This paper was written toward the end of 2019. Today, in 2020, the world seems a different place, as we collectively experience the coronavirus crisis and new awareness about issues of racism and policy brutality. These crises have brought about new, and highlighted existing, urgent problems ― often exacerbated by Big Tech’s iron grip on our economic and social lives.

Emerging Challenges in 2020

The WTO itself is in serious crisis. The 12th WTO Ministerial Conference was due to be held in June 2020 but has been postponed ― possibly for another year. WTO Director-General Roberto Azevêdo has said he will step down on August 31, 2020, a year before completing his term. The United States is still blocking the appointment of new Appellate Body Members to the WTO, which means the WTO’s judicial function is not operational.

At the same time, many countries have had to take measures to deal with the novel coronavirus pandemic that are inconsistent with their WTO obligations. This is leading to a rethinking of whether the WTO model ― which left many countries short on domestic productive capacity and locked in rules that put foreign corporate rights before the domestic public health emergency ― are really fit for this purpose. There is a need for countries to have greater flexibility to depart from existing trade rules. This could well lead to a fundamental rethink of the WTO and its model of extreme liberalization ― which would be an urgent and welcome outcome.

Online commerce is booming, but many technology start-ups and thousands of small businesses have been hit hard by the pandemic-related economic shutdowns. On the contrary, Facebook, Google, and Amazon have seen their market shares and profits explode during the crisis.

At the same time, there is growing concern about the control that Big Tech exerts over so many aspects of public life, especially through anticompetitive behavior. Members of the US Congress and several federal agencies have joined European Union leaders in growing calls to break up vertically integrated roll-up corporations like Amazon, Google and Facebook.

A key provision of US tech policy that shields platforms from liability is coming under political scrutiny in the United States. As science deniers circulated inaccurate information about COVID-19 on social media, some tech corporations began to take steps to remove or flag erroneous content from their platforms. The Trump administration claimed a political bias, and Republicans are looking into rescinding the platforms’ immunity. At the same time, Democrats are concerned about some of the platforms’ policies of not taking down false or misleading political advertising that could jeopardize our elections.

There is growing recognition in many countries that digital corporations should pay their fair share of taxes. The EU is proposing this as a fiscal support measure in the wake of the crisis, but the Trump administration has just abandoned efforts toward a multilateral solution at the Organization for Economic Cooperation and Development (OECD).

Dependence on essential workers during the coronavirus crisis has also led to a greater understanding of the need for hazard pay and social protection, especially in sectors with sectoral bargaining agreements. But so-called “gig” workers, such as Uber drivers, GrubHub deliverers, and Instacart shoppers, still do not enjoy basic labor rights as workers, rather than as “contractors.”

In the United States, pressure campaigns have successfully targeted the use of facial recognition software powered by artificial intelligence (AI), since studies have demonstrated the racist impacts of such software: AI gives false positives for Black people more often than for whites.

At the same time, WTO members have undertaken multiple rounds of negotiations with a view to drafting a new “plurilateral” agreement on digital trade. They have negotiated draft texts in secret on 13 different provisions on data collection, liability, market access rights, nondiscrimination, source code disclosure, taxes, cybersecurity, and more, as described in this paper.

During these times of crisis, uncertainty, and rapid transformation, we need our governments to be able to respond more proactively to emerging problems. We need public interest concerns about economic rights, racial justice and fairness, and human, civil, and political rights to be the focus of conversations about rewriting the rules governing data and technology.

To accomplish this, however, we need to ensure that corporations are unable to acquire new WTO “trade” disciplines designed by Big Tech to consolidate their power over our economy and limit democratic oversight in the public interest.

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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.

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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.

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Interestingly, there is no specific SDG trade goal. Among the 169 SDG targets, there are few references to trade-related objectives, the key ones being promotion of the rules- based multilateral trading system, and implementation of duty-free and quota-free market access for least developed countries, with a doubling of their export market share.

This book comes at a timely moment. The international development community, as well as policy makers in both developed and developing countries, are currently developing road maps on how to best achieve the SDGs. At the same time, there has been a backlash against globalization, mostly in developed economies. The benefits of trade opening are being increasingly called into question. It is therefore crucial to fully understand how trade interacts with the various goals enshrined in the SDGs.

Trade integration holds many opportunities for development, but, at the same time, can have risks that need to be managed. The objective of this book is to map out a triple-win scenario: when good trade policy spurs international trade, contributes to development-friendly outcomes, and supports achieving the SDGs. This book provides guidance by leading experts on how to best achieve this.

The nexus between trade and development is not new. Traditionally, trade policy specialists have focused on the income channel, i.e., that openness to international flow of goods and services can increase national income, which in turn enables moving forward on resource- intensive development issues. This argument has been received with a certain skepticism; however, there are various other channels through which trade can contribute to achieving the SDGs.

For example, many countries use tariff and non-tariff measures on pharmaceuticals and other medical products. These policies hinder poor people’s access to those goods, and undercut the goal of promoting healthy lives in developing countries. Free trade in health-related goods and services could potentially improve developing countries’ health care access, with corresponding positive impacts on people’s lives.

Trade in health services is subject to even bigger barriers that heavily impede access to health care by millions of patients worldwide. The same logic applies to environmental goods and services, where tariff and nontariff barriers increase their cost, hampering the fight against climate change.

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