William Krist's Blog, page 43

China’s Pursuit of Leadership in Digital Currency

Introduction

Many in Washington are concerned about what China’s leadership in fintech and pioneering efforts to launch a new form of the renminbi (RMB), a central bank digital currency (CBDC), could mean for the United States and the role of the US dollar. In her confirmation hearing, multiple senators prodded Treasury Secretary Janet Yellen on China’s digital currency and her plans to keep the US dollar and financial system on top. She said the United States “must be a leader” in fintech and digital assets and that, “[s]trategic competition with China is a defining feature of the 21st century.” Yet, the US Federal Reserve has not committed to launching its own digital currency to take on the Chinese one currently undergoing trials. Should the United States be worried? My argument is that it should not, and that the Federal Reserve and Treasury have been right to proceed cautiously, with the idea of getting any digital currency plans “right” instead of “first.”

China’s fintech success has been impressive, but it remains mostly a domestic affair. Its fintech giants Ant Group and Tencent have achieved enormous valuations, but their attempts to gain users internationally other than Chinese tourists abroad have so far made few inroads, and national security concerns in jurisdictions around the world mean that this is not likely to change anytime soon.

Hype has far outpaced the reality in digital currencies, CBDCs, and China’s digital RMB in particular. Cryptocurrencies like bitcoin are booming, but these are mostly for speculation, as they are ill-suited to large volumes of payment transactions. We are still at an early stage in which the benefits of CBDCs have not yet been proven in practice, and the risks (cyber, operational, financial) are serious enough that most central banks will be hesitant to issue any until these can be resolved with a high degree of certainty. China’s eCNY efforts have similarly yet to prove they will be any cheaper, more efficient, more private, or more convenient than the existing domestic and international payment systems. Therefore, it is unlikely to represent any more a threat to the dollar’s international dominance than the current forms of RMB, at least over the short and medium term. Nothing is certain over the long term, however, so the United States should continue to carefully monitor China’s CBDC efforts and other digital currency innovations and incorporate any useful lessons to ensure that dollars and the payments systems that carry them remain competitive long term.

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To read the original testimony from the Peterson Institute for International Economics, please click here

Martin Chorzempa, senior fellow since January 2021, joined the Peterson Institute for International Economics as a research fellow in 2017. He gained expertise in financial innovation while in Germany as a Fulbright Scholar and researcher at the Association of German Banks. He conducted research on financial liberalization in Beijing, first as a Luce Scholar at Peking University’s China Center for Economic Research and then at the China Finance 40 Forum, China’s leading independent think tank. In 2017, he graduated from the Harvard Kennedy School of Government with a masters in public administration in international development. He is working on a forthcoming book on fintech in China. He has been quoted in the Wall Street Journal, New York Times, Washington Post, Financial Times, MIT Technology Review, and Foreign Affairs.

THE COST OF BREXIT: FEBRUARY 2021

We estimate that leaving the single market and customs union had reduced UK trade by 5 per cent by February 2021. That is on top 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 in January 2021 had reduced the UK’s total goods trade by 22 per cent. Using the data for February, which was released today, we estimate that goods trade is now 5 per cent, or £3.5 billion, lower. That is a significant improvement on the January data, as we expected, partly because businesses had built up stockpiles to cope with disruption at the EU border in January, and were replenishing them in February, and partly because volatile trade in precious metals rose sharply. Furthermore, the value of trade in ‘doppelgänger UK’ – a group of countries whose trade performance matched that of the UK between 2016 and 2019 – fell slightly in February. Monthly trade data is volatile, so it will take several more months for the impact of Brexit on the level of UK goods trade to become clear. 

To read the full insight piece by the Centre for European Reform, please click here. 

Is the European Union’s Investment Agreement with China Underrated?

The European Union is very open to foreign direct investment. By comparison, despite considerable liberalisation in the past two decades, foreign investors in China’s markets still face significant restrictions, especially in services sectors. Given this imbalance, the EU has long sought to improve the situation for its companies operating or wanting to operate in China.

After eight years of negotiations, the EU and China concluded in December 2020 a bilateral Comprehensive Agreement on Investment (CAI). The text awaiting ratification aims to give foreign investors greater market access, enforceable via state-to-state dispute settlement. It does not yet, however, cover investor protection (such as against expropriation). Meanwhile, investor protection is covered by bilateral investment treaties between EU countries and China, which remain in force.

The CAI has been met in some quarters with scepticism on economic and geopolitical grounds. The main criticism is that it provides little new market access in China, and that this small economic gain for the EU comes at the price of breaking ranks with its main political ally, the United States. Our assessment, which focuses on the economic implications, is different. It is true the CAI provides only modest new market access in China, but this is because China has already made progress in recent years in liberalising its foreign investment regulations unilaterally. The CAI binds this progress under an international treaty, marking an improvement for EU firms insofar as their market access rights can be effectively enforced.

Most important, the CAI includes new rules on subsidies, state-owned enterprises, technology transfer and transparency, which will improve effective market access for EU firms operating in China. These bilateral new rules could also pave the way for reform of the multilateral rules under the World Trade Organisation, with the aim of better integrating China into the international trading and investment system – a goal shared by the EU, the United States and other like-minded countries.

From an economic viewpoint therefore, the CAI is an important agreement, and one worth having. However, its ratification by the European Parliament is unlikely while China continues to apply sanctions against some members of the European Parliament and other critics of China’s human rights record.

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To view the original brief by Bruegel, please click here

Is the European Union’s investment agreement with China underrated?

The European Union is very open to foreign direct investment. By comparison, despite considerable liberalisation in the past two decades, foreign investors in China’s markets still face significant restrictions, especially in services sectors. Given this imbalance, the EU has long sought to improve the situation for its companies operating or wanting to operate in China.

After eight years of negotiations, the EU and China concluded in December 2020 a bilateral Comprehensive Agreement on Investment (CAI). The text awaiting ratification aims to give foreign investors greater market access, enforceable via state-to-state dispute settlement. It does not yet, however, cover investor protection (such as against expropriation). Meanwhile, investor protection is covered by bilateral investment treaties between EU countries and China, which remain in force.

The CAI has been met in some quarters with scepticism on economic and geopolitical grounds. The main criticism is that it provides little new market access in China, and that this small economic gain for the EU comes at the price of breaking ranks with its main political ally, the United States. Our assessment, which focuses on the economic implications, is different. It is true the CAI provides only modest new market access in China, but this is because China has already made progress in recent years in liberalising its foreign investment regulations unilaterally. The CAI binds this progress under an international treaty, marking an improvement for EU firms insofar as their market access rights can be effectively enforced.

Most important, the CAI includes new rules on subsidies, state-owned enterprises, technology transfer and transparency, which will improve effective market access for EU firms operating in China. These bilateral new rules could also pave the way for reform of the multilateral rules under the World Trade Organisation, with the aim of better integrating China into the international trading and investment system – a goal shared by the EU, the United States and other like-minded countries.

From an economic viewpoint therefore, the CAI is an important agreement, and one worth having. However, its ratification by the European Parliament is unlikely while China continues to apply sanctions against some members of the European Parliament and other critics of China’s human rights record.

PC-09-2021_

To view the original brief, please click here

The EU-China CAI: An agreement whose time has passed?

The EU-China Comprehensive Agreement on Investment (CAI) is perhaps a one-of-a-kind deal aimed at balancing the existing asymmetric investment relationship, where Chinese companies enjoy a far greater freedom to invest in Europe than EU companies do in China. But would it be able to achieve its stated goals?

The EU-China Comprehensive Agreement on Investment (CAI) was concluded in principle on 30 December 2020 after seven years of negotiation. The next step of ratification by the European Parliament will no doubt fuel a broader debate about the European Union’s place in the world; its relationship with the Chinese government whose approach is at odds with the espoused liberal values of the EU, and Europe’s relationship with the United States.

This essay by Stewart Paterson, Research Fellow at the Hinrich Foundation, explores the background to the CAI, the EU’s asymmetric economic relationship with China, and – in the context of China’s two decades of phenomenal growth – the relatively modest economic interaction between the two parties. By examining the prospect of CAI rebalancing and deepening EU-China trade relationship, Paterson poses the challenging question of whether deeper economic linkages with China are sustainable or compatible, given past economic interaction with the country and China’s recent geopolitical moves.

EU-China CAI Stewart Paterson

To read the original report by the Hinrich Foundation, please click here. 

A New Comprehensive China Policy: Principles and Recommendations for a Serious Debate in Congress

SUMMARY

A major new bill on China policy is on the horizon. In a way, Congress has been preparing for a grand debate on China for years. Comprehensive bills have been filed. The U.S.–China Economic and Security Review Commission and the Congressional-Executive Commission on China are veritable idea factories. In addition, there are the almost 300 individual stand-alone measures that were introduced in the past Congress. This Backgrounder offers its own guidelines and recommendations. It is time to put as many existing ideas as possible to the legislative test and construct a China policy that will give direction to the present and future Administrations.

KEY TAKEAWAYS

1.) The most persistent and consequential challenge that will confront the United States for the next several decades is China.

2.) Congress now has a once-in-a-decade opportunity to construct a China policy that will give direction to the Biden Administration and future Administrations.

3.) A Congress-led China policy requires a comprehensive approach that engages all levers of power while defending human rights, religious liberty, and economic freedom.

Senate Majority Leader Chuck Schumer (D–NY) has prioritized Senate passage of a major new bill on U.S. China policy. How the bill will come together—a total of eight committee chairs have been tasked with drafting it—remains an open question. Whatever the ultimate vehicle, this bill is a once-in-a-decade opportunity for Congress to develop a comprehensive approach to China. It should adhere as closely to the regular order as possible. In the process, Members should consider the following principles and specific policy recommendations.

Seven Principles for a Congress-Led China Policy

In order to fashion a China policy that is in the U.S. national interest, Congress should:

1. Go Big. Some Members want to make the bill entirely about economic competitiveness. But the China challenge encompasses a much larger gambit. It is also about more than the U.S. military presence in the region—which is essential to the U.S. presence in the Indo–Pacific and handled by Congress through the National Defense Authorization Act (NDAA) and defense appropriations bills.

There are diplomatic issues at stake. There are issues involving Taiwan, Tibet, and Xinjiang, and faith communities of many stripes. There are domestic regulations that handicap the U.S. globally. All these and many other issues need to receive proper, systematic treatment. The U.S. competed with the USSR for 40 years in every area of engagement, all within the general framework of containment, and learned to adjust and adapt as conditions warranted. A similar comprehensive approach is warranted with respect to China, certainly different than the Soviet Union, and more complex, and thus needing similarly big ideas.

2. Watch the Congressional Purse. As one-time Senate Minority Leader Everett Dirksen (R–IL) is said to have remarked: “A billion here, a billion there, and pretty soon you’re talking about real money.” The fact that the federal debt is above $28 trillion and growing, with many looking the other way, does not mean that “money is no object.” Someday, the U.S. will have to make good on these debts. America’s strength lies not in how much taxpayer (and bond holder) money it can promise, but how well it can harness the advantages of its educational and research institutions, its deep markets, and the ingenuity of its people.

3. Stay Engaged. Congress often passes legislation on foreign policy and then forgets about it. In the upcoming China debate, Congress should institute forward-looking procedures requiring affirmation of the policies’ implementation. Carefully constructed certification and reporting requirements can be useful. Conversely, reporting requirements meant to simply prevent a Member from offering a more substantive proposal, are not.

4. Use Waivers Sparingly. There are ways to draft waivers that preserve congressional intent. The complex and amended waivers in the 2017 Counter America’s Adversaries Through Sanctions Act are good examples. On the other hand, blanket “national interest” or “national security interest” waivers are not the most effective use of Congress’s time.

Similar to the dynamics around reporting requirements, in processing the dozens of amendments that will be offered on this bill, it will be tempting to agree to the most sweeping of waivers. Members should resist. If their commitment is not strong enough to defend their amendment and force a vote, they should not offer it. U.S.–Chinese relations are headed in one direction for the foreseeable future. It will be exceedingly difficult for the Administration to argue for maximum diplomatic flexibility.

5. Avoid Protectionism. COVID-19 highlighted U.S. dependence on China for such necessities as pharmaceuticals and personal protective equipment. Congress has also recently stood up a task force to examine national security supply chains and their vulnerability to Chinese influence. In the past, the U.S. has responded by requiring certain commodities or sectors to be supplied only from domestic U.S. sources. Often, such efforts are driven by a desire to shore up an ailing U.S. industry. Such remedies result in higher prices and often do not fix the base problem.

Instead of protectionism, the U.S. should focus on targeted measures that restrict critical purchases from entities controlled by the Chinese Communist Party and allow the United States to take full advantage of its rich network of allies to meet its national security needs.

6. Create a Policy Framework. One need look no farther than the Taiwan Relations Act (TRA) to know that congressional policy statements matter. Administrations come and go, but the TRA has remained. Another example is the enduring value of the 1992 Hong Kong Policy Act, on which most action on Hong Kong has been built since. Congress should aim to create the same sort of lasting policy on China policy generally. It should think beyond the length of one session of Congress or one Administration, or the next election cycle.

7. Look Beyond China Itself. China presents the U.S. with many direct challenges. It seeks to constrain the movement of the U.S. Navy in international waters. Its agents steal U.S. intellectual property. With Made in China 2025 and Standards 2035, it has publicly declared economic war on vital elements of the U.S. economy. It is trampling on the rights of America’s friends in Hong Kong and destitute mainlanders. But the U.S. is not alone in this struggle. It has allies in Australia, Japan, the Philippines, South Korea, and Thailand, and partners in India, Taiwan, Singapore, and throughout Europe. Whether Congress is talking about foreign policy or supply chains, it must keep the broader supportive context in mind.

14 Priorities for a Comprehensive China Bill

The following list is not exhaustive. The base China legislation and floor debates will involve many worthwhile proposals. This list is a sample of some of the highest-priority, immediately actionable items.

1. Taiwan. As much as Congress has done over the past few years, much remains to be done. Congress should take action on the provisions contained in the Rubio–Merkley Taiwan Relations Reinforcement Act, including making the director of the American Institute in Taiwan a Senate-confirmed position and helping U.S. businesses and nongovernmental organizations navigate pressure from China on Taiwan-related issues.

Congress should make an unequivocal, binding statement in support of a free trade agreement with Taiwan. The U.S. Trade Representative’s (USTR) institutional tendency is to avoid Taiwan. At the very least, a substantive proposal and debate will force it to face Taiwan.

To help facilitate regular interaction on trade issues, Congress should require the USTR to remove it from the same office dealing with China and put it under the authority of the Assistant USTR handling Japan, Korea, and the Asia–Pacific Economic Cooperation. Dealing with China takes up so much of the USTR’s time that there is little left for Taiwan, even if the USTR is inclined to engage it. It often is not, due to Beijing’s sensitivities, another aspect of the gap that separating the functions will help ameliorate.

2. Xinjiang. Congress should direct the Administration to tackle forced labor in China by requiring an expansion of existing cotton and tomato Withhold Release Orders (WROs) to a region-wide level for a two-year period. Congress should provide that, if an overwhelming percentage of goods apprehended by the U.S. Customs and Border Protection under the expanded WRO are found to have been produced with forced labor, the U.S. must institute a region-wide rebuttable presumption that goods produced in certain sectors of Xinjiang are produced with forced labor. In addition to addressing forced labor, Congress should extend Priority-2 refugee status to Uyghurs fleeing persecution in China.

3. Hong Kong. Congress should extend safe haven protections to Hong Kong citizens facing newfound persecution by declaring them eligible for P-2 refugee status. According to U.S. refugee laws, a refugee is an individual who has experienced, or has a well-founded fear of future, persecution on account of “race, religion, nationality, membership in a particular social group, or political opinion.” The Department of Homeland Security should remain in charge of evaluating the eligibility of individuals seeking refugee status.

4. U.S.–Chinese Space Cooperation. Congress should codify prohibitions on U.S.–Chinese space collaboration in what is currently renewed annually in the appropriations process, and expand congressional notifications to include the Senate Foreign Relations and House Foreign Affairs Committees. Congress should also tighten executive branch waiver authority, or scrap it altogether in favor of the direct approach to military-to-military engagement in the FY 2000 NDAA.

5. The Better Utilization of Investments Leading to Development (BUILD) Act. Congress should reform the BUILD Act to make it explicitly about countering Chinese influence.What makes U.S. government-provided foreign infrastructure financing and risk insurance at all palatable is its place in a broader China strategy. That place should be made clear in the law that authorizes the new International Development Finance Corporation. Funds should also be made subject to the regular appropriations process so that Congress can maintain sufficient oversight.

6. Chinese Cyber Theft. Congress shouldcodify Executive Order 13694, which blocks property of foreign entities engaged in cyber theft and other cyber malicious activities, expand the action to physical theft and deemed exports, and decouple the sanctions from reliance on the International Emergency Economic Powers Act.

7. Confucius Institutes. Congress should require universities and K–12 schools to disclose their financial ties to Confucius Institutes—nationwide propaganda organizations, masking as cultural institutions, sponsored by the Chinese government. Shortly after taking office, the Biden Administration withdrew a rule proposed late in the Trump Administration to do so. Congress should require it to be reinstated. As for the purported purpose of the institutes to encourage the study of Mandarin, there are alternative ways of ensuring a sufficient pool of Mandarin speakers is available for U.S. government service.

8. Easing Export Controls on India. Congress should revise the Arms Export Control Act to include India among a special group of NATO alliance members and key non-NATO partners (Australia, Israel, Japan, New Zealand, and South Korea) facing lower regulatory hurdles to U.S. arms exports.

9. Chinese Influence within International Organizations. China is using economic and diplomatic pressure to secure support in international organizations. Congress should authorize the Administration to use aid and other incentives as a counterweight. Beijing has also clearly signaled its desire to put Chinese nationals in positions of authority in the United Nations system. The U.S. needs to be well prepared for appointments and elections. It should develop a robust list of prospective candidates and ongoing procedures to campaign and rally support for these candidates.

Congress can help by establishing an office to coordinate this process and renew the congressional reporting requirement on the status of U.S. employment in the U.N. to help keep track of progress. Finally, Congress should use its financial leverage to enhance U.N. transparency, whistleblower protections, and accountability, which help to reveal malfeasance in the U.N. system.

10. Rare-Earth Minerals. Congress should address concerns about supplies of rare-earth minerals by focusing on reform at home. It is not China that has made these minerals difficult for the U.S. to secure, but domestic regulation. Actions that Congress can take to get at the problem include clearly defining “navigable waters” in the Clean Water Act to strictly limit federal authority, prohibiting pre-emptive and retroactive vetoes under Section 404 of the Clean Water Act, empowering states to manage their water resources, repealing the National Environmental Policy Act, reforming the Endangered Species Act, prohibiting the use of the social cost of carbon in regulatory proceedings, and eliminating agencies’ ability to regulate greenhouse gases.

11. The 2022 Winter Olympics. Congress should encourage the International Olympic Committeeto postpone the 2022 Beijing Olympics and select a new host country. In the absence of such a change, Congress should call for an international diplomatic boycott. This means no official attendance beyond what is necessary for the participation and security of U.S. athletes.

12. Religious Liberty. Congress should require the Administration to issue a report listing individuals and entities sanctionable under the Global Magnitsky Act, along with explanations for why they may not yet be sanctioned.

13. Banking-Sector Reform. Congress should reduce impediments to competition in the financial-services sector so that people will want to invest in U.S. markets instead of in other countries. To strengthen the U.S. financial-services sector and attract more investment and capital formation, Congress should implement reforms, such as creating new charters for financial firms that eliminate activity restrictions and reduce regulations in return for straightforward higher-equity or risk-retention standards, as well as adjusting the currency-transaction-report threshold for inflation from $10,000 to $60,000 and the non-bank reporting threshold for inflation from $3,000 to, $10,000 and repealing the beneficial ownership reporting regime on small businesses.

14. Digital Currency. Congress should respond to China’s plans for creating a digital currency by fostering innovation at home. The United States cannot assert significant influence over China’s digital currency plans. It can, however, orient its own policies to create a prosperous environment for America’s financial innovations. Congress should remove barriers to market entry for alternative monies, and ensure that no single type of money enjoys a regulatory advantage. At a minimum, Congress should amend “legal tender” laws, eliminate capital gains tax disadvantages, and modify private coinage statutes.

Conclusion

In a sense, Congress has been preparing for a grand debate on China for years. Comprehensive bills have been filed, such as the Strengthening Trade, Regional Alliances, Technology, and Economic and Geopolitical Initiatives Concerning China (STRATEGIC) Act and the America Labor, Economic competitiveness, Alliances, Democracy and Security (America LEADS) Act. The House Foreign Affairs Committee’s 2020 China Task Force Report has literally hundreds of recommendations. The U.S.–China Economic and Security Review Commission and the Congressional-Executive Commission on China are veritable idea factories. And, none of this even accounts for the almost 300 individual stand-alone measures that were introduced in the past Congress.

It is time to put as many of these ideas as possible to the legislative test and construct a China policy that will give direction to the Biden Administration and Administrations to come.

Walter Lohman is Director of the Asian Studies Center, of the Kathryn and Shelby Cullom Davis Institute for National Security and Foreign Policy, at The Heritage Foundation.

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To view the original report by The Heritage Foundation, please click here. 

Trade policy and medical supplies during COVID-19: Ideas for avoiding shortages and ensuring continuity of trade

The COVID-19 pandemic has brought to the fore concerns about shortages of medical goods, including vaccines, and about the risks associated with competition for supplies. Policymakers to date have often advocated ill-conceived approaches that misunderstand the dynamics of relevant supply chains.

International mechanisms have a role in supporting properly devised national initiatives to ensure resilient supplies in times of crisis. To this end, this paper proposes a three-part framework for policy coordination, consisting of:

— Promotion of effective public health responses, including early intervention in emergencies and potential domestic rationing of key supplies.

— Specific national measures for medical goods, including revised rules on domestic and overseas procurement, de-risking of supply chains, and ‘trade facilitation plans’ to suspend tariffs and taxes and fast-track port clearances. 

— A confidence-building MoU to codify key principles. Signatories would commit to joint-purchasing arrangements and data sharing on medical goods stockpiles. Swap arrangements for stockpiles should also be agreed. The MoU could be presented for adoption at the G7 summit in June 2021. It could also form the basis for a wider agreement to be announced on the sidelines of the 2021 UN General Assembly.

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To read the full report by Global Trade Alert, please click here. 

“Too Big to Care” or “Too Big to Share”: The Digital Services Act and the Consequences of Reforming Intermediary Liability Rules

This paper reviews the Digital Services Act (DSA), a package of new rules for platforms proposed by the European Commission late last year. The paper takes stock of current and future situations for rules on content moderation and takedowns, and discusses how the DSA addresses the balance between the desired culture of openness online, on the one hand, and more pressures to take down not just illegal but harmful and objectionable content, on the other hand. The DSA introduces a few new transparency rules that follow previous codes of conduct: they are straightforward and desirable. However, it also brings in new know-your-customer rules and exacerbate the ambiguity surrounding the definition of illegal content. These types of rules will most likely have the effect that platforms will minimize risk even more by taking down more content that is legal. Moreover, there is a risk that the DSA will create new access barriers to platforms – with the result of making it difficult for smaller sellers to engage in contracts on platforms. New regulatory demands to monitor and address “systemic risks” will likely have the same effect: platforms will reduce their exposure to penalty risks by taking down and denying access for content that is legal but associated with risks.

The DSA’s differentiation between large platforms and very large platforms is disingenuous and contradicts the purpose of many DSA rules. Obviously, exposing some platforms to harder rules will lead to content offshoring – a trend that is already big. Objectionable content – not to mention illegal content – will move from some platforms to others and lead extremists and others to build online environments where there is much mess content moderation. Furthermore, the new regulatory risks that come with being a very large platform will likely become an incentive for some large platforms to stay large – and not become very large. While the DSA is often billed as a package of regulations that will reduce the power of big platforms, it is more likely to lead to the exact opposite. Very large platforms have all the resources needed to comply with the new regulation while many other platforms don’t. As a result, the incumbency advantages of very large platforms are likely to get stronger.

Too Big to Care:Too Big to Share

To read the full policy brief by the European Centre for International Political Economy, please click here. 

The unappreciated trend toward unilateral trade liberalization

A frequently voiced complaint from the Trump administration was that US firms have faced a competitive disadvantage in exports because the US market is open and US tariffs are low but US trading partners protect their markets with high tariffs. The administration used this concern to justify raising US tariffs whenever it could. Lawrence argues that these claims should be more nuanced and account for the extensive unilateral liberalization by many countries over the past 30 years and that the grievances that motivated the Trump trade policies are increasingly misplaced. Many developing countries have reduced their tariffs unilaterally to rates that are far lower than they applied three decades ago and far less than the bound rates reflected in their World Trade Organization (WTO) obligations. Globally, on average, tariffs were not raised during the global financial crisis of 2008 and continued to decline through at least 2018. Even when shocks from imports resulted in serious injury to domestic industries, several developing countries temporarily provided safeguard protection but at levels that were lower than their WTO bound rates. This evidence of import liberalization also suggests that rising protectionism was not responsible for the slow growth in world trade that has been evident since 2011. It remains uncertain whether countries will now respond to disruptions to global supply chains since 2018 caused by Trump’s trade policies and the COVID-19 pandemic by reversing their tariff liberalization stance, but the sustained enthusiasm for new megaregional trade agreements suggests many countries will not.

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To read the full policy brief by the Peterson Institute for International Economics, please click here. 

Will industrial and agricultural subsidies ever be reformed?

One economic argument for government subsidies is that they are necessary to compensate firms and industries for benefits they provide to society at large but cannot capture in the prices they charge for goods or services. For example, subsidies to renewable energy are defended because renewable energy limits carbon emissions. When a major economy subsidizes extensively, however, its trading partners are drawn into the game, with losses all around. As the prisoner’s dilemma suggests, a better outcome would entail mutual restraint. But the goal of mutual restraint is no less difficult in international trade than it is in international arms control. Both the European Union and the US federal system try, in different ways, to regulate industrial subsidies. Hufbauer examines efforts to contain unjustifiable subsidies and proposes modest improvements, bearing in mind that as countries struggle to overcome the global economic downturn resulting from the COVID-19 pandemic, there is little appetite for restoring a free market economy—one in which firms compete with minimum government assistance or regulation. Selective upgrading of the rulebook may nevertheless be possible. 

Industrial:Agriculture Subsidies Change

To read the full policy brief by The Peterson Institute for International Economics, please click here.