Apple, China and trade

A piece in the Harvard Business Review on Why Apple has to Manufacture in China by Karan Girotra and Serguei Nettessine makes an interesting read. They argue that labour costs may not be the only or major reason for manufacturing to shift to China - it is more about manufacturing risks and 'comparative advantage" China has in doing things on scale and quickly.

"In China, by contrast, manufacturers can deploy thousands of collocated engineers to introduce needed changes overnight, and large supply of labor allows to ramp up and ramp down capacity quickly. There is simply no factory capable of employing 250,000 workers day and night in the USA, surrounded by flexible and capable suppliers. So the location decision isn't really about labor costs — it's about manufacturing risk and where that risk is best managed (for a fuller discussion of risk in Business Models, see our recent HBR article)."

Another endorsement of the reality of global supply chains? Is "national manufacturing" in comparison to "most competitive manufacturing" politically desirable? While the former is termed being "protectionist", the latter is in tune with the notion of a flat, globalized world. There are lots of people on both sides of this divide in every country,  I guess.

10 things WTO can do

The WTO website has an interesting booklet on what the WTO can do. It is called "10 Things the WTO Can do". And the 10 Things are:

1.The WTO can ... cut living costs and raise living standards 

2. The WTO can ... settle disputes and reduce trade tensions
3.The WTO can ... stimulate economic growth and employment
4.The WTO can ... cut the cost of doing business internationally
5.The WTO can ... encourage good governance
6.The WTO can ... help countries develop
7.The WTO can ... give the weak a stronger voice
8.The WTO can ... support the environment and health
9.The WTO can ... contribute to peace and stability
10.The WTO can ... be effective without hitting the headlines

I found the point about settling disputes particularly interesting.

"The fact that the disputes are based on WTO agreements means that there is a clear basis for judging who is right or wrong. Once the judgement has been made, the agreements provide the focus for any further actions that need to be taken.The increasing number of disputes brought to the WTO does not reflect increasing tension in the world. Rather, it reflects the closer economic ties throughout the world, the WTO’s expanding membership and the fact that countries have faith in the system to solve their differences.

Sometimes the exchanges between the countries in conflict can be acrimonious, but they always aim to conform to the agreements and commitments that they themselves negotiated." 

The increasing number of disputes brought to the WTO does not reflect increasing tension in the world. Rather, it reflects the closer economic ties throughout the world, the WTO’s expanding membership and the fact that countries have faith in the system to solve their differences. 

Sometimes the exchanges between the countries in conflict can be acrimonious, but they always aim to conform to the agreements and commitments that they themselves negotiated."

It also highlighted the active role played by developing countries play in the dispute settlement mechanism. These graphics indicate the level of participation:

(Sources: WTO dispute settlement data; Raúl A. Torres,“Use of the WTO Trade Dispute Settlement Mechanism by the
Latin American Countries — dispelling myths and breaking down barriers”, WTO Staff Working Paper ERSD-2012-03, February 2012.)

Is Australia's Plain Packaging discriminatory in favour of local products?

The Tobacco Plain Packaging dispute is gradually progressing at the WTO. Honduras, one of the complainants against Australia, filed its complaint at the WTO which is available here. I have earlier blogged about the issue here, here, here and here. Apart from the main challenge on the grounds that plain packaging legislation is inconsistent with Australia's commitments under the TRIPS Agreement I found the points in relation to discrimination between local products and foreign products a bit untenable:

"  Article 3.1 of the TRIPs Agreement, because Australia accords to nationals of other Members treatment less favourable than it accords to its own nationals with respect to the protection of intellectual property;
...
  Article 2.1 of the TBT Agreement and Article III:4 of the GATT 1994, because the measures at issue result in treatment less favourable of imported products than of like products of national origin."

I found these two leal claims rather strange since the plain packaging applies equally to tobacco products manufactured in Australia and imported into Australia. Further, it is difficult to imagine de facto discrimination in this case. Am I missing something here?

Dumping chicken - South Africa takes on Brazil

The BRICS has been a strong interest group in espousing the developing countries cause at international fora. It signifies a coming together of emerging economies to strengthen economic cooperation. I had blogged about BRICs and their resolve against protectionism here.


(Courtesy:BBC)

Now BBC has reported  a dispute over chicken between two of the member countries threatens the interest group. South Africa has alleged that Brazil is dumping chicken into South Africa which is leading to unfair competition and loss of domestic jobs.

"South Africa proudly joined the Bric nations of major emerging economies last year, hoping it would boost its economy and give it far greater diplomatic clout. 

But the ink has barely dried on the paper and South Africa is already involved in a murky trade row with one of its new-found friends, Brazil. 

South Africa's poultry industry is accusing Brazil of dumping chickens on its market and farmers say they are now forced to cut jobs because they cannot compete with Brazil's "unfairly low" prices. 

Brazil has denied this and has taken the matter to the World Trade Organization (WTO)."

Earlier in June Brazil filed a case in the WTO against the imposition of provisional antidumping duties by South Africa on frozen meat from fowl from Brazil.

This case highlights that while trading bloc or interest groups do have some significance in international economic relations, ultimately a country's national, domestic interests play a dominant role in deciding trade policy. South Africa was threatened by a loss of local jobs by alleged dumping and it took the measure of imposing antidumping duties. Whether the imposition was legitimate will be decided by the dispute settlement mechanism. While countries do constitute trading blocs and espouse causes of the developing world in international fora, it is fortified by a keen protection of national interest. The existence of the BRICS would not deter South Africa to protect its local poultry industry against a fellow BRICS member. Whether the action is legitimate or globalization produces its losers is all together another question.

South south trade, protectionism and generalizations

Argentina has been charged with being increasingly protectionist with its import licensing procedures by the EU, Japan and the U.S. While this could be dubbed as a developed world vs. emerging economy dispute, Mexico joined the group complaining against Argentina at the WTO with this complaint questioning the north-south divide stereotype. How Argentina reacts to the trade onslaught will need to be watched, especially when it has taken on the EU and Spain against Spain's biofuel directive.

A World Bank study had declared Argentina as the most protectionist emerging economy with a number of import restrictive measures. Is this a north south tussle or are emerging economies equally impacted by protectionist measures by developing economies. The mexican challenge is an example of a developing economy being impacted by Argentina's (another emerging economy's) measures.

Chad P. Brown has done a detailed econometric study on trade barriers and their impact on south south trade and protectionism. In his study titled "Emerging Economies and the Emergence of South-South Protectionism" he analyzes the long run cost to emerging economies of South South protectionism i.e what impact does trade restrictive measures (like antidumping, safeguards and countervailing duties) of an emerging economy have on another emerging economy that is engaged with it? The paper asks the important question:

"First, major emerging markets have increased the scope of their imports covered by TTBs. Second, major emerging countries have a sizeable share of their total exports and exports sent to other emerging economies impacted by foreign-imposed TTBs. An important question yet to be addressed is what happens to exports when these temporary trade barriers are finally removed? To what extent do exports resume?"

The study comes to the conclusion that, barring China, emerging economies export recover sluggishly even though trade barriers are removed subsequently by other emerging economies indicating the negative impact they have on south south trade:

" Not only do more emerging economy exporters have an economically sizeable share of their exports impacted by TTBs imposed by other emerging economies, but such barriers may have effects that long outlive the duration of the imposed barrier. For even once the temporary barriers are removed, emerging economy exporters experience greater relative difficulty in resuming their exports – whether measured in volumes or in market shares – to other emerging economy trading partners."

Protectionist trends are dictated by strong domestic compulsions, primary among them being protecting one's domestic industry. It is often viewed as a part of industrial policy and as an effective tool to engage with the competition and often "unfair" onslaught of the developed economies. However, this study show that protectionism is not always the developing vs. the developed world. Emerging economies are increasingly involved in trade and any such protections measure does have an impact on their respective economies. To what extent this would influence sovereign behavior is, however, debatable since protectionist measures are dictated by strong national business sentiment. 

There is also ambiguity as to what actually constitutes protectionism at times. Do legitimate domestic policy interventions also fall under this category? For example, antidumping and safeguard measures are permitted as per WTO rules provided they satisfy the conditions set forth therein. Merely because a country is imposing antidumping duties does not make it protectionist. Similarly, a number of countries do not impose blatant trade barriers but are engaged more systemic violation of trade rules like offering subsidies and state support that violate WTO rules. The word "protectionism" is a much abused term as much as countries actually abuse it. One needs to tread cautiously on this slippery path at the same time keeping in mind the dangers of an inward looking path.

Ontario Feed in Tariff - Not a prohibited subsidy but violative of GATT provisions?

Breaking news of an interim WTO panel ruling on the Ontario Feed in Tariff case is coming in. The Globe and Mail reported it here. The EU and Japan had challenged the FiT program for renewable energy of Ontario which mandated use of locally manufactured Ontario products on the grounds that it violated the "local content" rules of the ASCM, TRIMS and GATT. I had earlier blogged about it here, here and here.

The WTO website has no official confirmation of the interim decision (the website is normally uptodate on decisions and happenings in the WTO). ICTSD has a detailed note on the interim decision:

"According to a confidential interim WTO dispute settlement report, a three-member panel has sided with the EU and Japan in their challenge of renewable energy support provided by the Canadian province of Ontario, sources told BioRes this week. The two countries had argued that the feed-in-tariff (FIT) system - put in place in 2009 - violates WTO rules because it requires participating electricity generators to source up to 60 percent of their equipment in Ontario. 

According to a confidential interim WTO dispute settlement report, a three-member panel has sided with the EU and Japan in their challenge of renewable energy support provided by the Canadian province of Ontario, sources told BioRes this week. The two countries had argued that the feed-in-tariff (FIT) system - put in place in 2009 - violates WTO rules because it requires participating electricity generators to source up to 60 percent of their equipment in Ontario .However, based on what is currently known about the confidential document, assertions by Brussels and Tokyo that the programme also amounted to illegal subsidies - dependent on use of locally produced equipment - have been rejected. At the time BioRes went to press, the ruling was not available."

If I understand this right, the panel has decided that the local content requirements are violative of WTO obligations of non-discrimination under GATT and TRIMS. However, they do not constitute a "prohibited subsidy" under Article 3 (1) (b) of the ASCM. Does this imply that an FiT as implemented in Ontario is not a subsidy as defined by the ASCM and hence does not amount to a "prohibited" subsidy? Or does it not have the characteristics of a prohibited subsidy as defined under Article 3 of the ASCM? The other major implication of this distinction of not amounting to a prohibited subsidy is the applicability of the general exception of Article XX of GATT. If it was declared a prohibited subsidy it would have been more difficult for Canada to justify its measure under Article XX of the GATT. This distinction has a major implication for renewable energy programs, especially FiTs, worldwide.

WIll eagerly await the November panel ruling.

GATS, electronic payments and country commitments

I have blogged about the China Electronic Payment Services case here and here. 

An ASIL Insight into the China Electronic Payment Services case by Panagiotis Delimatsis provides an overview of the implications of the WTO panel report on interpretation of various provisions of the General Agreement on Trade in Services of the WTO. The panel report as well as the commentary indicate the legal complexity and "country-specific" nature of GATS commitments.I am still very confused about the implications and import of this panel report. Concluding about the implications about the panel report, the author states:

"This case follows landmark decisions on the scope of GATS in US—Gambling and China—Publications and Audiovisual Products and is expected to further open China’s financial services market, benefiting American EPS suppliers in particular. Nevertheless, China will likely have several months to implement the Panel ruling. The Panel decision offered additional clarifications for the interpretation of Members’ Schedules of Specific Commitments under GATS. More importantly, as this case was not appealed, the Panel Report represents the only WTO dispute settlement ruling on the overlap in a Schedule of an  “Unbound” commitment (i.e., no liberalization) and a “None” commitment (i.e., full liberalization). The case confirms that the flexibility attributed to Members in drafting GATS Schedules can be a double-edged sword. At present, no clear solution exists to ensure predictability and security in the interpretation of GATS Schedules."

Unfortunately we will not have the Appellate Body opinion on this case as China has decided not to appeal.

Will require a few more decisions of the WTO panels and Appellate Body on the interpretation of GATS provisions to unravel the Agreement. India's challenge to the U.S. Visa rules perhaps can provide more answers?