French fries in the Kiwis - Not a crispy affair!

A classic example of winners and losers in the free trade debate is coming in from New Zealand - and the product is the unlikely french fries!

Due to the lockdown impact in Europe, imports of cheap french fries to New Zealand is causing prices to dip and challenge local growers and makers of french fries. The news reports are found here and here.

I was surprised to find a website called Potato News Today which traces the potato industry. It reported thus:

Globally, the disruption of supply chains, and particularly sales to hospitality, by virtue of COVID-19 restrictions has led to the complete collapse of potato prices in major production centres, in particular the European Union (EU). 

This will shortly lead to extraordinary price reductions in frozen potato chips from the EU. It’s expected that a similar collapse will be seen in other parts of the northern hemisphere, in particular in North America. The EU currently have approximately 2.6 million tonnes surplus frozen fries. 

If urgent steps are not put in place to prevent it, New Zealand is likely to be swamped by imports of frozen potato chips at those extraordinary prices. That, together with the existing impact of the current pandemic will in turn cause the New Zealand potato-growing and potato-processing industries to suffer severe and prolonged damage.

Familiar points when domestic industry is hit by a surge of imports. The multilateral trade rules do provide for possible action - raising applied tariffs if within bound rates, imposing anti-dumping duties or taking safeguard measures.

However, is the surge of imports a manifestation of the market or a deliberate attempt to off load cheap french fries in the Kiwi market? How do losers in this episode react - do they believe in the virtues of a free trading system based on comparative advantages? Is the fall in prices due to the market, an interplay of demand and supply, or a deliberate attempt to undercut competition?

The next DG of the WTO - What do the "stakeholders" say?

Discussions on who will be the next DG are heating up. Reports are abound on what is in store here, here and here.Eight candidates are in the fray. Will the next DG be the first from Africa? Will the next DG be the first woman DG? Will the next DG be a political representative or a trade bureaucrat? Well, these questions would only be answered when the next DG is actually announced, how about a survey on this aspect.

And a survey is exactly what was conducted and the results were brought out in this paper by the European University Institute. Titled "Stakeholder Preferences and Priorities for the Next WTO Director General" the working paper brings out the results of the survey conducted amongst a mixed stakeholder group. The paper states that "Government officials (including the EU) represent the second largest category of respondents (24.6%) after academia (25.1%); followed by the private sector (companies and business associations) (19%); staff of international organizations (18%) and NGOs, labor unions, think tanks (11% of the sample). There was at least one government respondent for 76 of the 164 WTO members (46% of the membership). Of the government and EU respondents, 31% (66) are based in Geneva."

Amongst the many responses, the conclusion of the paper highlighting the survey is interesting:

As far as the characteristics the "stakeholders" hoped the new DG would have, there was near unanimity - well who wouldn't want a professional manager!

The bottom line that emerges from the responses to the survey regarding priorities when it comes to the professional and personal attributes of the next DG is relatively clear. Competence, political experience, a network that spans major capitals, international business and international organizations, knowledge of the WTO negotiating process and a background in economics are all characteristics that are ranked most highly. Moreover, Geneva-based officials often accord greater priority to these characteristics than the total sample. 

Time for a political head for the WTO, not a bureaucratic leader!

One hypothesis this suggests is that the DG should not be a technocrat/WTO delegate. There is a recurring debate among trade officials and practitioners that has something of a cyclical dimension: should the WTO be led by an ex-Minister/senior politician or by a bureaucrat (a trade official)? The most recent DG was a bureaucrat; some of his predecessors were former Ministers or Prime-Ministers (e.g., Renato Ruggiero; Mike Moore). It appears that as far the respondents to the survey are concerned the pendulum has swung to a preference for the latter type of profile.

And thumbs up on the priorities for the new DG - sort out the dispute settlement crisis immediately!

There is a substantial degree of commonality in rank orderings of substantive issues for negotiation, institutional reform, and daily operations of the WTO. Resolving the dispute settlement crisis is a clear priority for most respondents, especially government officials.

Well, will these considerations play out when 164 members of the WTO come together to select the next DG? Are these priorities for capitals at all? What will play out as the selection process moves forward. Will it be a fair selection considering the formats and closed door selection process, as this piece suggested?

Let us wait and wait.

Going bilateral or multilateral - which way is the road headed?

Are bilateral trade agreements and multilateralism mutually exclusive? Can one co-exist with the other? Should one co-exist with the other?

Article XXIV (5) of the GATT 1947 provides for forming Free Trade Areas and is not considered an abrogation of multilateral commitments.

Accordingly, the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free trade area...

Article V of the General Agreement on Trade in Services, titled "Economic Integration" provides for bilateral agreements:

1. This Agreement shall not prevent any of its Members from being a party to or entering into an agreement liberalizing trade in services between or among the parties to such an agreement, provided that such an agreement:

(a)  has substantial sectoral coverage, and
 

(b)  provides for the absence or elimination of substantially all discrimination, in the sense of Article XVII, between or among the parties, in the sectors covered under subparagraph (a), through:
 

(i)  elimination of existing discriminatory measures, and/or
 

(ii)   prohibition of new or more discriminatory measures,
 

either at the entry into force of that agreement or on the basis of a reasonable time-frame, except for measures permitted under Articles XI, XII, XIV and XIV bis. 

Thus, the WTO framework does provide for regional and bilateral engagements along with the multilateral system. This is evidenced by the fact that there are numerous bilateral and regional free trade agreements across the globe. The resulting multiplication and intertwining of rules and obligations is often referred to in trade literature as the spaghetti bowl effect of regional trade agreements.

However, is the bilateral and regional proliferation desirable is another question. What is tending to happen now is that new standards (gold, silver and bronze) on rule setting on e-commerce, labour, State Owned Enterprises are happening outside the multilateral system in these regional and bilateral settings. Is that necessarily a bad thing or is it required for slow adoption by the multilateral system with varying growth trajectories?

Robert Lighthizer, USTR in a recent press report seems to suggest the two should not co-exist and the US could go for one at the expense of the other:

“The FTAs, in my opinion, we should just get rid of them. We should have a multilateral system or a bunch of bilateral systems,” Lighthizer said. “And to be honest, I can go either way. But we can’t have people who...profess to multilateralism and then go around basically being the biggest proponents of a bilateral system.”

Which way the world's largest economy and trading partner will go will definitely have an impact on the multilateral trading system and the institutions that govern it.

James Bacchus on the self-judging security exception

Last month, I had blogged here about how the security exception in the WTO Agreements may not be as self-judging as they look considering the decision of a panel in the Saudi Arabia Intellectual Property dispute at the WTO. It appeared that WTO panels were interpreting the security exception provisions to determine whether there indeed were a set of facts that justified the use of the exception and whether the measure undertaken had any relation to the security threat that the WTO member perceived there to be.

I was pleasantly surprised at the opinion in the Newsweek by James Bacchus, a former Chairman of the Appellate Body, who came to the conclusion that panels are dissecting national security exceptions as any other provision of the Agreements thus making it no longer feasible for Members to assume that when they undertake a measure under the security exception umbrella, they are above rebuke!

In his piece titled  "WTO Signals National Security No Longer Trump Card in Trade Disputes", he states:

The jurists in the Russian dispute disagreed. So too did those in the Saudi dispute. In sum, their reasoning goes: If the national security exception is self-judging, if it cannot be reviewed like any other obligation in the WTO treaty, then why do the national security exceptions in the WTO rules on trade in goods and services and on trade-related aspects of IP rights set out specific limited circumstances in which these exceptions can apply?

Notably, the panel in the Russian transit case– as mandated by the WTO treaty – drew on the "customary rules of interpretation of public international law" in noting that treaties must be upheld in "good faith" by those that are parties to them. On this basis, the panel in that case concluded that governmental actions for which a national security exception is claimed must "meet a minimum requirement of plausibility in relation to the proffered essential security interests."

The conclusion in the piece is even more interesting:

WTO rulings in disputes in which none of the disputing countries are from the West are often ignored in the politics and in the media of the West. These two rulings, though, are deserving of much global attention. They remove the foundations for the U.S. argument that it can do whatever it wishes in trade if it does so in the name of national security. And they foreshadow more such rulings to come.

Are we going to see a slew of panel decisions where measures taken by WTO members as national security measures are challenged? With no Appellate Body to decide on these panel decisions, will we see a proliferation of panel ruling that tend to take this view?

 

New trade deals, new disputes?

The USMCA is in force. A series of news reports on it here, here, here, here and here. 

But as any trade deal, there are supporters and critics. the supporters would say that this is the best thing that could have happened while the critics vouch for the fact that this is the worst trade deal ever!

From the supporters, the USMCA promises a lot on digital trade, rules of origin, intellectual property and labour rights. It is a high standard agreement that sets right what NAFTA couldn't.

CATO had this piece by Inu Manak that thought in very different terms. It stated that the rules of origin for the auto sector could lead to problems for local manufacturers needing to change their supply chains. Further, there is a possibility of labour disputes.

The most concerning aspect of the new labor rules is the potential litigation boondoggle they may unleash, with the inclusion of a rapid response mechanism (RRM) for labor enforcement, which was put into place to ensure remediation of a denial of collective bargaining rights. There are two separate RRMs, one as between Canada and Mexico, and the other between the United States and Mexico, and is specifically designed to handle a particular denial of the right of free association and collective bargaining by a private entity at a particular worksite.

Will the maximum of labour related disputes in trade agreements originate under the USMCA? Or is this just initial hype and things will ultimately settle down?

More on precautionism

Following up on "precautionism" that ex DG of the WTO, Pascal Lamy spoke about in a podcast blogged about here, I thought more about it. He mentioned that it tends to be more subjective and could lead to more protectionism than higher tariffs or quotas. Levelling the playing field is much more tougher when countries adopt more precautionary principles to determine what needs to be opened up and for how long.

This made me do a bit of research on the well known "precautionary" principle in EU trade policy. This detailed communication by the European Union on what the precautionary principle involves explains the circumstances under which the principle is applied.

The precautionary principle is detailed in Article 191 of the Treaty on the Functioning of the European Union. It aims at ensuring a higher level of environmental protection through preventative decision-taking in the case of risk. However, in practice, the scope of this principle is far wider and also covers consumer policy, European Union (EU) legislation concerning food and human, animal and plant health.

The summary goes on to state:

The precautionary principle shall be informed by three specific principles:

• the fullest possible scientific evaluation, the determination, as far as possible, of the degree of scientific uncertainty;

• a risk evaluation and an evaluation of the potential consequences of inaction;

• the participation of all interested parties in the study of precautionary measures, once the results of the scientific evaluation and/or the risk evaluation are available.

In addition, the general principles of risk management remain applicable when the precautionary principle is invoked. These are the following five principles:

• proportionality between the measures taken and the chosen level of protection;

• non-discrimination in application of the measures;

• consistency of the measures with similar measures already taken in similar situations or using similar approaches;

• examination of the benefits and costs of action or lack of action;

• review of the measures in the light of scientific developments.

 The debate really is to what extent "precautionism" can be used to be veiled protectionism. Risk evaluation and assessments do have their element of subjectivity. So while tariffs and quotas are objective numbers and limits, precautionism can turn more murkier.

Coming from a person who was the former EU Trade Commissioner, precautionism does ring a bell!

Moving from protectionism to precautionism?

What is the future of globalization post the pandemic? Pascal Lamy, the former DG of the WTO speaks about it here in a podcast reported in the Lowy Institute website.

Pascal Lamy cautioned that there would be more "precautionism" rather than protectionism. This would be more subjective and problematic. Some of the points on the podcast jotted down here:

On the future of globalization:

1. More obstacles to freer trade

2. Speed of globalization will change, but not towards deglobalisation

3. Slowing down of global trade - there is huge amount of helicopter money in some countries - so large State intervention in US, EU, China

4.Supply chain fragility - but more bark than bite 

5. Bit of rechoring may be in pharma

6. Precautionism as opposed to protectionism

7. It is protecting your people from risk - overall level of precaution will increase

8. Safety standards, security - precaution is a politically connected issue - what is a good level for you

9. As opposed to tariffs (usual tools) - addressing precautionism is very subjective - more fragmentation

10. Leveling the playing field of precautionism is more difficult

On the WTO

1. WTO is weaker than 10 years ago

2. Increasing divergence in collective preferences between the US and China

3. Updating the WTO rulebook - is what we say reform of WTO

4. China has changed - state owned part of economy is 30% of the economy

5. SOE needs support from the State - intervention - distorts the market, internally and externally

6. WTO disciplines in state aids are shallow and need to be strengthened - EU, US, China, Japan have to converge for competitive neutrality

7. US-China rivalry well placed to stay

8. Will take a few years to stabilize

9. WTO reform - short term goals - cooling down period, easing trade distortions, coalition of the willing to stop the distortions

10. Long term - Developing countries need to step in since international trade and investment is a big lever for development

Is it realistic that WTO will move forward?

1. Notion that playing field needs to be levelled is a major issue for developing countries - it is a further obstacle to development.

2. Notion of rebalance will remain

3. Is China a developing country anymore?

China and the WTO

1. Existing set of disciplines does not constraining some trade distorting practises of certain WTO players. 

2. No more convergence now. Co-existence now. 

3. If they do not accept new disciplines, then opening up trade will stop. The rulebook is not enough to adapt to the present trade distorting practises.

          4. US farm support also an issue. 

Lot of things to chew upon there. Reform required, but of what?