Great article in today’s Washington Post about the new toxic global trade environment concerning political risks — involving national security, balance of power, domestic policies. Here are a few quotes.
Investors and companies are facing the most complex global landscape in decades, as political conditions once regarded as enduring give way to profound and unpredictable change.
To varying degrees, governments in the United States, Europe and China are all now emphasizing a greater economic role for the state. That means encouraging — and discouraging — specific commercial activities.
We’re in a very difficult environment for multinational corporations, and look, I think we’re in a very difficult environment for companies that are based outside the United States to invest in the United States. The United States is also thinking of putting more restrictions on.
The speed and scope of change is exceptional. Events that one could imagine that they will never happen, they are happening one after the other.
Two really interesting pieces appeared today on the dramatic change in attitude toward global trade in the US, by both political parties. One in the Washington Post and the other in the Financial Times. Here are the salient excerpts.
“[Disenchantment over trade with China has fed wider disenchantment with global commerce itself; consequently, neither party actively supports new trade promotion agreements anymore.”
“These interventions (new US economic legislation), targeting foreign and domestic companies, are nothing short of revolutionary in a US context. For decades, Democrats and Republicans have trusted market forces …. But the proposed measures, devised through the prism of national security policy must … [have] rigorous safeguards.”
Both the Trump administration and now the Biden administration have attacked the WTO’s dispute resolution system, unjustifiably.
This attack has grown even more intense in the last two months when two panels ruled in favor of China and against the U.S. In both cases the panels rejected the U.S. defense of national security under Gatt Article XXI. (In cases involving Section 232 tariffs on steel and origin markings.) Another WTO panel ruled a bit earlier against the United States concerning its Section 301 imposition of tariffs alleging improper Chinese IPR practices.
All these cases have now been appealed to the defunct Appellate Body process — which the United States caused by blocking appointments to that body.
This has led to the situation where China is now both championing the rule of law in trade relations and the disputed resolution system of the WTO. A system in which the U.S. was the architect.
A good piece that appeared this week discusses this unfortunate foreign policy of the United States. Here are some excerpts.
Such was Donald Trump’s distaste for the WTO that he threatened to pull the United States out of the organization altogether. It’s debatable whether this could be done without the approval of Congress, but the subtleties of Constitutional interpretation were never Trump’s forte. In the meanwhile, his associates dismantled the WTO’s dispute settlement system and challenged many of the basic precepts of the organization including special treatment for developing countries and the use of national security exemptions to aggressively stymie exports from other countries.
President Biden has put far greater emphasis on alliances, the environment, and on human rights. He has shown respect for his allies, and he seems to listen to what they say. One area where little has changed however is trade and this is particularly true with respect to the WTO. Gone are the bombastic rhetoric and pugilistic protectionist actions. In its place is a kind of sneering indifference, a view that supporting, let alone leading the WTO.
The US “effort” at reforming the Dispute Settlement System of the WTO is equally opaque. The Trump administration had deliberately crippled the dispute system by blocking the appointment of the seven jurists who serve on the Appellate Body. While the wider membership was dismayed at the US tactics, Trump administration officials quite skillfully laid out the case against the Appellate Body, convincingly arguing that the AB had been overreaching its mandate and taking up issues not under appeal. What US officials Lighthizer and Shea never explained was how this should be fixed.
The December dispute settlement panel decisions on against the US on its steel and aluminum tariffs will complicate reform efforts. The four cases, in which Lighthizer used a Kennedy administration statute to justify the tariffs on national security grounds, applied against exports from China, Norway, Switzerland, and Norway …. The USTR press release condemning the ruling proved him right. Still, the Biden administration cannot be singled out on this point. Previous administrations had expressed similar indignation at the possibility that WTO lawyers might weigh in on what constitutes the national security interest of a superpower.
Another country that has taken note is China. Filling the void left by the United States has been a hallmark of Beijing’s foreign and economic policy for some time.
This is a good piece in the Wall Street Journal today discussing the U.S. and the WTO’s dispute resolution system. Too bad it describes the Trump-Biden scorn of it. Here are a few statements from this article.
… The globalization boom that began in the 1990s didn’t happen by itself: It was lubricated by the biggest economies’ willingness to write, enforce and obey shared rules of engagement.
… That consensus is now crumbling. The World Trade Organization, the embodiment of this rules-based order, has increasingly been sidelined as countries turn to export controls, subsidies and tariffs to promote domestic industries or kneecap adversaries.
… Many blame this on the U.S., as first President Trump and now President Biden rejected WTO authority and enacted tariffs and subsidies that riled trading partners.
… Biden has governed as a champion of the international order, yet on trade, he has stuck with many of the policies enacted by the avowedly nationalistic Mr. Trump. He has maintained Mr. Trump’s tariffs on China and blocked appointments to the WTO appellate body, which has the final say on enforcement decisions, leaving it unable to function.
… Last month, in two separate decisions, WTO panels ruled that the Trump administration had violated its WTO obligations by imposing tariffs on imported steel and aluminum, and requiring that products made in Hong Kong be labeled as made in China.
… A spokesman for U.S. Trade Representative Katherine Tai criticized the decision. The WTO, he said, had no right to even rule on the U.S. actions. The U.S., he noted, has for more than 70 years insisted that it, not the WTO, gets to decide what qualifies as national security.
… The U.S. had originally pushed for the WTO’s binding dispute mechanism out of frustration that under its predecessor, GATT, enforcement decisions could be easily blocked by any one country.
… The unintended consequence is that countries unhappy with U.S. trade laws, rather than negotiate, sue the U.S. at the WTO, and often win because WTO judges take an expansive view of their own authority to interpret and, critics say, make trade law.
… This doesn’t portend a return to the 1930s, when countries dramatically raised tariffs and retreated into autarky. The WTO still exists, and most members still abide by their commitments. Some have used alternative channels to adjudicate disputes while the appellate body remains defunct.
… U.S. officials say their imposition of trade barriers on national-security grounds won’t precipitate a flood of frivolous copycat actions. Any country making such a claim accepts the right of affected trading partners to retaliate—and would thus think twice. “There’s a self-regulating nature to invoking national security,” one official says, noting that the U.S. faced retaliation for its steel and aluminum tariffs long before the WTO ruled.
… Rather than a single set of rules imposed on fundamentally incompatible systems, such as China’s and the U.S.’s, the world will migrate toward a series of regional pacts.
The WTO dispute Settlement system has jumped back into the news. Big time. Now becoming the epic center of U.S. – China trade issues. Raising the legal issue of national security and trade restrictions.
China has won its case against the U.S. concerning Trump’s (and now Biden’s) Section 232 steel tariffs. The WTO determining that the defense of national security (‘security exception’ Gatt Article XXI) was not applicable.
Almost immediately afterwards China filed a new case alleging violation of WTO rules concerning the Biden administration’s imposition of export controls on the sale of semiconductor chips to China. This also involves the issue of national security and the potential U.S. defense of Article XXII security exception.
The problem is the Biden administration has followed the Trump administration in its disdain for following global traderules and insulting the WTO.
Abstract —As the Biden administration succeeded President Trump’s chaotic and undisciplined trade and investment policies toward China, the last six months of 2022 have seen the most significant development in U.S. trade law and economic policy toward China. These legislative and regulatory developments bring into sharper focus a broader and more aggressive U.S. legal and regulatory structure fostering industrial policy and confronting China. This change is worrisome. The legislative and regulatory measures emanating from the U.S. in the last half of 2022 are not helpful. They represent a worrisome development, not merely a continuation and extension of Trump’s trade and tariff policies focusing on national security and global politics. They are by far more aggressive, with significant domestic and global implications. They portend a new emerging post-WTO order.
Two recent and really significant government reports have been released (around the time of the U.S. midterm elections) concerning U.S. trade policy focusing on U.S. workers and China.
The first by the U.S. International Trade Commission (October 2022) and the other the 2022 Annual Report by the U.S. – China Economic and Security Review Commission.
The report by the ITC entitled “Distributional Effects of Trade and Trade Policy on U.S. Workers” concluded, in part, “[P]olicies resulting in increased import competition had negative effects on workers in their communities and that imports were competing unfairly, for example, due to dumping or lack of worker protections in exporting countries.” p. 14.
The report by the U.S. – China Economic and Security Review Commission concluded, in part, “China has subverted the global trade system and moved further from the spirit and letter of its obligations under its WTO accession protocol. China’s subsidies, overcapacity, intellectual property (IP) theft, and protectionist nonmarket policies exacerbate distortions to the global economy. These practices have harmed workers, producers, and innovators in the United States and other market-based countries.” p. 175
These reports echo the long-standing Biden administration’s focus on workers and its criticism of the trading system. To me, this is also a continuation of the Trump trade positions with a bit more emphasis on workers. I suspect that as a result of the midterm elections the Biden administration will find more common ground with the Republicans in Congress, and we will see a renewed push for more industry subsidies and restrictive trade legislation (perhaps also restricting the WTO.)
After four years of Trump’s trade wars here are three observations concerning tariffs on Chinese imports: some Chinese imports are surging; Chinese imports hit with 25% tariffs have struggled; imports of semi-conductors from China have cratered. Bottom line, decoupling is not clear. These trends are continuing under President Biden, and some are likely to increase in light of the passage of new legislation concerning semi-conductors.
What can also be said is that geopolitical trends and greater concern with national security threaten globalization as well as notions of free trade.
A good article appeared recently in Foreign Affairs arguing that global trade is now being changed by the end of globalization and the end of neoliberalism. I seem to agree with most of the arguments. But I’m concerned about how clearcut these propositions are and how inevitable they are. I recall the arguments of the early 1990’s concerning “the End of History.” Does the end of globalization mean a new regionalism or more protectionism? We’ll see. Here are some excerpts from this article.
Both parties have until quite recently pursued policies … deregulating global finance, striking trade deals such as the North American Free Trade Agreement, welcoming China into the World Trade Organization (WTO).
Encouraging American manufacturers to move much of their production overseas.
Free-market globalism was of course pushed in large part by the powerful multinational companies best positioned to exploit it.
But neoliberal policies also created immense inequalities within countries.
Neoliberalism’s agnosticism about place is striking, given the origins of the political philosophy. It emerged in Europe in the 1930s, when nations were turning inward and international trade was breaking down.
The notion that trade should be a handmaid to domestic policy interests fell out of favor during the Clinton administration, when the United States struck a series of trade deals and pushed for China’s entry into the WTO.
What is clear is that globalization is in retreat, at least in terms of trade and capital flows.
Muscular industrial policy will be increasingly common in the post-neoliberal world.
Even in the United States, most Democrats and a growing number of Republicans believe that government has a role to play in supporting national competitiveness and resilience.
As U.S. policymakers and business leaders seek to address these challenges, they must push back against conventional economic thinking.
Instead of assuming that deregulation, financialization, and hyperglobalization are inevitable, they should embrace the coming era of regionalization and localization and work to create productive economic opportunities.
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