William Krist's Blog, page 16

A Worker-Centered Trade Policy

What is a “worker-centered” trade policy? The Biden administration claims that it means protecting all workers—foreign and American—from exploitative working conditions in trade sectors. The administration’s vigorous enforcement of international labor rights suggests a significant departure from previous U.S. trade priorities centered on domestic interests. For economic and humanitarian reasons, various policymakers and scholars celebrate these developments. They optimistically assume that the administration’s new trade policy will influence foreign governments and facilities to comply with international labor rights in trade if the costs of noncompliance outweigh the benefits. They also assume that the policy will influence compliance with strong labor protections as negotiated on the international platform. Both assumptions are misplaced.



Outside the trade context, governments, employers, and workers negotiate how international labor rights mani-fest in their countries based on pragmatic issues such as political ideologies, economic capacity, and legal systems. Those actors tend to respect those labor rights because they actively participate in the design, monitoring, and enforcement processes. Despite its newfound interest in ensuring compliance with international labor rights under U.S. trade agreements, the Biden administration excludes foreign workers, employers, and counterpart governments from those processes. That exclusion risks obscuring and distorting enforcement predictability, perceptions of legitimacy, and the scope of international labor rights protections within and outside the United States—all of which may reduce or weaken compliance and protections for workers in trade sectors. If the administration sincerely intends to protect workers from trade-related exploitation worldwide, it must stop reinforcing its own discretion and control and start reinforcing the participatory processes embedded in international labor rights.

Despite decades of attention and lobbying efforts within the labor community, government parties to trade agreements fail to protect vulnerable workers from carrying the burden of globalized trade. Women and young children continue to be forced into labor, trafficked, sold across borders, worders. Union participation continues to decline globally, and union leaders are arrested or disappeared. Throughout supply chains, factories continue to enslave and torture with impunity. Millions of workers still lose their lives in workplace accidents.

Since the turn of the century, U.S. trade policy has reacted to such labor exploitation by requiring trade partners to commit to the ILO’s four “fundamental” labor rights, namely (1) collective bargaining and freedom of association; (2) prohibitions against child labor; (3) prohibitions against forced labor; ander (4) non-discrimination in employment. Yet, prior U.S. administrations have proved hesitant, if not unwilling, to enforce those commitments, mainly when doing so threatened more pressing foreign policy and geopolitical objectives.

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To read the full summary as it was published by the Social Science Research Network, click here.

To read the full paper, please click here.

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Trade Data Points to Deflation in China

For yet another month, China’s merchandise trade exports declined, falling 14.5% year-on-year in July to $281.8 billion. The drop was driven by a weaker economy and an ongoing realignment in global trade. Companies are seeking alternative manufacturing bases to China, to lower costs and temper political risk, and reducing their foreign direct investment that’s underpinned the Chinese economy for the first two decades of this century.



And China’s traditional trading partners are simply buying less because their people have less money to spend. Exports to the U.S. fell 22.7% to $42.3 billion, shipments to Europe fell 20.7% to $42.4 billion, and sales to ASEAN countries dropped 19.2% to $41.8 billion. The weaker demand for goods, as consumer run out of stimulus money and spend more on rent and food, has punctured manufacturing throughout Asian factories, according to surveys of purchasers.



That’s why the UN said in a June report that “the outlook for global trade in the second half of 2023 is pessimistic”, a sobering outlook for trade-dependent countries in Asia.



But China is such a big economy – the second largest in the world by GDP and the planet’s top exporter — that there are always pockets of growth, or at least, of more moderate decline, that offer a more nuanced understanding of the global economy.



The bad news has prompted economists to suggest that Beijing implement stimulus measures such as bonds to pay for spending on roads and other infrastructure, which would boost imports of iron ore and other industrial commodities.



To be sure, there are other parts of China’s industry that aren’t faring as bad as the top-line numbers, notably in technology.



Exports of mobile phones increased 2.2% to $9.2 billion. That’s 63.4 million phones. Exports of household appliances dropped only 2.6% to $7.4 billion. And, of course, its automotive sector keeps motoring on. Exports of motor vehicles leapt 83.5% to $8.8 billion. China this year replaced Japan as the world’s top exporter of automobiles.



Exports of ships increased 82.4% to $2.4 billion, but by quantity increased only 3.9% to 456 ships.



The increase in prices for high-priced yachts are an exception. China’s trade data points to a softening of prices in essential commodities, of which it imports massive quantities.



Imports of soybeans, for example, increased 23.4% by quantity to 9.7 million tons, but fell 4.7% by value to $5.5 billion. Because of declining prices, imports of agricultural products fell 10.3% to $18.7 billion, part of some economists’ prediction that the global economy is facing deflation.



Overall, Chinese imports fell 12.4% to $201.2 billion. Imports from the U.S. dropped 11.2% to $12 billion. Shipments from Europe dropped 2.9% to $23.3 billion. And imports from ASEAN countries fell 10.8% to $30 billion. Imports from India declined 9.5% to $1.4 billion. Even imports from Russia fell, down 8.4% to $9.2 billion.



But China still has sectors of robust internal growth. It needs energy sources to power all the electric cars it’s building, and in July, it again massively increased coal imports, boosting them 67.2% to 39.3 million tons.



One of the biggest changes in the global economy revealed by Chinese trade data is the country’s increasing role in oil transformation.



China hiked imports of petroleum 17.1% to $43.7 million tons, thanks in part to it trading relationship with Russia. It got a bargain for the oil it bought, as imports by price shrank 21% to $23.9 billion.



And China has been transforming some of that oil and shipping it out. Exports of petroleum products increased 55.8% by quantity to 5.3 million tons, and 5.6% by value to $3.7 billion. During the first seven months of 2023, China increased these exports 46.2% to 36.6 million tons.

 

John W. Miller is Trade Data Monitor’s Chief Economic Analyst, in charge of writing TDM Insights, a newsletter analyzing key issues through trade statistics. John is an award-winning journalist who’s reported from 45 countries for the Wall Street Journal, Time Magazine, and NPR.

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2022 WTO Agreement on Fisheries Subsidies

On June 17, 2022, the member states of the World Trade Organization (WTO) at its 12th Ministerial Conference agreed on a framework to limit harmful subsidies that member states may provide to fisheries, in an effort to sustain coastal fish populations and disincentivize illegal fishing activities. As of 2018, the governments which spend the most on fisheries subsidies include the United States and European Union, as well as highly developed East Asian countries such as China, Japan, and South Korea. The agreement came about after over 20 years of negotiations on the topic at the international level, through periods of accelerated and subdued discussions. The Agreement on Fisheries Subsidies marks the first time a Sustainable Development Goal (SDG) target, set by the United Nations in 2015, has been agreed upon in a multilateral organization. However, it will not come into effect until 2/3rds of member states submit “instruments of acceptance” regarding the proposal to the WTO. As of July 2023, 13 independent states have submitted their acceptances, in addition to the European Union. The United States formally accepted the agreement in April 2023.

The Agreement on Fisheries Subsidies is founded on prohibiting subsidies towards three types of activities; those that promote IUU (illegal, unreported, and unregulated) fishing, further fishing of already overfished stocks, and fishing-related activities outside of a member state/regional organization’s maritime jurisdiction or international waters. According to a 2021 study published by the University of California – Santa Barbara, if the subsidy prohibitions in the Agreement were to be fully implemented, they could yield a 12.5% increase to the fish biomass worldwide and provide needed relief to overfished populations. Further negotiations on the Agreement are set to continue, especially regarding any special and differential treatment (SDT) that may be granted to developing countries. LDCs have been granted SDTs on various WTO agreements in the past, allowing them more time or or assistance to meet  goals. A pathway for assistance was built into the agreement, as WTO members agreed to a Fisheries Subsidies Mechanism, providing a voluntary fund to be used to assist LDCs in their ability and capacity to meet the requirements.

One challenge for implementing the agreement successfully is that countries will have to take further stock of the population levels of nearby fish, many of which currently go unassessed. Member states would be required to report to the WTO the fisheries subsidies that they continue to provide, to ensure that those populations are not and do not become overfished. Another challenge to implementation is the timeframe allowed for negotiations. The agreement must be accepted by 2/3rds of member states by 2028, otherwise it will lapse. Given the WTO’s history of slow moving negotiations, it is yet unclear whether there is enough international support for the agreement until further negotiations on SDT exceptions and other issues are hammered out. Finally, since the Agreement solely prohibits subsidies that promote unregulated and extrajudicial overfishing, there are some in the WTO who worry about non-subsidy actions taken to evade the agreement’s terms.

If the Agreement on Fisheries Subsidies is to be accepted and ratified by 2028, it would mark a meaningful step towards global agricultural cooperation, and could provide a useful negotiating framework for future sustainability efforts. The Agreement’s efforts to combat forced labor through economic coercion, as well as limiting the widespread practice of using “flags of convenience” on fishing ships, may allow member states to crack down on maritime human rights violations and improve quality of life.

Sources Cited:

Wong, L. (2023, April 13). World Trade Organization fisheries subsidies negotiations – CRS reports. CRS Reports. https://crsreports.congress.gov/product/pdf/IF/IF11929 

World Trade Organization. (2023). Agreement on fisheries subsidies. WTO. https://www.wto.org/english/tratop_e/rulesneg_e/fish_e/fish_e.htm

Office of the United States Trade Representative. (2022, August). Fact sheet: WTO Agreement on Fisheries Subsidies. United States Trade Representative. https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2022/august/fact-sheet-wto-agreement-fisheries-subsidies

Briley, J. (2023, February 1). A Global Deal to End Harmful Fisheries Subsidies. The Pew Charitable Trusts. https://www.pewtrusts.org/en/trust/archive/winter-2023/a-global-deal-to-end-harmful-fisheries-subsidies#:~:text=A%20Pew%2Dcommissioned%20study%20found,using%20it%20to%20accelerate%20overfishing.

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Supply Chains and Value Chains, Explained

Over the years, the United States has at times pursued targeted policies to promote self-sufficiency and limited trade (also known as autarky in its extreme). For example, the CHIPS Act acknowledges that semiconductors are too important to the American economy to rely predominantly on international suppliers. The act has incentivized billions of investment dollars to build factories and hire Americans. Further, the recent Infrastructure Investment and Jobs Act included a provision which preferences American materials and manufactured products. These bills had clear tradeoffs on cost, security, and promotion of local jobs.

However, there are some goods or materials we simply cannot produce here. Americans love coffee, but the nation’s climate prohibits us from growing enough to satisfy our habit. Devoting all of Hawaii’s land to coffee cultivation wouldn’t come close.

Further, trade gives the US economy flexibility—in what we consume, produce, and prioritize in the sectors and skills at which we are comparatively skilled. Our workforce has exceptionally skilled scientists, engineers, and managers, which allows many Americans to focus on those jobs while other countries focus on different parts of the production process. The value chain demonstrates how these indirectly related fields contribute to trade-supported jobs, as they provide some of the value that makes trade efficient enough to employ longshoremen, truck drivers, and factory workers.

Policymakers must also recognize how trade can sometimes lead to job loss for domestic workers. Programs like Trade Adjustment Assistance are key aspects of trade policy that support the entire US workforce, and even more can be done to help workers with job and skill training before economic change happens. 

Friend/Near shoring

In the debate over where to make things, there is a push by some to do more “friend-shoring” and “nearshoring.” These phrases refer to prioritizing trade with neighboring countries (nearshoring) or our formal or informal allies (friend-shoring). Both efforts are responses to some of the vulnerabilities found in international trade—from COVID-induced shipping snarls to war.

Friend-shoring helps our supply/value chains be more transparent and, hopefully, reliable. The United States’ existing relationship with friendly nations enables better communication on trade issues and lets investors from both nations feel comfortable financing new ventures. Further, friend-shoring ensures that the value chain rewards our allies instead of our geopolitical and economic competitors.

Alternatively, nearshoring can spur bilateral trade that will employ Americans in both import- and export-heavy sectors. The proximity lowers transportation costs and potential disruptions while simultaneously encouraging cooperation in border regions. For example, Texas exports more than any other state, with Mexico being its primary recipient. Both border regions invest billions in each other’s productive capacity and pursue complementary parts of the value chain (aircraft parts, computer parts, and semiconductors in Texas, and trucks, automotive parts, and finished computers in Mexico).

Of course, policies that change existing supply chains have some tradeoffs along with their benefits. Our friends and neighbors have the capacity to satisfy much of our demands, but they do not have the same competitive advantages as others. A YETI tumbler made in Sweden or Canada would be much more expensive than one made in Thailand.

Trade Policy in Action

The best example of both friend-shoring and nearshoring is the United States-Mexico-Canada Agreement (USMCA). The policy has been largely successful as the two nations are our biggest trading partners—doubling US-Chinese trade—and are our largest export markets.

Beyond the numeric volume of North American trade, what we import and export between each country illustrates the value chain’s symbiotic nature. Looking at US-Mexico trade numbers, we often trade the same products back and forth (machinery, fuel, vehicles, etc.). However, each partner imports and exports specific kinds of goods, enabling each economy to specialize in how they add value. We export machinery like integrated circuits, office machinery, and engines, while we import machinery such as computers, video screens, and broadcasting equipment. American intermediate manufacturers, designers, and raw material extractors contribute their expertise to the products we export to Mexico, and the more finished goods we import enable our workforce to utilize their skills. Put simply, we export materials to Mexico, who builds them into productive products, which lets us add value and create more materials we can export.

supply-chains-and-value-chains-explained

 

To read the full report, click here

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2023 Fashion Industry Benchmarking Study

Forward by Julia K. Hughes, President, U.S. Fashion Industry Association

The Changing Landscape of Sourcing: Challenges and Opportunities in 2023

This is the tenth USFIA Benchmarking Survey. During the past decade we have seen the fashion industry respond successfully to major disruptions and unpredictability. This year is definitely another very challenging time. In 2023 sourcing executives remain concerned about the economy and inflation. Only half of the survey respondents anticipate their sourcing volume will grow during 2023, while one year ago 90% of the sourcing executives predicted expanding business.

What is new in this Benchmarking Survey is the level of concern about the future of the U.S.-China business relationship. Lately it seems that one of the few issues that unites Republicans and Democrats in the U.S. Congress is their focus on the threat from China. At a recent Congressional hearing the theme was “Decouple, De-Risk, Diversify,” and diversification seems like an appropriate way to summarize how the fashion industry is responding to the new level of economic and diplomatic uncertainty. Nearly 80% of respondents plan to reduce their China sourcing over the next two years.

While not just a China issue, in 2023 concerns about forced labor allegations and potential risks in the fashion supply chain rank as the second most serious business concern. The Uyghur Forced Labor Prevention Act (UFLPA) is part of the impetus for this high level of concern. The fashion industry has not wavered in our commitment to eliminate all forced labor from the supply chain, but we know it is going to take time to achieve that goal. In the meantime, there is a very clear impact on cotton sourcing in China and Asia. This issue is a top priority for USFIA as we talk with the Biden Administration and the key officials at the Forced Labor Enforcement Task Force and U.S. Customs and Border Protection.

There are many positive findings in this year’s Survey. We celebrate the industry’s commitment to increase sourcing of apparel made from recycled and other sustainable textile fibers. This year the top recommendation for a trade policy initiative is to reduce or eliminate tariffs on imports of sustainable and recycled textile and apparel products. And we see a very clear trend to expand sourcing in the Western Hemisphere – especially from our FTA partners in CAFTA and USMCA. There are a lot more insights in this year’s USFIA Benchmarking Survey and I encourage you to read the complete report. Our mission at USFIA remains to support the fashion industry with analysis, education and training, and also to advocate for trade policy that supports Fashion Made Possible by Global Trade. We continue to work to show the benefits of trade, and fashion industry sustainability initiatives, to lawmakers and to the public.

Special recognition to Dr. Sheng Lu, Associate Professor in the University of Delaware’s Department of Fashion & Apparel Studies, for his hard work to analyze the data and develop these important conclusions. And special thanks to the sourcing executives who shared their views and insights.

2023_USFIA_Benchmarking_Study (1)

To read more on the study, please click here.

Dr. Sheng Lu is an Associate Professor at the University of Delaware’s Department of Fashion & Apparel Studies.

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Could the Transition to Renewables Give Rise to a New OPEC?

OPEC and its affect on crude oil prices. 

The Organization of the Petroleum Exporting Countries, OPEC, was established in 1960, with five founding members: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. OPEC’s primary objective was to unify petroleum policies and secure fair prices for its member countries, which has since expanded to include 13 core members. According to current estimates, 80.4% of the world’s proven oil reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the Middle east, amounting to 67.1% of the OPEC total.1 Central to OPEC’s power is its ability to leverage its collective influence to manipulate global supply and demand dynamics, thereby influencing prices. Reductions in production create market scarcity, driving prices upward, while increases result in a surplus, leading to price decreases. Decisions on production quotas are made during OPEC meetings, where member nations negotiate and coordinate their strategies. 

The United States is on the cliff of its third energy revolution in 100 years. 

Up to this point, renewables have only played a minor role in US power generation; in order to fulfill the promises of a net-zero emissions scenario by 2030, 2040, or 2050…wherever the target is now! 

The shift from a fuel-intensive to a material-intensive energy system powered by renewables will rely on a supply chain for critical minerals and rare earth metals controlled by only a handful of countries. 

Where is this fuel coming from?

The materials necessary for our smart phones, high technology devices, consumer and industrial batteries, electric vehicles, renewable energy infrastructure, all require the metals and rare earth elements whose supply is currently controlled by a small group of countries, led by China.

China has emerged as a dominant force in the processing of these raw materials into usable forms, driven by domestic resource availability, cost-effective labor, and advanced processing technologies. An underlying reason for China’s preeminence is the hesitation of many countries to engage in environmentally impactful processing activities associated with critical minerals. The processing journey from raw materials to refined forms involves extraction, beneficiation, smelting, and refining; processes that generate waste, release pollutants, and have adverse ecological effects on the environment. China’s willingness to engage in processing activities, albeit with varying environmental standards, has allowed it to become a global bottleneck in the green-energy metal supply chain.

This bottleneck extends to both processed raw materials and finished goods (wind turbines, electric vehicle batteries, and battery energy storage systems) contributing to China’s dominance in the sector. As the world strives for renewable energy solutions, the reliance on China for processing and manufacturing introduces potential vulnerabilities in supply chains, affecting availability and affordability.

Where are the clean-energy technologies manufactured?

Answer: China

To recap, China controls a portion of the mine supply, a significant majority of the processing, and an even more significant majority of the manufacturing of clean-energy technologies. They are vertically integrated; a term that describes a business strategy in which a company owns or controls different stages of the supply chain of a product or service.

So what will the largest consumers of renewables and clean-energy technologies, the US & Europe, do if China decides to turn off the spout for say, a raw material…we’re about to find out. 

On July 4th (of all days) China announced a curb on exports of Gallium and Germanium, two of the rare earth elements critical to chipmaking and electronics. 

It’s not just a China problem…the risk of a new OPEC is real.

Argentina and Chile has the world’s second- and third-largest reserves of Lithium, respectively. Those countries, along with their neighbor Bolivia, make up the “Lithium Triangle”. The US imports roughly 91% of its lithium from the Lithium Triangle, primarily Chile. 

At the end of April 2023, Chile’s President announced the nationalization of its lithium reserves, which could signal the imminent rise of protectionist measures on a global scale, with a focus on these core green energy metals and rare earths. Our reliance on lithium is set to grow even further. Recently, MIT scientists created a solid-state lithium battery that surpasses the performance of current battery technologies5. As newer technologies demand even greater quantities of lithium, the US is likely to accept the nationalization of, and its short- to medium-term dependence on, Chilean lithium, while exploring alternative sources in countries with more favorable business environments. 

As the world accelerates its shift towards renewable energy, the concentration of green-energy metal reserves and processing capabilities in a limited group of countries raises concerns about pricing power and supply chain resilience; this could give rise to a new cartel of metal exporting countries, OMEC. 

The United States, Europe, and other developed nations, as major consumers of these materials, will have to deal with this group…but it’s likely that China will be setting the price for now. 

The_New_OPEC_EMG_Advisors

 

To read the full insight, please click here.

 

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Mexico Seeks To Solidify Rank As Top U.S. Trade Partner, Push Further Past China

Mexico became the top U.S. trading partner at the beginning of 2023, with total bilateral trade between the two countries totaling $263 billion during the first four months of this year.

Mexico’s emergence followed fractious U.S. relations with China, which had moved past Canada to claim the top trading spot in 2014. The dynamic changed in 2018 when the U.S. imposed tariffs on China’s goods and with subsequent pandemic-era supply-chain disruptions that altered international trade and investment flows worldwide.

Mexico’s gains mirror its rise in manufacturing, a key component of goods moving between it and the U.S. During the first four months of 2023, total trade of manufactured goods between Mexico and the U.S. reached $234.2 billion.

Overall, Mexican imports to the U.S. totaled $157 billion; U.S. exports to Mexico reached $107 billion.

Mexico–U.S. trade during the first four months of 2023 represented 15.4 percent of all the goods exported and imported by the U.S.; the Canada–U.S. share followed at 15.2 percent and then the China–U.S. share at 12.0 percent (Chart 1).

China gains follow World Trade Organization membership

China’s share of U.S trade had steadily increased since it joined the World Trade Organization (WTO) in 2001. WTO member nations enjoy preferential tariffs when trading with one another and are protected from nontariff barriers such as quotas and currency restrictions—an incentive for foreign direct investment. They also participate in the development of new international trade rules.

Once in the WTO, China’s access to the world’s premier consumer markets, combined with its own economic prowess and ability to marshal resources for growth, quickly transformed the country into a leading manufacturing hub.

Within a decade of its admission, critics increasingly accused China of flooding the world with cheap exports while limiting foreign access to its market. China’s trade growth coincided with sharp declines in U.S. manufacturing employment. Sectors and regions especially exposed to China’s trade tended to experience higher unemployment, lower labor force participation and reduced wage growth.

U.S. imposes tariffs of China’s exports

U.S.–China trade began trending lower in 2018 after the Trump administration imposed new tariffs on imports from China, whose government responded with a similar action on imports from the U.S. China subsequently lost its position as top trading partner later that year.

Approximately $335 billion in trade (66.4 percent of China’s exports to the U.S.) remains subject to the tariffs. The average U.S. tariff on Chinese imports is 19.3 percent, while China’s  average tariff on U.S. imports is 21.2 percent, according to the WTO. This exceeded tariffs among WTO members (enjoying most-favored-nation status) of 9 percent.

There was a short-lived rebound in China’s trade share during the pandemic that subsequently gave way following supply-chain disruptions, many involving shipping and manufacturing originating in China.

Mexico and Canada, which are highly interconnected to the U.S. economy, vied for the top spot. The three economies were formally tied together with the 1994 North American Free Trade Agreement (NAFTA) and again in 2020 with the United States–Mexico–Canada Agreement that replaced NAFTA.

Mexico positioned as a manufacturing base

Mexico’s expanding manufacturing base has offered an alternative to producing in China. Sourcing or producing goods in a nearby country is sometimes referred to as “nearshoring.” While data on recent nearshoring is thin and evidence of it is largely anecdotal, increased protectionism and related industrial policy are consistent with less global trade, more regional trade, and nearshoring and reshoring (returning production to the home country).

More activity in Mexico would support increased bilateral manufacturing with the U.S. It would also bolster Mexico’s standing as the U.S.’ leading manufacturing trading partner, a ranking it achieved in 2022 (Chart 2).

Bilateral manufacturing trade between Mexico and the U.S. represented 16.5 percent of all U.S. manufacturing trade; the Canada–U.S. share followed at 13.5 percent and then the China–U.S. share at 12.5 percent.

Automotive industry plays key role

The automotive industry is an especially active example of the cross-border manufacturing relationship. A U.S. plant typically produces an intermediate good that is then exported to Mexico where it becomes part of the assembly process before a final good is then imported back into the U.S.

The supply trade linkages are supported by the presence in Mexico of foreign-owned, labor-intensive assembly plants for export—the so-called “maquiladoras” Over the past 20 years, transportation has accounted for about 24.5 percent of total bilateral manufacturing trade, followed by computer and electronic equipment, 22.4 percent; electrical equipment, appliances and components, 8.5 percent; and machinery (excluding electrical), 7.7 percent.

While Mexico benefits from increased trade with the U.S., the impact on U.S. producers and consumers has been mixed. To the extent that frictions with China account for Mexico’s ascension in the trade rankings, the higher profile comes at a cost to U.S. firms and consumers through higher input and purchase prices.

While the principal focus of trade policy was once free trade, greater efficiency and lower prices, that may no longer be the case. Today’s global economic relationships encompass a myriad of concerns, among them national security, climate policy and supply-chain resiliency.

To read the full article, please click here.

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Section 232 Reloaded: The False Promise of The Transatlantic ‘Climate Club’ For Steel and Aluminum

Executive summary

In using the removal of Section 232 ‘national security’ tariffs on steel and aluminium imports as a bargaining chip, the United States demands that the European Union engage in negotiations on “global steel and aluminium arrangements to restore market-oriented conditions and address carbon intensity”. The US demand has reportedly been inspired by a blueprint that would establish an international institutional arrangement – labelled a ‘climate club’ – which would externalise market-access restrictions afforded by US Section 232 tariffs to the customs borders of club members. While the declared objective is to incentivise non-members to adopt low-carbon steel (and aluminium) production methods the US blueprint suffers from various design flaws including inefficient incentives, WTO inconsistency and incompatibility with the EU Carbon Border Adjustment Mechanism.

The effectiveness of the proposed US scheme is severely compromised by the plethora of policy objectives it pursues, which go far beyond the goal of incentivising industrial decarbonisation in third countries, including secondary (ie protectionism) and tertiary (ie global power competition with China) objectives. The initial negotiation proposal submitted by the United States Trade Representative (USTR) to European Commission trade negotiators incorporates many if not all the problematic elements of this blueprint, setting the US on a collision course with the negotiation proposal put forward by the European Commission. This paper concludes that the adoption of the scheme proposed by USTR would result in a step backwards for international climate and trade cooperation, whereas not adopting the EU proposal would make for a missed opportunity. Given the sharply diverging negotiation positions and associated respective domestic constraints on both sides, however, policymakers should start to engage stakeholders now to manage expectations towards a low-ambition negotiation result, if any.

Introduction

On 31 October 2021, the European Union and the United States agreed on temporary measures to settle their dispute over US Section 232 ‘national security’ tariffs on EU steel and aluminium products. In addition to opening tariff rate quotas for historical EU export volumes, the joint EU-US statement mandates negotiations on a “global steel and aluminium arrangements to restore market oriented conditions and address carbon intensity”, with a deadline of 31 October 2023. The relevant paragraphs are an eclectic mix of transatlantic policy objectives in the areas of steel and aluminium decarbonisation, sectoral overcapacity, non-market practices and inbound investment screening:

“Compatible with international obligations and the multilateral rules, including potential rules to be jointly developed in the coming years, each participant in the arrangements would undertake the following actions: (i) restrict market access for non-participants that do not meet conditions of market orientation and that contribute to non-market excess capacity, through application of appropriate measures including trade defence instruments; (ii) restrict market access for non-participants that do not meet standards for low-carbon intensity; (iii) ensure that domestic policies support the objectives of the arrangements and support lowering carbon intensity across all modes of production; (iv) refrain from non-market practices that contribute to carbon-intensive, non-market oriented capacity; (v) consult on government investment in

decarbonization; and (vi) screen inward investments from non-market-oriented actors in accordance with their respective domestic legal frameworks.

“To enhance their cooperation and facilitate negotiations on a global sustainable steel and aluminum arrangements, the United States and the EU agree to form a technical working group. Through the working group, the United States and the EU will, among other things, confer on methodologies for calculating steel and aluminum carbon-intensity and share relevant data”.

At the time of writing – 20 months after the formal launch of negotiations and four months prior to the deadline, negotiators have set up two technical working groups – one covering the carbon intensity element and one covering the overcapacity element of the negotiations. They have also exchanged negotiation positions in the form of concept notes in December 2022 and January 2023 respectively.

On 10 March 2023, European Commission President Ursula von der Leyen and US President Joe Biden declared, as part of a further joint statement (The White House, 2023), that they were “committed to achieving an ambitious outcome in the Global Arrangement on Sustainable Steel and Aluminum negotiations by October 2023. The arrangement will ensure the long-term viability of our industries, encourage low-carbon intensity steel and aluminum production and trade, and restore marketoriented conditions globally and bilaterally. Together, we will incentivize emission reductions in these carbon-intensive sectors and level the playing field for our workers. The arrangement will be open to all partners demonstrating commitment to countering non-market excess capacity and reducing carbonintensity in these sectors”.

But beyond this declaration of joint ambition, US and EU perspectives and their initial negotiation proposals diverge sharply in terms of both policy design features and the overall approach, objectives and vision of transatlantic and international climate and trade cooperation. This paper sets out the EU and US perspectives on the ongoing negotiations and evaluates US and EU initial negotiation proposals as the transatlantic talks slowly but surely approach the 31 October 2023, deadline. The October deadline could mark either a breakdown of negotiations and automatic reinstatement of US Section 232 tariffs on imports of steel and aluminium from the EU, or a transatlantic agreement on a ‘Global Steel and Aluminium Arrangement’. An agreement could follow either the US or the EU’s vision for climate and trade cooperation, with all of the imaginable scenarios having considerable economic and climate policy implications for the US, the EU and the rest of the world.

As a benchmark for evaluation, Falkner et al (2022) noted that a prospective transatlantic climate club must be assessed on the basis of whether it adds or distracts from the multilateral climate regime or diverts resources away from crucial national abatement efforts. Here, we assess both the US and EU proposals for the arrangement against both the multilateral and the national benchmark, among others.

David Kleimann (PhD) is a trade expert with 15 years of experience in law, policy, and institutions governing EU and international trade.

WP 11

To read full paper, please click here.

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The Scramble for Critical Raw Materials: Time to Take Stock?

The 31st Global Trade Alert Report

Many Western governments frame their strategies towards Critical Raw Materials in terms of security of supply and fret about “dependency” on hostile trading partners. Governments of lower per-capita income nations with lots of material reserves see the matter differently. For them, the sharp predicted increases in demand for these materials in the decades ahead is too good an opportunity to miss to develop processing industries as part of the modernisation of their economies. Both groups frequently talk past each other, a practice made worse by the suspicions created by intensified geopolitical rivalry. The ensuing scramble for critical raw materials is the subject of this report.

 

Many narratives around geopolitics and critical raw materials are misleading

What differentiates this report from others is that:

We assess the pros and the numerous cons of creating lists of raw materials deemed “critical.” Lists can have the merit of being transparent, but they attract the attention of special interest groups.

We evaluate whether trading patterns in critical raw materials are more volatile than other materials and metals (they aren’t). Central to geopolitical scaremongering about trade in critical raw materials are claims made that China “weaponised” Rare Earths exports against Japan in 2010. Using United Nations’ trade data, we found no evidence that China singled out any G7 member or the EU for reductions in Rare Earth exports.
We demonstrate that, with the exception of the United States, Western nations have significantly reduced their sourcing of Rare Earths from China since 2010. That was facilitated by a five-fold increase in the quantity of Rare Earths available from other countries in the years 2015 to 2021.
Another narrative we challenge with data is that Indonesia’s export curbs on nickel ore provided a surefire recipe to develop its downstream processing industry. Increases in Indonesia downstream exports look a lot less impressive when the surge in recent years of Indonesia’s other non-agricultural exports is taken into account. Attributing downstream nickel sector gains solely to the upstream export ban fails to take account of the other measures Indonesia took.
For all the talk of policy support for sourcing and producing critical raw materials we show that, worldwide, policy intervention affecting other materials occurred more often, was more likely to be permanent, and was more likely to favour local firms than the products deemed critical.
We show that the weight given in trade policy circles to export restrictions on critical raw materials is probably misplaced. In fact, such restrictions account for small percentages of the measures taken by governments that bear upon markets for critical raw materials. Resort to subsidies is far more frequent.
Given Western governments frequent reference to securing critical raw materials one might have expected that they would have reduced import restrictions on more critical raw material product lines and larger shares of relevant imports. We show that, when compared to those champions of active industrial policy—the BRICS and Indonesia—they didn’t.

Time to take stock and to face the realities inhibiting capacity growth

It surprised us that much of the trade policy-related narrative concerning critical raw materials has little basis in fact. Analysts and officials need to take stock of the current scramble for critical raw materials—and, ultimately, revisit assumptions about the factors most likely to prevent long-term supply of critical raw materials from growing to meet growing demand.

Even in the absence of geopolitical rivalry, the challenges associated with scaling up supply of raw and processed critical raw materials to meet higher levels of demand would have been formidable. Complicating factors include fundamental uncertainty as to the pace of the digital and energy transitions, with their knock-on effects for both how much material will be needed and, quite possibly, which materials are needed in greater quantities in the first place.

On top of this are geological considerations including the fact that some critical raw materials are byproducts of other less-wanted materials, that long time frames needed to bring some mining facilities online, and the central roles that uncertainty and difficulties in financing play in scaling up production. Without denying the contribution that greater recycling and the adoption of circular economy practices can make, on its current trajectory, supply expansion for most critical raw materials is likely to be sporadic.

One consequence is that periodic outbreaks of market disruption are on the cards. Whichever long-term strategies are adopted by governments need to be designed with this disruption in mind. Opportunists should not be allowed to capitalise on any short-term shortages, price hikes, and the like. Anyone expecting or demanding that markets for critical raw materials unfold over time in a predictable manner simply hasn’t read enough about the mining industry. This is going to be messy. Yet, we do not counsel despair.

The ensuing scramble for critical raw materials is the subject of this report, the 31st prepared by the Global Trade Alert team. Part I of the report examines the very notion of a critical raw material and what factors underlie the expected shortages and volatility in world markets for these goods. The pros and cons of enumerating lists of critical raw materials is discussed, not least given the tendency of some producer groups to claim their materials deserve state largesse. Given the frequent mention of Rare Earth materials in deliberations on critical raw materials, a chapter is devoted to alleged attempts to weaponise trade in them.

Part II of the report provides detailed evidence on the unilateral policy intervention undertaken by governments towards critical raw materials. Here we examine if there is a mismatch between the narratives used by policymakers to characterise their policies towards critical raw materials and the actual policy mix chosen. A subsequent chapter is devoted to steps taken by governments, sometimes in concert, to produce or secure critical raw materials abroad. Having found these approaches wanting, we advocate an approach to thickening over time markets of critical raw materials.

In policy deliberations, it is mistaken to view market structures and international sourcing patterns for critical raw materials as immutable. They can evolve over time guided by market-supportive government intervention. Still, the fundamental uncertainty facing demand for critical materials as societies undertake the digital and energy transitions means that, whatever steps are taken to thicken markets over time, there will be occasional shortages and market disruption. Private and public sector decisionmakers should expect such disruption and take mitigating measures in advance such as, where viable, stockpiling.

 

GTA31_final_1

 

The Global Trade Alert team at the St. Gallen Endowment for Prosperity Through Trade contributed to the production and dissemination of this report. This report was written by Simon J. Evenett and Johannes Fritz.

To read the full research report, please click here.

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Discarding a Utopian Vision for a World Divided: The Effect of Geopolitical Rivalry on the World Trading System

The greater danger for the world trading system is not that it is at present being divided into two camps, one led by the United States and the other by China, but that the two largest trading countries, by their lack of adherence to and support for the multilateral trading system, may seriously damage it. Both rivals act outside the existing trade rules, creating negative examples that are not lost on other WTO members who may also choose to act outside of the system’s rules.

The relationship between the United States and China is destined to be increasingly fractious. The two countries occupy geopolitical tectonic plates, the movement of one unavoidably generating friction with the other. It is an open question as to how much the world economy, where the market has largely determined trade flows to date, will be reshaped to reflect geopolitical forces.

Global trade figures in gross terms do not reflect the growing geopolitical rivalry.

Despite being strong allies of the United States, for Germany, Japan, and Korea, China is the largest trading partner. In this still undivided world economy, the US, EU, Japan, and the Republic of Korea accounted for 42% of Chinese merchandise exports in 2021. In 2022, the EU, Taiwan, the Republic of Korea, Japan, and US supplied 43% of Chinese imports. Not even the invasion of Ukraine by China’s closest friend, Russia, has caused the trading system to divide into two camps – one led by Beijing and the other by Washington.

The overall numbers tell only part of the story. While the volume of trade between the US and China remains high, bilateral strategic decoupling is proceeding. This is a US-China bilateral phenomenon. It is reflected in the trade of others only selectively. For America’s allies, the US-China trade war had been a spectator event only. Two exceptions began to occur – one for supplying geostrategic-relevant goods, services and technology, and a second the result of identifying sources of geostrategic relevant supplies. Where the US pressed Japan and the Netherlands to join in restricting exports to China of semiconductor production equipment, they have done so. Separately, learning from the European experience with excess dependency on Russia for fossil fuels, Western capitals have begun planning the diversification of sourcing of critical minerals, to avoid dependency on a single country, particularly China.

Any decoupling that does occur between China and the West will likely be substantially “made-in-China”, that is caused by China’s own policies. US preaching in favor of supply chain resilience would fall on deaf ears were there no concerns generated by China with respect to its reliability as a supplier of critical materials.

The general trade policies of the two rivals will also shape trade flows. China is aggressively moving to lower barriers to its trade with others, first through RCEP and then applying to join CPTPP. The United States has moved in the opposite direction, failing to deepen economic relationships with even its avowed friends. In fact, through its recent trade measures it has tended to alienate these trading partners.

Other factors, not traditionally the subject of trade agreements, will contribute to fragmenting the trading world. The contest over global standards has yet to play out – setting standards regarding 5G telecommunications, internet protocols, privacy, AI, electric vehicles and other products at the frontiers of technology may divide markets. Potential effects on trade can be expected as a result of the debt owed to China by the beneficiaries of the Belt and Road Initiative (BRI) and China’s other development programs. For example, the need to repay debt has enabled privileged Chinese access to raw materials, a phenomenon just beginning to be witnessed. The exponential growth of Chinese overseas investment, which will affect trade, is likewise at an early stage. Another factor is the RMB perhaps taking on a more central role as a global currency. All of these economic and financial variables may play a part in shaping world trade. 

None of the aforementioned influences may prove to be as consequential for world trade as the deterioration of the multilateral trading system itself. The immense increase in global economic prosperity made possible by international trade over the last three-quarters of a century has depended in very large part on the certainty provided by the rule of law. As the two largest trading countries begin to ignore the existing structure of rules, this could become a tipping point, seen in retrospect as the end of an era and the beginning of another, a darker one. If the rules are increasingly ignored, the new age would more likely than not be characterized by slower economic growth and fragmented trade.

This is not to suggest that either of the two contesting powers have a conscious plan to discard the current trading system. Neither appears to have reached the conclusion that an end to the multilateral trading system would be in its interest. It is possible that neither is fully conscious of the spreading damage caused by their acting at cross purposes with the current rules. But their conduct is telling. In the case of the US, the departure from the international rule of law is demonstrated by ending binding WTO dispute settlement by blocking Appellate Body appointments, applying tariffs at odds with its contractual commitments (tariffs on trade with China in general and embracing a national security rationale to restrict steel and aluminum imports from all sources), and unapologetically subsidizing domestic industries without regard to any international rules. China’s departure from the rules is at one and the same time more overt and more opaque. China uses trade measures for purposes of coercion and denies that market forces must govern competitive outcomes as it increases the role of the state and the Communist party in its economy.

Neither Washington nor Beijing has declared an end to its adherence to the WTO-administered multilateral trading system. The reverse is the case. Perhaps current conduct at odds with the system is an aberration. US officials state that there is no general policy of decoupling from the Chinese economy. China’s policy of working towards “dual circulation” has not been accompanied by it announcing a retreat from global trade. What is clear is that each wishes to be less reliant on trading with the other. The world has seen nothing like this in inter-hemispheric trade since US measures toward the Empire of Japan in 1940-41, and no analogy with the past is a sufficient guide to the future.

The game changers for the global trading system consist of the adoption by the United States and China, for domestic reasons, of economic nationalism as a controlling factor in formulating their foreign economic policies. In the US the Trump Administration embraced economic nationalism primarily with rhetoric. The Biden Administration made the rhetoric reality in its major economic legislative initiatives. For China, nationalist policies were evident in its statements about achieving dominance in key industries of the future and the episodic deployment of trade measures for purposes of coercion. China’s domestic concerns for regime stability and its contest with the United States led it to support Russia during its invasion of Ukraine. Its priorities blinded it to the inevitable Western reaction. Neither nation has room in its current world view for actively supporting multilateralism.

Most other countries continue to steer an uncertain, non-aligned course, which may increasingly be governed by ad hoc determinations of self-interest. The world’s largest trading bloc, the European Union, has called for a policy of “strategic autonomy”. Whatever this turns out to be, it is not a vote to join Beijing or Washington in a trading bloc, nor is it a declaration in favor of the multilateral trading system. As for some of the others, one would not expect to hear from India nor South Africa that adherence to the existing multilateral trading system is a national priority. Neither are there any indications whatsoever of any country, including these two, aspiring to join a trade bloc.

The bottom line: world trade is not at present coalescing into two trading blocs, but the center, the multilateral trading system, is under stress. The question increasingly asked in academic symposia is whether it will hold.

Wolff

Alan Wm. Wolff is a distinguished visiting fellow at the Peterson Institute for International Economics. He was Deputy Director-General of the World Trade Organization, Deputy US Special Representative for Trade Negotiations (USTR), and USTR General Counsel. He was a principal draftsman for the administration of the Trade Act of 1974, which provided the basic US negotiating mandate for future US trade negotiations. His book, Revitalizing the World Trading System (Cambridge University Press), is being published this month.

To read the full paper, please click here.

 

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