Trade
Buy America and subsidies mix with national security to see off the rules-based order
Author: Editorial Board, ANU
Today the global trade system faces three systemic challenges. None are new, but strategic competition between China and the United States has brought a dangerous edge to each of them.
The first is the dramatic shift in the composition of international economic interaction. When the Bretton Woods system was first set up, global trade was overwhelmingly in physical merchandise. Over time, the importance of services trade and, in the past few decades, data flows, has left large parts of global trade under regulated or uncovered by global rules entirely. While this is a long-standing issue, the increasing weight of China in the digital economy has caused major angst in Western countries, some of which have gone as far as banning Chinese companies from building key infrastructure like 5G.
The second, related challenge is the increasing imbrication of national security and economic policy. The two have never been entirely divorced, but in recent years the use of economic weapons to extract political outcomes, particularly by China and the United States, has risen markedly. Article XXI of the GATT always allowed countries to impose restrictive measures for genuine national security reasons. The exemption was never intended to be a blanket one, though: there was an implicit agreement not to overstep the mark that stopped the rules of the GATT and then the WTO from being shredded in the name of national security. Donald Trump’s steel tariffs were an overt violation of that agreement, as the WTO’s ruling on those tariffs demonstrated despite American protestations.
It is not, of course, the case that national security concerns might not ever override economic ones. There might be legitimate, if rare, occasions when a nation might choose to curtail trade or investment because there is no way to make the transaction ‘safe’ (trade in certain kinds of weapons is an obvious example). But as Gary Hufbauer notes in the first of this week’s lead articles, the policy apparatus for determining these decisions is not set up to evaluate trade-offs, and are deeply opaque. ‘US decisions as to whether a country, company, product or technology threatens US national security are shielded both from public and judicial scrutiny and deliberately ignore economic costs.’
As Hufbauer argues, the damage might be limited under a Biden administration in which there are still some pockets of internationalist sentiment. The important speech of National Security Advisor Jake Sullivan on the Biden administration’s international economic policy at least pays lip service to the idea that American policy must consider the good of the world economy as a whole, even if that idea is missing in its specific policy action. A returning Trump administration — which remains a live possibility — will not even honour both with lip service. It is much more likely to heighten the use of national security excuses to inflict irreparable harm on the global trade system.
The third challenge facing the system is another old problem with a new twist: the return of industrial policy in the North Atlantic, particularly in the form of protection for ‘green’ industry. Here the opinions of economists are mixed. The introduction of massive subsidies for green technology in Biden’s Inflation Reduction Act are on the one hand a recognition of the political reality that a first-best solution to the climate change problem — a nation-wide carbon price — would never make it through Congress.
Addressing this political reality through subsidies, however, comes with major risks to the global system, as well as to the American economy. The GATT and the WTO have always struggled with industrial policy: discriminatory subsidies are forbidden under their disciplines, but the prohibition has constantly been flouted, sometimes with the tacit approval of the original guarantor of the system, the United States. Even under GATT rules prior to the Uruguay Round, special and differential treatment of some protective policy was given to developing countries, recognising that transition to full and complete free trade would be more difficult for those countries than for advanced economies. But there was at least a general recognition that discriminatory subsidies, and other protective measures, were to be eliminated in the long term.
The return of North Atlantic industrial policy has more or less blown away that consensus, and the ramifications for the rules-based trading regime will be significant. Many of the provisions of the…
Trade
Self-Reliance and Openness: Core Principles of China’s Third Plenary Session
The Third Plenum communique from the CCP indicates a prioritization of stability and compromise in response to China’s economic challenges. It highlights the concept of Chinese-style modernization and establishes political guidelines for balancing regulation and market forces.
The CCP’s Third Plenum communique signals a focus on stability and compromise in the face of China’s economic challenges. It emphasises Chinese-style modernisation and sets political directions for balancing regulation and market forces. While not as groundbreaking as previous plenums, it acknowledges the importance of market mechanisms and technological self-reliance, aiming to address issues like high youth unemployment and private sector uncertainty. The communique seeks to navigate the complexities of global competition and domestic innovation, potentially reshaping global supply chains and trade dynamics. Overall, it presents a pragmatic blueprint for China’s economic future.
Source : Self-reliance and openness central pillars of China’s Third Plenum | East Asia Forum
Trade
Trade Prevails Over Political Persuasions in China-Germany Relations
China and Germany maintain a strong bilateral relationship, rooted in economic cooperation despite ideological differences. Recent visits and agreements focus on expanding trade and addressing mutual concerns, navigating challenges while nurturing ties.
Evolving Bilateral Ties
China and Germany share a strong bilateral relationship, rooted in history since 1972. This connection has seen moments of cooperation intertwined with periods of tension. German Chancellor Olaf Scholz’s April 2024 visit underscores Germany’s commitment to fostering this partnership, reflecting a mutual interest in maintaining economic ties despite ideological differences.
Economic Pragmatism
As the second and third largest global economies, China and Germany’s economic interdependence is crucial. Germany emerged as China’s primary trading partner in 2023, with trade values reaching €254.4 billion (US$280 billion). In response to global scrutiny, Germany has taken a balanced approach, emphasizing economic stability over political discord. This was evident during Scholz’s prior visit in November 2022, where his diplomatic tone contrasted with broader EU sentiments.
Facing Challenges Together
Despite increasing public skepticism in Germany regarding China’s global influence and human rights issues, both nations continue to seek common ground. Their October 2023 Joint Statement highlights intentions to pursue cooperation in areas like carbon neutrality and open markets. To navigate these complex terrains, Germany can utilize its institutional frameworks to enhance dialogue, while also considering supply chain diversification to reduce dependency on China. The intertwining nature of their economies suggests that, despite challenges, both countries will continue to prioritize their substantial trade relations.
Source : Trade trumps political persuasions in China–Germany relations
Trade
Fixing fragmentation in the settlement of international trade disputes
Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.
Fragmentation in Global Trade
Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.
Challenges with WTO Dispute Settlement
The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.
The Path Forward for Global Trade
Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.
Source : Fixing fragmentation in the settlement of international trade disputes
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