Thoughts on trade, investment and development from the ARTNeT community

To share your thoughts on particular issues on trade, investment and development, or to respond to any of the posts below, send an email to artnetontrade@un.org.


Martina
Martina Francesca Ferracane

European Centre for International Political Economy

Measuring Digital Protectionism

Protectionism has gone digital. With the transition of our economies to the online world, it was only a matter of time before governments would find new ways to protect their companies from foreign competition in this new important economic sphere. Over the last decade, we have seen a rising number of trade restrictions targeting digital goods and services. The tools used are both traditional trade restrictions, such as tariffs on digital goods and restrictions on investment in digital sectors, and new types of restrictions. These include, among others, measures that block the provision of services online, restrictions on movement and processing of data, requirements to disclose source code, technology mandates, restrictions on online payments and obligations for internet intermediaries to monitor the behaviour of the users on their platforms.

While these measures have become mainstream over the last decade, it is not yet clear what measures are imposed with the objective to restrict trade and which can be justified by legitimate non-economic policy objectives. The complexity of the internet makes this analysis especially complicated and creates a grey area prone to abuse to impose trade barriers.

At the European Centre for International Political Economy (ECIPE), we took an active role in analysing the raise of digital protectionism and mapping all those measures that restrict digital trade today. The result of our analysis are the Digital Trade Estimates (DTE) database and the Digital Trade Restrictiveness Index (DTRI). The DTE database summarises all those measures implemented in 64 major economies worldwide that restrict digital trade. The database is today the most comprehensive and up to date source to review digital trade restrictions implemented worldwide, listing over 1500 policy measures.

Although the DTE database offers a first good impression of where in the world most measures are located, their precise depth and severity cannot be readily assessed from purely listing them. This is why the DTRI was developed. This is the first index ranking countries based on their openness towards digital trade. The DTRI varies between 0 (i.e. completely open) and 1 (i.e. virtually closed).

The ranking shows that China has the most restrictive policy environment for digital trade, followed by Russian Federation, India, Indonesia, and Viet Nam. These five most restricted countries in digital trade are all middle-income countries. Generally, the index shows that emerging economies are more restrictive than developed economies. On the other side of the spectrum there are small service-oriented economies. The most digitally open economy is New Zealand, followed by Iceland, Norway, Ireland and Hong Kong, China. Being small, these economies are very dependent on global markets.

Sun Xi
Sun Xi

ESGuru

When trade disputes are not real trade disputes

More than one hundred years ago, the West, including the United States, used two Opium Wars and other military actions to force then closed-door Qing Dynasty to open the Chinese market to have free trade with them. Ironically, nowadays while China is becoming a strong advocate of freer international trade and globalization, the “America First” policy is steering world toward protectionism, unilateralism and isolationism.

“Nobody wants a trade war”, wrote Singapore’s Prime Minister Lee Hsien Loong in an opinion piece for the Washington Post recently. This viewpoint is widely echoed by most people, but not necessarily by the United States administration.

It is true that the United States has been suffering a huge merchandise trade imbalance, especially with China. In 2017, this trade deficit surged by 12.1 per cent to USD 566 billion, the highest since 2008, among which 66 per cent (USD 375.2 billion) was with China.

That is unsustainable. However, trade imbalance is a structural and long-term problem and should be viewed with rationality, rather than being dealt with unilaterally, potentially leading to a trade war. If the United States simply wants to narrow its trade deficit, it should lift its ban on exports of high-tech products to China and adjust its domestic industrial structure. However, will it do so?

It is good news that the United States and China have started to negotiate. Optimists believe that a trade war will probably be avoided as it is highly possible for the two countries to reach a compromise. However, pessimists warn that the bilateral frictions far beyond trade are yet to come.

The fundamental dilemma is the “Thucydides Trap” – wherein a rising power causes fear in an established power, which escalates towards a war. To avoid the Trap, China has proposed to build a “new type of major power relations” of “no conflicts and confrontation, mutual respect and win-win cooperation” with the United States, but unfortunately the United States seems reluctant to go along.

There are four pillars underpinning the United States’ dominant power in the world, namely economy, technology, military and culture. China is considered a “strategic competitor” and is emerging as a threat to the United States in almost all those domains.

United States - China relations will remain the world’s most important bilateral relationship for many years to come. The two countries are inevitably going to compete, but it is unwise to politicalize trade disputes and to be enemies. Therefore, let’s “render to Caesar the things that are Caesar’s, and to God the things that are God’s.”

Alberto Posso

Royal Melbourne Institute of Technology University

Preferential trade agreements with labour provisions and labour market outcomes in Asia Pacific

A growing consensus is emerging highlighting that the benefits of international trade are not accruing to everyone within economies with equity. Competition from abroad can often hurt a number of domestic industries, which has prompted many firms to search for cost-savings, potentially resulting in significant downward pressure on wages and labour conditions. A number of governments are attempting to ensure more equitable outcomes from trade liberalization, with labour provisions in trade agreements offered as a solution.

Many trade agreements now contain a wide scope of sustainable development provisions, including labour provisions designed to link labour standards with trade by demanding compliance with certain agreed upon base standards. These tend to include the core International Labour Organization (ILO) labour standards: (a) freedom of association and the effective recognition of the right to collective bargaining; (b) the elimination of all forms of forced and compulsory labour; (c) the effective abolition of child labour; and (d) the elimination of discrimination in respect of employment and occupation (for more information visit the ILO website).

In Posso (2017, 2018), I looked at the relationship between labour provisions in preferential trade agreements and three key labour market outcomes that make up the subject of most labour provision agreements: (i) child labour, (ii) formal employment, and (iii) inequality. The econometric models, which aim to determine whether there is a causal linkage between provisions and the variables of interest, suggest that preferential trade agreements are unlikely to cause improvements in these outcomes.

The problem is that developing economies, where informality, child labour and inequality are arguably worse, exhibit more apprehension about including sustainable development commitments in agreements as well as more stringent enforcement mechanisms. Perhaps one exception is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which incorporates labour market and environmental provisions, as well as governance goals aimed (mostly) at developing countries. However, legal provisions do not always lead to substantive changes.

This is because developing economies face significant capacity constraints in implementing obligations. In particular, data limitations limit the effectiveness of monitoring and evaluating outcomes. Good data will be paramount in future work which needs to focus on the nexus between globalization, international legal agreements and labour market outcomes to understand the consequences of these economic shocks and provide policy initiatives that can adequately prepare segments of the population for, at least, the most common potential negative outcomes.

Charles Woolfson

Linköping University

Brexit trade deal negotiations and labour standards

Following Brexit in March 2019, the UK will be effectively a “third country” for purposes of access to the European Union’s single market, in all likelihood facing some significant additional tariff (and non-tariff) barriers. During a further “transition” period lasting until December 2020, the UK will have the right to negotiate new trade deals with other non-EU states, while simultaneously seeking a comprehensive free trade agreement of its own with the EU. A Canada-style FTA (CETA) is the most likely outcome of these negotiations.

While securing labour standards and decent work comprise a separate chapter (no. 23) of CETA, it also recognizes “the right of each Party to set its labour priorities, to establish its levels of labour protection and to adopt or modify its laws and policies accordingly”. Such FTAs, involving countries at roughly similar levels of trade union rights, preserve “the right to regulate” of both partners and are “voluntary in nature, with no binding outcome”. Where countries have divergent standards, FTAs appear even less protective.

Paradoxically, however, fears of regulatory regime competition from a post-Brexit Britain are uppermost in the minds of Europe’s leaders. A future UK/EU trade deal according to Commission documentation must ensure a “level playing field” in terms of competition and state aid, and encompass “safeguards against unfair competitive advantages through, inter alia, fiscal, social and environmental dumping”. While accepting that a post-Brexit Britain would have “regulatory autonomy” in the future, the Commission is also seeking to limit that autonomy via “non-regression clauses” that will attempt to prohibit the dilution of the existing standards below pre-Brexit levels. Thus, specific “sanctions” and “cooperation procedures” to minimise divergences and prevent disputes in the future are foreseen.

With negotiations on the future trading relationship between the UK and the EU about to commence, FTA regulatory questions will determine the ultimate shape of any Brexit deal. The UK minister responsible for negotiating Brexit, David Davis, has reiterated that the UK is not seeking an “Anglo-Saxon race to the bottom” in environmental and labour standards. Yet such assurances are contradicted by internal government policy proposals referring to “maximizing regulatory opportunities” to boost the UK economy following Brexit, specifically mentioning removing employment and labour protections. Indeed, new trade deals offer opportunities to foreign parties to leverage significant concessions. Here, regulatory issues, particularly with regard to labour standards, may be especially vulnerable in a context of weak regional and global governance.

Daniela Santibáñez Godoy

e-Residency Estonia

Bridging the digital divide through e-Residency

In recent years, the power of digitization in international trade to enable sustainable development has been much touted. However, beyond the rhetoric, small businesses and entrepreneurs, particularly in developing countries, still find it difficult to take advantage of the opportunities for trading online. Barriers to accessing finance for trade and efficient delivery services, together with the lack of regulations to govern the flow of data and goods, among others, preclude small businesses from entering large consumer markets.

Firms in developing countries, as well as least developed and land-locked economies, can greatly benefit from accessing the global market if the regulatory frameworks and infrastructure to enable their growth are set in place and enforced.

Even when it comes to trade in physical goods, trade facilitation needs to be aided by digitization to overcome geographical constraints; it is not about pursuing innovation for its own sake, but about skillful implementation of policies that can enable seamless adoption of digital technologies.

How, then, can we assist countries in bridging the digital and knowledge divide in order to establish a robust environment for both domestic and cross-border online trade to flourish?

One example is the e-Residency programme, which operates based on the premise of open digital borders. The programme helps people to benefit from the trust and regulatory frameworks of the European Union, regardless of place of residence or where they were born. Anyone in the world who owns a passport can apply in just a few minutes to become an e-resident of Estonia. As 99 per cent of the services offered by the Estonian Government are available online, by becoming an e-resident people gain the right to use many of these e-services as if they were Estonian citizens.

The main value of e-Residency is granting the ability to remotely establish a company and manage it online from anywhere in the world. Most people choose to apply for e-Residency to gain access to financial services that they could not normally access because of their location. For example, by having a company in Estonia, with a European digital business payment account linked to it, businesses and entrepreneurs can benefit from an enabling and affordable business environment. For instance, they can access international payment services providers and apply for funding otherwise reserved to European residents. As of today, almost 35,000 people from 154 countries have applied to become e-residents, and 20 per cent of e-Residency companies that have been established in Estonia come from the Asia-Pacific region.

Geographical location continues to be a huge deterrent to conduct business, but innovations like e-Residency make it easier for entrepreneurs in every country to succeed in the global market. People now have the opportunity to become active players in the growth of their countries’ economies, while digitally accessing state-of-the-art financial and public services.

Governments in the Asia-Pacific region can work on addressing their infrastructural and regulatory needs, while their citizens benefit from entering the global market by remotely using the platform of the European Union.

Biswajit Dhar

Jawaharlal Nehru University

Steel tariffs to further soften multilateral trade rules

President Trump’s decision to increase import tariffs on steel and aluminium to 25% and 10% respectively, raises a number of critical issues that are central to the global trading regime. The fundamental issue is the unilateral nature of these tariff hikes. Tariffs were raised also on two other products, namely washing machines and solar cells and modules. There are indications that this list may get longer. Tariffs on steel and aluminium have been raised by invoking the provisions of Section 232 of the Trade Expansion Act of 1962 that allows the Administration to protect domestic industries for “national defense” and “national security”. Tariffs on washing machines and solar cells are being raised by using Section 201of the Trade Act of 1974, which sanctions use of safeguard measures.

Imposition of import tariffs on steel and aluminium is a real source of concern as “national security” has been interpreted to include “general security and welfare of certain industries, beyond those necessary to satisfy national defense requirements that are critical to the minimum operations of the economy and government”, which can easily be (ab)used to include more products. Additionally, egregious is President Trump’s insistence that the tariff increases are for an “unlimited period”.

However, Canada and Mexico with whom US is currently renegotiating the North American Free Trade Agreement (NAFTA) have been exempted from the high tariffs on steel and aluminium tariffs. The fact that its FTA partners (such as the Republic of Korea) are not spared, indicates that US could be using steel and aluminium tariffs as a negotiating chip in the NAFTA renegotiations.

In fact, a suggestion that US would push for “reciprocal tax” against countries applying tariffs on (any?) American products is bound to draw ominous parallels with the Smoot-Hawley Tariffs, invoked in 1930, triggering a trade war with a collapse of world trade. In a throwback to the 1930s, major trade partners of the US and Japan have spoken against the move to increase tariffs. The former is mulling 25% tit-for-tat levies on a range of consumer, agricultural and steel products imported from the US, including American icons like Harley-Davidson Kentucky bourbon and Levi’s jeans.

The Smoot-Hawley Tariffs happened in the absence of any global trade rules. But, in the past few decades, threats of American protectionism occurred while both the US and its partners had shown their commitment to adhere to the trade rules built into the World Trade Organization, and ultimately, corrective measures could be taken by sticking to those rules. The current unilateral act of protectionism is taken without any regard of the rules-based multilateral system. In fact, this action coupled with other (non)actions should be seen as de facto rejection of the multilateral trading system by the current United States administration. One can only hope that other Governments are not (trade) war thirsty.

Patrick Low

University of Hong Kong

Preserving multilateralism through PTAs

Multilateralism has been the backbone of international trade relations for seven decades. We usually associate multilateralism with non-discrimination, referred to in GATT/WTO circles as the most-favoured-nation (MFN) principle. That principle has been applied pragmatically and two prominent institutionalized exceptions are permitted. One is MFN departures for regional integration agreements and the other is for special and differential treatment to support development in lower income economies.

These exceptions have caused their fair share of contention over the years, but they have never seriously challenged the idea that non-discrimination must remain the point of departure – the essential principle – underpinning multilateralism.

That was until now. The WTO has spent the last decade and a half in virtual negotiating deadlock. Results have been few and far between, such as the Trade Facilitation Agreement negotiated in Bali in 2013, and the agreement on agricultural export subsidies in Nairobi in 2015.

Some are beginning to question the very essence of the multilateral model. Merely pondering the nature of the void that abandonment of multilateralism would leave, and the economic costs that would ensue, should be enough to focus minds.

Preferential Trade Agreements (PTAs) can complement the multilateral trading system, but they are no substitute. They overlap, create multiple trade regimes for the same jurisdictions, and risk market-fragmenting regulatory divergence. They can be exclusionary and suffused with geopolitics as a direct result of their preferential nature.

Above all, PTAs would be set adrift without the mother ship of the multilateral trading system. That essential dependency is often poorly understood.

The good news is that many countries grouped together at the WTO’s eleventh ministerial meeting in Buenos Aires last December to launch self-starting initiatives in the areas of electronic commerce, investment facilitation, and the promotion of micro, small and medium enterprises. These initiatives will explore the issues and possibilities for negotiations on strengthened rules. They are designed to be inclusive, and all are welcome to join them.

This new dynamic offers the best hope for preserving multilateralism that we have seen in a long time. It builds on the old idea of non-discriminatory “critical mass” trade deals such as in telecoms and information technology.

Asia can play a critical role in shaping agreements that are truly inclusive, non-discriminatory, and serve the interests of all parties.

Simon J. Evenett

St. Gallen University

Kick Starting Multilateralism

Support for multilateral solutions to trade policy problems is high among analysts in the Asia-Pacific region. Governments too say they prefer multilateralism over unilateral policy shifts. But what are we prepared to do about it? We are taught in game theory that talk is cheap--and there has been a lot of cheap talk about supporting the WTO in recent years. Indeed, if fine words in summit communiques resolved trade disputes and negotiation impasses, commercial peace would have broken out a long time ago.

Given the multilateral solutions involve give-and-take what initiatives could Asia-Pacific governments--potentially in collaboration with states from other parts of the world--propose that can generate tangible progress at the World Trade Organization in Geneva? Is there any serious appetite for taking on new bindings obligations? If not, then what are the alternative forms of cooperation that can be fostered at the WTO and can they address big ticket (ie. trillion dollar plus) matters of commercial significance. Of course, there may be a case for confidence-building measures that start small and beget further cooperation. But how can ministerial support be sustained without eye-catching initiatives?

Posturing is easy but unproductive. No doubt some will be tempted to repeat one-sided demands of trading partners. This forgets that trade deals are deals--all parties have to change policy. Or, will historians conclude that the appetite for global trade deal-making is over for now and that the populist and nationalist developments in certain industrialised countries and emerging markets were a convenient scapegoat for rot that set in many years ago?

Peter Lloyd

University of Melbourne

Multilateralising Regionalism

Since the early 1990s there has been a steady and continuing creation of new Regional Trading Agreements (RTAs) in the world economy. By contrast attempts to conclude the Doha Development Round of multilateral negotiations have floundered. There is a growing concern that these discriminatory RTAs may be hindering further multilateral liberalisation.

One response has been a drive to “multilateralise regionalism”. This movement began with a 2006 paper by Richard Baldwin. He proposed to extend the range of countries which may benefit from regional trade liberalisation.

One suggestion is to extend cumulation under rules of origin so that more countries supplying raw materials and inputs can benefit from regional liberalisation. Another example is the 1996 Information Technology Agreement which replaced national and regional tariffs on IT goods by multilateral free trade. These were seen as steps to move the world economy to the ultimate goal of global free trade. More recently other policies have come under the rubric. An example is the accession provisions which allow other countries to join an existing RTA. Others cite the development of new rules in RTAs which have subsequently been adopted in the WTO; for example, the Canada-US Free Trade Agreement was the first to includes rules for service trade, a step later adopted in Uruguay Round GATS.

However, these are a rather motley collection of policies, some adopted regionally and some multilaterally. The obvious method of multilateralising regional preferences would be for one or more members of an RTA to extend all the lower regional tariff rates on an MFN basis to all WTO members. However, no countries have agreed to this, partly because it conflicts with the commitment to exchange market access commitments among the regional members and partly because it involves no reciprocity on the part of the rest of the world. Meanwhile RTAs continue to proliferate. This highlights the urgency of resuming multilateral reductions in trade barriers.