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Initially, many countries responded to the pandemic and increased demand for medical goods—such as face masks and ventilators—with trade measures that restricted the free movement of those products. While many of those measures were eventually removed, they undoubtedly made it more difficult for products to go where they were most needed. Economic recovery discussions in the U.S. and around the world are now focusing on how to prevent such a recession in the future.

While countries may be tempted to close themselves off to the world and international supply chains, doing so will make it more difficult and more costly for their citizens to get what they need. The Heritage Foundation’s Index of Economic Freedom has demonstrated for more than 25 years that economic openness yields better results for individuals around the world. The same is true for countries that reduce barriers to trade and allow individuals to exchange freely with the world. Policymakers around the world should work to eliminate barriers to trade as economies recover from the pandemic.

To read the full issue brief, click here.

Tori K. Smith is a Jay Van Andel Trade Economist for The Heritage Foundation.

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As a signatory member of the WTO agreements, the United States has committed to abide by WTO rules and disciplines, including those that govern domestic farm policy as defined in the AoA. Since the WTO was established on January 1, 1995, the United States has generally met its WTO commitments with respect to allowable spending on market-distorting types of farm program outlays.

What Is the Issue?

The U.S. government provided up to $60.4 billion in ad hoc payments to agricultural producers cumulatively in 2018, 2019, and 2020, in addition to existing farm support. These payments have raised concerns among some U.S. trading partners, as well as market watchers and policymakers, that U.S. domestic farm subsidy outlays might exceed its annual WTO spending limit of $19.1 billion in one or more of those three years.

Compliance with WTO commitments is based on the total spending under all U.S. farm support programs for each crop year, but subject to certain exemptions (described below). From 1995 through 2017, the United States has met its WTO commitments; however, this compliance has relied on use of the available exemptions in several years to exclude certain domestic support spending from counting against the spending limit.

The United States notified an average of $15.4 billion in annual domestic farm support (prior to exemptions)—or cumulatively, $46.1 billion—during the recent three-year period from 2015 to 2017. New spending of up to $60.4 billion under U.S. government ad hoc payment programs— that the United States may have to report, and which would be in addition to the traditional farm support programs—could more than double the amount of annual domestic support subject to the spending limit in 2018 through 2020. This new ad hoc spending includes the 2018 Market Facilitation Program (MFP), valued at $8.6 billion; the 2019 MFP, valued at $14.5 billion; the two 2020 Coronavirus Food Assistance Programs(CFAP-1 and CFAP-2), valued at up to $16.0 billion and up to $14.0 billion, respectively; and the 2020 Paycheck Protection Program’s (PPP’s) forgivable loans to agricultural interests, valued at $7.3 billion.

CRS analysis (described in this report and based on available data) indicates that U.S. domestic farm support outlays were likely within the agreed-to WTO spending limit of $19.1 billion in 2018, but could exceed the limit in 2019 depending on the U.S. Department of Agriculture’s (USDA’s) notification strategy. In 2020, U.S. non-exempt domestic support outlays appear likely to surpass the spending limit if a typical notification strategy is used by USDA.

To download the full report, please click here. 

Randy Schnepf is a Specialist in Agricultural Policy at the Congressional Research Service. 

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If you have questions or need additional information, Simon and his colleagues can be reached at: simon.evenett@unisg.ch

CV-export-restrictions-10-April-2020

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After several pilot programs, China began constructing a nationwide social credit system in 2014, guided by a document issued by China’s cabinet, the State Council, Planning Outline for the Construction of a Social Credit System (2014-2020). The plan describes the system as necessary to build “trust” in the marketplace and broader society, and establishes a 2020 implementation deadline. Since the plan was published, the social credit system has developed into two connected but distinct systems: a system for monitoring individual behavior, still in early pilot stages, and a more robust system for monitoring corporate behavior: the Corporate Social Credit System (SCS).

What is China’s Corporate Social Credit System?

The Corporate SCS is currently a network of initiatives operated by state and private actors at the national and local levels, connected by shared data platforms and a common goal of regulating corporate behavior in the Chinese market. The network’s overarching structure consists of three components:

Data Aggregation. A firm’s social credit profile is the aggregate of potentially hundreds of data points compiled by dozens of government entities. In October 2015, the National Development and Reform Commission (NDRC), China’s powerful economic planning agency, launched the National Credit Information Sharing Platform (NCISP). The NCISP, operated by the NDRC in cooperation with 45 other government ministries, serves as the data “backbone” of the Corporate SCS, integrating all national and locallevel corporate regulatory data. To structure the database, all companies registered in China have been assigned a Unified Social Credit Code—a common identifier used across all datasets linked to the Corporate SCS.

Evaluation. As government departments collect information on firms, they create “blacklists” of firms that are found to have violated regulations or engaged in illicit financial behavior. National and local government departments have a wide mandate to create blacklists for violations that fall under their jurisdiction. Consequently, there are hundreds of official blacklists covering everything from severe offenses, such as tax evasion and falsifying emissions data, to minor offenses such as failing to file a change of address. Some departments also publish laudatory “redlists” of firms with exemplary records, such as the State Taxation Administration (STA) “Grade A Taxpayer List.” The National Enterprise Credit Information Publicity System (NECIPS), a public online database run by the State Administration for Market Regulation (SAMR), records each time a firm is added to or removed from a blacklist or redlist. Firms placed on multiple blacklists or that commit particularly serious offenses can be added to SAMR’s forthcoming “heavily distrusted entities list”—the closest analogue to a national blacklist.

Joint System of Punishments and Rewards. The primary enforcement mechanism of the Corporate SCS is a “joint system of punishments and rewards,” a set of legal cooperation agreements by which government agencies enforce each other’s blacklists. Under this framework, a firm blacklisted by the STA for tax offenses can be subject to customs penalties and more frequent financial audits based on cooperation agreements between the STA and China’s customs and financial authorities. Firms on the STA’s “Grade A Taxpayer” redlist, on the other hand, are not only eligible for expedited and less costly tax filings, but are also eligible for other benefits, such as customs fee waivers and low-interest loans. The system is designed, in the words of President Xi Jinping, “to make everything convenient for the trustworthy, and ensure the untrustworthy cannot move a single step.”

How is the System Being Implemented?

Although much remains to be done and data sharing gaps persist, reports indicate that China’s Corporate SCS is moving beyond its pilot stages and is on track for at least partial implementation in 2020. Many laws passed and regulations issued since 2014 include clauses stating that non-compliance will be recorded in the Corporate SCS. In July 2019, the State Council issued Guiding Opinions on Accelerating the Building of the Social Credit System, which urges government agencies to “fully employ next-generation information technologies such as big data and artificial intelligence to achieve comprehensive credit monitoring.”

China’s central government has only issued general guidelines for the buildout of the Corporate SCS. Consequently, no single standardized national social credit score is currently assigned to companies. Instead, various national and local government entities, as well as some third party companies, are issuing their own social credit ratings to firms based on NCISP and NECIPS records (Table 1). In September 2019, the NDRC announced it had completed its first “social credit evaluation” of 33 million domestic Chinese firms and assigned each of them a “Comprehensive Public Credit Rating.” This NDRC rating is the closest analogue to a national corporate social credit rating, but government documents indicate that it will only serve as a baseline for corporate social credit evaluation and will not take precedence over local or sector specific ratings.

Multinational firms are already subject to the system’s data reporting requirements, according to the U.S.-China Business Council and the EU Chamber of Commerce. Some are already being rated by third-party companies authorized to issue corporate social credit reports: one such company, Xinhua Credit, launched an English-language version of its web portal in September 2019, providing one of the first platforms for non-Chinese firms to access corporate social credit data. 

Policy Implications

New Government Market Access Controls. Chinese officials and some international observers contend that the Corporate SCS may create a more level playing field by merging domestic and multinational firms into a single, nominally more transparent regulatory regime. Certain provisions and rating criteria, however, could be used to discriminate against multinational firms, including for political purposes. For example, the Civil Aviation Administration of China pressured multiple international airlines in early 2018 to change their websites’ descriptions of Taiwan, stating that failure to comply would be recorded in each airline’s social credit records. Additionally, SAMR’s “heavily distrusted entities list” includes provisions that might be used to target U.S. firms. The list will include, for example, firms that “threaten national and public interest” or “infringe on the rights and interests of consumers.” Two U.S. companies—FedEx and Flex Ltd.— were accused of the latter, following supply disputes with Chinese telecommunications firm Huawei in mid-2019.

The NCISP also includes political data that tracks the number of Communist Party members employed by firms; firms that hire fewer Party members or avoid Party building activities may be penalized under the Corporate SCS framework. The Corporate SCS may also lead to a more opaque market access regime and increase compliance costs for U.S. firms operating in China. A recent report on the Corporate SCS published by the EU Chamber of Commerce estimates that multinational firms in China will be subject to approximately 30 different ratings under the Corporate SCS, the requirements of which will be dispersed across numerous government documents. Firms are also required to disclose to the Chinese government detailed data and other information about their operations and capabilities, including IP data related to patents and copyrights.

Expansion of China’s Economic Influence. The State Council’s 2014 Planning Outline explicitly identifies the Corporate SCS as a means of “enhancing China’s soft power and international influence.” To that end, Beijing has framed “credit cooperation” as a central component of its Belt and Road Initiative (BRI) and is working to export the Corporate SCS more broadly. Several countries in Asia and the Middle East participating in the BRI have engaged in credit cooperation initiatives organized by the NDRC. Saudi Arabia, a strategic U.S. partner, is constructing its own Corporate SCS as part of its BRI cooperation with China. If the Corporate SCS is exported more broadly along the BRI, the Chinese government could potentially monitor and influence the behavior of U.S. firms and their interactions with Chinese companies in global markets, even if they are not directly operating in China.

Select Legislation in the 116th Congress

In the 116th Congress, the UIGHUR Act of 2019 (H.R. 1025) includes a provision that requires the Department of State to submit a report to Congress detailing the social credit system’s potential impact on the geopolitical and economic interests of the United States. Additionally, the Hong Kong Human Rights and Democracy Act of 2018 (H.R. 3289 and S. 1838), in its current form, requires the Department of Commerce to conduct an assessment of whether dual-use items subject to U.S. export control laws are being used to develop China’s social credit system.

To read original report, click here

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“From logistics, to finance, to informatics, services have become the indispensable backbone of our economies. Services generate more than two-thirds of economic output.  They account for more than two thirds of jobs in developing countries, and four-fifths of employment in developed ones.

“But services also play an increasingly important role in international trade. Global value chains for merchandise could not function without logistics and communications services. And thanks to digitalization, services that once had to be delivered face-to-face, like education, can now be delivered remotely.Yet services are often overlooked in discussions on global trade, and the extent of their contributions to global trade is not always fully appreciated. This report attempts to remedy this oversight.”, said DG Azevêdo in his opening remarks.

His full speech is available here.

The report underlines that trade in services – ranging from distribution to financial services -can help countries boost economic growth, enhance domestic firms’ competitiveness and promote inclusiveness. It illustrates how the share of services in international trade has continued to grow, and how technology, climate change, rising incomes and demographic changes will have an impact on services trade in the future. It also suggests ways to maximize the potential of services trade globally in the years to come.

On average, services account for about half of GDP worldwide. For developed economies, they account for around three-quarters of GDP and their proportion is increasing rapidly in developing economies.

According to the report, services trade has grown 5.4 per cent per year since 2005, while trade in goods has grown at 4.6 per cent on average. Trade in computer services and research and development have recorded the most rapid annual growth over the past decade. According to the WTO Global Trade Model, a new quantitative trade model used by the WTO to make projections about global trade, the share of services in global trade could increase by 50 per cent by 2040. This is thanks to lower trade costs and the reduced need for face-to-face interaction due to digitalization. It is also dependent on policy barriers to services trade being lowered.  

Many developing economies are becoming increasingly services-based and their share of world services trade has grown by over 10 percentage points since 2005. However, services trade is concentrated in five developing economies – China; Hong-Kong China; India; the Republic of Korea and Singapore – accounting for over 50 per cent of developing economies’ services trade in 2017.

The report says that services trade may help women and micro, small and medium-sized enterprises (MSMEs) play a more active role in world trade, particularly in developing economies, helping to reduce economic inequality. When MSMEs in developing countries start exporting services, they are on average two years younger than manufacturing firms. However, they export less than 5 per cent of total sales. Services are the main source of employment for women. However, the service sectors that account for most women employment have been so far among the least traded.

Despite their decline by 9 per cent between 2000 and 2017, barriers to trade in services remain much higher than in goods trade. This is largely due to the limited possibilities to supply certain services across the border and the regulatory intensity of many service sectors.

Technologies are key drivers of services trade, enabling cross-border trade of services that have traditionally needed face-to-face interaction. Digital technologies are also reducing the cost of trading services. The report finds that if developing countries are able to adopt digital technologies, their share in world services trade could increase by about 15 per cent by 2040.

The report notes that policy barriers to services trade – mainly regulatory measures –are much more complex than in goods trade. The authors of the report note that for services trade to be a powerful engine of economic growth, development and poverty reduction international cooperation will need to be intensified and new pathways will need to be found to advance global trade cooperation and make services a central element of trade policy.  

The report can be downloaded from the WTO website and printed copies are available through the WTO Online Bookshop.

An executive summary of the report is available here.

Read more about services trade in the WTO here.

To read original article, click here.

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The survey results this year are decidedly mixed. While actual business performance was strong in 2018, confidence in the future has weakened considerably. Investment is slowing and revenue growth expectations are lower than in recent years. China’s regulatory environment has improved and its growing consumer market is still a lure. However, market access barriers still impede foreign businesses and over a quarter of members are redirecting investment originally intended for China.

Business Performance: Profitability in 2018 remained consistent with previous years, with 76.8% of companies reporting profits. Logistics companies all reported profits, as did 93.3% of chemicals firms and 89.9% of pharmaceuticals, medical devices and life sciences firms. Real estate, engineering and construction services fared poorly, with only 36.4% profitable.

Revenue growth estimates for 2019 are weak. Only 50.5% of companies expect revenues to beat their 2018 numbers. 27.1% of companies anticipate lower revenues, markedly up from the 6.1% that projected lower revenues for 2018. 47.6% of automotive companies anticipate lower revenues.

Five-year optimism dropped by one fifth to 61.4%, against historical rates of 80-90%, while pessimism about the future rose by 14.0 percentage points. The most downbeat industries included non-consumer electronics and chemicals.

Investment: 47.1% of companies expect to increase their China investment in 2019, versus 61.6% in 2018. 22.5% of manufacturers plan to decrease investment in 2019.

Challenges: Over the next 3-5 years, 57.8% of our members rated an economic slowdown as their biggest challenge, with U.S.-China tensions a close second (52.7%).

In many areas, China’s regulatory environment is better, though difficulty obtaining required licenses (56.7%), a lack of IPR protection and enforcement (56.4%) and procurement practices favoring domestic competitors (51.3%) were viewed as hindrances by more than half of respondents.

Operational challenges have decreased, with inefficient government bureaucracy (down 22.0 percentage points) and corruption and fraud (down 20.4 percentage points) seeing the most progress. But these are still viewed as hindrances by 56.5% and 48.6% of respondents, respectively.

Rising costs (90.3% viewed as a hindrance) and domestic competition (80.9%) remained the top two challenges for the third year in a row.

69.4% of businesses believe that their Chinese competitors are faster to market. 71.2% of respondents believe their product quality is more advanced than at competing Chinese firms.

35.6% of survey respondents see the U.S.-China trade tensions continuing for 1-3 years, and 12.7% expect them to continue for 3-5 years. 16.9% believe the trade tensions will continue indefinitely.

Opportunities: 59.2% of respondents said increasing consumption will be the top factor to benefit their industry in the next 3-5 years, a slight increase from last year (58.0%) and the year before (56.5%). Similarly, 40% of those increasing investment in China in 2019 report doing so due to the growth potential of the Chinese market.

Policy & Trade Environment: 53.4% of companies say that they are either delaying or reducing investment as a direct result of the U.S.-China trade tensions, with only 4.5% increasing investment in response. Over a quarter of respondents (26.5%) have redirected investments originally planned for China to other locations in the past year – up 6.9 percentage points from last year.

The technology, hardware, software and services industry reports the highest level at 40.0%.

28.9% of members believe expanded government dialogues would best help the U.S. achieve its trade objectives with China, and 23.2% chose investment and market access reciprocity as the most effective tool.

INTRODUCTION

The tariffs imposed by the U.S. and China had little impact on company profitability in 2018, but in combination with the government’s deleveraging process, their impact is being felt now. Revenue growth projections have lowered, optimism about the future has waned, and many companies are redirecting investment originally planned for China. Thirty percent of members believe that the tensions in the U.S.- China relationship will continue for three or more years, a worrying outlook given the gains from 40 years of trade.

Despite the travails created by the trade war and a slowing economy, many American companies still see a profitable future in China. The allure of China’s consumption story remains intact, so too the government’s commitment to improving lives. Policy changes in healthcare have opened and accelerated access to best-in-class drugs, and American drug companies have benefitted as a result. Three-quarters of pharmaceutical and medical device firms expect increased revenues in 2019.

The record therefore is mixed. While levels of optimism are the lowest in many years, nearly half of companies are increasing investment in 2019. Even though an economic slowdown is our members’ greatest fear for the next three to five years, many businesses are expanding outside tier-1 cities. Global supply chain disruptions are spurring manufacturers to rethink their strategies, and many are diversifying production out of China. Yet others, emboldened by a weaker renminbi see fresh opportunities.

Still, with no sign of a trade agreement, 2019 will be a difficult year; without a trade deal, 2020 may be worse. The majority of our members are opposed to the tariffs, preferring that China and the U.S. engage in dialogue to resolve outstanding trade and investment issues. However, a significant percentage believes that the U.S. government should use reciprocity as a tool to achieve its trade objectives. The causes of their dissatisfaction are the same problems that have plagued foreign businesses for years, and which China has failed to properly address.

Market access, for example, remains restricted. Obtaining licenses is also not easy, report 56.4% of our members. And 56.0% of companies say that a lack of IPR protection and enforcement remains a hindrance to business. Alleviating these problems would address some of the American government’s primary complaints about China’s unbalanced trade and investment environment.

China has made progress. Members report that the regulatory and operating environment has improved in several areas, including better tax administration. Corruption and fraud are less of a concern than in the past. Such improvements in the business environment don’t just benefit U.S. companies.

If China made similar progress in transparency, rule of law and better protection of intellectual property, it would spur both domestic and foreign companies to invest more. It would also encourage some of the companies now leaving to instead remain.

To read the original report, click here

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In the early 2000s, the Chinese government actively promoted outbound investment as part of its “Going Global”strategy, which encouraged Chinese private and state-owned enterprises to acquire technologically advanced companies in OECD countries and aggressively pursue opportunities to invest in poorer countries’ natural resource wealth and infrastructure. By 2016, China had become a major outbound
investor, with outward investments reaching over $200 billion, or almost 2 percent of Chinese GDP.

But since 2016, growing concerns over capital flight and associated depreciation pressure on the Chinese renminbi have led China to toughen restrictions on outward investment. There is also a growing perception in the United States and Europe that China under President Xi Jinping has turned back toward authoritarianism. China’s rising economic power and lingering doubts abroad about its long-term political and economic intentions have prompted US and European governments to implement several new screening and evaluation measures for foreign investments, mostly targeted (effectively if not explicitly) toward Chinese investors. These include the 2018 congressional overhaul of the US government’s Committee on Foreign Investment in the United States (CFIUS) and export control processes and the introduction of the first common inward investment framework in the European Union in 2019. As a result, Chinese investment levels, especially in the United States, have declined dramatically in recent years. Adam Posen (2018) had highlighted the decline in FDI to the United States early on.

Chinese outward investments, especially in the United States, are unlikely to reach the peak levels of 2016 in the foreseeable future, and US and EU governments will likely never fully believe Chinese investors are implementing merely a business-driven investment strategy.

This Policy Brief analyzes the most recent trends in Chinese investments in the United States and the European Union and reviews recent political and regulatory changes both have adopted toward Chinese inward investments. The final section explores the emerging transatlantic difference in the regulatory response to the Chinese information technology firm Huawei. Concerned about national security and as part of the ongoing broader trade friction with China, the United States has cracked down far harder on the company than the European Union.

To read the original research: Click here

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