As the year ended, the UK finally exited the EU; China with Angela Merkel’s help concluded an EU-China trade agreement (despite suggestions from Biden officials that it should wait to consult with the incoming US administration); and the departing Trump administration issued a request to the WTO that environmental shortcomings become countervailable.
The weekly trade report with L.C.
Just before the new year, European and Chinese leaders concluded the framework for a China-EU Comprehensive Agreement on Investment. On New Year’s Day the UK left the EU single market/customs union and began provisionally relating to the EU through a new free trade agreement. It was also the day on which the African Continental Free Trade Agreement began being phased in, as well as when the ratification process for the RCEP began for the 15 participating countries. New Year’s Day also marked the 26th anniversary of the WTO, a rather sad occasion as the organization exited 2020 without a functioning appeals process or a director-general.
And Founders Broadsheet made Feedspot‘s top 20 list of trade blogs.
Where did my Stage Two agreements go?
This is also the one-year anniversary of the US-Japan Trade Agreement, providing limited improvements in bilateral tariffs and quotas, and of the US-Japan Digital Trade Agreement. The promised effort to move to stage two of this phase one deal hasn’t materialized.
It’s also almost the anniversary of the US-China Phase One Trade Agreement, signed almost a year ago on January 15th, 2020; it took effect on February 14th, 2020 – but there has been no progress on the promised talks for a second phase.
Early January will also bring more trans-Atlantic tariffs as the US expansion of retaliatory tariffs for Airbus subsidies take effect on January 12th, while the retaliatory tariffs on French exports for France’s digital services tax take effect on January 6th. The US also might impose Section 301 tariffs on Vietnam in January.
It remains to be seen how these various trade matters will be affected by the advent of a new US president on January 20th.
The EU and China approve a CAI
The European Union and China succeeded in concluding the framework for their Comprehensive Agreement on Investment (CAI) that has been under negotiation for seven years. We will not repeat those aspects of the deal that were covered well several days ago in the New York Times.
Nonetheless, several EU countries have already raised concerns, most notably Belgium and the Netherlands, that question if the provisions for improving China’s human rights behavior are adequate. Poland also questions why a bilateral deal should be rushed through so soon before a new US president takes over who has decried his predecessor’s unilateralism and called for cooperation with the EU on China.
Although Europe generally doesn’t restrict foreign investment, the EU recently tightened its process for reviewing investments and blocking them on national security grounds. That change was understood to be directed at China.
National security concerns
The CAI replaces the bilateral investment treaties that EU member-states have long had with China, so that bloc-wide investment rules will now prevail. Some press report that the CAI will allow Chinese companies to bypass the tightened EU screening system as well as any blocks on foreign investment that individual EU countries might want to implement for national security reasons. This seems to raise the very issue of national sovereignty that was a bone of contention between the UK and EU, leading to the former’s exit.
It appears that the biggest value for Beijing is that the CAI will help forestall closer US-EU cooperation on fighting China’s abuses, driving a wedge into trans-Atlantic relations and also among member countries of the EU.
Merkel’s role
Given these obvious negatives, why did the EU agree? German Chancellor Merkel, whose country held the rotating EU presidency in the second half of 2020, made it a priority to get the deal done under her EU leadership. That’s both an accomplishment she can point to in her final term in office and a gift for Germany’s automakers and certain other manufacturers who depend on the Chinese market. Germany is expected to gain the most from the CAI.
Merkel also got French President Emmanuel Macron to go along despite his earlier skepticism. French companies are expected to be the second biggest beneficiaries, after the Germans.
EU turned back on US
Beijing is correct that the agreement will cause friction in US-EU relations – it already has. National Security Adviser-designate Jake Sullivan’s comment in response to the deal last week that “The Biden-Harris administration would welcome early consultations with our European partners on our common concerns about China’s economic practices” was seen as expressing the incoming administration’s displeasure at the EU move. So was the similar statement made by a Biden transition official this week that “The Biden-Harris administration looks forward to consulting with the EU on a coordinated approach to China’s unfair economic practices and other important challenges.”
Many in the US as well as Europe raise the fact that China has a “tradition” of breaching agreements – just ask Australia, South Korea, or Hong Kong — or the US with regard to its Phase One accord. It is certainly dishonest about its human rights practices. As a White House spokesperson told reporters, “Our allies… increasingly agree that the obvious approach when dealing with Beijing is distrust and verify. Any commitment from China that is not accompanied by strong enforcement and verification mechanisms is merely a propaganda win for the CCP.”
China’s poor compliance record
A key point of concern is that China’s acquiescence to provisions targeting its labor practices doesn’t mean it will actually abide by them – especially since there is no real enforcement. The CAI could even make it harder to compel China’s compliance. Europeans might be more reluctant than ever to criticize Beijing or hold it to the letter of its commitments since this could jeopardize the new opportunities enjoyed by European companies in China. That was the point of China’s punishment of Australia by withdrawing trade benefits: it wants other countries to understand that if they challenge China’s interests – specifically the interests of the CCP and Xi Jinping – they will pay for it commercially.
Commenting on the CAI labor commitments, the director of the Global Public Policy Institute in Berlin, Thorsten Benner, was even more blunt. He told reporters, “I don’t think these promises are worth the paper they’re written on. As we’ve seen with Beijing’s action in Hong Kong, [it] just tore up the agreements on Hong Kong’s status… regardless of international commitments.”
The EU Parliament has not yet approved the CAI. It remains to be seen whether enough legislators can be assembled to bring down the Merkel-Macron approved deal.
The US requests WTO permission to punish environmental shortcomings
Lastly of note: the US is proposing that the WTO enable countries to treat other countries’ failure to abide by environmental standards as a countervailable subsidy. The proposal raises a number of questions. Countervailable subsidies, under WTO rules, must be “specific” – applying to specific industries, sectors, or companies but not the economy as a whole (as, for instance, a general tax cut would). Moreover, who will define the standards, how will one calculate the benefit that a lack of environmental standards gives a product, and how will one even determine which products benefit from the lack of standards?.
Perhaps even more difficult would be winning adequate support – the required consensus of support for a change in WTO rules – given that many poor and developing countries have problems enforcing environmental standards and often resist adding new rules of this sort to the WTO. Moreover, making environmental deficiencies countervailable means it would be up to the importing government to investigate and determine if such a “subsidy” exists and if so at what rate. The methodologies used would doubtless quickly become controversial.
There’s another problem for the US – a boomerang effect. Other countries might leap at holding the US to their own questionable environmental standards, e.g., on CO2, GMOs, additives, and pesticides. The proposal appears to be compatible with the growing push for border carbon taxes by some countries to penalize imports from other countries that don’t impose carbon taxes and thus have allegedly weaker environmental standards.
In short, the Trump administration proposal opens a can of worms for the US as well as for the WTO.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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