William Krist's Blog, page 38

Global Clout, Domestic Fragility: China’s Long-Term Success will Depend Primarily on Addressing its Internal Challenges

In 2012 the Chinese government set a long-term goal: build China into a fully developed and prosperous country by 2049, 100 years after the founding of the People’s Republic. Given its success since the beginning of economic reform in 1978, this kind of transformation is certainly possible. But it is difficult and not guaranteed.

China faces serious domestic challenges such as an aging population, a rural-urban divide, an underdeveloped financial system, insufficient innovation, and reliance on carbon-based energy sources. Furthermore, China’s external economic relations have become contentious with a number of major partners, resulting in growing trade and investment barriers in both directions. Our book, China 2049, examines the policies that can help the country achieve this ambitious goal.

the-future-of-china-dollar-huang-yao

To read the full report from the International Monetary Fund, please click here.

Questioning Industrial Policy: Why Government Manufacturing Plans Are Ineffective and Unnecessary

In the wake of the COVID-19 pandemic and rising U.S.-China tensions, American policymakers have again embraced “industrial policy.” Both President Biden and his predecessor, as well as legislators from both parties, have advocated a range of federal support for American manufacturers to fix perceived weaknesses in the U.S. economy and to counter China’s growing economic clout.

These and other industrial policy advocates, however, routinely leave unanswered important questions about U.S. industrial policy’s efficacy and necessity:

What is “Industrial Policy”? Advocates of “industrial policy” often fail to define the term, thus permitting them to ignore past failures and embrace false successes while preventing a legitimate assessment of industrial policies’ costs and benefits. Yet U.S. industrial policy’s history of debate and implementation establishes several requisite elements – elements that reveal most “industrial policy successes” not to be “industrial policy” at all.

What are the common obstacles to effective U.S. industrial policy? Several obstacles have prevented U.S. industrial policies from generating better outcomes than the market. This includes legislators’ and bureaucrats’ inability to “pick winners” and efficiently allocate public resources (Hayek’s “Knowledge Problem”); factors inherent in the U.S. political system (Public Choice Theory); lack of discipline regarding scope, duration, and budgetary costs; interaction with other government policies that distort the market at issue; and substantial unseen costs.

What “problem” will industrial policy solve? The most common problems purportedly solved by industrial policy proposals are less serious than advocates claim or unfixable via industrial policy. This includes allegations of widespread U.S. “deindustrialization” and a broader decline in American innovation; the disappearance of “good jobs”; the erosion of middle‐​class living standards; and the destruction of American communities.

Do other countries’ industrial policies demand U.S. industrial policy? The experiences of other countries generally cannot justify U.S. industrial policy because countries have different economic and political systems. Regardless, industrial policy successes abroad – for example, in Japan, Korea and Taiwan – are exaggerated. Also, China’s economic growth and industrial policies do not justify similar U.S. policies, considering the market‐​based reasons for China’s rise, the Chinese policies’ immense costs, and the systemic challenges that could derail China’s future growth and geopolitical influence.

These answers argue strongly against a new U.S. embrace of industrial policy. The United States undoubtedly faces economic and geopolitical challenges, including ones related to China, but the solution lies not in copying China’s top‐​down economic planning. Reality, in fact, argues much the opposite.

working-paper-63-updated


Scott Lincicome is a senior fellow in economic studies. He writes on international and domestic economic issues, including international trade; subsidies and industrial policy; manufacturing and global supply chains; and economic dynamism.
 
Huan Zhu is a research associate at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, where her research primarily focuses on U.S.-China trade relations, World Trade Organization negotiations and disputes, as well as China’s trade and investment laws and policies.
 

To view the full report from the CATO Institute, please visit here

Potential WTO TRIPS Waiver and COVID-19

The Coronavirus Disease 2019 (COVID-19) pandemic has spurred biopharmaceutical companies to conduct costly and risky research and development (R&D) to develop vaccines and other products to respond to COVID-19. Firms have relied on intellectual property rights (IPR) to commercialize these products. Governments and nonprofits have funded and coordinated some of the underlying R&D. Some groups have voiced concerns over the impact of IPR on affordable access to these products for low- and middle-income countries (LMICs). An active debate is unfolding in the World Trade Organization (WTO) on the role of IPR in the pandemic response. On May 5, U.S. Trade Representative Katherine Tai announced the Biden Administration’s support for the concept of a waiver of the 1995 WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) for COVID-19 vaccines, and pledged to “actively participate in text-based negotiations at the [WTO] to make that happen.” Many consider this notable, given the United States’ history of advancing stronger IPR standards globally. Members of Congress have varying views on the issue.

IF11858

To read the full report from the Congressional Research Service, please click here. 

Techno-Nationalism via Semiconductors: Can Chip Manufacturing Return to America?

The COVID-19 pandemic and ongoing US-China geopolitical tensions have converged to create a global shortage of semiconductors. In 2021, this “perfect storm” marked a milestone in public perception with the world learning the crucial role of semiconductors in virtually every aspect of the global economy. Almost every industry of the future – from fintech to cleantech and even quantum computing – depends on semiconductors.

The increased attention on semiconductor global value chains brought stark realities to light. First, semiconductor manufacturing is disproportionately concentrated in Asia, especially in Taiwan. Single-source supply chains are fragile and highly vulnerable. Second, China’s increasingly competitive relationship with the US and its allies is accelerating strategic decoupling, reshoring, and ringfencing throughout the semiconductor landscape.

As geopolitical rivalry intensifies, the US and China share one common goal: They both want to localize semiconductor manufacturing. This behavior is typical of early-stage techno-nationalism, the neo-mercantilist mindset that links a nation-state’s technology prowess with its national security, economic prosperity, and socio-political stability.

This report is Part 2 of the comprehensive Hinrich Foundation primer Semiconductors at the heart of a US-China tech war. In this Part 2 of the series, author and Research Fellow Alex Capri focuses on the actions the United States has taken to try and revitalize its semiconductor industry.

Techno-nationalism via semiconductors - Hinrich Foundation white paper - Alex Capri - June 2021

To read the full report from The Hinrich Foundation, please click here.

Global Economic Effects of COVID-19

The COVID-19 viral pandemic has been individually experienced, but globally shared. It disrupted lives across all countries and communities and negatively affected global economic growth in 2020 beyond anything experienced in nearly a century. Estimates so far indicate the virus reduced global economic growth to an annualized rate of -4.5% to -6.0% in 2020, with a partial recovery of 2.5% to 5.2% projected for 2021. Global trade is estimated to have fallen by 5.3% in 2020, but is projected to grow by 8.0% in 2021. According to a consensus of forecasts, the economic downturn in 2020 was not as negative as initially estimated, due, at least in part, to the fiscal and monetary policies governments adopted in 2020. Major advanced economies, which comprise 60% of global economic activity, are projected to operate below their potential output level through at least 2024, which will negatively affect national and individual economic welfare. Compared with the synchronized nature of the global economic slowdown in the first half of 2020, the global economy showed signs of a two-track recovery that began in the third quarter of 2020 with developed economies experiencing a nascent recovery, but economic growth in developing economies lagging behind. A resurgence in infectious cases in Europe, Russia, the United States, Japan, Brazil, India, and various developing economies renewed calls for lockdowns and curfews and threatened to weaken or delay a potential sustained economic

recovery into mid to late 2021.

Since the beginning of 2021, developed economies have made strides in vaccinating growing shares of their populations, raising prospects of a recovery in those economies and, in turn, the broader global economy. However, a surge in diagnosed cases in large developing economies and resistance to vaccinations among some populations in developed economies raise questions about the speed and the strength of an economic recovery over the near term. The economic fallout from the pandemic could risk continued labor dislocations as a result of lingering high levels of unemployment not experienced since the Great Depression of the 1930s and high levels of debt among developing economies. Job losses have been concentrated more intensively in the services sector where workers have been unable to work offsite.

The human costs in terms of lives lost will permanently affect global economic growth in addition to the cost of elevated levels of poverty, lives upended, careers derailed, and increased social unrest. Some estimates indicate that 95 million people may have entered into extreme poverty in 2020 with 80 million more undernourished compared to pre-pandemic levels. In addition, some estimates indicate that global trade could fall by an annual amount of 9.0% or slightly less in 2020 as a result of the global economic downturn, exacting an especially heavy economic toll on trade-dependent developing and emerging economies. While the full economic impact of the pandemic is coming more into focus in developed economies where vaccinations are facilitating a return to prepandemic levels of economic activity, the global impact remains less certain as new viral outbreaks have worsened the economic impact in some developing economies. This report provides an overview of the global economic costs to date and the response by governments and international institutions to address these effects.

R46270

To view the full report from the Congressional Research Service, click here.

Section 301 of the Trade Act of 1974

Section 301 of the Trade Act of 1974 (19 U.S.C. §2411) grants the Office of the United States Trade Representative (USTR) a range of responsibilities and authorities to investigate and take action to enforce U.S. rights under trade agreements and respond to certain foreign trade practices. Prior to the Trump Administration and since the conclusion of the Uruguay Round of multilateral trade negotiations in 1995, which established the World Trade Organization (WTO), the United States has used Section 301 authorities primarily to build cases and pursue dispute settlement at the WTO. However, former President Trump was more willing to act unilaterally under these authorities to promote what its Administration considered to be “free,” “fair,” and “reciprocal” trade. The recent use of Section 301 has been the subject of congressional and broader international debate.

The Trump Administration attributed this shift in policy to its determination to close a large and persistent gap between U.S. and foreign government practices that it said disadvantaged or discriminated against U.S. firms. In addition, it justified many of its tariff actions—particularly those against China—by pointing to alleged weaknesses in WTO dispute settlement procedures and the inadequacy or nonexistence of WTO rules to address certain Chinese trade practices. It also cited the failure of past trade negotiations and agreements to enhance reciprocal market access for U.S. firms and workers.

While the Biden Administration is reportedly reviewing the previous administration’s trade policies, most analysts do not expect any immediate changes to Section 301 actions or to the tariff exclusions on U.S. imports from China.

IF11346

To view the full report from the Congressional Research Service, please click here.

The Cost of Brexit: April 2021

We estimate that leaving the single market and customs union had reduced UK trade by 11 per cent in April 2021. That is on top of our previous finding of a 10 per cent hit to trade between the referendum and leaving the single market.

Last month, our cost of Brexit model showed that leaving the single market and customs union had reduced the UK’s total goods trade by 11 per cent in March. Using the recently-released data for April, we estimate that total goods trade is once again 11 per cent, or £7.9 billion, lower.

To estimate the effect of single market and customs union exit, we use trade data from other advanced economies. An algorithm chooses – from a ‘donor pool’ of 22 advanced economies – a smaller selection of countries with economic characteristics that most closely matched those of the UK over the last decade. Those countries are combined into a ‘doppelgänger UK’, with the relative weighting of the selected countries chosen to create the smallest possible deviation from the real UK goods trade data between 2016 and 2019. By comparing the UK’s actual goods trade performance from January 2021 to that of the doppelgänger, we can assess how leaving the single market and customs union has affected Britain’s trade in goods. (For more details on how the model works, see the estimate for January.)

COVID-19 does not significantly affect our model, because we only use it to evaluate the UK’s performance from January 2021, when goods trade in advanced economies had largely recovered to pre-pandemic levels. The countries in our doppelgänger UK are chosen using pre-pandemic data, which also reduces the impact of the virus on our estimate.

To read the rest of the article on the Centre for European Reform, please click here.

insight_costofbrexit_april21_14.6.21

The Ties That Bind: A Helsinki Commission Staff Report on Secure Supply Chains

The COVID-19 pandemic has laid bare long-standing vulnerabilities in U.S. and global supply chains, including American reliance on sole-source manufacturing and on Chinese manufacturing, in particular. This report examines threats to U.S. and global supply chains created by doing business with authoritarian regimes that flout the rule of law and recommends policies to strengthen global trade and commerce.

The Commission on Security and Cooperation in Europe, also known as the Helsinki Commission, is an independent U.S. Government commission created in 1976 to monitor and encourage compliance with the Helsinki Final Act and other OSCE commitments. As a part of the 1990 Charter of Paris, the Concluding Document of the Bonn Conference on Economic Cooperation in Europe, and related frameworks, OSCE participating States undertook commitments to uphold free and competitive market economies, improve corporate governance, and combat corruption. These commitments are threatened by the actions of authoritarian regimes in global supply chains.

This report identifies and examines seven threats to U.S. supply chains: (1) the theft of intellectual property, (2) defective and substandard products, (3) human rights abuses, (4) customs and border operations, (5) data privacy and security, (6) lack of transparency, and (7) free riders and illicit transactions. The report also briefly discusses foreign authoritarian investment in the United States. Finally, it analyzes whether certain goods should be considered for special status based on national security concerns. The report concludes that, rather than focusing on goods or industries, the United States should build a secure network of suppliers.

The report recommends a menu of policy options in a framework of three tiers based on (1) non-binding standards and voluntary guidelines, (2) international framework and development efforts, (3) domestic U.S. law and executive action. Recommendations aim to mitigate the threats identified by the report and ensure that supply chains become—and remain—transparent, responsible, accountable, and resilient.

The first tier focuses on the creation of a “certified secure” standard for individual companies and the establishment of a Secure Supply Chains Initiative, modeled on the Extractive Industries Transparency Initiative, which would set guidelines for participating countries.

The second tier reflects the need to apply existing international agreements to the problem; add anti-cor- ruption provisions to new agreements; consider rule of law-based country groupings such as the D-10 concept; leverage development to create rule of law-based markets that offer an alternative to authori- tarian ones; elevate the fight against authoritarian corruption; and redouble efforts at inter-parliamentary diplomacy.

Finally, the third tier recommends the passage of important anti-corruption legislation to criminalize the demand side of bribery and require professional services to uphold anti-money laundering requirements. The report also briefly discusses corporate board mandates, the role of tax policy, extraterritorial law enforcement, federal procurement, public-private partnerships, and diplomatic engagement.

Ties_that_Bind

To read the full report from the Wilson Center, please click here.

Shipping, Ports, and the Federal Maritime Commission

Since summer 2020, U.S. overseas containerized trade has risen to record levels as the Coronavirus Disease 2019 (COVID-19) pandemic led households to spend less on services such as vacation trips and restaurant meals and more on imported goods. The demand surge has resulted in transport delays, higher freight rates, and increased tension between shippers and ocean carriers over ancillary fees and the availability of containers. These controversies have drawn attention to the role of the Federal Maritime Commission (FMC),a federal agency with jurisdiction over ports and ocean shipping.

Shipping Research

To read the original research post from the Congressional Research Service, please click here.

The Case for Ambitious Services Market Access Commitments

Ongoing negotiating efforts have only gained in importance since the outset of the COVID-19 pandemic as businesses and individuals across developed and developing economies have increased their reliance on a range of digital technologies and services. In a recent report, the Organisation for Economic Cooperation and Development (OECD) found that e-commerce orders increased 50 percent in Europe, 70 percent in the Asia-Pacific region, and 120 percent in the United States year-on-year, providing firms – most notably small and medium-sized enterprises (SMEs) – access to customers across existing and new markets during this particularly challenging period.¹ More broadly, access to telecommunications networks, cloud processing, and digital communication is helping businesses maintain key operations and communicate with employees and clients while adhering to physical distancing requirements. Indeed, one survey found that throughout the pandemic, digitalization and automation accelerated across 85 percent of companies,² while one in three U.S. SMEs reported that their businesses would not have survived the pandemic without digital tools.³ Digital services, have also been critical to the development of vaccines, therapeutics, and other products that are essential to ending the pandemic, as well as the delivery of healthcare.

2021-06-ITINFTCServicesMarketAccessPaper

To read the original report from the Information Technology Industry Council and the National Foreign Trade Council, please visit here.