As the global leader in digital trade, the United States has a big stake in ensuring that international rules facilitating its continued expansion are put in place.

The Obama Administration’s bold agenda to establish these rules across Europe and the Asia-Pacific did not yield lasting success, with the failure of the Transatlantic Trade and Investment Partnership (TTIP) negotiations and the Trump Administration’s withdrawal from the Trans-Pacific Partnership (TPP). Nonetheless, the key elements of US digital trade policy enjoy bipartisan policy support, providing a promising basis for the next Democratic administration to re-engage with Europe, our biggest digital trading partner.

Part 1 of this issue brief explains why international rules are needed to protect and facilitate digital trade. Part 2 describes the turbulent past decade in transatlantic trade relations and the growing importance of US digital trade with Europe. Part 3 explains why the US government and the European Union (EU), during TTIP negotiations, were unable to agree on a digital trade chapter, including a key provision guaranteeing the free flow of data. Finally, Part 4 suggests how two parallel sets of trade negotiations beginning early this year — between the EU and the United Kingdom (UK) and between the United States and the UK — may help a future US Administration end the transatlantic stand-off over digital trade.

To view the full report at Progressive Policy Institute, please click here

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A recent easing of global trade tensions has not come without critical change involving two of the U.S.’s largest trade partners: Mexico and China.

Talks aimed at easing underlying trade policy differences between the U.S. and Mexico and the U.S. and China concluded earlier this year with two agreements. The United States–Mexico–Canada Agreement (USMCA) replaces the North American Free Trade Agreement (NAFTA), which had been in place since 1994. It sets a new framework for North American regional integration among the three nations.

The U.S.–China Phase One deal included Chinese pledges for the purchase of U.S. farm products, safeguards for intellectual property, and the promise of further talks to reduce trade frictions between the two nations. The trade dispute has included successive rounds of tariffs since early 2018.

Taken together, the two agreements present challenges and opportunities for Mexico, both in the short term and long term, with regard to how it will do business—including with Texas that counts its neighbor as its largest trading partner and as a key link in the production of intermediate and finished goods.

USMCA, while opening the possibility of further regional integration in areas such as digital commerce, is more restrictive than NAFTA in other sectors, such as the automotive sector, where lower Mexican output could adversely affect its gross domestic product (GDP). On the other hand, even with the latest agreement between the U.S. and China, ongoing policy differences between the two have prompted trade diversion toward Mexico, which has acquired an increasing share of the U.S. import market.

However, these positive effects of trade diversion may be short-lived and come with the cost of higher prices to consumers.

Uncertainty of Projections

Projections of the economic effects of new trade agreements, particularly of their short-term impact, are tentative given the high level of uncertainty that persists regarding trade policy and global growth. In this sense, rising protectionism across the world and within the North American region is one of the main risks confronting the global economy.

In particular, there is uncertainty regarding the extent of the distortions that measures such as tariffs and non-tariff barriers may pose for global trade, supply chains, and the international organization of productive processes. There is also uncertainty about the effects that tariffs and the deterioration in international trade conditions could have on the global economy and investment in the short and medium terms.

Finally, over a longer horizon, greater barriers to trade could lead to a reconfiguration of global value chains to the detriment of aggregate productivity as manufacturing moves away from the efficient allocation of the production of goods and services.

USMCA Auto Sector Effect

USMCA is more restrictive in some respects than NAFTA, particularly in the automotive sector. Under USMCA, the value of regionally sourced content has increased significantly. Additionally, there are new restrictions regarding the origin of steel, aluminum, and vehicle parts used in the production process and new requirements governing labor value content and the wages paid.

Specifically, USMCA stipulates several notable changes in vehicle production. The North American share of the value of automobiles and light trucks produced increases from 62.5 percent under NAFTA to 75 percent under USMCA and from 60 percent to 70 percent for heavy trucks.

Rather than applying NAFTA’s uniform content standard for vehicle parts, USMCA sets separate content requirements (the percentage that must be produced in North America) for three groups: core parts, such as engines and transmissions, 75 percent; principal parts, like electrical and electronic parts, 70 percent; and complementary parts, which include brake systems and miscellaneous parts, 65 percent.

At least 70 percent of the steel and aluminum used in the manufacture of automobiles and light trucks must originate in the U.S., Canada or Mexico.

Notably, requirements for labor value content were introduced in the updated agreement: 40 percent of the materials for automobiles and 45 percent of the content for light trucks must be produced by regional enterprises that pay workers at least $16 per hour. Since Mexican autoworkers currently earn about $7.30 per hour for auto assembly and $3.40 while making automotive parts, this new provision most directly affects Mexico.[1]

The USMCA requirements could make automotive production less efficient and decrease the competitiveness of the automotive industry across the North American region relative to the rest of the world, our estimates show.[2] Using a quantitative general equilibrium trade model—typically used to study the effects of trade reforms on the industry—we estimate the effects of the new requirements, comparing USMCA with NAFTA.[3]

In the baseline scenario, more restrictive rules-of-origin requirements will increase production costs that, in turn, will imply higher prices, reduced output, and a decrease in consumer surplus in the region (Chart 1, blue bars).[4] Furthermore, at the regional level, spending on the transport equipment sector will shift away from local producers and toward foreign suppliers of these goods.

There are considerable losses of real output in the transportation manufacturing sector, as the whole region will reduce its output in the sector. While all countries in the region are negatively affected, Mexico stands to sustain the biggest loss both in terms of the absolute number of vehicles produced and GDP. The competitiveness of some assembly operations in Texas could be affected since facilities such as Toyota’s truck plant in San Antonio and the General Motors SUV unit in Arlington rely on Mexican parts.

Opting Out of USMCA Trade

It is also possible that the new auto provisions increase the burden of compliance to the point that firms opt out of using the benefits of the USMCA and prefer, instead, to source their inputs from the least-cost country (not necessarily from North America) and pay the most-favored-nation (MFN) tariff when exporting. Such a move would hurt regional suppliers. Thus, even in a mildly disruptive scenario, the increase in the rules of origin may increase regional content at the cost of lower North American competitiveness in the automotive industry. In a heavily disruptive scenario, the tougher rules could actually lead to a reduction in the overall regional content in the sector.

Using our model, we estimate the effects that opting out of USMCA could have on the auto sector by considering an MFN opt-in scenario in which all regional trade in the sector faces MFN tariffs. Our estimates imply that this scenario is harsher than our benchmark USMCA scenario, although not drastically so (Chart 1, orange bars). This suggests the possibility that any further tightening of the rules of origin requirements in the auto sector could create incentives for firms to opt-out of the USMCA as a means of conducting trade within the region.

Trade Diversion to Mexico

Trade conflicts between the U.S. and China have also been a factor behind Mexico’s recent export performance. Electrical and optical equipment, machinery, footwear, and textiles are among the sectors where the U.S. has imposed high tariffs on China and where Mexico competes with China for market share.

Thus, it is natural to believe that trade diversion could boost Mexican exports in some industries. Since the U.S.– China dispute began, China has lost market share in the U.S., and Mexico has recorded gains (Chart 2). Most of the market share that China lost in the U.S. involved goods subject to higher tariffs—the same set of goods in which Mexico achieved its largest gains of market share in U.S. imports (Chart 3).

It is important to note that some of Mexico’s gains were in sectors in which China did not export to the U.S. Thus, it appears that Mexican exports have benefited from trade diversion, though perhaps not as much as some might have initially expected.

Notice that the declining share of Chinese imports in the U.S. has outpaced Mexico’s gains. In fact, the increases that Mexico has achieved due to trade diversion amount to only one-third of what China lost. Thus, trade diversion has benefited other countries too, as the rest of the world acquired a market share in the U.S. In particular, South Korea and Taiwan have also gained a considerable presence in the U.S. import market.

Mexico has gained not only in terms of the market share of U.S. imports. China’s market share losses positively affected Mexico’s manufacturing production in sectors in which China lost the most.

However, even though Mexico has been able to gain some output from trade diversion, this improvement has come at someone else’s expense since trade diversion entails an efficiency loss.

In this case, it seems that U.S. consumers have borne the loss through higher prices of imports. Mexico has realized higher prices for the type of exported goods that would have faced tariffs had they come from China. Prices for those Mexican exports to the U.S. increased relatively more than the export prices of goods unaffected by the tariffs.

While there is evidence suggesting that Mexico has, at the margin, benefited from trade diversion, these “gains” may be short-lived if trade tensions lead to a further slowdown of global economic activity, larger trade distortions, and a breakup of global value chains.

Estimates of a counterfactual scenario in which the U.S.–China trade dispute was persistent suggest that both the U.S. and China would sustain real output losses, while Mexico and Canada would increase production, albeit only marginally. However, prices would be much higher, particularly across North America. These higher prices would reduce the gains from globalization for consumers in the region.

Changing Trade Patterns

The adverse impact on economic activity, trade, and investment flows of an evolving and uncertain global trade environment is not surprising. However, calculating the magnitude of this effect is difficult. Mexico as a key U.S. trade partner is, not surprisingly, subject to the crosscurrents of trade tensions between the U.S. and China. These impacts are especially important for Texas, which counts Mexico as its largest trade partner.

Approval of the USMCA, an update to the almost quarter-century-old NAFTA, could by itself change trade. Indeed, costs—especially in the key automotive sector—will rise and tend to make North American products potentially less competitive than they might have been over the longer term, depressing Mexico’s GDP.

However, Mexico stands to gain, albeit in the short term, from trade tensions between the U.S. and China and the imposition of retaliatory tariffs that began in 2018. Mexico has been a beneficiary of trade diversion, accounting for a portion of what China previously supplied to the U.S.

The U.S.–China Phase One agreement that called a ceasefire to the dispute and a pledge for further trade talks make calculating the future benefit to Mexico difficult. The impact of disrupting the production of goods and services and the global value chains that they represent could exacerbate any broader economic slowdown, further trimming Mexico’s short-term gains and negatively affecting its trading partners.

Notes

1. For more information, see “NAFTA Briefing: Review of Current NAFTA Proposals and Potential Impacts on the North American Automotive Industry,” by Kristin Dziczek, Michael Schultz, Bernard Swiecki and Yen Chen, Center for Automotive Research, April 2018.
2. Estimates are derived from a model that can be used to analyze different counterfactual scenarios regarding changes in tariffs and trade costs among different countries and sectors based on two main data requirements: sector-level trade elasticities and expenditure shares between countries and sectors. For more information, see “Trade Theory with Numbers: Quantifying the Consequences of Globalization,” by Arnaud Costinot and Andrés Rodríguez-Clare, Handbook of International Economics, Gita Gopinath, Elhanan Helpman, and Kenneth Rogoff editors, 2014, vol. 4, pp. 197–261.
3. To properly interpret the results of this exercise, it is important to keep in mind that it only contemplates the general equilibrium implications of changes to the barriers that shape automotive trade in the region. The shift from NAFTA to USMCA contemplates changes in other sectors that are not considered for the purposes of this exercise but can have important macroeconomic consequences (i.e., reducing uncertainty). In addition, important assumptions were made in order to map regional value content and labor value content requirements into the model. For more information about the modeling results, contact Alfonso Cebreros or Armando Aguirre.
4. See note 2 for details of the methodology used to produce the estimates depicted in Chart 1.

To view the full report at the Federal Bank of Dallas , please click here

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But with the “return of history” we may also be witnessing a return—after an anomalous period of positive-sum progress—of the geopolitics of technology. The scale and speed of this technological change makes it difficult to completely internalize the opportunities and challenges that lie ahead for the world’s major powers.

Essentially, different approaches to technological development, and specifically the use of data, threaten to divide the world and shape the contours of geopolitical competition, contributing further to the securitization of technological competition. Instead of a “clash of civilizations,” we could be in for a “clash of automations.”

The iPhone Era

The past two to three decades may well have been an aberration. They were marked by an acceleration of globalization: the faster, cheaper, and more efficient flow of goods, people, capital, information, and energy. This period witnessed rapid advances in broadband and satellite telecommunications, accelerated microprocessor speeds, more efficient energy use, the evolution of global financial markets, and the dispersal of manufacturing supply chains. The apotheosis of this world was the iPhone.

But there was an inherent compromise at the heart of the iPhone era of globalization. The United States and other advanced economies remained world leaders in innovation, deriving benefits from the resulting intellectual property and their marketing power. Meanwhile, actual manufacturing of these products shifted to lower income countries, notably China, and also parts of East and Southeast Asia. Lower cost services—software development, research, and back-end work—were outsourced to places like India. The global economy grew and everyone benefited, even if some—such as China, the United States, and India—benefited more than others.

The Next Wave of Technologies

But the new era of technologies, many of which are already emerging, may not simply build upon these developments—rather, in counterintuitive ways they may in fact undermine the globalizing effects of earlier breakthroughs. To date, many new developments are simply buzzwords to most consumers, so it is important to break down what the new set of technological developments will encompass. They can be grouped into six broad areas. The combinations of these technologies may well form the basis of what some have described as the Fourth Industrial Revolution.

• Computing and storage, both of which will increasingly migrate to remote servers (the “cloud”), bringing down the cost and increase the scale of data storage. This could have potential implications for security and communications, especially features such as distributed record-keeping (blockchain) and new developments in data storage.
• Telecommunications, specifically the developments of a fifth generation (5G) of infrastructure, which may operate up to 20 times faster than existing systems, with low latency (delay in data communication). This will enable a vast array of applications, including driverless cars and machine-to-machine communications.
• Artificial intelligence, specifically machine learning, which involves fast and accurate pattern recognition by feeding vast troves of data to computers in order to “teach” them. This can then be applied to language, visual imagery, and other domains to resemble a form of intelligence.
• Automation, including the online integration of physical objects: cyber physical systems (CPS) or the “internet of things” (IoT). Think health monitors, remotely-managed factory robots, or internet-enabled security systems.
• Manufacturing, including in materials, optics, sensors, and additive manufacturing (“3D printing”).
  Energy, particularly renewable and mobile energy sources and smarter management systems.

When combined, these changes are already beginning to affect every aspect of globalization. The emerging sectors in which this will be felt directly by consumers include social media for information, financial technologies (“fintech” e.g. digital payments) for capital flows, e-commerce (both wholesale and retail) for goods trade, e-services (including peer-to-peer businesses, automation, and digital identification) affecting mobility and social services, and changes to the sourcing and management of energy.

Most “unicorns”—start-ups valued at over $1 billion—would fall in one or more of these domains. Consider QQ, Stripe, Rakuten, Oyo, or Tesla. Today’s tech giants are already investing heavily in future technologies from which start-ups are benefiting: Google in machine learning, Samsung in 5G, Amazon and Alibaba in automation, and so forth.

The Re-Securitization of Technology

The geopolitics of these emerging technological developments are already being felt. China continues to project the benefits of its model. Beijing is no longer content to restrict it to its own territory: For the continuing success of a firm like Huawei, it will have to be able to compete in the global marketplace.

To view the full blog, click here.

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The growth of international trade is one of the defining trends of our time. While trade has shaped societies and economies for as long as societies and economies have existed, its impact over the past half century has been nothing short of extraordinary. During this time, trade volumes of goods and services increased 20-fold and now top $23 trillion. As a percentage of global GDP, exports now account for nearly one-third of global economic activity, a 100 percent increase since 19701. Technology plays a unique role in the international trade landscape. As a category, it represents one of the largest segments of U.S. trade. This reflects the insatiable demand of consumers and businesses for the latest and greatest in devices, applications, content – and by extension, the underlying digital infrastructure to make it all work. Additionally, as an enabling force, trade in technology goods and services creates its own virtuous cycle. The more technology is put into use, the more businesses and consumers have the tools to communicate, create, and exchange, thereby encouraging even more trade.

OVERVIEW

U.S. information technology exports reached an estimated $338 billion in 2018, an increase of 2.5 percent over the previous year. Growth slowed slightly compared to the 2017 rate of 4.5 percent. Since 2010, U.S. exports of technology added nearly $65 billion in new earnings and aggregate growth of 23 percent. Growth in the tech sector, especially as it relates to international trade, is a function of many factors. Macro technology trends, such as the ongoing push of digital business transformation, combined with economic conditions – are customers in the mood to buy, currency fluctuations, and government trade policies all have a bearing on growth.

Analysis of the export subsectors within the technology category reveal many of these factors. On a percent change basis, the information and data processing services subsector led all technology export categories in growth at 15.2 percent. The IT services category and the software/software-as-a-service category also performed well, recording growth of 5.9 percent and 4.5 percent, respectively. The growth in tech services and the “everything-as-a-service” model have been driving forces in the tech sector over the past decade. The migration to cloud computing, the modernization of legacy applications and workflows, and the mission-critical importance of data – and soon artificial intelligence (AI), translate to demand for expertise in integration, software development, data management, cybersecurity and related competencies categorized as technology services.

On the hardware front, also referred to as manufactured goods, the computing equipment category recorded the highest export growth at 7.4 percent. This was followed by navigational, measuring, and control equipment category (6.3 percent), and semiconductors and components (1.6 percent). As important as tech services, applications, and data have been to growth, these categories can only thrive when there is a large installed base of devices (think users with computers, tablets, mobile phones, etc.) and robust infrastructure that reliably delivers faster, higher capacity, and less costly computing and storage. Emerging technologies such as internet of things (IoT), edge computing, smart cities, and robotics require cutting edge processors and the components that form the “brains” of these intelligent solutions.

The one export category that notably lagged was telecommunications. Exports of communications equipment hardware fell -6.0 percent, a loss of $2.5 billion in revenue, while telecommunications services dropped -8.1 percent, a loss of nearly $900 million in revenue compared to the prior year. For context, the overall U.S. telecom market for equipment, services, and employment has been sluggish the past couple of years. In many markets, traditional wired telecom along with segments of wireless telecom, can be considered mature categories. Moreover, as the transition to 5G gets underway, both telecom providers and customers must contend with the uncertainty that comes with any disruptive shift.

Like most countries, the U.S. is both a buyer and seller of technology. U.S. businesses and consumers purchased nearly $500 billion in technology goods and services from overseas sellers in 2018. The net of technology exports from the U.S. and technology imports to the U.S. results in a trade deficit of nearly $161 billion. In tech services, the U.S. experienced a trade surplus of nearly $40 billion in 2018, a figure that grew 10.5 percent over the previous year. This is driven heavily by U.S. software (+$29.5 billion surplus), followed by information and data processing services (+$7.2 billion surplus).

In tech goods, the U.S. experienced a trade deficit of slightly over $200 billion in 2018, a figure that grew by 4.1 percent year-over-year. The largest deficit occurred in the communications equipment category, where U.S. buyers purchased $83.7 billion more in goods from overseas buyers than overseas buyers purchased from U.S. providers. The computing equipment category recorded a deficit of -$56.8 billion, followed by semiconductors (-$25.5 billion), and audio and video equipment (-$22.3 billion). China accounted for 84 percent of the deficit in tech goods trade with the U.S., down slightly from their 2017 rate of 87 percent. Since 2010, China’s share of the tech goods trade deficit has fluctuated between a high of 97 percent and a low of 84 percent. The next two largest trade imbalances for tech goods in 2018 belong to Malaysia (10 percent of the total deficit), and Mexico (also 10 percent).

Note: because the U.S. runs a trade surplus with the vast majority of its tech goods trading partners (82 percent surplus vs. 18 percent deficit), as a percentage of the total trade balance, some figures may appear to exceed 100 percent, which is a function of offsetting figures in the surplus column.

The top destinations for U.S. exports in 2018 was nearly identical to the previous year. The top four markets for U.S. tech product exports remained unchanged, while at #5, Germany moved up one slot, switching places with Japan at #6. U.S. tech services exports followed a similar pattern, with the top 10 markets consistent with the prior year. The one notable newcomer to the list was Hong Kong appearing at #10. See tables on following page.

Debate over the meaning of trade deficits has been a topic of discussion since the earliest days of international economic analysis. Given the many complexities of trade, confusion and concern are not uncommon. Because of limitations in how trade statistics are calculated, deficits can be mischaracterized and misinterpreted, which can be especially problematic for technology goods and services.

For example, the iPhone is designed in the U.S. by Apple and then an estimated two hundred suppliers from around the world provide the materials and parts that go into the final product. Lastly, the phone is mostly assembled in China. When shipped back to the U.S. for domestic customers, the entire wholesale value of the device is counted as an import from China. According the research consultancy IHS Market, Chinese assembly facilities capture only 3 to 6 percent of the total manufacturing costs of an iPhone, meaning nearly all of the value flows to Apple and other suppliers.

As noted by Louis Kuijs, head of Asia economics research at Oxford Economics, “if trade deficits were measured to account for the complex nature of global supply chains for products such as smartphones, the U.S.-China trade deficit would be about 36 percent lower.” This is but one example. The same principle applies to many tech product categories. See CompTIA’s supplemental brief for additional details on U.S.-China tech trade.

Another limitation with trade statistics is the difficulty in accounting for avoidance behaviors. This typically entails sellers in one country shipping their product to an intermediary country that may have more favorable trade terms with the final market destination. For example, tech goods from China sent first to Mexico and then onto the U.S. market. The data indicates Mexico recorded the largest gain of any country exporting tech goods to the U.S. market: +$5.5 billion in new sales or an increase of 9.2 percent. In the aggregate the figures generally hold, but evaluating the trade relationship with any single market can quickly get murky because of these scenarios.

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