Reform narratives, global innovation index and some random thoughts

Some readings this week:

Jennifer Hillman, former member of the Appellate Body, writing in the Council for Foreign Relations website on the future of the WTO and the challenges for the new Director General opined:

They will inherit a WTO that has failed to reach any significant pacts (other than the Trade Facilitation Agreement) since its founding in 1995. Critical agreements are needed to curb fishery subsidies that are contributing to the depletion of the world’s supply of fish, and to write rules of the road for e-commerce and digital trade. These are “must-do” items, along with fixing the WTO’s dispute settlement system following a U.S. decision to destroy its Appellate Body, which could allow countries to avoid complying with decisions they do not like. The director-general will also need to find ways to address growing concerns over China’s unfair trade practices.

The reform agenda seems to be centred around fisheries, ecommerce rules, addressing concerns around China and fixing the AB. They have been called "must-do" items. I am not sure if there is consensus on the reform agenda itself amongst the 164 WTO members leave alone agreeing on what needs to form the substantive response to this agenda. Some members feel the agenda narrative is not in their interest and the WTO needs to be addressing more "inclusive" agenda items including reduction of agricultural subsidies as well as ensuring interests of developing and least developed countries are protected in future global trade rules. Can the Members get consensus on what the agenda is first?

The Global Innovation Index for 2020 is out.Switzerland tops it once again. 

Some excerpts:

Sovereign Wealth Funds and Innovation - An interesting observation on the impact of geopolitics and the behaviour of SWFs:

However, while geopolitics remains a major consideration for SWFs investing in foreign technology companies, there is a new frontier for political considerations—those of major global technology companies. As firms such as Alphabet, Facebook, and Amazon gather ever more data about their users, they are increasingly shaping people’s lives and politics. For a government-owned investor looking to back major new technologies in an era where start-ups can quickly emerge as dominant global players—and big data can have unforeseen or unintended consequences—it is essential that they look ahead to these considerations and understand the potential reputational and political implications, both for them as an investor and for their government as an owner. 

I found the chapter on government funding of innovation by Josh Lerner interesting as it  raises the difficulties government officials have in handling the innovation bubble - the different world of entrepreneurship, innovation and venture capital!

The final challenge reflects the nature of people who often are associated with the greatest entrepreneurial success. Government officials may have many valuable talents and play incredibly important roles, but the skill sets associated with successfully identifying and funding entrepreneurial businesses are very different from those encountered in their typical daily work. The ambiguity, complexity, and specialization associated with these ventures make these tasks quite challenging. 

In many instances, officials may be manifestly inadequate to selecting and managing entrepreneurial or innovative firms. Many examples can be offered of government leaders who did not think carefully about realistic market opportunities, the nature of the entrepreneurs and intermediaries being financed, and how the subsidies they offered would affect behavior. Whether they affect the ability of firms to accept outside financing, offshore routine coding work, or the response to shifts in customer demand, well-intentioned officials can make rules that prove to be very harmful to those they mean to help. 

But beyond the inability of governments, much of economists’ attention has been focused on a darker problem that affects these and similar programs: the theory of regulatory capture. This hypothesis suggests that entities, whether part of government or industry, will organize to capture the direct and indirect subsidies that the public sector hands out. Subsidies geared towards entrepreneurial firms are no exception.

These issues are exacerbated by the fact that the most creative entrepreneurs are often outsiders. For instance, extensive literature has documented the disproportionate representation of immigrants in U.S. entrepreneurship, both in general and among high-potential enterprises.These may be people who are less likely to be well connected or less able to lobby successfully for public grants.

Solutions like independence of decision making in selecting innovation projects, insisting on matching funds (from informed funders and not government entities!) by the private sector are some of the solutions provided to overcome the government deficit in understanding the innovation world! Good lessons for government's around the world.

 

To appeal or not to appeal is the question

Simon Lester has a succinct account of the Appellate Body (AB) crisis at the WTO and what alternative arrangements in place now can offer to resolve the impasse. With the AB dysfunctional presently and an alternative ad hoc arbitration mechanism in place adopted by about 10% of the WTO's 164 members, one needs to wait and watch on how the Multi Party Interim Arbitration arrangement(MPIA) will pan out.

The MPIA still does have challenges - its limited following, secretarial and funding support, how it will address the issue raised on the AB's overreach, issue of interpretation, "law making instead of clarifying the rights and obligations of WTO members and how much deference it will show to domestic authorities' decisions.

As Simon points out:

Just as there was uncertainty about the Appellate Body in 1995, there is uncertainty about the MPIA now. In addition to the points noted above, there are other questions: What approach will the MPIA take regarding the interpretation of core WTO principles such as the nondiscrimination obligation and public policy exceptions? How often will the MPIA appeal process be used? What kind of legal culture will develop around it, including the approach of the arbitrators and of the litigants themselves? How much deference will the MPIA show toward politically sensitive domestic laws and regulations? How much deference will the MPIA show toward the findings and reasoning of WTO panels? Will the MPIA avoid novel and controversial issues that are put before it or take them on? Only practical experience will give us clear answers.

However, the issue is much more than compliance and enforceability. It is an issue inherent in judicial interpretation. The power to interpret carries with it the inherent possibility of expansive or restrictive interpretative approaches. The language of the law is not always clear and unambigious. The Vienna Convention on the Law of Treaties does provide guidance but the same articles of the VCLT have provided scope of varying interpretation according to the text, object and purpose or context.

The issue is whether sovereign countries are willing to accept a neutral arbiter with the power of enforcement in international trade disputes. It is inherent in such processes to have the arbiter have the final word on interpretation and jurisprudence, of course within limits. One sees the tension in investment arbitration where States seek joint interpretative notes to control the interpretative jurisprudence of treaty text. The irony is that in the arena of international investment arbitration, the debate is about having an appellate system - a Multilateral Investment Court, partly because there is a perceived inadequacy of the ad hoc arbitral tribunal system leading to incoherent jurisprudence.

Trade negotiations - who does one listen to?

Trade negotiations and stakeholders have been a tricky issue always. Who does one consult when arriving at trade deals. Who are the stakeholders in business and society that need to be consulted? How do sub-national and local authorities figure in the process? What should the mechanisms be for effective input sharing and arriving at negotiating positions? What kind of businesses get access to air their views? What about civil society groups and workers?

The UK has set up several Trade Advisory Groups (TAGs) to help the government in negotiating their trade deals in sectors ranging from professional advisory services to life sciences.The purpose is "to provide the blend of strategic and technical expertise required to ensure the United Kingdom’s trade negotiations are able to progress at pace."

The issue of who needs to be consulted and what interests dominate trade negotiations is as old as trade deals itself. Not everyone is happy with how stakeholders are consulted, as is evident in this voicing of concern that workers views  are not getting enough priority in trade deals.

Unions bosses warned “workers will suffer” if the Government failed to involve them in talks.

Animal welfare campaigners such as the RSPCA and consumer groups have also been left out - despite concerns that a US trade deal could slash food standards by allowing chlorinated chicken in British shops.

In another part of the world, concerns of how a trade deal could hurt local jobs in Singapore is a critique of the need for such trade deals. Mobility of labour across geographies pursuant to a trade deal is also seen as very sensitive. 

Trade deals involve extremely complex trade-offs, winner and losers as well long standing impacts on economies. Some sectors stand to gain while others may lose out due to the competition from outside. How the political economy of these realities are understood, negotiated and managed is critical in any trade negotiating strategy. Of course consultation of all those going to be impacted is always the first step towards that goal!

Look at your outer space - we need to set multilateral rules there too!

 Two articles this week on the need for international rules on managing Space caught my attention. Not strictly related to international economic law and policy, the need for multilateral rules on regulating activity in space seems a real challenge.

Activity in Space, whether for strategic, military or commercial purposes has increased manifold. More countries are participating in it including private actors. Though there are treaties that govern activity in outer space, they seem to be inadequate as well as limited in scope. Further, enforcement of rules and a lack of dispute settlement mechanisms are also a source of worry.

Syed Akbaruddin emphasizes on the enormous growth of the outer space industry and the need for a more concerted action on developing international rules. He calls for both domestic and international action.

The proposed involvement of private players and the creation of an autonomous body IN-SPACe (Indian National Space Promotion and Authorisation Centre) under the Department of Space for permitting and regulating activities of the private sector are welcome efforts. However, the space environment that India faces requires us to go beyond meeting technical milestones. We need a space legislation enabling coherence across technical, legal, commercial, diplomatic and defence goals. Our space vision also needs to address global governance, regulatory and arms control issues. As space opens up our space vision needs broadening too.

Molly Quell writes about the challenge of space debris and who has to bear the cost of this reality. She argues that the existing international legal landscape is not equipped to deal with the pressing issue of space debris and its consequences.

Most of what goes into space doesn’t come back. Nations aren’t required to remove their garbage from space and to do so voluntarily would cost a tremendous amount of money. So more than half of those 9,000 satellites remain, some as operational but more as decommissioned junk. As they crash into each other, they create more tiny bits of debris whizzing around the Earth.

The need for deliberating on an international legal framework is real. How will nations react to this need? How will they perceive their offensive and defensive interests? How will commercial players be involved? Will the large majority of economies be bystanders in rule setting? Should there be a binding dispute settlement mechanism like the WTO? As technology and developments in outer space gather steam at a quick pace will the legal landscape be able to cope?Will there be a difference in approach of the major players in what needs to be regulated at what cost? Will there be special and differential responsibility - since a few limited countries have been responsible for the debris? 

Kiran Vazhapully has an elaborate discussion on lunar mining and international law in this post in Opinio Juris. He raises the issue of equity and the rights of all stakeholders. The principles apply to outerspace too. There are space-faring nations and there are others.

Now that the US has started proactively pursuing its agenda through Artemis Accords, the future meetings of UNCOPUOS will witness elaborate deliberations on this matter. While fully agreeing with the ‘adaptive governance’ strategy endorsed by the Hague Working Group to draw the details, the development of a broad multilateral framework with clearly formulated objectives is the need of the hour. Democratic discussions at the UN hopefully will prompt States like the US to reposition their ideology, rethink the fundamental premises of negotiation and in turn, realign strategy while deliberating on a legal framework. Above all, in-principle acceptance of an equitable framework as the basis of any multilateral discussion would go a long way in assuaging the concerns of developing nations and temper fears of neocolonialism in the final frontier.

Will outer space and the lunar/Mars environments be the next stage of international tension? Will it lead to a multilateral framework or a "coalition of the willing" approach to international norm setting? Whether it is the WTO or elsewhere, the tensions remain the same. the subject matter changes!

Setting the rules on digital trade

The digital world economy is the fastest growing. Like other sectors, it has economies that contribute as producers, innovators, consumers and bystanders. International rules on digital trade  have been restricted to bilateral or plurilateral initiatives. An international consensus on the need for and content have eluded negotiators so far.

Anbound, a think tank, has pitched for being proactive in rulesetting in digital trade. Outlining the contours of what the digital trade economy has in store for the US, China, EU and India, it argues for a more proactive role for China to play in standard setting:

Like it or not, with the progress and popularization of digital technology, a highly digital world in on the horizon and we will face the problems of "digital survival", "digital development" and so on. Since there are insufficient rules in this new field, it is important to establish relevant rules. As a major emerging market, China needs to actively participate in the formulation of these rules in the digital era.

Final analysis conclusion:

The digital age has arrived, and China is an important participant in such an age where it needs to play an active role in the formulation of the rules of the game.

The digital economy is going to be the next battlefield. The signs of it are reflected in the digital services tax, issues of security around technology, data privacy as well as the need for global rules to address the new age economy. How economies will react to the calls and strains will determine how they stand to benefit from it.

 

Another FTA in the offing - Japan and UK this time.

News of another FTA trickling in - a Japan-UK FTA this time. Reports of the deal are found here, here and here. Considering general timelines for FTAs, some being negotiated for years if not decades, this is quite an achievement - limited deal or otherwise.

UK's negotiating objectives are outlined here which include an ambitious FTA going beyond the EU-Japan FTA, opening up new opportunities for UK's MSMEs, high consumer standards, ambitious digital trade provisions (a la DEPA which I had blogged about here), export of professional services like banking, accounting and engineering services and automative exports amongst others.

However, one objective that stood out for me was with relation to health care:

The government has been clear that when we are negotiating trade agreements, the National Health Service (NHS) will not be on the table. The price the NHS pays for drugs will not be on the table. The services the NHS provides will not be on the table. The NHS is not, and never will be, for sale to the private sector, whether overseas or domestic.

Pretty clear and categorical on that front - no question about negotiating or liberalising on health services. Full stop. I guess when it comes to many other countries and their negotiating positions, the full stops are on many sectors and issues. That is the dynamics of international trade.

On investment, it included an objective of ensuring "UK investors in Japan continue to enjoy high standards of treatment." Well this must definitely mean some of the standards like Fair and Equitable Treatment and definitely the ISDS mechanism.

The UK has also seen these FTA negotiations as part of the larger geo-political landscape and the need to be part of rule-making in increasingly fragmented trade deals.

These bilateral negotiations will also be a logical stepping stone to joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). CPTPP is one of the world’s largest free trade areas, representing over 13% of global GDP in 2018, increasing to more than 16% if the UK were to join, and Japan is the largest trading partner out of all the CPTPP member nations, representing over 28% of total CPTPP trade.

Lastly what struck me was the 96 page UK strategic approach paper for these negotiations - all details, objectives, data in the public domain. Also indicates how data and evidence is the basis for trade negotiating positions. 

Will wait for more details on the text itself. The devil, in trade deals, is ultimately the text.

Getting business input to bolster trade negotiations

Dmitry Grouzobinski has brought out the importance of businesses and business inputs in trade negotiations in this piece. Often trade negotiations are conducted in a vacuum with minimal or no business inputs. In some cases, large influential and national champions do provide their inputs to ensure their interests are protected. It often transposes itself into negotiating positions. But what about smaller businesses? What about those who have no voice in large industrial bodies or associations. Developing country negotiators often have an issue of formulating a negotiating position because of a lack of information on what is in their country's national interest.

I was surprised to read about this problem existing for more well developed trading economies like Australia too. Dmitry opines:

A common myth is that trade negotiators begin each day with detailed marching orders from slick corporate lobbyists representing all the major multinationals. Frankly, that level of engagement would be a nice change.

The reality is that creating a pipeline of timely, candid and usable business input across the full spectrum of trade policy work has eluded governments.

Free trade agreement negotiations, being higher profile, are the easiest part of trade policy work on which to solicit business views, but results are still middling.

The Australia-UK FTA has, in half a year, received just 16 submissions. Other consultations did better, but even the 100 and 150 submissions received by EU and China negotiation consultations respectively can hardly be said to represent the sum total of potential views on such critical trading relationships.

Many a times countries negotiate complex trade agreements with a lack of understanding on how much impact those delas would have on their businesses. The quality of interaction with businesses when seeking inputs is sub-optimal and at times scarce. This has been a perennial problem with negotiation - and he makes the right point that both governments and businesses have to sit up and take stock.