How much protectionism is good?

A European perspective on how protectionism is not a remedy or an economic strategy is found in this VoxEU piece which traces the history of the US Smoot Hawley tariff to present day dynamics. It avers that high tariffs in the 1930's had led to more unemployment in the subsequent years.

The post dwells on the general trend across the world on looking inward - on shielding importers and domestic manufacturers, on promoting self-reliance and shunning external reliance.

The example of Great Depression protectionism is instructive for the world today. We are yet again at a point in history when protectionism is on the rise – and when governments are considering (and already pursuing in some cases) ‘beggar-thy-neighbour’ policies in the belief that such measures will boost jobs and growth. “America First” seems to be the guiding ethos of US international economic policy. Europe is debating whether it needs ‘strategic autonomy’ in a post-Covid world, and China is accelerating its own ambition of creating ‘indigenous innovation’ by restricting markets to foreign firms. Many supporters of these concepts are not shy about the essence: shielding domestic economies from imports.

On the way forward, the piece warns that more protectionism is not the answer to the challenges countries are facing - more trade, openness and reduction of barriers are. 

Like in 1930, there are loud calls for more protectionism which, for the most part, draw on ideas and policy initiatives that were conceived long before the pandemic started. Even if these ideas are dressed-up in popular-sounding terminologies – ‘America first’, ‘strategic sovereignty’ or ‘value chain repatriation’ – they all boil down to the same intention: reducing imports and reducing dependency on others in the belief that such actions create more jobs and prosperity. The anniversary of the SHTA should remind us that protectionism can lead to unintended and unwanted outcomes, and that trade restrictions during an economic crisis would make the situation worse rather than better. There are very real challenges posed by the current crisis which need to be confronted directly.  Else we may prove Mark Twain correct yet again: “History doesn't repeat itself, but it often rhymes.”¹

However, this is easier said than done. Policy makers and political leaders face political consequences of their actions. This includes being answerable to their constituiences for the economic condition they are in. Arguments of economic efficiency and openness may not sell amidst growing unemployment. Losers in the business of open trade need to be addressed. Mere acknowledgement that there will be losers does not suffice. Whether compensatory programs are enough to turn the tide are debatable.

Again it is an issue of balance. How much does one liberalise, where and how? Can a calibrated system work? Can there be a rolling back of options? What about history and legacy - the most open societies were once highly protectionist in their initial years of industrial growth.

Neither unbridled protectionism nor the love for free trade is perhaps the answer. Then is it left for every country to chart its own course on the level of protectionism? That would lead to a chaotic world again. However, this is what multilateral negotiations are all about - how much to liberalise and at what costs.

USMCA or CUSMA or T-MEC?

The Kluwer Arbitration Blog is hosting an interesting series of articles on the investment provisions of the USMCA, a la CUSMA, a la T-MEC. 

NAFTA is gone, USMCA/CUSMA/T-MEC is in.

                              (Courtesy https://www.unifor.org/en/take-action/campaigns/usmca)

Will do some blogposts on them soon.

But a bit of trivia:

United States calls the regional trade agreement USMCA (United States Mexico Canada Agreement)
Canada calls it CUSMA (Canada United States Mexico Agreement)
Mexico calls it T-MEC (Tratado entre Mexico, Estados Unidos y Canada)

Call it my whatever name you want, the provisions, impact and after effects will be the same!

Of spirits, a debate and a spirited debate - Tariffs on wine and spirits!

The tariff war manifests itself in different ways. Raising tariff on imports produces losers as well as winners. We generally assume that increasing tariffs on imports on specific products, will by making those products costlier, benefit local producers of the same. It is a form of protecting one's businesses as well as strengthening one's industry.

News of increased tariffs to be imposed by the US on EU wines and spirits is doing the news rounds here and here. This is in relation to the retaliation in the non-compliance by the EU in the Airbus WTO dispute. The EU is awaiting the WTO order on the Boeing WTO dispute that may perhaps give it the right to retaliate also.

In this blogpost, I wanted to reflect on some of the public submissions made by local US businesses on the proposed tariff rise. There is a portal on which public comments can be given and one can view the public comments already provided. Some of them make interesting reading and opens us to the reality of imports, trade and who benefits. This of course is product and nation specific, but in any case is a fascinating piece of information.

Some of the public comments on the proposed tariffs on wine is naturally from the US wine industry (consisting of US wine manufacturers as well as importers). 

This comment from a wine importer states:

Tariffs related to the importation of European wines will do nothing to benefit the American economy, the business of wine in American, nor the thousands of Americans who make their living through this business. Increased tariffs, on top of the already unnecessary 25% tariffs for certain European wines, will actually harm American businesses and kill American jobs. This will ruin the key relationships and trust in the American market that so many in our industry have worked for decades to create with partners in Europe and that dissolution of trust will only lead those producers to send their products to other, more favorable markets. In the way to the COVID-19 Pandemic, we've already seen hundreds of thousands of American jobs lost as they relate to the wine industry in the hospitality sector, more tariffs will only increase the lose of those American jobs further and make it more difficult for local and national US business to be successful moving forward.

Another one is more elaborate:

Adding a 100% tax on imported wines would devastate these industries, and eliminate the jobs and livelihoods of thousands of Americans, many of whom have specialized knowledge and skills specific to wine importing and that do not seamlessly translate to other industries. In addition to these adverse effects to the far-reaching wine import industry, I am further concerned that this proposed action by the USTR will lead to increased retaliatory tariffs on U.S. wines and set back ****** efforts to continue growing U.S. wine exports. Today, there is a gross surplus of wine – bulk wine in particular – that will not be consumed by Americans. Adding on top of that challenge the possibility of E.U. countries levying retaliatory tariffs, will be catastrophic to many American grape farmers. It could cause the shuttering of countless US wineries, because the E.U. is American wine's biggest export market, totaling $469 million in sales in 2018. I and my company support US efforts to hold our trading partners accountable, level the playing field for American businesses and forge enforceable trade agreements. We urge the US administration to get back to the negotiating table while working with our allies to develop global, enforceable solutions. An escalated trade war is not in the country’s best interest, and both sides will lose. I am counting on you to force a positive resolution that removes the current 25% tariffs, abolishes the proposed 100% tariffs, fosters American competitiveness, grows our economy and protects our workers and customers. 

A succinct, direct one is here:

As the General Manager of a small wine distributor and importer I am strongly opposed to any tariffs levied against European wine, foodstuffs, and other goods in response to the Large Civil Aircraft dispute. The tariffs levied in 2019 have already cost American jobs, and any expanded or increased tariffs will only cost more American jobs. What's more, it's American companies and consumers who end up paying for these tariffs as a result of higher prices. This does nothing to harm the European economy. What's more, these tariffs one wine, foodstuffs and other products have absolutely nothing to do with the aviation industry! These tariffs are misguided, should not be increased or expanded, and in fact should be repealed. Thank you for your time.

On how small businesses will be impacted, not the bigger ones, this one:

I own a small wine bottle shop. Half of my sales are European wines from France, Spain & Germany. I also buy from small importers & distributors. They can't absorb the increase in wines I buy & have my customers enjoying. If I'd have to raise prices at least double, that would put my distributors/Importers out of business, as well myself. What wine has to do with aircraft I have no idea. This will effect everyone in the industry & all you'll end up with is the huge companies. Small businesses built this country, not the Evil Empires! If this country is to continue, this should not happen!

Some support for the tariffs:

Using the approved WTO ruling of tariffs on products that can, and are, already manufactured in the USA will help grow our domestic manufacturing capability, thereby providing jobs in the important manufacturing sector. 

 What does one learn from this? 

Domestic industries (albeit importers/local businesses) are also impacted by tariffs on imported goods. If there is no adequate local manufacturing capacity, then it does not translate to any benefit. The pain of a few domestic players is inevitable when imposing a tariff that seeks to send a message to the importing country to bring its measure into compliance? What about the same products that are being exported? This report shows that as a result of tariffs on wine, American whiskey will also face the same fate in Europe and be impacted. The dichotomy between small businesses (whether manufacturers or retailers) employing local workers and interests of large corporations comes out very clearly. Of course, the consumer is not in the picture out here - typically not organised and electorally significant, her interests of reduced rates don't count!

This news report sums it up:

As the threat of tariffs on certain wines looms, Ades and others in the industry fear that many wineries and connected U.S. businesses will be unable to sustain the cost impact, and that consumers will face a reduction in choices on the wine shelf, in addition to higher price tags.          ....  

 “Tariffs may impact the country of origin, but they also have a real impact on Americans: from a jobs perspective, from a consumption perspective, from a life perspective,” says Ades. “They hurt American businesses and reduce jobs and income, which is why American wineries universally oppose these tariffs as well. It weakens their customers and their distributors.” 

Who are the winners and losers? Where are jobs lost? Which industry is impacted the most? What do consumers gain from this? How does it impact the country of origin? 

It is sure a spirited debate!

It is not globalisation anymore - it is slowbalisation!

It is no more GLOBALISATION  - call it SLOWBALISATION now. This was the call pre-Covid-19.

                                                           (Courtesy - The Economist)

The Economist in January 2019 coined a new term adapting a term used by a Dutch writer - Slowbalisation - to indicate the current reversal of openness in global trade and investment.

Globalisation has slowed from light speed to a snail’s pace in the past decade for several reasons. The cost of moving goods has stopped falling. Multinational firms have found that global sprawl burns money and that local rivals often eat them alive. Activity is shifting towards services, which are harder to sell across borders: scissors can be exported in 20ft-containers, hair stylists cannot. And Chinese manufacturing has become more self-reliant, so needs to import fewer parts.

On the fundamental principles of national treatment and most favoured nation treatment, it had this to say:

Less glaring, but just as pernicious, is that rules of commerce are being rewritten around the world. The principle that investors and firms should be treated equally regardless of their nationality is being ditched.

On the eternal question of whether we need to globalise or not, it had this to offer:

Globalisation made the world a better place for almost everyone. But too little was done to mitigate its costs. The integrated world’s neglected problems have now grown in the eyes of the public to the point where the benefits of the global order are easily forgotten. Yet the solution on offer is not really a fix at all. Slowbalisation will be meaner and less stable than its predecessor. In the end it will only feed the discontent. 

Mitigating the costs of global trade has been the quintessential question - how does it impact our producers, workers and industries? How will jobs be impacted in our country? How will it impact local businesses? What impact would it have on local supply chains? How much should we depend on foreign suppliers? How much sovereignty would we lose? What policy space is left to enact laws and regulations to ensure local communities benefit or are not impacted? 

These are some of the questions that policy makers have to engage in before deciding on appropriate trade policy. Too little has been done to mitigate globalisation costs, it is said. But the question is do governments have the ability to mitigate the costs at all?

Will slowbalisation now, post the pandemic, lead to ultra-slowbalisation?

Not walking out of the WTO anytime soon?

I had blogged about legislative moves in the US to walk out of the WTO here. Latest reports suggest that this may not actually happen immediately now.

Section 125 of the Uruguay Rounds Agreements Acts passed in 1994 in the US specifically provides for a procedure to be followed to review US participation in the WTO. A joint resolution of the 2 Houses of the US Congress can result in the US withdrawing from the WTO.

Section 125(b)(1) states that the approval of the Congress, provided under section 101(a), of the WTO Agreement shall cease to be effective if, and only if, a joint resolution described in subsection (c) is enacted into law pursuant to the provisions of paragraph (2).

Section 125(c) of the Act enumerates the procedure that a joint resolution would have to undergo for the US to withdraw from the WTO.

The Rules for conduct of business of the 116 Congress states in point 37 as follows:

"Provides that the provisions of section 125(c) of the Uruguay Round Agreements Act shall not apply during the remainder of the One Hundred Sixteenth Congress."

So, next session may be?

Some weekday readings on WTO, trade and China!

Some reports on trade, WTO and China's growth in the global sphere made interesting weekday reading:

Politico reports that there may be soon a Congressional vote in July on whether US should stay in the WTO. Like earlier attempts, this might just be another damp squib.

Why it matters: The decision means lawmakers will be forced to go on the record either in favor or against withdrawing from the WTO, which the Trump administration has frequently accused of being unfair to the United States.

The push to get out of the WTO comes as the United States and the 163 other members of the organization are in midst of selecting a new director general to succeed Roberto Azevêdo, who is leaving at the end of August.

Opponents of the resolutions say U.S. withdrawal from the WTO would give Beijing more influence, not less, over the global trading environment. The measures also ignore the leading role that the United States played in creating the WTO and its predecessor organization, the General Agreement on Tariffs and Trade, those opponents say.

Some news in the Huffingtonpost of churning of who handles trade related matters in the UK amidst Brexit talks and the emergence of a possibility of a US-UK trade deal. No matter which economy, there continues to exist the tension between economic diplomacy and foreign diplomacy. Some get reported, some don't. The talk of rejigging the Department of International Trade in the UK, after the Department of International Development merged with the Foreign Ministry is found here:

“What is also clear is that we have to speak with one voice internationally, which is why I’m working very closely with the foreign secretary, which is why our trade commissioners are working closely with local ambassadors and high commissioners. And I am focused on getting this job done and realising those opportunities.” 

The Washington Post has this "WTO for dummies" piece on why the next WTO DG needs to be in place to save the crumbling world economic order. It argues:

If members can align behind a candidate committed to modernization, it could break bureaucratic logjams and help unleash a wave of global growth at a time when it is needed most. If no such candidate can be found, the WTO risks further receding into irrelevance.

 

Res ipsa loquitur?

And finally, this masterpiece on China's story over the centuries is a must read. The Council on Foreign Relations has brought out this illustrative piece on how China views itself in the world and it's rise in global geopolitics and institutions.Titled "China's Approach to Global Governance" it charts a centuries old journey and what the future holds for China in multilateral relations.

Over the last two decades, China has regained much of its influence in the world, as Beijing is making progress toward its dream of restoring what it sees as its rightful great power status. Beijing has built up its influence over global governance in particular, gaining a greater say within important organizations while also launching new initiatives like the Belt and Road Initiative. China’s increased involvement in global governance expands its international political clout, helps it project soft power, and also promotes its domestic economic development.

In the future, if its economy continues to grow over the long term, China will more forcefully set the terms for global governance. It will wield greater power within long-standing organizations like the World Bank and United Nations and also will strengthen new, China-dominated institutions.

Beijing’s more assertive approach could enhance the international system. China could shoulder greater international responsibilities and prod global governance institutions to better represent the needs of emerging powers. It could facilitate international solutions on climate change in particular. And Beijing has shown, with the Asian Infrastructure Investment Bank, that it can launch an institution that works within existing global governance norms.

But China’s increasingly assertive presence could prove divisive, especially in areas like development finance, where Beijing’s approach could marginalize existing institutions. Such divisions could paralyze collaboration in critical realms of global governance. And while in some areas, such as climate change, China does not try to impose its own visions and models, in areas of human rights and internet governance, Beijing tries to promote its own, more authoritarian norms. In May 2020, Beijing passed new legislation giving China extensive powers to crush dissent in Hong Kong, seriously threatening the special administrative region’s autonomy. If China (and Russia) can set the standards for internet governance, for instance, they could pave the way for other countries to embrace cyber sovereignty, sparking a divided world with two internets—one generally open and the other closed and favored by autocracies.

 Everyone is waiting to see how the fall out of the emerging power disruption - will it strengthen, equalise the multipolar world or will it lead to the re-emergence of blocs and divergent groupings poised for conflict. Or a more nuanced way to look at it is - issue based coalitions of the willing.

Lets talk about services trade policy!

When one talks about trade policy, protectionism and liberalisation, one tends to focus on goods and manufacturing. But there is a large segment of trade - services that misses the eye. What are the restrictions in the services sector. How have they been liberalised? Have they seen similar trends of protectionism like higher tariffs or export controls?

These issues have been addressed in this Vox EU piece titled "Services trade policy since the Great recession" which argues that though there have been liberlaising trends in certain sectors like finance and telecommunications, certain behind the border measures do exist that are not really liberalising.

To conclude, the last decade has seen steady and widespread liberalisation, but with a twist. While markets in services, e.g. finance and telecommunications, are increasingly free from explicit restrictions on entry and ownership, they are increasingly subject to greater regulatory scrutiny (e.g. economic needs tests, FDI screening), especially in higher income economies. This raises several questions for future analysis. Does this type of measure reflect ‘learning-by-liberalising’, in that lessons have been learnt on the need to complement openness with more stringent prudential regulation? Do they reflect a shift analogous to the reversal of openness in goods trade policy, ostensibly on security grounds, but possibly in response to the increased competitiveness of developing economies’ services firms? And do they signal a trend towards de jure openness but de facto discretionary policy, in particular at the point-of-entry stage (e.g. through FDI)? These policy trends deserve further analysis.

In intangible nature of services trade has always been a difficult issue to deal with it. Data on services trade, sector wise growth and barriers to services trade have been far more complex than goods trade. Further, immigration law intertwines with movement of people across borders complicating the issue even further. With services sector increasingly constituting the GDP of many emerging economies, a rigorous analysis of services trade policy, markets and impediments would help nations further their trade agendas. 

I found the "learning-by-liberalising" concept interesting - tightening conditions of providing the services based on lessons of history of liberalisation. However, there is a limit to learning by liberalising i.e one cannot go back on commitments in the GATS schedule or in bilateral trade agreements based on how liberalisation has impacted the domestic sector. However, the tightening could be in norms and regulations equally applicable to domestic players.This is more like calibrtaed liberalisation in a nuanced way!