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Greening regional trade agreements: Subsidies related to energy and environmental goods

Madelyn Cunningham — Tue, 07 Jan 2020 14:52:26 +0000

Many regional trade agreements (RTAs) contain chapters and articles that are environmentally specific. But Parties can elect to more broadly incorporate environmental objectives in their RTAs to promote their environmental concerns in such agreements. This report investigates in what ways RTAs could incorporate environmental objectives in chapters and articles related to subsidies for energy and environmental goods based on existing practice and information.

Subsidies can have trade effects and are therefore disciplined by the Agreement on Subsidies and Countervailing Measures (ASCM) at the World Trade Organization (WTO). The Agreement disciplines the use of trade distorting subsidies and stipulates actions which Members can take in response, including through the WTO dispute settlement mechanism to seek withdrawal of the subsidy or removal of its adverse effects, or remedial unilateral action in the form of countervailing duties to offset the effects of subsidised imports.

Some subsidies, such as those that support domestic renewable energy development and environmental goods and services, can have stated environmental objectives. On the other hand, certain subsidies may potentially contribute to over-exploitation of natural resources, or result in other environmental impacts, and can be flagged for reduction among Parties consistent with their national priorities.

This paper provides an overview of how trade disciplines on subsidies for energy and environmental goods in certain RTAs could address environmental concerns of Parties. While other subsidies including those for agriculture and fisheries could also have environmental implications, they are excluded from the scope of this report due to the complexity of the issue as well as resources required to develop the work.

In the absence of new multilateral disciplines, RTAs offer an opportunity for like-minded Parties to agree on disciplines. With respect to WTO rules, RTAs can provide an additional layer of disciplines by reaffirming WTO rules, agreeing to deepen or expand multilateral commitments; or agreeing to refrain from taking remedial actions between the Parties to the agreement.

Two specific questions are examined in this paper: (i) to what extent can the objectives of particular subsidies for energy and environmental goods be considered in RTAs without prejudice to WTO obligations and (ii) how could RTAs serve to secure greater transparency of energy and environmentally related subsidies?

Subsidies for the energy and environmental goods can have environmental consequences as well as trade effects, and thus they are an important topic when considering how to green RTAs. The application of local-content requirements in renewable energy development has emerged in the past two decades and is a subject that requires consideration to ensure non- discriminatory measures, including for the environment.

As already observed in agreements such as the EU-Singapore Free Trade Agreement (FTA) that has been signed but not yet entered into force, Parties may agree to explicitly prohibit the use of such requirements in the framework of RTAs either in relation to renewable energy development or in a general sense as a way to signal the strength of their commitments to non-discriminatory forms of environmental regulation.

This approach can reaffirm the prohibition of local-content requirements under WTO rules that preclude quantitative and mandatory requirements on goods, and provide additional commitments to discipline those attached to services or qualitative requirements such as technology transfer, employment conditions, staff training, joint ventures, local procurement, or domestic equity participation.

In addition, Parties could agree on a set of non-actionable subsidies that clearly benefit the environment. These non-actionable subsidies would be protected from formal WTO challenges and remedial action between like minded Parties. Such an example is provided by the CARICOM Agreement. There are however several issues that require consideration. A first issue is the difficulty of identifying a special regime for the environment and to determine products that count as “environmental goods”.

As a possible solution, Parties may agree on common coding of those goods. A second limitation of creating such carve- outs in RTAs is that these could still be challenged by other WTO members outside of a RTA. Nevertheless, agreeing on non-actionable subsidies related to the environment could initially be a symbolic move between the Parties, it could create a reference point for other RTAs as well as a stepping stone for plurilateral and multilateral agreements.

Subsidy phase-outs based on stated environmental objectives are another area for consideration. Disciplines to progressively reduce fossil-fuel subsidies have been committed in only one RTA, the EU-Singapore Agreement, which has not yet entered into force. Nevertheless, these areas could be further explored between Parties of the willing to encourage reforms to phase-out certain subsidies based on national priorities.

Parties can also commit to increase the transparency of environmentally related subsidies, including by fulfilling their notification obligations under the WTO. For energy and environmentally related subsidies, Parties could reaffirm reporting obligations of the WTO, and also align reporting efforts with existing schemes such as through the OECD, or SDG Indicator 12.c.1 process to avoid unnecessary duplication. As in the EU-Korea FTA, these transparency commitments can also be legally binding and enforceable.

While this report suggests that governments can potentially incorporate environmental objectives in RTAs through chapters and articles related to subsidies in a number of ways, it is a retrospective exercise based on available information or existing provisions in RTAs and does not intend to speculate the effects of possible provisions and proposals. This study also does not intend to judge whether some options are superior to others. To answer the question of whether some of the available options would be more effective or realistic would require additional study on a case-by-case basis.

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To view the full report, click here.

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Crafting an Open and Innovative Digital Trade Agenda for Latin America

Ben Stevens — Mon, 26 Nov 2018 17:57:02 +0000

Summary

Success in the digital economy depends in large part on scale. Digital innovators that have access to larger markets usually do better than competitors with access to smaller markets. Because there is no single, integrated Latin American market, Latin American digital innovators compete with a considerable disadvantage, especially compared with U.S. and Chinese competitors. As such, countries in Latin America, in addition to subgroups within it like the Pacific Alliance, should pursue an ambitious digital trade agenda to accelerate the development of their individual digital economies—but with the overarching goal of a region-wide integrated digital single market (DSM). This digital trade agenda should embrace openness, innovation, and competition within the region—following the model of the Asia-Pacific Economic Community, rather than the more closed and heavily regulated European Union. Removing barriers to digital trade and enacting similar or compatible frameworks and principles for digital and digitally enabled goods and services would provide the region’s firms with the critical economies of scale needed to succeed in the global digital economy. Such an agenda would be grounded in both the region’s large Spanish-speaking markets and increasingly connected and tech-savvy businesses and consumers. The risk is that without a shared, ambitious approach, the opportunity for a more integrated Latin American digital economy, from Mexico to Chile, will slip away as countries head in the other direction toward digital protectionism. To accomplish this bold but achievable goal, Latin American nations should do the following:

Improve trade facilitation for small packages.
Address broader trade-facilitation issues.
Establish intermediary liability protections.
Enable the free flow of data.
Centralize spectrum management.
Eliminate tariffs on information and communication technology (ICT) products.
Provide more open access to service markets.
Do not regulate online platforms and “over-the-top” (OTT) services as telecom providers.

Crafting an Open Digital Trade Latin America PDF

To view the original posting of this report on the Information Technology & Innovation Foundation website, click here. Copyright © 2018 Information Technology & Innovation Foundation. All Rights Reserved.

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Online Platforms, Economic Integration and Europe’s Rent-Seeking Society: Why Online Platforms Deliver on What EU Governments Fail to Achieve

Oliver Colletti — Sun, 28 Oct 2018 14:34:41 +0000

Executive Summary

Online platforms create “more perfect” markets. Online platforms are a market-driven cure to the imperfections of the EU’s incomplete Single Market. Platforms provide well-functioning technical infrastructures that allow users to easily deal with country-specific legislation in the EU, e.g. VAT and invoicing requirements, consumer protection laws, sector-specific licenses and the particularities of national contract law. Modern online platforms have “skin in the game”. They have an intrinsic motivation to create value for, and trust between, users and to enforce high and widely accepted standards for business conduct. In the EU, therefore, platforms encourage value-adding interactions that would not emerge without platforms when markets are locked by regulations and barriers that effectively protect insiders and deter new entrants. By doing so, platforms help consumers and businesses to “bypass” the effects of rent-seeking activities in the EU, which are at the root of significant differences in Member State regulations – and which for a long time have been known for being harmful to cross-border trade and economic integration and convergence in the EU. The EU and some Member State governments are neither unique nor extreme in their political calls to restrict or even ban certain platform businesses from operating. Yet, Europe’s persistent hesitation – sometimes outright hostility – to platforms has to be seen in a broader perspective of political power and control. In the EU, old-fashioned national regulators have an organisational incentive to stick to and defend old approaches to regulation. In many cases, they have an intrinsic incentive to respond to vested interests in business and civil society. At the same time, through a bottom-up trial-and-error process, online platforms culturally appropriate customs and practices of governments and regulatory authorities in regulating markets and commercial behaviour, which are often “unacknowledged” by policymakers or considered “inappropriate”. However, policymakers’ hostilities towards modern online platforms disincentivise innovative companies to invest, grow and expand within and beyond the EU, with adverse implications for the Single European Market.

“WE DO WHAT YOU PROMISE SO WHY DO YOU HATE US SO MUCH?”

All the big and famous digital platforms have probably got the message by now: European policymakers don’t like them very much. Antitrust case after antitrust case has been filed against the likes of Amazon, Apple, Facebook, Google and others. While there are good reasons for competition authorities to keep big firms on their toes and prevent competition from stagnating, it’s difficult to escape the feeling that, for platform firms, EU competition law – which is less attentive to consumer welfare – has been stretched to the breaking point in order to keep platforms on a tighter leash. And that’s just one part of the EU’s policy armoury. The European Commission and several EU governments have advocated a special platform regulation with the effect of slowing down the competitive effect of both larger and smaller platform firms. Indeed, a new ‘special tax’ on services of digital platforms has been proposed by the Commission. Around Europe, Uber and Airbnb have been restricted – or outright banned – by national or local governments. And in the European Parliament, there have been repeated calls for breaking up platforms and companies like Google and Facebook. On top of these initiatives comes the hostile tone of argument inherent in several positions by the European Parliament, which has been the demonisation of Internet platforms for being too big, too powerful or too dangerous. They are getting it wrong. The ascent of the platform economy has been a boon for the European economy. Online platforms encourage competition and the consumer by reducing information and trade costs in municipal, regional, national and cross-border commerce. They stimulate entrepreneurship and new economic activities, ultimately leading to economic renewal and economic convergence. Accordingly, for friends of economic integration in Europe, platforms have been powerful tools to break up local oligopolies and create access to goods and services across the EU. In the process, online platforms have helped to expose protectionist governments in Europe that – despite nominal support for the Single Market – have introduced a series of regulations that force businesses to follow national regulatory borders rather than consumer preference. Importantly, while regulatory heterogeneity in the EU effectively reduces – or prevents – intra-EU commerce and economic integration, online platforms facilitate cross-border trade and therefore contribute to economic development and convergence. In a way, online platforms deliver on what EU institutions and governments repeatedly promised to voters – but largely have failed to achieve: creating a deeper Single Market and strengthening economic integration in Europe. Indeed, much of what the platform economy accomplishes is firmly anchored in classic EU economic orthodoxy. The guidelines for economic policymaking, which are laid down in the Lisbon Treaty, state that the EU policymakers “shall work for […] a highly competitive social market economy” and “promote scientific and technological advance.” (Article 3 TFEU) The purpose of the Single Market is to stimulate competition and trade, to “improve economic efficiency, to raise quality, and to help cut prices” (European Commission 2018a). The intention of the EU’s new data protection policies, to give a more recent example, is to make “businesses benefit from a level playing field” in the EU (European Commission 2018b). As far as the Digital Single Market is concerned, EU policymakers explicitly aim to facilitate “better access for consumers and business to online goods and services across Europe” by removing the “key differences between online and offline worlds, to break down barriers to cross-border online activity.” (European Commission 2018c) The same spirit is heralded in trade and competition policy: EU Trade Agreements should make “European businesses, particularly SMEs, more competitive” and to encourage “Trade for All” (European Commission 2015), while competition policy is “designed to ensure fair and equal conditions for businesses, while leaving space for innovation, unified standards, and the development of small businesses” (European Commission 2018d). ECI_18_PolicyBrief_Competition_9_2018_LY04

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How Will the Post-Brexit “Data Wall” Affect the European Union?

Oliver Colletti — Wed, 17 Oct 2018 18:39:28 +0000

SUMMARY

The absence of a data adequacy agreement could create a post-Brexit “data wall” between the United Kingdom and the European Union. Clear the UK will be badly hurt, but the EU has much at stake as well. First, a data adequacy agreement will enable UK digital workers and firms to continue to contribute to the scale of the EU digital sector. Second, the technological resources of the UK digital sector in areas such as artificial intelligence can help the EU keep up with the U.S. and China–but only with the right rules in place. All told, we believe that the lack of a data adequacy agreement could effectively slow the development and absorption of new technologies in the EU by a year or more while alternative data transmission channels are put into place.

INTRODUCTION

As of March 2019, the United Kingdom will have the status of a “third country” from the perspective of the European Union and the General Data Protection Regulation (GDPR). Will the EU accept that UK data protection standards are high enough to grant them the status of “adequacy,” which will allow data to flow more easily between the UK and the EU? Or will a “data wall” appear overnight between the UK and the EU? The answers to these questions obviously matter to the UK. These data-related issues arise at a crucial moment in the development of the EU economy, which will be badly hurt by a post-Brexit data wall. The UK finance and tech sectors are at special risk, since they require a firehose of cross-border data transfers. On the one hand, the region’s digital sector has been growing at a rapid pace, fed in part by the strength of UK tech. As of April 2018, for example, the UK led Europe with 353,000 App Economy jobs, followed by Germany and France with 327,000 and 314,000 App Economy jobs, respectively.1 Overall, the UK had 960,000 information and communications technology professionals as of 2016 – almost as many as France and Germany combined (1.1 million). On the other hand, the growth of the EU digital sector has been lagging that of the U.S. Between 2007 and 2016, the last date when a full set of data is available, the EU digital sector grew by 29 percent. That’s strong growth, but less than the 43 percent gain reported by the U.S. digital sector. Looking beyond the tech/telecom industries, digitization has been essential for financial services and professional services such as accounting – dramatically changing the nature of the business. Small and medium-size enterprises now have access to services that were formerly too expensive. Even more important, the benefits of digitization are just now spreading to “physical” industries such as manufacturing, agriculture, distribution and healthcare, which still make up the great majority of employment in both the EU and the U.S. Manufacturing is a particular problem, where productivity growth in the EU has slowed to a crawl in recent years. Similarly, productivity gains in much of the service sector, including wholesale and retail trade and transportation, have been weak. In this paper we will make the case that the way the EU handles post-Brexit data flows could significantly affect future EU growth. First, a data adequacy agreement will enable UK digital workers and firms to continue to contribute to the scale of the EU digital sector. Particularly important are fast growth socalled tech ‘startups’ who would be at higher risk if the EU and the UK agreed to a different kind of structure for data transfers. That, in turn, will boost the productivity of financial and professional services, and accelerate the digitization of physical industries and the development of “manufacturing platforms” that could pull the EU ahead of the U.S. Second, the technological resources of the UK digital sector in areas such as artificial intelligence can help the EU keep up with the U.S. and China – but only with a data adequacy agreement. Conversely, the lack of a data adequacy agreement between the UK and the EU will significantly slow technological progress – not just in the digital sector, but across the entire EU economy. We don’t want to exaggerate the damage – the nature of the Internet and the global economy is that information will eventually get through the Brexit “data wall,” especially for the biggest global firms. But small and medium-size businesses will find themselves falling further behind the global standard, especially high-growth companies from Europe’s startup sector. All told, we believe that the lack of a data adequacy agreement could effectively slow the development and absorption of new technologies in the EU by a year or more while alternative data transmission channels are put into place. A year may not sound like much, but it’s a delay the EU can ill afford at this critical juncture. The United States and China are leading a massive global push to apply digitization to the physical sector, and the EU doesn’t want to fall behind. PPI_Post-Brexit-Data-Wall2018 © Progressive Policy Institute, All Rights Reserved. To see the original post, click here.

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The Coming North American Digital Trade Zone

Matt Style — Tue, 09 Oct 2018 20:13:38 +0000

In 1992, when NAFTA was signed, the World Wide Web had yet to become truly world-wide and the iPhone was still fifteen years away. Thus, it is not surprising that an update was needed to bring the free trade agreement between Canada, Mexico, and the United States into the twenty-first century. While much of the public attention has been focused on the new agreement’s implications for cars and milk, the revised NAFTA—or what’s formally being called the “United States Mexico Canada Agreement” (USMCA)—contains digital economy provisions that have significant implications for emerging tech. Despite the Trump administration withdrawing from the Trans-Pacific Partnership (TPP), USMCA negotiators used the TPP’s electronic commerce chapter as the basis for negotiations (or—the TPP is dead, long live the TPP). The USMCA’s digital trade chapter continues the TPP’s ban on customs duties on digital products (though regular taxes remain unaffected). It also requires anti-spam laws in each country. Like the TPP, it bars countries from requiring the disclosure of source code, but it goes further to bar governments from requiring the disclosure of “algorithms expressed in that source code” unless that disclosure was required by a regulatory body for a “specific investigation, inspection, examination enforcement action or proceeding.” The USMCA also reprises the TPP’s safe harbors for internet service providers modeled on the Digital Millennium Copyright Act’s Section 512, protecting them for copyright liability for the actions of their users. (For a discussion of the critical role of these safe harbors, see my paper here.) Unfortunately, the USMCA drops the language adopted by the TPP requiring a “balanced” approach to copyright, which might have further empowered user rights. The most important provisions borrowed from the TPP, and the ones most likely to find themselves in the center of a future trade dispute, are those that bar data localization. Indeed, the USMCA version is stronger than the one in the TPP (it even bars data localization with respect to financial services, though it does so under a different set of rules set forth in the financial services chapter). Data localization is the nemesis of digital trade—permitting foreign companies to work in a country only if they build out or lease costly separate data infrastructures in that country. Data localization thus limits access to global services and serves as the principal instrument for protectionism in the information age. While some argue that this provision limits the ability of countries to protect their citizens, that depends on whether Canadian citizens’ data can be better safeguarded in Canada, Mexican citizens’ data in Mexico, and U.S. citizens’ data in the United States. Uyên Lê and I have argued that that is unlikely to be the case. The USMCA follows the TPP in requiring each country to establish personal information protection laws, though it leaves the content of such laws and the means of enforcement to be decided by each country. (In an earlier brief for the Council for Foreign Relations, I had argued that the NAFTA negotiators should seek to establish mandatory privacy protections in the various states, including the APEC Privacy Framework, which each of the three countries had established.) Although detractors may object that the USMCA information protection rules do not establish a mandatory minimum of protections, it does present an advance over earlier trade agreements, which neglect this area entirely. The USMCA does not preclude a nation from adopting strict privacy protections. The USMCA’s digital trade chapter offers a number of other innovations. First, this is the very first “digital trade” chapter in a trade agreement of which I am aware. This is a semantic change—U.S. free trade agreements have included an “electronic commerce” chapter since the 2003 Singapore agreement. But where “electronic commerce” might lead some to think only of goods and digital products sold online, “digital trade” seems to invoke a broader set of economic activities—from the services offered by Baidu and Google to internet-powered medical or other professional services. The World Trade Organization, which has long had a work program in electronic ecommerce, might take note. Second, and more importantly, the United States convinced Canada and Mexico to accept an “Interactive Computer Services” provision whereby internet platforms are not held civilly liable for the actions of their users. Eric Goldman has noted how closely the relevant USMCA text hews to the Communications Decency Act’s Section 230. That doesn’t stop the platforms from being held criminally liable, as shown by the criminal prosecution of Backpage.com for promoting prostitution. If the U.S. Congress were to undo Section 230 in the future, Congress might find itself in conflict with the USMCA. In this way, trade agreements restrict not only our trading partners, but ourselves as well. Of course, at the present time, neither Canada nor Mexico would seek to enforce this provision against us. Third, the chapter has unenforceable provisions favoring open government data provided in machine readable format (someday our robot overlords will hail the USMCA negotiators), as well as risk-based cybersecurity approaches. USMCA also requires consumer protection laws that would apply online, but it does not go further to help consumers enforce their rights across borders. Early commentators have described changes from the old NAFTA as “mostly cosmetic” (as a Brookings’ commentator suggests) or suggested that it might be a “step backwards” for free trade (as the Economist argues). Whatever one’s view of the entire agreement, there are in fact some provisions that significantly advance internet-powered trade should the three countries ratify it. Indeed, the USMCA’s digital trade chapter represents the strongest set of digital trade provisions yet negotiated, at least outside the single market created in the European Union.

To view the original posting of this article on the CFR website, click here.

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After Salzburg: How to salvage the Brexit negotiations

Ben Stevens — Mon, 24 Sep 2018 15:50:54 +0000

Although EU leaders delivered the coup de grace to Theresa May’s Chequers plan in Salzburg avoiding no deal is still possible, but it will require some tough choices on the Irish backstop. Theresa May’s Chequers plan, which lost her two leading Brexiter members of her Cabinet, is dead. At the European Council summit in Salzburg on September 20th, the EU’s heads of state and government said no to her proposal for a dual-tariff customs arrangement and participation in the single market for goods (but not services, and without the free movement of people). Michel Barnier, the EU’s chief Brexit negotiator, had already said that the plan violated the EU’s principle that there should be no partial membership of the single market. He had also said that the EU would not accept the customs proposals, which would allow the UK to maintain frictionless trade with the EU, while still being able to sign free trade agreements with countries outside Europe. The risk of no deal has risen. Is there any way to salvage the Brexit negotiations?

Brexit PDF

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Retooling Trade Agreements for Social Inclusion

Mariapia Carbajal — Wed, 25 Jul 2018 18:14:18 +0000

International trade law has been oblivious to social inclusion. It is not the reason for the weakening of the U.S. economy and entrenchments of poverty, but it is nevertheless blamed for them, including the shuttering of factories, joblessness, and even homelessness. Although it is not primarily to blame, it is not wholly innocent either. International trade law plays a powerful role in fomenting the conditions under which people may thrive, implicating social equality and inclusion. This Article addresses why international trade law needs to be structured in ways that support social inclusion if society is to turn the tide against rising neo-nationalism, racism, and authoritarianism. The impacts of trade and rapid technological change on income inequality and the security of work have become politically salient issues in the United States and Europe. They have led to the rise of nativist political parties that threaten to upset the international institutional framework. The outcome could be dire. The Article shows how international economic law can and should be retooled. By doing so, it can: (i) help combat harmful tax competition, avoidance, and evasion; (ii) aid domestic social security and job retraining; (iii) support labor protection; (iv) deter social dumping; and (v) enable industrial policy experimentation for development.

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The paper was originally posted here.

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Bringing Trade Rules Into The 21st Century

David Korkoian — Fri, 15 Dec 2017 18:06:20 +0000

The WTO is supposed to police world trade but instead is held captive by its members and an outdated agenda.

Last week, the World Trade Organisation (WTO) held its 11th ministerial meeting in Buenos Aires. Did you hear much about it? Neither did I. In the run-up to the meeting, trade experts warned everybody: don’t expect much. That turned out to be an understatement. The trade ministers of the 164 countries attending the meeting in Argentina could agree on precisely nothing – not even on what they should talk about. The Buenos Aires jamboree was a dialogue of the deaf. The WTO is supposed to be the policeman of world trade, which sets the rules and disciplines by which countries do business with one another, so that we don’t have to operate by the law of the jungle. The WTO’s Doha Round of trade negotiations has dragged on for 16 years and there is still no end in sight. Countries’ patience is wearing thin, including the administration of US President Donald Trump, who, in his campaign, threatened to pull the United States out of the WTO and is openly disdainful of the organisation – and of multilateral trade in general. Companies have long ceased to care much about the proceedings of WTO meetings although they still need the organisation to settle trade disputes – one area in which it remains effective. Civil society is also losing interest. Even the once-vociferous protesters who used to lambast the WTO as a champion of the twin evils of capitalism and globalisation don’t bother to show up any more. Why has this once-mighty organisation that is so important for the world fallen so far from grace? Why do its members find so little to agree about? How can the WTO be salvaged? Part of the problem is size. The membership of the WTO has expanded from 123 in 1994 to 164 at present. In a way, this is good. It means that more countries have to follow the organisation’s rules: For example, they can’t discriminate between their trading partners – if they grant special favours to one country, they have to extend the same favours to others. Their commitments are supposed to be binding and enforceable. They also can’t discriminate between their own companies and foreign companies – at least in theory. But size and diversity complicate decision-making, especially if all members have to agree. Unlike the World Bank and International Monetary Fund (IMF), where countries have different levels of voting power, the WTO is supposed to operate by consensus. So, even a small minority of countries can block a decision they do not like. This has happened several times, including in Buenos Aires.

SO 20TH CENTURY

In recent years, developing economies, particularly China, India and Brazil, have become more prominent and influential. While they can be outvoted by developed economies in the World Bank and the IMF, this is not possible in the WTO. So, in Buenos Aires, for instance, China and India were able to block a widely supported attempt to ban subsidies for illegal fishing (a move that European Trade Commissioner Cecilia Malmstrom described in a tweet as “horrendous”). India and some other developing countries were also able to derail an initiative to put e-commerce on the negotiating agenda of the WTO. The examples highlight another serious problem with the WTO: its agenda is increasingly becoming out of date. It continues to pursue what is essentially a 20th-century agenda. But the nature of global trade has changed. Most trade today is not about making goods in one nation and selling them to consumers in other nations. About 70 per cent of global trade is now in intermediate and capital goods and services, through supply chains. The iPhone is a classic example. It is designed in California and assembled in China, but its components come from more than 200 suppliers from all over the world. For example, it contains displays and flash memory made in Japan and South Korea, touch ID sensors made in Taiwan, gyroscopes made in France and Italy, accelerometers made in Germany, batteries made in South Korea and glass for the screen made in the US. Thousands of products are “made in the world” in this way. What the world needs then is a trade system not just for selling already-made goods, but a system for making goods through supply chains. To operate efficiently and fairly, supply chains need quite different rules from those addressed by the WTO. “At the border” issues such as tariffs, quotas and subsidies are less important, while “behind the border” issues such as rules to protect investments and intellectual property and regulations on product standards are more important. Services such as design, engineering, logistics, telecoms and finance play a vital role in supply chains. Services are even embedded in products. In the case of the iPhone, for example, the merchandise components account for less than one-third of the value of the final product. Most of the value is derived from services, such as research and development, design, software development, engineering and marketing. Apple’s App store, which hugely enhances the value of the iPhone, is a service. Barriers to cross-border movement of services are now barriers to trade. By not focusing on such issues, the WTO rules fail to address the realities of business. The WTO is aware of its shortcomings. Some of the best research on how value chains have changed world trade comes from the WTO itself. The organisation has also taken some steps forward – for example by forging an agreement on trade facilitation (which speeds up Customs and port procedures and is vital for supply chains), which was ratified in February. But it is a member-driven organisation and most of its members – particularly developing countries – are more focused on settling 20th-century issues of traditional trade such as agriculture, patents on pharmaceuticals, and rules governing anti-dumping. They don’t want to expand the agenda to new areas such as e-commerce and supply chain-related issues.

So countries have been forced to address these issues through other means. One way is through bilateral agreements, such as those that Singapore has signed with 12 individual countries. Another way is through big multi-country agreements like the Trans-Pacific Partnership – which contain strong provisions for “new issues” like IP protection and e-commerce. So-called plurilateral agreements within the WTO (which involve more than two countries but not a great many) are also possible. While they may start with a small group of countries, over time, others join in. An example is the International Technology Agreement (ITA), which was agreed at the WTO ministerial conference in Singapore in 1996 and reduces tariffs on more than 200 IT products. At first, only 29 countries signed up. But at the 2015 ministerial conference in Nairobi, another 53 countries added their signatures. The ITA now covers more than 95 per cent of trade in IT products. Negotiations on e-commerce look like they will go plurilateral. After the failure in Buenos Aires to include this issue in the WTO’s main agenda, some 70 countries agreed to go ahead with negotiations on their own. As with the ITA, others will eventually come on board or risk being left behind.

NEW APPROACHES

More plurilateralism may in fact be the key to rescuing the WTO from being marginalised. Some trade experts favour radical approaches. For example, Professor Richard E. Baldwin, professor of international economics at the Graduate Institute of International and Development Studies in Geneva, proposes a “WTO 2.0” that focuses on supply-chain trade, which calls for completely different disciplines than traditional trade and which the current WTO is incapable of addressing. WTO 2.0 should have a restricted membership, he suggests, since most nations do not participate in supply chains anyway, and if they were made members, they might try to extract gains on traditional trade issues in return for their agreement on new issues. In other words, WTO 2.0 should itself be a plurilateral organisation. Another suggestion is for the WTO to abandon the Doha Round of negotiations. This is what a number of countries proposed at the 2015 ministerial meeting in Nairobi. This proposal has merit – the WTO is being held hostage by a set of negotiations that is going nowhere and is unable to move on. But many large developing countries, including China, India and South Africa, are not willing to abandon the round just yet. Nor will all the Doha issues – particularly trade in agriculture – simply go away merely because the round is declared dead. What may be needed then is for the WTO to continue focusing on traditional trade issues but also to not just permit, but encourage more plurilateral trade agreements on new issues. In other words, the WTO should embrace a process of creeping multilateralism. It may be the only way in which it can move, incrementally, towards meeting the needs of 21st-century trade.

Vikram Khanna is the Associate Editor at the Strait Times.

The paper was originally posted here.

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Negotiating Trade Barriers Behind the Border

David Korkoian — Fri, 11 Aug 2017 14:02:08 +0000

U.S. trade agreements today look nothing like they did forty-some years ago. Tariffs are generally low and, as explained in an earlier post, the spread of global value chains (GVCs) and growing importance of digital trade mean that policy attention now focuses on services, investment, and, behind the border, non-tariff barriers. Regulatory coherence ≠ tariff cutting Behind the border trade issues that impede GVC trade differ from traditional trade measures in key ways. With the removal of import restrictions, the generally accepted expectation is that everyone will benefit from lower prices, improved quality, and increased variety that competition brings. Of course, some import-competing industries and workers will suffer overall net losses because of lost jobs or lower wages, but in theory, the benefits are generally large enough to compensate the losers and leave no one worse off. Non-tariff barriers that increase costs for global value chains or impede digital trade entail potentially more complicated trade-offs. While trade barriers usually protect particular sectors at the expense of the general public, regulations to ensure food safety, make medicines affordable, or protect privacy online are meant to do the opposite. The quite reasonable rationale for including regulatory “coherence” or regulatory harmonization in trade agreements is that differences in regulatory content or practice create trade costs without necessarily achieving better outcomes for consumers. Reducing those differences would make everyone better off. However, if societies differ in their levels of risk aversion or their willingness to pay for certain public goods, such as clean air or water, then the value of the overall gains in public welfare may not be appreciated by the very populations that stand to benefit from them. Behind the border issues need to be negotiated transparently If regulatory coherence and other behind the border issues remain on the trade agenda, the process of negotiating and ratifying trade agreements needs to be more open and transparent. In traditional trade-bargaining situations, negotiators value secrecy because it allows them to reach compromises and avoid generating opposition to every proposed tariff cut before an overall deal can be reached. With negotiations on behind-the-border and regulatory issues that only indirectly affect trade, however, secrecy is more problematic – especially if you factor in the different values that one society or another may place on regulations governing health and safety or issues such as internet privacy. A pragmatic reason to be more transparent is the difficulty in keeping anything secret in the internet age. The EU already releases many documents to the public, while various nongovernmental organizations, including Wikileaks, repeatedly get hold of negotiating texts and post them online. Moreover, despite USTR secrecy, U.S. positions are well known, since typically U.S. negotiators seek provisions in new trade agreements that are similar to what they sought in whatever is the most recently concluded agreement. In reality, U.S. negotiators gain little from hoarding information while increased transparency could help them ward off the exaggerated accusations of negotiating secret backroom deals. Future progress on rules to facilitate global value chains and digital trade thus may require a different approach. These negotiations often address domestic regulations that incidentally affect trade, and using trade agreements to constrain regulatory flexibility often raises concerns among the general public. On the flip side, where there are technical regulatory differences across countries that impede competition and trade with minimal offsetting public benefit, “regulatory coherence” agreements are valuable. But these provisions should be negotiated transparently and openly. The opaque process surrounding the negotiation and implementation of these 21st Century trade agreements undermines their legitimacy by feeding perceptions that they aim to protect the interests of multinational corporations rather than those of consumers, workers and the environment. In sum, the content of trade agreements has changed markedly. The process of negotiating and ratifying them needs to do so as well.

Kimberly Ann Elliott is a Senior Fellow with the Center for Global Development and the author or co-author of numerous books and articles on trade policy and globalization, economic sanctions, and food security. Previously, she was with the Peterson Institute for International Economics. The views expressed here are her own.

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Modernizing NAFTA for 21st Century Workers

David Korkoian — Wed, 02 Aug 2017 14:45:31 +0000

After years of praise and protests, Canadian, Mexican, and American diplomats met at a fancy hotel in Washington in August to launch a renegotiation of the 1993 North American Free Trade Agreement (NAFTA). Although President Trump promised that the revised agreement will yield more and better jobs, there is little evidence that policymakers are thinking creatively about how to use NAFTA to create such opportunities. And if the negotiations don’t succeed, Trump has threatened to withdraw from NAFTA, which could cause job loss for thousands of workers in all three countries. In recent years, workers in all three countries have been buffeted by job losses, underemployment, technological change, and economic insecurity. Despite rising productivity, many workers—especially those with fewer skills—earn less in real terms than they did 20 years ago. Many of those who voted for President Trump blame agreements such as NAFTA for societal problems such as worker displacement, income inequality, drug abuse, and poverty. Many of those who didn’t vote for President Trump have also expressed concerns about these agreements, arguing these agreements empower companies but not workers. We believe that trade has contributed to these problems to some extent, but the role of trade, and especially trade agreements, is often exaggerated. Nonetheless, we believe trade agreements can be rethought to truly help more workers more of the time. NAFTA 2.0 is a good place to start. While NAFTA was the first US trade agreement to substantively address worker rights, the provisions were relatively weak and tacked on as a side agreement. In the years since NAFTA was ratified by Congress in 1993, labor chapters in US trade agreements have come a long way. Policymakers worked to address political pressures and concerns about the impact of imports on jobs and wages Based on recent agreements, we can expect that NAFTA 2.0 will include the labor chapter in the body of the agreement; it will promote all the core labor standards, not just the least controversial; and it will make the provisions binding and enforceable. Thus, when it comes to worker protections, NAFTA 2.0 will be a major improvement on the relatively weak original version embodied in the side agreements. But simply updating NAFTA’s labor provisions will not be enough to empower the workers of today. Over the two-plus decades since NAFTA was negotiated, technology and the spread of global value chains have changed what trade, trade agreements, and labor markets look like. For NAFTA 2.0 to be effective, it must both reflect these changes and address the real needs of the modern workforce. As example, many of those who toil today in all three countries are contingent workers who are not covered by contracts or represented by unions. Those workers who hold contingent jobs (for example, free lancers), often receive few benefits and have few job protections. Many of the fastest growing sectors on the continent rely on a contingent workforce, and the rights of those workers also need protection. In addition, many workers are increasingly concerned that the regulatory coherence and investment chapters could undermine labor rights. The regulatory coherence chapters in recent trade agreements aim to reduce costs arising from differences in regulations across the three NAFTA jurisdictions. Some union, environmental, and consumer groups argue that these efforts could go too far and lead to lower health and safety standards for them. Meanwhile, they are even more concerned about the investor state dispute settlement mechanism; unions have argued that these provisions are inconsistent with the labor rights chapters. Critics acknowledge that it is reasonable to protect investors from direct or indirect expropriation and that some form of dispute settlement between investors and states is helpful. However, these critics also believe that foreign firms should not use investor state dispute settlement mechanisms to challenge domestic regulations such as OSHA workplace safety regulations as regulatory takings, simply because they may raise costs to foreign investors. Although the United States and Canada have stated that government regulatory policies cannot be challenged as regulatory takings, advocates of labor rights want more explicit language. The most up to date trade agreement—the Trans-Pacific Partnership—is a step forward, but it does not sufficiently address the needs of 21 st century workers. Trade diplomats should not simply think they can tack on the TPP language and be done. The renegotiation of NAFTA provides an opportunity to think differently about how policymakers can create jobs for the future, protect labor rights, and empower workers in the 21 st century. Hence, we believe trade negotiators should:

Ensure that core labor standards are enforced for part-time and temporary workers and create a mechanism to explore how each country can reform its labor laws to ensure that all contingent workers receive basic labor rights, just like those workers with contracts.

Encourage unions to offer cross border services such as collective representation, benefits, training, and other workplace services. In so doing, unions would become stronger and more competitive.

Consider each chapter as part of a coherent whole and review each chapter for consistency with labour and employment objectives, including ensuring that regulatory coherence provisions or the investor-state dispute settlement mechanism do not impede the ability to regulate to protect workers’ rights.

Jointly explore how each country can ensure that its workers have the education and training to take advantage of 21 st Century job opportunities, and have access to health insurance and pensions that are not at risk if they lose a job.
Recent trade agreements allow highly skilled workers to work temporarily on projects in other countries. But less skilled workers deserve similar provisions. We believe policymakers should create a mechanism either within the agreement or as a side agreement that allows for temporary movement of low skilled workers in areas outside agriculture and hospitality such as barbers, masseuses, and home health aides. These individuals should be allowed to offer services across borders.

The famous economist Adam Smith taught us that people are the wealth of nations. Yet many people believe that trade agreements empower corporations and not people. If trade diplomats want NAFTA 2.0 to succeed and build worker trust in trade agreements, they must place people more explicitly at its center.

Susan Ariel Aaronson is Research Professor of International Affairs at George Washington University.

The views expressed here are the authors’ own.

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