Trade
The gaping ‘national security’ hole in the world trade regime
Author: Editorial Board, ANU
If a loophole exists, it will be used; if the loophole is used, it will get bigger over time. In the system of rules governing the global economic order, the most dangerous loophole right now is the national security exemption in the World Trade Organization (WTO).
Rescuing the WTO is one of the most pressing tasks facing world leaders today. As Ken Heydon argued earlier this week, the next WTO ministerial conference in Abu Dhabi will be a crucial test. The agenda laid out by WTO Director-General Ngozi Okonjo-Iweala will cover a number of worthy topics, but none of them get to the heart of the crisis around the national security exemption.
In the aftermath of World War II, when the rules of the system were being devised, it made sense to carve out a space within the rules governing international trade for nations to take extraordinary measures if national security dictated. Even the most ardent free-trader would agree that a country at war has the right to restrict the export of weapons and ammunition to its enemy.
The phrasing of the exception, codified in Article XXI(b) of the rules of the General Agreement on Tariffs and Trade (GATT), left room for nations to hide behind dubious justifications for trade restrictions, and the limits were sometimes tested. Most notoriously, in 1975, Sweden tried to protect its local footwear manufacturers by imposing import quotas on certain types of shoes worn by Swedish soldiers, claiming that what would otherwise be deemed a blatantly protectionist form of industrial policy fell under the national security exemption in the trading rules. Back then, at least, Stockholm had enough shame to withdraw the measure only a few years after its introduction.
Today, however, the country most associated with the establishment of the open liberal economic order has lost its sense of shame. Under the Trump administration, the United States invoked the WTO national security exception to justify considerably higher import duties on imported steel and aluminium. As a WTO panel later ruled, there was no ‘emergency in international relations’ to justify the national security exception for Trump’s steel tariffs.
Having lost the case, the United States appealed: but it has since gutted the WTO appellate body by refusing to consent to the appointment of new judges. The body is still effectively on life support, though it has been partially resurrected in the form of the Multi-Party Interim Appeal Arbitration Arrangement, which replicates WTO appellate rules for those who sign on. So far 52 members of the WTO have joined this workaround dispute settlement arrangement, fortunately including the world’s largest trader, China, the European Union, Japan, Canada and Australia.
The Biden administration doubled down on Trump’s national security tariffs with US Trade Representative Katherine Tai trashing the WTO ruling last December.
Increasing use of the national security exemption has the potential to rip a hole in the centre of the global trade order. If any issue can be considered a national security issue — and one only has to think of the increasing list of goods and services that security hawks like to designate as ‘dual use’ — then the rules will offer very little defence against protectionism. And if the appellate body is not restored, and the United States refuses to sign on to a replacement, then the rules-based order could decay around the hole that America has left, and the world economy will continue to fracture along geopolitical lines.
The increasing use of the national security exemption is symptomatic of a broader trend in policymaking towards the subordination of economic policy to geopolitical ends. Massive new subsidies are offered to ‘re-shore’ and ‘friend-shore’ production of goods said to be strategically crucial, like semiconductors. Most of these policies are not vetted by even cursory analysis from economists and are driven almost entirely by strategists who think in zero-sum terms: what China loses, the United States must gain.
The options for reforming the WTO in a way that satisfies the United States are complicated, as Mark Tokola writes in the first of this week’s feature articles. Washington might accept the need for more consultation on its use of the national security exemption in exchange for recognition within the WTO that formal action cannot be taken against countries invoking it. This might be an improvement on the current state affairs, but not a major one.
If the WTO is to remain relevant, it has to…
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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