William Krist's Blog, page 13

Comparing the European Union Carbon Border Adjustment Mechanism, the Clean Competition Act, and the Foreign Pollution Fee Act

Each of the three BAMs discussed in this report share two common goals. The first goal is to protect the competitiveness of domestic industries engaged in international trade while they take actions to reduce their emissions. The environmental justification for protecting domestic competitiveness is the risk of carbon leakage, where domestic climate policies might induce a shift in emissions to other regions, thus undercutting the effectiveness of the policy. While actions to mitigate the risk of carbon leakage can also support competitiveness, and vice versa, they do not necessarily do so equally in all cases. The second goal is to incentivize trading partners with less ambitious climate goals to increase their ambition and thereby retain access to the markets of high-ambition countries. Each BAM has one or more additional complementary goals. For example, a complementary goal can be pairing a BAM with a new decarbonization regulatory program.

EU CBAM

The EU CBAM is designed to work hand in glove with the EU Emissions Trading System (ETS), a carbon pricing workhorse policy for the decarbonization of EU industry and of the European Union in general. In addition, the EU CBAM incentivizes other trading nations to adopt carbon pricing as a foundational decarbonization policy tool.

CCA

The CCA is also a BAM designed to work seamlessly with a domestic regulatory program intended to reduce greenhouse gas (GHG) emissions from the industrial sector. The CCA introduces a performance standard to achieve the reductions desired within the industrial sector. The performance standard within the CAA is defined as tons of GHGs per ton of product. Producers with a GHG intensity above the benchmark pay a fee while producers below the benchmark pay no fee. To ensure a rapid decline in GHG intensity over time, the benchmark declines year over year and the fee increases year over year. Revenues from fees are used to further incentivize investments in low-carbon technologies and other activities designed to reduce industrial emissions.

FPFA

A key distinction of the FPFA from the other two approaches is that the FPFA does not include a regulatory program to reduce industrial emissions. This is in line with the FPFA’s objective to reduce the importation of embodied GHGs within US trade flows rather than focus on further reductions in emissions from domestic sources.

Takeaways

The EU CBAM entering into force in October 2023 is clear evidence that the use of international trade as a component of climate policy has left the realm of academia and is now an accepted policy tool. While the European Union argues that the EU CBAM is a straightforward extension of the EU ETS and should not be considered an international trade policy, the introduction of the EU CBAM has provided a rationale that supports the consideration of BAMs in other countries that have the potential to significantly impact global trade.

It is hard to overstate the extensive impact BAMs can have on international trade. While the EU CBAM identifies six categories of internationally traded products, the number of actual products that would be subject to the CBAM can be quite large. In the case of iron and steel alone, the number of products is over 100. Some estimates of the number of products covered by the CCA run into the multiples of hundreds, and the provisions within the FPFA that allow domestic producers and others to add covered products to the existing list leaves the total number of covered products open-ended. The indirect impacts may yet be greater still through the consumption of covered goods in other products.

The cornerstone of any BAM is a measure of the GHG intensity of a covered product. Since BAMs will impact vast numbers of covered products and therefore the producers of those products, it will be in the best interest of those producers to provide measures of GHG intensity for their products. While such producers will have the information and ability necessary to construct those measures, the fact that BAMs do not share a common frame of reference for intensity calculations imposes an additional burden on those producers. At present there is no forum the business community can utilize to reconcile differences across BAMs or develop interoperable definitions and protocols that would allow companies to provide information compliant with individual countries’ BAMs.

The vast number of products subject to BAMs clearly poses complex implementation issues. It also leads to the scope of BAMs affecting large numbers of countries that rely on developed country markets for their exports and economic well-being. Many countries argue that BAMs are inconsistent with World Trade Organization (WTO) multilateral trade rules. While the WTO does have a dispute settlement system (the Appellate Body), that system is in a state of crisis because countries, including the United States, have blocked the appointment of Appellate Body members such that the Body’s current configuration is incapable of hearing appeals and processing disputes. Without a functioning WTO, there is no multilateral institution capable of resolving conflicts that will naturally arise due to the deployment of additional BAMs in the future.

Problems of emissions leakage, lost international competitiveness due ambitious decarbonization policies, and suggestions regarding the use of BAMs are not new. However, until the enactment of the EU CBAM they have been merely suggestions. Now BAMs are a reality, and we are confronted with important questions. Will this policy tool be effective in addressing leakage and competitiveness and spread beyond the European Union to the US and other large industrial nations? What will be the impact of widespread BAM adoption on the global system of international trade, industrial emissions, green investments, and the economic welfare of exporters in countries that enacted BAMs? Will long standing international trade rules embodied in the WTO successfully challenge the spread of BAMs or will trade rules—whether multilateral or plurilateral—adapt to this new reality? Time will tell.

 

RESOURCES FOR THE FUTURE

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Trade Beyond Neoliberalism: Concluding a Global Arrangement on Sustainable Steel and Aluminum

On October 31, 2021, the United States and the European Union launched historic negotiations aimed at landing an agreement to increase trade in “green” steel and aluminum—that is, steel and aluminum produced in a way that emits lower greenhouse gas emissions than when steel is produced using conventional manufacturing practices. Were it to be concluded, the agreement—formally referred to as the Global Arrangement on Sustainable Steel and Aluminum (GASSA)—would represent a significant achievement in the United States’ trade and climate policy that has the potential to reshape global supply chains toward greater sustainability, protect the livelihoods of U.S. workers, and significantly contribute to industrial decarbonization.

These negotiations are playing out against the backdrop of American and European efforts to decarbonize their heavy industries to achieve net-zero climate targets by midcentury, as well as long-standing problems of excess capacity in global steel and aluminum markets. Steel and steel products have some of the highest embedded carbon content of all traded goods, and the iron and steel industry produces nearly one-third of global emissions from industry. Aluminum, meanwhile, is energy and carbon intensive and is consequential to global greenhouse gas emissions, albeit on a comparatively smaller scale.

Yet recent reporting reflects that GASSA negotiations have stalled on account of different U.S. and EU approaches to linking market access to the carbon intensity of traded goods, which may result in the deal being indefinitely shelved. This would be an immense missed opportunity. GASSA, if concluded in a way that links market access to carbon intensity, would mark a paradigm shift in the organization of cross-border commerce, one in which like-minded democracies use trade—and the institutions that facilitate and govern it—as a tool to address shared problems. Furthermore, by laying the groundwork for a transatlantic climate bloc, the deal would strengthen other U.S.-EU partnerships aimed at confronting some of the major global challenges of the 21st century—above all, climate change, but also the influence of authoritarian states in the international system and the need to recalibrate the global economy in a way that better serves the interests of workers and the planet.

This issue brief offers an overview of GASSA, explains why it matters, and examines challenges to its implementation. It assesses that a strong agreement would both constitute a major step forward in aligning trade with climate action and offer a productive mechanism for countering abuses of the global trading system by nonmarket economies while strengthening transatlantic relations. Finally, it recommends that if GASSA cannot move forward in a timely fashion, the United States should seek similar partnerships with other high-ambition steel- and aluminum-producing nations.

Background to the deal

In 2018, the Trump administration imposed tariffs of 25 percent on European steel products and 10 percent on European aluminum products under Section 232 of the Trade Expansion Act of 1962. The Trump administration justified the tariffs—which covered most U.S. trading partners—on national security grounds, provoking a sharp reaction in most European capitals, given that the United States and most European states are bonded together through the NATO alliance to ensure each other’s security. As a result of the tariffs, alongside a broader drop in demand relating to the COVID-19 pandemic, EU exports to the United States in steel and aluminum, worth about $7 billion, declined more than 50 percent between 2018 and 2020. Although the effects of the tariffs on the U.S. steel market are contested, some respected economists have concluded that they did not meaningfully affect domestic steel prices and coincided with an improved economic outlook for the U.S. steel industry.

As a “rebalancing,” or retaliatory, measure, the European Union imposed a range of duties on various U.S. products, including steel products but also motorcycles, bourbon, and other trade-exposed goods. Both the United States and the European Union initiated disputes at the World Trade Organization (WTO) over the other side’s tariffs. While steel tariffs addressed legitimate concerns the U.S. steel industry had over steel overproduction—concerns that European producers shared, ironically—they nonetheless were a major thorn in U.S.-EU relations, and the EU has pressed the new administration to reverse the tariffs since President Joe Biden came into office.

In October 2021, on the eve of the 26th U.N. Climate Change Conference in Glasgow, American officials announced they would exempt imports of European steel and aluminum from the Section 232 tariffs up to a certain volume through the end of 2023, beyond which the tariffs would remain in effect. In return, the European Union agreed to suspend its countervailing tariffs on a range of U.S. products and refrain from imposing additional tariffs that were set to go into effect on December 1, 2021. According to a joint statement released at the time of the announcement, this suspension would create space for the two sides to agree to negotiate “future arrangements” to address both “non-market excess capacity” and the “carbon intensity” of the steel and aluminum industries. In addition, both sides agreed to drop WTO disputes they had filed against one another concerning their reciprocal tariffs. And in a somewhat unusual move, they agreed to transfer those cases to arbitration panels, as permitted under WTO rules, based on the understanding that arbitration would only go forward if the arrangements contemplated in the deal were to fail.

In a separate, unilateral statement, the European Union asserted that it considers the residual tariffs on European steel and aluminum retained by the United States under the agreement to be “incompatible with World Trade Organization rules,” although there is no indication Brussels intends to challenge those tariffs before the WTO. Notably, although the European Union suspended its dispute relating to the Section 232 tariffs, other non-EU countries—Switzerland, Norway, China, and Turkey—pursued claims against them before a WTO adjudicative panel and obtained a finding that the tariffs were incompatible with WTO rules.

What GASSA would do

The “future arrangements” contemplated in the 2021 joint statement included, most significantly, measures that “restrict market access”—by imposing tariffs or other barriers to import—for economies that either contribute to global steel and aluminum oversupply or that do not meet certain emissions thresholds in their steel and aluminum production. In other words, this agreement could lead to the United States and the European Union coordinating efforts to impose costs on high-polluting steel and aluminum producers.

In addition, the two sides agreed to “refrain from non-market practices that contribute to carbon-intensive, non-market oriented capacity,” as well as ensure their domestic policies support these goals. Finally, they agreed to consult on government investment in decarbonization and “screen inward investments from non-market-oriented actors”—which, as discussed below, refers to nonmarket practices and actors, including Chinese steel producers. When the United States and the European Union came to agreement, they set a goal of concluding the negotiations in two years, by October 2024, and noted that the agreement could be expanded to include “like-minded economies.” This means that once the United States and the European Union reach an agreement, other allies could sign on, potentially making this the basis for a global agreement consisting of a large portion of the global economy.

Why GASSA matters

GASSA would be more narrowly focused than a conventional free trade agreement. But from an economic and climate perspective, the scope of the deal would nonetheless be substantial: Steel is one of the most used products in the world as well as one of the most widely traded commodities, both in finished products and as a component of other goods. There are few sectors of the global economy untouched by steel production, which is used in everything from cars, buildings, and appliances to wind turbines, nails, and screws. The annual value of global steel products has been estimated to be as high as $2.5 trillion, about one-quarter to one-third of which can be attributed to exported goods. Aluminum is likewise one of the most traded commodities in the world and a key component of many finished goods.

From the perspective of addressing climate change, the deal is even more consequential: The iron and steel industry accounts for about 11 percent of global CO2 emissions and nearly one-third of industrial emissions. Notably, the United States and European Union are the second- and third-largest import markets for steel—after China, which is both the largest importer and the largest exporter of steel—and are also major exporters. Aluminum, meanwhile, accounts for about 3 percent of global CO2 emissions.

American and European steel manufacturing is less carbon intensive than that of many other countries with major steel industries, particularly China and India, because of greater prevalence of low-carbon manufacturing methods, a greener electric grid, and greater efficiency in traditional blast-furnace production methods. Inflation Reduction Act and EU Green Deal Industrial Plan investments in steel decarbonization and related technologies such as green hydrogen mean that the carbon gap in steel and aluminum is poised to widen substantially in the coming decade. In contrast, the Chinese steel sector recently invested $100 billion in coal-fired steel production—the most carbon-intensive steel production method by a considerable margin.

By tying market access to sectoral manufacturing practices, GASSA has the power to shape production standards beyond the American and European markets. Specifically, by raising market barriers on imports of carbon-intensive steel and aluminum and creating a free-trade area for lower-carbon versions of those commodities, the deal creates incentives for other steel- and aluminum-exporting countries to pivot to greener production methods. The arrangement would also safeguard the livelihoods of American and European steelworkers by advantaging their lower-carbon steel vs. more-carbon-intensive steel produced in other regions. In this sense, GASSA could substantially reshape supply chains and significantly contribute to industrial decarbonization on a global scale. It would also be a boon to domestic industrial decarbonization efforts by rewarding domestic greenhouse gas emission improvements in the steel and aluminum sectors with access to a protected market.

Just as importantly, GASSA would mark a fundamental shift in understandings of how global trade should function that have persisted since the end of the Cold War. In particular, a strong GASSA arrangement would signal alignment between the world’s two largest free-market economies on two pressing issues: responding to the climate crisis and managing China’s role in the global economy. In addition, the deal offers a crucial opportunity for leading democracies to influence global trade rules and institutions with a view toward a more sustainable, fit-for-purpose global trade system. As an additional benefit, GASSA has the potential to strengthen transatlantic cooperation on a broad range of issues at a time when solidarity between democracies is more important than ever.

A long-overdue alignment of trade with climate action

Multilateral and plurilateral trade arrangements have, to date, done little to nothing to address the climate crisis. Arguably, they have contributed to it by lowering the barriers to carbon leakage—the shifting of production to regions with lower climate standards—through investor-state dispute resolution mechanisms, which favor corporate interests, and tariff reductions on high-emission products. No trade agreement involving major economies has sought to account for the carbon content of traded goods.

The European Union recently introduced a Carbon Border Adjustment Mechanism (CBAM), which imposes a fee on imported goods based on the carbon intensity of their production. Comparable legislation has been introduced by both Republican and Democratic legislators in the U.S. Congress. Both the EU CBAM and possible U.S. carbon tariffs are watershed developments in the sense that they reflect a shift toward internalizing negative externalities—that is, costs to society not reflected in the price of traded goods. Yet these measures are the product of a unilateral legislative process and have not been designed with a view toward compatibility with each other or with other economic and regulatory systems. As a result, they leave on the table the multiplying effects of aligning the combined market power of the two largest free-market economies, which together can act with far greater effect to influence global standards and production methods.

By contrast, GASSA may resemble a sector-specific version of what economists describe as a “climate club”—that is, a preferential trade arrangement between countries in which enhanced market access (or exclusion from market barriers) is linked to a common or harmonized set of emission reduction policies. A key feature of climate clubs is that countries inside the club will move toward freer trade between themselves. But countries that do not meet the club’s climate standards are subject to less favorable trade terms than countries within it. Here, again, China—whose steel has a carbon footprint that is nearly two times greater, on average, than U.S. steel and is widely exported to both the American and European markets—is the third party that stands to be most affected by the deal. But other countries with highly carbon-intensive steel industries, such as Russia and India, would also be affected absent significant measures to decarbonize their industries.

Notably, the disparity between U.S. and Chinese steel emission intensities differs by production method. Chinese steel produced by the traditional blast oxygen furnace (BOF) method—the most carbon-intensive method—produces about 50 percent more emissions than U.S. BOF steel. Meanwhile, Chinese steel produced using an electric arc furnace (EAF), a more recent manufacturing method that is less carbon intensive than BOF, is about three times more carbon intensive than U.S. EAF steel.

A new approach to managing the economic rise of China—and other authoritarian, nonmarket states

Although China is not mentioned by name in the joint statement released in 2021, it remains the elephant in the room. The joint statement’s repeated references to “non-market excess capacity” and the need to ensure “market-oriented conditions” clearly allude to Chinese steel production, which has surged from 15 percent to about half of global production since 2000. There are long-standing transatlantic concerns that the Chinese economic system of state capitalism has conferred unfair advantages to Chinese business and resulted in overproduction of key commodities—above all, steel—driving down global prices and harming domestic industry. Most notably, in 2018, the United States circulated a detailed memorandum to all WTO members concerning China’s “trade-disruptive economic model,” assessing that a variety of “non-market” practices—such as “massive, market-distorting subsidies,” foreign investment restrictions, and state-controlled financial institutions—had given Chinese manufacturing an unfair trade advantage to the detriment of market economies.

Although the European Union has been less vocal in challenging the Chinese economic model on a general level, it has repeatedly expressed frustration over Chinese steel overproduction and trade-distorting subsidies, most recently regarding subsidies to Chinese electric vehicles.

In this sense, GASSA would represent the first coordinated multilateral effort to address China’s integration into global markets without directly engaging Beijing or invoking WTO dispute resolution measures. It would also reflect a new approach to promoting Chinese climate ambition, in which direct engagement with Chinese authorities is supplemented by market-shaping policies that create economic and reputational incentives for Chinese manufacturers to decarbonize. Such an approach would reinforce unilateral measures to promote decarbonization of carbon-intensive sectors such as carbon tariffs, green procurement standards, and subsidies to clean industry.

China, of course, is not the only nonmarket state with a major role in the global economy. Russia, which the United States recently assessed to be a nonmarket economy, also produces considerable volumes of steel and aluminum, and steel production is expanding in a number of nondemocratic states in the Middle East and Southeast Asia, with a record of trade-distorting practices. As with China, GASSA would protect U.S. and EU industries from being undercut by steel and aluminum produced cheaply or in excessive quantities by these countries as a result of carbon-intensive manufacturing, exploitative labor conditions, or other unpriced externalities and social harms. In this sense, GASSA could be an important first step in reversing what U.S. Trade Representative Katherine Tai has described as a “race to the bottom” in the organization of the global economy, “where exploitation is rewarded and high standards are abandoned in order to compete and survive.”

A catalyst for remaking the global trade system

In recent years, the WTO and globalization itself have come under unprecedented pressure to remain relevant in an international environment defined by the U.S.-China geopolitical rivalry, supply chain disruptions, and the emergence of climate action as an urgent priority in the international agenda. As observed by current WTO Director-General Ngozi Okonjo-Iweala:

“A series of shocks in the space of 15 years—first the global financial crisis, then the COVID-19 pandemic, and now the war in Ukraine—have created an alternative narrative about globalization. Far from making countries economically stronger, this new line of thinking goes, globalization exposes them to excessive risks. Economic interdependence is no longer seen as a virtue; it is seen as a vice. The new mantra is that what countries need is not interdependence but independence, with integration limited at best to a small circle of friendly nations.”

Whether this accurately describes the position of the United States or another major economic power is up for debate, but there is little question that current U.S. trade policy is grounded in the assessment that economic integration cannot proceed on the neoliberal terms envisioned by the late 20th century architects of the WTO system.

On the one hand, GASSA can be seen as affirming the WTO’s continued relevance in managing trade relations between sovereign economies. The provisional lifting of steel and aluminum tariffs under the 2021 U.S.-EU agreement, with recourse to WTO arbitration should negotiations fail, could buttress the WTO system by using the WTO’s own procedures to resolve a dispute that would otherwise have languished under the organization’s currently inoperative dispute resolution mechanism. Even so, some analysts and senior European officials have expressed reservations that GASSA could, depending on its design, be incompatible with WTO rules. Although the WTO system has long tolerated plurilateral free trade agreements, in which participating countries reciprocally reduce trade barriers for one another, the same cannot be said for agreements to increase trade barriers on third-party countries; such arrangements could be read to run afoul of the WTO’s “most-favoured-nation” principle, which requires treating imports from all WTO members equally.

Yet such concerns are not reason to avoid moving forward with GASSA. The urgency of the climate crisis militates against an excessively cautious, self-limiting approach to the design of trade arrangements, and there is a case to be made that GASSA is a permitted trade measure under WTO rules. Ultimately, the trade system must be responsive to the broader policy context in which it operates and current public priorities—most notably the need for alignment with the global commitment to reduce greenhouse gas emissions. Given the outsize role the United States and European Union play in global trade, GASSA may prove to be a vehicle for reappraising WTO rules to better align with climate action.

In this respect, GASSA could have the surprising consequence of galvanizing a long-overdue conversation about overhaul of the global trade system. In particular, GASSA would add further ballast to an emerging trade reform agenda that recognizes that the WTO and the global trade system more broadly must move beyond their current focus on clearing barriers to trade—what U.S. Trade Representative Tai has called a system that encourages “low cost at any cost—and be regeared to promote specific kinds of economic activity that carry positive environmental and social benefits—for example, trade in low-carbon goods and goods that can support a green transition, such as inputs into EVs, photovoltaic solar panels, and wind turbines. If landed, GASSA would mark a major pivot toward what national security adviser Jake Sullivan has called the “new Washington consensus,” which rejects reflexive lowering of trade barriers and seeks alignment of trade policy and trade institutions with climate action, equitable economic growth, and resilient supply chains that avoid excessive dependence on any one country for strategically important goods. Sullivan has identified WTO reform as one element of this new approach to international economics.

A special economic relationship between democracies

GASSA negotiations began in earnest in November 2021, in the first year of the Biden administration. It is not surprising that the administration’s first major move in trade policy was with the European Union. U.S. trade officials have stated their desire to deepen economic ties with existing economic partners and allies and to use trade as a tool to strengthen global democracy.

GASSA would create a new set of economic relationships among the world’s two largest democratic economies, organized around a novel set of trade policy propositions. In other words, it could presage a long-term trend in the global trading system in which trade arrangements and the cross-border investment and supply chain cohere more closely with shared values among trading partners, rather than the narrow notions of economic efficiency that have created economic interdependence between the economies of democracies and authoritarian regimes such as China and Russia.

Of particular note, once established, GASSA could be broadened to one or more democracies in the Global South, such as Brazil, with requisite investment in lowering carbon intensity and (where needed) strengthening of core labor rights. In addition to the climate benefits, this would help address concerns that linking market access to climate ambition is a form of “green protectionism” designed to disadvantage developing countries.

A much-needed step forward in transatlantic relations

Despite a long history of security cooperation and shared democratic values, economic cooperation between the United States and the European Union has been a recurring source of tension and even conflict. During the Obama administration, negotiations over the Transatlantic Trade and Investment Partnership floundered and were eventually abandoned. And during the Trump administration, Brussels was blindsided with tariffs on national security grounds, which antagonized European leaders and prevented more constructive discussions over collaborating to address a range of economic challenges, including China’s unfair trade practices. More recently, provisions of the Inflation Reduction Act linking tax credits to domestic content incentives and providing direct subsidies for domestic production provoked anger and accusations of protectionism and trade discrimination from European officials, which in turn led the United States and European Union to begin negotiating a one-off agreement that would make European firms eligible for some of the disputed credits.

Given this history, GASSA represents a much-needed step forward in U.S.-EU economic relations, as it not only turns a page on past acrimony but also opens a pathway for U.S.-EU cooperation in other critical areas of the relationship, such as digital regulation, investment screening, and technology standards. Moreover, the agreement may serve as a template for trade clubs organized around standards other than climate—for example, labor standards—and facilitate coordination between Brussels and Washington in how they engage the Global South on economic issues. In short, GASSA should be viewed as a key building block in the construction of a durable U.S.-EU economic partnership, one that will prove vital in combating climate change, calibrating economic relations with China in a way that balances fair competition with the need to derisk key sectors, and ensuring that democracies are able to set the global rules of the road on technology and trade.

Conclusion

The particulars of any GASSA arrangement—provided it has tangible, market-shaping effects—are ultimately less important than the crucial precedent a deal would set in demonstrating that like-minded democracies can work constructively within the global trading system to condition market access on carbon intensity, all while managing the distorting practices of nonmarket economies. At a moment when climate change, the lingering aftershocks of the COVID-19 pandemic and Russia’s invasion of Ukraine, and a deepening U.S.-China rivalry have placed unprecedented strain on the post-Cold War consensus on globalization and regulation of cross-border trade, GASSA offers a potential path forward: a new approach to economic relations capable of meeting the challenges of the 21st century head on. However, for this new approach to succeed, leaders in both Washington and Brussels must be willing to set their differences aside and use their immense market power to guide the global economy toward a more sustainable, resilient future.

Given the urgency of the climate crisis, U.S. officials should also consider allowing the two-year tariff rate quota—which partially lifted the Trump-era Section 232 tariffs on European steel—to expire, if the European Union is unwilling to agree to a sufficiently ambitious global arrangement. This effort should include a firm implementation plan that sends a strong signal to industry that the future of steel and aluminum trade will be marked by clear carbon intensity-based tariffs.

In addition, U.S. officials should strongly consider pursuing a GASSA-like arrangement with other democratic trading partners with high levels of climate ambition—such as Canada, Norway, and Australia—while seeking to conclude negotiations with the European Union. As the world’s foremost economic power, currently led by an administration committed to climate leadership and democratic values, the United States is uniquely capable of providing proof of concept of a new model of trade policy that supports a just transition to a decarbonized global economy.

To read the full issue brief, click here.

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Trade Policy Tools for Climate Action

In June 2022, at the WTO’s 12th Ministerial Conference (MC12), the entire WTO membership recognized that the world is facing “global environmental challenges including climate change and related natural disasters, loss of biodiversity and pollution”. It also noted “the importance of the contribution of the multilateral trading system to promote the UN 2030 Agenda and its Sustainable Development Goals, in its economic, social, and environmental dimensions, in so far as they relate to WTO mandates and in a manner consistent with the respective needs and concerns of Members at different levels of economic development”. This acknowledgement came after an increased level of discussions at the WTO’s Committee on Trade and Environment (CTE) and other WTO bodies, and initiatives on how trade and trade-related policies could be harnessed and better aligned with climate objectives.

The WTO’s Environmental Database (EDB), available via the WTO website, shows that WTO members, from all regions and stages of development, are increasingly using trade-related policies as part of their climate action toolbox. From 2009 to 2021, members notified to the WTO more than 5,000 measures with climate-related objectives. About 40 per cent were notified by developing members. WTO bodies and notification tools offer extensive opportunities, therefore, for governments to exchange views and experiences, learn from each other and develop best practices on a range of trade-related policy tools that can contribute to effective climate action.

Following the publication of the WTO Secretariat’s 2022 World Trade Report, which focused on the complex relationship between trade and climate change, Trade Policy Tools for Climate Action seeks to highlight key trade-related policies being used, or that could be used, by governments to mitigate the effects of climate change or to adapt to its consequences.

The policy tools set out in this publication are simply intended to be a source of information and possible inspiration, amongst others, for policymakers to draw on in pursuit of their domestic climate mitigation and adaptation plans. They are purely voluntary in nature, and the publication does not seek to evaluate what the most appropriate or efficient policy tools might be for governments, individually or collectively.

As a contribution to the discussions at COP28, taking place in late 2023, on how trade can be a key part of the solution to the climate crisis, the aim of this publication by the WTO Secretariat is to provide information that will assist the debate going forward.

tptforclimataction_e

 

To access the summary, as well as a chapter directory posted by the WTO, click here.

To read the full publication, click here.

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Fast Fashion, Global Trade, and Sustainable Abundance

Plentiful cheap clothes are a triumph of innovation and markets. Most of human history has been characterized by privation and low‐​productivity toil. As one American sharecropper exclaimed in John Steinbeck’s Depression‐​era novel The Grapes of Wrath, “We got no clothes, torn an’ ragged. If all the neighbors weren’t the same, we’d be ashamed to go to meeting.”

Today, things are different. People in wealthy countries can order a new outfit for less than a day’s wages. We enjoy new styles and trends that were once reserved for the ultra‐​rich. Even our poorest are rarely lacking sufficient clothes and shoes.

Much of this abundance is owed to globalization. Clothing is so plentiful that unwanted new garments are piling up on the beaches of Ghana. African consumers can no longer absorb the quantities shipped to them by rich ones, so they choose the styles they love and discard the rest.

There are, however, critics of these trends, especially the recent phenomenon labeled “fast fashion,” the rapid production of inexpensive, trendy clothing that is quickly made available to consumers, often resulting in short product life cycles. The United Nations Economic Commission for Europe called the fashion industry an “environmental and social emergency” because clothing production has roughly doubled since the year 2000. Their main concerns are fast fashion’s environmental impact and working conditions.

Is apparel a menace? In short, no. Globalization of the clothing industry has been good for the United States and the world.

Clothing Abundance and Globalized Fashion Provide Myriad Benefits

From the runways of Paris and Milan to the shops on Savile Row and the streets of Brooklyn, fashion has long been global and one of the ways people around the world can learn from one another. It used to be, however, that most fashion was reserved for the elite while common folk got by on a few well‐​worn staples. The recent explosion of cheap mass‐​produced clothes is a testament to the power of specialization and exchange on a global scale. Elizabeth Cline wrote, “If you ever wonder how we went from living in a world of relative clothing scarcity to feeling like we’re swimming in the stuff, ponder no further than China.” One city in China produces most of the world’s socks, over 20 billion pairs a year. This works because of an integrated international supply chain. It was only with the expiration of the Multifiber Arrangement in 2005 that the global textile and apparel trade was fully opened, following decades of gradual liberalization efforts through agreements such as the Agreement on Textiles and Clothing negotiated as part of the Uruguay Round of the General Agreement on Tariffs and Trade (the GATT).

Critics sometimes ignore the social benefits of cheaper clothes that weigh against its costs. Globalization has increased the variety of clothes we can choose from, and we can express ourselves in almost any way imaginable. What The Economist calls “mass customization” is fun. A fashion influencer summarizes the attitude of fans of low‐​budget brands like Shein: “People deserve to have nice things.… A lot of us that work regular 9‑to‑5 jobs can’t afford $2,000 shoes.”

But having plenty of textiles is about more than just people looking good or buying new dresses. Abundance means that children have winter hats and burn victims have bandages. And the global nature of fast fashion fosters economic integration and understanding. The exchange of fashion ideas creates a merging of cultures as designers draw inspiration from different traditions and consumers embrace trends from around the world. Fast fashion has the potential to democratize new trends and ideas, making them accessible to a broader demographic.

There are also other ways that cultural exchanges happen. Global supply chains bring people together to solve problems and foster an exchange of businesspeople to run these supply chains. For‐​profit clothing businesses achieve the goals of cultural nonprofits such as the Rhodes Trust and the Olympic Foundation for Culture and Heritage. And thanks to the internet, any person in any country can share what they love with a global audience of fans. This is what a rich globalized world looks like.

Textiles Trade Supports Better Jobs—Here and Abroad

Critics also misunderstand that what might be considered a sweatshop in the United States is an improvement over the real‐​world alternatives available in poorer countries—a step that Americans themselves took a century ago.

Dana Thomas sums up the sentiment toward trade and technology among fast‐​fashion critics in her book Fashionopolis:

“Since the invention of the mechanical loom nearly two and a half centuries ago, fashion has been a dirty, unscrupulous business that has exploited humans and Earth alike to harvest bountiful profits. Slavery, child labor, and prison labor have all been integral parts of the supply chain at one time or another—including today. On occasion, society righted the wrongs, through legislation or labor union pressure. But trade deals, globalization, and greed have undercut those good works.”

The implication that child labor is the result of mechanized manufacturing is backward. Children today have been largely freed from production jobs because of the wealth created by machines and globalization. It is not primarily legislation that creates safer jobs but rather economic growth.

Preindustrial women spent much of their lives spinning thread. In the United States today, it would be illegal to pay as little as these women earned for their labor. The reality was that these women were not very productive because they were working with poor technology, and yet they did the work because it was their best option. Machines and synthetics allow us to produce more textiles with less labor.

To read the full publication, click here. 

Joy Buchanan is an Associate Professor of Quantitative Analysis and Economics, at the Samford University Brock School of Business.

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World Trade Law and the Rise of China: Struggles over Subsidy Rules

The following is an excerpt from the book: World Trade Law and the Rise of China In: The Many Paths of Change in International Law.

It seems intuitive to think that if the distribution of political power shifts, law eventually follows, as new powers want political changes to ultimately be reflected in the law. However, established actors typically want the law to remain stable and therefore resist legal change. When and how are shifts in global power structure then brought into international law?

One of the greater shifts in geopolitics in recent history has been the rise of China, and it has put the international order under significant strain. The question this chapter will explore is to what extent this shift has resulted in change in international law, and especially in world trade law. The WTO has been a key arena of conflict between the US and China in recent years, well before the Trump years. What happens when a new, potentially powerful, (state) actor enters the scene of an already existing and established legal regime such as international trade law? How did China, whose international trade law profession was underdeveloped (or virtually non-existent) prior to its accession to the WTO, manage to use the WTO dispute settlement system to push for change.

International trade law is a particularly suitable field for an inquiry into the effects of geopolitical shifts on international law, because—especially in the form it found in the WTO Agreements—it is widely seen as a reflection of a particular economic vision associated with the dominant powers of the 1990s. The WTO Agreements tend towards neoliberal market liberalization, mainly due to pressure from the US and, to an extent, the European Union during the Uruguay Round. Developing countries challenged this dominance in the Doha Round and prevented the further extension of this approach through treaty-making, but they did not achieve a rebalancing on this route either as negotiations largely ended in gridlock. Meanwhile, societal contestation—particularly in the area of environmental regulation—has created legitimacy issues for the WTO, adding to the pressures the organization finds itself under, but has not led to formal changes in existing agreements either.

Yet, change in trade law does not necessarily have to come through state-led processes. In fact, this field of international law is particular not only because of its ideational orientation, but also because of the centrality of the ‘judicial’ path of change, embodied in the WTO dispute settlement system and the jurisprudence of the panels and the Appellate Body (AB). In light of the clogged nature of state or multilateral paths, the focus for change agents in this field soon shifted towards the judicial path, and it is here that we have seen most movement, especially under the influence of the AB from the mid-1990s until 2019, when the AB itself became blocked as the US prevented the appointment of new members. Change processes in world trade law over the past decades have then also largely come about through shifts in the interpretation by WTO dispute settlers.

China, too, has been among the change agents using the judicial path at the WTO, and it has been quite successful in using it for its own interests and to advance its global economic and political position. This was aided by the fact that, as we will see in more detail later in the chapter, China invested significant resources into building its own trade law capacity to further global influence. This contributed to the country being perceived as a credible rival to Europe and the US in shaping, changing, and developing international trade law. The change in turn has resulted in political shifts, impacting the political (im-)balance between China and the Western world.

This chapter traces China’s rise and its consequences at the WTO, especially with a view to understanding how the country utilizes home-grown capacity for international trade law, and how these developments can embody a global political shift in power. In the WTO context the AB could achieve (lasting) impactful change and might have therefore been an obvious choice of forum to push for change. In other areas of international law, where one does not have a similar focal point or decisive body, it might be less likely that change can be pursued (successfully) through judicial bodies.

Pressures of geopolitics are especially encapsulated in the case of subsidy regulation at the WTO—the focus of our inquiry here. Subsidy regulation, a seemingly niche topic, provides a magnifying glass through which we can observe how disagreements between economic and political systems play out in a specific issuearea. The WTO’s subsidy rules were not ideally suited to dealing with economies with a blurred boundary between public and private actors, and China soon pushed back against the wide application of these rules on its state-owned entities. This led to a (limited) interpretive shift among WTO dispute settlement bodies, but also to contestation on the part of, in particular, the US, which saw this issue as increasingly significant in the context of the developing trade conflict with China in the early 2010s. As we will see below, the issue seemed relatively settled for several years before the AB took a step back towards the US position later in the decade, when the crisis over AB appointments was already well advanced. Subsidy disciplines have become an element in discussions about general WTO reform, and one could even go as far as to argue that the future of the WTO hinges on them as they represent the ultimate test for whether the institution can accommodate a strong non-market based economy—and whether it can strike a balance between the demands of different types of economies within it.

 

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De-globalization, International Trade Protectionism, and the Reconfigurations of Global Value Chains

There has been an increasing interest in understanding the impact of international trade protectionism on the global organization and adaptive reconfigurations of value chain activities. The move towards protectionism started in the wake of the 2008 financial crisis, with many economically developed governments enacting populist policies and measures encouraging the local sourcing of supplies in order to protect their local industries and jobs. Such policy interventions have attracted significant interest, which was stimulated by the attempt made by the 45th President of the United States, Donald Trump, to surrender the US’s global leadership and replace it with a more inward-looking and fortress-like mentality, which led to the US-China trade war. This significant shift of globalization toward international trade protectionism emphasizes the implicit assumption – made by the international business (IB) literature over the past decades – that globalization is ongoing and accelerating. Under this assumption, the dominant IB studies have examined the causes of globalization and its effects on the activities of multinational enterprises (MNEs). In contrast, relatively limited studies have paid attention to the reverse processes – i.e., ‘de-globalization’ or ‘anti-globalization’ related protectionism measures – and their implications for the reconfiguration of GVCs. As some estimates suggest that around 80% of global trade is undertaken through GVCs, and in such a context protectionism measures and trade wars between the USA and China can have significant consequences for the GVCs. Rising protectionism also reflects the slowing down of globalization, suggesting far reaching implications for firms.

This research gap is amplified by the significant numbers of pro-market and pro-globalization reforms that many of the emerging Asian and Latin American economies have enacted in the early twenty-first century with the aim of providing MNEs with significant opportunities to fine slice their GVC activities in terms of integrating, coordinating, and communicating with geographically dispersed partners to co-create value and of effectively competing in the global marketplace. The organization of global economic activities under GVCs has enabled global learning and the rapid expansion of ideas through the exchange of technology and human capital, thus contributing to lower production costs, higher specialization levels, and more innovative products and services. The resulting vibrant international economic activities have also promoted societal welfare and fostered wealth and job creation. Furthermore, GVCs’ role is becoming extremely important in achieving sustainable economic growth and development and given these benefit, several international organizations have made GVCs as part of their policymaking agenda. Various countries from Asia to Latin America have benefited through their insertion into GVCs. For instance, the participation of southern-based small suppliers in GVCs has been noted to be crucial in improving their so-called economic upgrading prospects through the flow of valuable knowledge from lead firms – MNEs. Economic upgrading refers to a process whereby economic actors – countries and firms – move to higher value activities in GVCs. It is also considered to be their passport to entry into international markets.

To address the aforementioned gaps in the extant literature, our study built on the nexus between the de-globalization and GVCs literature to investigate the impact of international trade protectionism on the reconfiguration of GVCs and further explore its boundary conditions. Specifically, we aimed at answering the following two fundamental questions: (1) “What are the implications of international trade protectionism for GVCs?” and (2) “What risk mitigation response strategies are suited to manage trade protectionism and develop resilient GVCs?” In answering these two questions, we focused on a set of US protectionism measures enacted during the Trump era and maintained by the current administration of President Biden, and discussed their implications for the reconfiguration of GVCs in terms of their control and coordination. This context is important in light of the aggressive protectionist measures enacted by the US against China and other trading partner countries – which have led to the decoupling of value chain activities. For instance, the USA has withdrawn from the Trans-Pacific Partnership agreement, renegotiated free trade agreements with Mexico and Canada under the umbrella of NAFTA, and enacted a range of new tariffs on goods and services. In addition, MNEs, as lead firms from the US, are the major actors behind the global organization and coordination of GVCs; thus, such context provides important insights into the changing geography of GVCs as well as their resilience. To understand the US trade protectionism measures and their implications for GVCs, we examined 174 newspaper articles published between 2016 and 2020 in broadsheet newspapers (The New York Post, The New York Times, and Newsday) and specialist business publications (The Financial Times, The Wall Street Journal, and Bloomberg). In doing so, we made three contributions to the international business literature. Equally importantly, given that the extant IB studies have rarely employed historical accounts to research important IB topics, we deployed unique historical research methods, thus compiling and reconciling empirical evidence relating to US trade protectionism and the reconfiguration of GVCs.

Our findings contribute to the IB, de-globalization, and the GVCs literature in several important ways. First, the IB literature makes the implicit assumption that globalization is relentlessly accelerating. Conversely, our study drew on the de-globalization literature to challenge this implicit assumption. We conceptualized international trade protectionism as a specific form of de-globalization and proposed that it acts as a driver to shape policy reforms and tariffs in order to control the activities of GVCs and spur local economic activities for low-skilled workers, thus leading to the reconfiguration of GVCs from the global to the regional and local scale. Our efforts to identify this link have significant implications for both theory and practice. Our other important contribution to the IB literature is that we took a step toward exploring the potential influence of international trade protectionism on GVCs by taking into account various industries as a boundary condition, as more globalized industries rely far more on global suppliers of components, which certainly poses both more opportunities for and threats to the functioning and coordination of GVCs, an aspect that is virtually neglected in the IB literature. We, therefore, filled this gap in the dominant IB studies.

Second, our study makes important contributions to both the de-globalization and GVCs literature. The de-globalization literature suggests that changes in the global structural and political systems to protect national economies from immigrants have serious implications for IB and the vulnerability of GVCs. Relatedly, the international trade protectionism measures enacted by governments are expected to limit the international transfer of the tacit knowledge that resides in global excellence centers, restrict the free movement of goods and shift production to geographically dispersed locations to reduce costs, and disharmonize those international trade policies that foster inequality and industrial decay. Unfortunately, we lack a systematic understanding of the nature and extent of international trade protectionism and its impact on GVCs. This has been echoed by those scholars who have called for more research on “the potential impact of various expressions of the renewed protectionism, such as Brexit and Trumpism, on GVCs.” Our study hence responds to this call by exploring the potential impacts of trade protectionism on GVCs, with the core argument that trade protectionism poses serious challenges to their activities. It thereby advances the de-globalization literature by not only placing de-globalization in the context of international trade protectionism, which has been little explored but also exploring the consequences of such protectionism.

On the other hand, our study also contributes to the GVCs’ literature, which suggests that a clear pattern of dispersed and fragmented international MNE business activities emerges where offshore production sites located in low-cost developing countries are closely linked with consumers in developed markets. The critical role played by GVCs in international business, alongside the populist and nationalist rhetoric that is emerging from developed markets (e.g., the US), has generated a severe backlash against globalization and the very nature of GVCs due to the disappearance of local companies and firing of workers resulting from increased foreign competition. The global integration of value chain activities is disrupted by import tariffs, anti-globalization policies, and restrictions on the migration of skilled labor for the free flow of ideas and knowledge through GVCs. Institutional changes have reversed the globalization trend, with governments implementing protectionist measures and weakening global institutions such as the World Trade Organization. Globalized industries are increasingly more likely to be severely affected by trade protectionism – in the form of increased tariffs and trade restrictions to reduce imports in an attempt to protect domestic sectors and boost local employment, which limits the trade activities of MNEs and restrains the free flow of goods, services, and capital across borders. This situation has been made more complicated, for example, by the US’s ‘America First’ policy stance, resulting in the initiation of strict industrial policies and tariff wars aimed at curtailing imports from Canada, Mexico, Europe, and China. We advance the GVCs literature by connecting it with the de-globalization literature, which had hitherto been largely viewed as separate despite being closely associated. We synthesize the key insights and establish the link between the two streams of literature, proposing that trade protectionism plays a key role in shaping policy reforms and tariffs in order to control GVC activities and spur local economic activities for low-skilled workers.

Besides contributing to knowledge, our study has practical and policy implications. First, it provides insights to MNEs’ decision-makers about changing global market environment. Given the fact that the trade protectionist measures by governments are increasing trade barriers for MNEs and disrupting GVCs, it is vital for MNEs to consider macro-economic factors including protectionism policies that undoubtedly determine the effectiveness of GVCs. This high-level consideration is particularly relevant for those decision-makers of MNEs who are doing the cost–benefit analysis of developing and nurturing GVCs. The consequence of protectionism having disrupted GVCs is that the over-reliance on global partners affected the operations of MNEs, thereby reducing their profitability. Therefore, decision-makers must determine which activities should be outsourced to global partners and which should be assigned to regional partners. By doing this, MNEs can diversify their outsourcing activities at both regional and global levels, therefore achieving profit gains even during disruptive events. Moreover, this study has important implications for policies and policy-makers. On the one hand, there is an urgency for policies that should reduce trade deficits and cut the import tariff revenue losses suffered by MNEs in order to improve their competitiveness. On the other hand, it is vital for policy-makers to pay greater attention to the populace with low education levels and low skill sets, who are vulnerable to ever-changing job environments, since these marginalized low-skilled workers who forced the de-globalization movement desperately need their governments to take actions by, for instance, creating favorable policies to help and protect them as well as providing them with training opportunities.

The remainder of this paper is structured as follows. Next, we review the literature on GVCs and trade protectionism. We then detail our methodology with an explanation of the data collection and analysis process. Subsequently, we present our findings on how US trade protectionism affects the GVC activities of MNEs. Before concluding, we present the theoretical and practical implications of our study as well as its limitations.

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To read the full article as it was published by Springer Nature, click here.

To read the full article, click here. 

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The Positive Impact of US-China Trade War on Global South’s Position in the Global Value Chain

Amid the US-China trade war, several US companies have relocated back to the US, while China turned its industry inward to become more self-sufficient. This unpleasant development created a risk for Global South’s position in the Global Value Chain (GVC), especially in countries with manufacturing industries that can only assemble products. However, throughout the last decade, the position of the Global South within the GVC has been strengthening. In 2016, the Global South produced more than 47% of global manufacturing exports. However, the US-China trade war has threatened the delicate process and connection of the GVC. The interference of American and Chinese governments in international trade has forced many companies in taking measures to reduce their exposure to political risk. Additionally, an increasing number of American companies are reconsidering their decision to invest in the Chinese market and diversifying their investment to the Global South. This paper argues that the trade war could provide opportunities for Global South countries, particularly Southeast and South Asian countries represented by India. These opportunities include broader employment access for the youth, robust industrial-based innovation, and rapid economic growth, leading to a higher national income and life quality improvements.

Introduction

Since 2018, the United States and China have been embroiled in a trade war. The trade war stems from US President Donald Trump’s decision to impose tariffs on several products and commodities imported from China. In response to the policy, China also imposed tariffs on several products and commodities imported from the US. Research conducted by Chad P. Bown (2022) from the Peterson Institute forInternational Economics shows that as of July 2018, the average US tariff on imports from China was still 3.8%. However, tariffs on imports from China gradually increased until they peaked at 21% in September 2019 and then dropped to 19.3% in February 2020.

Meanwhile, on the Chinese side, in July 2018, the average tariff on imports from the US was at 7.8% and then gradually increased to 21.8% in September 2019. As of February 2020, Chinese tariffs on imports from the US decreased to 21.3% and reached a low of 21.2% on July 2020. Furthermore, based on the impact of tariffs on the percentage of trade, around 66.4% of US imports from China and 58.3% of Chinese imports from the US in June 2022 are still affected by tariffs set against each other.

There are efforts between the US and China to defuse the trade war through the Phase One agreement, which was agreed upon in December 2019. The two countries agreed on structural reforms to China’s economic and trade regime, particularly in intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. In the deal, China also committed to increasing the imports of goods and services from the US. Furthermore, a dispute resolution system was established with immediate and effective implementation and enforcement. Finally, the US agreed to modify Section 301 of the Trade Act of 1974. Despite these efforts, as shown from the data in the previous paragraph, the tariffs that the US and China imposed on each other remained relatively high.

The US put several Chinese companies on the Entity List as the trade war escalated between the two countries. The US Bureau of Industry and Security (2022) reported on August 23rd, 2022, that about 600 Chinese companies were already included on the list, with 110 companies included during President Joe Biden’s tenure. In practice, companies on the Entity List will have restrictions on access to commodities, software, and technology from the US. However, US entities may export, re-export, and transfer such matters to companies on the Entity List with a license from the US Bureau of Industry and Security.

The conflict between the US and China is not limited to political economy issues but also security politics. China’s claim to much of the South China Sea, known as the nine-dashed line, is contrary to the principles of the US freedom of navigation. This situation leads to freedom of navigation operations (FONOPS) by the US Navy in those waters that China regards as part of its territories as opposed to its claims. The existence of Taiwan also creates issues between the two countries. Although since 1972, it has recognized the communists in Beijing as the sole representative of China, the US maintains its ties with nationalists in Taipei and ensures their independence from Beijing. China’s growing economic and military power over the past two decades allows the country to become increasingly assertive of Taiwan. This raises tensions with the US as Taiwan’s ally and security guarantor.

The conflict between the US and China prompted the two countries to reduce their dependence on each other. US manufacturing imports from China have decreased, while Asian countries categorized as low-cost countries, have increased. At the same time, the issue of reshoring US companies’ operations in China arose. A survey conducted by A.T. Kearney (2022) found that about 47% of executives of US manufacturing companies operating in China have moved part of their operations back to the US in the past three years. 29% said they would restore parts of their operations in the next three years, and 16%said they had considered reshoring but are yet to make a decision. In the survey, US company executives also outlined that their options also include Mexico, Canada, and Central American countries (nearshoring), not limited to reshoring to the US. This decision coincides with the trend of automation by US companies; instead of looking for cheap labor, they are replacing them with robots. The process creates challenges for countries that host part of US companies’ operations characterized by the labor-intensive and technology-laden process.

From the Chinese side, the disruption caused by the conflict with the US encourages them to become more economically self-sufficient. Such efforts to achieve self-sufficiency are made through the dual circulation model, which includes changing the growth model from export-based to domestic consumption and reducing dependence on imports. Concerning the second element, according to the Economist Intelligence Unit (2020), China focuses on three sectors. First, technology with a priority towards semiconductors. China provides fiscal incentives and subsidies, and encourages cooperation between industries and universities to reduce dependence on US semiconductor companies or companies from other countries that use US technology. China also provides fiscal incentives and subsidies, and encourages cooperation between industries and universities. The second sector is energy. China does not rely on the US or its allies for energy supplies, however, shipping oil and gas by sea is vulnerable to a blockade or interception. The threat of a blockade prompted China to increase its renewable energy sector investment. The third sector is food. China’s agricultural sector is labor-intensive, but they experience labor shortage and are dependent on imports of seed and technology. This limitation prompted a policy of agriculture modernization from labor-intensive to technology-intensive.

Alfin Febrian Basundorois a graduate student at the Strategic and Defence Studies Centre, Australian National University, Canberra, Australia.

Muhammad Irsyad Abraris a graduate student at the Department of International Relations, Universitas Gadjah Mada (UGM), Yogyakarta, Indonesia.

Trystantois an undergraduate student of international relations at Universitas Gadjah Mada (UGM), Yogyakarta, Indonesia.

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To read the abstract as it was originally posted by the Journal of World Trade Studies, click here.

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See the Big Picture: 2024 Supply Chain Outlook

Global supply chains have faced a decade of disruptions. The most significant have included the US-China trade war, the COVID-19 pandemic-era consumer goods boom and the Russia-Ukraine war. Supply chain disruptions have also included a variety of natural disasters, financial failures and operational difficulties.

Supply chain activity has normalized in operational terms during 2023, but there are significant risks across the industrial policy, labor action and environmental policy implementation spheres heading into 2024.

Supply chains need to be more resilient, but questions remain over whether corporations and their investors are willing to make the investments necessary to fortify them.

The Take

Global supply chains largely normalized in 2023 after years of disruption, and the need for resilience is clear. The willingness of corporations to build that resiliency is not.

Falling operating margins and higher interest rates may be leading companies to cut their inventory balances and reverse recent supplier diversification increases.

There is no shortage of technology available to enable supply chain resilience, with generative AI as the latest example. Most companies need to see short-term returns on investment, and recent experiences with blockchain, for instance, are leaving some hesitant.

Organizational alignments are necessary to ensure continuing supply chain resilience. Tools for success include increased engagement with labor unions, geographic diversification with an eye to mitigating operational risk, closer tracking of environment profiles, reshoring and enhanced supplier engagement to manage tariff and geopolitical risk.

Paying for Resilience in a High-Cost Environment

S&P Global Market Intelligence data indicates that gross operating profit margins for manufacturers globally are expected to fall to 10.4% of sales in 2024 from 10.7% in 2022. The decline is expected to be particularly stark for the computing and electronics sector and domestic appliance manufacturing. At the same time, capital expenditures are forecast to exceed gross operating profits by 5% in 2024 after being equal to them in 2022. Reinvesting in capital stock may take priority over spending on supply chains.

Empty shelves were one of the most tangible signs of supply chain challenges during the pandemic era. The shortage of inventories, whether of toilet paper or computer chips, led many companies to over-order and subsequently cut stock levels in late 2022 and into 2023.

Data from the S&P Global Purchasing Managers’ Index (PMI) indicates that manufacturing stocks of finished goods were in retreat for eight of the first nine months of 2023. Destocking has been particularly notable in computing, which has been going on for 27 months while the downturn in consumer goods has been more sporadic.

The evidence from corporate financial data is mixed. The inventory-to-sales ratio for the Russell 3000 group of manufacturers and retailers of goods was 54.1% on a trailing three-month basis as of Sept. 30 compared to 50.1% on average for the 2016 to 2019 period. The elevated level is not necessarily evidence of a change in inventory patterns, as it is below the 54.8% peak reached in March.

The increase is also caused by just a handful of sectors. The apparel sector has an inventory-to-sales ratio of 74.7% versus 68.6% historically, while electronics excluding semiconductors stands at 39.1% versus its historical average of 29.9%. 

Sectors with longer sales cycles are closer to balance. In the case of household durable goods, the inventory-to-sales ratio of 55.0% in September is well below the 64.7% peak of a 2022 and in line with the 54.9% historic average.

Diversification of suppliers and reshoring are not the same thing. Both can reduce the inherent risk of a supply chain, and they often go hand-in-hand. However, diversification of suppliers can come in and out of fashion depending on the need for cost reductions.

With a focus on cost cutting in 2024, there may be less diversification as companies seek to shorten their supplier lists by pushing more orders to fewer suppliers to get better prices.

The number of suppliers per ultimate consignee for US seaborne imports for all industrial companies — nonfinancial, logistics or services — among the top 500 US importers increased by 13% in 2021 compared to 2019, indicating the use of more suppliers to deal with disruptions.

That increase in suppliers broadly started to reverse in 2022 and fell below pre-pandemic levels in the 12 months through Sept. 30, 2023. At a sector level, consumer goods companies registered one of the steepest drop-offs in suppliers. Similarly, the pool of suppliers for consumer durables companies — including furniture, appliances and leisure goods — expanded through 2021 but has contracted since then, dropping below pre-pandemic levels.

The auto industry’s supplier pool has crested but remained elevated, potentially reflecting the secular shift to electric auto production while maintaining internal combustion engine production. Electronics has also remained elevated after a drop in 2022.

 

Chris Rogers is the Head of Supply Chain Research at S&P Global Market Intelligence.

Mark Fontecchio is a Research Analyst, covering the Internet of Things, 451 Research at S&P Global Market Intelligence.

Amy Chang is the Lead Analyst at Panjiva, S&P Global Market Intelligence.

Emilee Nason is a Data Scientist at Panjiva, S&P Global Market Intelligence.

 

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Manufacturing Resilience: The US Drive to Reorder Global Supply Chains

Spurred by technological advances in shipping and communications and aided by a liberal world-trading environment, deepening global supply chains (GSCs) have for four decades lowered costs and increased the variety of goods available to consumers around the world. GSCs are complex networks of manufacturers, suppliers, warehouses, distributors, and shippers who move products and services from one location to another. Supporting these activities are orchestrated flows of blueprints, technology, people, and data across multiple countries and organizations. According to the World Trade Organization (2019), prior to the COVID-19 pandemic, more than two-thirds of world trade occurred through supply chains in which production crossed at least one border, and typically many borders, before final assembly.

Since the onset of the COVID-19 pandemic, however, supply chains once seen as exemplars of economic efficiency are increasingly portrayed as unacceptable sources of collective risk. Concerns about their resilience deepened as a series of external shocks continued to disrupt trade in the pandemic’s wake. Fragmentation has made GSCs long and thus subject to shocks emanating anywhere along the chain, while geographic concentration has made them heavily dependent on certain locations (and thus to shocks hitting specific parts of the world). In contrast to idiosyncratic shocks like the 2011 Tōhoku earthquake and tsunami, headline supply shocks since 2020 have been global and cross-sectional—hitting many countries and industries simultaneously. Adding to concerns about exogenous shocks, the weaponization of trade by China and Russia has raised the geopolitical risks of overdependence on unfriendly countries. In concert, public demands have grown louder for both government and private-sector actions to reduce supply vulnerabilities.

In the United States, the federal government has responded to widespread demands for domestic government action with new industrial and trade policies that promise a more resilient economy, defined as one that can better adapt to shocks and withstand geopolitical turmoil. Since taking office in 2020, President Joe Biden has prioritized efforts to enhance supply resilience. His administration has pursued policies designed to move some production onshore, expand commerce with “likeminded” countries, and reduce reliance on unfriendly states. This paper focuses on the administration’s efforts to “reshore, friendshore, and derisk” the supply chains that serve American businesses and households. Now that two major federal statutes promoting reshoring have passed a divided Congress, and the administration is deeply engaged in forming new partnerships, we may ask how effective these efforts are likely to be at reducing the risk of supply disruptions; what this new insurance will cost American taxpayers, businesses, and consumers; and how compatible they are with other US commitments. My early assessment suggests that supply chains are malleable and can be shifted in limited ways but that doing so is costly and often in conflict with other US objectives.

The US is in the early stages of efforts to boost supply resilience, and policies related to supply chains are taking shape in real time through the promulgation of implementation rules, ongoing international negotiations, and review of existing trade and investment policies. In this paper, I describe efforts to reorder the global supply chains that serve US importers, omitting discussion of export controls and investment restrictions. This omission does not imply that such efforts are unrelated to economic resilience, only that they are grounded in national security concerns and, thus, more appropriate for discussion in that context.

 

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The New U.S. Digital Trade Agenda: Retreat

Last week, the Office of the U.S. Trade Representative (USTR) confirmed that the United States was withdrawing support for key digital trade rules. The rules in question were proposed by the United States at the start of the WTO Joint Statement Initiative on E-Commerce (JSI) to ensure that exporters from participating countries receive reasonable treatment with respect to cross-border data flows, data localization, and source code protection. With the rescission, the forthcoming outcomes of the WTO negotiations are likely to be far less impactful: U.S. support is critical to finalizing any such provisions, which are foundational to digitally-enabled commerce. The announcement is an abrupt turn for not only U.S. trade policy, but brings forth the question, what else is the United States abandoning in the digital governance space? For key allies and stakeholders who have looked to U.S. leadership, the image presented is one of a ship adrift with neither a rudder nor a captain.

The United States was a first mover in advancing trade rules for the digital economy. The most recent Trade Promotion Authority legislation, reflecting a strong bipartisan consensus, states: “The principal negotiating objectives of the United States with respect to digital trade in goods and services, as well as cross-border data flows, are . . . to ensure that governments refrain from implementing trade-related measures that impede digital trade in goods and services, restrict cross-border data flows, or require local storage or processing of data[.]” 

Just four years ago at the start of the JSI talks, the United States put forth a communication detailing just how important data flows are and emphasized why it is critical that the JSI tackle the challenge of negotiating rules to facilitate data flows. The text tabled by the United States in the JSI also mirrored the data flows text in United States-Mexico-Canada Agreement (USMCA) and the text in the U.S.-Japan Digital Trade Agreement. The United States is now bound by those rules, not only vis-a-vis Canada, Mexico, and Japan, but also vis-a-vis over a dozen Free Trade Agreement (FTA) partners who enjoy Most-Favored Nation (MFN) rights from those prior agreements.

But these policies go back further and rules to enable cross-border data flows have been a part of modern U.S. trade policy. 

The 2012 U.S.-Korea FTA contains an electronic commerce chapter with commitments on data flows. Article 15.8 states: “Recognizing the importance of the free flow of information in facilitating trade, and acknowledging the importance of protecting personal information, the Parties shall endeavor to refrain from imposing or maintaining unnecessary barriers to electronic information flows across borders.”  
Article 15.5 of the 2004 U.S.-Chile Agreement states: Parties recognize the importance of “working to maintain cross-border flows of information as an essential element for a vibrant electronic commerce environment[.]” 
Article 14.5 of the 2006 CAFTA-DR (Dominican Republic-Central America FTA) states: Parties affirm the importance of “working to maintain cross-border flows of information as an essential element in fostering a vibrant environment for electronic commerce[.]” 
And, with respect to financial services, a U.S. obligation, available to all WTO members, was memorialized in the General Agreements on Trade in Services (GATS) Financial Services Understanding in 1994. Article 8 states: “No Member shall take measures that prevent transfers of information or the processing of financial information, including transfers of data by electronic means, or that, subject to importation rules consistent with international agreements, prevent transfers of equipment, where such transfers of information, processing of financial information or transfers of equipment are necessary for the conduct of the ordinary business of a financial service supplier.”

Principles underlying these rules have been prevalent throughout U.S. law and policy, but it’s also part of the Biden Administration’s agenda. 

The U.S. Commerce Department has spent decades negotiating agreements with trading partners on data transfer mechanisms. Under Secretary Raimondo, these efforts have continued and expanded. In 2022, Commerce announced the establishment of the Global Cross-Border Data Privacy Forum. The preamble of the Declaration states: “Believing that cross-border data flows increase living standards, create jobs, connect people in meaningful ways, facilitate vital research and development in support of public health, foster innovation and entrepreneurship, and allow for greater international engagement”. Commerce also successfully negotiated a new agreement with the European Union on transatlantic data transfers. Later this month, the United States will also host the APEC Leaders Summit, a venue where the United States and aligned trading partners have long championed the APEC Cross-border Privacy Rules System that facilitates data flows among member economies. 

Enhancing data flows is a part of U.S. foreign policy under the Biden Administration. The U.S.-led Declaration on the Future of the Internet commits signatories to “[p]romote our work to realize the benefits of data free flows with trust based on our shared values as like-minded, democratic, open and outward looking partners.” And just days after the United States announced its JSI decision at a meeting in Geneva, the United States then joined G7 members in a statement emphasizing importance of facilitating digital trade and data flows: 

“We recognize that unjustified data localization measures have a negative impact on crossborder data flows, by increasing data management costs for businesses, particularly Micro, Small and Medium-Sized Enterprises (MSMEs) and heightening cybersecurity risks. We remain committed to tackling unjustified data localization measures that lack transparency and are arbitrarily imposed, which should be distinguished from measures implemented to achieve legitimate regulatory goals.”

In short, USTR’s announcement last Wednesday should have those in the inter-agency process puzzled, in addition to sparking stakeholder concerns. It is also alarming that USTR’s move appears to be driven by domestic interests in pursuing competition-related legislation in the United States. However, the effects of rules promoting data flows on abuse of monopoly power have no obvious relevance or articulated rationale, other than to constrain the export potential of a handful of companies, while denying benefits to a much broader set of stakeholders who are arguably the more important beneficiaries. Research continues to show the benefits of data flows and access to new markets are particularly beneficial for start ups and SMEs. Further, digital trade provisions not only catalyze the exchange of digital products and goods between markets, but also serve as a multiplier effect for other sectors. The OECD has found that reducing barriers to cross-border data flows is essential to increasing non-digital services exports and goods exports from industries such as agriculture and food.

In the retreat of U.S. leadership at the international level, one is left to ask who steps in. Many were quick to point to China following the announcement, including many voices in Congress criticizing USTR’s decision. 

But this abdication of leadership involves more than just competition between the United States and China. This issue is about deciding the preferred governance model going forward for the digital economy. At a time when many countries are pursuing digital sovereignty and industrial-focused policy with respect to new technologies, the United States is sending a clear signal that it is at least amenable to these approaches–pointing to a more fragmented and unstable framework for trade likely to undermine global prosperity. 

It’s telling how others are reacting to the abrupt change to U.S. policy. India has long been critical of negotiating digital rules at the WTO. While it represents one of the fastest growing digital markets, it is also one of the most restrictive, protectionist, and closed markets for foreign exporters. Stakeholders in India have taken note of the reversal, seeing it as a “validation” of a digital isolationist approach. Ajay Srivastava, founder of Global Trade Research Initiative (GTRI), opined: “The new US stand on digital trade validates India’s approach on the subject. India had long ago foreseen potential challenges with unregulated digital trade and thus refrained from participating in the WTO e-commerce negotiations.”

It remains to be seen how others in the WTO process will respond, noting that many of these countries are actively pursuing their own regional and multilateral trade agreements with similar digital trade provisions outside the JSI such as Singapore’s Digital Economic Partnership Agreement and the EU’s pursuit of new bilateral trade agreements and initiatives like the recently-concluded EU-Japan data flow agreement. While the various approaches may differ in level of ambition, ultimately countries negotiating digital rules among themselves stand to benefit their economies and their suppliers, as the United States watches from its self-imposed exile.

So where does this leave the WTO process? 

It is encouraging that progress has been made on other elements of the JSI agreement. Last week co-conveners announced consensus text on the following areas: online consumer protection; electronic signatures and authentication; unsolicited commercial electronic messages (spam); open government data; electronic contracts; transparency; paperless trading; cybersecurity; open internet access; electronic transaction frameworks; electronic invoicing; and “single windows.”  

However, the dereliction of U.S. leadership with key trading partners to pursue an ambitious agreement with key outcomes on critical components of digital trade dampens the significance and effectiveness of global rules.

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