The services pact should benefit the US, which is the world’s largest exporter of services. Meanwhile, the US, EU, and Japan are discussing ways to counter at the WTO the market-distorting practices of non-market economies — namely, China’s. Separately, the US and EU are also holding discussions on strategic cooperation in the Indo-Pacific region, where again, China is the center of concern. In North America, however, it’s the US that’s of concern to Canada and Mexico, in the wake of the Democratic-controlled House of Representatives’ proposed Build Back Better subsidies for US produced electric vehicles.
The December 6th, 2021 trade report with L.C.
After years of bad news and few accomplishments, the WTO has just notched a major success. On December 2nd, the WTO announced that it had successfully negotiated a services liberalization deal. The agreement is quite important to the US, which is the world’s largest services exporter. In 2019, US services exports were valued around $875.8 billion.
The official title of the pact is “Joint Statement Initiative on Services Domestic Regulation” (DR JSI).
The deal is “aimed at slashing administrative costs and creating a more transparent operating environment for service providers hoping to do business in foreign markets,” the WTO said. It seeks “to improve the business climate, lower trade costs and cut red tape so as to facilitate services trade worldwide.” It supersedes a much weaker services trade pact inherited from the WTO’s predecessor, GATT.
The 67 participating countries submitted schedules “spelling out how each participant will incorporate the new disciplines into its existing services commitments.” The participants are pledged “to certifying the new commitments within 12 months.” The commitments will be applied on a most-favored nation basis – which means that the participating countries will extend their commitments to the whole WTO membership, regardless of whether a country has signed on to the agreement.
Victory wasn’t guaranteed
Although the basic agreement was reached in September, the countries’ individual commitment schedules remained to be completed, so something could have gone wrong.
US Trade Representative Katherine Tai welcomed the agreement in a December 2nd statement saying, “The US joined over 60 WTO Members… in announcing the successful conclusion of the [DR JSI] negotiations. The negotiated rules will improve the transparency and fairness of processes for obtaining authorizations to provide services by professionals and firms in a wide array of fields.”
The 67 participating countries account for more than 90% of world services trade and will benefit from the streamlining of licensing, qualification procedures, the application of technical standards, enhanced transparency, and the easing of regulatory requirements now hindering trade. As the WTO has explained, the negotiations sought to ensure that domestic regulation procedures for trade in services are clear, predictable, and transparent and do not unnecessarily restrain trade. Flexibilities are envisaged to help governments apply the measures and regulate based on their national policy objectives and levels of development.
Limitations
As with any WTO agreement, the inclusion of provisions allowing flexibilities and reference to levels of development means that the deal will have loopholes and won’t be carried out with the same level of ambition by all participants. Nonetheless, it includes most of the major global players, including China. It does not include India, however, even though that country is a huge services provider. The reason is that New Delhi rejects negotiations done on a plurilateral basis rather than including all WTO members. Most developing countries, however, don’t agree with India and South Africa on this.
The US, which belatedly joined, said it saw the negotiations as “an opportunity to improve the transparency and fairness of processes for obtaining licenses to provide services by US professionals such as engineers, architects, and environmental consultants, as well as for US firms in fields such as retailing, express delivery, and financial services. The US has long championed transparency and fairness of regulatory rules as a fundamental feature of good governance, and views the [negotiations] as an opportunity to strengthen such standards around the globe.”
Importance to WTO
The mere fact that the WTO has a new negotiating success – a concrete agreement for liberalization of some dimension of global trade – is important for the institution. As the EU ambassador stated, “Today, we prove [that a] large and diverse group of WTO members can work together towards a common objective, overcome their differences, show flexibility and agree on tangible results.”
Australia’s WTO ambassador noted, “This outcome marks a historic update to the WTO’s rule-book – the first new set of services rules agreed in over a quarter of a century.”
The UK Secretary of State for International Trade, Anne-Marie Trevelyan, released a statement similarly noting that the deal “shows exactly the kind of cooperation we want to see at the WTO and demonstrates it can deliver trade rules fit for the 21st century.” The UK is the second largest services exporter after the US.
US-Japan-EU trilateral partnership revived
Meanwhile, the US, Japan, and the EU have revived the trilateral partnership formed to counter market-distorting practices of non-market economies. It was first launched at the previous WTO Ministerial Conference at the initiative of Japan and the EU, in part to steer Washington away from unilaterally acting against China.
The three met virtually on November 30th and issued a joint statement. They said they will focus their work “as trilateral partners” in three areas: 1) Identification of problems due to non-market practices; 2) Identification of gaps in existing enforcement tools, developing new tools when necessary and “discussing cooperation in utilizing existing tools”; and 3) Identification of areas where further work is needed to develop rules to address such practices.
They plan to meet “to review progress regularly.”
The trilateral partnership was understood from the start to be aimed particularly at making the WTO more responsive to challenges posed by China and to enlist the US in working through the WTO, in collaboration with Tokyo and Brussels, rather than on its own. Thus it was, initially, an effort by Japan and the EU to get the US to agree to tackle China’s abuses, especially its subsidies, in the WTO and to work for WTO reform to make it more effective against countries like China. That Japan-EU interest in steering the US away from unilateralism and toward working within the WTO remains, despite the change of administrations.
US-EU convergence on China measures?
In a related development, the second session of the US-EU Dialogue on China and the US-EU high-level consultations on the Indo-Pacific were held on December 2nd. A State official told reporters in advance that the two have an “increasingly convergent” view of China’s “concerning behavior.” That includes shared concern over China’s economic coercion and the unfairness stemming from its state-owned enterprises. Also, he said, “Taiwan will be a topic of discussion in the dialogue.” The meeting, held in-person in Washington, was led by Deputy Secretary of State Wendy Sherman and European External Action Service Secretary General Stefano Sannino.
A joint statement afterwards said the officials expressed “strong concern over China’s problematic and unilateral actions in the South and East China seas, and the Taiwan Strait… [that] have a direct impact on the security and prosperity of both the US and EU.” The two sides said they agree that China’s human rights abuses “breach international law,” noting repression in Xinjiang and Tibet and the erosion of autonomy in Hong Kong. They also said they would deepen bilateral information-sharing on China’s disinformation. The statement also “emphasized the importance of the US and EU maintaining continuous and close contacts on our respective approaches as we invest and grow our economies, cooperate with China where possible, and manage our competition and systemic rivalry with China responsibly.”
The meeting appears to have helped mend the fissure that developed in US-EU relations regarding strategy toward China and the Indo-Pacific following the AUKUS alliance, which upset Paris. The meeting also seems to signal a narrowing of US-EU differences over whether, in relations with Beijing, the focus should be on engagement or on confrontation and decoupling. That the new government of Germany has taken a harder line regarding China than did the Angela Merkel government is assumed to have played a role in this new convergence.
USMCA: Brawl mounts over EV tax credits
But all is not lovey-dovey back in North America. The dispute over the Democratic Party’s proposed incentives for building electric vehicles in the US continues to heat up. Canada and Mexico are warning Congress and the administration that the provisions, which are included in the “Build Back Better” social and climate spending bill that passed the House and awaits Senate action, would violate the USMCA.
The incentives would be in the form of tax breaks: $4,500 in additional credits to purchasers of vehicles made in the US by unionized workers above the $7,500 federal subsidy already given to buyers of any e-vehicle, and $500 more if the battery pack is US-made. Then beginning in 2027, the entire $12,000 tax credit/subsidy would be available only for EVs made in the USA – quite an extreme subsidy for local content.
Canadian Trade Minister Mary Ng spent three days in Washington lobbying against the incentives, which the Canadians warn would disrupt the integrated North American auto sector and damage its competitiveness, as well as directly harming Canada’s auto industry and jobs. Ng met with senators and union representatives. She discovered, she said, that many senators weren’t familiar with the issue. She also warned that Ottawa would “respond accordingly” if the incentives are enacted.
Mexico prepared to retaliate
On December 2nd, Mexican Economy Secretary Tatiana Clouthier said that if the incentives are enacted, Mexico will retaliate with “all kinds” of measures including tariffs. This is not an idle threat. The retaliatory tariffs Mexico imposed in response to the Section 232 metals tariffs and earlier during the dispute over cross-border trucking were very painful for US farmers and politically painful for Washington.
Clouthier said that at least two investments in EV production in Mexico would be put at risk by the US incentives. She is speaking with senators to get the incentives removed from the legislation. She noted that a number of major automotive investments are being planned for Mexico’s northern border states as companies are moving production from Asia to comply with the USMCA’s tighter rules-of-origin. But these plans could be disrupted if the US goes ahead with incentives for cars made in the US. If they do, Clouthier suggested that Mexico will request a USMCA dispute settlement panel in early January and that she expects Canada to join the case as co-plaintiff or as a third party.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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