William Krist's Blog, page 28

Industrial Policy and International Competition: Trade and Investment Perspectives

All governments intervene in their economies to some extent – whether through subsidies, the operation of state-owned or controlled undertakings, government procurement policies that favour domestic players, the use of trade remedy measures or investment-screening regimes. International trade and investment rules seek to manage the spillover effects of these interventions on other markets, balancing legitimate interests.

Disagreement among countries regarding the extent to which international rules should discipline these interventions is one of the sources of ongoing trade tensions. Yet, as all governments increase their intervention, whether in the context of the COVID-19 pandemic and recovery, securing critical supply chains or environmental imperatives, there is an opportunity to engage in a balanced, inclusive conversation about how to update the rules. This must include issues of concern to developing and least-developed countries.

This paper outlines the existing rules, areas of debate and priorities for reform for a broad set of industrial policy measures. It aims to encourage more in-depth conversations among trade and investment negotiators about the way forward. This paper also summarizes key issues for senior business representatives.

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To read the full report by the World Economic Forum, please click here.

The African Continental Free Trade Area: Opportunities for India

Unlike in other regions of the world, the value of intra-Africa trade has remained low over the years. Moreover, Africa accounts for just 2 percent of global trade. In 2021, African countries launched the African Continental Free Trade Area (AfCFTA), which aims to create a single African market for the free movement of goods, services, labour, and capital, and increase intra-African trade. AfCFTA may be able to provide Indian firms and investors certain opportunities to tap into a larger, unified, and robust African market. This paper outlines those opportunities, and the concomitant challenges that need to be addressed in order for India to integrate with the African economy.

A free trade agreement allows for duty-free trade within a specified area, and members set their own tariffs on imports from non-members. The Organisation for Economic Cooperation and Development (OECD) adopts a broader notion that includes non-tariff barriers as well, defining a free trade area as “a grouping of countries within which tariffs and non-tariff trade barriers between the members are generally abolished but with no common trade policy toward non-members.” Countries in geographical proximity often enter into preferential trade agreements that allow member countries outside the boundaries of sovereign nations both market access and non-discriminatory treatment, among other facilities.

The North American Free Trade Agreement (NAFTA), for example, is a free trade area between the United States (US), Mexico, and Canada; the Association of Southeast Asian Nations (ASEAN) Free Trade Area is an arrangement between the ten ASEAN member states; the South Asian Free Trade Area (SAFTA) is the free trade arrangement of the South Asian Association for Regional Cooperation (SAARC); and the African Continental Free Trade Area (AfCFTA) is an agreement between 54 out of 55 African Union members.

This paper focuses on the AfCFTA. It outlines the benefits of the AfCFTA and weighs such potential against the challenges. It then discusses how India can harness the potential of the agreement.

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To read the full report by the Observer Research Foundation, please click here.

An OECD For a New Era

September 30th, 2021, marks the 60th anniversary of the creation of the OECD—the Organization for Economic Cooperation and Development. The organization was the post-WWII flagbearer for market economics, offering a positive vision of the benefits of cooperation among market democracies. By emphasizing analytical expertise to find pathways to policy alignment, the OECD achieved success and helped define the character of post-war liberal political systems in competition with authoritarian statism. Today, market economies are struggling to agree on a competition model with non-market statecraft again. Rather than invent a new institution, they should take a fresh look at this existing one.

After a period of unilateralism, the US is again promoting international cooperation to address shared concerns. This will not always be the case, as the contretemps over submarine sales to Australia made painfully clear. But the return to market economy teamwork is real, and it comes at a crucial moment: advanced economies are dealing with questions that require active coordination. How to deal with non-market or authoritarian business partners? How to craft data policy, competition policy, investment screening, and other policy areas at the intersection of economic and national security?

Most importantly, what forum should market nations use to cooperate on these issues? The big-tent multinational organizations such as the World Bank, WTO, UNCTAD, and IMF each have important roles. But their inclusiveness has drawbacks too, particularly when members have fundamentally different views over the merits of market mechanisms versus state planning and economic authoritarianism. A few business associations – notably Germany’s admirable BDI – have moved out front to get their members thinking proactively, but most trade groups are keeping their heads down, waiting for national leaders to set the tune.

Daniel H. Rosen is a Partner at Rhodium Group and leads the firm’s work on China, India and Asia.

Agatha Kratz is a Director at Rhodium Group. She heads Rhodium’s China corporate advisory team, as well as Rhodium’s research on European Union-China relations and China’s economic statecraft.

Charlie Vest is a Senior Analyst on Rhodium Group’s corporate advisory team.

Lauren Dudley is a Research Analyst at Rhodium Group focusing on geopolitical competition with China.

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To read the full report by the Rhodium Group, please click here.

Boosting Trade Opportunities for Least-Developed Countries

Major advances have been made in enhancing trade opportunities for LDCs, as well as in providing continued flexibilities to implement WTO rules and disciplines. A set of concrete decisions aimed at improving market access for LDC products, such as duty-free and quota-free (DFQF) market access, preferential rules of origin and the LDC services waiver, indicate members’ commitment to LDCs’ development, while WTO members’ generous extension until 1 July 2034 of the transition period for LDCs under the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) attests to members’ willingness to allow LDCs sufficient time to integrate WTO rules. LDCs have also received special treatment in the implementation of multilateral agreements like the WTO Trade Facilitation Agreement (TFA), which has the potential to reduce trade costs in LDCs.

LDCs thus continue to remain at the heart of the development dimension of the multilateral trading system. At the same time, LDCs have not been able to take full advantage of the opportunities provided under the multilateral trading system, and their participation in global trade has not reached the desired level. The IPoA goal of doubling the share of LDCs in global exports by 2020 was not met. LDCs’ trade performance is conditioned by their weak productive and institutional capacity, narrow export base and limited market destinations, continued and widening trade deficit, susceptibility to high price volatility for primary commodities, and, most recently, by the declining demand and global economic contractions resulting from the ongoing COVID-19 pandemic. LDCs are facing challenges similar to those they were already confronting a decade ago, and these are severely impacting their ability to recover from the ongoing pandemic.

It is in these challenging circumstances that the Fifth United Nations Conference on the Least Developed Countries (LDC5) will be held. LDC5 should aim to forge a renewed partnership between LDCs and their trading and development partners over the next decade, in order to build a strong foundation of enhanced economic growth and resilience in LDCs that will overlap with the remaining years of the 2030 Agenda for Sustainable Development.

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To read the full article by the World Trade Organization, please click here.

Regional Trade Agreement Burdens Global Carbon Emissions Mitigation

Regional trade agreements (RTAs) have been widely adopted to facilitate international trade and cross-border investment and promote economic development. However, ex ante measurements of the environmental effects of RTAs to date have not been well conducted. Here, we estimate the CO2 emissions burdens of the Regional Comprehensive Economic Partnership (RCEP) after evaluating its economic effects. We find that trade among RCEP member countries will increase significantly and economic output will expand with the reduction of regional tariffs. However, the results show that complete tariff elimination among RCEP members would increase the yearly global CO2 emissions from fuel combustion by about 3.1%, doubling the annual average growth rate of global CO2 emissions in the last decade. The emissions in some developing members will surge. In the longer run, the burdens can be lessened to some extent by the technological spillover effects of deeper trade liberalization. We stress that technological advancement and more effective climate policies are urgently required to avoid undermining international efforts to reduce global emissions.

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To read the full report by Nature Communications, please click here. 

Trade, The Poor, and “America is Back”: A Friendly Critique of Congress’ GSP Renewal Bills, with Some Ideas on Improving Them

Should the United States help the poor abroad?  If so, how much?  Should we ask something of their governments in exchange?  And what if we ask something the governments can’t fully do?  These are the core questions as Congress discusses renewal of the Generalized System of Preferences.

This system, known for short as “GSP,” is the U.S.’ largest trade and development program.  Dating to 1974, it waives tariffs on about 11% of imports from 119 low- and middle-income countries and territories, so as to encourage U.S. buyers to source some products from them rather than larger, wealthier economies.  Balancing these benefits, it imposes some eligibility rules, for example asking “beneficiary countries” to take steps toward enforcement of labor rights, intellectual property, and other matters.

GSP lapsed at the end of 2020, and thus has provided no benefits in over a year.  Both parties in Congress appear in principle to support its renewal.  The Senate has passed a bipartisan reauthorization bill (endorsed as well by House Republicans); and while the House is divided by party on several specific issues, actual opposition seems scarce.  Assuming one believes the U.S. should try to help the poor, this is good news — for countries enrolled in GSP, for the workers and businesses that draw the benefits, and also, in a small but tangible way, for the Biden administration’s effort to show that America “is back” and has not slumped into inward-looking passivity or resentment.

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To read the full report by the PPI, please click here. 

Strengthening Turkish Policy on Drone Exports

Drones are quickly becoming the weapon of choice for many states and, worryingly, even for nonstate actors. They are relatively cheap and have proven to be very effective both in offensive and defensive operations. Turkey has been capitalizing on the noteworthy performance of its domestically produced drones in operational theaters ranging from Syria and Libya to the South Caucasus as Ankara seeks to steadily increase the number of drones it sells to other countries.

But this success has come at a price—Turkey is drawing international attention, and at times attracting criticism, over its drone export policies. The latest example was in December 2021 when the United States reportedly expressed humanitarian concerns over the use of Turkish drones in Ethiopia, where conflict between the government and fighters in the region of Tigray continues with severe implications for the civilian population. According to unofficial reports, Turkey brushed off this criticism by highlighting its engagement with all parties involved to help resolve the conflict and pointing out that Ankara attaches humanitarian provisions to its arms sales.

Strengthening Turkish Policy on Drone Exports - Carnegie Endowment for International Peace

To read the full report from the Carnegie Endowment for International Peace, please click here. 

The U.S.-China Relationship: A Four-Point Strategy to Increase U.S. Competitiveness and Enhance American Leadership

With a deep bench of China experts, the Biden administration appears poised to build on the Trump administration’s view of China as a strategic competitor by working with allies and partners, strengthening the U.S. at home and clearly defining areas of cooperation and competition.

In the past, I observed that there are three species of China hawks in Congress: national security hawks, economic hawks and human rights hawks. Under the Trump administration, their interests were aligned. In Congress, this built a consensus view of China as a strategic competitor.

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To read the full report from Representative Rick Larsen, please click here.

The Economic Impacts of Retaliatory Tariffs on U.S. Agriculture

In 2018, the United States imposed Section 232 tariffs on steel and aluminum imports from major trading partners and separately Section 301 tariffs on a broad range of imports from China. In response to these actions, six trading partners—Canada, China, the European Union, India, Mexico, and Turkey—responded with retaliatory tariffs on a range of U.S. exports, including agricultural and food products. The agricultural products targeted for retaliation were valued at $30.4 billion in 2017, with individual product lines experiencing tariff increases ranging from 2 to 140 percent. This report provides a detailed look at the impact of retaliatory tariffs on farmers at the State level by estimating the direct export losses associated with the trade conflict. Using the product-line econometric estimates from Grant et al. (2021) and the USDA, Economic Research Service’s State Exports, Cash Receipts Estimates, this report comprehensively assesses the direct effect of retaliatory tariffs on U.S. agricultural exports to these retaliating trading partners across States and commodities. From mid-2018 to the end of 2019, this study estimates that retaliatory tariffs caused a reduction of more than $27 billion (or annualized losses of $13.2 billion) in U.S. agricultural exports, with the largest decline in export losses occurring for exports to China. At the commodity level, soybeans accounted for the predominant share of total trade loss, making up nearly 71 percent ($9.4 billion of annualized losses) of the total, followed by sorghum (over6 percent or $854 million in annualized losses), and pork (nearly 5 percent or $646 million in annual- ized losses). At the State level, losses were largely concentrated in the Midwest with Iowa ($1.46 billion in annualized losses), Illinois ($1.41 billion in annualized losses), and Kansas ($955 million in annualized losses), accounting for approximately 11, 11, and 7 percent, respectively, of the total losses. For soybeans, most of the trade lost by the United States was gained by Brazil. In 2020, U.S. agricultural exports to China significantly rebounded following the signing of the U.S.-China Phase One Economic and Trade Agreement (Phase One Agreement) and a separate retaliatory tariff waiver program; however, 1 year after the deal, U.S. market share still remained below pre-retaliatory tariff levels.

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To read the full report by the U.S. Department of Agriculture, please click here.

Mission Critical: The Global Energy Innovation System Is Not Thriving

National governments made commitments during the November 2021 United Nations Climate Change Conference (COP26) in Glasgow that will keep the goal of limiting global average temperature increase to 1.5 degrees Celsius only barely “within reach.” These promises will ring hollow unless nations act with urgency to accelerate innovation that will make climate solutions feasible, affordable, and reliable in the coming decades. The International Energy Agency (IEA) concluded at Glasgow that “a step-change in action and ambition is needed across all energy technologies and sectors.”

Unfortunately, such action has been lacking since the Paris Agreement was signed in 2015. The health of the global energy innovation system is anemic, far from the robust condition the world needs it to be in.

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To read the full report by the Information Technology & Innovation Foundation, please click here.