William Krist's Blog, page 11

Climate and Trade in a World of Resurgent Industrial Policy

Few citizens and governments consider the current system of international trade beneficial to climate action today, and many worry about the distribution of outcomes. Although free trade has been instrumental in the reduction of global poverty and the expansion of the global middle class, many in industrialized nations feel that the international trade system has shipped manufacturing jobs and activity overseas and left behind a weakened middle class. In the world of climate policy, international competition between firms is making industrial decarbonization more difficult, due to the risk (or fear) that firms operating in nations with more stringent climate policies simply may relocate to nations where emissions are less stringently regulated, yielding a situation known as carbon leakage.

Can the trade system change? Radical changes have tended to reflect major shifts in geopolitics or macroeconomics. The Bretton Woods system of trade rules was shaped by the United States, which reflected the nation’s new role as a superpower following World War II and an interest in avoiding the mistakes following World War I; namely, the protectionist tariffs that fomented economic depression. The General Agreement on Tariffs and Trade grew into the World Trade Organization after many rounds of liberalizing trade by reducing tariff and non-tariff barriers, with the hope that the gains of trade would spread to the developing world in the era after the Cold War.

Today, geopolitical realities and the goals in the Paris Agreement may call for a further institutional overhaul of the global trade system. The global push to achieve net-zero emissions demands unprecedented action, albeit at different speeds in different countries, given the Paris Agreement’s bottom-up architecture based on nationally determined contributions, and the United Nations Framework Convention on Climate Change principle of “common but differentiated responsibilities.” The goals of the agreement require policy choices that are not easily reconciled with the trading system that has existed since 1989.

Climate and Trade: More Policies, More Policy Priorities?

As countries expand climate action to meet the Paris Agreement, a willingness to accept a wide diversity of approaches to climate policy from trade partners would be beneficial. Experimentation with various policies in the real world is crucial for nations to discover the policies that are most effective, efficient, and equitable. Policy approaches also inevitably will differ between regions, given constraints related to local economies, politics, and cultures, along with differences in legal systems. For example, the United States, which is backed by the Federal Reserve and the strength of the US dollar, will offer generous subsidies, while the European Union, which has decades of experience incrementally integrating dozens of national markets, will regulate and price greenhouse gas emissions.

The international trade system (and the institutions associated with the Washington Consensus, such as the World Bank and the International Monetary Fund) needs to evolve and enable policies that reflect new political and geopolitical priorities, if the trade system is to support the goals in the Paris Agreement. For example, a rekindled international trade system needs to reflect the legitimate role for industrial policy, given that industrial policy, though long maligned, has returned with a vengeance to nations in the West. This return of industrial policy requires a rethinking of subsidies; the traditional impulse is to constrain subsidies, rather than encourage a design with positive spillovers, such as innovation or regional development.

Some industrial policies are considered attractive—or even essential—climate policies, like subsidies that support reductions to the cost of clean energy technologies or trigger investments in firms that emit little or no greenhouse gases. But industrial policy in the 2020s has a mercantilist bent to it, as well. Some governments face electorates that reject the value of open trade. Governments also may face geopolitical tensions that encourage increased resilience against global economic shifts and perturbations, or motivate the domestic manufacturing of goods that are considered important to national security and the national economy. Industrial policies in these nations seem to aim to protect domestic economic interests above all else.

Border adjustment mechanisms are another type of climate policy that is potentially controversial. These policies, which impose fees, tariffs, or other costs on importers of a good based on the emissions associated with the production of that good, can be a way to both mitigate carbon leakage and incentivize other nations to mitigate emissions in response to the policy.

A reformed international trade system ideally would recognize the political motivations behind new green industrial policies and trade policies, while still encouraging restraint, fairness, and the scope of any policy to stay in proportion to its purpose. A tax credit in the Inflation Reduction Act may be a fantastic incentive to produce clean hydrogen, but if the tax credit becomes the sole business case for clean hydrogen, few countries will be able to compete with firms in the United States. Border adjustment mechanisms may be legally legitimate to level the playing field between firms that operate in nations with more stringent climate policies and firms in nations with less stringent climate policies, but the costs of complying with border adjustment mechanisms may be disproportionate, especially for countries in the Global South or for smaller producers. These challenges are not cause for such policies to be avoided or abandoned, but policymakers may want to account for the impacts of these policies on trade partners or political partners, as well.

When countries, individually or collectively, weigh the merits of industrial policy and policies that address climate and trade, they may not want to merely consider whether a policy is justified, as if justification were a dichotomy. The reductions in cost for renewables, including reductions spurred by subsidies, have provided a rare glimmer of hope for the achievement of lofty emissions-reduction goals. However, cost reductions also have been the result of China’s manufacturing prowess, given that China has a comparative advantage in scaling up manufacturing from certain industries such as solar energy. Replicating subsidies for other low-carbon technologies would not necessarily yield the same results as have been achieved for solar. In addition, some technologies inherently are better suited to rapid reductions in cost; for example, the commodification of components that are critical to production helps lead to economies of scale. For other technologies, such as carbon capture, for which customization and systems integration are more important, costs may not necessarily decline at the same pace.

Subsidies and industrial policies long have been deployed with the purpose of protecting industry incumbents. However, in a political environment where domestic interests and industrial competitiveness take priority, policies that compensate and protect incumbents may risk crowding out strategies of industrial policy that focus on investments and impacts that would benefit the climate or other societal goals. The economist Dani Rodrik, who has been more favorably disposed toward industrial policies than many other economists and politicians since before the current renaissance of these policies, emphasizes that the key consideration for industrial policy should be to “let the losers go [rather than] picking winners.” This attitude may be particularly crucial for climate policy, given that a low-carbon economy likely will be built on new forms of energy and industrial production that may be best suited to regions that differ from the regions where some industries currently are clustered.

What Is the Role of Multilateral Institutions?

International institutions could focus on more germane technical considerations. “Interoperability,” which is shorthand for the ability of nations to design climate and trade policies that affect trade without creating barriers to trade in terms of administrative costs, has become an oft-used keyword. International trade institutions, including the World Trade Organization, could contribute solutions to challenges regarding interoperability.

In the past, the coexistence of many different free trade agreements actually has led to a reduction in trade, due to the so-called “spaghetti bowl” effect: the costs of complying with overlapping agreements are higher for countries that are not party to these agreements. Free trade agreements also allow for deeper integration or alignment between nations, but reaching agreement on rules (or a larger set of rules) with a larger group of countries can become more difficult than with smaller groups.

The risk of a “green spaghetti bowl” emerges in the context of climate policy. (We apologize for the mental image this phrase may conjure.) Firms and importers have to navigate myriad border adjustment mechanisms; rules for subsidies; requirements for how much of a good must be produced domestically; product standards based on emissions intensity; and regulations in the domain of environmental, social, and corporate governance. These factors all contribute to the transaction costs that companies and importers have to deal with. While multinational firms are well-versed in navigating multiple complex regimes of regulations, smaller companies may see transaction costs rise to the extent that those companies stop trading internationally.

A desire undoubtedly exists among nations for a forum (or fora) to discuss interoperability and, ideally and eventually, some form of alignment on the many climate polices that affect international trade. The international community should continue to consider what the most appropriate venues could be, if this dialogue really is a priority. One of these venues could be the World Trade Organization, but this choice would require willingness both from current political leaders, who have critiqued how the organization currently is functioning, and traditional supporters of the organization, who would need to accept that member nations of the organization have policy goals that go beyond free and open trade. The United Nations Framework Convention on Climate Change might be another option for a venue, following the first-ever “Trade Day” at the 28th Conference of the Parties. Other intergovernmental initiatives such as the Climate Club might offer the most promising venue, though these initiatives may be insufficiently inclusive and comprise countries that already are like-minded, thereby not addressing the trade relationships in which interoperability might be most critical.

Finally, a particularly important role may exist for the world’s middle powers, such as Canada and Indonesia, in the ongoing debate about climate and trade. These nations are at risk of being squeezed in a subsidy race or a tariff tit for tat between the largest economies—the United States, China, and the European Union—while often being aligned with one of them. Middle powers can encourage economic superpowers to consider the better angels of their nature, practice restraint, and be measured when crafting policies that impact trade. Policies that fulfill these criteria can help extend the gains of trade to future generations while the trade system continues to support sustainable growth across the globe.

To read the full article as it is posted on the Resources for the Future website, click here.

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IPEF — Two Steps Forward, But One Important Step Still Missing

The fourteen members of the Indo-Pacific Economic Framework for Prosperity (IPEF) released the agreement texts for two of the IPEF pillars on 14 March 2024 — the Clean Economy Agreement (CEA) and the Fair Economy Agreement (FEA) — as well as a text establishing the IPEF institutional mechanisms (the IPEF institutional agreement). These agreements represent an important step for the U.S.’ re-engagement in the Indo-Pacific region and illustrate the U.S.’ strength in pulling together outcomes with a broad group of 13 partner countries in a remarkably short time span. Meanwhile, the absence of outcomes on the trade pillar continues to underscore the U.S. political divide on all things trade.

The CEA covers a wide range of initiatives to advance the transition to clean economies, from clean energy technology development to decarbonize industries, through to greenhouse gas capture and energy security. The FEA contains provisions to ensure corruption and bribery activities are criminalized, that enforcement of such is effective, and steps are taken to raise public awareness and promote the role of the private sector. The FEA also promotes the transparency and exchange of tax information among members’ tax authorities in order to improve tax administration and compliance. The IPEF institutional agreement sets up two bodies: the IPEF Council to oversee the operation of all of the IPEF agreements and consider any proposals for new members or new agreements; and the IPEF Joint Commission to consider the implementation of each of the pillar agreements.

Initial analysis of these three new texts reveals the following:

Cooperation is Key to Meeting Objectives

Like the earlier IPEF Supply Chain Agreement, these agreements focus on cooperation among the members as a key mechanism to advance their objectives. Unlike traditional trade agreements, the CEA and FEA do not set out detailed rules which can be enforced through binding dispute resolution, and, interestingly, do not contain any reference upfront to the importance of the rules-based multilateral trade system (although this was included in the Preamble of the Supply Chain Agreement). In the case of the CEA, the agreement seems to provide a menu of initiatives and areas from which parties can pick and choose according to their interests and means. The tax section of the FEA is also focused on improving cooperation through greater exchange of information.

This cooperation ethos also extends to the private sector, with the CEA and FEA highlighting the importance of stakeholder engagement, education and input, and social dialogue on these issues in order to achieve effective implementation.

Economic Inclusion and Labor Rights are Highlighted

Economic inclusion features prominently in the three texts. The CEA notes at the outset that each Party’s efforts to transition to a clean economy should be implemented in a manner that is “just and inclusive.” There is specific recognition that local communities and Indigenous Peoples have an important role to play in transitions to clean economies and Parties intend to partner with them in the implementation of the agreement. The FEA also emphasizes the importance of ensuring the benefits of free trade, investment and economic growth are broadly shared, and includes a specific provision advancing gender equality and women’s empowerment in anti-corruption programs.

In line with this Administration’s focus on a worker-centric trade policy, and the earlier IPEF Supply Chain Agreement, both the CEA and the FEA include a number of provisions promoting labor rights. Both agreements highlight, for example, the role of workers’ organizations as part of broader participation, with the CEA also including a number of provisions on the importance of promoting labor rights, employment, decent work and just transitions to a clean economy. Notably, the FEA includes specific provisions around migrant workers’ rights. The IPEF institutional agreement’s Preamble also refers to the importance of an Indo-Pacific region that has “the potential to achieve sustainable and inclusive economic growth.”

Implementation is Flexible and Capacity Building is Provided

Layers of flexibility regarding implementation are featured in these texts. This is not a surprise given the disparate grouping and their different levels of development and approach to these policy areas. While the agreements are legally binding, the drafters have allowed sufficient flexibility for countries to determine how they will implement many of the provisions. For example, many of the FEA’s provisions state that Parties ‘should,’ or ‘endeavor to,’ do something ‘where possible’ or ‘where appropriate.’ Many of the CEA’s key initiatives simply refer to ‘interested Parties’ working together on cooperative activities, rather than all Parties. Both the CEA and FEA also contain a specific provision that Parties are only required to implement the commitments within their available resources — a significant ‘out’ — and in the FEA, Fiji alone is designated to receive a longer transition period for some commitments.

Alongside this flexibility is an emphasis throughout the CEA and FEA texts on technical assistance and capacity building. Both agreements recognize sharing of information, best practices and other forms of capacity building will be needed to achieve its objectives. This is usually a big ask coming from ASEAN economies in trade negotiations, and no doubt was something they requested from these agreements, particularly given that market access was not on the table. Capacity building is also acknowledged as necessary in order to support the ‘inclusive’ and ‘just’ policies that are prescribed.

Building on the CPTPP for Anti-Corruption Provisions

The anti-corruption provisions in the FEA draw from the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) text in several places, but also include additional provisions that are also not found in the UN Convention Against Corruption. For example, the FEA includes new provisions that each Party “may encourage its law enforcement authorities…to consider implementing measures to incentivize enterprises to develop effective internal controls,…as well as to encourage disclosures of misconduct.” Another new addition is that Parties should require an external auditor of an issuer’s financial statement who discovers a suspected offense to report it to the issuer’s management and monitoring bodies. Other advances include bringing some of the Financial Action Task Force’s recommendations into the FEA.

Withdrawing from the IPEF

Like the Supply Chain Agreement, the FEA and the IPEF institutional agreement allow Parties to withdraw only starting three years after the entry into force of the Agreement. Interestingly, a similar provision is not found in the CEA, where a more usual rule of simply giving notice for withdrawal applies (that withdrawal becoming effective after 6 months). This could signal that other countries were less willing to tie themselves down to a three-year rule in that sector, or because of the more ‘opt-in’ nature of many of the provisions in the CEA, a longer period before withdrawal was simply not considered necessary. But the three-year rule could also represent an effort by the United States to show its reliability as a partner by signaling that Washington can make a binding commitment past the upcoming elections.

Next Steps

The release of the final texts of these three new agreements is encouraging for the U.S.’ commitment to the Indo-Pacific region and to generating greater economic connections with this dynamic part of the globe. IPEF members will soon sign these three agreements, most probably in June when the Ministers meet in person. Work to implement the supply chain pillar is already in train, with members setting up the various committees and councils to undertake the specified initiatives. The members have already established five cooperative work programs under the CEA, and announced that the inaugural IPEF Clean Economy Investor Forum will be held in Singapore in June to foster greater investment in climate-related projects in the region.

The Missing Piece

All of the activity on the Commerce-led pillars highlights the missing piece of IPEF — the USTR-led pillar on trade. The IPEF institutional agreement includes reference to the not-yet-concluded Agreement on Trade and even refers to the Trade Commission that will be set up under that new trade agreement. Unfortunately, prospects for progress on the trade pillar remain slim to none during the U.S. election year. It is a good time for the U.S. to reflect internally on what adjustments could be made to that pillar to make it more acceptable domestically and more attractive internationally.

Jane Mellsop is the Director of Trade, Investment, and Economic Security at the Asia Society Policy Institute in Washington, D.C.

To read the full article as it was published by the Asia Society Policy Institute, click here.

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Whole-of-Nation Innovation: Does China’s Socialist System Give It an Edge in Science and Technology?

This brief is part of a special series organized jointly by the University of California Institute on Global Conflict and Cooperation (IGCC) and the Mercator Institute for China Studies (MERICS). This analysis was originally presented at the Conference on the Chinese National Innovation and Techno-Industrial Ecosystems in Berlin, September 5–6, 2023.

China wants to become a science, technology, and manufacturing superpower by upgrading and modernizing its industrial base and concentrating the nation’s innovation resources around strategic priorities. However, it is difficult for the state to integrate innovation resources because of the gap separating universities and research organizations from industry, which impedes the translation of scientific output into technological prowess. By contrast, Beijing has been much more successful at directing industrial development. As a result, achieving a modernized industrial base is now the dominant framework for Chinese policymakers as they pursue technological self-reliance.

Key findings











Official calls for a new-style whole-of-nation effort in China are primarily aimed at directing Chinese researchers and business to tackle key techno-industrial bottlenecks. This sense of urgency is necessary to overcome barriers between academia and industry. 
Public information does not support the idea that Beijing has a shortlist of top priorities that it is concentrating the nation’s resources on. 
By refusing to outsource and preferring to maintain a large share of its economy in manufacturing as opposed to services, China is pursuing a different development path than most developed countries. This will impact trade relations with other nations. 
Beijing’s fixation on national sovereignty and self-reliance complicates interaction with foreign stakeholders. Its long-term vision for China’s industrial and innovation policy envisions a limited role for foreign technology firms in the Chinese market.




















Introduction

On October 17, 2023, the United States issued its second batch of export controls on advanced computing and semiconductor manufacturing items to China, expanding its “small yard, high fence” approach to include more technologies and impact more countries. The European Commission has similar concerns about technology leakage but is more circumspect in its response. Its economic security strategy calls for partnering with allies, promoting competitiveness, and protecting interests “in a proportionate and precise way that limits any negative unintended spillover effects on the European and global economy.” The Commission intends to complete a security review of four critical technologies in 2024.

China is a major catalyst of the global trend of scientific and technological nationalism, with its party and state leader Xi Jinping doubling down on national security ever since he came to power in 2012. For instance, in 2016 Xi called for national self-reliance and self-empowerment (自立自强) in key and core digital technologies at the inaugural Work Conference for Cybersecurity and Informatization, predating U.S. sanctions by several years. Science, technology, and innovation (STI) have become the main arena of global strategic competition, Xi announced in 2022, adding that the contest over the scientific and technological commanding heights of the global economy has never been more intense.

Diverse geopolitical actors across the United States, European Union, and China have different interests, priorities, and approaches in securing key technologies. But the net result  is that science, technology, and innovation have become increasingly political. Policy is now driven by national security concerns, which creates friction in international networks. Joint publications between U.S. and Chinese researchers are already declining.

Chinese and Western firms face questions about their loyalty at home and abroad, as well as complex regulations for exporting data and goods involving strategic or critical technologies. 

To understand this trend, this brief offers a thorough analysis of Beijing’s vision for its innovation and industrial systems based on close readings of high-level policy documents and commentaries.

Collectivizing industrial efforts

The Communist Party of China has a long history of directing industrial development, combining domestic goals of providing basic goods, jobs, and economic growth with notions of self-reliance and national security that emphasize international competition. The notion of the “new-style whole-of-nation” system (NSWN, 新型举国体制) takes inspiration from this history. It has gained prominence since the fourth plenum of the 19th Central Committee in 2019 as Beijing seeks to capitalize on the socialist system’s unique ability to “concentrate power to do great things (集中力量办大事).” The 14th Five-Year Plan of 2021-2025 presented the NWNS system as a key component of “the battle for key and core technologies.” 

The NSWN concept refers back to the whole-of-nation approach of the late 1960s and early 1970s, which enabled China to develop nuclear weapons and ballistic missiles in the space of just a few years, despite being cut off from its major source of technological knowhow through the Sino-Soviet split. Under Chairman Mao, the effort had been overseen by the Central Special Commission (中央专委), which was discontinued in the 1970s.  Similarly, President Xi set up a Central Science and Technology Commission (中央科技委员会) in March 2023 to oversee the NSWN approach and reform the Ministry of Science and Technology into its supporting agency.

By centralizing control of STI in China, these changes go against the central tenets of the “reform and opening up” (改革开放) policy that began in the late 1970s. These included the depoliticization of science and technology, as well as the devolution of power over resource allocation to markets and local actors. Still, the presence of a large and vibrant private sector distinguishes the NSWN approach from its 1960s predecessor. Acknowledging the importance of entrepreneurship to innovation, Beijing looks to enlist the private sector through a mixture of incentives, regulations, and political steering. This structural tension in China’s socialist market economy is summarized by the ideal of “an efficient market and an effective government (有效市场和有为政府).”

A network of fitness centers to break local barriers

To understand how China’s mixed economic system works for innovation and industrial policy, it helps to see the NSWN system as a variation of the country’s national Olympic program. Sports programs in China are discussed in terms of a whole-of-nation system. Both China’s highly successful Olympic programs and its current effort to break foreign technological bottlenecks combine training and grassroots competitions with a multi-tiered national selection program focused on outperforming international competitors. In this approach, the state delegates the day-to-day organization and refereeing of the program to trusted partners. 

In the NSWN system, objective external indicators measure the program’s effectiveness. Absent medal tallies, export volumes and values have become the benchmark for industrial innovation. Success in overseas markets makes a firm more worthy of government support. Domestically, Beijing allows foreign firms like Apple and Tesla to sell products in a controlled setting while monitoring the market share of domestic frontrunners to assess their competitiveness.

These mechanisms compensate for a lack of trust in local data on the fitness of Chinese businesses, and this “export discipline” targets firms as well as local officials. In a previous phase of China’s state-led development model, local officials had wide room for policy experimentation, including by launching industrial and innovation zones, creating pilot and demonstration projects, and in allocating investments. However, this sometimes led to local protectionism. The NSWN system is part of a larger trend to restrict local discretion in how these programs are implemented. 

Too many stakeholders to concentrate

The whole-of-nation approach enables other actors to vie for central government attention. Following previous mission-oriented programs, it stands to reason that the NSWN system would appoint issue owners in a handful of technology areas who would each bring together various stakeholders, formulate benchmarks, allocate resources, assess progress, and lobby Beijing for funding and favorable policies.

The NSWN system aligns with recommendations by professors Yutao Sun and Cong Cao, who point to more recent precedents, such as the National Integrated Circuit Industry Investment Fund, China’s development of high-speed rail, or the 16 science and technology megaprojects for the 2006 to 2020 period. The latter successfully spearheaded Beidou’s satellite navigation, Huawei’ 5G next-generation mobile Internet, and the C919 commercial aircraft, which were supervised respectively under a military research organization, a state-affiliated think tank, or a state-owned enterprise (SOE).

These organizations are almost certainly lobbying for state support in Beijing. It has become hard for outsiders to read the outcome of these negotiations. For instance,  a new batch of 15 science and technology (S&T) megaprojects was announced in the S&T Five-Year Plan for 2016-2020, to which new-generation artificial intelligence was added in 2017. Details on these megaprojects and their relative centrality in the innovation chain would be in the Science and Technology Mid- to Long-Term Plan for the 2021-2035 period, but that plan was never published. Using these limited resources, Barry Naughton, Siwen Xiao, and Yaosheng Xu do a remarkable job of puzzling together what the NSWN system might look like.

However, there is no public evidence to suggest that this approach has become dominant. Chinese commentators rarely discuss which technologies should be prioritized on what grounds, how many technologies China could realistically concentrate resources on, or who should bring the nation together in a specific technology area. As a result, there is no current authoritative list of key and core technologies—the best proxy is a list of 35 “stranglehold” technologies such as lithography machines, operating systems, and aircraft engines issued by a state-affiliated newspaper in 2016. There is also no matching list of topic owners or even institutional platforms for “national teams.”

Instead, China’s innovation and industrial policy is still fragmented across many partially overlapping platforms and initiatives. Naughton, Xiao, and Xu identify around 50 bottleneck and competitive-advantage technologies. But this number is too large and the technology areas are too big for this to amount to an effective concentration of resources. Analysis of research funding, investment data, publications, and patents also does not show a clear prioritization.

Instead of focusing on specific technologies and sectors, public discussion on the NSWN focuses on improving synergies between industry, universities, and public research institutes (产学研融合).

The slow process of mending weak links in the innovation chain

Next to providing a benchmark for competitiveness, the West has been a major source of science, technology, and innovation that is fueling China’s catching up. Now that China’s access to Western STI is less secure and China is getting closer to the global cutting edge, Beijing has repeatedly stated that it wants to improve the domestic research and development (R&D) pipeline from early-stage research to mass production. The primary contribution of the NSWN system is in making the innovation chain more prominent.

Although China produces a growing portion of the world’s top-cited research papers and patents, this is not matched by a corresponding growth in total factor productivity, indicating that much of this research output is not influenced by downstream industrial demand. Because China has been very successful at scaling up proven technologies and creatively adapting or re-inventing products that were pioneered elsewhere, China’s issues with technology diffusion primarily involve domestic inventions. Most of the successes China can point to have some degree of foreign inspiration.  Digital giants in search, e-commerce, ride hailing, and social networking started by translating U.S. models to Chinese contexts. In hardware sectors like solar panels, batteries, electric vehicles, smart phones, and commercial drones, Chinese overseas returnees and local entrepreneurs gained global market share by building on ideas and components pioneered elsewhere.

If inventing something new is going from zero to one and scaling up is going from one to 100, China’s main successes are either early—close to zero—or near the end—close to 100. The largest challenge resides around the one, where invention is slowly brought to scale. This structural gap demonstrates the so-called “two-layers” (两张皮) problem of a mismatch between academy and industry. Although Beijing wants firms to lead, Chinese firms typically avoid investing in risky basic research, seeing this as a task for the state, especially if the sector is of national strategic importance. As a result, the gap between the two layers remains wide. The National People’s Congress noted this when it reviewed the Science and Technology Progress Law in October 2023, adding that many in knowledge institutions do not sufficiently recognize the urgency of closing this gap.

Beijing has a range of instruments to address this long-standing two-layers problem. Many of these overlap with the NSWN system as they seek to break silos in the interest of national development. Together with industry, the state formulates and funds open challenges for knowledge institutions in a process known as “unveiling the list” (揭榜挂帅). Further, local governments organize “innovation associations” (创新联合体) where companies are paired with universities and labs to tackle technological needs. In addition, a new type of more market-oriented, state-sponsored research institute is emerging to facilitate technology transfer (New R&D Institutes, 新型研发机构), while legacy institutes are pressured to serve industrial and strategic needs. Finally, reforms are being initiated to grant inventors more ownership over patents, to encourage state-employed researchers to become more entrepreneurial.

This multifaceted approach to connecting the innovation chain is piecemeal and slow because the state is simultaneously seeking to centralize control. As this plays out, public debates have embedded the pursuit of technological self-reliance into the larger question of the future of China’s industrial development. These debates are now considering a larger group of industries than those involving high-end technology.

Xi wants a complete, advanced, and secure industrial base

The 14th Five-Year Plan (2021-2025) calls for building a modern industrial base (现代产业体系), linking the project to China’s goal of becoming a manufacturing powerhouse (制造强国). Similar terms have been used since at least the 17th Party Congress of 2007. In May 2023, President Xi elaborated on the closely related term of a “modernized industrial base” (现代化产业体系). To build a modernized industrial base that is complete, advanced, and secure, President Xi told the Central Commission for Financial and Economic Affairs (CCFEA) that China should make use of scientific and technological revolutions, capitalize on its industrial prowess, and promote global innovation. Xi also argued that China should not simply push out low-grade industries but instead work to upgrade them.

This last remark is consistent with the leadership’s emphasis on the “real economy.” President Xi repeatedly warns against Chinese modernization “losing touch with reality” (脱实向虚), for instance during his trip to Guangzhou in April 2023. Zheng Shanjie, the director of China’s chief planning agency, the National Development and Reform Commission, elaborated on this in Qiushi, the party’s main theoretical journal.

“Today’s modernized economies rely on the real economy to generate growth and remain resilient. One of the main reasons some countries lost their lead or fell into the so called “middle income trap” and experienced long periods of stagnation is their neglect of the real economy, their failure to modernize their industrial system. … Traditional industries make up most of China’s manufacturing prowess. We can’t simply push “low-grade industries” out. Instead, we should guide and support firms in traditional sectors to upgrade. … The emerging industries are the pillars of future development, but we shouldn’t blindly pursue foreign novelty.”

China should not let its manufacturing base be hollowed out like the United States’, adds Cui Fan, a professor at China’s University of International Business and Economics and the director of the research unit of the China Institute for WTO Studies. Cui argues for including financial and digital services that support industrial activity into the definition of the “real economy” and excluding only those activities that “directly create money with money.” This is consistent with recent government clampdowns on “the disorderly expansion of capital,” particularly real estate speculation. 

The insistence on including traditional industries like steel, coal, and shipbuilding—as well as the SOEs that dominate them—follows Communist orthodoxy. It also seeks to hedge against an escalating trade conflict with the West. Industrial bases are important in times of crisis, as COVID-19 was a stark reminder. They are especially important to China as global technological competition intensifies, because China’s leverage is based less on the uniqueness of its technologies and more on its ability to produce large volumes quickly and cheaply. Replacing China’s global role in critical raw materials, solar panels, active pharmaceutical ingredients, and telecommunications equipment would be an economic challenge for the West rather than a technological one. To keep the cost of decoupling high for foreign governments and multinationals, China needs to retain its central position in global supply chains.

However, due to rising labor costs, the contribution of manufacturing to China’s gross domestic product (GDP) declined 6 percent between 2008 and 2020 to 26.3 percent, calculates Professor Cui. After, Beijing was able to arrest the decline but only slightly, growing the figure 1.1 percent in 2021 and 0.3 percent in 2022, which inadvertently caused China’s debts to balloon. Beijing’s insistence on boosting industrial production also demotes other national goals, such as making China less reliant on export markets, reducing carbon emissions, and raising consumption and quality of life under the rubrics of “common prosperity” (共同富裕). 

Policy implications

The new-style whole-of-nation system and the modernized industrial base represent two partially overlapping responses to the risk of foreign technological containment. Whereas the former focuses on generating intellectual property through strengthening the innovation chain, the latter seeks to upgrade the Chinese manufacturing sector to climb up the global value chain. The two policies side-by-side expose the contradictions of China’s two goals of technological self-reliance and economic de-risking.

The relative importance of the modernized industrial base in the Chinese-language debate is clear by the recent flurry of publications, including by leading ministries and think tanks. These writings consistently call for consolidating leads, upgrading traditional industry, and accelerating innovation through the NSWN system, in that order. The tensions between these goals are rarely discussed. This paper highlights some of the more obvious contradictions, such as concentrating resources on all technologies of possible importance. The program also creates changing state-market relations, which is leading to tasking the most conservative stakeholders—such as military organizations, legacy research labs, state-owned enterprises, and public financial institutions—with organizing innovation and nurturing a start-up scene. China’s policies encounter further contradictions in their attempts to upgrade manufacturing capacity without outsourcing polluting and labor-intensive industry segments to other countries and in promoting exports, international collaboration, and in-bound investments as a means to reduce foreign reliance.

Some degree of ambiguity may work in Beijing’s favor, as it provides flexibility and cover in achieving its de-risking and self-reliance aims. However, implicit restrictions on the public debate also blunt the recommendations of policy advisors. A glaring absence in the emerging vision is that of large private and foreign companies. Despite the large contributions of tech giants and multinational corporations to China’s past innovation and productivity gains, as well as the importance of overseas returnees in China’s innovation landscape, the outside world features either as a source of risk—through the technological strangleholds—or as an export market whose absorption of more and more Chinese goods validates the country’s progress.

Foreign firms may be able to convince local Chinese interlocuters that their contributions should be recognized and accommodated, especially if their branches are well integrated in local value and innovation chains. This approach is likely to succeed some of the time, and in some places and sectors. But the overarching long-term vision for innovation and industrial policy that currently dominates in Chinese policy circles follows the logic of China’s dual circulation strategy (双循环), which primarily aims to compartmentalize and reduce China’s exposure to external shocks. Even though China may never realize this vision in full, it is wise for Western stakeholders to take it seriously and formulate their own de-risking strategies.

Conclusion

Based on China’s track record, the NSWN approach will be most successful in areas where there is an established technology that China can emulate—such as atomic bombs, navigation satellites, space stations, or high-speed rail. Lithography equipment may also fit this mold. By contrast, China’s successes in solar panels, energy vehicles, telecommunication equipment, and various digital platforms have relied much more on private entrepreneurship. Looking forward, the first policy by the Central Science and Technology Commission focuses on “future industries”, many of which require corporate initiative, not least artificial intelligence. The key metric for success of the NSWN approach will be in whether it can spur innovation by tech entrepreneurs. So far, that looks unlikely.

Jeroen Groenewegen-Lau is Head of Program of “Science, Technology and Innovation” at MERICS.

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To read the full brief as it is published on MERICS’ website, click here.

To read the full brief, click here.

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Can Trade Intervention Lead to Freer Trade?

The global trading system has been broken for decades. A well-functioning trading regime would permit neither the large, persistent trade imbalances that characterize the current global trading system nor the perverse flow of capital from developing economies to advanced economies. The system needs new rules that encourage a return to the benefits of free trade and comparative advantage.

Until this happens, trade imbalances will persist. This matters especially to the United States because of the role it plays in anchoring global imbalances. Countries that run large, persistent trade surpluses must acquire foreign assets to balance these surpluses. American assets are particularly attractive for this purpose, and the United States allows nearly unfettered access to these assets. As a result, surplus countries prefer to acquire assets in the United States in exchange for their surpluses, which also means that the United States must run the corresponding trade deficits.

This has important implications for U.S. manufacturing, unemployment, and debt. It means that the U.S. share of global manufacturing must decline while that of surplus countries must rise. Because surplus countries are those that subsidize their manufacturing at the expense of domestic consumption, American manufactures are forced indirectly to subsidize U.S. consumption. This is why, during the past five decades, manufacturing has consistently migrated from deficit countries (mainly the United States) to surplus countries (mainly China). Until global rebalances are resolved, this will continue.

It also means that for all the talk of reshoring and friendshoring, the U.S. trade deficits cannot decline as long as surplus economies can continue to acquire assets in the United States with the proceeds of their surpluses. The United States, in other words, has no choice but to run deficits to balance the surpluses of the rest of the world.

What’s more, while many mainstream economists assume that foreign inflows lower U.S. interest rates and finance U.S. investment, as occurred in the nineteenth century, this hasn’t been the case for decades. Foreign inflows instead force adjustments in the U.S. economy that result in lower U.S. savings, mainly through some combination of higher unemployment, higher household debt, investment bubbles, and a higher fiscal deficit.

To rebalance its economy toward manufacturing while reining in debt and generating higher-paying employment, the United States must either transform the global trading regime or unilaterally opt out of its current role. Not only would this benefit the U.S. economy, but it would also benefit the global economy by eliminating the persistent downward pressure on global demand created by the surplus countries.

This won’t be easy, however. Any meaningful resolution of global trade imbalances will be strongly opposed by surplus countries and would result in a diminished global role for the U.S. dollar. 

HOW DOES INTERNATIONAL TRADE AFFECT THE U.S. MANUFACTURING SECTOR?

Last month, Yao Yang, former dean at the National School of Development at Peking University, said on his blog that “America’s industrial base has already been hollowed out. How can it possibly compete [with China]? The United States has obviously made a strategic mistake.”

He’s right, but perhaps not for the reasons he thinks. While manufacturing comprises roughly 16 percent of global GDP, according to the World Bank, the manufacturing share of China’s GDP is 28 percent, among the highest in the world, whereas for the United States it is 11 percent, among the lowest for any major economy. The opposite is true for consumption. While consumption accounts for 75 percent of global GDP, it accounts for 80 percent of the United States’ GDP and only 53 percent of China’s GDP.

To put it another way, while China comprises less than 18 percent of global GDP, it accounts for over 31 percent of global manufacturing and less than 13 percent of global consumption. The United States, which accounts for 24 percent of global GDP, accounts for less than 17 percent of global manufacturing and nearly 27 percent of global consumption.

While the differences in the two countries’ manufacturing and consumption shares of GDP may seem unrelated, it turns out that they are different expressions of the same imbalance. China and the United States are extreme representatives of a common pattern in the global economy. Manufacturing typically represents a disproportionately large share and consumption a low share of the GDP of non-commodity economies with large, persistent surpluses. The reverse is true for advanced economies that run large, persistent deficits.

This clearly isn’t a coincidence, but in which direction does the causality run? Do countries have larger manufacturing sectors because they are surplus countries, or do they run surpluses because they have larger manufacturing sectors? For many years, economists have argued that it is the latter. Surplus economies, they claim, have a comparative advantage in manufacturing that leads them to produce tradable goods more efficiently, and this is why they export more than they import. Deficit countries like the United States, on the other hand, have a comparative disadvantage in manufacturing.

But this misunderstands altogether the meaning of comparative advantage. As I explain below, surplus economies run surpluses mainly because of industrial policies that implicitly or explicitly force households to subsidize the manufacturing sector. Their competitive advantage in manufacturing comes not from comparative advantage but rather from transfers that distort comparative advantage and reduce domestic demand.

WHAT IS THE RELATIONSHIP BETWEEN COMPETITIVE MANUFACTURING AND WEAK DOMESTIC DEMAND?

In these persistent surplus economies, weak domestic demand is simply the flip side of policies that result in manufacturing competitiveness. The manufacturing sector is subsidized directly or indirectly by households, which leaves them more competitive and leaves households less able to purchase a substantial share of what they produce.

But in order to balance these surpluses, the opposite transfers must occur in the deficit countries. Just as consumers are forced to subsidize producers in the surplus countries through various explicit and implicit transfers, producers are effectively forced to subsidize consumers in the deficit countries.

There are many forms these transfers can take, but the easiest one to understand is through currency values. An undervalued currency, typical of surplus countries, affects trade imbalances by raising the cost of imports and increasing the profits of exporters. It results, in other words, in an implicit transfer from importers to exporters. Because households are all net importers, and because net exporters are mostly manufacturers, these implicit transfers subsidize the manufacturing sector at the expense of households. This makes the manufacturing sector in that country more competitive while reducing the capacity of households to consume.

The opposite happens in the deficit countries. An undervalued currency for one country is the obverse of an overvalued currency for its trade partner, and this overvaluation also represents an implicit transfer, in this case from net exporters (manufacturers) to net importers (households as consumers). Just as manufacturers are subsidized by consumers in the former, so are consumers subsidized by manufacturers in the latter, making their manufacturing sectors less competitive globally.

It is not surprising, then, that global manufacturing naturally migrates from deficit countries to surplus countries, while global consumption migrates in the opposite direction. This has nothing to do with comparative advantage. Manufacturers in both economies are simply responding to the direction of subsidies.

Although I use undervalued and overvalued currencies as an easy illustration of how these transfers between producers and consumers affect trade, they are not the only, nor even the most important, of such transfers. Repressed interest rates, for example, have often been far more important, along with overinvestment in infrastructure, wage repression, and several other implicit or explicit transfers that subsidize manufacturers at the expense of households. (See appendix 1 for a list of such transfers and how they subsidize manufacturing at the expense of households.)

CAN TRADE INTERVENTION BE USED TO MAKE TRADE FREER?

There is no meaningful difference between trade-oriented policies and most forms of industrial policy. Any economic, monetary, or fiscal policy that affects the balance between a country’s domestic savings and its domestic investment must necessarily affect that country’s trade balance, and through its trade balance, it must necessarily affect the balance between the domestic savings and domestic investment of its trade partners. In a closed global economy, where savings must equal investment, any policy that forces up the savings rate in one sector must be balanced by either higher investment or lower savings elsewhere.

That’s where trade intervention can lead to freer trade. Trade surpluses that are caused by beggar-thy-neighbor industrial policies—designed to improve international competitiveness by suppressing domestic demand—can only exist to the extent that they are matched by trade deficits in other countries. In that case, if the deficit countries implement interventionist trade or capital polices directed at reducing their deficits, these will automatically force surplus countries to reverse their own beggar-thy-neighbor policies. This in turn will force an adjustment in the global trading regime such that global trade is once again based on comparative advantage and contributes to expanding global production, not to suppressing global demand.

The point is that there are a wide range of policies that can cause global trade distortions, and while some of these policies can target trade, many of them don’t do so explicitly. That’s why in the interests of a well-functioning global trade environment it is better to target overall trade imbalances, as John Maynard Keynes proposed at the Bretton Woods Conference in 1944, than it to target specific trade violations.

While the World Trade Organization and other existing trade regulatory entities have focused on the latter, they have left us with a world of massive, persistent trade imbalances and perverse capital flows. These conditions are prima facie evidence that existing trade regulatory entities have failed to manage global trade appropriately. That’s why the United States, and most of the rest of the world, would be better off with a radical reorganization of the global trading system.

Michael Pettis is a nonresident senior fellow at the Carnegie Endowment for International Peace. An expert on China’s economy, Pettis is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.

To read the full analysis as it is posted on the Carnegie Endowment for International Peace’s China Financial Markets blog, click here.

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On a Collision Course: China’s Existential Threat to America’s Auto Industry and its Route Through Mexico

A Bad Bargain

The introduction of cheap Chinese autos – which are so inexpensive because they are backed with the power and funding of the Chinese government – to the American market could end up being an extinction-level event for the U.S. auto sector, whose centrality in the national economy is unimpeachable.

 

The U.S. auto sector accounts for 3% of America’s GDP. It is annually responsible for tens of billions of dollars of annual research and development spending. It supports an entire ecosystem of manufacturers, from steelmaking to semiconductor fabrication. And for nearly a century, it has provided reliable, well-compensated employment for millions of American workers of various levels of educational attainment, making it a pillar of the American middle class. As such, the U.S. auto industry’s health has been the years-long focus of U.S. trade policy, and a more recent focus of U.S. industrial policy. This includes longstanding tariffs on imported light trucks, and more recent rules of origin (ROO) content requirements for vehicle imports from Mexico and Canada, as well as clean vehicle consumer tax credits that reward domestic production as U.S. automakers undertake an industry-wide pivot to the manufacture of EVs.

The U.S. auto sector and its extensive domestic supply chain, however, face a growing threat from Chinese competitors, buoyed by the Chinese state. While direct imports of Made in China automobiles have until now been extremely limited, China’s auto sector is hardly the uncompetitive laggard of decades past. Thanks to the Chinese Communist Party’s (CCP) industrial planning and generous assistance that began in the wake of the 2009 financial crisis, its state-owned and state-supported manufacturers are poised to dominate the burgeoning global EV market. China is estimated to have spent tens of billions of dollars to create an auto sector ready to take advantage of the clean energy shift, with support including tax breaks, favorable lines of credit, land use agreements, extremely limited import competition, and often direct subsidization. Chinese automakers have also benefited from mandatory joint ventures with and forced technology transfers from foreign firms seeking to gain access to the vast Chinese auto market. And, most egregiously, they benefit from the use of forced labor in their supply chains.

The state support has paid off. The Chinese auto industry’s growth has been exponential. The country became the world’s leading auto exporter in 2023, selling cars in Europe, Australia, Africa, Mexico and Southeast Asia, and Chinese automakers lead the world in EV production and sales by wide margins. China’s technological lead and its extensive supply chains, particularly for critical battery raw materials and components, are deep and secure because of its defined and deliberate industrial policies. Beijing has prioritized reducing dependencies on other countries, which in turn makes the world increasingly dependent on its own supply chains.

The CCP’s objective is no secret: Global market dominance, made explicit in economic blueprints like Made In China 2025 and China’s most recent Five Year Plan. And the results of China’s industrial bets – mammoth entities like BYD, SAIC Motor and battery maker CATL – are this effort’s champions. They are expanding rapidly, without consideration to supply and demand and basic market forces, so much that the Chinese auto sector is estimated to have a production overcapacity of millions of vehicles per year. That overcapacity is now facing outward, in search of new markets to soak up the largesse.

China’s automakers currently face significant barriers to entry into some western markets, including the United States. The European Union in 2023 began an investigation into the raft of subsidies that underpin Chinese auto exports’ competitiveness, while U.S. tariffs have successfully kept these cars, electric or otherwise, off American highways.

But Chinese automakers are not idle. BYD, which became the world’s largest EV manufacturer in 2023, is building a factory in the heart of the European Union and is among half a dozen Chinese companies preparing to manufacture in Thailand, thereby gaining access to nearby markets through regional trade pacts.

More alarming, however, are Chinese firms’ heavy spending on plants in Mexico, through which they can access the United States by way of the more favorable tariffs under the United States-Mexico-Canada Agreement (USMCA). This strategy is, in effect, an effort to gain backdoor access to American consumers by circumventing existing policies that are keeping China’s autos out of the U.S. market.

This is an auto industry backed by the Chinese state. It has invested heavily in foreign markets in order to access more of them. And there is cause for alarm that Chinese vehicles and parts will only increase their access to the U.S. market, overcoming existing tariffs and evading existing trade enforcement measures, to directly challenge domestic automakers and threaten the jobs of millions of American manufacturing workers.

The United States must adopt a proactive and evolving strategy to stymie the CCP’s penetration. Washington should raise tariffs further on Made in China vehicles, tighten and fully enforce the USMCA’s ROO so they are not allowed to leak in, and exclude from the pact’s preferential treatment components and vehicles made by companies headquartered in non-market economies like China. Washington must strictly enforce its own industrial policies, like the clean vehicle tax credits included in the Inflation Reduction Act, so that upstream content and raw materials from China do not benefit. Washington also must fully implement and enforce the Uyghur Forced Labor Prevention Act to keep goods and inputs produced in the Chinese police state of Xinjiang and by other oppressed minority ethnic groups out of the U.S. market, so that none of this content reaches American consumers.

The threat posed to the American auto industry by heavily subsidized Chinese imports is significant, and the level of its severity will depend greatly on how federal policymakers respond to it. A dedicated and concerted effort to turn those imports back requires greatly strengthened trade enforcement and fully implementing existing domestic industrial policies. This effort should be undertaken immediately; there is no time to lose.

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To read the introduction and takeaways as it is posted on Alliance for American Manufacturing’s website, click here.

To read the full report published by Alliance for American Manufacturing, click here.

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13th WTO Ministerial Conference: What is at Stake for Digital Trade?

The thirteenth Ministerial Conference of the World Trade Organization (MC13) will take place from 26 to 29 February, in Abu Dhabi. On this occasion, WTO members will take stock of advancements since the 2022 Ministerial, and will seek to agree on a framework to guide negotiations in the next two years.   

In general, no major breakthroughs

The list of themes on the agenda of MC13 includes a wide range of issues, such as agriculture, an extension of the agreement on fisheries subsidies, trade and development, and dispute settlement reform. On most of the issues, members do not seem close to achieving an agreement. Some of the reasons for this are external to the WTO dynamics – for example, the US is one of the main proponents of dispute settlement reform, and no progress on this issue can be expected before the upcoming US elections. Difficulty in fostering convergence also relates to the fact that WTO members seem to be increasingly inhabiting different ‘filter bubbles’. They have very different assessments on where the Doha Development Round stands at the present time, and where to go from here. Diverging opinions lead to different understandings of the present situation, as well as different views on priorities and next steps. WTO members seem to be trapped in a clash of narratives, which opposes groups of countries across fault-lines, contributing to the gloomy mood in the weeks leading to MC13. Options on the table are not clear and narrow enough for Ministers to be able to bridge gaps.

The agenda item on e-commerce

In Abu Dhabi, members will discuss the continuation of discussions taking place under the Work Programme on e-commerce, and will decide on the future of the current Moratorium on Customs Duties on Electronic Transmissions. The Work Programme, launched in 1998, involves all WTO members, and aims to build understanding around the trade-related aspects of e-commerce, including the relation between e-commerce and existing WTO agreements, and its interplay with development. The Moratorium was also introduced in 1998, and exempts digital products, such as online films, music, and software from tariffs (customs duties) as they cross borders. The Moratorium has been extended roughly every two years by consensus, and the current extension will expire at MC13.

The continuation of the Work Programme could be relatively straightforward, especially considering the 2022 Ministerial decision to reinvigorate the Work Programme, and the concrete efforts made to ensure that the discussions emphasize the development dimension. However, the issue may become embroiled in the controversy surrounding the extension of the Moratorium. While some countries hope to make the moratorium permanent, others are increasingly putting its renewal into question. A vocal group of developing countries – including India, South Africa and Indonesia, among others, claims that the Moratorium is depriving developing countries of much needed revenue, citing a study that supports this position. This revenue loss could be even more significant in the future, as digitalization continues, and new technologies, such as 3D printing, develop.   

Alternatively, the Moratorium is supported by a considerable group of WTO members, including the EU and China, and by a large number of organizations in the business sector, as can be observed from a recent Global Industry Statement. Countries often cite studies produced by the OECD, WTO and St. Gallen Endowment for Prosperity Through Trade, among others, to argue that the imposition of customs duties would not only be difficult and costly to implement, but it would actually bring reduced additional revenue to developing countries. In general terms, developed and developing countries agree on the importance of increasing governmental revenue collected from e-commerce transactions, but not on the preferred instrument to do so (tariffs or domestic taxation, such as VAT).

Rendering the Moratorium permanent is not achievable in MC13. Currently, there are split views on whether the Moratorium will be extended for another couple of years or not. While some think an extension does not seem likely – especially considering the US wavering commitment to the liberalization of digital trade – others believe that the give-and-take dynamics at the WTO will once again produce compromise. All sides agree, however, that the extension is becoming harder to approve at every Ministerial, and the multilaterally-agreed Moratorium may be coming to an end. This would not mean, however, that the topic would be absent from the WTO, since a moratorium on customs duties is also being discussed in parallel by the Joint Initiative on e-commerce, an ongoing negotiating process among 90 WTO Members aiming to produce a binding agreement on e-commerce among participants.  

The side discussions at MC13: Joint Initiative on e-commerce

A statement issued by the co-conveners of the JI on e-commerce made clear that, despite best efforts made throughout 2023, a final agreement would not be concluded by MC13. The JI officially began negotiations in 2019 with an ambitious agenda, which included enabling issues, customs duties and market access, as well as a wide range of digital policy issues, such as data flows, localisation, data protection, access to the source code, cybersecurity, and spam. A preliminary agreement has been achieved in the broad areas of digital trade facilitation, open digital environment, and business and consumer trust, covering thirteen specific issues.

Henceforth, negotiators will focus on topics in which agreement could be “within reach”, according to the co-conveners, such as e-payments, development provisions, and customs duties. Nevertheless, the future of negotiations on some of the most ‘digital’ issues, such as data flows and source code, is uncertain. These issues have been very polarized from the outset, and suffered a considerable setback when the US decided to withdraw its support for these areas in order to preserve domestic policy space.

In January, the co-conveners issued a ‘Chairs’ text’ which expresses their views about where the landing zone of potential agreement could be. This text will inspire side discussions at MC13. Negotiators will seek to take advantage of the presence of high-level officials to unblock stalemates before the March round of negotiations of the JI begins.

The indirect impact of other MC13 agenda items on digital trade

At MC13 discussions on WTO reform will continue, including on whether and how to incorporate agreements produced by Joint Initiatives into the WTO legal architecture. Some actors see Joint Initiatives as key mechanisms to make progress on trade liberalization, in a context in which consensus on rule making has been harder to achieve on a multilateral basis. Others argue that Joint Initiatives go against consensus-based decision-making and weaken multilateralism at the WTO. India, South Africa, and Namibia in particular, introduced a communication questioning the legality of Joint Initiatives and their outcomes.

During MC13, the chairs of the JI on Investment Facilitation for Development (IFD) will seek the inclusion of the recently-produced agreement under Annex 4 of the Marrakesh Agreement, which deals with WTO Plurilateral Agreements. Nevertheless, such an inclusion would require a hard-to-achieve consensus among all WTO Members. In this context, the JI on IFD will be an important test-case for other JIs, including for a JI on e-commerce agreement.

Another issue under discussion during MC13 with impact not only on digital trade, but also on digital policy, more broadly, is the ‘Draft ministerial declaration on strengthening regulatory cooperation to reduce technical barriers to trade’. The Committee on Technical Barriers to Trade (TBT) has been one of the hot spots in which geoeconomics have more clearly reverberated in the work of the WTO. In recent years, the number of trade concerns related to digital issues have been rising.  

On the one hand, domestic regulations have been questioned under the TBT Agreement, notably in fields such as cybersecurity and cryptography. On the other hand, Members of the TBT committee have discussed the role of international standards in addressing (and mitigating) regulatory fragmentation in the field of emerging technologies, such as artificial intelligence. The draft declaration states that “cooperation on emerging issues – particularly in the context of international standards development and adoption – provides an opportunity to promote regulatory convergence where appropriate”. The declaration urges the the Committee to enhance its work on emerging regulatory challenges, including in the digital economy.

Looking forward: The impact of MC13 on digital trade governance

The outcomes from MC13 are not going to significantly change the e-commerce landscape. The non-renewal of the moratorium would carry an important symbolic weight, and could be a setback against the WTO’s primary goal to remove tariff barriers to trade, contributing to sapping trust in the Organization. Nevertheless, even if the Moratorium is not renewed, many countries have already committed to a moratorium on customs duties in the context of free trade agreements that they celebrated – according to the OECD 95% of digital trade chapters include such provision. Moreover, if a moratorium is agreed in the JI, at least 90 countries would abide by it at the WTO. The end of the moratorium would certainly create policy space for the countries which have not committed to the non-introduction of customs duties, but it is not clear whether and how they would make use of such space.

One of the collateral consequences of MC13 could be, therefore, to highlight once more the key importance of FTAs for the legal architecture of global digital trade. In particular, FTAs could be seen as the way to “get things done” if the opposition to JIs manages to deter the incorporation of outcomes from joint initiatives into the WTO legal architecture. This could consolidate the growing perception that the most dynamic aspects of the digital economy need to be taken elsewhere and discussed separately, notably in Digital Economy Agreements (DEAs). The WTO continues to be a custodian of the baseline agreements that serve as pillars to the global trading system. However, advancements are taking place outside the WTO framework, at different speeds and geometries, enhancing the complex tapestry of trade policy and regulation.  

Marília Maciel is the Head of Digital Commerce & Internet Policy at Diplo.

To read the full blog post published by Diplo, click here.

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WITA’s Friday Focus on Trade – February 9, 2024

Commerce Tariff Moratorium at 25

 

Following is an excerpt from the report “WTO E-Commerce Tariff Moratorium at 25” by Malena Dailey & Ed Gresser at the Progressive Policy Institute.

The WTO’s 164 members have some significant calls to make this month, on an array of agenda topics ranging from fishery subsidies to agricultural stockpiling, intellectual property, and — not least — whether to extend their quartercentury-old pledge for “duty-free cyberspace.” This policy, more technically if clunkily termed a “moratorium on application of tariffs to crossborder electronic transmissions,” represents a 25-year-old consensus — always temporary but regularly renewed at each WTO Ministerial meeting — which helped to create and continues to underpin the modern global digital economy. If they renew it, no WTO member would need to change policy. Rather, they would simply continue to refrain from grabbing and tampering, while focusing their energy on issues in need of activist policy, from privacy protection to cybersecurity and action against disinformation. This commitment, simply by avoiding unintentional harm, would allow the digital economy to continue the natural growth that has helped hundreds of thousands of small businesses, and an uncountable but very large number of individuals, enter the global economy and find new ways to realize dreams and earn incomes.

 

The “moratorium,” however, is under some stress and criticism, mainly from left-populist NGOs and a few large developing-country governments. Their argument, fundamentally, is that the moratorium prevents taxation of data flows and therefore deprives developing-country governments of some tax revenue. But abandoning the moratorium would be a sad mistake, for global growth, for innovation, and for the governments who, in focusing on potential tax revenues (which, see below, are quite modest), are losing sight of their much larger growth and development opportunities. And it would be a sad mistake for the Biden administration’s hope for a more ‘inclusive’ trading system that offers more opportunity for small businesses and marginalized communities. Duty-free cyberspace remains critical to all these things, and the WTO members should enthusiastically endorse it once again.

Read the Full Report Here



















01/31/2024 | Malena Dailey & Ed Gresser | Progressive Policy Institute
 









Fisheries Subsidies: Will World Trade Organization Members Finish the Job at MC13?

Following are excerpts from a policy analysis by Tristan Irschlinger published by the International Institute for Sustainable Development.

Members of the World Trade Organization (WTO) clinched a historic deal on fisheries subsidies in June 2022, drawing applause from around the world. But while there is no denying the importance of this agreement, it is too early to call it a definitive success just yet. The agreement’s ultimate contribution to safeguarding the health of marine resources still depends on its entry into force, faithful implementation, and—perhaps most importantly—WTO members’ ability to strengthen it with additional rules to tackle harmful fisheries subsidies more broadly. What can we expect ahead of the WTO’s Thirteenth Ministerial Conference (MC13)?…

…Ongoing talks can be seen as an opportunity to better address the underlying role of subsidies in driving overcapacity in global fishing fleets and incentivizing unsustainable levels of fishing.

It is precisely these additional rules that members are now negotiating. While the agreement reached at MC12 aims to prevent the most damaging impacts of fisheries subsidies, the ongoing talks can be seen as an opportunity to better address the underlying role of subsidies in driving overcapacity in global fishing fleets and incentivizing unsustainable levels of fishing. As such, they are an opportunity to tackle more directly, and more broadly, one of the root causes of overfishing.

The further disciplines that are envisaged rely on three key elements: (1) a main prohibition of subsidies that contribute to overcapacity and overfishing, including a list of subsidy types that are presumed to do so; (2) an exception allowing subsidies to continue when members can show that they apply fisheries management measures to keep stocks healthy; and (3) special and differential treatment (SDT) for developing country members, in the form of temporary and permanent exemptions from the rule and the management exception for subsidies by these members. The proposed disciplines also include prohibiting subsidies “contingent upon or tied to” fishing beyond the subsidizing member’s waters, as well as additional transparency requirements.

Read the Full Policy Analysis Here
 

01/11/2024 | Tristan Irschlinger | International Institute for Sustainable Development

The Global Arrangement for Sustainable Steel and Aluminum & New Opportunities for Climate Cooperation

Next week, on February 12-13, WITA will host its annual International Trade Conference. One of the authors of this report, Catrina Rorke, will take part in the session titled “Balancing at the Border – Trade Policies to Close the Pollution Loophole.” Information can be found here and below.

The industrial sector produces more than 25% of global CO2 emissions. No climate solution can be effective without identifying and mobilizing decarbonization pathways for hard-to-abate manufacturing processes, like those required to produce steel, aluminum, cement, fertilizers, and chemicals. Firms are innovating low-carbon solutions, but a singular challenge remains: stiff competition from low-cost suppliers makes it difficult to finance the development and deployment of innovative, lower-carbon processes and technologies. This is especially true in competition between firms operating in market economies and state-owned enterprises.

Recognizing that firms face significant hurdles to achieving decarbonization, the United States and the European Union have launched negotiations for the Global Arrangement for Sustainable Steel and Aluminum (Global Arrangement or GASSA), the first trade agreement of its kind. It will enable the parties to work together toward reducing sources of global non-market excess capacity (NMEC) in steel and aluminum manufacturing and lowering the carbon intensity of traded products.

The approach is revolutionary. It brings together two of the largest, cleanest manufacturers and the most powerful consumer markets in the world to reform trade in energy-intensive goods. Prior Council research has demonstrated that successful resolution of the Global Arrangement can reduce global industrial emissions, reward carbon-efficient manufacturers and workers, and generate clear benefits for participating economies. Moreover, the Global Arrangement can provide a powerful template for future agreements between additional countries, covering additional commodities and addressing global manufacturing practices across a number of important sectors.

Read the Full Report Here
 

12/13/2023 | Catrina Rorke & Matthew C. Porterfield | Climate Leadership Council

The Role of AI in Developing Resilient Supply Chains

The term artificial intelligence (AI) was first introduced in the 1950s, but it wasn’t until the launch of ChatGPT, which amassed over 100 million users within just two months in late 2022, that the public began to take notice. Similarly, the importance of “supply chain management,” a term coined in the 1980s, was largely overlooked until the COVID-19 pandemic led to prolonged shortages of various products, from personal protective equipment to semiconductors. Today, an increasing number of companies are turning to AI to manage their global supply chains. Two questions arise: can AI enhance supply chain resilience? What impact will AI have on employment in supply chain management?

 

The missing link between AI and supply chain in Biden’s executive orders

 

The Biden administration has paid considerable attention to both global supply chains and AI. In 2023, President Biden signed two executive orders: one regarding governance and responsibility in AI development and another to improve supply chain resilience. In June 2023, the White House released a progress report to build resilient supply chains for four critical products: semiconductors, large-capacity batteries, critical minerals and materials, and active pharmaceutical ingredients. The development of resilient supply chains is a key component of Bidenomics. For this endeavor, Biden attained $52.7 billion from Congress through the CHIPS and Science Act. Later, in October 2023, the White House released a report summarizing President Biden’s executive order on Safe, Secure, and Trustworthy AI. The order requires developers of powerful AI systems to meet certain safety standards before publicly releasing their solutions. Finally, President Biden announced in November 2023 the establishment of the new White House Council on Supply Chain Resilience to develop new capabilities to monitor existing and emerging risks and to detect and respond to supply chain disruptions in critical sectors with supply chain partners. Although these policies are promising, American policymakers have yet to address the inherent connection between AI development and supply chain resilience.

 

This trend is not limited to the United States. First proposed in 2021, the EU Parliament reached a provisional agreement with the Council on the EU AI Act in December 2023. The policy provides guidance for high-risk AI systems and breaks down responsibilities throughout the AI supply chain with requirements for importers, distributors, and other supply chain stakeholders.

 

 




















Read the Full Article Here
 

02/05/2024 | Maxime C. Cohen & Christopher S. Tang | Georgetown Journal of International Affairs

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Information about upcoming WITA and trade community events

TRADE COMMUNITY EVENTS CALENDAR

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Preview of the World Trade Organization’s 2024 Ministerial Conference

The World Trade Organization (WTO) will hold its 13th Ministerial Conference (MC13) in Abu Dhabi from 26 to 29 February 2024. Priority items on the MC13 agenda are likely to include the reform of the WTO’s dispute settlement function; new disciplines to eliminate fisheries subsidies that encourage overfishing and overcapacity, to complement the multilateral Agreement on Fisheries Subsidies adopted at MC12 in June 2022 and currently under ratification; the integration of the plurilateral Investment Facilitation Agreement into the WTO legal architecture; and the extension of the e-commerce moratorium. WTO members are set to endorse formally the WTO accession of Comoros and Timor-Leste, increasing the organisation’s membership to 166.

Restoring a fully and properly functioning WTO dispute settlement system

Since December 2019, the Appellate Body – the second instance of the WTO’s dispute settlement body– has been paralysed, after the United States (US) repeatedly blocked the nomination of new judges to review appeals of first-instance panel reports. In line with the MC12 mandate to restore a functioning dispute settlement system by 2024, WTO members have held informal negotiations on two separate tracks: one that has led to a draft consolidated text on issues other than the appeal mechanism, and another for the debate on the appeal mechanism that as of January 2024 was still focused on ‘the identification of certain concepts that could offer a solution to this critical issue’. Speaking for the Appellate Body’s main critics, US Trade Representative Katherine Tai, at the G20 Summit in India in August 2023, stated that the ongoing new and constructive process of reforming the WTO’s dispute settlement function ‘requires a fundamental rethink’ with a view to ending ‘the practice of judicial rule making’, among other things. She emphasised that the US had tabled 30 ideas, including on the appeal mechanism. At a US think-tank event in September 2023, she specified key points of the US position, e.g. the need for appropriate alternatives to litigation (leading by example, the US recently resolved all its trade disputes with India through methods other than litigation), an end to ‘judicial overreach’, for WTO members’ policy space to be restored, to allow them to regulate on climate-change issues and non-market practices, and for members to remain free in their legitimate national-security judgements. Some commentators do not expect a breakthrough at MC13, since the 2024 deadline coincides with the US presidential election year, in which repairing a system that in the US is perceived by both Democrats and Republicans as having allowed the ‘China shock’ that eliminated millions of US jobs would politically be very challenging for the Biden administration.

Complementing the Agreement on Fisheries Subsidies

MC12 ended with the adoption of a multilateral Agreement on Fisheries Subsidies that prohibits support for illegal, unreported and unregulated (IUU) fishing, bans support for fishing overfished stocks, and ends subsidies for fishing on the unregulated high seas. WTO members have since negotiated a ‘second wave’ of disciplines eliminating fisheries subsidies that contribute to overcapacity and overfishing. In January 2024, they held a ‘Fish month’based on the latestendorsed draft text, with the aim of transmitting a clean text to ministers at MC13. Experts have stressed that WTO members continue to diverge on a wide range of topics, including on the details of exemptions for developing countries. Acceptances from two-thirds of WTO members are required for the Agreement to enter into force. By January 2024, 55 WTO members, i.e. roughly one-third of the WTO membership, had transmitted their instruments of acceptance.

Incorporating the Investment Facilitation Agreement into WTO legal architecture

In July 2023, a subset of more than 110WTO members finalised negotiations on a plurilateral Investment Facilitation Agreement aimed at eliminating red tape that hampers investment. They opted for a plurilateral negotiating format to develop new WTO rules as a way of overcoming deadlock if consensus is elusive. The talks were launched under a 2017 Joint Statement Initiative after the failure of multilateral trade negotiations on a range of topics under the 2001 Doha Development Round. The 118 countries have since sought to incorporate the agreement, whose benefits would accrue to all WTO members under the most favoured nation principle, into the WTO legal architecture as an ‘Annex4 agreement’. This requires consensus from all 164 current WTO members, some of which, including India and South Africa, are strongly opposed to such a move. They argue that only rules negotiated by all WTO members should be added to the WTO rulebook. Only 9%of WTO members have never participated in a WTO plurilateral deal.

Extending the e-commerce moratorium

Since MC2 in 1998, WTO members have regularly extended the moratorium on the imposition of customs duties to electronic transmissions as part of the work programme on e-commerce, while the definition of ‘electronic transmissions’ as well as the moratorium’s scope and impact have remained controversial. Absent an MC13 decision to extend it, the moratorium will expire automatically in March 2024. The related debate at MC13 could yet again pit developed countries such as the EU and the US, which support the moratorium, against developing countries such as India and South Africa, which call for ending it. The latter have long claimed that, adding to the growing digital divide between developed and developing countries, the moratorium prevents developing countries from taking advantage of the growing imports of electronic transmissions. However, the US has argued that, as some studies have shown, a decrease in digital trade resulting from ending the moratorium would lead to a bigger economic loss for developing countries than potential foregone customs revenue. According to a 2023 Organization for Economic Co-operation and Development (OECD) study, the cost of terminating the moratorium would be considerable. A 2023 International Monetary Fund (IMF)report emphasises other methods of revenue collection resulting from digital trade. As of December 2023, differences among WTO members on the moratorium’s future persist, ‘including the need for more discussions on its definition, scope and impact

Extending the TRIPS waiver for COVID-19 vaccines to diagnostics and therapeutics

At MC12, WTO members endorsed a five-year waiver for intellectual property (IP) protection under the WTO agreement on trade-related aspects of intellectual property rights (TRIPS),to enable developing countries to manufacture and distribute COVID-19 vaccines. WTO members also mandated a decision within six months on a potential extension of this waiver to the production and supply of COVID-19 diagnostics and therapeutics, as requested by India, South Africa and some 63other WTO members. The debate in the WTO seems to have entered an impasse. US lobby groups as well as lawmakers have pressed the Biden administration to oppose a waiver extension. The former are concerned that the extension could stifle medical research, the latter that it ‘could outsource to foreign countries advanced manufacturing and research jobs that should exist in the United States’. A 2023 US International Trade Commission report states that ‘the wide disparity among countries in their ability to access COVID-19 diagnostics and therapeutics is the result of multiple factors, including access to IP, prices and affordability, regulatory approvals, healthcare infrastructure, and the healthcare priorities of governments’. The EU’s December 2023 statement to the WTO General Council on the follow-up to MC12 issues notes’ that little progress has been made in this complex discussion and the positions of Members remain far apart’

Preview of the World Trade Organization's 2024 Ministerial Conference

To access information about the document and read the “At a Glance” section as it was published by European Parliamentary Research Service, click here.

To read the full document, click here.

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WTO E-Commerce Tariff Moratorium at 25

Here’s semi-mythical classical sage Lao Tzu, with some poetic advice to authorities who long to fix things. Sometimes they’re not broken, and are best left as is:

“Those who would gain all under heaven by tampering with it — I have seen that they do not succeed. Those that tamper with it, harm it. Those that grab at it, lose it.”

Prosaic modern economists occasionally echo him, with the unexciting but sometimes correct advice: “Don’t just do something, stand there.”

As the World Trade Organization (WTO) prepares for its 13th Ministerial Conference late in February, both the ancient sage and the modern wonks are offering very good (if also very modest) advice on the most modern of all technologies: the internet and the world’s digital economy. If the WTO members take heed, they will help growth and development in lower-income countries, and simultaneously help the Biden administration achieve its goal of a more “inclusive” trading system that does more to create opportunities for the small and the less powerful “empowering small businesses to enter the market, grow, and compete.”

THE MORATORIUM AND THE DIGITAL ECONOMY 1989-2023

The WTO’s 164 members have some significant calls to make this month, on an array of agenda topics ranging from fishery subsidies to agricultural stockpiling, intellectual property, and — not least — whether to extend their quartercentury-old pledge for “duty-free cyberspace.” This policy, more technically if clunkily termed a “moratorium on application of tariffs to crossborder electronic transmissions,” represents a 25-year-old consensus — always temporary but regularly renewed at each WTO Ministerial meeting — which helped to create and continues to underpin the modern global digital economy. If they renew it, no WTO member would need to change policy. Rather, they would simply continue to refrain from grabbing and tampering, while focusing their energy on issues in need of activist policy, from privacy protection to cybersecurity and action against disinformation. This commitment, simply by avoiding unintentional harm, would allow the digital economy to continue the natural growth that has helped hundreds of thousands of small businesses, and an uncountable but very large number of individuals, enter the global economy and find new ways to realize dreams and earn incomes.

The “moratorium,” however, is under some stress and criticism, mainly from left-populist NGOs and a few large developing-country governments. Their argument, fundamentally, is that the moratorium prevents taxation of data flows and therefore deprives developing-country governments of some tax revenue. But abandoning the moratorium would be a sad mistake, for global growth, for innovation, and for the governments who, in focusing on potential tax revenues (which, see below, are quite modest), are losing sight of their much larger growth and development opportunities. And it would be a sad mistake for the Biden administration’s hope for a more ‘inclusive’ trading system that offers more opportunity for small businesses and marginalized communities. Duty-free cyberspace remains critical to all these things, and the WTO members should enthusiastically endorse it once again. By way of context, the WTO’s “moratorium” dates to the late 1990s — the era just after the launch of the World Wide Web — and originates in prescient American thinking about the Internet’s potential future growth. Developed in that world of 150 million mostly American, European, and Japanese internet users, their hypotheses and projections look very good a quarter-century later. Here for example is that era’s U.S. Trade Representative, Charlene Barshefsky, explaining the early U.S. agenda in 1999:

“Moving on from the foundational commitment we won from the WTO members in 1998 on the principle of “dutyfree cyber-space” — that is, ensuring that electronic transmissions over the Internet remain free from tariffs — we are moving on to a longer-term work program. Its goals include ensuring that our trading partners avoid measures that unduly restrict development of electronic commerce; ensuring that WTO rules do not discriminate against new technologies and methods of trade; according to proper application of WTO rules to trade in digital products; and ensuring full protection of intellectual property rights on the Net. At the same time, we are working with individual trading partners on a series of related questions — for example, on privacy issues where we have worked closely with the European Union to create a model that both protects consumer privacy and prevents unnecessary barriers to transatlantic economic commerce.”

Her list of topics remains strikingly current. Some of the issues she cites still raise complex questions within the United States and are still politically contested both within countries and between large trading economies and technological powers. Technical debates over copyright continue to animate thinkers and lawyers in Silicon Valley and Hollywood, for example; likewise, the U.S. and the European Union still argue over privacy while working to preserve cross-Atlantic data flows. But two things seem clear.

One, the “foundational” moratorium on tariffing electronic transmissions remains at the heart of digital policy. In pleasing contrast to many trade agreements, it is a short one-sentence commitment in plain English. (Or plain French, or plain Spanish — the other two official WTO languages.) The actual texts of its first 14-word iteration, and the slightly longer renewals in 2019 and 2022, read like this:

“Members will continue their current practice of not imposing customs duties on electronic transmissions.” (Original moratorium in 1998)

“Members agree to maintain the current practice of not imposing customs duties on electronic transmissions until the 12th Ministerial Conference.” (2019 renewal)

“We agree to maintain the current practice of not imposing customs duties on electronic transmissions until MC13, which should ordinarily be held by 31 December 2023. Should MC13 be delayed beyond 31 March 2024, the moratorium will expire on that date unless Ministers or the General Council take a decision to extend.” (2022 renewal)

And two, in practical terms it continues to work. Over this quarter-century of not grabbing and not tampering:

World Internet Population Up by More Than 5 Billion: As governments have “stood there,” the world’s Internet user population has grown from 150 million to 5.5 billion, or from about 4% to 60% of humanity.

Over 1000-Fold Rise in Data Transmission: Transmissions of data over the Internet, estimated at 100 quadrillion bytes in 2000 by Cisco Systems in its fondly remembered “Visual Networking Index,” rose to 93 quintillion in 2017 — nearly 1,000-fold — before the Cisco statisticians gave up trying.

U.S. Domestic E-Commerce Up by $35 Trillion: The level of e-commerce within the United States has grown from the $700 billion Ambassador. Barshefsky noted in her speech (as estimated by the Commerce Department) to $36 trillion, a figure now about 30% greater than the U.S.’ $26 trillion GDP. Internationally no such figures exist, but the WTO’s most recent annual statistical summary, World Trade Statistics 2023, points to a single form of electronic commerce — digitally enabled trade in services — as the most dynamic element of 21st-century trade:

“Looking back through the entire pandemic period, computer services were the most dynamic sector in services trade, with global exports in 2022 worth 44% more than their value in 2019. Digitally delivered services — that is, services provided via computer networks, from streaming games to remote consulting services — are an emerging source of growth, accounting for 54% of global services exports in 2022, and 12% of total global trade in goods and services.”

New Industries Steadily Emerging: The moratorium has facilitated this by keeping the cost of data transfer low, enabling not only growth, but also the transformation of existing industries, and the creation of entirely new ones: “influencers,” social media, telemedicine, and distance education; or, alternatively, digital services integrated in manufactured goods from cars and medical technology to rice-planting machines and smartphones.

SMALL BUSINESS AND THE ‘DEMOCRATIZATION’ OF TRADE

The picture of trading firms has also changed noticeably and to the benefit of the smaller and less advantaged: digital technologies lower the costs of entry to the trading world for everyone, but disproportionately for small firms and individuals.

In-depth reviews of the challenges American SMEs (small and medium-sized enterprises) face in international trade done by the U.S. International Trade Commission in 2010 suggest obvious reasons why these businesses (and by extension individual entrepreneurs) would, relatively speaking, find special value in lowcost Internet access. They report particular challenges, for example, in finding overseas customers, navigating required customs documentation, securing payment, and managing returns. Large firms traditionally open overseas offices that settle these problems; small ones, except in special cases such as family firms with relatives in two or more countries, can’t. The smaller ones, with new access to low-cost email, data analytics, and social media, should be able to use digital technologies to (at least in part) compensate for this disadvantage.

Edward Gresser is Vice President and Director for Trade and Global Markets of the Progressive Policy Institute. Before joining PPI in October 2021, he served as Assistant U.S. Trade Representative for Trade Policy and Economics, and concurrently as Chair of the U.S. government’s interagency Trade Policy Staff Committee.



Malena Dailey is the Director of Technology Policy with the Progressive Policy Institute, where she works on issues relating to social media and the internet and technology sector.

PPI-WTO-Moratorium

To read the introduction as it is posted on Progressive Policy Institute’s website, click here.

To read the full report published by the Progressive Policy Institute, click here.

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Trade Policy, Industrial Policy, and the Economic Security of the European Union

Out of fear about its economic security, the European Union is transitioning to a new form of international economic and policy engagement. The Trump administration in the United States, Russia’s invasion of and war on Ukraine, and concerns over China’s increasingly aggressive foreign and economic policies have combined to put a new EU policy into motion. Without the assurance that other countries will continue to follow the rules of a multilateral trading system, the European Union is working through what comes next.

It is taking steps to rebalance its position in the global economy. While seeking to preserve the benefits of interdependence with the rest of the world, the European Union is contemplating policies that would induce change. One change seeks to alter the footprint of global production for certain goods, affecting whom it sources imports from and whom it sells exports to. It wants to decrease certain trade dependencies (which could be weaponized) and increase others (to encourage diversification). A second change is the enactment of new contingent policy instruments intended to allow the European Union to respond more quickly when policymakers in other countries act badly (or to establish a credible threat sufficient to deter them from doing so in the first place).

This paper describes how the European Union is seeking to use trade and industrial policy to achieve its economic security objectives. It identifies some of the economic costs and tradeoffs of using such policies. Because the issues it examines—many of which are noneconomic, for which reasonable estimates of costs and benefits are lacking—are evolving, the paper shies away from normative recommendations. Instead, it explores the political economy of what is emerging and why. The paper focuses on EU efforts to “de-risk” vis-à-vis China especially, given the emphasis EU policymakers now place on doing so.

The paper is organized as follows. Section 2 defines the concept of economic security and the events that led it to play such a sudden and prominent role in modern policy. It provides some early evidence to motivate the new policy interventions but emphasizes that much remains unknown, especially concerning their design.

Section 3 explores a case study that highlights the difficult choices the European Union faces in responding to threats to its economic security. The case study involves the electric vehicle (EV) industry, the European Union’s potential use of trade defense instruments (TDIs) to address unfairly subsidized imports from China, and China’s potential retaliatory response of placing export restrictions on graphite, a critical material needed to manufacture EV batteries. It also identifies unknowns facing policymakers seeking “a clear-eyed picture on what the risks are,” in the words of European Commission President Ursula von der Leyen. The section also explores empirically whether the European Union’s trade interdependence with China may be deepening—despite stated goals to de-risk—in part because of the third-country effects arising from the US– China trade war.

Section 4 introduces the policy instruments the European Union, its member states, and other governments are pursuing to address concerns about their economic security. They include stockpiling and inventory management, investment or production subsidies, various forms of tariffs, export controls, and regulations on foreign investment. This section also highlights proposals for new policy instruments, analyzes the associated tradeoffs, and briefly describes basic World Trade Organization (WTO) rules that might discipline such instruments.

Section 5 turns to the potential for selective international cooperation over the use of such policy instruments. It explores how countries facing common concerns over economic security have been acting in coordinated fashion— implicitly or explicitly—and the difficulties of doing so.

Section 6 concludes with some caveats and lessons from history.

Trade policy, industrial policy, and the economic security of the European Union

To read the abstract published by the Peterson Institute for International Economics, click here.

To read the full working paper, click here.

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