The EU curries favor with Russia and China while taking an independent stance toward the US. The US debates decoupling from China. The WTO has a new leader who hopes to resuscitate the WTO.
The Feb. 15-21, 2021 roundup of major trade developments, with L.C.
The 164 member nations of the World Trade Organization just unanimously approved Ngozi Okonjo-Iweala as its next Director-General. She hopes to revive the fallen fortunes of the WTO. The WTO just spent several bad years during which the two-and-a-half-decades-old organization was buffeted by a US-China trade war, subsets of its membership concluded free trade agreements (FTAs) superior to WTO arrangements, and a final blow, an isolationism-promoting pandemic. China, a principal WTO member, meanwhile has become more statist and aggressive, contrary to WTO free trade ideals, has continued stealing Western technology, and is forging an Imperial Preference area of nations become dependent on it through Belt and Road loans.
97-pound weakling dons gorilla suit
The European Union meanwhile — a 97-pound-weakling in the diplomatic and military arena — is determined to make the most of the one domain in which it need not pretend it is a great power: trade. Much to the delight of the China-Russia-Iran axis, the EU’s present main project seems to be to distance itself as far as it dares from the US, except on green policy. Thus on February 19th, the EU unveiled its “trade strategy for the coming years.” It aspires to create rules to promote the “green” and the digital economies, work cooperatively with other countries while taking a leadership role globally, toughening its enforcement, and being willing to go-it-alone when that’s in the EU’s interests.
The idea of the EU taking a leadership role globally is widely ridiculed, especially in the wake of the humiliations its foreign policy chief recently endured in Moscow, among other places. (See, for example, Politico‘s “Bested by Lavrov, Borrell faces fury in Brussels.”) But the EU has recently shown its defiance of its principal NATO defender, the US, in a number of ways. The EU’s principal economy, Germany, has refused to stop building the Nord Stream 2 pipeline. This will impair Europe’s energy security and a Ukraine point of resistance to Russian pressure, since the older, original pipeline passes through Ukraine.
Russia and the Iron Chancellor
Josef Joffe, a respected commentator on German and European affairs, says the Nord Stream 2 pipeline makes no economic sense but is a genuflection to a basic tenet of German Realpolitik that originated with Otto von Bismarck, Germany’s “Iron Chancellor”:
Regardless of how often Germans and Russians have been at each other’s throats, the enduring reflex goes back to Bismarck, who famously told the country in the middle: “Never cut the link to St. Petersburg.” In other words, keep the peace with the giant on Germany’s eastern flank.
The Biden administration has apparently decided to indulge Germany in this, even though Germany isn’t “a country in the middle” any more but a dominant member of the EU. Thus the Biden State Department refused to sanction additional companies involved in the push to complete the last 100-mile stretch of the Nord Stream 2 pipeline, “allowing work on the pipeline to continue unabated for now,” the Wall Street Journal reports.
A separate trade peace with China too
The EU also thumbed its nose at the US by concluding a trade pact with China despite appeals by the incoming Biden administration to hold off until consultations with the new US administration so that a joint approach could be concerted, given that China is such a powerful threat to both the US and Europe.
Nevertheless, as a heavily trade dependent area, the EU is also vitally interested in WTO reform. Its latest suggestions are contained in an 18-page Annex to its trade-policy paper. Although the EU’s policies toward Russia and China make it look initially as though EU trade policy is former US president Trump’s trade policy reborn as “EU First!” there is considerable EU agreement with policies being put forward by US President Biden and the WTO’s new Director-General in their emphasis on “green” policies, the need for new digital rules, and WTO reform.
According to the EU, it “is putting sustainability at the heart of its new trade strategy, supporting the fundamental transformation of its economy to a climate-neutral one.” It “prioritizes a major reform of the WTO, including global commitments on trade and climate, new rules for digital trade, reinforced rules to tackle competitive distortions, and restoring its system for binding dispute settlement.” The EU justifies its new EU-China Comprehensive Agreement on Investment while admitting that China is a “systemic rival” and that “The level at which China has opened its markets does not correspond to its weight in the global economy.” But China has just displaced the US as the EU’s largest trading partner. That gives Beijing a lot of leverage over Brussels, leverage Beijing could use to drive a wedge between the US and EU and force an easing of the EU push for WTO reforms China doesn’t want.
Meanwhile, the EU’s US-facing trade strategy is geared toward encouraging it to reengage with Europe. But the EU retains the threat – to the US and everyone else – that if other countries don’t let it pursue its priorities, it will act on its own. But perhaps sensing that it might have gone too far in its moves away from the US and towards its (and their) systemic rivals, the Wall Street Journal reported, as we went to press, that “The European Union will impose fresh sanctions on Russian officials over the jailing of opposition leader Alexei Navalny and will move ahead with measures to challenge Beijing over its crackdown in Hong Kong, signaling a shift in the bloc’s position on the two countries toward the U.S.’s.” To what extent these statements are backed by teeth remains to be seen.
To decouple or not, and how?
The US meanwhile is facing the long-simmering issue of how much to decouple the US economy from China. This got high-profile attention this week with the February 17th release of a US Chamber of Commerce report. The 88-page analysis “identifies the potential costs of a US-China decoupling from two perspectives”: the aggregate costs for the US economy across four key channels – trade, investment, people, and ideas – and the industry-level costs in four areas of national importance – civil aviation, semiconductors, chemicals, and medical devices.
The report was in essence a warning that any radical decoupling would have detrimental effects on the US, which the study quantifies. That doesn’t mean the US should retreat from confronting China, according to the Chamber, but should do so with allies and in a measured fashion that takes account of the economic impact.
Small yard, high fence
According to other press stories, the Biden administration is indeed heeding this warning. The review of Trump’s China trade policy is reportedly heading not toward a full decoupling but an approach termed “small yard, high fence.” In this approach, a small number of cutting-edge technologies are designated strategically important. These are to be withheld from China in a “small yard” behind a “high fence.” But the majority of tech products are outside the “small yard” and are less restricted.
That would be a reversal from Trump’s blanket approach of blocking Chinese access to a wide swath of US technologies, halting US investments in Chinese companies, and slapping limits on any Chinese technology that could access US data (e.g., TikTok).
In the Chamber study’s look at the impact of decoupling on the four sectors, it cited specific numbers for GDP and job losses, depending on the extent of the decoupling. But in each case, the loss was huge. For the semiconductor industry – currently the hottest topic – the report said, “Depending on the extent of decoupling, a loss of access to Chinese customers… would cause $54 billion to $124 billion in lost US output, risking more than 100,000 US jobs, $12 billion in R&D spending, and $13 billion in capital spending.”
Constraints
A full decoupling, the report said, would result overall “in hundreds of billions in foregone GDP and capital gains losses while undermining US productivity and innovation.” The report doesn’t try to quantify the value of the national security interests that are protected by decoupling from China. It says that proponents of decoupling argue “that the national security benefits of decoupling” justify the costs. But there hasn’t been a rigorous study of the trade-off, and “Given the tremendous, long-term economic implications of the decoupling stance that has emerged over the past four years, such an economic impact assessment is crucial.” The report doesn’t portray itself as being the last word. Rather, it says, “The high price tag of decoupling suggests that a more partial decoupling is better for the US interest” – but “further cost-benefit analysis is needed to be certain.”
One alarming sign is that the US trade deficit in high-tech goods hit a record last year, the largest deficit being with China. That means that the US technology sector not only benefits by access to the Chinese market but depends on imports from China. While special circumstances caused some of the increase, the extent of the deficit suggests how painful decoupling will be. China has also stepped up its warning over possible restrictions on access to its rare earths minerals, will consider tighter export controls, and (according to a Financial Times report) will look into whether such supply cutbacks would hurt the US defense industry.
The US trade and financial deficits make it especially important that the US improves its trade position through the WTO and by joining or founding free trade associations.
What direction will the WTO take under its new D-G?
Ngozi Okonjo-Iweala will become the Director-General of the WTO on March 1st. She was chosen by acclaim by the WTO’s 164 member-countries at a special (virtual) session of the General Council on February 15th. She is an MIT-trained development economist who served for 25 years at the World Bank in Washington, DC, where she also raised her family, and is the first US citizen to lead the WTO. Mrs. Okonjo-Iweala is also a citizen of her birth country, Nigeria, where she held important political posts.
Her appointment became possible when the Biden administration lifted the previous administration’s veto of her candidacy. In her address to the General Council, she was open about suggesting she owes her appointment to the new US president. She said, “Without the recent swift action by the Biden-Harris administration to join the consensus… on my candidacy, we would not be here today. I am grateful to the US for the prompt action and strong expression of support.”
Towards the 12th Ministerial Conference
In her General Council address upon being appointed and in remarks to reporters afterwards, she laid out some of her plans and priorities. While trying to keep medical protectionism at bay and expanding access to vaccines will be her first interest, much of her focus this year will be on assuring there are “deliverables” for the ministers to endorse at the WTO’s 12th Ministerial Conference (MC12) expected to take place later this year. The outcome of the conference will be seen as a test of her leadership.
Those items now under discussion for possible MC12 action include agreeing on new rules covering
- trade aspects of future pandemics,
- fisheries subsidies,
- e-commerce,
- agricultural subsidies (including on food stockholding/food security),
- procedure for reforming the WTO,
- changes to the dispute settlement system (to overcome the Appellate Body crisis).
Towards needed reforms
She referenced all these matters in her General Council remarks, where she said,
The WTO rule book is outdated, and its rules lag behind those of several regional and bilateral trade agreements which are incorporating… innovations. The rule book must be updated to take account of 21st century realities such as e-commerce and the digital economy. The pandemic has… accelerated the role of e-commerce…. Success in the e-commerce negotiations could provide an impetus for reviving more broadly the negotiations on Trade in Services.
In a January 29th interview with Time, she expressed enthusiasm for the climate issue, endorsing carbon taxes. According to Time, she said that policymakers “should consider policies to address the climate implications of the logistics conducting trade – namely, how goods are transported – as well as the carbon-content of traded goods themselves.”
Carbon tax complications
Analysts have warned that the border carbon tax issue is extremely complicated – both practically in terms of how it could be implemented (how does one calculate the carbon “content” of a traded good, and then determine a duty?) and politically in terms of avoiding disguised protectionism and giving fair market access to exports from poorer countries. Moreover, the WTO frowns on imposing border measures based on how a product is produced rather than what the product is. A carbon tariff would take the WTO into that unwelcome territory. But we take Okonjo-Iweala’s remarks to signal that she will go along with those who are pushing for an active WTO role in climate policy.
Regarding agriculture, she said that it
is particularly important for many developing and least developing countries. Improving market access for export products of… these countries is of paramount importance, as is dealing with trade distorting domestic support. She then trod on some further sensitive ground, sensitive to China and the larger developing countries: “Likewise, we must also strengthen disciplines on industrial subsidies. In that regard, it would be important to ensure that subsidies granted by Members to their state-owned enterprises… do not distort the conditions of competition. The issue of Special & Differential Treatment (SDT) is a divisive one that undermines trust. However, the voluntary action of some developing country Members to not avail themselves of SDT in the future points a way forward, so does the Trade Facilitation Agreement which allowed for taking into account each Member’s particular development status.
She concluded her GC address: “[T]he challenges facing the WTO are numerous and tricky, but they are not insurmountable… I am keen to support you to carry out the necessary reforms.”
L.C. reports on trade matters for business as well as Founders Broadsheet.
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