US, lacking trade policy, concedes field to China

Also featured in this week’s trade roundup:
* US vs. India, South Africa over waivers for vaccine production;
* Calls for US to help India overcome its pandemic surge;
* Australia security conflict with China over Victoria;
* New Zealand retreat from Five Eyes solidarity;
* Europe’s carbon tax;
* Biden’s Climate Summit fiasco;
* Canada’s planned Digital Services Tax;
* Administration restoration of Government Procurement Agreement, for now.

The April 19-25, 2021 roundup of major trade developments, with L.C.

The Biden administration’s obsession with an economically damaging, scientifically unsound climate policy is dividing the US and pitting it against important allies, such as India and Brazil. The more fundamental problem that needs to be addressed is that the US has no trade strategy. The Atlantic Council has just put out an important policy statement on this topic, headlined “Without a trade strategy, Biden can’t win the contest with China.” The statement quotes a Foreign Affairs article written by Adam Posen of the Peterson Institute:

Both Democrats and Republicans are now advocating ‘a trade policy for the middle class’… In practice, this seems to mean tariffs and ‘Buy American’ programs aimed at saving jobs from unfair foreign competition…. [Instead] Washington should enter into agreements that increase competition in the United States… It is the self-deluding withdrawal from the international economy over the last 20 years that has failed American workers, not globalization itself.

The Atlantic Council piece concludes by warning that “while the Biden administration has put its trade agenda on hold, China marches forward—closing the deals and setting the standards that will shape the future.” This week’s trade developments are variations on that unfortunate theme.

The international conflict over vaccine supplies

There was no apparent movement toward a resolution of the disagreement among WTO members over the India-South Africa TRIPS waiver proposal to remove intellectual property protection from COVID-19-related vaccines and medicines. It continues to be opposed by the US, EU, Japan, and other developed countries while about a hundred poorer countries side with India and South Africa.

Ten Democratic senators led by Bernie Sanders (I-VT) and Elizabeth Warren (D-MA) wrote to Biden urging that he come out in support of the waiver proposal, saying, “We ask that you prioritize people over pharmaceutical company profits.” But the pharmaceutical industry and countries opposed to the waiver make the case that the impediment to more vaccine production and use in the rest of the world isn’t patent protection but access to ingredients, skilled personnel (both to make and to distribute vaccines), and logistics. They argue that undermining patent rights would be counterproductive because the result would be the spread of vaccine production to facilities that have no connection to the vaccine developers and have no quality, effectiveness, and safety checks. It would also make it more difficult to get investment to develop new vaccines when new infectious diseases arise or if needed to make supplemental COVID-19 shots to deal with new variants. Moreover, India and South Africa are proposing that IP protection be lifted not just for patents on how the COVID-19 vaccines are made but how they are developed and designed – trade secrets that wouldn’t help most poor countries but would greatly help generic drug makers in making other medicines in India and a few other developing countries.

India’s pandemic crisis

National security analysts are concerned that the lack of US help to India in the face of its health crisis is undermining the strategic gains recently made regarding its role in the Indo-Pacific. There is anger both in the US and abroad that the US has stockpiles of vaccine, especially AstraZeneca’s, that it hasn’t offered to export. An additional reason for supplying surplus vaccines and raw materials to India is the fact that now, for the first time, supplies in the US seem to have caught up and begun exceeding demand. In response to these concerns, US Defense Secretary Lloyd Austin on April 25th announced that he had “directed the Department to use every resource at our disposal, within our authority, to support U.S. interagency efforts to rapidly provide India’s front line healthcare workers with the materials they need.”

Australia revokes Victoria’s agreement with China

The Australian government, which has been in the forefront of international resistance to China, faces further retaliation by China following its decision to revoke the participation of the state government of Victoria in China’s Belt & Road Initiative. Politically-progressive Victoria is Australia’s version of California. In non-binding deals reached in 2018 and 2019, the Victoria government opened itself to BRI projects. But the federal government this week used its new authority to countermand treaties entered into by state or local governments, citing Australia’s national security interests.

This provoked an angry and threatening response from Beijing, with a Foreign Ministry spokesperson calling the decision “irrational” and warning “China will respond resolutely.” China has already taken heavy punitive measures against Australia for previous perceived offenses, so the Australians are bracing for new actions. However, China may not have many avenues for more punishment left, having already cut off trade significantly. What imports remain – such as Australian iron ore – are needed by China. By meddling in Australian domestic affairs, China also exposes its off-the-dial hypocrisy, given how it is always quick to anger when other countries criticize its policies in Xinjiang, Tibet, Hong Kong, to name just a few instances of its bad behavior.

New Zealand’s Victoria-like behavior

In other China developments impinging on US strategic interests, a split has apparently emerged between Australia and New Zealand over whether the Five Eyes intelligence-sharing bloc (US-Canada-UK-Australia-New Zealand) should take a stand against China’s human rights abuses. Wellington doesn’t think it’s appropriate for the group; Canberra and other member countries think it is. The difference is seen as signaling that China retains influence in the region through its economic dominance and that the US will have a difficult time if it pushes even its close allies to choose between the two countries. The same dynamic has also been apparent in Europe.

Also this week, the US Federal Communications Commission adopted a new rule saying that radio and TV stations, when carrying content sponsored by a specific country or political party, must make that involvement clear at the start and the end of a program. The change was understood to have been prompted by growing efforts by China and Russia to influence US audiences. But China doesn’t allow US media to publish or broadcast at all to China’s population. Until this changes, why should China be allowed any access to the US population?

Biden takes on huge US climate costs, gets nothing from China

On Earth Day, April 22^nd, President Biden opened a virtual two-day Leaders’ Climate Summit to address climate change. Biden committed the US to halve US greenhouse gas emissions from their 2005 level by 2030. President Xi Jinping said China would strive to reach carbon neutrality by 2060. Meanwhile China continues to construct new coal-fired plants at a brisk pace.

The summit set up a situation in which Washington welcomed China’s promise while deriding the Australian approach. Leading into the summit, Australian Prime Minister Scott Morrison made it clear that while he’d like to achieve net-zero emissions “quickly,” the path Australia prefers is to develop new technologies rather than limit economic activity. Given the worsening China-Australia trade standoff, this was an awkward position for the US to put itself in.

Europe’s carbon tax

The week before the summit, Xi held a virtual meeting with French President Emmanuel Macron and German Chancellor Angela Merkel, with climate prominently on the agenda. The European leaders welcomed his stated goal of reaching carbon neutrality. But Macron and Merkel are among the most enthusiastic world leaders promoting the use of carbon taxes and linked tariffs (“a carbon border adjustment mechanism”). That’s something China opposes. So the call was, by some accounts, testy, as Xi denounced the planned EU carbon tariff – set to take effect this summer.

The US is one of the few major countries not planning a carbon tax/tariff. As trading partners begin to implement theirs, this is likely to become a major flashpoint for trade disputes. The WTO announced plans to set up a working group, in cooperation with the EU, to try to come up with guidelines for these tariffs, but they raise complex issues that will be difficult and messy to resolve – such as how to calculate if a trading partner’s carbon tax is equivalent, how to determine how much to tax goods from countries without any carbon tax, and how to account for differences in emissions caused by differences in shipping methods and distances as well as differences in production methods.

Digital service taxes

In the OECD-hosted talks for a global agreement on guidelines for digital services taxes, there is a new snag. The US reengaged in the talks, a development welcomed by the other parties. However, the proposal it submitted for determining which companies would be taxed includes global profitability. Because Amazon reinvests most of its profits back into its business, it wouldn’t be captured by the US’s proposed standard. Not applying to the world’s richest company would make any DST guidelines unacceptable to other countries. Missing the OECD deadline could reopen a new tariff war. Separately this week, the just-released Canadian federal budget shows that Ottawa is committed to imposing its planned DST — to tax 3% of revenues earned in Canada by huge multinational companies — starting on January 1^st, 2022. There are a number of inducements the Biden might consider to get the Canadian government to reconsider this tax, such as dropping the US tariff on imports of Canadian lumber.

Administration returns to Government Procurement Agreement — for now

The Biden administration has revoked the Trump administration’s notification to the WTO that the US was removing about 300 medical-related products from coverage under the WTO Government Procurement Agreement. This is an important move because it takes away a point of friction with key trading partners and removes a threat to the GPA. Until this reversal, the US’s continued disrespecting of its obligations under the WTO-GPA had reinforced the perception that the Biden administration was not inclined to reverse the unilateralist trade policies of its predecessor.

Nonetheless, the Biden administration has said it intends to discuss modifying the GPA with the other parties to it, especially regarding medical products but also in order to enable the tightening of US Buy American rules that Biden has proposed. So although the immediate dispute was defused, the GPA may trigger other controversies.

In short, it seems that the Biden administration will continue the Trump administration’s ad hoc, strategy-less protectionism, allowing China to claim the leadership role in the drive for expanded international trade.

L.C. reports on trade matters for business as well as Founders Broadsheet.