William Krist's Blog, page 12
January 24, 2024
Commission Proposes New Initiatives to Strengthen Economic Security
The Commission adopted five initiatives to strengthen the EU’s economic security at a time of growing geopolitical tensions and profound technological shifts. The package aims to enhance the EU’s economic security while upholding the openness of trade, investment, and research for the EU’s economy, in line with the June 2023 European Economic Security Strategy.
Today’s proposals are part of a broader three-pillar approach to EU economic security by promoting the EU’s competitiveness, protecting against risks and partnering with the broadest possible range of countries to advance shared economic security interests.
The initiatives adopted today aim at:
further strengthening the protection of EU security and public order by proposing improved screening of foreign investment into the EU;
stimulating discussions and action for more European coordination in the area of export controls, in full respect of existing multilateral regimes and Member States’ prerogatives;
consulting Member States and stakeholders to identify potential risks stemming from outbound investments in a narrow set of technologies;
promoting further discussions on how to better support research and development involving technologies with dual-use potential;
proposing that the Council recommends measures aimed at enhancing research security at national and sector level.
Future EU actions will continue to be informed by the on-going risk assessments and by strategic coordination with Member States to reach a shared understanding of the risks that Europe faces and of the appropriate actions.
Legislative proposal to strengthen foreign investment screening
Foreign investments into the EU benefit the European economy. However, certain foreign investments may present risks to the EU’s security and public order. The Commission has reviewed over 1,200 foreign direct investment (FDI) transactions notified by Member States over the past 3 years under the existing FDI Screening Regulation. Building on this experience and extensive evaluation of the functioning of the current regulation, today’s proposal addresses existing shortcomings and improves the efficiency of the system by:
ensuring that all Member States have a screening mechanism in place, with better harmonised national rules;
identifying minimum sectoral scope where all Member States must screen foreign investments;
extending EU screening to investments by EU investors that are ultimately controlled by individuals or businesses from a non-EU country.
Monitoring and assessment of outbound investment risks
The EU is one of the biggest foreign investors in the world and recognises the importance of open global markets. It also acknowledges the growing concerns regarding outbound investments in a narrow set of advanced technologies that could enhance military and intelligence capacities of actors who may use these capabilities against the EU or to undermine international peace and security.
This is currently neither monitored nor controlled at EU or Member State level. The Commission’s White Paper on Outbound Investments is therefore proposing a step-by-step analysis of outbound investments to understand potential risks linked to them. This analysis will include a three-month stakeholder consultation and a 12-month monitoring and assessment of outbound investments at national level, which will contribute to a joint risk assessment report. Based on the outcome of the risk assessment, the Commission will determine, together with Member States, if and which policy response is warranted.
More effective EU control of dual-use goods exports
Today’s increasingly challenging geopolitical context requires action at EU level to improve the coordination of export controls on items with both civil and defence uses – such as advanced electronics, toxins, nuclear or missile technology – so that they are not used to undermine security and human rights. Today’s White Paper on Export Controls proposes both short and medium-term actions, in full respect of the existing rules at EU and multilateral level. The Commission proposes to introduce uniform EU controls on those items that were not adopted by the multilateral export control regimes due to the blockage by certain members. This would avoid a patchwork of national approaches.
The White Paper also provides for a senior level forum for political coordination and announces a Commission Recommendation in Summer 2024 for an improved coordination of National Control lists prior to the planned adoption of national controls. The evaluation of the EU Dual-Use Regulation is advanced to 2025.
O ptions to support research and development in technologies with dual-use potential
With a White Paper on options for enhancing support of research and development (R&D) of technologies with dual-use potential, the Commission launches a public consultation. Announced by President von der Leyen in November 2023, the White Paper contributes to the ‘promote’ dimension of the European Economic Security Strategy, aiming at maintaining a competitive edge in critical and emerging technologies with the potential to be used for both civil and defence purposes.
The White Paper reviews current relevant EU funding programmes in the face of existing and emerging geopolitical challenges and assesses whether this support is adequate for technologies with dual-use potential. It then outlines three options for the way forward: (1) going further based on the current set-up, (2) removing the exclusive focus on civil applications in selected parts of the successor programme to Horizon Europe, and (3) creating a dedicated instrument with a specific focus on R&D with dual-use potential. Public authorities, civil society, industry, and academia can have their say in an open public consultation and inform the Commission’s next steps until 30 April 2024.
Enhance research security across the EU
In today’s complex geopolitical context, the openness and borderless cooperation in the research and innovation sector may be exploited and turned into vulnerabilities. Results of international research and innovation cooperation can be used for military purposes in third countries, or in violation of fundamental values. Higher education and research institutions can fall victim to malign influence by authoritarian states.
Against this background, the Commission presents a proposal for a Council Recommendation to provide more clarity, guidance and support to Member States and the research and innovation sector at large. EU action is required to ensure consistency across Europe and to avoid a patchwork of measures. By joining forces at all levels and across the Union we can mitigate the risks to research security and ensure that international research and innovation cooperation is both open and safe. The overall approach follows the principle ‘as open as possible, as closed as necessary’ as regards international research cooperation.
Background
On 20 June 2023, the European Commission and the High Representative published a Joint Communication on a European Economic Security Strategy, to minimise the risks in the context of increased geopolitical tensions and accelerated technological shifts, while preserving maximum levels of economic openness and dynamism. It provides a framework for assessing and addressing – in a proportionate, precise and targeted way – risks to EU economic security, while ensuring that the EU remains one of the most open and attractive destinations for business and investment.
The strategy identified four risk categories to be addressed as a matter of priority: supply chains; physical and cyber-security of critical infrastructure; technology security and technology leakage; weaponisation of economic dependencies or economic coercion.
To address these risks, the Strategy is structured around three pillars:
Promoting the EU’s competitiveness and growth, strengthening the Single Market, supporting a strong and resilient economy, and strengthening the EU’s scientific, technological and industrial bases.
Protecting the EU’s economic security through a range of policies and tools, including targeted new instruments where needed.
Partnering and further strengthening cooperation with countries worldwide who share our concerns and those with which we have common economic security interests.
To read the press release as it appears on the European Commission’s press corner, click here.
For more information
Communication: advancing European economic security: an introduction to five new initiatives
Proposal for a Council Recommendation on enhancing research security
White Paper on export controls
White Paper on outbound investment
Proposal for a new regulation on the screening of foreign investments
Memo on European Economic Security
Factsheet – Proposal for a Council Recommendation on enhancing research security
Factsheet – White Paper on export controls
Factsheet – White Paper on outbound investments
Factsheet – Proposal for a new regulation on the screening of foreign investments
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January 16, 2024
A Return to Reciprocity in US Trade Policy
As the United States enters another presidential election year, experts will be at the ready to clarify, debunk, and correct the oversimplifications and flat-out falsehoods spewed by candidates on the campaign trail.
Though all policy issues are vulnerable to this phenomenon, trade stands out, not only for the haphazard way that politicians explain it, but also the repeated misconceptions that have amplified a false narrative warning of the costs of openness and touting the benefits of closure. When Donald J. Trump calls the North American Free Trade Agreement “the worst deal ever negotiated,” and vows to bring jobs back home, detailed expert rebuttals struggle to contend with those punchy soundbites.
Trade has become toxic, not just on the campaign trail, but in the way that it is discussed by both Democrats and Republicans. “Traditional” US trade policy, which began to form its nearly century-old roots under the leadership of President Franklin Roosevelt and his Secretary of State, Cordell Hull, has been described by US Trade Representative Katherine Tai as “trickle-down economics,” where “maximum tariff liberalization…contributed to the hollowing out of our industrial heartland.” Her predecessor, Robert Lighthizer, calls those afflicted towns “ruins,” and has also railed against the international trading system which, through successive rounds of tariff liberalization, opened world markets to US goods and services while lifting billions of people out of poverty.
But the fact that some Americans were hurt by a failure to adjust to foreign competition has become the central grievance of the critics of modern US trade policy and has perhaps overly dominated the debate. This has clouded trade policy discussions with issues better addressed through domestic policy actions, such as workforce development and education policy.
The existence of domestic solutions has not stopped prominent officials, such as President Joe Biden’s National Security Advisor, Jake Sullivan, to question how trade fits into US international economic policy and ask “what problems is it seeking to solve?”
Instead of seeing trade openness as a source of strength, it is now framed as a source of potential weakness. Interdependence is increasingly described as a vulnerability, as countries can weaponize their trade links. However, few ever claimed that trade integration would lead to world peace—in fact, economic coercion is part and parcel of international affairs.
What matters, however, are the boundaries countries draw around what kind of behavior is acceptable and what is not. In the international trading system, the drawing of such lines used to take place at the World Trade Organization, but that institution has been weakened by the United States through its continued objections to the WTO’s appeals mechanism that has successfully, and peacefully, settled hundreds of trade disputes.
The current US approach to trade, if it can be called an approach at all, risks weakening US influence abroad and economically disadvantaging Americans at home. It rests on the false belief that retrenchment of “traditional” US trade policy—by putting America First or catering to a select group of US workers and branding such efforts as “worker-centric trade policy”—will somehow restore the United States to a position of hegemonic dominance with no peer competitor. The reality, however, is that such retrenchment comes with many significant and unforeseen costs that could weaken US leadership in the world. The United States, for the first time since its unipolar moment, is now faced with competition from all corners of the globe and a potential rival in China that could one day upend the status quo. Fears of being overtaken by China should not, however, prompt the United States to sabotage the very order it created and immensely benefited from. Instead of trade wars, what is needed, now more than ever, is to focus on what makes the United States exceptional and to secure a more open and prosperous future at home and abroad.
The problem with trade
The politics of trade have always been contentious. James Madison recognized this early, when writing in Federalist 10, “Shall domestic manufactures be encouraged, and in what degree, by restrictions on foreign manufactures? are questions which would be differently decided by the landed and the manufacturing classes, and probably by neither with a sole regard to justice and the public good.”
Lamenting the power of factions on the legislative process, Madison recognized that adjusting to “these clashing interests” is difficult and could not be done “in many cases… without taking into view indirect and remote considerations, which will rarely prevail over the immediate interest which one party may find in disregarding the rights of another or the good of the whole.” Trade policy was thus vulnerable to capture by special interests clamoring for protection, and these pressures would be difficult to overcome even by a president determined to craft policy for the benefit of the entire country.
Those clashes in US trade policy history are astutely detailed by economic historian Douglas Irwin, who chronicles the countless legislative and ideational battles that eventually led to the trade policy the United States used to lay the groundwork for the international trading system that we have today. Irwin describes the modern era of US trade policy, which begins around 1932, as driven by the objective of reciprocity, where the US government prioritized reductions in tariff and non-tariff barriers through negotiated agreements with other countries.
An important catalyst to this era were the ideas espoused by Secretary of State Cordell Hull, who foresaw the destructive powers of economic nationalism and urged “a revival of world trade” as “an essential element in the maintenance of world peace.” He went on to clarify that “by this I do not mean, of course, that flourishing international commerce is of itself a guaranty of peaceful international relations,” but “that without prosperous trade among nations any foundation for enduring peace becomes precarious and is ultimately destroyed.” Hull also well understood that trade could strengthen ties with foreign allies, not only serving to create economic opportunities, but also to reduce political tension
Those ideas have largely fallen out of favor: President Donald Trump challenged the foundations of the international trading system, and Biden continued Trump’s trade policy, in addition to taking significant actions to pave the way for a new US interest in industrial policy. In fact, though Biden offered a more positive view of the United States’ place in the world during his first presidential campaign, journalist Fareed Zakaria observes that Biden has governed as if “the country has been following the wrong course” leaving Washington “gripped by panic and self-doubt.” That panic and self-doubt has promulgated the belief that the international trading system is broken and in need of remaking. However, the budding new architects seeking to transform it have come to the job without a vision for what it should look like.
A misguided attempt to solve the problem
Both the Trump and Biden administrations have criticized past US trade policy and promised to correct the wrongs inflicted on average Americans, both real and imagined. Those efforts have led to an unprecedented number of executive actions that have put “security” above trade and sown distrust among US allies. It has also led to a troubling embrace of industrial policy, driven by a fear that China will overtake the United States in terms of economic influence, innovation, and raw power. Lighthizer argued that US trade policy should focus on “improving the lives of and opportunities available to regular working people” and “economic efficiency, low prices, and corporate profits,” while “important goals … should be secondary.”
Meanwhile, Jake Sullivan suggests modern US trade policy should move “beyond traditional trade deals to innovative new international economic partnerships focused on the core challenges of our time.” (Both statements, of course, ignore the regressive nature of the US tariff system and its disproportionately negative impact on working families). The examples Sullivan lays out are the Indo-Pacific Economic Framework for Prosperity (IPEF), the Americas Partnership for Economic Prosperity (APEP), the US-EU Trade and Technology Council (TTC), the United States-Mexico-Canada Agreement (USMCA) rapid response labor mechanism, and US talks with the European Union to create a global arrangement for steel and aluminum.
However, a closer look at what those trade policies do reveals that they are unlikely to be the foundation upon which a new consensus on trade can be built. The IPEF does not even include any trade provisions because domestic political pressure led the Biden administration to postpone the conclusion of the trade pillar as the United States heads into an election year where many Democratic congressional seats are up for grabs. The pillars it has concluded, including supply chain resilience, are likely to do little more than improve some information sharing among IPEF’s 14 members, mostly Asian economies that include some of America’s largest trading partners and strategic allies. True resilience requires strengthened trade ties, something the IPEF does not deliver.
Similarly, the APEP does not yet include any trade initiatives, though it does seek to make strategic investments in climate financing and critical technologies, such as semiconductors. The TTC appears more focused on tech than trade, and EU-US trade frictions have continued over Trump-era steel and aluminum tariffs that Biden has upheld in a slightly modified form and vehemently defended as necessary for national security. The global steel arrangement discussions were launched to resolve the impasse over tariffs and create a green steel carbon club, but these have also morphed into a convoluted negotiation primarily concerned with protecting US industry.
Finally, the USMCA rapid response labor mechanism is a one-way enforcement tool that has delivered limited benefits to the Mexican economy and done nothing to improve the conditions for workers in the United States. Despite this, Tai claims that “this is having a real impact on working peoples’ lives, not only in Mexico but also here at home, because elevating labor standards in Mexico empowers US workers by reducing unfair incentives to ship jobs overseas.” This sounds more like disincentivizing certain firm location decisions rather than empowering US workers directly. There is no guarantee, for instance, that strengthening labor standards in Mexico will encourage companies to reshore those jobs to the United States. The rhetoric is strong, but the evidence for Tai’s arguments is sorely lacking.
The common thread in this new approach to trade can best be described as asymmetry, which is in direct opposition to the principle of reciprocity. Over the last two administrations, the United States has asked its allies and trading partners to adjust to meet its immediate policy needs—real or imagined—and done little in return. Though our trading partners and allies have gone along with this American detour on trade, they have done so out of necessity, not out of desire. In fact, many still hold out hope that the United States will become a leader in trade again, rejoin the Trans-Pacific Partnership, lift its blockade on the WTO’s Appellate Body, and end the trade wars that Trump began. Current US trade policy is in many ways a blast from the past. Nowhere is this clearer than in recent enthusiasm for industrial policy, eerily similar to the Japan Panic that swept over Washington in the 1980s. Then, as in now, the United States will not beat its economic competitors by emulating their policies, but by embracing the openness—to trade, capital, and people—that has defined US economic success for decades.
What comes next
Surveys show that Washington’s political elites are out of touch with the American public. Though Americans have become more supportive of some trade restrictions, on the whole, 74% view trade as good for the US economy, 63% think trade creates good jobs in the United States, and roughly 80% see it as positive for consumers and for improving their standard of living. Americans also largely support immigration, though they have some particular reservations. Finally, the majority of Americans have more favorable views toward capitalism as opposed to socialism, though there are some notable differences between Democrats and Republicans. On most policy issues, though views have become more polarized, there does appear to be significant middle ground where Americans agree on the fundamentals.
In his first inaugural address, President Thomas Jefferson called on the country to come together, urging that “every difference of opinion is not a difference of principle.” A similar call is urgently needed today so that the United States can build a grand strategy for its international economic policy that matches its desires for global influence.
Jake Sullivan argued that “international economic policy has to adapt to the world as it is, so we can build the world that we want.” But to do that, the United States needs to build on top of the order it created—not tear it down. A return to the era of reciprocity is possible, but without a clear vision for the United States’ role in global economy and compelling incentives for our partners to go along, the new approach to trade will inevitably be a tough sell.
The result will be a weaker US economic presence abroad, rule fragmentation, and a more unstable global economy for years to come. Retrenchment should be avoided, and the United States would do well to remember that trade is not a zero-sum game where one side’s wins are another side’s losses.
Instead, trade is fundamentally about trust, openness, and reciprocity. The current international trading system has generated opportunity and economic success because of a commitment to these principles. It would be wise to return to them.
Inu Manak is a fellow for trade policy at the Council on Foreign Relations (CFR). At CFR, she researches and writes on policy issues relevant to US trade policy, including topics such trade politics and institutions, trade negotiations, and dispute settlement.
To read the full article, click here.
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January 11, 2024
Fisheries Subsidies: Will World Trade Organization Members Finish the Job at MC13?
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)?
From Words to Action
It is no understatement to say that the Agreement on Fisheries Subsidies adopted at the WTO’s Twelfth Ministerial Conference (MC12) is a landmark achievement. The first agreement in the WTO’s legal regime to focus on sustainability and the second multilateral agreement reached in the organization’s almost 3 decades of existence, it establishes for the first time a set of global, binding rules on the support governments provide to their fishing sector. With more than 35% of marine fish stocks considered overfished—a proportion that has grown steadily over the past 5 decades—addressing the contribution of fisheries subsidies to this pressing global environmental problem through international cooperation was long overdue.
In particular, the new disciplines prohibit the provision of fisheries subsidies in the situations where concerns about the sustainability of fishing activities are the clearest: (1) when illegal, unreported, and unregulated fishing activities have been identified; (2) when the health of fish stocks is assessed and their biomass is determined to be at alarmingly low levels; and (3) when fishing occurs in unregulated high seas fisheries, meaning that no entity has competence for managing stocks sustainably.
The new rules are thus essential tools to keep at bay the most harmful effects of fisheries subsidies, not only for the marine environment, but also for those who depend on healthy fish resources for their livelihoods and nutrition. At the moment, however, the agreement only consists of words on a few pieces of paper. Its beneficial effects will not materialize—at least not in full—until it enters into force, for which two thirds of the WTO membership (i.e., at least 109 members) must formally accept it. It is only at this stage that the new disciplines will become enforceable by, and against, members that have accepted it. At the time of writing, 52 members had submitted their instrument of acceptance to the WTO.
Meanwhile, members also need to assess what changes will be required domestically to align with the new rules and, in the case of developing country members, identify the types of international assistance they may need to implement these rules. IISD has produced a self-assessment tool they can use to do that as they prepare for implementation.
Toward Further, Broader Rules
Importantly, the agreement’s main disciplines are subsidy prohibitions that focus on specific, particularly alarming situations. But before adopting the agreement at MC12, WTO members were also considering broader rules to curb the subsidies that lead to the overexploitation of fisheries resources more generally. These rules could not be included in the agreement due to a lack of consensus, and members committed to continue negotiations and agree on these additional disciplines later—which they hope to do at the 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.
For more than 3 years, negotiations on this part of the disciplines have focused on this “hybrid” approach—the combination of a general prohibition, including a list of subsidy types, with an exception based on fisheries management. Alternative approaches have (re-)appeared in numerous proposals, but none have gathered a level of support that would give them better chances of attracting consensus. The central issue is whether the balance of rights and obligations—between members that would avail themselves of the management exception and those that would avail themselves of SDT—is acceptable. As members have explored options for an outcome, three broad structural questions have shaped discussions, and they are all interrelated.
How Strict Should the Rules Be for the Big Players?
A key question in negotiations has been whether the envisaged rule would be stringent enough to meaningfully discipline the subsidies provided by the largest players in the fisheries sector—especially members with the biggest fishing fleets and those that provide the most subsidies. Looking at the subsidies that could fall in the scope of the new rules, around 72% are provided by the top 10 subsidizers, a number that increases to 86% if one considers the top 20 subsidizers.* The way the disciplines apply to those providing the most subsidies will thus be critically important to ensure the rules are effective.
A key question in negotiations has been whether the envisaged rule would be stringent enough to meaningfully discipline the subsidies provided by the largest players.
Since the hybrid approach emerged as the focus of talks in 2020, some developing country members have raised concerns about the permissiveness of the proposed rules, in particular for the largest subsidizers. Other members, including most of the biggest subsidizers, have generally argued that the proposed rules considered under this approach were stringent enough. These discussions have continued since talks resumed in 2023, with various proposals and ideas tabled by different members to somewhat raise the level of ambition in the envisaged rules, notably by making them stricter for large subsidizers.
What Should Be the Role of Fisheries Management?
Another important, and closely related, question that has generated significant debate is whether and how the rules should be linked to members’ fisheries management. It is widely recognized that, in theory, effective management of fisheries resources can help to mitigate the harmful impacts of fisheries subsidies. Influential analytical work on this topic by United Nations Environment Programme or the Organisation for Economic Co-operation and Development has emphasized that point.
Another important, and closely related, question is whether and how the rules should be linked to members’ fisheries management.
But members have shown diverging levels of comfort with the idea of relying on fisheries management as part of the application of WTO subsidy rules. Some developing country members have voiced concern that management-based rules could preserve the status quo by allowing big subsidizers to keep supporting fleets as long as some type of fisheries management measure is implemented, even if such measures are ineffective.
While the link with fisheries management is inherent to the hybrid approach that members have agreed—with varying degrees of enthusiasm—to focus on, some recent discussions have centred on how strict the sustainability and transparency requirements should be for members to use the management exception. Many members have proposed tightening these requirements, for large subsidizers in particular, but others resist the idea of making rules too stringent. The balance that members must strike here will be to ensure that any management-based exemption is strict enough to halt the continuation of unsustainable subsidization, while keeping it accessible to WTO members with different types of fisheries management and levels of capacity.
What Flexibilities Should Be Included for Developing Country Members?
A third key question that has been at the centre of discussions is what types of SDT provisions for developing country members should be part of the new rules. Demands for SDT were limited in the context of the rules included in the Agreement on Fisheries Subsidies, due to their focus on unequivocally alarming situations. But the broader nature of the new disciplines currently under negotiation has led developing country members to be more vocal in calling for exemptions from the main prohibition of subsidies that contribute to overcapacity and overfishing.
Many developing country members argue that they must protect the livelihoods and employment of poor fishing communities and develop their fishing fleets to ensure a fairer distribution of the benefits extracted from fishing among nations. Other members insist that if exemptions from the disciplines are excessively broad, they could undermine the effectiveness of the rules, to the detriment of everyone whose livelihoods rely on the sustainability of marine resources.
Among the top 20 subsidizers, 13 are developing country members and, together, they provided about 55% of global subsidies.
One complicating factor regarding SDT in the context of rules on fisheries subsidies is that some of the largest fishing nations and subsidizers in the world are developing countries. Among the top 20 subsidizers, 13 are developing country members and, together, they provided about 55% of global subsidies.** More broadly, however, many developing countries provide very limited amounts of subsidies, if any. SDT provisions thus need to take this high heterogeneity into account.
Generally, the temporary and permanent exemptions from the main prohibition that members are considering remain quite similar to those that were discussed ahead of MC12 in this area. They include a temporary exemption for subsidies that developing country members provide to fishing in their domestic exclusive economic zone (EEZ) or under the competence of a regional fisheries management organization (RFMO), as well as a permanent exemption for subsidies to artisanal fishing—“low-income, resource-poor, and livelihood” fishing, to be precise. Full exemptions from the main prohibition for least developed country (LDC) members and members that are small fishing nations (and/or small subsidizers) are also among the proposed provisions.
This combination of possible exemptions can be seen as an attempt to tailor the flexibilities to members’ different roles in global fishing and to different kinds of fishing activities. The EEZ and RFMO flexibility that covers all developing countries exempts a large share of global catch, fishing effort, and subsidies from the application of the rule, but it is only temporary. On the other hand, exemptions for small-scale fishing, small fishing nations, and LDC members apply permanently, but cover much smaller shares of global catch, effort, and subsidies.
Can WTO Members Do It Again?
WTO members have made progress in defining the broad contours of their collective answer to these questions since negotiations resumed in early 2023. But they must make decisions if they want to conclude this “second wave” of negotiations by adopting additional disciplines on subsidies that contribute to overcapacity and overfishing at MC13.
The question is whether members will show the necessary political will and flexibility to converge toward each other and find a landing zone that, by definition, will not be anybody’s ideal solution. To do that, they will need to recall what enabled conclusion of the first part of the agreement: the capital importance of this common endeavour for both the marine environment and the hundreds of millions of people worldwide whose lives directly depend on it. WTO members did it once; there is no reason they cannot do it twice.
To read the full policy analysis as it appears on International Institute for Sustainable Development’s website, click here.
The post Fisheries Subsidies: Will World Trade Organization Members Finish the Job at MC13? appeared first on WITA.
Fisheries Subsidies: Will World Trade Organization members finish the job at MC13?
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)?
From Words to Action
It is no understatement to say that the Agreement on Fisheries Subsidies adopted at the WTO’s Twelfth Ministerial Conference (MC12) is a landmark achievement. The first agreement in the WTO’s legal regime to focus on sustainability and the second multilateral agreement reached in the organization’s almost 3 decades of existence, it establishes for the first time a set of global, binding rules on the support governments provide to their fishing sector. With more than 35% of marine fish stocks considered overfished—a proportion that has grown steadily over the past 5 decades—addressing the contribution of fisheries subsidies to this pressing global environmental problem through international cooperation was long overdue.
In particular, the new disciplines prohibit the provision of fisheries subsidies in the situations where concerns about the sustainability of fishing activities are the clearest: (1) when illegal, unreported, and unregulated fishing activities have been identified; (2) when the health of fish stocks is assessed and their biomass is determined to be at alarmingly low levels; and (3) when fishing occurs in unregulated high seas fisheries, meaning that no entity has competence for managing stocks sustainably.
The new rules are thus essential tools to keep at bay the most harmful effects of fisheries subsidies, not only for the marine environment, but also for those who depend on healthy fish resources for their livelihoods and nutrition. At the moment, however, the agreement only consists of words on a few pieces of paper. Its beneficial effects will not materialize—at least not in full—until it enters into force, for which two thirds of the WTO membership (i.e., at least 109 members) must formally accept it. It is only at this stage that the new disciplines will become enforceable by, and against, members that have accepted it. At the time of writing, 52 members had submitted their instrument of acceptance to the WTO.
Meanwhile, members also need to assess what changes will be required domestically to align with the new rules and, in the case of developing country members, identify the types of international assistance they may need to implement these rules. IISD has produced a self-assessment tool they can use to do that as they prepare for implementation.
Toward Further, Broader Rules
Importantly, the agreement’s main disciplines are subsidy prohibitions that focus on specific, particularly alarming situations. But before adopting the agreement at MC12, WTO members were also considering broader rules to curb the subsidies that lead to the overexploitation of fisheries resources more generally. These rules could not be included in the agreement due to a lack of consensus, and members committed to continue negotiations and agree on these additional disciplines later—which they hope to do at the 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.
For more than 3 years, negotiations on this part of the disciplines have focused on this “hybrid” approach—the combination of a general prohibition, including a list of subsidy types, with an exception based on fisheries management. Alternative approaches have (re-)appeared in numerous proposals, but none have gathered a level of support that would give them better chances of attracting consensus. The central issue is whether the balance of rights and obligations—between members that would avail themselves of the management exception and those that would avail themselves of SDT—is acceptable. As members have explored options for an outcome, three broad structural questions have shaped discussions, and they are all interrelated.
How Strict Should the Rules Be for the Big Players?
A key question in negotiations has been whether the envisaged rule would be stringent enough to meaningfully discipline the subsidies provided by the largest players in the fisheries sector—especially members with the biggest fishing fleets and those that provide the most subsidies. Looking at the subsidies that could fall in the scope of the new rules, around 72% are provided by the top 10 subsidizers, a number that increases to 86% if one considers the top 20 subsidizers.* The way the disciplines apply to those providing the most subsidies will thus be critically important to ensure the rules are effective.
A key question in negotiations has been whether the envisaged rule would be stringent enough to meaningfully discipline the subsidies provided by the largest players.
Since the hybrid approach emerged as the focus of talks in 2020, some developing country members have raised concerns about the permissiveness of the proposed rules, in particular for the largest subsidizers. Other members, including most of the biggest subsidizers, have generally argued that the proposed rules considered under this approach were stringent enough. These discussions have continued since talks resumed in 2023, with various proposals and ideas tabled by different members to somewhat raise the level of ambition in the envisaged rules, notably by making them stricter for large subsidizers.
What Should Be the Role of Fisheries Management?
Another important, and closely related, question that has generated significant debate is whether and how the rules should be linked to members’ fisheries management. It is widely recognized that, in theory, effective management of fisheries resources can help to mitigate the harmful impacts of fisheries subsidies. Influential analytical work on this topic by United Nations Environment Programme or the Organisation for Economic Co-operation and Development has emphasized that point.
Another important, and closely related, question is whether and how the rules should be linked to members’ fisheries management.
But members have shown diverging levels of comfort with the idea of relying on fisheries management as part of the application of WTO subsidy rules. Some developing country members have voiced concern that management-based rules could preserve the status quo by allowing big subsidizers to keep supporting fleets as long as some type of fisheries management measure is implemented, even if such measures are ineffective.
While the link with fisheries management is inherent to the hybrid approach that members have agreed—with varying degrees of enthusiasm—to focus on, some recent discussions have centred on how strict the sustainability and transparency requirements should be for members to use the management exception. Many members have proposed tightening these requirements, for large subsidizers in particular, but others resist the idea of making rules too stringent. The balance that members must strike here will be to ensure that any management-based exemption is strict enough to halt the continuation of unsustainable subsidization, while keeping it accessible to WTO members with different types of fisheries management and levels of capacity.
What Flexibilities Should Be Included for Developing Country Members?
A third key question that has been at the centre of discussions is what types of SDT provisions for developing country members should be part of the new rules. Demands for SDT were limited in the context of the rules included in the Agreement on Fisheries Subsidies, due to their focus on unequivocally alarming situations. But the broader nature of the new disciplines currently under negotiation has led developing country members to be more vocal in calling for exemptions from the main prohibition of subsidies that contribute to overcapacity and overfishing.
Many developing country members argue that they must protect the livelihoods and employment of poor fishing communities and develop their fishing fleets to ensure a fairer distribution of the benefits extracted from fishing among nations. Other members insist that if exemptions from the disciplines are excessively broad, they could undermine the effectiveness of the rules, to the detriment of everyone whose livelihoods rely on the sustainability of marine resources.
Among the top 20 subsidizers, 13 are developing country members and, together, they provided about 55% of global subsidies.
One complicating factor regarding SDT in the context of rules on fisheries subsidies is that some of the largest fishing nations and subsidizers in the world are developing countries. Among the top 20 subsidizers, 13 are developing country members and, together, they provided about 55% of global subsidies.** More broadly, however, many developing countries provide very limited amounts of subsidies, if any. SDT provisions thus need to take this high heterogeneity into account.
Generally, the temporary and permanent exemptions from the main prohibition that members are considering remain quite similar to those that were discussed ahead of MC12 in this area. They include a temporary exemption for subsidies that developing country members provide to fishing in their domestic exclusive economic zone (EEZ) or under the competence of a regional fisheries management organization (RFMO), as well as a permanent exemption for subsidies to artisanal fishing—“low-income, resource-poor, and livelihood” fishing, to be precise. Full exemptions from the main prohibition for least developed country (LDC) members and members that are small fishing nations (and/or small subsidizers) are also among the proposed provisions.
This combination of possible exemptions can be seen as an attempt to tailor the flexibilities to members’ different roles in global fishing and to different kinds of fishing activities. The EEZ and RFMO flexibility that covers all developing countries exempts a large share of global catch, fishing effort, and subsidies from the application of the rule, but it is only temporary. On the other hand, exemptions for small-scale fishing, small fishing nations, and LDC members apply permanently, but cover much smaller shares of global catch, effort, and subsidies.
Can WTO Members Do It Again?
WTO members have made progress in defining the broad contours of their collective answer to these questions since negotiations resumed in early 2023. But they must make decisions if they want to conclude this “second wave” of negotiations by adopting additional disciplines on subsidies that contribute to overcapacity and overfishing at MC13.
The question is whether members will show the necessary political will and flexibility to converge toward each other and find a landing zone that, by definition, will not be anybody’s ideal solution. To do that, they will need to recall what enabled conclusion of the first part of the agreement: the capital importance of this common endeavour for both the marine environment and the hundreds of millions of people worldwide whose lives directly depend on it. WTO members did it once; there is no reason they cannot do it twice.
To read the full policy analysis as it appears on International Institute for Sustainable Development’s website, click here.
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January 8, 2024
Jobs, National Security, and the Future of Trade
Key Takeaways
As world commerce adapts to geopolitical disruption, trade flows are shifting and trade blocs are playing a more prominent role. A BCG analysis outlines the changes and presents strategies to help companies navigate this new normal.
Global trade growth is forecast to grow at 2.8% per year through 2032—less than the 3.1% annual increase forecast for global GDP over the same period.
Intra-regional trade in North America is forecast to grow by $466 billion, due to a combination of the US Mexico Canada Agreement and new US industrial policies.
Southeast Asia and India stand to benefit from slowing trade between China and the West. ASEAN global trade will grow by $1.2 trillion and India’s will expand by over $390 billion.
To stay competitive, companies should strengthen their geopolitical decision-making to help withstand supply chain disruptions, enhance their ability to respond to price volatility and inflation, adopt “fractal innovation,” and turbo-charge their risk and cybersecurity capabilities.
As the global economy adjusts to persistent economic and geopolitical pressures and disruptions, the familiar routes that defined the world trade map are being redrawn and trade blocs are playing a greater role. In addition, overall global trade is growing at a slower rate than the world economy, a fundamental shift away from the trend of trade-led globalism that has been prevalent since the end of the Cold War. World trade in goods is forecast to grow at 2.8% per year, on average, through 2032, compared with an estimated 3.1% growth rate for global GDP in the same period, according to a new BCG analysis.
Stronghold North America
The United States, Canada, and Mexico will benefit from the US Mexico Canada Agreement (USMCA), as US trade with its neighbors is forecast to grow by $466 billion in the coming decade. Faced with a combination of economic pressure and national security concerns, the Biden administration has adopted a new focus on industrial policies with a more protectionist bent, such as the Infrastructure Investment and Jobs Act (IIJA), CHIPS Act, and the Inflation Reduction Act (IRA). The result is a more influential regional manufacturing footprint with direct investment into strategic industries.
China Trade Dynamics
Persistent trade tensions and growing trade barriers are continuing to impact trade between China and the West. The projected fall-off in US-China trade is one of the most significant developments in the updated global trade map, with 2032 trade value forecast to fall $197 billion from its 2022 level. This is more than three times the $63 billion contraction forecast one year ago in a similar BCG analysis. The change is due to China’s slowing GDP growth in 2022, combined with other factors. China’s trade with the EU will continue to grow, but more slowly than the global average.
ASEAN Trade Growth
Southeast Asian nations are among the biggest winners in the new world trade order. Cumulative ASEAN trade is forecast to grow $1.2 trillion in the next ten years due to the region’s emergence as a key destination for companies seeking to decrease their dependence on China for manufacturing by adopting a “China + 1” diversification strategy. ASEAN is an attractive China alternative because of its young and dynamic population, economic diversity, and generally neutral stance among geopolitical blocs.
India Ignition
Like the ASEAN nations, India is benefiting from a low-cost structure and capable workforce to rise as a major domestic market and “China + 1” destination for global manufacturing. India’s large market and particular strength in industries such as chemicals, consumer electronics, and pharmaceuticals are attractive for companies seeking to diversify their global footprint. Expanding trade connectivity, as evidenced by new and under-negotiation trade agreements, are helping to increase India’s projected external trade in the next ten years by $393 billion, including $180 billion with the US and EU and $124 billion with China.
Russia Trade Divergence
The break in Russia’s trade with the EU and the US caused by the war in Ukraine and the resulting sanctions and reduced European dependence on Russian energy will influence Russia’s trading profile at least so long as the stalemate in Ukraine continues. These conditions have not led to the elimination of Russian trade, but rather its redirection elsewhere. For example, much of the trade with the EU has shifted to Russia’s fellow BRICs countries: Brazil, China, India, and South Africa. While Russia’s trade with the EU in 2032 will fall by $222 billion, compared with 2022, its trade with China and India will grow by $134 billion and $26 billion, respectively.
Multiple Challenges Are Inhibiting Trade Growth
The cooler trade climate is part of a reordering of the world trade map that is taking shape in the wake of the recent twin shocks of the pandemic and the Ukraine war, accompanied by a rise in trade protectionism and a falloff in globalization sentiment. A variety of factors are contributing to reshoring of manufacturing around the world, with a predictable dampening effect on global trade. These include:
Industrial policy. A leading element is the rise of national policies designed to support domestic industry and job creation. Policies such as the United States’ Inflation Reduction Act (IRA), with its “Buy American” incentives, reflect governments prioritizing national interests over multilateral, rules-based organizations, such as the World Trade Organization. Similar policies can be seen in the European Union and other parts of the world.
Labor economics. Companies in some regions are taking advantage of capable, low-cost labor as well as the availability of new technologies that have enabled them to reshore or near-shore manufacturing operations. For example, the cost gap between US and Chinese labor has narrowed as labor costs in China have risen on a relative basis, while locations such as Mexico, Southeast Asia, India, and Latin America have become competitive with China on labor costs.
Supply chain stability. Faced with risks of disruption and overreliance on extended and brittle supply chains, companies are seeking to diversify their global manufacturing and sourcing networks by moving to markets with lower geopolitical risk, reliable infrastructure and, in some cases, proximity to end-markets.
Environmental factors. Global and domestic pressure on industry to decarbonize operations has led companies to focus on geographies with clean energy supplies, reduce carbon footprints, and increase overall sustainability. Policies such as the EU’s Green Deal are incentivizing European companies to use more low-carbon energy sources by locating manufacturing closer to home.
As Cooperation Cools, Regional Trade Blocs Rise
A characteristic of the new world trade order will be the growing prominence of trade blocs—especially North America, the EU, ASEAN countries, and potentially the BRICs—as production moves closer to end markets. Blocs are attractive for countries seeking to limit geopolitical friction by trading with entities seen as “friendly” partners, especially where trade agreements exist, such as the EU, USMCA, Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Regional Comprehensive Economic Partnership, and EU-Vietnam Free Trade Agreement.
Under the Biden administration, the US has adopted new industrial policies, with legislation that encourages direct investment in strategic industries such as semiconductors, domestic manufacturing, renewable energy production, and electric vehicle infrastructure and battery technology.
Combined with the USMCA, the net effect of these industrial policies is to pull investment back to the US—especially for industries deemed critical to national security, like computer chips. Trade between the US and Mexico stands to grow by an impressive $300 billion over the coming decade. The Inflation Reduction Act, for example, goes beyond familiar “Buy American” incentives to encompass a “Buy North American” approach, such as extending the $7,500 credit for electric vehicles with powertrains or battery technology made in the US, Canada, or Mexico.
Among the biggest impacts of increasing emphasis on resilience through diversification of global markets and supply chains will be a continued fall-off in trade between China and the United States, as companies seek trading partners and manufacturing locations to rebalance their global risk exposure.
As the world’s leading exporter of manufactured goods, China itself is resilient. Trade that stops flowing between China and the West will simply move elsewhere. Notable beneficiaries of reduced US concentration in China will be the ASEAN countries and India as many companies move manufacturing to these economies, both to reduce global supply chain risks and to access new markets. As a result, trade between ASEAN and China will grow a remarkable $616 billion in the coming decade—and trade between ASEAN and both the US and Japan will increase by more than $200 billion. India is forecast to achieve 6.3% average annual trade growth, partly because of this rebalancing of China trade.
“No-Regrets” Moves to Improve Preparedness and Competitiveness
As trade frictions grow and trust in multilateralism weakens, the global market is becoming more fragmented. The more cooperative trade environment that enabled companies to build global supply chains in recent decades is quickly being replaced by a more uncertain world characterized by a mix of smaller regional and local supply chains. In the short term, companies should take several steps to adapt.
Strengthen geopolitical decision-making capability to enable supply chains to withstand disruptions. Companies can improve resilience by investing in digital tools, such as artificial intelligence, to enable agile decision-making and adaptability. Companies can also take steps such as building buffer inventories of essential commodities, prequalifying alternative suppliers, and planning contingencies for at-risk supply inputs.
Enhance ability to respond to price volatility and inflation. Strategies can include building resilient pricing, such as by sensing demand shifts earlier and developing dynamic pricing capabilities, strengthening customer relationships and contracting flexibility, and exploring new monetization models, including “as-a-service” models and outcome-based pricing.
Become more flexible and adaptable by adopting “fractal innovation.” To help meet the challenges of a fragmenting global trading landscape, companies can address differentiated needs of local customers by adopting a “customer-in” approach and embracing a new way of designing products—something we call fractal innovation.
Turbo-charge risk and cybersecurity capabilities. Companies should identify security gaps, prioritize security projects and tools, and consider approaches such as a cyber tool health index, zero-based budgeting, and cyber risk quantification to develop a custom cybersecurity roadmap.
Forces that have had a dampening effect on global trade in recent years will continue to be a factor in the world economy and corporate decision-making. Companies that rely on global supply chains must recognize that the challenges afflicting global trade are here to stay, and should continue to diversify their networks and build resilience.
To read the full article, click here.
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December 30, 2023
Globalization in 2024: The Clouds are Clearing
It’s been a rocky year for global trade. The World Trade Organization now expects trade in world merchandise to have grown just 0.8% in 2023, less than half of the 1.7% growth it forecasted earlier in the year, buffeted by rising inflation, high interest rates, and simmering geopolitical tensions.
What’s in store for 2024? Can we expect more of the same? Or will the situation start to stabilize? Our experts share their insights on what to watch out for over the next 12 months.
Globalization will continue to involve in 2024, not unwind
Richard Baldwin, Professor of International Economics at IMD
Globalization is under fire in many nations, no doubt about it. International commerce – and indeed the whole idea of economic openness – has been challenged by a long series of massive shocks ranging from Brexit and President Trump’s tariffs to the pandemic, the Russo-Ukrainian war, battles in the Levant, and rising geoeconomic tensions.
Newsfeeds are filled with headlines about de-globalization and the adoption of inward-oriented trade and industrial policies. But the headlines can be deceiving. The facts are that global trade in goods – as a share of global income – has recovered from COVID-19 lows, even if it has not reversed its downward trend. Digitally enabled trade in services, by contrast, never faltered, even in the depths of the pandemic, and continues to power ahead. As we head into 2024, my research suggests that trade in goods will continue to stagnate while trade in digitally enabled services (e-services) will continue to boom.
A stabilization of US-China geoeconomic tensions
The US and China are now strategic rivals in the economic, political, cultural, and military spheres. But neither wants this intense competition to lead to WWIII. The US is actively trying to prevent China from acquiring technology that would counter the US’s military edge and promoting the diversification and de-risking of the American supply. This involves encouraging more production in the United States while hindering production in China of a narrow range of goods, most notably including the highest-end semiconductors, technology related to quantum computing, and advanced AI that has military and surveillance uses. Apart from these goods, the Biden administration is not pursuing policies aimed at hindering China’s economic prosperity.
China’s retaliation to date has been very measured – limited to requiring export licenses for a few inputs that are critical to semiconductor production (gallium, germanium, and graphite). These are best seen as a ‘shot across the bow’ of the US restrictions aimed at preventing China from developing the capacity to produce or purchase the very highest-end semiconductors.
Both sides are trying to cool down the conflict. As one White House official put it, “The United States and China are in an intense competition, and we believe the best way to manage that competition is through equally intense diplomacy.” Biden and Xi met for the first time in about a year on the sidelines of the Asia-Pacific Economic Cooperation Summit in November 2023, sending a signal that they are committed to working out how to cooperate where they can. I hedge my conjecture with a famous Lenin quote, “There are decades where nothing happens; and there are weeks where decades happen.” Great power rivalries are usually stable but beware that things can go south quickly.
Climate-related disruptions in production and trade will continue
Extreme weather events are becoming more frequent and climate-related disruptions will increasingly impact international business and international trade globally. What’s more, the interconnectedness of global trade will only amplify the risks of climate-related disruption. Some extreme weather events disrupt production directly via droughts, floods, or overheating of workers. Others – such as low water levels in the Rhine, or hurricanes that damage ports – disrupt international transportation directly.
How do we know that extreme weather is becoming more common due to climate change? Nothing is certain in the business of climate change, but there are many hints that the unusual weather the world has seen in recent years is not a fluke. These clues include record-breaking heatwaves on land and sea and in most parts of the planet, severe floods and droughts, and extreme wildfires. To withstand the challenges of extreme weather events, policymakers, and business leaders will need to work together to build more resilient and adaptable systems.
Simultaneous Speech Translation (SST) will continue to transform international commerce
Microsoft recently launched speech translation technology that allows participants in a Teams meeting to see live captions of the conversions that are translated into a language of their choice. This is a big deal. There is even a story in the Old Testament suggesting that language-linked divisiveness was divinely inspired. The book of Genesis discusses a building that humans were constructing to reach the heavens: “The Lord said, ‘If as one people speaking the same language, they have begun to do this, then nothing they plan to do will be impossible for them. Come, let us go down and confuse their language so they will not understand each other.’” The structure came to be known as the Tower of Babel, where “babel” means a confused noise made by a number of voices.
Not to put too fine an edge on it, simultaneous speech translation is dismantling the Tower of Babel. English speakers – who have long had an edge when it comes to international commerce, especially trade in services – are in for some competition. With machine translation being so good, and getting better so fast, English speakers will soon find themselves in much more direct competition with the billions of service workers who don’t speak English. Machine translation won’t let them speak perfectly but perhaps well enough to participate in remote office work. The result will be a tsunami of global talent in the online service sectors. This will increase the choices facing employers or remote workers, generate more opportunities for high-skill low-wage workers in emerging markets, and create a lot more competition for advanced economy workers who have jobs that can be done remotely.
Super election cycle will disrupt trade policy
Simon J Evenett, Professor of International Trade and Economic Development at the University of St. Gallen, and Fernando Martin, Head of Analytics at Global Trade Alert
Nearly two billion people living in some of the most important economies on Earth will vote next year in elections. The run-up to polling day doesn’t normally make for enlightened trade policies because plenty of opportunistic politicians will try to blame foreigners for their own countries’ deficiencies. Already governments are maneuvering to deliver short-term political highs by whacking trading partners. The European Commission’s investigation into fast-growing imports of electric vehicles from China is cynically timed to deliver a verdict just before the elections to the European Parliament. Few US politicians will resist the siren call of being tough on Chinese trade and investment as November 2024’s American elections approach. Furthermore, so tight is that US election that the Biden Administration’s patience with the EU on steel will likely snap, leading to transatlantic trade tensions in 2024.
Geopolitical tension may tempt governments to weaponize trade flows
With geopolitical tension top of many executives’ minds, security of supply considerations will remain an important narrative for many governments and corporate buyers during 2024. Will Russia again tighten the screws on grain exports from Ukraine? Will China retaliate against harsher US trade and investment measures by curbing exports of the so-called ‘rare earth’ minerals, critical to the production of many IT products? Derisking pressures – a term used by many to signal reduced dependence on China and other geopolitical foes – won’t go away.
Furthermore, should events in Gaza spiral out of control, some petrol Arab states may find it impossible to resist national pressures to impose oil embargoes. These are unlikely to cause the same damage as witnessed during the 1970s. Even so, oil price hikes are the last thing most economies need as their central banks get inflation under control.
The impact of trade policy pressures will start to be felt
A number of slow-burn trade policy pressures will come to the fore during 2024. October 2023 saw the European Union’s Carbon Border Adjustment Mechanism (CBAM) come into effect. This scheme will impose additional taxes on imports from outside the EU that cannot show they have paid enough charges for the carbon generated during a good’s production. Importers will start receiving their first CBAM bills early in 2024 and there will inevitably be harsh words about EU implementation practices. Some nations may take the EU to court at the World Trade Organization. Others may just retaliate straight away by jacking up trade barriers on EU exports and argue that it is better to negotiate with Brussels from a position of strength. Expect headline-grabbing standoffs over carbon taxes. Other sore points include the EU’s regulations on sourcing products from areas with extensive deforestation and plans in the works to impose extensive regulation on cross-border supply chains operating into and out of the European Union.
The world won’t shatter into trade blocs along geopolitical lines
Despite these concerns, the much-feared split of the world economy into separate trading blocs is unlikely to happen during 2024. The most likely trigger would be an outrage perpetrated by either China or the United States. To many Western governments, any attempt by China to invade Taiwan would be a step too far and would likely result in harsh economic sanctions on Beijing. Yet those American military experts who claim to track this matter aren’t publicly warning that this outcome is likely in 2024. Schism isn’t impossible in 2024, just very, very unlikely.
Africa and Asia will remain bright spots for trade policy
Against this gloomy backdrop are some positive trends that will keep creating opportunities for forward-looking businesses. Africa is pushing ahead with implementing a massive continental free trade agreement, strengthening ties between nations likely to see the fastest population growth through to 2050. Plus, by and large, the sourness expressed across the Atlantic towards globalization and trade finds no counterpart across the Asia-Pacific region. The mistake here is to let zero-sum narratives in the West dominate senior executive decision-making. After a divisive election season in 2024, some may conclude that the derisking needed involves limiting exposure to slower-growth, surly Western economies.
Richard Baldwin is Professor of International Economics at IMD and Editor-in-Chief of Vox since he founded it in June 2007. He was President/Director of CEPR (2014-2018), a visiting professor at many universities, including MIT, Oxford, and EPFL, and a long-time professor of international economics at the Graduate Institute in Geneva. Richard is an expert in global economic policy and theory, specializing in international trade.
Simon J. Evenett is currently a Professor of Economics at the University of St. Gallen and on 1 August 2024 will join the Faculty at IMD. He is also the Founder of the St. Gallen Endowment for Prosperity Through Trade, home of two of the leading independent monitors of how governments shape international business.
Fernando Martín leads the Analytics Unit at the Global Trade Alert. His work focuses on trade and industrial policy with a special focus on geopolitics and geoeconomics. He holds a PhD in business economics from KU Leuven and an MSc in political economy of Europe from the London School of Economics and Political Science.
To read the full blog post, click here.
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December 18, 2023
Modern Industrial Policy and the WTO
To remain relevant in the international trading system, the World Trade Organization (WTO) may need its members to engage directly over the issue of industrial policy. The staff at the major international organizations—the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), the World Bank, and the WTO—have put out an explicit plea for a renewed work program and policymaker engagement on the issue. This paper explains the new emphasis on industrial policy and explores priority areas for economic research to help inform policymakers at the front lines of the rules-based trading system.
For a number of overlapping reasons, today’s industrial policy seems different from policy in the past. It is often forcefully pursued by major highincome industrial economies, including the United States, the European Union, and Japan, as opposed to emerging economies. China’s use of industrial policy is both motivating these new users—sometimes to deploy industrial policy themselves, sometimes to defend their economies from China—and driving some of the associated WTO challenges. Today’s industrial policy objective is also often less about learning for the first time how to competitively produce a good or acquire the necessary technological absorptive capacity to do so, which is what often motivated past infant industry policies for developing countries. Instead, the objective appears aimed at returning parts of a supply chain for industries ranging from semiconductors to personal protective equipment (PPE) that were once present but that have since been offshored.
Industrial policy today is also sometimes motivated by objectives other than increasing firm-level productivity or generating spillovers to other sectors and thus enhancing national economic growth. Instead, industrial policy is aimed at diversification in the name of supply chain resilience, fear over the weaponization of exports by trading partners, maintenance of technological supremacy, or the desire to offer future policymakers more control over economic activity in response to expected shocks. In the presence of cross-border supply chains, some governments are seeking to coordinate their industrial policies with key partners, as opposed to implementing everything at the national level in an attempt at reshoring. Overlaying other considerations is the existential threat of climate change, an important driver behind many modern industrial policy initiatives.
To explore these interrelated motivations for today’s industrial policy and its numerous implications for the WTO, this paper is organized as follows. The next section briefly introduces the historical economic approach to industrial policy, borrowing from Harrison and Rodríguez-Clare (2010). The starting point of this literature is typically market failures, developing countries, and how industrial policy can improve firm-level productivity growth and possibly national economic growth.
Section 3 turns to the dominant economic framework motivating the WTO. It draws on Bagwell and Staiger (1999, 2002) as well as key WTO rules and the role of enforcement. The WTO is interpreted as providing an institutional setting for large countries to coordinate policies and set rules on behavior to neutralize the international externality implications of their actions and solve a prisoner’s dilemma problem. This section also explores the economic understanding of current subsidy rules with implications for industrial policy. It describes unease with the evolution of those rules, gaps in knowledge, and important data and measurement shortcomings.
The subsequent two sections form the heart of the paper. They introduce four areas in which modern industrial policy has emerged as a major issue for the WTO. Section 4 tackles the myriad challenges introduced by China. Section 5 examines areas of supply chain resilience, supply chain responsiveness, and climate change. The four issues are not cleanly separable; the last three are independent areas of concern, but China plays a critically important role in each. The last section concludes by motivating the need for further economic research.
Chad P. Bown is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics.
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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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December 13, 2023
The Global Arrangement for Sustainable Steel and Aluminum & New Opportunities for Climate Cooperation
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.ii 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.
To meaningfully address the 9.15 gigatons of annual industrial CO2 emissions, we need a global marketplace capable of rewarding firms for manufacturing goods with fewer emissions than their competitors. As a carbon-efficient manufacturer of goods, the U.S. is well-positioned to lead the development of policies that leverage trade rules to cut emissions and reduce the power of non-market firms. And as the world’s largest economy, the U.S. can bring other countries to the table in partnerships that yield more emissions reductions and more benefits for the cleanest firms.
In this context, the Global Arrangement’s success is an important bellwether. This deal tests our ability to use novel trade approaches in the climate fight, begins with negotiations between two like-minded and large economies, and is specifically designed to welcome future participation by new countries over time. Progress has been slow-going, but the paradigm shift that success could bring warrants the parties redoubling their efforts to finalize a deal.
This paper builds from previously conducted research to assess the state of steel production and trade and the abundant benefits available to the U.S. and the EU if the negotiation is successful. A well-designed Global Arrangement can reward lower-carbon manufacturers with higher sales and profits, on-shore steel production, secure decarbonization investments, and lower carbon emissions.
Catrina Rorke serves as executive director of the Center for Climate and Trade and senior vice president, policy and research at the Climate Leadership Council.
Matthew Porterfield is the vice president, policy and research at the Climate Leadership Council.
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To read the full report published by the Climate Leadership Council, click here.
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December 12, 2023
Reset, Prevent, Build: A Strategy to Win America’s Economy Competition with the Chinese Communist Party
For a generation, the United States bet that robust economic engagement would lead the Chinese Communist Party (CCP) to open its economy and financial markets and in turn to liberalize its political system and abide by the rule of law. Those reforms did not occur.
Since its accession to the World Trade Organization in 2001, the CCP has pursued a multidecade campaign of economic aggression against the United States and its allies in the name of strategically decoupling the People’s Republic of China (PRC) from the global economy, making the PRC less dependent on the United States in critical sectors, while making the United States more dependent on the PRC. In response, the United States must now chart a new path that puts its national security, economic security, and values at the core of the U.S.-PRC relationship.
The House Select Committee on the Strategic Competition between the United States and the Chinese Communist Party (Select Committee) has studied the PRC’s pattern of aggression and economic manipulation and recommends the following strategy for economic and technological competition with the PRC.
The strategy that follows is guided by three pillars:
First, the United States must reset the terms of our economic relationship with the PRC and recognize the serious risks of economically relying on a strategic competitor that harnesses the power of the Party-State to compete economically. While economic exchange with the PRC will continue, the United States government and the private sector can no longer ignore the systemic risks associated with doing business in the PRC or allow companies’ pursuit of profit in the PRC to come at the expense of U.S. national security and economic resilience. For over two decades, the U.S. government and businesses have sought access to the PRC as a market for consumer goods, a source of low-cost production, and a recipient of U.S. investment. In that time, the PRC has failed to live up to its trade promises, tightly controlled access to its markets, stolen hundreds of billions of dollars a year in technology and IP, and employed subsidies and unfair trade practices to squeeze out American competitors. These are not merely an assortment of separate moves made by individual actors but a feature of Beijing’s long-term strategy to harness the scale of its domestic market to achieve global dominance for PRC firms in critical technology and products and to make foreign countries, including the United States, dependent upon the PRC and subject to its coercion.
Second, the United States must immediately stem the flow of U.S. technology and capital that is fueling the PRC’s military modernization and human rights abuses. General Secretary Xi has made plain his intent to “resolutely win the battle of key and core technologies” and build the People’s Liberation Army (PLA) into a “great wall of steel.” At present, U.S. capital, technology, and expertise aid that effort. They support the PLA’s modernization, the CCP’s predatory technological goals, and genocide. The United States must change course. To quote Dr. Eric Schmidt’s remarks at the Select Committee’s hearing, “Leveling the Playing Field,” “it’s never too late to stop digging our own grave.”
Third, the United States must invest in technological leadership and build collective economic resilience in concert with its allies. The best defense against the CCP’s predatory economic practices will fail if not paired with a proactive strategy to invest in America and increase economic and technological collaboration with likeminded partners. The United States must bolster its unique advantages in technological development by funding research, incentivizing innovation, and attracting global talent in critical areas. In addition, the United States needs to invest in workers, who must remain competitive for jobs of the future, including by helping workers acquire skills-based training and adapt to technological transitions.
Consecutive U.S. presidential administrations have sounded the alarm on growing U.S. dependence on the PRC for critical goods, including rare earth minerals, components and chemicals used in U.S. weapon systems, and pharmaceutical products and precursors. The PRC has already demonstrated its willingness to weaponize these dependencies to coerce the United States and its allies and seek to constrain our policy options. The PRC’s growing leadership in key critical and emerging technologies vital to long-term competitiveness heightens the risks.
The strategy presented here includes sets of findings and recommendations for each pillar. Taken together, they would level the economic playing field, reduce the PRC’s hold on U.S. and allied critical supply chains, and invest in a future of continued economic and technological leadership for the United States and its likeminded allies and partners.
reset-prevent-build-scc-report
To read the full committee report, click here
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December 6, 2023
Asia-Pacific Trade and Investment Report 2023/24: Unleashing Digital Trade and Investment for Sustainable Development
The Asia-Pacific Trade and Investment Report (APTIR) is a biennial publication prepared by the Trade, Investment and Innovation Division of the United Nations Economic and Social Commission for Asia and the Pacific to provide insights into the impact of recent emerging developments in trade and foreign direct investment on countries’ abilities to meet the challenges of achieving sustainable development.
The theme of APTIR 2023/24 is “Unleashing digital trade and investment for sustainable development.” Prepared in collaboration with the United Nations Conference on Trade and Development and the United Nations Industrial Development Organization, the report explores the roles of digital trade and investment in guiding the Asia-Pacific region towards sustainable development. It examines digital trade and investment patterns in the region and provides an overview of the digital trade and investment policy environment, viewed through a sustainable development lens. The report also assesses the potential of unilateral policies on trade and investment, as well as the impact of multilateral and regional cooperation, in maximizing the benefits of digital trade and investment while focusing on the Sustainable Development Goals (SDGs). Incorporating a quantitative assessment, this study evaluates the role of digital trade in archiving the SDGs and examines the impact of various policy scenarios. Building on this understanding, the report concludes by offering a series of action-oriented policy recommendations, specifically targeting the trade and investment domains, to ensure that digital and investment policies effectively unlock the potential of digital trade and investment for sustainable development.
EXECUTIVE SUMMARY
To harness the potential of digital trade and investment for sustainable development, it is essential to carefully craft trade and investment policies. These policies should take into account the related societal and environmental opportunities and challenges. This report presents an integrated approach to policy-making, aimed at enhancing the understanding of trade and investment policymakers regarding their roles in realizing the potential of digital trade and investment as effective means for the achievement of the Sustainable Development Goals (SDGs).
The role of digital trade and investment in sustainable development
‘Digital trade’ encompasses all international trade transactions that are digitally ordered or delivered. In the developing regions of the Asia-Pacific, the growth of digital trade is largely dependent on foreign direct investment (FDI) for the development of digital infrastructure, digital technology adoption and digital businesses. This ‘digital FDI’ provides essential capital, expertise, and cutting-edge technologies, which are vital for establishing a competitive stance in digital trade. Moreover, digital trade necessitates Information and Communication Technology (ICT) networks, equipment, and services. These ‘digital-trade enablers’ facilitate the process of ordering and delivering all digital trade transactions.
Digital trade and investment present a promising means for economies in the Asia-Pacific region to achieve the SDGs. Central to this dynamic are digitally deliverable services, notably those associated with data, online platforms and services facilitating online transactions. Empirical studies conducted by United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) and the United Nations Industrial Development Organization (UNIDO) found a positive relationship between increased digital trade and overall progress towards the SDGs. This association was especially pronounced for SDG targets connected to social development.
The benefits derived from digital trade are closely tied to Internet penetration. Thus, unlocking the full potential of digital trade urgently calls for bridging the digital divide. ESCAP research suggests that a 1% increase in digital trade value is associated with a 0.8 percentage point rise in the growth rate of an economy’s real Gross Domestic Product (GDP) per capita. Additionally, the study finds that the positive outcomes of digital trade are often reliant on widespread internet access. The results underscore the importance of addressing the digital divide. This is especially urgent for Least Developed Countries (LDCs), the economies of South- and South-West Asia (SSWA), Pacific Islands Developing Economies (PIDEs) and Land-Locked Developing Countries (LLDCs).
Trends and development in digital trade and investment policies in Asia and the Pacific
The digital trade policy environment in the Asia-Pacific region exhibits a dual-pronged approach. On one side, there is a shift towards regulatory simplification, prominently in areas like tariffs, trade facilitation and intellectual property rights (IPRs). Such policy development is expected to boost digital trade, mitigate costs, and amplify competition. However, when one delves into the policies pertaining to digital service trade, investment and the overarching framework for digital governance, there is a growing trend towards stringent policy enforcement. This rigorous approach is more prevalent, on average, in the NCA and SSWA economies.
CONCLUSION
In wrapping up, a consistent theme throughout the report is that unleashing digital trade and investment for sustainable development requires giving particular attention to the regulatory impacts on consumers, small firms, workers, and the environment. Fundamental to achieving this are the coherence of both traditional and digital trade and investment policies with sustainable development aspirations, and regulatory cooperation with key trade and investment partners.
Central to these strategies is the need for a streamlined, open regulatory framework. This requires avoiding regulations that unduly increase compliance costs for businesses. Such a regulatory environment is particularly advantageous for small enterprises, which are pivotal for achieving inclusive growth outcomes. Simplifying processes associated with business establishment, licensing, permits and their associated costs and durations becomes crucial. Moreover, the importance of creating mechanisms that encourage regulatory cooperation and interoperability cannot be overstated. Aligning technical requirements within regulations with international standards and mutual recognition arrangements guarantee a level of international consistency and interoperability.
For a conducive setting for digital trade and investment, a holistic policy approach is important. This entails co-ordination among various agencies, unwavering commitment to transparency, and engaging public consultations.
Lastly, as the regulatory environment evolves, preparing enforcement agencies for upcoming changes is crucial. Specialized training programmes can empower these institutions, enabling them to efficiently enact and promote the newly established or revised regulations. ESCAP, UNCTAD and UNIDO are poised to assist in this endeavour.
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To read the abstract published by United Nations Economic and Social Commission for Asia and the Pacific, click here.
To read the full report, click here.
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