The significant expansion of global trade over time suggests that there are recognized benefits of trade, but there are also risks. The latter have come into more focus in recent years—for example, during the COVID-19 pandemic—as have terms like “decoupling,” “reshoring” and “friendshoring.”

I consulted Fernando Leibovici, an economic policy advisor in the St. Louis Fed’s Research Division, about the benefits and risks of trade as well as some potential ways for countries to mitigate those risks, which is where the terms mentioned above come in.

Benefits of International Trade

Leibovici explained a few benefits of trade.

Comparative advantage

The standard view of international trade is that it is beneficial because it allows countries to specialize based on what they’re relatively good at producing, Leibovici said. Given that there are differences in how well countries produce different items, trade between two countries can lead to gains for both if they each specialize and trade what they produce.

As an example, say that the U.S. is good at producing a certain food relative to other goods and that France is good at producing wine relative to other goods. In other words, the U.S. has a comparative advantage in producing that food and France has a comparative advantage in producing wine. Trading food and wine between the two countries can lead to both being better off. The idea of specializing and trading based on comparative advantage goes back to the 1800s, and it has been an important driver of growth and development for many countries, Leibovici said.

Access to other goods

Trade allows people in different countries to access goods they otherwise wouldn’t be able to, Leibovici said. For instance, the production of some agricultural goods may require a certain type of land or climate, which means that countries would have to trade to acquire those goods they can’t produce themselves.

Risk sharing

Another benefit of trade that Leibovici mentioned is that it helps countries share risk, especially local risk. To illustrate, if a country had a major natural disaster that disrupted production of certain goods, the country may be able to obtain those goods from trading partners. In contrast, a fully closed economy—that is, one that doesn’t trade with anyone else—would be limited to what it has on its own.

Leibovici added, however, that a global shock, like the COVID-19 pandemic, would affect the country’s trading partners as well, potentially leaving them unable to help provide goods.

Some Risks of International Trade

While trade can help with local risk management, depending on other countries to access certain goods has led to growing concerns about the potential for disruptions in recent years, particularly when it comes to “critical goods,” Leibovici said during our discussion.

He explained those concerns in the St. Louis Fed’s 2022 annual report.

“Some goods are critical to economic activity and welfare even though they account for a small portion of aggregate output and consumption,” he said in the report, noting that dependence on international trade for such critical goods is a potential source of vulnerability for the U.S. economy.

“Geopolitical risk (such as war), reliance on risky trade partners and shocks to trade institutions can severely disrupt the short- and medium-run access of the U.S. economy to critical imported goods,” he wrote. During our conversation, Leibovici also cited shipping disruptions as another risk that may limit a country’s access to goods from other countries.

A key example of a critical good is semiconductors, which are used in the production of computers, toys, appliances, cars and many other goods, as Leibovici noted in the 2022 annual report. The U.S. is a net importer (i.e., imports exceed exports) of semiconductors, with Taiwan being a top source for U.S. imports of these goods. Semiconductor shortages in recent years have had notable effects across the globe, he wrote. (For more on the semiconductor industry, watch Leibovici’s 2023 video on the topic.)

Medical goods are another example; their critical nature became particularly clear during the pandemic. “Countries that relied heavily on imports of critical medical goods—such as personal protective equipment—found themselves at a distinct disadvantage when the pandemic created a sharp worldwide increase in the demand for these goods,” Leibovici and Ana Maria Santacreu, also an economic policy advisor, wrote in the St. Louis Fed’s 2020 annual report.

Possible Ways to Reduce Trade Risk

Even though trade is good in the long run, certain shocks can expose an economy to risks, especially if the imported goods are considered critical, Leibovici reiterated during our discussion. Some people suggest that increasing suppliers of these types of goods would be a way to lessen a country’s exposure to trade risks, he said.

He described some possible ways countries could go about diversifying trade. “Decoupling” refers generally to reducing trade with countries that could be potentially risky due to a variety of reasons, Leibovici explained. So, what might a country do if it has reduced its dependence on potentially risky countries for certain imports? Two possible options for accessing the goods Leibovici mentioned are:

• “Reshoring,” which refers to producing the goods domestically
• “Friendshoring,” which refers to increasing trade with countries that are trusted trading partners

In a January 2024 Economic Synopses essay, Leibovici and Jason Dunn, a senior research associate, examined the extent to which the U.S. has decoupled from China in recent years. They noted that the share of U.S. imports from China has declined from a peak in 2017. Focusing on critical sectors, they found that the largest reductions in imports from China were among those on which the U.S. was most dependent on China: communications and information technology.

“These findings suggest the US is on track to reduce its dependence on China in critical sectors that it relies on the most. However, significant exposure remains,” they wrote.

During my conversation with Leibovici, he noted that while changing suppliers—whether obtaining imports from a different country instead or producing the goods domestically—may reduce exposure to trade risk, it does have costs. For example, companies could have to make a big investment in order to produce something domestically, or the price of the goods could be higher from other countries for various reasons.

Ultimately, it isn’t clear how big these trade risks are or how much it would cost to adjust suppliers, or even what the best way to reduce risk would be while still reaping the benefits of shared production with other countries, he said.

For example, in his December 2023 video, Leibovici discussed how the U.S. might handle semiconductor supply to deal with the possibility of shocks from abroad. “At the end of the day, there’s a trade-off between efficiency and resiliency, and the U.S. has to decide how to balance out these two forces,” he said.

Kristie M. Engemann is a senior coordinator in the St. Louis Fed External Engagement and Corporate Communications Division. 

To read the full blog post as it appears on the website for the Federal Reserve Bank of St. Louis, click here. 

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The modern era of trade can be traced to an important meeting between Winston Churchill and Franklin Roosevelt on a battle cruiser in Argentia Bay, Newfoundland, in August 1941, early in the Second World War. The two statesmen had been close observers of what had already been a catastrophic period comprised of unprecedented bloodletting in World War I followed by a global economic depression. They saw trade as a means to restore both peace and prosperity to the world. Theirs was a utopian vision – “to further the enjoyment by all states, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity”. This policy, which they issued as a press statement, was of sufficient importance that it was forever known as the Atlantic Charter.

When the war was won, the vision was gradually made into reality. Twenty-three nations signed the first-ever multilateral trade agreement, the General Agreement on Tariffs and Trade (GATT), to be administered by an International Trade Organization (ITO). The ITO never came into being, but the parties to the GATT kept up their efforts, decade after decade, liberalizing trade under a system of agreed rules. There were eight great rounds of multilateral trade negotiations, each one becoming more complex, until the last, the Uruguay Round, which lasted eight years, from 1986 to 1994. The number of participants grew dramatically to 128 and they agreed to try again to create a World Trade Organization (WTO), this time successfully.

The world economy benefitted enormously. Trade flourished, economies grew, and peace reined among the major powers (until the Russian invasion of Ukraine). Before the multilateral trading system existed, real GDP took seven decades to quadruple, moving from US$1.92 trillion in 1870 to US$7.81 trillion in 1940. Over the next seven decades, world GDP grew by 14 times, from US$7.81 trillion in 1940 to USD 108.12 trillion in 2015. With the help of trade, hundreds of millions of people have been lifted out of poverty. Human life expectancy has increased over this period by 62 per cent due significantly to the organization of the world economy in favour of openness and living up to internationally agreed rules.

Today, the WTO consists of 164 members, and its rules govern 98% of world trade. An additional 24 countries are pursuing WTO membership. The organization has, however, been experiencing internal problems and facing external challenges. The members all recognize that reform is needed. Over the last quarter-century of the WTO’s life, the number of truly multilateral trade agreements they have negotiated, that is with all signing on to binding obligations, just number two – one on trade facilitation (lowering administrative burdens at the border), and an incomplete agreement limiting subsidies to fisheries. Binding dispute settlement applicable to all, a distinguishing feature of the WTO compared with other international arrangements, is no longer functioning. Transparency in terms of reporting measures affecting trade is inadequate.

Even so, world trade is served by ongoing WTO functions. Members large and small come before a committee of the whole to have their trade policies reviewed. Governments for most of their trade live up to their international obligations. Assistance is given to the least developed. Tariffs generally do not exceed agreed levels. Groups of members seek to reach an agreement on important new subjects such as rules for the burgeoning world of digital trade, while others created an alternative dispute settlement mechanism.

Revitalizing the World Trading System is a guidebook to the WTO. It traces the organization’s history from the outset in 1995 when it came into existence, through 12 Ministerial Meetings, at which decisions were taken or failed to be taken, that defined the role of the organization in international trade. The book describes the subject areas governed and to be governed by the rules of the trading system, including agriculture, services, e-commerce and more. It places the reader in committee and working party meetings to see how members express their concerns and how they respond to the concerns of others. Key moments in trade history are witnessed, such as bringing China into the WTO, and hearing what the representatives of members and China said at that time. In other committees, members discuss product standards that will channel trade, and the reader is present for their deliberations.

The book considers both the value and the values of the WTO. It addresses the challenges the world has faced (such as the COVID-19 pandemic) and will face. Future challenges include the trade aspects of climate change (moving food from areas of plenty to areas of need), the development of the digital world, future pandemics, how to best bring about economic development through trade, how to support peace among conflict-affected countries, and the accession process for bringing additional countries into the organization.

The book offers ideas on how to make the WTO more effective in meeting global needs. It recommends solutions to restore binding dispute settlement, reinvigorate rule-making and multilateral trade negotiations, and strengthen the executive functions performed by the Secretariat. It also provides practical advice for trade negotiators based on a lifetime of practitioner experience as a former US trade negotiator, a trade lawyer, and a former international civil servant as Deputy Director-General of the WTO.

World leaders, including Nelson Mandela, Bill Clinton, and Tony Blair, came together in Geneva in 1998 to celebrate the 50th anniversary of the multilateral trading system embodied in the GATT and express their hopes for the future of the then-new organization, the WTO. The year 2023 is the 75th anniversary of the system, and it needs world leaders to once again focus on the kind of world they wish for and the role of international trade in delivering it. Revitalizing the World Trading System is designed to assist their negotiators in thinking through how to achieve this objective.

Ambassador Alan Wm. Wolff is a Distinguished Visiting Fellow at the Peterson Institute for International Economics, and was co-Acting Director General (2020–21) and Deputy Director-General of the World Trade Organization (2017–21). He is a leader in the field of international trade, with over five decades of experience as a lawyer and trade negotiator. He is a member of the Council on Foreign Relations (CFR) and the Friends of Multilateralism Group (FMG).

To read the full article, please click here.

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In this increasingly complex landscape, the world needs a system to tackle challenges of the global commons, diffuse trade conflicts, and tap into new growth opportunities. Only a revitalized World Trade Organization (WTO) can serve this purpose. Contrary to misguided views of the WTO as an irrelevant outfit or a strait jacket that obstructs the pursuit of legitimate national goals, the WTO matters. Now, more than ever.

Of course, reforming the WTO will not be easy, but it can be done. The global trading system has confronted challenges before, and governments have found ways to reinvent it. We owe this in no small measure to the trading system’s flexibility.

Trade frictions: Déjà vu all over again

Neither tensions in the trading system nor their underlying causes are new. Already in the late 1970s, the eminent scholar John H. Jackson was concerned that the sluggishness of the world economy at the time, a growing scepticism about free trade, the downsides of economic interdependence, and divergent economic structures across major participants would corrode the system. Governments did not allow that to happen, even if they took some time to sort things out.

After complex and drawn-out negotiations, the WTO was established in 1995 with an expanded rulebook, a strengthened monitoring role and an effective mechanism to resolve trade conflicts. The reformed system underpinned a rapid expansion of global commerce which in turn unleashed an era of unprecedented prosperity and poverty reduction, even if not all people or places shared equally in the benefits.

Can the WTO help this time around and if so, how?

As the global economy recovers from massive global shocks, the world needs the WTO as much as ever.

First, the WTO can assist countries tap into new sources of trade growth. Digital technologies, for example, have boosted trade in services, offering new possibilities for trade diversification, jobs and innovation. Global exports of digitally delivered services, which totalled US$3.7 trillion in 2021, have been growing much faster than goods exports since 2005 and the prospects are bright (see Figure 2). For countries like Costa Rica, the Philippines, Ghana and India, digitally-enabled services already represent 20 percent of their total exports. Negotiations by groups of WTO members to cut red tape and facilitate services trade, improve the investment climate and foster digital trade are all valuable in unleashing much needed trade-led growth and development opportunities, including for people and countries that have remained on the margins of the global economy.

Second, the WTO is needed to help resolve problems of the global commons. Climate change is a case in point. A successful response to climate change can be achieved only if all countries act in a coordinated and decisive way, including on trade issues. The key here is to leverage the full power of the global market to exploit countries’ green comparative advantage. Trade cost reduction can also accelerate the diffusion of relevant technologies, spur innovation and create deeper and less concentrated markets that are better able to withstand global shocks, whether from extreme weather events, pandemics or disruptions of agricultural supply chains.

Third, the WTO can help manage and de-escalate trade tensions. One growing source of stress that requires urgent attention is subsidies. Subsidies were the most frequent form of intervention after the financial crisis of 2008, surpassing tariffs and other non-tariff measures, and representing nearly half of recorded interventions during 2009-2021 (Figure 3). While subsidies can help achieve important policy goals, as the experience with the development of COVID-19 vaccines shows, they can also lead to trade conflict, including among governments pursuing the same goals and operating within similar economic systems. The steady rise of official handouts over the past decade or so also feeds into perceptions that the playing field is tilted in favour of those holding the largest purse, adding to a sense of unfairness in global trade. The way in which different systems use subsidies to support policy goals, and the transparency or lack thereof of specific programs, adds fuel to the fire.

A dedicated dialogue involving all key players, supported by enhanced information, solid evidence, and objective analytics, is needed to look into the implications of subsidies for the global trading system.

More broadly, the restoration of a fully effective dispute settlement mechanism, perhaps comprising a basket of tools for resolving controversies, is indispensable. Absent such a mechanism, norms become good guidance at best; at worst, bad behaviour risks becoming contagious and eroding the system.

Don’t take the status quo for granted

The WTO rests on strong fundamentals, which have served the world well for over 70 years. The system requires adjustment, urgently. Without reform of the WTO, unleashing new sources of trade growth, using trade to resolve global common problems and managing trade tensions will become elusive. A fragmented trading system will become more likely.

The costs should not be underestimated (see Figure 4). They could well surpass those of the global financial crisis of 2008-2009, leading to increased concentration of risks, reduced resilience and distorted value chains. It would be inflationary just at a time when governments are deploying all tools to bring inflation under control. And it would stifle competition, innovation and technological collaboration, the main drivers of human progress. All countries would be affected but trade fragmentation would disproportionately impact the poorest countries. In today’s world, however, all things are connected. If goods cannot flow freely, people will find a way to look for better opportunities.

In the current geopolitical context, some rearrangement of production networks appears inevitable. In fact, while highly efficient, certain supply chains are also too highly concentrated geographically. In a world with stronger and more frequent shocks, investing in backup supply chains, while expensive, may be a solution.

The risk of course is that measures to pursue supply chain resilience or other strategic considerations turn into a free-for-all that ends up subverting the global trading system. A focused multilateral dialogue to develop a shared understanding is needed about possible parameters of concentrated supply chains and the guardrails that would be needed to minimize negative spillovers from policy measures.

Building on WTO pragmatism to make reform happen

WTO reform must be guided by the basic principles that have propelled the global trading system forward for over seven decades – confidence building through transparency; non-discrimination; fairness; trade cost reduction; and pragmatism. Pragmatism allows for exceptions, waivers and other tools to manage adjustment within the system and achieve coherence between trade and other policy goals.

WTO rules are not set by a supranational body. Governments agree to them in what are naturally difficult negotiating processes. Precisely because officials understand the benefits and challenges associated with increased trade cooperation, escape valves are built into the system to allow sovereign nations to pursue legitimate national security or other objectives while reducing spillover effects on third countries. Put differently, while it provides flexibility, the system aims to prevent protectionism spiralling out of control, making sure that transitional measures do not drive permanent wedges into global trade integration.

WTO reform is likely to be a slow burn, rather than a big bang. Bits and pieces of this reform are already crystallizing in small group conversations or broad-based committee discussions. But more is required. Negotiations need focused, high-level acceleration to ensure that the WTO can be better equipped to serve its members in a more complex and rapidly changing trade policy environment.

Just like they did in the past, governments must rekindle a spirit of self-interest and do the hard work of revitalizing the WTO to match the size of the challenges facing global trade. This is the time to make it happen.

To read the full article, please click here.

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Our planet’s history tells us that friendship among nations is to be cherished and nurtured. Too often countries have not served as good friends to others, particularly in the area of international trade, when we prioritize competition over friendship. In our view, we should view trade friendships as a means of protecting the future of our children and successive generations, who will inherit our planet and the promise of humanity.

We must act to ensure not only their economic health but their freedom and liberty. If free market liberty-loving countries increasingly isolate themselves from each other via trade barriers, we are hurting our ability to compete both economically and in innovation. Free trade among friends and allies is important as it greatly benefits each nation and gives us the best chance at staying ahead of authoritarian governments.

With these perspectives in mind, we share CTA’s “Top Ten Ways for Turning Trade Friends into Trade Best Friends Forever (Trade BFFs).” We hope these ideas spark a necessary conversation among democratic and liberty-loving nations on leaving the self-serving measures of the 20th century behind and forging a stronger and like-minded free trade future for our children and successive generations. And we welcome ideas from others on what it takes to be a “Trade BFF” in our era of fierce global competition.

Your friends,
Gary Shapiro, President and CEO, Consumer Technology Association (CTA)® 

Ed Brzytwa, Vice President of International Trade, Consumer Technology Association (CTA)® 

Trade BFFs should:

1. Honor their commitments to each other. Friendships are built on trust, which means Trade BFFs should bind and enforce their commitments to each other (trade pinky promises) through comprehensive, binding, and enforceable free trade agreements (trade friendship bracelets).

2. Have each other’s backs. You look out for someone by helping them – not putting up barriers to their success. True friendships embody selflessness – not selfishness. For example, they should promise to spare their Trade BFFs from disruptive and harmful unilateral enforcement actions, including tariffs and import prohibitions.

3. Work together. Friends make each other better and push each other to live up to or surpass expectations. One way to do that is to collaborate on strengthening the World Trade Organization and on multilateral and regional trade and investment efforts.

4. Share common values – and stick to them. We value freedom, democracy, and the power of the free market. We can maintain and promote market economies by avoiding policies that intentionally displace or injure foreign competitors and making any incentives available to their domestic industries also available to industries in their Trade BFFs.

5. Compete hard – but fairly. Trade BFFs develop and implement regulations that allow companies located in their fellow Trade BFFs to compete fairly on a level playing field while encouraging a race to the top through high performance.

6. Be empathetic and open to mutual, voluntary support. Trade BFFs take measures to encourage but not coerce industries located in their fellow Trade BFFs to trade with or invest in their economies.

7. Invest in and support each other’s successes. If one friend is an expert or good at something, they use that skill or expertise to help their friends. Trade BFFs invest in and support each other’s successes, avoiding irritating and disruptive investment reviews or other restrictions on investment.

8. Share openly with each other. Trade BFFs take steps to allow data to flow freely across borders. They prioritize transparency and participation by interested persons in policymaking, including in their fellow Trade BFFs.

9. Join forces to fight for their shared futures. All countries sharing the values of democracy and liberty should work together and rip out trade barriers among like-minded friends. They can work together to confront trade bullies and provide more market access to each other in the face of bullying. They avoid policies that bully their fellow Trade BFFs.

10. Communicate with each other clearly and often. One key to any friendship is an open and honest level of communication. For example, Trade BFFs talk to each other regularly about issues like IP protection and enforcement and new trade rules that benefit our people and planet. They avoid unilateral measures, which can have unintended consequences on their friendships, companies, workers, and people.

TOP TEN WAYS TO TURN TRADING PARTNERS INTO TRADE BEST FRIENDS FOREVER (TRADE BFFS)

Technology is about changing people’s lives for the better. It’s about ideas, large and small, that keep us connected, that help us move, that spark even bigger ideas. The Consumer Technology Association (CTA)® convenes companies of every size and specialty in the technology industry to move us all forward. Our “Top 10 Ways to Turn Trading Partners Into Trade Best Friends Forever” will grow our industry and every industry using technology if governments adopt these principles.

Trade BFFs should:

1. Honor their commitments to each other. Friendships are built on trust, which means Trade BFFs should bind and enforce their commitments to each other (trade pinky promises) through comprehensive, binding, and enforceable free trade agreements (trade friendship bracelets). When Trade BFFs make deep and lasting commitments to each other, they bind them in a durable way and make them public and transparent so all stakeholders can understand and use them. These binding commitments tell the bullies “Don’t even try to harm my Trade BFF!” Comprehensive and enforceable free trade agreements are trade friendship bracelets that lock in the trade pinky promises. And Trade BFFs keep and treasure their bracelets and fellow Trade BFFs.

2. Have each other’s backs. You look out for someone by helping them – not putting up barriers to their success. True friendships embody selflessness – not selfishness. For example, they should promise to spare their Trade BFFs from disruptive and harmful unilateral enforcement actions, including tariffs and import prohibitions, which would in turn spare them from inevitable retaliation. Unilateral trade measures will NOT lead to win-win cooperation. Trade BFFs are honest about their policy goals and problems and demonstrate empathy and support. Trade BFFs are in it together and live up to their sworn oaths to cooperate for the greater good. They do not stab each other in the back!

3. Work together. Friends make each other better and push each other to live up to or surpass expectations. One way to do that is to collaborate on strengthening the World Trade Organization and on multilateral and regional trade and investment efforts. Trade BFFs know that a strong and fully operational WTO is a win-win for the rule of law, reducing and preventing barriers to trade and investment, and amicably resolving disputes without resorting to unilateral trade measures, which erode trust and cause economic and reputational harm. Trade BFFs work side by side to strengthen the WTO, through their own bilateral engagements and as teammates in multilateral and regional fora. Strengthening the WTO requires sweat equity and trust building among Trade BFFs. The world will be a better place for their WTO reform efforts. 

4. Share common values – and stick to them. We value freedom, democracy, and the power of the free market. We can maintain and promote market economies by avoiding policies that intentionally displace or injure foreign competitors and making any incentives available to their domestic industries also available to industries in their Trade BFFs. Trade BFFs have dynamic private sectors and limit government intervention in the marketplace. Subsidies, for example, tell the world that your government is selfishly interested in the short-term and uninterested in long-term win-win cooperation. Trading partners often take offense when governments limit tax credits only to companies producing domestically. Such policies send the wrong signal. Trading partners will question whether written or oral words of trade friendship are just talk and whether the trading partner providing those tax credits deserves to be a Trade BFF! Trade BFFs should instead enact policies that give companies in their fellow Trade BFFs the same opportunities as their domestic companies.

5. Compete hard – but fairly. Trade BFFs develop and implement regulations that allow companies located in their fellow Trade BFFs to compete fairly on a level playing field while encouraging a race to the top through high performance. Trade BFFs know that all governments prize the right to regulate as they see fit. They also share common values that regulation should be developed in an open, inclusive, and transparent manner and reflect input from interested persons. Trade BFFs undertake regulatory cooperation, for example on higher labor and environment standards, while preventing barriers to trade and investment. Trade BFFs agree that to meet these goals, they should allow companies to focus on performance over design and drive innovation, helping their fellow Trade BFFs throughout.

6. Be empathetic and open to mutual, voluntary support. Trade BFFs take measures to encourage but not coerce industries located in their fellow Trade BFFs to trade with or invest in their economies. Policies designed to force domestic or foreign companies to move out of their Trade BFFs are not in the Trade BFF playbook. Encouragement of investment is the self-assured and confident play and leads to more optimal use of scarce capital and resources, to the benefit of the economies, companies, and people of Trade BFFs.

7. Invest in and support each other’s successes. If one friend is an expert or good at something, they use that skill or expertise to help their friends. Trade BFFs avoid irritating and disruptive investment reviews or other restrictions on investment when companies in their fellow trade BFFs seek to invest in their markets. Trade BFFs talk to each other regularly about their goals and aspirations. When one succeeds, their fellow Trade BFFs celebrate. And when governments look at possible investments by companies in their Trade BFFs designed to aid those goals, they welcome those companies with open arms. They do not adopt unilateral investment measures that signal “Our Economy is Closed to You!” Trade BFFs think the best of investments from their fellow Trade BFFs and don’t assume that all investments are threats to national and economic security!

8. Share openly with each other. Trade BFFs take steps to allow data to flow freely across borders. They speak candidly about their data policies and leverage data for the greater good of the planet and its people. Policies that restrict data flows and force companies to keep their data local by their nature are adversarial and selfish. Trade BFFs protect personal data and the right to privacy and agree on approaches with their fellow Trade BFFs to enable companies to transfer data across borders. Trade BFFs should be generous with their data, since their people and companies can solve big global problems with it and make their products and programs work even better!

9. Join forces to fight for their shared futures. All countries sharing the values of democracy and liberty should work together and rip out trade barriers among like-minded friends. Trade BFFs know a trade bully when they see one. They can work together to confront trade bullies and do not let them divide and conquer. Instead, they provide more market access to each other in the face of bullying. They avoid policies that bully their fellow Trade BFFs. Trade BFFs are also optimistic and hopeful that with the right mix of policies and actions, the bullies can change for the better and join the Trade BFF Club, no matter how long it takes!

10. Communicate with each other clearly and often. One key to any friendship is an open and honest level of communication. For example, Trade BFFs talk to each other regularly about issues like intellectual property protection and enforcement and new trade rules that benefit our people and planet. Trade BFFs are market economies that abide by the rule of law and know that innovation can come from anywhere and anyone. Their protection and enforcement of intellectual property rights for all industries provide mutual and long-term benefits to their economies, as well as the global economy. When trade bullies steal intellectual property or forcibly transfer technologies, Trade BFFs confront the bullies together and adopt joint policies for changing bully behavior.

Trade BFFs who bind the above commitments lift each other up and have each other’s backs for life! They celebrate their successes and recognize that trade jealousy is corrosive and harmful. And Trade BFFs set the most positive examples for the rest of the world, leading to better, more empathic, and economically beneficial behavior and outcomes for their citizens and companies over time.

To read the full article, please click here.

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These questions took center stage during a session titled, ‘The Trade System is Changing: Can It Deliver for the Future?’ held at this year’s World Trade Organization’s (WTO) Public Forum. The event, which took place on 27 September, both in person and online, was co-organized by the International Institute for Sustainable Development (IISD), the International Chamber of Commerce (ICC), and CUTS International, Geneva.

Moderator Alice Tipping, Lead for Sustainable Trade, IISD, set the stage for the conversation, outlining how the past several years have already seen a sea change in both the substance and practice of trade policy. Two examples of how the substance is changing are the discussions underway among over 80 WTO members on potential rules for digital trade, along with efforts among other WTO member groups to look at where the trading system can contribute to tackling environmental challenges such as climate change or plastic pollution.

Currently, the WTO’s rules on digital economy issues are limited. There has long been in place a moratorium on customs duties on electronic transmissions, which normally must be renewed every two years at the Organization’s ministerial conferences, and there is a work programme on e-commerce that dates back to 1998. However, the moratorium has been dogged with repeated questions over whether it should be scrapped, made permanent, or continue to be renewed on a roughly biennial basis. Discussions under the work programme have also been limited and, in some WTO bodies, infrequent. In 2017, however, a large group of WTO members launched a “joint initiative” towards negotiating binding rules on digital trade, which has advanced significantly in the years since.

While the WTO’s Committee on Trade and Environment (CTE) is an important forum for environmental issues, and multilateral negotiations on select environmental agenda items have taken place in parallel since 2001, there is a growing appetite among WTO members to have a space for more targeted work on select issues. To complement the conversations underway in the CTE, following extensive preparatory work, different WTO member groups launched ministerial statements for three “joint initiatives” – on trade and environmental sustainability, plastic pollution and environmentally sustainable plastics trade, and fossil fuel subsidy reform.

However, the practice of launching joint initiatives is controversial in Geneva circles, given that some WTO members worry that such processes could detract attention from the existing issues on the multilateral agenda that already have agreed mandates. While some of these joint initiatives envision the negotiation of new rules, others have involved sharing experiences, best practices, and ideas for cooperation. These joint initiatives involve a subset of the WTO membership.

“This is not an easy discussion,” said Tipping, noting the tension around the emergence of joint initiatives. This is why, however, “it’s important to think and to talk about what these changes might mean for international cooperation on trade policy in the coming years – both the opportunities that they present, but also the challenges that might be there that we need to acknowledge and address.”

The digital economy: eyes on process, emphasis on capacity building

The Public Forum session began with a deep dive into the digital economy and the role of the trading system, especially in light of the rapid changes seen in the digital landscape over the past few years due to the COVID-19 pandemic. With 87 WTO members now looking to clinch a binding deal on e-commerce rules next year, speakers weighed what the substance and the process of these negotiations should entail, and what implications this would have for developing country members and smaller businesses located in those economies.

Digital trade has great potential in helping address societal and environmental goals “when treated well,” said Kumar Iyer, Director General, Economics, Science, and Technology, Foreign, Commonwealth, and Development Office (FCDO), UK, but it can also hamper achieving those objectives when handled poorly. The question is “how to maximize the advantages and minimize the risks,” especially in such a vital area.

“These are not challenges that can wait. They will overtake us,” he said, explaining that existing rules could risk becoming obsolete, along with putting the WTO’s relevance into question. Bad practices in the digital sphere could also become increasingly commonplace unless WTO members find paths forward to answer the challenges and opportunities being posed by an increasingly digital economy.

Similarly, Ute John, Chair of Trade and Investment Commission, ICC, and who also works at the Mercedes Benz Group, noted that new barriers in digital trade could pose risks to companies and sectors, urging WTO members to make the moratorium on customs duties on electronic transmissions permanent. A car, for example, is now “a computer on wheels,” John noted, meaning that the scope of what an electronic transmission covers is becoming “increasingly intensive,” and introducing such customs duties could have far-reaching ramifications.

“The pandemic has accelerated the digital transition, and this affects all companies, irrespective of size, sector, or region,” John told the audience. The e-commerce negotiations currently underway among a group of WTO members should involve an “ambitious agreement” that includes data governance, such as data flows and cyber privacy. With momentum in the talks picking up, a deal at the WTO’s next ministerial conference (MC13) could be in sight, John said.

Negotiating new rules in this area, however, will be challenging for governments, especially given that this is a negotiation that is not a traditional exercise on market access, noted Ambassador Pimchanok Pitfield of Thailand, who represents the Southeast Asian nation at the WTO. This is a negotiation that involves regulatory issues and regulatory convergence, but “at the same time, compliance costs are high, especially for developing countries, so we need to take that into account.”

John also argued for the value of capacity building, noting it would benefit many companies that are part of the ICC and that are based in developing countries. This support would be important for these companies to take part in the conversation and benefit from the changes underway in the digital economy.

Capacity building would also be key for governments, the audience heard. “These are new issues” and therefore not all delegations will have the technical expertise they need, said Pitfield. “Because these are different rules, they require different skills to negotiate,” Tipping concurred, noting a new report from the TradeExperettes network that named capacity building one of the recommended “quick wins” that WTO members should consider on digital trade.

Ambassador George Mina of Australia reminded participants that the digital economy, while long a part of our daily lives, is still a comparatively nascent area in international rule making. “We have a long way to go on digital trade,” said Mina, noting that the moratorium on customs duties on electronic transmissions remains the only specific rule at the WTO on e-commerce, though some existing rules in areas such as services trade may intersect with the digital economy. The joint initiative on electronic commerce provides a platform that WTO members can build from, he said.

Trade and environment: tackling existential threats

The other major substantive theme of the session was the role of trade cooperation in tackling pressing environmental challenges, especially the climate crisis.

“Climate change is the single biggest threat facing all of our nations. It is existential in nature,” said Iyer, pointing to recent examples of flooding in Pakistan, droughts in Europe, and hurricanes in the Caribbean as cases where communities are feeling the impacts of the climate crisis in their daily lives. These extreme weather events also affect the poorest the hardest. “It is imperative for us to find solutions here. Trade is not the only lever, but it is absolutely a part of the solution set,” he said.

Examples of where the trading system could help, Iyer noted, would be a “coordinated approach to carbon leakage” and liberalizing trade in environmental goods and services, noting that the trading system will not always be “the answer to all of our targets” and should not be treated as such.

While the trading system can help in tackling threats such as climate change, it can also be a hindrance to those same objectives if not handled carefully. “We can’t let the trading system be the way that you can evade” commitments made in the UN climate talks or other international forums, said Iyer. Initiatives such as the trade and environmental sustainability structured discussions (TESSD) underway among a large group of WTO members can be a source of excellent work in this vein, he urged.

John concurred, referring also to the informal dialogue on plastic pollution and environmentally sustainable trade (IDP) underway by another group of WTO members, which has some overlapping membership with the TESSD initiative. These informal initiatives, Tipping indicated, are a space where governments are “sharing best practices on how trade can contribute,” and while some may lead to negotiations, that is not their sole purpose and may not be the ultimate outcome.

One of the big challenges, however, is the current narrative around environmental protection. Pitfield, recounting the evolution of trade and environment issues since the 1992 Rio Earth Summit, indicated that one of the big problems has been in making the benefits of these policymaking efforts evident. “It is easier if you can demonstrate the benefits of why you have to negotiate on the digital economy. The benefits are more tangible.”

Today, as extreme weather events make the impact of climate change increasingly apparent, that conversation is beginning to show real progress. But that does not mean that the road ahead will be easy. For instance, while Thailand is an advanced economy and has taken important policy steps like establishing a carbon credit market, it cannot necessarily keep the pace of larger economies like the EU. The narrative here, unlike the digital economy, can easily become negative. For example, there are concerns that the changes in economic policy laws and frameworks needed to tackle the climate crisis are “difficult, burdensome, and high cost.”

“I think we need to find a new way to present these issues,” said Pitfield, highlighting the importance of multilateral cooperation for the environment, as well as that of capacity building and access to technologies, though this does not have to entail no-cost technology transfer. It also means acknowledging that while some terms, such as the circular economy, have become common parlance in policy circles, these issues may not be as clear-cut to small and medium-sized enterprises (SMEs) in smaller economies, she said.

While the narrative around environmental issues is complex, the advances seen at the international level on cooperation in trade policy for environmental protection are showing promise, panelists noted. “There is something very positive emerging here in Geneva” on trade and environment, confirmed Mina. Thirty years ago, “Geneva was the capital for trade negotiations globally.” “Today, I would say it is a key capital for trade negotiations and a key capital for trade policy and what trade policy can bring to broader global goals,” he said.

“Cooperation doesn’t necessarily mean jumping into rule making […] and we aren’t just jumping into rule-making,” Mina emphasized. An important area where trade policy can help is addressing environmentally harmful subsidies, Mina said. This would be “one of the most urgent things we can do to help the climate” and achieve the objective of net-zero emissions.

More broadly, Mina affirmed, policymakers must across the board ensure that in times of conflict and crisis, they “keep power out of international economic relations” and keep their focus instead on cooperation on imperatives such as food security, the digital economy, and the environment.

“The fact of cooperation needs to be treated as a precious thing in a world where multilateral regimes are under enormous pressure,” said Mina. “This cooperation needs to be fostered, and governments need to be open to different avenues for achieving that.”

Crucial in this international cooperation is talking not just to like-minded governments but also to the “un-likeminded,” said Pitfield. “Cooperation will start if you open your mind as well” and are willing to engage and exchange ideas, even when a given government is not ready to become an active participant in a particular initiative or negotiation.

The importance of speaking not just with those who agree, but with those who hold different views, was reiterated by fellow panelists, as well as event organizers. Rashid Kaukab, Executive Director, CUTS International, Geneva, flagged that transparency in these processes is crucial to have meaningful engagement by all those affected, as is capacity building. “Can we get out of our comfort modes and talk to the un-likeminded?” he asked. It is worth a try, cautiously and thoughtfully, especially when we are no longer “in a static world.”

Moving ahead in groups: considering systemic and development implications

During the question-and-answer session, some participants referred to the tension inherent in pursuing new rules in areas such as e-commerce among groups of WTO members, while many crucial issues on the existing multilateral agenda for negotiations have long struggled to advance.

For instance, Buddhi Prasad Upadhyaya, Counsellor and Deputy Permanent Representative (Commerce), Permanent Mission of Nepal in Geneva, reminded the audience about how the conclusion of the Uruguay Round in 1994, which set up the WTO, left some gaps to be addressed during negotiations further down the line, such as on agriculture.

“If we only focus on a few areas for developing new rules, by ignoring other aspects [of rules where urgent gaps exist] and also without taking into account the capacity constraints of some members, how can we ensure that the WTO will deliver in an equitable and just manner?” he asked.

Others asked about the systemic implications of subsets of the WTO’s membership moving ahead to craft rules and hold conversations on certain issue areas that do not currently have multilaterally agreed mandates, and doing so without the consensus of the full membership.

“Would you accept…that there is real, genuine, legitimate concern about the systemic consequences for the WTO of groups of members going off and embarking on negotiations that are basically ‘well let’s just do it and work out the legalities later,’ when there are pressing outstanding issues” that are extremely important, asked Jane Kelsey, Emeritus Professor, University of Auckland’s Faculty of Law.

Kelsey further noted that the 1998 work programme on e-commerce does not mandate negotiations and goes beyond the moratorium on customs duties on electronic transmissions. She also flagged that the WTO’s Marrakesh Agreement refers to how members should go about adopting new rules and amending existing rules, and to the need for consensus from the Organization’s full membership.

At the same time, “it is important for all countries here to have the opportunity to do agenda setting,” from the smallest economies through to the medium-sized ones and beyond, Mina noted. “We’re not going to do that if we require absolute consensus at the start of any idea that is ultimately going to form the basis of a rule-making project,” he said, warning that this approach could have “systemic consequences of its own” in “completely stopping rule-making.”

“I completely agree with the comment from Nepal about the gap that was left over in the Uruguay Round on agriculture and the urgent need for us to get back to the table on that subject,” he added.

Under the WTO’s services rules, negotiating bilaterally and plurilaterally is foreseen and common, Pitfield added, referring to her own experiences as a services negotiator. This has bearings also on the services-related conversations involving digital trade. Furthermore, “I also want to distinguish between the discussion on the process and the outcome. The outcome, in the WTO, should be, in principle, MFN,” said Pitfield, referring to the principle of most-favored-nation treatment under the Organization’s rules.

Sofia Baliño is Senior Manager of Communications and Engagement at IISD.

To read the original policy brief, please click here.

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But beyond mining’s dominance, Chile’s trade flows are more varied and complex than they may appear, with significant exports of vehicles, pharmaceuticals and telecommunications equipment. And according to a recent IMF staff paper, the Andean economy is among those that shine as a role model for diversification policies.

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Whether the United States and European Union succeed in using the TTC to rebuild the transatlantic relationship holds broad implications, because the alternative — strained engagement between major trading partners — would contribute to the global fragmentation of the digital economy. And worse, it would be a strategic gift to China, because it would represent a fatal dissolution of a key alliance needed to limit China’s technology mercantilism and counter its digital authoritarianism.

Forward-looking policymakers on both sides of the Atlantic need to recognize this and redouble their efforts to build a better, stronger, and deeper digital-trading relationship.

But to do that, U.S. and EU negotiators will need to meet in the middle on some critical issues. The White House should not define success as increasing cooperation for its own sake — particularly if the price of comity is embracing the EU’s precautionary approach to regulating competition and technological innovation. The administration’s emissaries should instead focus on advancing key U.S. economic interests in ways that also maintain cordial relations with Europe.

For example, no matter how desperately the Biden administration’s trade negotiators may hope to restore harmonious transatlantic relations after watching in dismay as they deteriorated during the Trump administration, the United States cannot agree to a digital services tax or acquiesce to discriminatory regulation of internet platforms, as the European Commission seeks to do with its proposed Digital Markets Act. Either of those would skewer America’s leading technology companies (and kill U.S. jobs) and fundamentally alter longstanding regulatory principles at the expense of innovation and growth. By contrast, the administration and Congress could, and should, meet the EU somewhere in the middle on data protection — not by emulating its heavy-handed General Data Protection Regulation, but by passing a national privacy law that establishes a common set of protections across state lines while improving transparency and enforcement. That would hopefully persuade the EU to support robust cross-border data flows, while at the same time defending America’s pro-innovation regulatory system.

The most glaring differences between the United States and the European Union on digital economy issues stem from the fact that technology policy in the EU is motivated largely by social policy concerns — from data privacy rights to the potential for algorithmic bias — and it views the proper role of government as one of regulating and restraining digital companies and technologies to ensure they cause no harm. In contrast, the United States has long acted on the view that government is the one that should do no harm — and, where it can, it should support technological innovation. As such, the Biden team should ensure that talks cover how to foster the growth of technologies such as quantum computing and artificial intelligence. Besides, social concerns such as privacy, bias, and other related issues are best addressed at the national or regional level, not in bilateral or multilateral trade talks.

The risk is that the EU delegation will press the United States to adopt their precautionary approach to regulating data privacy, AI, and internet platforms, and that the Biden administration will accede, in part because many Democrats long to emulate European economic and social policy.

The EU could do this in part because it genuinely believes the world would be better off under its regulatory system, but also because it knows that unless major competitors adopt its stifling regulatory system, its own tech companies will remain at a competitive disadvantage.

Finally, while China won’t be in the room when U.S. and EU officials meet, it should be near the top of everyone’s minds. China’s innovation mercantilist policies — from forced technology transfers to massive production subsidies — have harmed both the U.S. and EU economies, and its digital authoritarianism is a threat to freedom.

It is in the mutual best interest of the United States and EU to push back.

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That [negotiating trade deals] seems a distant memory now for the world’s biggest trade bloc. Concerns about human rights in China and fears about deforestation in Latin America mean that the EU’s free trade agenda is running out of steam.

Doing trade deals is no longer just about keeping German carmakers and French farmers happy — which was often challenge enough. EU trade officials must now also please young climate marchers, union leaders and human rights activists — and that’s before they even start to haggle over tariffs and quotas with the negotiators across the table. The growing litany of public objections to trade means that the European Parliament and EU capitals are increasingly unwilling to sign off on deals that the Commission has struck.

What intrigues me most about this is that you could take out “EU” and insert “United States,” and it would still make perfect sense. Clearly, there has been a sea change in thinking about trade, perhaps not by the majority of people (U.S. polls continue to show strong support for trade), but certainly among the people that make the most noise.

This debate over trade is not new—the older folks reading this will remember Seattle in 1999—but the argument has evolved. In the early days, the focus was on what the activists were against—most trade agreements, which were deemed to be tools of big corporations that exploit the workers. Now it has turned a useful corner, and the trade skeptics, while still seeing a corporate conspiracy, are talking about what they are for rather than what they are against. This is a hopeful sign because it permits a more constructive conversation, although we have yet to have it.

The fact that these concerns are international is also not new. It was obvious during negotiations on the Transatlantic Trade and Investment Partnership (TTIP) that the agreement was in more trouble in Europe than in the United States, as activists convinced European consumers that the deal would be a giant regulatory downgrade that would imperil their health and safety. (This concern is also not new. One of my favorite headlines from the 1980s appeared in a Canadian paper attacking the proposed U.S.-Canada free trade agreement: “Free Trade Called Threat to Day Care.” It’s on the wall in my office.)

Sadly, these ideas have not gotten better with age. They were wrong then, and they are wrong now. Overall, trade creates benefits. It leads to more jobs and more growth. As every economist will tell you, however, trade agreements, while net positives, produce both winners and losers, and as politicians will tell you, the losers make the most noise. Historically, the answer was to design programs like trade adjustment assistance that compensated the losers. For a variety of reasons, those programs have not been as successful as we would like, and the debate has turned from compensation to prevention—let’s not have trade agreements that don’t do what we want.

The list of things we want has also grown longer, to include worker rights in other countries, avoidance of forced labor and other human rights concerns, climate change mitigation, opportunities for women, and more. These are all worthy objectives, consistent with administration goals and values the United States has long advocated. (The Scholl Chair has recently completed analysis on three of these issues—the role of women in trade, climate and trade, and forced labor in Xinjiang.)

Where I get off the boat is with the insistence that these are more important than other trade priorities, and we should oppose agreements that do not contain them. In that regard, I am admittedly old fashioned.  Trade agreements should be about trade. Their goal is to promote the exchange of goods and services to the benefit of all parties in the agreement. There are millions of Americans who have a stake in the global economy (whether they know it or not) because they grow things, make things, or provide services that are exported. Improving market access will enhance their prosperity and grow our economy.

The trade activists seem to have forgotten this, and the administration seems to be forgetting it as well. They will be reminded of it if they ever launch a trade negotiation, because I can guarantee the other party will bring it up because it has its eyes more clearly on the prize. That does not mean we should give up on these other important goals. They are fair game in negotiations, but we should be realistic about how much we can obtain and not forgo agreements that provide important market access because they don’t give us everything we want on other issues.

There is a disconnect here. Trade negotiations are incremental—get what you can and come back later and try again for more. Environmental, labor, and human rights activists are pursuing a moral agenda. They want the whole loaf because it is right and just and are willing to sacrifice the agreement if they don’t get what they want. The two groups speak different languages. Here at the Scholl Chair, we’re dedicated to bridging that divide. I hope the administration will attempt to do the same.

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

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

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Investing in China

In a recent paper, we tried to reconcile these contrasting realities. Although tensions over human rights, security and geopolitics clearly play a big role in relations with China, we focused solely on the economic and business aspects of the situation.

To do so, we first examined surveys of EU, US and Japanese businesses operating in China to understand why they continue to operate there, despite the trade war. Unsurprisingly, businesses point to the size and dynamism of China’s market as key to their presence. However, they also mention several threats and concerns that give them pause. We focus specifically on those concerns to compare China with other countries that attract large amounts of FDI. We only used trusted sources, such as the OECD, the World Bank, the World Economic Forum and the World Trade Organization. In a highly politicised debate, our aim was to arrive at an appraisal of business conditions in China that is as fact-based and objective as possible.  

Drawing on company surveys and international comparisons, we show that some of the concerns expressed by Western policy-makers about operating in China are real, and that a particular weakness is the uneven and difficult-to-predict application of laws and regulations, as distinct from the laws themselves.

However, we also show that, along many important dimensions (such as protection of intellectual property [IP] rights, for example), China compares well with other countries at similar levels of development, while in others (such as overall ease of doing business), China outranks nearly all developing countries and even some advanced countries. The implication is that, while China’s size and dynamism are clearly very important for foreign investors, they provide only one part of the explanation of the country’s attractiveness. Moreover, contrary to the prevailing narrative, conditions for doing business in China have improved considerably over the past few years.  

Macro fundamentals help explain the attractiveness of China. The country is now the world’s largest market for many products, from automobiles to some luxury products. According to a McKinsey study, top global brands now have a higher penetration in China than in the US. Chinese consumer goods markets — and those for machinery, parts and equipment — are growing three times as fast as their Western counterparts. 

Meanwhile, per capita incomes in China (a good proxy for labour cost), are about one-fifth of those in the West. Accounting for productivity, the cost of labour in China in many sectors, though rising rapidly, remains internationally competitive. It is not surprising, therefore, that many international companies place China among their three top strategic priorities as a market and production base and, despite political pressures of various kinds, very few firms say they plan to leave the country.

However, China’s market size and growth trends are not the whole story.   

Doing business in China

The World Bank’s ‘Doing Business’ report, which is based only on measures of regulations and time required to conduct ordinary business transactions (such as clearing goods through customs) now ranks China 31st out of 190 countries. The World Economic Forum’s competitiveness report, which is based on a far wider set of indicators and includes a comprehensive survey of executives, ranks China similarly. This means that China is ranked in line with the average advanced country and ahead of some of them — and ahead of nearly all other developing countries. The Doing Business ranking only places Thailand ahead of China in this group.  

The trade and investment regime in China is not as open as in advanced countries, although it is improving and compares well with other developing countries. China’s average applied tariffs in the WTO are now around 7%, around 4% higher than the advanced countries and a bit lower than a sample of large upper-middle-income countries, such as Brazil and Turkey.

China also displays very good trade logistics according to the World Bank, although non-tariff barriers impede trade about as pervasively as in other upper-middle-income developing countries that attract FDI. According to the OECD, in the manufacturing sector, China’s FDI regime displays few restrictions and is more open than some advanced countries, such as Australia and Canada. However, while China’s service sector is far less open than is the case in advanced countries, it is in line with other upper-middle-income developing countries.

The country is clearly becoming a more open economy, as shown by China’s score on the OECD’s Foreign Investment Restrictiveness Index. China’s rank in the World Bank’s Doing Business report has improved by a remarkable 60 places over the past five years. China’s new foreign investment law eliminates joint ventures requirements in many sectors and establishes equal treatment of foreign companies in commercial law and even in public procurement. The new law also explicitly forbids forced technology transfers. The country has recently concluded major agreements with its main trading partners, namely the Regional Comprehensive Economic Partnership with Asian countries and the Comprehensive Investment Agreement with the EU. Both of these agreements face a difficult ratification process.

China Inc

The image of a “China Inc” systematically seeking advantage for its firms against foreign competitors, as often depicted in Western political discourse, is not consistent with the available data — most foreign firms do not feel discriminated against. Half of European firms report to their chamber that they are treated equally and 10% are treated better than Chinese firms — and their combined share has increased in recent years. Similar results are found among American firms. Of course, 40% of European firms complaining of discrimination is far too large a number, but the discrimination that occurs appears to be contextual — dependent on sector, geographic location and individuals — and not systemic. The IT sector is one where discrimination against foreign firms appears to be especially pronounced, however.  

China’s market institutions are ranked broadly ahead of other upper-middle-income developing countries and improving, but they still fall behind Western standards. Despite its many achievements, from taking a lead in 5G networks to space exploration, China’s vital statistics remain those of a developing country. Based on per capita income, China is classified as an upper-middle-income developing country by the World Bank, like Brazil and Thailand. For example, 25% of China’s labour force is in agriculture, around five times the share in OECD members, and 24% of people live under the World Bank’s middle-income poverty line of $5.50 PPP a day. 

International surveys find corruption to be rife in China, although it is not as bad as in most developing countries at similar levels of development. Measures of judicial independence also place China ahead of other upper-middle-income countries, but some way behind the OECD average. On the thorny issue of IP protection, China ranks 53rd out of 141 countries in the World Economic Forum survey, well behind the average rank of OECD countries, but ahead of nearly all other large upper-middle-income countries.

Improving the situation

China’s biggest challenge is consistency in the application of laws and regulations, and frequently not the laws themselves. American firms have placed this concern at the very top of their list for many years. European and Japanese firms also mention it as a major concern. This is ironic as the perception in Western policy circles is of an all-powerful, all-controlling state apparatus, reinforced by the country’s success in early control of the pandemic. In fact, China’s spatial and social inequalities — and its institutional underdevelopment — present enormous challenges of implementation of the law.

The picture that emerges from our extensive review of the relevant data is of a central government trying hard to improve China’s business climate and to address the many concerns of foreign investors, but making only slow progress.  Nonetheless, in sectors such as some prioritised under China’s 2025 programme, the authorities’ desire to attract more FDI clashes with the objective of promoting China’s own capacity. And in media and education, critical to political control, FDI remains tightly restricted. 

Most established foreign investors in China are familiar with the features we highlight here, which is why nearly all persist despite the complaints and political tensions. Our survey shows that despite all the regulatory impediments and the trade war, foreign firms in China are concerned above all with the ordinary challenges of running a business: increasing competition, slowing growth, rising labour cost and so on. 

China now plays a vital and growing role in world markets, and its leaders should recognise that they bear a special responsibility to move faster on market reforms and, above all, improve their implementation. At the same time, Western policymakers should recognise that China remains a developing country, and still in a transition that is likely to take decades to complete.  

Uri Dadush is senior fellow of the Policy Center for the New South and non-resident scholar at Bruegel. Pauline Weil is a research assistant at Bruegel.

To read the full commentary from fDi Intelligence, please click here.

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Change is happening as West African countries work together to ‘pool’ their power systems for better use and sharing of cheaper, greener energy resources available right in the neighborhood. The region has significant natural energy resources, namely, hydropower, gas, and wind mostly along the coast and solar power – especially in the Sahel region. The West African Power Pool (WAPP), established in 1999, expects to interconnect the 14 mainland countries of the Economic Community of West African States (ECOWAS) by the middle of the decade and bring to fruition a self-reliant regional power market that delivers abundant affordable electricity to all.

Across the region, the economic benefits of the regional power market are evaluated at up to US$665 million per year, with the average cost of electricity generation expected to fall by between a quarter and a third. Over the past 10 years, the World Bank has financed close to US$2.3 billion of investments in transmission infrastructure, and institutional capacity in support of the WAPP.  

But hardware and institutions alone do not make a market. For actual trade to happen, neighbors must have confidence in each other and in the flow of commodities and payments. Despite progress, market confidence remains shaky as some countries balk at the lumpy capital investments and long lead times needed to develop new WAPP-dependent infrastructure. Others suffer from financially distressed national utilities whose creditworthiness and ability to trade may be called into question. These and other factors have caused some would-be importer countries to continue to rely on their own expensive small-scale electricity generation instead of shifting their sights and investment priorities toward least-cost options from neighboring exporter countries.     

The World Bank and other partners are helping countries overcome the financial barriers but changing mindsets and instilling trust in the market have required a new focus on regional cooperation in domestic policies.

An important step forward was the adoption of the ECOWAS Directive on the Securitization of Cross-Border Power Trade in December 2018. This regional reform program aims to increase confidence in the enforcement of commercial agreements, to encourage least-cost investment decisions that promote regional options and competition, and to promote transparency on the creditworthiness of national power utilities and on key investment decisions that may impact demand and supply across the market. It calls for national policies and reforms that, if implemented collectively across the region, will lead to sustained trade and thus investment decisions that lower costs.  

Funding from the World Bank’s Energy Sector Management Assistance Program (ESMAP) supported the directive’s preparation, and the Bank is now helping to operationalize it through the $300 million West Africa Regional Energy Trade Development Policy Financing (DPF) in Burkina Faso, Côte d’Ivoire, Guinea, Liberia, Mali, and Sierra Leone. Like other DPFs issued by the Bank, this one provides governments with fast general budget support in exchange for a pre-agreed program of institutional and policy reforms referred to as “prior actions.” Unlike other DPFs, this one marks the Bank’s first multi-country DPF operation using the Regional IDA window –[IDA is the International Development Association, the branch of the World Bank Group that supports poor countries]– and a joint matrix of policy and institutional actions. Not surprisingly, there has been a learning curve. Three important lessons have emerged so far:

1. Start with joint agreements among high-level decision makers. Early in the process (and pre-pandemic), we were able to get all the Ministers of Finance and Ministers of Energy from all six countries in one room to mutually agree on the prior actions needed to build trust in trade. This has meant that sector ministries have found it hard to back out of difficult, but necessary, prior actions required of them.
2. Design prior actions in a manner that is resilient to events. The structural measures put in place to regularize payments from Mali to Côte d’Ivoire were simple transparent mechanisms designed to limit opportunities for interference, and were unaffected by the August 2020 coup d’état in Mali, even while the West Africa Economic and Monetary Union (WAEMU) closed normal flow of funds with Mali.
3. Remain flexible to keep on track. The COVID-19 pandemic and continuing political instabilities in Mali delayed the DPF’s effectiveness, but we did not let these forces blow us off course. We continued to work with countries bilaterally (and virtually), and the DPF was able to launch in February 2021 with all countries fully on board.

We are encouraged by this initial progress, but deep complexities remain in knitting together the region’s power systems. Most recently, unforeseen supply shortages curtailed exports from Côte d’Ivoire to Mali and Burkina Faso. Several interconnectors under construction will eventually alleviate such shortages, as countries will be able to import from different sources in the region. Regulatory reforms backed by the DPF will further increase trade connections and confidence. Transformation at this scale takes time, but as it happens, the West Africa region will be more self-reliant, greener, and more able to cope with shocks. Together, we remain committed to achieving affordable and reliable electricity for all.   

Mustafa Zakir Hussain advises senior levels of government on policies to advance major infrastructure service delivery while controlling fiscal deficits and advancing national and global de-carbonization objectives. During 2018-21, he led dialogue in a number of countries in West Africa to reduce the fiscal burden of the energy sectors – including leading the Bank’s landmark 6-country Regional Energy Trade Development Policy Financing operation to advance affordability, resilience and de-carbonization in the region’s energy use.

His over 15-year career at the Bank has also covered Eastern and Southern Africa, South Asia, East Asia Pacific, the Balkans and North Africa. He has worked on many aspects of infrastructure service delivery – including economic regulation, output-based financing, project finance and guarantees – and polices to increase competition and improve governance around key investment decisions. A major sector focus has been on energy transition. Beyond infrastructure, he has led national multi-sector budget support operations and worked on the Bank’s operational policies and corporate agenda.

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

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