Some weekend readings for trade policy makers

 Weekend readings for policy makers:

1. On the ever controversial question of addressing the challenges of international investment agreements and the dispute settlement regime called ISDS. Should countries exit them or reform, how to do it and what are the avenues available. 

Columbia Center on Sustainable Development has this recent publication titled "BREAKING FREE:STRATEGIES FOR GOVERNMENTS ON TERMINATING INVESTMENTTREATIES AND REMOVING ISDS PROVISIONS" which outlines three ways:

"In this report, we present three practical approaches governments can consider in the near term to address their current stock of IIAs with ISDS: 

1. Terminating BITs, ideally with an agreement to neutralize the sunset clause. 

2. Amending FTAs to remove the investment chapters, ideally with an agreement to neutralize the sunset clause, where applicable. 

3. Amending BITs and FTAs to remove the ISDS provisions or to withdraw advance consent to ISDS.

This report is designed to provide policymakers with a comprehensive understanding of the various approaches available to their governments for mitigating the adverse effects of IIAs and ISDS, highlighting the advantages and disadvantages of each. These policy approaches can be implemented unilaterally, bilaterally, or multilaterally, depending on the instrument and the specific context of the State. They should not be viewed as antiinvestment, anti-foreigner, or anti-international law. Rather, they reflect a conscientious effort to govern effectively and fairly, ensuring that investment treaties and their dispute settlement mechanism achieve their intended goals, produce legitimate decisions respected by all countries (even those that lose cases), and do not undermine regional and national economic cooperation and sustainable development objectives."

2.  A GTRI report on the state of play of India's FTA journey titled "India FTA Report 2024 - Learning from the Past to Shape the Future".

"Broadly, two types of measures are negotiated in trade agreements. Border measures include eliminating customs duties on products from the partner countries. And behind the border measures that deal with harmonizing domestic regulations of members. The new issues are essentially behind the border measures will impact the domestic policy and regulations. Indo-Pacific Economic framework is the most recent trade agreement India is negotiating with the US and 14 other countries. IPEF does not negotiate market access through tariff negotiations but focuses only on new issues. 

From the Bangkok agreement or APTA to IPEF, Indian FTAs have come a long way. India's FTA journey has evolved significantly, reflecting its commitment to fostering international trade and economic integration within its region and with global partners. These phases demonstrate India's adaptability and willingness to explore new avenues for economic growth and cooperation on the international stage."

To enter or not is the question?

What should motivate a country to join a trading bloc or a free trade agreement? 

The ability of enhancing its exports, growth in trade, cheaper imports for its consumers, increased foreign investment, possibility of participation in global value chains and enhanced transfer of technology and knowhow are some of the triggers. However, to what extent a trade agreement would benefit a country would depend on hard data, analysis and sectoral analysis of strengths and weaknesses compared to the other partners in the agreement. Would the trade agreement benefit the country's manufacturers to export more to partner countries or will it lead to flooding of the market with cheap imported goods from the very same partners. A bit of both is good but a tilt to imports can be hazardous.

The above debate is being seen in the contentious issue of whether India should join the RCEP. Calls for rejoining the trading arrangement have been recently voiced. The World Bank in its India Development Update 2024 pushed for a strong case for India's entry into the world's largest trading bloc.

"Analysts have tried to evaluate the impact of participating in or pulling out of mega trade deals using general equilibrium models, The conclusion of the most widely cited study (Petri and Plummer, 2020) suggests that India would gain USD 60 billion by 2030 if it joined RCEP. Aggregate income gains from RCEP16 would be shared across all of India’s major economic sectors (raw materials, light manufacturers, advanced manufactures, domestic services and traded services). Export gains would range from approximately 4 percent for (primarily) domestic services to 17 percent for traded services (e.g., in computing, finance, marketing) (Figure 2)."

The World Bank report also argues that integrating into global value chains would have a great impact for India on diversification of its exports as well as gaining competitiveness.

"By integrating into GVCs, India can: (i) expand the variety of what it produces (by participating in the production of higher-added value goods), (ii) enhance its competitiveness (by gaining access to advanced technologies and global markets), and (iii) increase flows of FDI by multinationals seeking to produce in India. Currently, India's participation in GVCs is relatively limited. Backward participation, where exports incorporate foreign inputs, peaked at over 25 percent of gross exports around 2010 before declining to about 15 percent by 2020. Forward participation, where India provides inputs for other countries' exports, remained relatively stable between 10 percent and 15 percent from 1995 to 2020, with minor fluctuations around the 2008 financial crisis and after 2011. The decline in backward participation highlights the importance of removing barriers on intermediate inputs (Figure 4.11). "

However, the other side of the spectrum there is scepticism. It is reflected in this piece by Surendar Singh who argues that the data shows that the trade deficit with RCEP partners has grown over the years and this would further worsen. He states:

"This raises a pertinent point: Had India joined the RCEP agreement, the trade deficit would likely have worsened, further contributing to its trade deficit with RCEP countries, mainly on account of China.

Therefore, it is important to state that India’s decision to reconsider joining the RCEP agreement should weigh the potential gains and losses in terms of trade at both aggregate and country levels. These are particularly important vis-a-vis China, with which India conducts a significant volume of trade, and has a huge trade deficit. "

The data he puts forth is quite telling:

The detailed report by  Peter A. Petri and Michael G. Plummer in their study titled "East Asia Decouples from theUnited States: Trade War, COVID-19,and East Asia’s New Trade Blocs" for PIIE however estimates substantial gains from India's entering into RCEP.

"Finally, India will gain $60 billion on an ongoing basis if it joins RCEP, that is, RCEP16 is implemented instead of RCEP15. Put another way, India’s decision involves losing $6 billion outside RCEP or gaining $54 billion in it (table 4). This loss is 1.2 percent of India’s projected GDP in 2030 and thereafter, or a little more than twice the US loss from pulling out of the TPP. The remaining RCEP15 economies are $6 billion better off without India, a negligible share of the region’s $44 trillion income in 2030."

However, they do recognise the potential impact of the RCEP on India's economy:

"The government apparently felt that potential threats to manufacturing employment due to Chinese competition would be politically unacceptable. Indeed, concerns about Chinese competition have been prominent since the start of negotiations but are now exacerbated by concerns that China will shift its exports from the United States to India. India’s politically sensitive agriculture sector also feels threatened by products such as spices from Southeast Asia and dairy from New Zealand and Australia. Finally, India has run a bilateral trade deficit with 11 of its 15 RCEP partners and, like the United States today, it is evidently concerned about it. In 2018, India’s deficit rose to $74 billion with China, 25 percent of its overall deficit.32 To mitigate these fears, India has asked for modifications of RCEP, including changing tariff calculations, adding “auto-trigger” protection for import surges, and greater flexibility on tariff concessions (Suneja 2019). Other members were unwilling to accommodate so many changes." 

In conclusion, what does one have to weigh in on when analysing one's options:

1. A detailed evidenced based analysis of what impact the trading arrangement could have across sectors in both manufacturing and services

2. In what ways could India integrate in GVCs in these partner countries? Which MSMEs and in what sectors are these GVC possibilities possible? An oft-repeated refrain is that India's businesses have not utlised the potential of their existing FTA opportunities. If that is the case, one would have to closely examine whether joining the GVC bandwagon remains a theoretical construct and fails on the ground due to other contributing factors.

3. How would India's exports be boosted considering already existing trading arrangements?

4. Are a surge of imports always a bane for the country or can it be viewed as benefitting consumers as final beneficiaries or businesses who use intermediate imports to re-export final products.

5. If there is a gain predicted, what are the sectors that would benefit from the inclusion? Would it offset the loss of other sectors. As it is said, there are always winners and losers in a trading arrangement.

 

Some more tariff lessons

 The tariff debate in the context of the United States rages on. Some recent pieces:

1. The impact tariffs could have and the various powers to impose them - by Alan Wolff in PIIE

2. The need for reform of tariff powers - by Clark Packard and Scott Lincicome in CATO.

3. And the search for answers led me to this book in 1982 by Robert C Feenstra and Jagadish Bhagwati titled "Tariff seeking and the Efficient Tariff" found in the NBER archives, which reveals the pressure for tariffs by stakeholders in the face of foreign competition.

Of tariffs and the ongoing debate

Continuing on the fascinating debate on the most basic of trade policy instruments, tariffs, two interesting opposing views in the Atlantic and the other in the PIIE website in the context of imposing across the board tariffs in the United States raises the issue of trade and tariffs back to centre stage, atleast during some elections.

Let us try to demystify the debate:

One view is that tariffs are a legitimate policy instrument to boost local manufacturing, create local jobs, boost the economy, encourage research and innovation and leads to overall growth of the economy. It has its costs in terms of increased costs to the consumer, however the benefits in terms of creating employment, boosting local communities far outweighs the costs. In addition, the revenues that accrue to the exchequer are useful for providing basic needs to society if not returning it to the impacted consumers.

The contrarian view is that tariffs are not a good economic idea, they lead to increase costs, makes imports costlier and impacts customers. Manufacturers who use imported components are impacted and it leads to inflationary trends. It also leads to companies seeking exemptions from import tariffs and these are normally given not on sound economic principles but on other considerations. Further, it could lead to retaliation from trading partners. There are other policy tools like WTO consistent subsidies to support local industry.

The WTO, in a sense, recognizes that tariffs are a reality and makes WTO members commit to certain levels of tariff liberalisation. It binds members to bound tariffs and the WTO members can apply tariifs within this limit without inviting international scrutiny. The WTO website has this to say:

"The bulkiest results of Uruguay Round are the 22,500 pages listing individual countries’ commitments on specific categories of goods and services. These include commitments to cut and “bind” their customs duty rates on imports of goods. In some cases, tariffs are being cut to zero. There is also a significant increase in the number of “bound” tariffs — duty rates that are committed in the WTO and are difficult to raise."

The debate on tariffs and what is the bets path forward brings us to the debate on globalization and the WTO itself. Jason Furman, speak at the WTO Public Forum this year has this to say on the future:

I'll very briefly lay out a few ideas for what can be done next on globalization.

The first is, ideas really do matter. You could not have the backlash we have without a huge amount of confusion and trying to dispel and explain. England would never have gotten rid of the Corn Laws without some interests in getting rid of the Corn Laws, but also the set of ideas that Smith and Ricardo and others advanced. So, ideas really do matter—although I should confess that I may be a little biased given all the time I spend teaching those ideas.

The second is, there's a lot that countries other than the United States and China can do to expand trade among themselves, negotiate better deals with the United States and China as well.

Third, the world does need the United States and China. I have talked more about some of the self- inflicted the problems we have in the United States, but China is very, very far from being an innocent actor in trade restrictions and distortions.

Fourth, national security and resilience are legitimate issues for trade, but they're legitimate issues if we approach them in a much more rational way, where we talk about weighing off trade-offs of costs and benefits, rather than just pretending it's benefits, and benefits being much more limited about the countries they apply to and the sectors they apply to, and being much clearer about where those limits are.

Finally, the WTO plays an incredibly important role. I would be thrilled with yet another global trade round that was unanimously agreed to by every country in the world. But it has been a while and no one is putting all their eggs, or really even many eggs, in that basket. Fostering as much plurilateralism as possible and as many agreements that create an incentive for other follower countries to want to join them should be the emphasis.

Not sure about another trade round. But the debate on globalization, hyperglobaloization, tariffs and trade are back at the centre of political debate yet again. 

Some reads

For those who follow the WTO closely, two updates:

1. The WTO website announces that the search for the new Director General has begun.

2. A pessimist's (realist's?) overview view of the future of the WTO in the Foreign Affairs - The World is Abandoning the WTO

Across the board tariff increase - what does it do?

Tariffs are the mainstay of any discussion on international trade. WTO members bind their tariff limits in the WTO with commitments. There are basically two categories - bound and applied. Bound tariffs is the limit beyond which imposition of tariffs would be a violation of international obligations. Applied tariffs are those that are actually applied by a WTO member. As long as applied tariffs do not cross the bound tariff level, things are fine.

Explaining the impact of raising tariffs across the board on a local economy is not easy. Doing it in simple terms is even more difficult. Wendy Edelberg and Maurice Obstfeld in their piece titled "Tariffs on all imports would create chaos for business" in Brookings outline the impact tariffs could have on the US economy (for that matter any economy):

1. Higher prices for consumers

2. Impacts exporters who rely on intermediate goods that are imported

3. A number of exemptions from the tariffs that creates winners and losers

4. Inflationary pressures

5. Retaliation from trade partners making exports costlier

6. Need to re-negotiate contracts to mitigate the impact of tariffs on intermediate/finished goods imports

Pretty straightforward and clear. What caught my attention in this piece is a reference to an article in ProPublica on how China had become the largest source of the Bible to the United States. As per this piece, China's Amity Printing said it printed 14.15 million copies in 2017. 

The hidden treasures of international trade!

What next - a Trade Related Aspects of Generative AI Agreement (a la TRIPS) at the WTO?

Artificial Intelligence (AI) is the buzzword today and applying its logic, impact and use to different scenarios is common practice now! The other day it was AI in international arbitration in this piece.

What I was waiting for was a discussion on AI and international trade. What could the combination evoke? The WTO and AI. 

As I thought about it - came across this piece in the World Economic Forum website - ChatWTO:An Analysis of Generative Artificial Intelligence and International Trade.

The piece examines the growth of AI, its potential and the need for international trade rules addressing issues surrounding the ethical, legal and policy implications of AI. Does the existing GATS, TRIPS framework suffice to address AI's use in international trade?

What do we need now? More coherence in national legislative and policy frameworks? More harmonisation in international trade rules covering the trade related aspects of AI? More discussion on AI's development and legal framework? More experience sharing? Bridging the digital divide to ensure AI benefits more people? The ability of AI to help government's address pressing governance issues? Should subsidization of AI by large industrial nations be questioned?

The authors provide these remedies:

Governments and the WTO should use existing trade rules and institutions/committees to create a forum for discussing GAI-related issues in international trade. 

The WTO should consider creating a new committee that spans its existing committees to comprehensively examine the impact of international trade rules on GAI, and vice versa, in a cross-cutting manner. Hosting educational sessions on GAI and its characteristics, benefits and risks would be an important first step. Additional or specialized work could be completed in existing WTO committees, such as the TBT committee and the GATS and TRIPS councils. GAI is already crossing borders, and ensuring its alignment with global goals and values set by the OECD, UN and G7 is a critical contribution the WTO could facilitate.] 

Establishing common ground rules at the WTO is crucial to ensure that GAI is developed in a fair, safe manner that benefits individuals and communities globally. The WTO offers a unique platform for its members to enhance transparency regarding their national initiatives, seek technical assistance and negotiate critical issues. This role is particularly urgent in addressing the rapidly evolving challenges associated with GAI.

Is this an issue for the WTO at all? Should national government's frame their own policies as longa s they do not infringe on the basic tenets of WTO - national treatment and MFN? More than the need for harmonization, is there a need for divergent policy approaches based on national needs and sensitivities? Or is there scope for a uniform approach to deal with AI internationally? 

Are we looking ahead to a Trade Related Aspects of GAI Agreement (TR-GAI) - a la TRIPS? 

Negotiators get ready!