Rapid economic expansion, generally accompanied by increased trade, has reduced income disparities and levels of inter-country inequality. The Sustainable Development Goals (SDGs) and the 2030 UN Agenda for Sustainable Development both specifically mention the role trade plays. However, the impact of trade on inequality may not be consistent. National and multinational policy also play a major role in the differences in outcomes. For instance, the regulations controlling market access and entry conditions and the uneven distribution of earnings across value chains in a trade scenario may benefit certain countries while harming others. 

Therefore, a new approach to trade policy should be considered in the context of growing inequality and advancement towards the SDGs. Such disparities have been made worse by the COVID-19 pandemic and trade disruption, which has had a significant negative impact on MSMEs. Hence, the post-pandemic trade policy should promote MSMEs’ integration into the global market, allowing them to compete more effectively on a global scale. 

International Trade 

The years preceding the pandemic saw a drop in international trade growth. From 1990 to 2010, the contribution of trade to the global GDP grew at a 2% but shrank by around 0.9% between 2010 and 2020. That trend was somewhat accelerated by the pandemic. Notably, 2020 saw the largest trade and output volume declines since World War 2. In the first half of 2020, both global industrial production and goods commerce decreased. 

Despite tensions and policy uncertainty, the global trade is expected to grow by 2 to 4% in 2022, closely tracking the expansion of the global economy. However, a convergence of continued supply chain issues like aggressive monetary policy, reduced demand for consumer durables and elevated freight costs would cause a substantial downturn starting in 2021. 

Although the global economy was on the road to recovery after the pandemic, most of the G20 countries are forecasting a considerable output gap for 2023 compared to the pre-COVID trend.

Chances of an early or short-term reversal of the current trend have been severely hampered by recent geopolitical uncertainty. These uncertainties intensified the rising price pressures on the historically high prices of the several commodities in the global market. Fuel prices spiked around 80% between March 2021 and the first half of 2022. The prices for other commodity groupings also rose positively YoY for the majority of the same period. As a result, the UNCTAD Commodity Price Index (UCPI) reached all-time high levels in August 2022.

The falling GVC participation and the subsequent GVC contribution to the global GDP led to the recent decline in global trade. The years 2018 – 2020 indicated significant concerns that can put the regular operation of GVCs and commerce in danger. There were significant commercial uncertainties during this time due to trade restrictions, sanctions, and natural disasters in key GVC cities.

Although overall trade has increased recently, significant variations exist among products, industries, and trading relationships. Supply chains have come under pressure as a result of the different impacts across goods, services, and trading partners. 

Opportunities and Imperatives 

In 2020, services trade decreased more than that of products since travel, hospitality, etc. were scarce and witnessed a slower rate of recovery. Thankfully, trade in online services soared.

Telecommunications, computer, and information services kept growing on the back of increased demand during the pandemic. Globally, they grew by 19% in 2021, more than doubling their growth from the year before. In-house collaboration, B2B and B2C networking, and digital trade are frequently supported by these services. 

These recent developments in ICT growth and digital service delivery offer a rare chance to advance Trade 4.0 based on the rise of digital infrastructure in developing economies. These services could provide an alternative to the existing GVC participation’s significant reliance on natural resources, particularly in developing economies. 

Challenges 

In a time of varied geopolitical situations and disruptions in supply chains owing to the pandemic, climate related disasters, and weaponization of trade, there is need for nations as well as businesses to shift their models of external engagement. Trade that is fostered through dependable, stable and flexible supply chains with minimal risks has the potential to support the growth of all countries and the world at large, thereby addressing the recalcitrant issue of poverty alleviation and generating resources for climate action.

 International trade must address the following key challenges: 

• Building resilient and sustainable GVCs: Value chain disruptions have expanded along with the size and complexity of the GVCs. To avoid such interruptions, better supply chain management, enhanced trade facilitation, and supply chain diversification are required. Techniques to reduce disturbances and react quickly to them should also be promoted. 
• Trade facilitation and connectivity: With the increased use of digital technologies, it is important that trade across borders becomes easier, more transparent and less costly. This can be carried out through enhanced use of new technologies, including Industry 4.0 technologies of artificial intelligence, big data, cloud, and others, in the systems and processes for trade. An ecosystem for digitalization at the borders that is integrated across the world is the need of the hour. These adjustments would create new opportunities, such as stronger MSMEs integration in trade.
• Promoting services trade: With most economies now being dependent more on the services sectors for their growth rather than the agriculture or manufacturing sectors, services trade becomes central to economic growth. Trade in services has increased more rapidly than that in products since 2011; however, the flow of services across borders in the different modes of delivery remains a challenge due to different definitions, regulations, and policies. 
• Enhancing MSME participation: In most countries, micro, small and medium enterprises make up the bulk of the enterprise sector and contribute significantly to jobs and exports. However, they are often unable to understand international trade or participate effectively in global value chains due to various gaps in information, finance, competitiveness, and so on. Global organizations must endeavor to make global trade more welcoming to MSMEs, particularly those led by women and youth to generate opportunities for growth that can boost the participation of underrepresented sections of society on the international arena. 

To read the full article, please click here. 

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The global economy avoided a meltdown 2020-2022 due to the Covid-19 pandemic because governments around the world, led by the U.S., printed trillions of dollars for their own citizens, oiling consumer demand and goosing merchandise trade around the world.

That steroid is now wearing off, as consumers have spent most of the money they were given, and because their spending fueled inflation, making it harder to buy as much stuff, and that’s denting Chinese exports, according to an analysis by Trade Data Monitor, the world’s premier source of trade statistics.

In April, exports rose only 3.9% over the previous year, to $273.6 billion. That’s the lowest rate in two years, and far below a 14.7% improvement in March. Imports were flat at $222.5 billion, and would have declined precipitously without broad inflation in the prices of key commodities.

Much of the economic analysis has focused on the impact of Russia’s invasion of Ukraine, and the pandemic locking down ports in China, but the bigger picture is that the world is now having to adjust to consumers no longer having huge stacks of free cash in their pockets to spend on retail goods made in China.

The upshot: Chinese shipments of high-tech products in April declined 4.9% year-on-year to $72.3 billion from $76 billion. Exports of LCD panels declined 0.5% to $2.3 billion. Exports of mobile phones fell 7.3% to $10.3 billion. Exports of household appliances declined 5.3% to $7.9 billion. Exports of furniture fell 2.9% to $6 billion.

There were some exceptions to this bleak picture, mainly due to people being outside and on the move again. Shipments of cars and trucks rose 8.9% to $2.8 billion. Shipments of footwear rose 28.2% to $3.8 billion. Exports of toys, which includes a lot of outdoor athletic gear, increased 18.1% to $3.6 billion.

And battery-related industries are still expanding, requiring a strong supply chain. Rare earth exports doubled to $109.4 million from $54 million. (Contrary to popular assumption, rare earths remain a small, niche market.)

To be sure, Chinese exports are still increasing, partly because of inflation and partly because the world is still recovering from the Covid-19 pandemic. Exports to the EU increased 8.1% to $43.1 billion. Shipments to the U.S. rose 9.6% to $46 billion. Exports to ASEAN countries rose 7.7% to $44.2 billion.

Officially, Chinese imports were basically flat, but that was only because of price inflation in essential commodities. It was only those rising prices which kept Chinese imports from freefalling. Natural gas imports, for example, rose 32% by value, to $4.3 billion from $3.2 billion, but fell 19.6% by quantity, to 8.1 million tons from 10.1 million tons. Iron ore imports fell 12.6% to $86 million tons. Copper imports declined 1.9% to 1.9 million tons. It’s clear that Chinese industry is slowing down.

It’s the high-tech supply chains that appear most affected by the current slowdown. Exports to Vietnam, a key component of China’s supply chain, fell 0.2% to $12.8 billion. Imports from Vietnam declined 4.7% to $6.5 billion.

Imports from the EU fell 12.5% to $23.4 billion. Imports from the U.S. declined 1.4% to $13.8 billion. Imports from ASEAN countries rose 3.7% to $32.8 billion.

China is one of the only economies still buying huge quantities of Russian exports. It hiked shipments, mostly gas and oil, 53.2% to $8.9 billion in April. However, Russian consumers, beset by a painful war economy, are having an even more difficult time than those in the U.S. and Europe. Chinese exports to Russia fell 25.8% to $3.8 billion.

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It is extremely important for the future of the international trading system that the upcoming WTO Ministerial Conference be seen to be a success. Success can be achieved if all Members approach the Ministerial with a broad view of what is good for the system rather than what they seek more narrowly for themselves. Success will be achieved if the Members who unanimously backed an activist for the post of Director-General will now support her by crafting an agreed Declaration.

The Ministerial Conference will be a success if the agreed declaration is seen to improve international cooperation with respect to global health during this pandemic, and if that achievement is not marred by failure to agree to effective disciplines on the grant of fisheries subsidies. It will be a success if enough Members join together to address climate change and take ownership of their role as stewards of the planet’s environment. It will be a success if added to this is a path forward with respect to better rules for agriculture and addressing the growing problem of industrial subsidies.

The multilateral trading system, also called the world trading system, is, and always should be, a work in progress. It was started in the 1940s, proceeded through eight great rounds of multilateral trade negotiations in the half-century duration of the GATT 1947. The last two of these rounds added to the global trade rule book, as well as continuing the opening of markets.

The WTO, created in the Uruguay Round concluded in 1993/94, was a significant step in the process of building the global trading system. During the last twenty-six years, from 1995 when the WTO came into being, trade liberalization slowed in several respects. There were no successful rounds of across-the-board tariff cutting, no further opening of agricultural markets, and no additional disciplines on subsidies, either for agricultural commodities or industrial goods. While there was nothing accomplished on the scale of the last two GATT rounds, nevertheless there was additional progress in the form of a duty-free pharmaceutical agreement, a duty-free information technology agreement (with one subsequent update), a telecommunications reference paper, the Trade Facilitation Agreement, and a ban on agricultural export subsidies.

The advance continued but in a muted way at MC11 held in Buenos Aires in 2017. There were no commemorative T-shirts imprinted to celebrate MC11. There should have been, for at that meeting a way forward was found to continue the process of building the trading system. At Buenos Aires were born the Joint Statement Initiatives (JSIs), negotiations proceeding despite opposition from some WTO Members who did not wish to see the negotiating agenda expanded on these subjects. An important step forward had been taken.

What is needed as the MC12 outcome?

First, there must be an agreed declaration. If there is not, the system will deteriorate. It will not end, but it will evolve in a less coherent way. It will become less multilateral and less global. It is imperative that all participants understand what the stakes are.

What should be in an agreed declaration?

We know by now what the outlines of the possible outcomes are at MC12, ranging from some of them being close to certain to some being merely probable.

The first item in this list is essential.

1. Trade and health. This would be a statement concerning appropriate behavior to deal with the current pandemic. This would cover export restrictions; trade facilitation, regulatory coherence and cooperation, and tariffs; the role of services trade; transparency and monitoring; collaboration with other international organizations and engagement with key stakeholders; and a framework for future pandemics and crises. It appears that nothing would be agreed if no compromise is found on the question of the TRIPS waiver for COVID-19 vaccines.

The second item has an importance not just because of its intrinsic value but due to its long history of attempts at resolution. It requires reaching:

2. Agreed disciplines on fisheries subsidies.

• This has become a litmus test for the WTO. If the Members cannot find a way to carry out an often-renewed pledge after 21 years of negotiation, the feeling will become more widespread that little can be accomplished applicable to global trade. Objectively, the third requirement should be

3. A clear pledge to deal with trade and climate, and other environmental issues (marine plastics pollution, fossil fuels, etc. – this last, probably unspecified).

• The effort is likely to take the form of an open plurilateral negotiation, a joint statement initiative. This is now a path more often chosen, as agreement among 164 disparate sovereigns is becoming close to impossible to achieve.

Other expected outcomes:

4. The conclusion of the JSI on domestic regulation of services.

5. The already agreed result for the JSI on micro, small and medium-sized enterprises (MSMEs).

6. Progress reports on the JSIs on e-commerce and investment facilitation; and

7. The creation of a WTO Reform effort with a general mandate, citing as objectives at a minimum — restoring the negotiating function, putting into place an agreed dispute settlement mechanism, and some enhanced transparency.

More uncertain, but highly desirable:

• An inclusive work program for agriculture, and adoption of the pledge not to place export restrictions on food purchases by the World Food Programme.

• An extension of the moratorium on the placing of tariffs on electronic transmissions (paired with a continuing moratorium on the bringing of TRIPS non-violation cases); and

• A statement on the importance of trade in the cause of making more possible peace for conflict-affected countries.

What not to expect:

• Binding (enforceable) multilateral agreements with the exception of a fisheries subsidies agreement.

• An immediate solution to the dispute settlement impasse.

• An agreed statement dealing with forced labor (a new entrant agreed among the G7 trade ministers)

Commentators will view whatever accomplishments there are as positive or inadequate depending on their point of view. Few will say that the results are transformative — because transformation is not on the agenda. Transformation of the trading system will not begin, if at all, until 2022.

What should come next, beyond MC12?

The challenges that threaten the multilateral trading system are numerous. Among these are the strains caused by national measures taken to deal with the pandemic, the planned measures to address climate change, geopolitical divisions, the rise of populism and nationalism, and all too many nations turning inward to give domestic issues exclusive priority. In these countries, there is a far more cramped vision of national self-interest than that which allowed the creation of the world trading system three-quarters of a century ago. The answers for the future of the multilateral trading system (WTO) lie in three categories: (1) governance of the multilateral trading system, (2) a change in Member attitudes, and (3) the negotiation of new substantive rules.

Reforms that should be adopted starting next year:

⇒ The negotiating pillar — Members overcome stasis

• There is an end to the convoy system for negotiated outcomes, the existing system where all must agree or none can agree.

• “Consensus” is no longer to be misconstrued as requiring unanimity. It exists where a majority decides to move an issue forward and the rest acquiesce.

• A veto cannot be used to prevent agreements among like-minded Members.

• • However, when like-minding Members move forward to reach agreements among themselves, they cannot in doing so increase the obligations of any Member without its consent, nor reduce its existing rights.

• There is no veto over the budget or on the adoption of an agenda for a meeting. Vetoes are to be reserved for matters of strong national interest, and only as the result affects them directly.

• JSIs (open plurilaterals) are declared to be legitimate as part of the core functions of the WTO. Forward-leaning Members are encouraged to engage in open plurilaterals to expand the scope and effectiveness of the multilateral trading system.

⇒ Members make explicit what has always been implicit, that the core understanding of the multilateral trading system is that market forces, not state interventions, are to determine competitive outcomes. Members should agree —

• that the WTO is about convergence, not co-existence, and
• that to prevent market forces from generally determining competitive outcomes would be inconsistent with a Member’s WTO commitments.

⇒ Reaffirm that the multilateral trading system is about progressive trade liberalization, which includes ongoing improvements in the rules.

• An example would be prompt restarting and achieving an ambitious conclusion to an environmental goods agreement.

⇒ Each sub-multilateral (regional and bilateral) agreement should be justified according to whether it is likely to be more trade-creating for non-parties than trade-diverting. This would include existing agreements.

• An FTA should not be considered acceptable merely because it covers substantially all trade, an inadequate standard that is in any event increasingly honored in the breach.

⇒ An overarching principle is that the WTO is to provide fairness – in line with the founding of the system.

• Part of the answer is to restore trade remedies to their rightful place in the system.
• Another part of the answer lies in intensifying trade facilitation assistance, supporting the implementation of the African Continental Free Trade Agreement, promoting equitable access to supplies during the pandemic and working with international organizations to restore trade finance.

⇒ The dispute settlement pillar

• Quasi-judicial overreach – The solution is to be found in Members agreeing to extend the coverage of the agreed rules, particularly for industrial and agricultural subsidies and forced technology transfer.

• • Ministerial guidance (e.g., a panel’s factual findings are not reviewable on appeal, trade remedies are not to be treated as exceptions to the rules, a narrowing of their availability) that there is to be no gap-filling and that the dispute settlement system is not designed to make law, absent explicit consent of the Members. Panels are to concentrate on resolving disputes, not amending the rules.
  • Checks and balances – providing for DSB or other review of adherence to the guidance which has been given.
  • Structural change – substantially expand the number of appellate body members to deepen the amount of available expertise and increase diversity of representation, make no provision for collegial working arrangements among different appellate panels, and require strict adherence to time limits which should help to limit “judicial activism”.

⇒ Establishing the executive functions of the WTO

• A mandate is given for the Director-General to become far more proactive, overtly leading Members to negotiate compromises and tabling proposals to resolve negotiating impasses.

• Transparency

• • The Secretariat is called upon to engage in proactive, autonomous monitoring, using facts available, of measures affecting trade, both restrictive and trade-facilitating, noting which measures Members verify and for which there is no Member response.
  • Tougher penalties for failure to file notifications are put into place.

• Development

• • Echoing this Director-General’s efforts to bring vaccines and vaccine production to developing countries, she should convene a meeting of major commercial banks and international financial institutions to pledge to restore trade finance.

• Dispute settlement

• • The Director-General should table elements of a solution to the Appellate Body impasse.
  • The Director-General should announce that appeals into the void (appeals filed with the Secretariat for the Appellate Body, although none exists) will no longer be accepted. The WTO dispute settlement process is not to give advisory opinions unless a Member bringing a case so requests. If no alternative arrangements are made by the parties for an appellate process, every panel report will be deemed final.

• Strategic foresight

• • Given the likelihood of continuing major challenges to the global trading system, require the Secretariat to engage in Strategic Foresight, reporting its conclusions autonomously, not subject to advance Member review or censorship.

• Policy planning

• • The Director-General is asked to create a policy planning function within the Secretariat.

• Liaison with sister international organizations

• • Representatives of the WTO are posted with the World Bank, IMF, OECD, FAO, the AfCFTA Secretariat, and the ILO

• Budget

• • Provide the WTO with a self-sustaining budget based on a sliding scale tied to share of world exports. Activities of the Secretariat are not to be manipulated through the undue influence of individual Members over the WTO budget.

⇒ Adding to the rule book

• Trade and health

• • A working party should be formed to consider how the WTO should respond to the current pandemic and to future pandemics.
  • Part of its mandate would be to determine what should have been done starting in March 2020 when the scope of the pandemic first became clear.
  • Possible elements for study and recommendation:
    • A new accord on trade and health should contain a binding international understanding limiting the use of export restrictions, defining the WTO-rule-promised “equitable share” of supply that is to be made available to the world outside one’s own national boundaries (required by GATT Art. XX(j) when export controls are put into place). Assigning a number to that share would be a crude but potentially effective way to make the WTO rule have clear effect. Commitments should be made to have imports of essential goods duty-free.
    • As suggested by a colleague of mine at PIIE, Chad Bown, agree to a positive approach to subsidies when the object of support is the production of inputs for vaccines and vaccine manufacture itself.
  • China and India should join the Pharmaceutical Agreement, providing for duty-free treatment of covered products, thus restoring the coverage of the agreement to 90% of world trade in these products.
  • Negotiations are inaugurated to update the Information Technology Agreement to include medical equipment, making them duty-free.

• Agriculture

• • Agreement to begin negotiations on reducing domestic support (including cotton subsidies), increasing market access and food security, with a fixed timetable for results, to which specific new limits on domestic support would be added.
• Non-agricultural market access (NAMA)

• • A work program is created for progressive reduction of tariffs.

• Trade and climate

• Intensive discussions begin to determine rules for carbon border adjustment measures (CBAMs).
• A work program would include the fostering of circular economy, green credit, sustainable finance, etc.
• The Trade and Environmental Sustainability Structured Discussions begin to home in on negotiated results, and
• The Environmental Goods Agreement (EGA) negotiations resume.

• Resilient global value chains/supply (the subject of the 2021 WTO Public Forum)

• A working party is formed, not limited to essential goods for the pandemic, to address the concern that re-balancing in the name of assuring adequate supplies of essential goods could move too far inward, over-emphasizing near-shoring, hurting all economies. Some shortening of supply lines as a hedge against disruptions can be expected but should be limited by the need to avoid unnecessary costs, and the reality that global diversity of supplies will provide the surest security.

• State involvement

• Disciplines are deepened and broadened with respect to state-owned, state-invested, and state-influenced enterprises,
• Disciplines are created for industrial subsidies and forced technology transfer, and o Competition policy is enlisted to shore up market orientation.

• Inclusive trade

• Efforts continue to assure that the benefits of the trading system are extended with respect to women, and more generally workers, farmers, engaging business associations and civil society organizations etc.
• A declaration is adopted on the relationship of labor rights to the WTO, among other human rights.

• Accessions

• Additional emphasis is given to the need to conclude long-standing accessions and achieve universality in the WTO’s trade coverage, recognizing that the accession process is a leading edge of continuing WTO reform.

• AfCFTA

• A major WTO initiative is inaugurated dedicated to making the African Continental Free Trade Agreement a success.

• Accountability

• The Secretariat is to inform the Members of trade actions threatened or taken that may be inconsistent with Member obligations or against the general welfare of the Members.
  • Administrative measures: Member in arrears either have a payment schedule to which they must adhere, or they are barred from speaking.

• Unilateral measures for the good of the system

• Self-declaration of developing country status with its implied claim of eligibility for special and differential treatment) ceases.
• Global leadership has costs. The multilateral trading system needs greater investment from all its Members, including all of the largest Members.
• The countries whose economic standing has progressed the most since the WTO was founded should take the lead in proposing trade-liberalizing negotiations, with higher tariffs cut more deeply.

• Re-balancing

• The major trading Members, particularly, the United States, the European Union, and China each seek to restrike the balance envisaged by the GATT and WTO, giving up some flexibilities (unilateral measures, excessive claims of the need to resort to national security and safeguard measures; domestic support, lowering tariffs on a harmonized basis etc.). Trade remedies are recognized as a necessary price paid for greater openness on average.

Conclusion

My intention in this listing of what should occur in 2022 is not put forward as a criticism of whatever results come out of MC12, where significant results are still possible. It is to indicate that the work of multilateral cooperation does not end with MC12. If anything, MC12, like MC11, should be a launchpad for further efforts.

Alan Wm. Wolff is a distinguished visiting fellow at the Peterson Institute for International Economics. Until joining PIIE, he was deputy director-general of the World Trade Organization (WTO). 

To read the full commentary from the Peterson Institute for International Economics, please click here.

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Articles and commentaries on that subject have begun to pop up, largely due to Covid-19, supply chain blockages and backlogs, and, probably most important in the United States, growing concerns about the security implications of trade with China. The Wall Street Journal dealt with this issue as recently as last week (October 21). The issue does not seem to be a decline of trade—which appears to be coming back rather nicely as the world recovers from the pandemic—but a decline of global supply chains.

That trend was noticeable not only before Covid but before Trump. Companies were shortening supply chains in order to be closer to their customers and less exposed to the vagaries of shipping costs, increasingly uncertain weather, and political disturbances, among others. It is also likely to continue, at least for a time. Port backlogs have dramatically illustrated the problems associated with trans-oceanic supply chains, and uncertainties in doing business with China have continued to grow.

Perhaps more important for the long term, company supply chain managers have learned that in addition to price, quality, and delivery—their usual staples—they now have to consider resiliency, and that increasingly means redundancy. Simply put, we ran out of things at the height of Covid and don’t want that to happen again, and we have also witnessed China’s “weaponization” of trade—cutting off imports from countries that have upset them for unrelated reasons. Australia has been the most recent victim, but it is not the only one, and U.S. companies do not want to be next in line if they make a comment about Hong Kong or Xinjiang that Beijing finds objectionable. Throw in the Biden administration’s concerns about supply chain security in critical technology sectors—see its four sectoral studies published last June—and you can see the handwriting on the wall. Companies are under pressure to shorten their supply chains, move them out of China, and develop redundant sources of supply, with at least one of them preferably in the United States.

Economists will say, correctly, that this is not economically optimal. Changes cost time and money, and the new supply chains will probably be less efficient and productive than the old ones. The U.S. government will point out, also correctly, that there are other factors to consider besides cost, and for the time being, the pendulum is swinging in the government’s direction.

Despite all that, it’s not time to write globalization’s obituary. The main reason is that the tools that enabled it have not changed. In a nutshell, enormous reductions in transportation and communication costs over the past 50 years as well as the dramatic growth of digitization in the economy have made it both possible and profitable to disaggregate the production process into its many pieces and search out the best producers for each piece, regardless of where in the world they are, and construct a product globally. This is why, for example, it is quicker and cheaper to move car parts like axle assemblies or engines around to multiple locations, adding something at each stop, than it is to ship all the parts to Detroit and assemble the entire car there.

These developments have, to use Richard Baldwin’s term, “unbundled” technology, or know-how, from production, enabling the development of supply chains that mesh high technology (U.S. intellectual property, for example) with low-wage economies to produce an unbeatable combination. This is not an unalloyed good thing, as progressives have complained, and I will no doubt talk about that in a future column. Today, however, the issue is not whether it is good or bad but whether it is going away. And the answer to that is no, it is not. The enabling tools remain and the economic logic remains. We cannot “uninvent” them.

Still, that calls to mind the popular cliché: “two steps forward, one step back.” We are in the middle of taking one step back, and the questions are how big a step it will be and how long it will last. This doesn’t happen very often. The last time began in 1913 when global trade peaked, and that level was not reached again until 1970, thanks to two world wars and a depression. If we can avoid disasters like those, then perhaps this time the step backward will be smaller and shorter.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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Climate change presents huge risks to the functioning of the world’s economies.

This matters to the IMF because climate change presents huge risks to the functioning of the world’s economies. The right climate policies can address these risks and also bring tremendous opportunities for transformative investments, economic growth, and green jobs—so much so that our Board recently approved proposals to include climate change in our regular country economic surveillance and our financial stability assessment program.

At the heart of our policy discussions with member countries is carbon pricing—now widely accepted as the most important policy tool to achieve the drastic cuts to emissions we need. By making polluting energy sources more expensive than clean sources, carbon pricing provides incentives to improve energy efficiency and to re-direct innovation efforts towards green technologies. Carbon pricing needs to be supported by a broader package of measures to enhance its effectiveness and acceptability including public investment in clean technology networks (like grid upgrades to accommodate renewables) and measures to assist vulnerable households, workers, and regions. Nonetheless, at the global level, additional measures equivalent to a carbon price of $75 per ton or more are required by 2030.

Ahead of the United Nations’ 26th annual climate change conference (COP26) in November—the most important climate conference since Paris 2015—we see promising signs of growing climate ambition. Many countries have stated new climate objectives—60 countries have already pledged to be emissions-neutral by midcentury and some, including the European Union and United States, have offered stronger near-term pledges. Importantly, carbon pricing schemes are proliferating—more than 60 have been implemented globally, including key initiatives this year in China and Germany.

Yet stronger and more coordinated action in the decade ahead is critical.

While some countries are moving ahead aggressively, ambition varies country-by-country such that four-fifthsof global emissions remain unpriced and the global average emissions price is only $3 per ton. As a knock-on effect, some countries and regions with high or rising carbon prices are considering placing charges on the carbon content of imports from places without similar schemes. From a global climate perspective, however, such border carbon adjustments are insufficient instruments as carbon embodied in trade flows is typically less than 10 percent of countries’ total emissions.

In part, the slower progress reflects how hard it can be for countries to unilaterally scale up mitigation policies to meet their Paris Agreement commitments—not least because of concerns about how it may affect their competitiveness and worries that others may not match their policy actions. The near-universal country participation in the Paris Agreement, so critical for its legitimacy, does not make for easy negotiation.

So how do we get carbon pricing to where it needs to be within ten years? A new paper from IMF staff, still under discussion with the IMF Board and membership, proposes the creation of an international carbon price floor arrangement that complements the Paris Agreement and is:

1. Launched by the largest emitters. The chart shows, that China, India, the US and the EU will account for nearly two-thirds of projected global CO2emissions in 2030 (if no new mitigation actions are taken). Including the full G20 takes this to 85 percent. Once launched, the scheme could gradually expand to encompass other countries.

2. Anchored on a minimum carbon price. This is an efficient, concrete, and easily understood policy instrument. Simultaneous action among large emitters to scale up carbon pricing would deliver collective action against climate change while decisively addressing competitiveness concerns. The focus on a minimum carbon price parallels the current discussion on a minimum for the tax rate in international corporate taxation. More broadly, international harmonization through tax rate floors has a long tradition in Europe.

3. Designed pragmatically. The arrangement needs to be equitable, flexible and account for the differentiated responsibilities of countries given, among other factors, historical emissions and development levels. One way to do this is to have, say, two or three different price levels in the agreement that vary according to accepted measures of a country’s development. The arrangement could also accommodate countries where carbon pricing is not currently feasible for domestic political reasons, so long as they achieve equivalent emissions reductions through other policy instruments.

An illustrative example shows that reinforcing Paris Agreement pledges with a three-tier price floor among just six participants (Canada, China, European Union, India, United Kingdom, United States) with prices of $75, $50, and $25 for advanced, high, and low-income emerging markets, respectively and in addition to current policies, could help achieve a 23 percent reduction in global emissions below baseline by 2030. This is enough to bring emissions in line with keeping global warming below 2°C.

The application of carbon pricing across Canadian provinces gives a good prototype for how a price floor could translate to the international level. The federal government requires provinces and territories to implement a minimum carbon price rising progressively from CAN$10 per ton in 2018 to CAN$50 in 2022 and CAN$170 in 2030. Jurisdictions are free to meet this requirement through carbon taxes or emissions trading systems.

At the international level, a well-designed carbon price floor agreement would yield benefits to individual countries as well as to the collective. All participants would be better off from stabilizing the global climate system, and countries would enjoy domestic environmental benefits from curbing fossil fuel combustion—most importantly, fewer deaths from local air pollution.

There is no time to waste in putting in place such an arrangement. Imagine us in 2030. Let us make sure that we will not look back at 2021 just to regret the missed opportunity for effective action. Let us instead look back with pride at global progress towards keeping global warming below the 2oC threshold. We need coordinated action now—and it should be centered on an international carbon price floor.

Vitor Gaspar, a Portuguese national, is Director of the IMF’s Fiscal Affairs Department. Prior to joining the IMF, he held a variety of senior policy positions in Banco de Portugal, including most recently as Special Adviser. He served as Minister of State and Finance of Portugal during 2011–2013. He was head of the European Commission’s Bureau of European Policy Advisers during 2007–2010, and director-general of research at the European Central Bank from 1998 to 2004. Mr. Gaspar holds a PhD and a post-doctoral agregado in Economics from Universidade Nova de Lisboa. He has also studied at Universidade Católica Portuguesa.

Ian Parry is Principal Environmental Fiscal Policy Expert in the IMF’s Fiscal Affairs Department, specializing in fiscal analysis of climate change, environment, and energy issues. Before joining the Fund in 2010, Ian held the Allen V. Kneese Chair in Environmental Economics at Resources for the Future.

To read the full commentary from the International Monetary Fund, please click here.

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What is massive modularity? An example can be found in the mobile telecommunication industry. Albeit simplified, Figure 1 visually represents six major modules in three broad functional areas that define a smartphone handset. The modules share common traits: (i) they are interconnected with each other according to standard interfaces; (ii) innovation can take place independently in each module, as long as the interface standard is adhered to and continually updated; and (iii) they can be broken down into smaller, more specialized modules (represented by bullet points in Figure 1), each with its own evolving standards, replicating the modular pattern at progressively deeper levels. 

Massive modularity allows industries to cope with rapidly growing complexity in products and systems.  For instance, after decades of industry evolution, a single phone may incorporate decades of wireless communications standards (2G, 3G, 4G, and now 5G), be compatible with 10 or more WiFi standards, offer multiple, distinct WiFi services, and include seven or more distinct US-led GPS services, not to mention versions of the three other major non-US geolocation systems[1].  Similar structures support the evolution of Google’s Android operating system, Bluetooth, nearfield communications (mobile payment), audio, video, and many others lurking in the depths of the massively modular system (MMS) that is your mobile phone. 

Over the years, the mobile telecom GVC has evolved from a standard GVC structure (with, for example, Finland’s Nokia, Sweden’s Ericsson, and the USA’s Motorola designing their own handsets and selecting suppliers) to a MMS where expertise and market share is dispersed in specific functional modules that have gradually become highly concentrated in specific companies and countries. Figure 2 illustrates the extraordinary geographic concentration in the industry across a few key functions in 2019. 

Figure 1. Major functional modules in a mobile phone

Source: Thun, Taglioni, Sturgeon, and Dallas, forthcoming, “The prospects for decoupling in massively modular industries.”

Figure 2. Mobile handset share of value added in main functions, by geography of supplier ownership, 2019

Source: Thun, Taglioni, Sturgeon, and Dallas, forthcoming, “The prospects for decoupling in massively modular industries.” using data from IHS Market device teardown reports for 40 handsets.

The United States is predominant in the most R&D and design-intensive ICs, such as phones’ application processors (CPU) and advanced radio frequency IC packages. The Rep. of Korea is predominant in capital- and process-intensive memory production and LCD displays. In some cases, global capabilities are focused on a single firm (Qualcomm in processors, and Samsung in memory and displays). And this is just a single layer of the mobile phone.  Opening the proverbial hood of each of these functional areas reveals new standards, dominant players, and platform ecosystems operating at lower levels. Thus, even giants like Qualcomm must stand on the shoulders of hidden giants like Taiwan’s TSMC, which manufactures many of its ICs and provides process-specific design requirements to make this possible, and the United Kingdom’s ARM, which provides the power management architecture present in 95% of mobile handsets. Tellingly, the ARM ecosystem includes hundreds of complementing firms that sell tools to make it easier for handset designers to adhere to the (de facto) ARM standard. As ICT become more important, if not core, in more industries, it appears that more industries are evolving in the direction of massive modularity.[2]

Why is massive modularity important? One reason is cybersecurity risk. Because innovation in MMS is both partitioned and constantly evolving, new modules and standards usually include “legacy” code, circuity and other features that ensure they are compatible with existing and older standards, at least at first, instead of purging them and starting from scratch. In addition, the openness of massively modular systems means that new devices and software can be added without the permission of any single gatekeeper.  While the results might be astounding, MMS typically have accumulated hundreds, if not thousands of backdoors and vulnerabilities that can be, and regularly are, exploited by bad actors. While cybersecurity risks are a special type of strategic vulnerability, and one that will require especially urgent attention, digital services are symbolic of the diverse vulnerabilities that reside in massively modular industries. 

What are the broader implications of MMS for geopolitics, national security and industrial policy? First, the policy challenge is not only that vulnerabilities can surprise and disrupt, but also that policies aimed at reducing risk might have severe unintended consequences, as shocks become amplified and propagate through complex industries in ways that are difficult to predict (as Mandelbrot’s Fractal Geometry teaches us). Clearly, some options that governments are considering risk falling short of confronting the vast multi-dimensional complexity of the industries they are hoping to rebalance. Between the extremes of rebuilding massively modular industries in all their complexity on a national level, or trying to mitigate each crisis as it arises in an endless game of whack-a-mole, there lies a vast middle ground of options that include combinations of strategic buffering and recasting of international cooperation that allow for some degree of global supply chain risk, given that GVCs are likely to remain globally distributed. 

But first we need to see the world as it is and not how it used to be. There is an urgent need to characterize industries not only in terms of trade and investment flows, but also in terms of IPR and asset ownership—something not currently possible with official economic statistics. It will require a new type of policy expertise to help ensure that shocks to the system are reabsorbed and not amplified. Most of all, it will require the uncommon marriage of technical and political skill to needed engage partners in the context of exceedingly complex technological ecosystems and business strategies.

Eric Thun is the Peter Moores Associate Professor in Chinese Business at Oxford’s Saïd Business School and a Fellow of Brasenose College, Oxford. His areas of expertise include business in China, industrial development and upgrading in China, and Chinese political economy, as well as global strategy and global value chains.  His primary research interests revolve around the dynamics of competition and innovation in emerging markets.

Daria Taglioni is Research Manager, Trade and International Integration, Development Research Group. She joined the World Bank Group in 2011 as Senior Trade Economist in the International Trade Department of the Poverty Reducation and Economic Management Network (PREM).  Since then, she has held various positions and roles, including Team-Task Lead for the World Development Report 2020, Principal Economist in the International Finance Corporation, and World Bank’s Global Lead on Global Value Chains.

Dr. Timothy J. Sturgeon is Senior Researcher at the at the Massachusetts Institute of Technology’s Industrial Performance Center (IPC).  His research focuses on the processes of global integration and digital transformation, with an emphasis on offshoring and outsourcing practices in the electronics, automotive, and services industries. He has made significant contributions to Global Value Chain (GVC) theory and is working to improve the metrics and methods available for globalization research.

Mark P. Dallas is an Associate Professor of Political Science and Director of Asian Studies at Union College in New York.  In 2021-22, he will be a Council on Foreign Relations International Affairs Fellow for Tenured International Relations Scholars (IAF-TIRS), working at a US government executive agency on US policies related to China, emerging technologies, supply chains and national security.

To read the full commentary from World Bank Blogs, please click here. 

Image from World Bank Blogs 

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Last week’s report was prompted by two developments: the Covid-19 pandemic, which made us acutely aware of supply chain gaps and vulnerabilities in sensitive sectors, and China’s continuing dominance in production in some of these sectors. The latter is not new, but concern has been growing because of China’s dominant position in some areas like critical minerals processing and its demonstrated willingness to use denial of access as a means of responding to criticism or to further its foreign policy goals. In fairness, the United States probably weaponized trade before they did through our many sanctions programs, but when the shoe is on the other foot, it turns out it does not fit very well.

These developments have also made us acutely aware that our own efforts have been lagging. Manufacturing in some critical sectors has long been declining in the United States, as has our investment in basic research. In fiscal year 2019, federal spending for research and development (R&D) was 0.6 percent of GDP in the United States, the lowest in over 60 years. These challenges are acknowledged deficiencies and have been a wake-up call, to which the Biden administration has responded, first with its Build Back Better program and now with this report.

The 23 recommendations in the report represent a return to what used to be called industrial policy and might now best be described as innovation policy—a greater role for the government in promoting research in essential areas and, if necessary, promoting either onshore production or the development of secure supply chains based on relationships with trusted partners. The United States has done this before, and we are good at it. If we do it correctly, the result will be more resilient supply chains and a more secure America.

Whether their roadmap is the correct one, however, remains uncertain. Many of the recommendations address the need for pouring additional resources into our innovation efforts. Republicans have often opposed these policies in the past as government meddling in the economy and “picking winners and losers.” They may well do so again, particularly if their leadership adopts the position of opposing everything the president recommends, but this time the debate is taking place in the context of national security. We need to up our game, not just because it’s a nice idea, but because our security and ability to compete effectively with China demands it. Republicans in Congress who have taken a hard line on China—and criticized the president (incorrectly) for being too soft—may have difficulty opposing measures intended to do precisely what they have been demanding. More likely, as also happened last week in the Senate, they will moan, whine, delay, and tweak but in the end support ambitious innovation policy programs.

A more complicated question is how these measures interact with trade policy. While the report acknowledges that it is neither possible nor optimal for the United States to make everything it needs, the Buy America and reshoring policies recommended may ultimately make achieving greater supply chain resilience more difficult and more expensive. The old adage, “Don’t put all your eggs in one basket,” comes to mind. One of the best ways to promote resiliency is to diversify sources of supply. While the report demonstrates an understanding of that, some of its proposals run counter to it. There has long been a tension between resiliency and efficiency in constructing supply chains, but the report basically pretends it isn’t there. Resiliency means more redundancy and having secure sources of supply, but secure sources are often not the cheapest, particularly if you compare domestic costs to foreign-sourced costs. Partly for that reason, CSIS has recommended a “trusted partner” approach which seeks to develop deep economic relations with reliable and secure foreign partners rather than trying to achieve autarky as much as possible. The report acknowledges this approach, but it remains to be seen if it is lip service or if a genuine effort to develop those partnerships will occur.

One clue about that is that the administration’s goals include creating jobs domestically and providing more rewards to our workers. Those are also noble goals, but they are not entirely compatible with either resiliency or efficiency. U.S. production will probably be more expensive and in the long run this may make our industries less globally competitive. In some circumstances like semiconductors, that is a price worth paying but in others perhaps not.

It would be helpful as the report’s recommendations are implemented if the administration did two things: first, recognize the tension between resiliency and efficiency rather than pretending we can have our cake and eat it too; and second, undertake the difficult task of defining which industries are essential to our national security. It has long been axiomatic in export control circles that if you try to protect everything you end up protecting nothing. The administration would be wise to take that to heart in its supply chain policy. If everything is critical, then nothing is critical. The essence of a smart supply chain policy is to set clear priorities.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) and is a senior adviser at Kelley, Drye & Warren LLP. Previously, he served for 15 years as president of the National Foreign Trade Council, where he led efforts in favor of open markets, in support of the Export-Import Bank and Overseas Private Investment Corporation, against unilateral sanctions, and in support of sound international tax policy, among many issues. 

To read the full commentary from the Center for Strategic and International Studies, please click here.

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We do need more domestic production and more of the high-paying jobs that go along with it—but we won’t get there by going it alone. That’s because pivoting supply chains back home is not always realistic; we rely on components and materials from many parts of the world. There is a better way forward, and it starts by selectively leaning into our trade and co-production relationships with friends and allies we trust—what we call “ally-shoring.”

In announcing its strategy for supply chain resilience, the Biden White House recently embraced ally-shoring as the most realistic and effective path to ensuring U.S. supply chains are never as vulnerable as was exposed by COVID-19. It also is the best way to rebuild our economy and that of our friends, which strengthens the health of all our democracies. Additionally, working together to rewire supply chains and co-produce high-tech products in emerging sectors will serve to rebuild bruised alliances and U.S. global economic and political leadership, as well as check China’s bid to extend their own authoritarian economic and political model across the globe.

One reason ally-shoring makes so much sense is that in automotive and other industries, we don’t so much engage in “trade” as we make things together with other countries. This is especially true in our auto and mobility sector. Nearly 50% of Midwest states’ so-called “trade” is with Canada, and 30% is with Mexico. Over half of this North American trade and 37% of our trade with allies in the EU is in intermediate goods—meaning component parts of a finished product. This “co-production” reality will be true for electric vehicles as well as other emerging mobility products, like the AI-controlled delivery robot vehicle now being “trained” on the streets of Ann Arbor, Mich.

With the disruptions of COVID-19, it is understandable that many of our leaders are proposing the “onshoring” of critical supplies. But as attractive as onshoring sounds, it is not an effective way to win the strategic competition with China. An onshoring push would not only irk our allies, but would also be problematic for U.S. companies (including our automakers) who want to keep doing business in foreign markets and using foreign-made component parts in products. It would also be impractical and impossibly costly. With sophisticated, IT-laced products like cars and phones integrating dozens of components from around the globe at the lowest cost possible, no one could afford to buy a solely domestically made one. Even attempting to onshore many supplies would reduce our influence on the world stage. Alliances have benefits too, particularly when in the middle of a global strategic tug of war for primacy between autocratic and democratic political systems.

Ally-shoring is a much better choice. It involves deliberately sourcing essential materials, goods, and services with countries who share our democratic values and commitment to an open, transparent, rules-based international economic and trade regime. Many countries would prefer to work with the U.S. than China and its dependency-building and corrupting development approach, including lower-cost producers such as Mexico, Vietnam, India, and other developing world economies that are essential in keeping supply chains cost-efficient and where we can work together to reinforce strong institutions, a level playing field for manufacturers, and transparent supply chains.

Ally-shoring increases the reliability of critical supply chains while reducing dependence on China and other state actors who will seek to continue to use that dependence to undermine the U.S. Reworking relationships to promote partnership with countries that share our values and interests would reduce our vulnerabilities while maintaining access to a wide variety of goods and markets for U.S. businesses and consumers alike.

The Biden administration’s just released critical supply chain reviewencouraged working in partnership with allies who share our values. The Senate could help the country lean into ally-shoring as well, by passing the Innovation and Competition Act of 2021. This sprawling legislation includes multiple supply chain resilience and competitiveness provisions, including a “Strategic Competition Act” that talks of “prioritizing” alliances and partnerships. In addition, ongoing legislative efforts by the Helsinki Commission—a bipartisan group of U.S. lawmakers committed to countering foreign corruption, kleptocracy, and authoritarianism—further reinforce democratic principles and good governance norms around the world, strengthening the foundations for long-term economic security.

If the U.S. takes steps toward ally-shoring, it would be a strong lever to put democracy at the heart of our foreign policy (as many call for) given the aggressiveness of China and Russia in trying to make authoritarianism dominant. Aside from countering rogue actors, we can shift the focus to strategies that reinforce strong democratic governance. Purposefully re-centering trade relations, production, distribution, and sourcing networks with nations that agree to standards of openness, rule of law, and democratic governance will help reverse the tide of anti-democratic rulers, norms, and practices.

Perhaps most important at a moment of rebuilding the pandemic-ravaged domestic economy, ally-shoring would also help bring new economic opportunities and create more good jobs here at home—including where they are needed most, like the industrial Midwest. To understand how ally-shoring can contribute to an increase in production and grow new jobs in the U.S., look no further than when supply chains were initially cut. As the country worked frantically to find or make ventilators, masks, and medical equipment, it turned to domestic manufacturers with global supply chains and production capabilities—many headquartered right here. Companies such as General Motors converted sophisticated facilities and extensive networks in the Midwest and Mexico to answer the call. The Ford Motor Company quickly followed suit.

Ally-shoring is one significant tool to speed our economic recovery and help realize the president’s pledge of a “foreign policy for the middle class.”Rethinking our domestic industrial and jobs “base” is at the heart of delivering more opportunity to Americans and rebuilding a strong and prosperous middle class. Reworking our supply chains can also be a powerful contributor to restoring U.S. global leadership and strategic alliances, protecting and enhancing democracy, and checking China’s (and other authoritarians’) bad behavior—all in one fell swoop.

Elaine Dezenski is Senior Advisor at the Center on Economic and Financial Power and Chief Growth Officer at Blank Slate Technologies

John C. Austin is the former President of the Michigan State Board of Education. Austin directs the Michigan Economic Center, a center for ideas and network-building to advance Michigan’s economic transformation. Austin also serves as a nonresident senior fellow with the Brookings Metropolitan Policy Program, the Chicago Council on Global Affairs, and the Upjohn Institute, where he leads these organizations efforts to support economic transformation in the American Midwest. Austin also Lectures on the Economy at the University of Michigan.

To read the full commentary from the Brookings Institute, please click here.

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The European Union pitched the council last year. Its leaders realized that it was in the interest of America and Europe—each other’s largest trading partner—to smooth over accumulated differences of opinion and develop a coordinated approach on trade and technology. But a secondary reason for the potential new council might be more consequential: Both sides want to set common technological standards. Doing so would afford the U.S. and EU the ability to deal with the underestimated long-term national security threat posed by China.

The EU’s approach to regulating technology, in particular American technology, is unintentionally exacerbating the China threat. A proposal for sweeping new legislation aimed at American Big Tech may have unwittingly created an opening for China. Introduced last December, the proposed Digital Markets Act intends to promote a level playing field for online services and to prevent anti-competitive practices. Ironically, it might instead enable a country that steals intellectual property as a matter of national policy, blocks access to foreign products, and couldn’t be more opposed to the fundamental values of European democracies.

America traditionally deals with anti-competitive marketplace acts after the fact. But in keeping with Europe’s typically more aggressive regulatory approach, the DMA is designed in anticipation of possible future competitive harm—without specific proof that such harm has occurred. The bill would limit the ability of online “gatekeepers,” such as search engines and marketplaces, to promote their own products. It would downplay security and privacy concerns in order to force app stores to allow apps from other developers using separate payment systems. The DMA would also force gatekeepers to share IP and trade secrets—such as search ranking and click data—with direct competitors.

Just who would the DMA classify as gatekeepers? The law is far from final and doesn’t name explicit targets. But—surprise—it’s Microsoft, Google, Amazon,Apple, and Facebook that would be regulated under its current criteria. No giant European tech firms. Nor any of the Chinese online giants such as WeChat (1.2 billion users around the globe) or its corporate parent Tencent (the largest video game vendor and one of the 10 biggest companies in the world). Far from leveling the playing field, the bill would penalize the business models of successful American tech companies, and naively leave the field open to China. Its companies could exploit the DMA’s arbitrary thresholds to increase their presence in the EU digital economy at the expense of American companies.

The practices targeted by the proposed law are fair topics for debate and regulation. No one’s saying American Big Tech should be shielded from competition. But against China, it’s lopsided competition. Letting that happen is not only unfair, it’s also shortsighted and perhaps dangerous. 

It’s lopsided because of the unique way China enters and then seeks to control overseas markets, the result of a profoundly integrated and coordinated effort by the entirety of the Chinese government and economy. With strategic goals of market domination set by the Chinese Communist Party, the Chinese government puts political pressure on a country to buy Chinese products, a Chinese development bank arranges a low-interest loan, the subsidized state-owned enterprise offers an irresistibly cheap price (and is not subject to U.S. antibribery laws), and even Chinese private sector companies are directed as to how they price and market their products and services. Americans have trouble fully appreciating the scope and effectiveness of China’s system, because this approach seems so different. Our private sector’s success abroad is due far more to superior products than to government promotion.

China requires that its companies turn over data to the government if it asks. The United States and United Kingdom looked at that policy and decided to ban Huawei’s 5G equipment from their networks. If, due to its aggressive tactics, China had an outsized role in the internet on the continent, it would reach deep into European personal and commercial lives. China has a unique way of integrating its payment systems into all online operations. WeChat Pay and Alipay have basically displaced cash in China. If they achieve anything like that prevalence in Europe, the financial and personal details of over 400 million Europeans could be stored on Beijing’s computers. The DMA fits a pattern in which Europeans generally minimize the risks of improper data collection by China for national security purposes (including the advancement of their artificial intelligence programs) and of being locked into Chinese technical standards.

China is perfectly willing to use economic coercion as a tool of statecraft, making market access a means of state ends. When Norway awarded the 2010 Nobel Peace Prize to a Chinese dissident, Norwegian salmon fishermen bore the consequences. China banned their salmon imports and did not relent for six years. Time and again, in disputes with the United States, South Korea, Japan, and others, innocent commercial parties have been held hostage to Chinese government demands. If the DMA succeeds in hampering American tech firms in Europe, and China rushes in to fill the void, Europeans will be vulnerable. WeChat Pay has said it sees Europe as its next key market. It’s not hard to imagine it succeeding. What’s to keep Chinese authorities from threatening to stop commercial payments on that platform until France rectifies some perceived affront to China?

China, Europe, and the United States have much to gain from each other, especially when fair competition drives innovation. Demonizing China is counterproductive if not risky. But it’s equally a mistake to not candidly face the threats posed by a powerful nation that does not share our democratic values. At a minimum, these issues need a frank and honest airing. The EU-US Trade and Tech Council could be a vehicle to persuade Europe it isn’t fully appreciating those national security threats.

Glenn S. Gerstell served as the general counsel of the National Security Agency from 2015 to 2020, and is currently a senior adviser at the Center for Strategic & International Studies.

To read the full commentary from Barron’s, please click here.

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