Brookings: Topics - Trade Disputes

Value-Added Trade and Its Implications for International Trade Policy

Kemal Derviş, Joshua Meltzer and Karim Foda — Tue, 02 Apr 2013 15:20:00 -0400

Reported Trade and Value-Added Trade

In 2012, the U.S. exported $2,196 billion and imported $2,736 billion worth of goods and services, producing a trade deficit of $540 billion. This U.S. trade balance with the world comprises the sum of all the bilateral trade balances the U.S. runs with its trading partners, some of which are in surplus and others that are in deficit. For instance, in 2012, the U.S. had bilateral trade in goods deficits with China ($315 billion), Japan ($76 billion), Mexico ($61 billion) and Germany ($60 billion), and bilateral trade surpluses with Australia ($22 billion), Brazil ($12 billion), Chile ($10 billion) and Panama ($9 billion).

The reported trade balances of the U.S., and all other countries for that matter, are based on the gross commercial value of the goods and services as they depart and enter the country. What these reported trade balances don’t adequately capture is the complex nature of the global economic relationships of international trade today. Quite often goods and services move across multiple national borders in order produce a final product that is then exported. WTO Director-General Pasqual Lamy has described this phenomenon as goods being “made in the world”.

For instance, the U.S., Canada and Mexico are economically very integrated with goods and services often crossing their borders many times in order to produce a final product. According to reported trade data in 2009, [1] the U.S. had a trade deficit with Mexico of $48 billion and a trade deficit with Canada of $22 billion. This would suggest the U.S. simply buys more from Mexico and Canada than it sells to these countries. However, the economic ties between producers, manufacturers, and consumers across borders mean that this is only part of the story. In many cases, U.S. imports from Mexico and Canada are of intermediate goods that are used to produce products which the U.S. then exports back to Mexico and Canada, or the rest of the world.

Reported trade data also fails to capture the role of third countries in bilateral trading relationships. For instance, Japan exports goods to South Korea that are then exported to the United States.

Reported trade data also fails to capture the role of third countries in bilateral trading relationships. For instance, Japan exports goods to South Korea that are then exported to the United States. In these cases, Japan is exporting to South Korea but is also exporting to the U.S. via South Korea. However, the way that the U.S.-South Korea trade balance is currently reported does not adequately capture the role of Japanese inputs into Korean exports, which in value-added terms are Japanese exports to the U.S.

Value-added trade data reveals these economic relationships. But to date developing value-added statistics has been difficult to compile for a range of reasons, including obtaining what can be considered commercially sensitive data, the absence of a common statistical framework, and challenges in distinguishing between intermediate and final goods. Recent joint work undertaken by the WTO and the OECD assists with calculations of value-added trade.

For example, under a value-added calculation for 2009, both Mexico’s and Canada’s exports to the U.S. actually decline by around 25 percent each. Additionally, the value-added data reveal that 12 and 8 percent of total exports from Mexico and Canada to the world, respectively, reflects U.S. value-added trade. Moreover, in value-added terms the bilateral U.S. trade deficit with Japan would increase dramatically by 60 percent, from $23 billion to $36 billion.

The following table explains these differences between reported and value-added trade:

The table above explains how a country’s reported exports comprise three elements: domestic value-added that stays overseas; domestic value-added that returns home via imports; and foreign value-added incorporated into its exports. Similarly, reported imports includes the foreign value-added that remains in the country of import, the domestic value-added incorporated in its imports, and the foreign value-added in the imports that are later re-exported. In contrast, a country’s value-added exports capture only the domestic value-added that stays overseas and value-added imports are only the foreign value-added that remains in the country of import.

This table also explains why a country’s overall trade balance will be the same in reported and value-added terms, as the over and under accounting of exports and imports that arises from the inclusion of domestic and foreign value-added goods are themselves imports and exports that cancel each other out over a country’s total trade. This is to be expected as the current account balance, which equals the trade balance and net factor income, the latter unaffected by the conversion to value-added, is a function of the gap between domestic savings and investment and does not depend on whether trade is calculated in reported or value-added terms.

While a country’s trade with the world is the same in reported and value-added terms, bilateral trade balances can diverge greatly under value-added and reported data. But as the sum of a country’s reported and value-added bilateral trade balances sum to the same overall trade balance, a reduced bilateral trade deficit using value-added data with one country must be offset with changes in other value-added bilateral trade relationships. For instance, both reported and value-added trade data will still see the U.S. running the same overall trade deficit and China the same overall trade surplus, even when the value-added data shows a reduced U.S.-China bilateral trade deficit.

Trade Policy Implications for U.S.-China Trade

Differences between reported and value-added bilateral trade relationships have important implications for trade policy. As noted, value-added trade data captures the value traded and thereby reveals the income generated by trade in multiple countries and industries.

There is no bilateral trade relationship of greater economic and political significance for the U.S. than with China. For example, in 2012, U.S.-China trade in goods deficit was $315 billion, the largest bilateral deficit the United States has ever had. And it is the size of the trade deficit that feeds all manner of concerns in the U.S. about declining competitiveness, job losses, and unfair trade practices by Chinese companies. China is also the world’s largest exporter and a global center for the manufacturing and assembling of goods for export. In addition, manufactured exports tend to have higher levels of foreign value-added due to the role of imported intermediate goods and services in their production.

As a result, calculating the U.S.-China trade deficit using value-added data reduces the deficit by 25 percent. However, as China’s overall trade balance remains the same under reported and value-added trade data, a reduced bilateral trade deficit with the United States also means that China has greater bilateral trade surpluses (or reduced deficits) with other countries. This suggests that while China is exporting less domestic value to the U.S., it is adding more value to its exports to other countries.

One of the important trade policy insights here from the value-added data is that barriers to Chinese imports will often harm U.S. consumers through higher prices for final goods.

One of the important trade policy insights here from the value-added data is that barriers to Chinese imports will often harm U.S. consumers through higher prices for final goods. In addition, U.S. manufacturers would end up paying more for intermediate goods, which would reduce the competitiveness of their final goods in the U.S. and in export markets overseas. Furthermore, to the extent that U.S. trade barriers reduce demand for Chinese imports, they also reduce demand for the U.S. goods and services incorporated into China’s exports.

Value-added trade also reveals why it is also in China’s interest to reduce its trade barriers. Given the significant trade in intermediate goods and services used in China, reducing its trade barriers would make Chinese products even more competitive domestically and overseas.

This is only one example of how value-added data can change the way we understand how the international economy works, the role of trade and with important implications for trade policy. Reported data gives the impression that each country is wholly responsible for the production of its exports and this is now significantly out of a step with an international economy that increasingly relies on disaggregated supply chains spread across many countries where goods and services are trade across borders multiple times. In contrast, value-added data calculates these economic linkages and reveals the contribution that countries make to global processes. Economists since David Ricardo in the 19th century have demonstrated the economic gains to countries from trade. Value-added trade data reaffirms these insights and reveals how in today’s economically-integrated world trade barriers are also often barriers against goods and services that domestic industry had a role in creating.

These realities may also help explain why protectionist pressures have been relatively subdued during the difficult economic period after the 2008 global crisis. Does this mean that international trade comes with no problems? Not at all. Whether in value-added or traditional final products form, trade supports a process of “creative destruction” where national wealth increases but some firms and households lose out to others. There are, therefore, strong ethical and political arguments for assisting the “losers” in their needs to adjust and providing a social safety net to those who are not in a position to adjust. The increasing importance of international value chains raises tax avoidance issues for multinationals. This is a big topic but suffice it to say here that international cooperation to avoid excessive tax avoidance is reasonable. Finally, while international value chains make it easier for some poorer countries to “break-into” the world economy, it may also make it more difficult for them to develop national economic strategies aimed at reaping the benefits of agglomeration of economic activities and deepening their industrial production.

Footnote

[1] The most recent value-added trade data is from 2009

References

Benedetto, John. July 2012. “Implications and Interpretations of Value-Added Trade Balances,” Journal of International Commerce & Economics, Vol. 4, No. 2. U.S. International Trade Commission.

Authors

Image Source: © Paulo Whitaker / Reuters

Will It Be Legal to Download 'Pirated' Music and Movies From Servers in Antigua?

John Villasenor — Mon, 04 Feb 2013 00:00:00 -0500

As a consequence of a long-running dispute over online gaming services, the Caribbean nation of Antigua and Barbuda (commonly known as Antigua) may soon begin providing online access to U.S.-copyrighted movies and music without compensating the owners of those copyrights.

Will it be lawful for consumers in the United States and elsewhere to avail themselves of this content? Not in most places. But, before getting to why, it’s helpful to provide some context.

Back in the 1990s, online sports books and casinos proliferated in Antigua thanks to the growing reach of the Internet and a favorable corporate tax environment. In response, American authorities began invoking statutes such as the Wire Act to prevent offshore gambling providers from accessing the American market. Antigua considered those actions to be in violation of U.S. obligations under the World Trade Organization’s GATS (General Agreement on Trade in Services) treaty, and initiated a WTO dispute settlement proceeding in 2003.

In a series of reports in 2004 and 2005, the WTO generally found in favor of Antigua, and in 2007, a WTO arbitrator pegged the resulting “impairment of benefits” to Antigua at $21 million annually. In principle, this could be remedied by allowing Antigua to suspend its own equivalently valued GATS obligations towards the United States. However, since this was not feasible given the enormous trade asymmetry between the two countries, the WTO allowed Antigua to request authorization to suspend its intellectual property obligations to the United States under a completely different WTO treaty (called TRIPS), up to an annual level of $21 million. Last week, the WTO formally granted Antigua an “authorization to retaliate.”

The island nation is apparently planning to waste no time in doing just that. Harold Lovell, Antigua’s minister of finance, the economy and public administration, wrote in USA Today on February 1 that his country has “reluctantly decided to suspend intellectual property rights protections for American firms and products.” And, in the international trade equivalent of “nice car; sure would be a shame if anything bad happened to it,” Mr. Lovell asked “why should, for example, the U.S. motion picture industry suffer just so the federal government can continue to protect the monopolies of the big American gambling interests?”

Exactly how Antigua plans to tighten the screws on the movie industry and other holders of U.S. copyrights remains to be seen, and it’s still possible that settlement talks will resolve the dispute before Antigua opens the downloading floodgates. But, suppose Antigua does in fact proceed to make U.S.-copyrighted movies and music available at nominal or even no cost to anyone in the world with an Internet connection. Will it be legal to download that content?

Almost certainly not, according to Ariel Lavinbuk, an attorney with the Washington, D.C. law firm of Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP. Mr. Lavinbuk explains that a person in the U.S. who downloads a song or movie from a server in Antigua without authorization from the copyright holder is reproducing that work in violation of U.S. copyright law. “When you download a song, a new, distinct copy is created,” Mr. Lavinbuk says. “And the creation of that copy on a computer in the U.S. without copyright-holder authorization is unlawful in this country, regardless of whether the website providing the content is now considered lawful in Antigua.”

And what about copies downloaded from Antigua to computers in non-U.S. countries? With the exception of Antigua itself, the TRIPS treaty’s intellectual-property obligations of WTO member countries are still in full force. And almost all countries have laws prohibiting unauthorized reproduction of copyrighted content. Thus, just as in the U.S., downloading a song from Antigua without the copyright holder’s consent would generally violate copyright rights.

None of this is likely to give much comfort to the big movie studios and record labels, which have usually (though certainly not always) aimed their enforcement efforts at those who facilitate distribution of pirated content as opposed to those who download it. And, there’s no small irony in seeing these companies scramble to play defense against the same sort of heavy-handed techniques they have been so willing to dole out when it served their interests.

But it’s also important to remember that the copyright system is intended, first and foremost, to protect and incentivize songwriters, recording artists, writers, sculptors, photographers, choreographers, artists, architects, playwrights, and others who create copyrightable works. Whatever one thinks of the biggest corporate copyright owners, it is hard to think of much reason to celebrate when any country, even one with fewer than 100,000 people, declares with WTO backing that it is suspending intellectual property rights protections within its borders for the creative output of millions of Americans.

Authors

John Villasenor

Publication: Forbes

Image Source: © Mike Segar / Reuters

The WTO Ruling on U.S. Country of Origin Labeling (“COOL”)

Joshua Meltzer — Wed, 18 Jul 2012 14:58:00 -0400

Introduction

The WTO dispute on country of origin labeling (“COOL”) requirements for imported livestock is the latest in a series of cases dealing with the Agreement on Technical Barriers to Trade (“TBT Agreement”). The Appellate Body Report was circulated on June 29, 2012. This case pitted U.S. cattlemen against large packers and food processors and raised questions about the significance of country of origin labeling when it comes to integrated and international supply chains. This Insight provides an overview of the key issues addressed by the Panel and the Appellate Body (“AB”).

Read the full piece at asil.org »

Authors

Joshua Meltzer

Publication: American Society of International Law

Image Source: Denis Balibouse / Reuters

@ Brookings Podcast: China’s Currency Policy

Kenneth G. Lieberthal — Fri, 14 Oct 2011 12:00:00 -0400

China's long practice of undervaluing its currency continues to take a toll on the U.S. economy; it has led to a growing increase in the trade deficit between the two countries, reduced U.S. GDP and has eliminated more than two million Americans jobs, by some estimates. As Congress and the Obama administration wrangle over ways to even the playing field for U.S. interests, expert Kenneth Lieberthal takes a closer look at China's currency policy.

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How Congress’s Showdown With China Puts Obama in a Serious Bind

William A. Galston — Thu, 06 Oct 2011 10:03:00 -0400

While all of Washington fastened its gaze on Chris Christie, the most important issue of the week—maybe of the year—was playing out on the floor of the Senate. By a margin of 79 to 19, senators agreed to consider a measure that would allow the United States to impose tariffs on another country if the Treasury found its currency to be “misaligned.” As the Wall Street Journal points out, this is a less demanding standard than current law, which “requires a finding of intentional manipulation.” If this newfound bipartisan comity in Congress over the issue of confronting China culminates in a bill that passes both houses, it will put Obama in a serious bind: either adopt a similarly hawkish stance and risk a trade war, or issue a veto that would expose him to attack from the Republican nominee and provoke a populist backlash from workers and communities throughout America’s hard-pressed manufacturing sector.

The huge bipartisan majority on the procedural question this week virtually guarantees that the bill will make it through the Senate, and it illuminates the changing contours of the China trade issue. Nearly every Democrat voted to proceed; Washington’s Maria Cantwell and Patty Murray and (intriguingly) Claire McCaskill of Missouri were the only dissidents. And fully 31 of the 47 Senate Republicans supported the motion as well, including Minority Leader Mitch McConnell, Conference Chairman Lamar Alexander, Policy Committee Chairman John Thune, and John Cornyn, who heads the committee responsible for electing more Republicans to the Senate in 2012. Among the party’s leadership, John Kyl stood alone in opposition.

This Republican split should have come as no surprise. Last year, just a month before the midterm elections, a similar bill won the support of 99 Republicans, with only 74 opposed. If anything, the balance inside the new House Republican majority has shifted even further toward confronting the Chinese: Compared to traditional business-oriented conservatives, Tea Party populist conservatives are significantly more hawkish on Sino-U.S. trade relations. In a nomination contest in which Tea Party sympathizers will enjoy disproportionate influence, it is not hard to understand why even a quintessential business candidate like Mitt Romney has chosen to embrace a hard line on Chinese currency and trade practices.

Republicans are hardly out of step with the country, either. In a Pew survey conducted earlier this year, 54 percent of Republicans and Republican-leaning independents said that it was very important to get tougher with China on economic and trade issues; so did 52 percent of Democrats and their independent leaners. Among Republican identifiers and leaners, 60 percent of Tea Party sympathizers agreed, compared with only 49 percent of non-Tea Party sympathizers.

This is not to say that Americans see China as an adversary, a position endorsed by barely one-fifth of the population. And nearly three in five Americans believe that it is very important for the United States to build a stronger relationship with the People’s Republic. The question is whether we can have it both ways.

It’s easy for business-oriented leaders and publications to dismiss these sentiments as raw politics. But there’s more to them. In a recent NBER paper, “The China Syndrome,” economists David Autor, David Dorn, and Gordon Hanson, who cannot be accused of shilling for anyone, examine the effects of Chinese import competition on the U.S. economy. Their conclusion: The more exposed a local labor market is to that competition, the larger its negative effects. They summarize matters this way:

Rising exposure increases unemployment, lowers labor force participation, and reduces wages in local labor markets. Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment. Transfer benefits payments for unemployment, disability, retirement, and healthcare also rise sharply in exposed labor markets. The deadweight loss of financing these transfers is one to two-thirds as large as U.S. gains from trade with China.

I hope that other economists will examine and assess these findings, which seem solidly grounded. If Autor, Dorn, and Hanson are right, the United States has a problem that goes well beyond the vagaries of populist politics.

And speaking of politics, what about the House and the White House? John Boehner characterizes the Senate’s action as “dangerous” and believes that forcing another country to revalue its currency goes “well beyond what the Congress ought to be doing.” If he has his way, the bill will never come to the House floor. But it’s not clear that he will, because he probably doesn’t speak for a majority of his own party, let alone of the House. If a bipartisan coalition feels strongly about the matter, it can probably get enough signatures on a discharge petition to override the Speaker’s wishes.

As for the president, he has declined to take a position on the matter. Trapped between the imperatives of global diplomacy and pressure from the Democratic base, no doubt he is hoping that the Republican leadership can keep the bill bottled up indefinitely. If not, he’ll have to declare himself. And if legislation reaches his desk, he’ll be forced to make what could turn out to be a fateful choice: Sign the bill and risk a trade war, or veto it and face an onslaught from Mitt Romney throughout the Midwest. No wonder many Democrats are urging him to get engaged and negotiate with the Hill before he is faced with only these unpalatable options.

In a lead editorial, the Wall Street Journal argues that “a major benefit of free trade is its stabilizing effect on rising powers like China.” There’s something to this, as the history of the 1930s suggests. But American workers are entitled to ask why they are always the ones paying the price for our global diplomacy. If the U.S. business community wants to sustain an open global trade regime, it should start investing in job-creating enterprises here at home. And if the Obama administration wants to maintain a good working relationship with the world’s second-largest economy, it should use the leverage created by the pending currency legislation to wring significant economic concessions from China’s leaders. The alternative is a trade war that will benefit no one, and the collapse of the modest cooperation that now exists on issues such as North Korea and Iran. The clock is ticking, and the stakes couldn’t be higher.

Authors

William A. Galston

Publication: The New Republic

Image Source: © Kevin Lamarque / Reuters

@Brookings Podcast: Barriers and Benefits in Free Trade Agreements

Joshua Meltzer — Fri, 29 Jul 2011 15:13:00 -0400

Political arguments and protectionism often stand in the way of approving free trade agreements, and nations jockey with one another in trade negotiations to gain advantage. Expert Joshua Meltzer says that overall, economic benefits flow to the overall national economy and all the way down to the consumer level when trade barriers are lowered and tariffs come down.

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Meltzer is co-author with Mauricio Cárdenas of a new paper on three free trade agreements pending in Congress, "Korea, Colombia, Panama: Pending Trade Accords Offer Economic and Strategic Gains for the United States."

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The U.S., China and Japan in an Integrating East Asia

Naoko Munakata — Wed, 13 Jan 2010 14:06:00 -0500

Abstract

• There is no concrete vision of the eventual architecture of institutional economic integration in East Asia, much less a roadmap to get there, with various initiatives being pursued concurrently in a multi-layered fashion. The ASEAN-China Free Trade Agreement, which has just marked its near-completion at the beginning of 2010, will not by itself determine the future course of economic integration in the region.

• To demonstrate leadership in Asian economic integration, the United States should lead regional economies to a system of higher economic efficiency, while taking Asian reality into account and showing flexibility where necessary.

• In order to reduce the margin of discrimination of the FTAs in East Asia which the United States is not party to, and to mitigate the ensuing trade distortion, an early conclusion of the WTO Doha Round is by far the most effective policy remedy and would definitely be in the U.S. interest.

1. Introduction

The economic crisis since the fall of 2008 has helped increase Asia’s presence in the global economy. Emerging Asia (China, India, Indonesia, Malaysia, Thailand, Vietnam, the Philippines, etc.) has led the recovery from the current global depression, with impressive real GDP growth of 6.2 percent in 2009 against sluggish global growth of -1.1 percent.[1]

The main driver of Asian economic growth since World War II has been the expansion of exports to destinations outside the region. The current crisis, however, has shown that the world can no longer depend on American consumers purchasing the products of Asian manufacturers for economic growth. Asia’s big challenge is to expand demand within the region so as to help rectify global imbalances. Regional economic integration[2] has a key role to play here.

Two events on January 1 this year each marked a step forward in this respect. One is mutual elimination of tariffs on essentially all items among the six countries (Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand) out of the ten parties to the ASEAN Free Trade Area (AFTA),[3] in accordance with the leaders’ agreement of 1999.[4] The other is the elimination of tariffs between China and the ASEAN 6 (the same six countries as above) on the so-called “normal track” items of the ASEAN-China Free Trade Agreement (ACFTA) signed in 2004.[5] The AFTA, established in 1992, has deepened its integration step by step. Based on this progress, ASEAN has been advancing FTA negotiations with countries outside the group. The ACFTA spearheaded these external moves and is impressive in size, and therefore commands particular attention.

2. Overview and Evaluation of the ACFTA

China and ASEAN agreed to establish the ACFTA within 10 years at a leaders’ meeting in November 2001.[6] In 2002, the leaders of China and all ten ASEAN nations[7] signed the ASEAN-China Framework Agreement on Comprehensive Economic Cooperation,[8] which laid down the basic principles of the liberalization of trade in goods and services, an investment treaty, and so on. Based on this agreement, the elimination of tariffs on agricultural products started from January 2004 as an early harvest package.

As for the liberalization of trade in non-agricultural goods, the Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Co-operation between the ASEAN and China[9] was signed in November 2004, and tariffs have been reduced since July 2005. The items on the liberalization schedule are divided into two groups: “normal” track items and “sensitive” track items. The countries are also separated into China and the ASEAN 6 on one hand and the newer ASEAN Member States on the other. For the normal track items, China and the ASEAN 6 are to eliminate tariffs in principle by January 1, 2010, and the newer states will follow by 2015. On sensitive items, the parties committed themselves to lower the duties to 0-5% by 2018 (by 2020 for the newer states) and on highly sensitive items to below 50% by 2015 (by 2018 for the newer states). There is an upper limit to the number of items to be included in each category.

The elimination of tariffs on the normal track items between China and the ASEAN6 at the beginning of this year marked the completion of most of the ACFTA. The actual impact of this FTA on the regional economy can be measured only after the duty abolition takes effect on the ground. According to simulations by experts from China and the ASEAN countries in October 2001, however, the ACFTA is expected to expand China’s economy by 0.27 percent and ASEAN’s by 0.86 percent while reducing Japan’s real GDP by 0.09 percent and the United States’s by 0.04 percent.[10] Thailand’s Chulalongkorn University estimated in a 2004 study[11] that real GDP in ASEAN would increase by 0.38 percent and that of China by 0.30 percent, whereas Japanese real GDP would decrease by 0.02 percent. Generally speaking, the FTA has two effects on extra-regional trade: trade creation (expanding it through stimulating regional economies) and trade diversion (reducing it through giving preference to intra-regional products). The two estimates suggest that trade creation by the ACFTA with respect to the United States and Japan would not surpass the treaty’s trade diversion effects on them.

Turning to the ACFTA’s coverage, important manufacturing products—such as cars, motorcycles, electric household appliances like refrigerators and color televisions, and other various machineries—are designated as sensitive track items and are exempt from tariff elimination. A reciprocity principle further limits its coverage to items that each of the two countries involved in bilateral trade has listed on a normal track.[12] There are limits to items each party can designate as sensitive; their number has to be 400 or less and their combined import value must be less than 10% of that nation’s total imports. The ACFTA has the distinction of being a pioneer agreement (the first FTA between ASEAN as a whole and a non-ASEAN state) in which China and ASEAN pursued the maximum they could agree on at the time of conclusion, taking into account their respective sensitivities. The impact of the agreement, however, is restrained by the number of goods exempted from tariff elimination, the trade of which is expected to increase in the future with the rise of the middle class.

3. The ACFTA in Today’s Institutional Economic Integration in Asia

In East Asia, it was at the end of the 1990's, much later than in Europe and North America, that free trade agreements began to be utilized. (With respect to the evolution of the regionalism in the area, please refer to Naoko Munakata, Transforming East Asia: The Evolution of Regional Economic Integration, 2006, Brookings Institution Press, in particular Chapter 6 thereof, “New Assumptions about Regionalism” for a background on the policy changes in East Asian countries triggered by the 1997-1998 Asian financial crisis.)

Since then, FTAs in various configurations have been actively studied, negotiated, and concluded in the region. With the ASEAN-India FTA signed in August 2009, FTAs between ASEAN and all six non-ASEAN members of the East Asia Summit have been concluded.[13]

As for multi-party FTAs in East Asia, the Japan-China-Korea FTA, the ASEAN+3 FTA, the ASEAN+6 FTA, the Trans-Pacific Partnership (TPP) Agreement, and the Free Trade Area of the Asia-Pacific (FTAAP) are being considered.[14] With government-level studies just about to be launched, the Japan-China-Korea, ASEAN+3, and ASEAN+6 FTAs have no definite timeframes for conclusion. The FTAAP is discussed within APEC, but ways to realize it are yet to be determined. In contrast, the TPP Agreement among eight countries, including the United States, Singapore, and Australia, is set to make a step towards realization ahead of the other initiatives, with a meeting scheduled in March this year to prepare the ground for negotiations. The Obama administration notified Congress of the government’s intention to participate in the TPP negotiations on December 14, 2009, and proposed a policy that the U.S. would aim at a high-standard trade agreement with a focus on the protection of the environment and workers’ rights.[15]

There are also proposals for a regional community which goes beyond economic integration, such as the East Asian Community by Prime Minister Hatoyama of Japan,[16] and the Asia Pacific community (APc) by Prime Minister Rudd of Australia.[17] Both need further elaboration.

Thus, a number of bilateral FTAs, multi-party FTAs, and regional communities are simultaneously being considered or implemented. At present, however, there is no concrete vision of the eventual architecture of institutional economic integration in East Asia, much less a roadmap to get there. Although the ACFTA has spearheaded efforts of regional trade liberalization, it is just one of the five ASEAN+1 FTAs (including the AANZ FTA between ASEAN and both Australia and New Zealand) now concluded, with much room for further liberalization, as described above. The ACFTA by itself will not determine the future course of economic integration in the region.

The only consensus that exists about a future scenario is to move various initiatives forward in parallel. The underlying thinking is that, rather than to push for a premature and possibly ill-fitting agreement, the best move is to keep various initiatives alive in a multi-layered manner and decide, on the basis of actual developments, which framework should carry which function.

4. Challenges and Opportunities for Japan, China, and the United States

It is uncertain when and how each initiative for regional integration will be realized, and if accomplished, how much it will promote structural changes in the Asian economy. By overcoming the following challenges, Japan, China, and the United States could help shape Asian economic integration so that it will be better equipped to revitalize the world economy as a whole.

Japan should overcome difficulties in sensitive sectors and embark on a strategy to make the country more open so that it can participate in high-standard FTAs including the TPP. The Hatoyama administration advocates a policy of growing with Asia. Japan hosts APEC in 2010, a unique opportunity to map out its growth strategy and that of the APEC.

China could play a greater role in regional trade and investment liberalization by pushing forward the liberalization of the items that are expected to be in greater demand by its middle class in the future, and improving the quality of the ACFTA. While the ACFTA mainly deals with tariffs, non-tariff barriers will become more important. Dispelling trade partners’ suspicions that China is trying to utilize its unique domestic standards for promoting indigenous industries would form a basis on which China could exercise leadership in designing the institutions of Asian economic integration. Furthermore, China could take the initiative in redressing global demand-supply imbalances by steadily expanding consumption by its middle class, not through a temporary pump-priming but through a lasting social safety net.

In an Asian policy speech in Tokyo in November 2009,[18] President Obama proposed a policy of correcting U.S. over-consumption, focusing on exports, and, as a prerequisite, reinforcing U.S. engagement in the Asia-Pacific, the center for growth. The TPP is one of the tools for this. The United States could demonstrate leadership in economic integration in this region by spearheading high-standard FTAs. The pursuit of high-standard agreements, including the protection of the environment and labor rights as suggested in its policy of TPP negotiations, may not be readily accepted by Asian countries with diverse levels of economic development, but the United States should lead Asian economies to a system of higher economic efficiency, while taking Asian reality into account and showing flexibility as needed.

On January 12, this year, there was another welcome development when Secretary of State Clinton elaborated U.S. policy toward regional architecture in a speech in Hawaii.[19] It sent a strong message that the United States is, and will continue to be, committed to Asia. She urged the Asia-Pacific nations to “decide which will be the defining regional institutions” that “will best protect and promote our collective future.” Eventually, they will do so. It may take some time, however; institution building in a region as diverse as Asia requires patience as well as flexibility.

At least for now, economic integration in East Asia is proceeding without U.S. participation. The TPP does not include Japan and China at the moment. Trade liberalization at a global level is necessary to reduce the margin of discrimination of the FTAs that individual economies may not be party to, and to ease the ensuing trade distortion. Although negotiations are stalled at present, an early conclusion of the WTO Doha Round, is by far the most effective policy remedy, and would definitely be in the interests of the United States.

This article is based solely on the author’s personal opinions and does not represent any organization with which she is or was associated.

Special thanks go to Naoko Kato, Multilateral Trade System Department, METI, for her invaluable research assistance.

[1] IMF, World Economic Outlook (October 2009).

[2] There are two types of regional economic integration. One is de facto economic integration (where the share of intra-regional trade increases) induced by market forces-a process called regionalization. The other is institutional economic integration or regionalism-meaning the pursuit of economic integration through intergovernmental institutions such as free trade agreements (FTAs).

[3] Press Release of the ASEAN Secretariat, “ASEAN-6 Achieves Zero Tariffs” (December 31, 2009), http://www.aseansec.org/24146.htm.

[4] Chairman's Press Statement on ASEAN 3rd Informal Summit (November 28, 1999), http://www.aseansec.org/5300.htm.

[5] Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Co-operation between the Association of Southeast Asian Nations and the People’s Republic of China (November 29, 2004), http://www.aseansec.org/16646.htm.

[6] Press Statement by the Chairman of the 7th ASEAN Summit and the Three ASEAN + 1 Summits (November 6, 2001), http://www.aseansec.org/5316.htm.

[7] The ASEAN 6 as well as Burma, Cambodia, Laos, and Vietnam.

[8] Framework Agreement on Comprehensive Economic Co-Operation Between ASEAN and the People's Republic of China (November 5, 2002),　http://www.aseansec.org/13196.htm.

[9] See n. 4.

[10] ASEAN-China Expert Group on Economic Cooperation, “Forging Closer ASEAN-China Economic Relations in the Twenty-first Century” (2001), p.152.

[11] Suthiphand Chrawat and Sothitorn Mallikamas, “The Potential Outcomes of China-ASEAN FTA” in China and Southeast Asia, edited by Ho Khai Leong and Samuel C. Y. Ku (2005), pp.80-107.

[12] Article 3(1)(e) of the Protocol to Amend The Agreement on Trade in Goods of The Framework Agreement on Comprehensive Economic Co-operation Between The ASEAN and The People’s Republic of China, http://www.aseansec.org/22205.pdf.

[13] The six non-ASEAN members of the EAS are Australia, China, India, Japan, the Republic of Korea, and New Zealand.

[14] Par.19 of the Chairman’s Statement of the 4th East Asia Summit (October 25, 2009), http://www.aseansec.org/23609.htm; par.13 of the Chairman’s Statement of the 12th ASEAN Plus Three Summit (October 24, 2009), http://www.aseansec.org/23594.htm; and the Statement of the 17th APEC Economic Leaders’ Meeting,“Sustaining Growth, Connecting the Region” (November 15, 2009), http://www.mofa.go.jp/policy/economy/apec/2009/state1.pdf.

[15] Trans-Pacific Partnership Announcement by the United Stated Trade Representative, (December 14, 2009), http://www.ustr.gov/webfm_send/1559.

[16] “Address by H.E. Dr. Yukio Hatoyama, Prime Minister of JAPAN at the Sixty-Fourth Session of the General Assembly of the United Nations” (September 24, 2009), http://www.kantei.go.jp/foreign/hatoyama/statement/200909/ehat_0924c_e.html.

[17] Address by the Prime Minister Kevin Rudd to the Asia Society AustralAsia Centre, “It’s time to build an Asia Pacific Community” (June 4, 2008), http://www.pm.gov.au/node/5763.

[18] “Remarks by President Barack Obama at Suntory Hall” (November 14, 2009), http://www.whitehouse.gov/the-press-office/remarks-president-barack-obama-suntory-hall.

[19] Hillary Rodham Clinton, Secretary of State, “Remarks on Regional Architecture in Asia: Principles and Priorities,” Imin Center-Jefferson Hall, Honolulu, Hawaii (January 12, 2010), http://www.state.gov/secretary/rm/2010/01/135090.htm.

Authors

Naoko Munakata

Developing Countries, Dispute Settlement, and the Advisory Centre on WTO Law

Chad P. Bown and Rachel McCulloch — Tue, 22 Dec 2009 12:35:00 -0500

Abstract

Critical appraisals of the current and potential benefits from developing country engagement in the WTO focus mainly on the Doha Round of negotiations. This paper examines a different aspect of developing country participation in the WTO: use of the WTO dispute settlement system to enforce foreign market access rights already negotiated in earlier rounds of multilateral negotiations. We examine data on developing country use from 1995 through 2008 of the WTO Dispute Settlement Understanding (DSU) to enforce foreign market access.

The data reveal three notable trends: developing countries’ sustained rate of self-enforcement actions despite declining use of the DSU by developed countries, developing countries’ increased use of the DSU to self-enforce their access to the markets of developing as well as developed country markets, and the prevalence of disputes targeting highly observable causes of lost foreign market access, such as antidumping, countervailing duties, and safeguards. The paper also examines how introduction of the Advisory Centre on WTO Law (ACWL) into the WTO system in 2001 has affected developing countries’ use of the DSU to self-enforce their foreign market access rights. A first pass at the data indicates that developing country use of the ACWL mirrors their use of the DSU more broadly; the ACWL has had little effect in terms of introducing new countries to DSU self-enforcement. A closer look at the data reveals evidence on at least three channels through which the ACWL may be enhancing developing countries’ ability to self-enforce foreign market access: increased initiation of sole-complainant cases, more extensive pursuit of the DSU legal process for any given case, and initiation of disputes over smaller values of lost trade.

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Authors

Chad P. Bown
Rachel McCulloch

Could the WTO Better Serve the Poor?

Mon, 09 Nov 2009 10:30:00 -0500

Event Information

November 9, 2009
10:30 AM - 12:00 PM EST

Falk Auditorium
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

While many developed countries reap the rewards of increased globalization and trade, the developing world struggles to improve its economic status through these foreign markets. Poor countries look to the World Trade Organization to supervise international commercial trading, yet its dispute settlement system disproportionately benefits wealthy nations.

On November 9, Global Economy and Development at Brookings held a discussion on recent efforts and suggested proposals to help developing countries overcome hurdles imposed by the WTO, featuring Chad P. Bown, author of Self-Enforcing Trade: Developing Countries and WTO Dispute Settlement (Brookings Press, 2009). Panelists included Kimberly Ann Elliott from the Center for Global Development; Gawain Kripke from Oxfam America; and James Durling from Winston & Strawn LLP. Paul Blustein, a Brookings nonresident journalist, provided introductory remarks and moderated the discussion.

Participants

Moderator

Panelists

Chad P. Bown

Nonresident Fellow, Global Economy and Development
Senior Economist, The World Bank

James P. Durling

Partner, Winston & Strawn LLP

Kimberly Ann Elliott

Senior Fellow, Center for Global Development

Gawain Kripke

Director, Policy & Research, Oxfam America

A Dangerous Game of Trade 'Chicken'

Eswar Prasad — Mon, 14 Sep 2009 12:00:00 -0400

The Obama administration's decision to impose tariffs on imports of Chinese tires Friday has been met with a swift and sharp response: China has threatened to retaliate by imposing tariffs on imports of automobiles and chicken meat from the U.S. These measures are of course symbolic and amount to political posturing for the benefit of domestic audiences. But both governments are playing with fire—unless they douse the protectionist flames quickly, they could find things spiraling out of control.

The U.S. administration has backed itself into a corner, promising to be tough on trade and using this as a bargaining chip to strengthen political support for its other domestic priorities. The U.S. may well be on firm ground by the letter of the law in seeking temporary "safeguards" protection from certain Chinese imports, a technical provision that was part of China's accession agreement to the World Trade Organization in 2001.

The problem is that these technical issues are difficult to disentangle from purely protectionist measures, especially in the public eye. Hence, symbolic measures to get tough on China mainly serve as an excuse for China to impose its own explicit protectionist measures or bring implicit measures out in the open.

The Chinese are hardly saints in this process. They have maintained a variety of subsidies and other measures to boost their exports, including an undervalued exchange rate and weak enforcement of intellectual property rights. Beijing continues to rely on export growth to generate job growth, something that their still-dominant and stultified state enterprises are not much good at. Chinese officials also continue to maintain the canard that trade with the U.S. would become more balanced if only the U.S. would lift restrictions on certain high-tech exports to China. That would barely make a dent in the bilateral or multilateral trade surpluses that the Chinese need to run to sustain their growth model.

The risk is that the actions by the two governments may be just the leading edge of more protectionist measures to come from both sides. Indeed, both the U.S. and China have already violated the much-hyped pledges to refrain from protectionist measures that they and other Group of 20 leaders have been making at their various summits. The "Buy America" provision in the U.S. fiscal stimulus bill let the Chinese put in place an explicit "Buy China" provision in their own stimulus package. The U.S. recently imposed duties on certain types of steel pipes from China, at the prodding of the steelworkers' union and a few domestic manufacturers of those pipes. All of this hardly improves the economic welfare of the average American or Chinese citizen.

Each action by either side simply invites an equal and opposite reaction, leaving everyone worse off, except for a small group of domestic producers in each country who are happy to have to face less foreign competition. But the collateral damage might be broader. An escalating trade war between these two large economies has the potential to disrupt the world trading system and set back the fragile global economic recovery that has just gotten started.

Heightened trade tensions between the two countries would also hinder progress on important multilateral initiatives where the two countries play important roles. The U.S. and China invariably set the tone for international discussions on key matters, including initiatives to control climate change, promote reform of the international financial institutions and handle rogue nations like North Korea. A dysfunctional economic relationship between these two countries could spill over into other areas and have huge costs.

The reality is that both economies need each other more than they would like to admit. The Chinese need the U.S. export market to maintain their own GDP and employment growth—a dependence that will only rise with all the new industrial capacity being built up thanks to Beijing's stimulus package. With surging public deficits, the U.S. government needs every bit of financing it can get, including Chinese purchases of U.S. government bonds.

The timing of the Obama administration's action suggests that it is intent on solidifying its domestic political base even at the risk of damaging this important relationship and fostering the perception that it is willing to gut free trade if that's what it takes to push other reforms domestically.

This is a dangerous strategy. Protectionist measures, both explicit and implicit, could be difficult to pull back once they become entrenched. The bigger risk is that the administration might have tipped the China-U.S. relationship into a more contentious and perilous phase. And all for the sake of keeping a few trade unions happy.

Authors

Eswar Prasad

Publication: The Wall Street Journal

Obama Must Resist the Anti-Trade Mobs

Chad P. Bown — Fri, 28 Aug 2009 12:00:00 -0400

The Obama administration’s first real test on trade policy has arrived. The US must decide whether to impose new import restrictions on Chinese tyres under what is known as its "China safeguard" law.

This decision is not just a test of President Barack Obama’s support for free trade. History could well record it as the defining moment when the multilateral trading system was able – or not – to withstand the crisis-provoked protectionist forces that currently threaten to bring it down.

The World Bank-sponsored Global Antidumping Database suggests that, since the economic turmoil began, countries have been ganging up to use World Trade Organisation rules in an almost mob-like response to restrict imports from China. The tyres case could make this far, far worse.

The US tyres case began in April when the United Steelworkers union asked the government to investigate tyre imports from China. By June, the US International Trade Commission recommended the president impose a new 55 per cent tariff. President Obama has the discretion under the law to accept this, offer a different package of assistance to the steelworkers or dismiss the case.

There are numerous comparisons between the tyres decision and the first trade policy test President George W. Bush faced over a steel safeguard case in 2001-2002. Each test occurred under safeguard laws subject to presidential discretion, took place early in each president’s first terms, and could lead to import barriers which would benefit a key domestic constituency.

However, for any US administration with multilateralist aspirations, an important historical element is what happened after the Bush administration imposed import restrictions. The 2002 US trade barriers ignited a protectionist fire that quickly spread across the world. Nine other economies, including the European Union and China, followed the US lead by imposing new steel import restrictions. Some governments feared that the steel exports newly shut out of the US market would be deflected into their own markets.

It is doubtful that today’s struggling world economy, still reeling from the financial crisis, could withstand a similar global protectionist backlash. Unfortunately there are three reasons to expect an even stronger international protectionist response if Mr Obama accepts new tariffs.

First, this China safeguard is just one of many anti-China trade policies currently in vogue. Industry demands for new import restrictions against China under this and other policies such as anti-dumping were up 23 per cent in 2008, and are on pace for another increase in 2009. It is not limited to the US and EU; India, Brazil, Argentina, Indonesia, South Africa and Turkey are imposing most of the new import restrictions China faces.

Second, a little-known loophole in the rules governing China’s 2001 WTO accession makes it easy for a global protectionist response to spread faster and further than that which took hold in 2002. Nowadays, once any one country imposes a China safeguard on imports, all other WTO members can immediately follow suit, without investigating whether their own industries have been injured.

Third, much of the world still follows the US lead regarding new import restrictions. The most recent example was the Bush administration’s reversal of a long-standing US policy that made a particular anti-subsidy law off-limits for use against China. After the US charged China under this law, Australia and India initiated their first such cases against China, and others will follow.

Neither China’s exports nor its policies are blameless in these affairs. Some of the US and other WTO member countries’ concerns are based on legitimate problems. It is simply that the mob mentality on new trade barriers does not help the trading system address such problems.

The best option for the US administration in the imminent China-safeguard decision over tyres is to decline to implement new trade barriers, but to offer the adversely affected communities in the US help through adjustment assistance programmes. Doing so will help the US stand up for the trading system and counter the crisis-driven mob mentality that threatens to bring it down.

Authors

Chad P. Bown

Publication: The Financial Times

Protectionism Exposed

Chad P. Bown — Thu, 06 Aug 2009 10:09:41 -0400

In May, the United States slapped new tariffs on steel pipe imports from China. In June, China imposed new barriers on U.S. and European Union exports of adipic acid, an industrial chemical used to make nylon and polyester resin. In July, the EU also decided to restrict imports of steel pipe from China.

The important question now is, do these events foreshadow spiraling protectionism and tit-for-tat retaliation that threaten a global trade war? Or is trade policy always like this, and we’re just noticing more now, given the global slowdown and heightened fears of Smoot-Hawley-style protectionism?

A new set of data on protectionism can help answer that question. The World Bank’s newly updated Global Antidumping Database, which I help organize, displays in almost real time emerging trends in this form of protectionism in more than 20 of the largest economies in the World Trade Organization. Some of the numbers are worrying.

The count of newly imposed protectionist policies like antidumping duties and other “safeguard” measures increased by 31% in the first half of 2009 relative to the same period one year ago, which itself is not an alarming number. But many governments take more than a year to make final decisions on such policies after receiving the initial request for protection from a domestic industry. The fact that industry requests for new import restrictions were 34% higher in 2008 relative to 2007 is a worrying trend even though 2007 saw a historical low in such requests. And with the recession continuing, requests for new import restrictions were 19% higher in the first half of 2009 relative to 2008.

This suggests a wave of new protectionist measures may be on the way. While leaders of the Group of 20 large economies unanimously pledged not to resort to protectionism at a Washington summit last November and reaffirmed this in London in April, virtually all of them have slipped at least a little bit.

Nor is it just the U.S., EU and China: Since the beginning of 2008, Indian companies alone are responsible for roughly 25% of all requests for new trade barriers, attacking a range of imports that include steel, DVDs, yarn, tires and a variety of industrial chemicals. While it is too early to know the final resolution of these new investigations, Indian policy makers have imposed at least preliminary barriers on more than 20 different products being investigated.

The burden of this protectionism is not uniformly distributed among exporting countries. In the first half of this year, China’s exporters were specifically named in more than 75% of these economies’ newly initiated investigations. In the second quarter, China’s exporters were targeted in all 17 of the cases in which new trade barriers were imposed around the world.

Despite all this bad news, there is a silver lining. The fact that countries may be resorting to antidumping actions and safeguards in lieu of other protectionist policies, such as across-the-board tariff increases or a proliferation of “Buy-America”-type provisions in national stimulus packages, is a partial sign of the strength and resilience of the rules-based WTO system. It is important to have a reliable trading system that allows for the transparency necessary to clearly see the new trade barriers, because industry demands for protectionism are somewhat inevitable in a recession.

That’s encouraging because “little” acts of protectionism could add up to a big problem. Having accurate data on the extent of the problem is important, but the only solution is for policy makers to recognize the dangers of the path they’re headed down.

Authors

Chad P. Bown

Publication: The Wall Street Journal

Protectionism Continues its Climb

Chad P. Bown — Thu, 23 Jul 2009 00:00:00 -0400

Editor's Note: Chad P. Bown finds that although the G-20 committed to reduce trade protectionism and barriers following the start of the financial crisis, almost all of them have turned to trade “remedy” policy instruments in response to domestic industry demands for protection from import competition. New data and a study, produced by Bown, show that the first half of 2009 had a 30.5 percent increase in the imposition of new import-restricting measures, as compared to the same time period in 2008.

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Executive Summary

Despite the Group of 20’s (G-20) commitments to refrain from imposing new protectionist measures in the wake of the global economic crisis, virtually all of them have turned to trade “remedy” policy instruments such as antidumping, safeguards, and countervailing duties (anti-subsidy policies) in response to domestic industry demands for protection from import competition. This study examines newly available data that tracks the combined use of these trade policies and finds a continued increase in protectionist resort to these import barriers in the second quarter 2009. The second quarter 2009 increase is above and beyond the sharp increase that began in 2008 with the global spread of the financial crisis.

Compared to the same time period in 2008, the second quarter of 2009 saw a 12.1 percent increase in initiated investigations in which domestic industries request the imposition of new import restrictions under trade remedy laws. While India and the United States combined to initiate 50 percent of the new investigations during this period, other G-20 members that also initiated at least one new investigation during the second quarter of 2009 include Argentina, Australia, Brazil, Canada, China, European Union, and Turkey. Other developing countries also resorting to these instruments include the Dominican Republic, Pakistan and the Kyrgyz Republic. China’s exporters were the dominant target for these new investigations that may result in import restrictions, being named in over 80 percent of the new country-level investigations.

One new and striking feature of the data is that much of the new protectionism taking place in the first half of 2009 is through use of the global “safeguards” policy. While use of the antidumping policy in 2009 has leveled off after the initial escalation associated with the crisis in 2008, safeguards use has spiked only more recently. If continued through the second half of the year, the 2009-to-date pace of new safeguard investigations would make 2009 the second most prolific year since the WTO’s 1995 inception.

Finally, compared to the same time period in 2008, the first half of 2009 also saw a 30.5 percent increase in the imposition of new import-restricting measures upon completion of earlier investigations initiated under these trade remedy laws, a trend that will almost certainly continue to increase throughout the remainder of 2009 and into 2010. Most striking in the second quarter 2009 data is that China’s exporters were targeted in 100 percent of the new product-level import-restrictions imposed under other WTO members’ trade remedy laws that require the investigating country to name at least one exporting country.

Authors

Chad P. Bown

U.S.–China Trade Conflicts and the Future of the WTO

Chad P. Bown — Tue, 09 Jun 2009 14:00:25 -0400

Introduction

While many trade policy observers focus on signs of life from the Doha round of negotiations, arguably more important to the long-run relevance of the WTO is how the United States and China politically manage a number of currently ongoing formal trade disputes. The cases are likely to become political flashpoints not only because they involve major U.S. exporting industries such as Hollywood, music and other media, as well as the struggling automobile firms, but because a full process WTO trade dispute—that would include targeted and WTO-sanctioned U.S. threats of retaliation—would be China’s first such experience in the limelight.

We provide a road map of what to expect from both countries in this WTO process, and we also identify a number of new issues likely to confront Washington and Beijing along the way. While we do draw lessons from how countries have used earlier WTO disputes to manage tensions in bilateral relationships, we also pinpoint limitations as to what can be learned from these earlier episodes given the complexities of trading with China. The politics of handling these particular disputes is especially critical for the international trading system in the context of a global resurgence of protectionist pressures amid the deepening economic crisis.

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Authors

Chad P. Bown

Publication: The Fletcher Forum of World Affairs

Protectionism on the Rise: A Report on the Use of Trade Remedies During the Global Financial Crisis

Chad P. Bown — Mon, 11 May 2009 12:00:00 -0400

Editor's Note: Despite G-20 promises to reduce trade protectionism and barriers, Chad P. Bown shows through new data and a new report that protectionism increased and spread 18.8 percent during the first quarter of 2009.

View the executive summary »

View the full article »

Executive Summary

Much has been made of the Group of 20’s (G-20) commitments to refrain from imposing new protectionist measures in the wake of the global economic crisis. Most of the G-20 economies are members of the World Trade Organization (WTO), and many of them had pre-crisis “applied” import tariff rates quite close to the upward limit on their “bound” tariff legal commitments under the WTO. This proximity limits their policymakers’ abilities to respond to domestic protectionist pressure by simply raising applied import tariffs; as raising import tariffs above these bound legal commitments would be a flagrant violation of the rules of the international trading system under the WTO.

Nevertheless, policymakers in these economies do have the flexibility to funnel domestic industry demands for new import restrictions into alternative trade “remedy” policy instruments such as antidumping, safeguards, and countervailing duties (anti-subsidy) policies. A new study examining newly available data that tracks the combined use of these trade policies indicates a continued increase in protectionist resort to these import barriers in the first quarter 2009. The first quarter 2009 increase is above and beyond the sharp increase that began in 2008 with the spread of the global economic crisis.

Compared to the same time period in 2008, the first quarter of 2009 saw an 18.8 percent increase in initiated investigations in which domestic industries request the imposition of new import restrictions under trade remedy laws. While the list of new investigations is dominated by India and Argentina, other G-20 members that also initiated at least one new investigation during the first quarter of 2009 include Australia, Canada, China, the European Union and its member states, Mexico, South Africa, Turkey and the United States. China’s exporters were the dominant target for these new investigations that may result in import restrictions, facing over two thirds of the new investigations.

Compared to the same time period in 2008, the first quarter of 2009 also saw a 15.4 percent increase in the imposition of new import-restricting tariffs and quotas upon completion of earlier investigations initiated under these trade remedy laws, a trend that will almost certainly continue to increase throughout the remainder of 2009 and into 2010. While India imposed the most new import barriers under these laws during this time period, other G-20 members that did so include Argentina, Australia, Brazil, Canada, the EU and its member states, South Korea, Turkey and the United States. China’s exporters are the dominant target for these newly imposed import restrictions facing new barriers in over 70 percent of the cases.

Authors

Chad P. Bown

Classification and Statistical Reconciliation of Trade in Advanced Technology Products: The Case of China and the United States

Thu, 01 May 2008 12:00:00 -0400

The Brookings-Tsinghua Center hosted a roundtable on September 6, 2007 titled “China’s Economic Policies” featuring top scholars and experts from U.S. International Trade Commission (USITC). This topic is a point of interest in U.S.-China relations. Participants in that roundtable will be featured in a joint research working paper series between USITC, school of public policy and management at Tsinghua University and Institute of International Economics at NDRC of China.

EXECUTIVE SUMMARY

This study provides an objective overview of U.S.-China trade in advanced technology products (ATP). It examines the definitions and classification methods of ATP in the United States and China, compares available ATP lists, and investigates some of the pros and cons of both countries’ current systems using historical data. It also illustrates a method to reconcile U.S.-China ATP trade data that combines the strengths of both countries’ trade statistics. Finally, it presents preliminary explanations for U.S.-China ATP trade patterns from 1996 to 2006, based on one set of reconciled ATP trade statistics.

Major findings from the study are:

ATP classifications in the two countries, while similar in a number of ways, appear to have been created to serve different purposes. Some Chinese classifications appear to be used to help inform and manage its broad industrial development strategy and often extend to products beyond those considered advanced technology products in the United States. The U.S. ATP classification are mainly for statistical monitoring purposes and do not appear to be tied to specific policy goals.

The ATP-producing industries are relatively stable, while the ATP product list changes year by year, with dramatic changes taking place when a revision of the HS codes occurs.

ATP statistics from numerous sources consistently show that the U.S. trade deficit in ATP with the world grew rapidly in recent years, with China as one of the largest contributors.

The dramatically increasing surplus of China in ATP trade since its WTO accession is concentrated mostly in information and communication technology, while the United States still enjoys sizeable surpluses in electronics and aerospace technology.

The adjustment of re-exports through Hong Kong has only a modest impact on the discrepancies in U.S.-China ATP trade statistics, which is similar to the findings of Ferrantino and Wang (2007) in U.S.-China general merchandise trade. However, when we make adjustments for differences in classification definitions, and largely purge the Chinese data of “new” products, we get a clearer picture of U.S.-China trade in ATP products.

More than 90 percent of the rapidly expanding ATP exports from China to the United States is processing trade, which is closely related to foreign direct investment (FDI) and largely carried out by foreign firms. This is in contrast to non-ATP trade, where most of the growth in trade since China WTO accession has been carried out by private Chinese firms, not foreign firms.

Various special economic zones and areas have largely hosted the rapid expansion of Chinese ATP exports.

The emergence of China as a major supplier to the U.S. advanced technology products market results from the combination of the fragmentation of global production, China’s comparative advantages, and Chinese Government preference policies to processing trade and foreign invested enterprises.

There appears to remain a considerable technological gap between Chinese ATP exports and Chinese imports from the United States. Chinese ATP imports from the United States were dominated by large-scale, sophisticated, high-valued equipment and devices, while Chinese ATP exports to the United States were still mainly small-scale products or components in the low-end of the ATP value-added chain.

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Authors

Falan Yinug
Fengjie Qu
Haifeng Wang
Ling Chen
Michael Ferrantino
Robert Koopman
Zhi Wang

Publication: Brookings-Tsinghua Center for Public Policy Working Paper Series

The Future of American Multilateralism

Edward Joseph and Philip H. Gordon — Thu, 27 Sep 2007 12:00:00 -0400

As they do every four years, Europeans are tracking the presidential election campaign in the United States with a mix of apprehension and hope. And this year, as in 2004, a majority will be pulling for a Democrat in the belief that any of the party's candidates will restore trans-Atlantic relations to their pre-Bush norm.

That's a reasonable calculation, but Europeans also need to consider how their own actions play into the debate on American foreign policy.

When Europeans show themselves to be responsible, capable partners, they bolster multilateralists in America. But when they appear reluctant to bear burdens or take risks even for common interests, the unilateralists in the United States win the debate.

Right now, the most important test case of Europe's ability to contribute to Western security is Afghanistan, and the latest signs are not good. The Taliban insurgency has inflicted a toll not only on NATO troops, but on domestic political support among crucial allies, including Germany, Italy and the Netherlands.

The Dutch government has postponed a decision on its deployment of 1,600 troops to Afghanistan's difficult Urzugan Province. Should the Netherlands decide to withdraw their troops (or even re-deploy them from the difficult south), it would trigger a domino effect in other NATO countries as well as in others, such as Australia. Even if the Dutch extend the deployment, European diplomats fear that if their troops get hit by mass casualties, it will spell the end of the mission at once.

The new French president, Nicolas Sarkozy, has backed away from hints he made during the election campaign that France would withdraw from Afghanistan, but French diplomats are now urging Washington to develop an "exit strategy," arguing that the Europeans cannot stay "forever."

The differences in public opinion across the Atlantic are stark. A just-released German Marshall Fund survey shows that while more than two-thirds of Americans approve of combat operations against the Taliban in Afghanistan, less than one third of Europeans do.

In America, even strident critics of President George W. Bush are committed to the Afghanistan mission and would like to commit more troops there. Indeed, had John Kerry, the Democrat's candidate for president in 2004, beaten Bush, he would likely find himself today just as frustrated as Bush with the flagging European and Canadian support.

Kerry's Democratic colleagues now seeking the party's nomination for president will be hard-pressed to make the case for pursuing security interests through the Atlantic Alliance if Europe will not do its share in Afghanistan.

No matter how different European and American views, the reality is that stabilizing Afghanistan will take years and significant resources - just as has been the case in the Balkans, where Europeans and Americans have been working together for more than a decade.

Unlike in the Balkans, President Hamid Karzai of Afghanistan confronts a vicious insurgency. And unlike in Iraq, where European reluctance to fight a war that most of them opposed is understandable, Washington has largely played by the rules, with full international legitimacy.

Now is the time for European leaders to remind their publics of what is at stake, both in Afghanistan and across the Atlantic. Instead of biding time until Bush leaves office, European statesmen need to explain in clear terms why what happens in far-away Afghanistan has a direct impact on European security - and that just because Bush supports the mission does not mean they should oppose it.

Instead of letting others take all the military risks in Afghanistan's difficult south, the French, Italians and other NATO members need to share the burden and join the fight against the Taliban. The key is to convince European voters that their security is linked to a shared struggle in Afghanistan against terrorists from the same movement as those stopped recently in Germany, Denmark and Britain.

America has learned a lot over the past several years about the need for partners and international legitimacy. Europeans were largely right about Iraq, and the case for respectful trans-Atlantic diplomacy and more joint decision-making is far easier to make now than it was a few years ago.

With Europe deploying 20,000 troops and taking risks in Afghanistan for our common security, those of us in Washington who want U.S. foreign policy to move further in this direction have the upper hand. If Europe decides that such deployments - even for legitimate military conflicts critical to their own security - are just too difficult, costly, or associated with the United States - the unilateralists will return.

Authors

Edward Joseph
Philip H. Gordon

Publication: International Herald Tribune

Global Trade Talks: The Doha Disaster

Paul Blustein — Mon, 09 Jul 2007 00:00:00 -0400

Glorious news from Potsdam, Germany! Global trade negotiations suffered yet another blow—perhaps a crowning one this time—as a meeting of trade ministers from the U.S., European Union, Brazil and India broke up early on June 21 with the parties declaring that they are hopelessly deadlocked. And here's more glad tidings: congressional authority for President Bush to negotiate trade pacts expired June 30, adding to the woes facing the global talks.

Let me explain. I'm a journalist by trade, and as most people suspect, we journalists relish a good disaster story. After more than 25 years working for newspapers, the portion of my brain that welcomes news beneficial for the welfare of humanity has atrophied, or at least it fails to function on matters about which I'm writing. My current focus is a book on the WTO and the Doha Round, the global trade talks named for the capital of Qatar where they were launched in November, 2001. Following the debacle in Potsdam, I'm happy (in my perverse journalist way) to report that as disaster stories go, the Round is shaping up as a corker.

As a reporter who covered the 2001 World Trade Organization meeting in Doha, I vividly remember the idealism that pervaded the gathering. Braving the perceived risk of traveling to the Persian Gulf just two months after the Sept. 11 attacks, delegates from the 140 countries belonging to the WTO reached an accord after six grueling days on the agenda for a "development round." The goal was to strike agreement by Jan. 1, 2005 on new international trade rules that would be much fairer for developing countries than the current ones, and in so doing give the world's poor a better chance to reap the benefits of globalization. By eradicating many trade barriers and inequities that hamper growth in the developing world, the new rules would help "drain the swamp" of poverty in which terrorism flourishes—or so the attendees hoped.

Not only is the deadline long passed, but those noble goals are clearly running afoul of harsh political and economic realities, especially as the negotiators have confronted the issue of trade in agriculture, the sector in which the bulk of the world's poor make their living. On a couple of occasions since Doha, WTO meetings have eked out progress, but more often than not, they have collapsed amid an orgy of finger pointing, and although the specifics change from meeting to meeting, the basic story has remained the same: Developing countries accuse the United States of refusing to cut its lavish farm subsidy programs, especially in crops such as cotton, where payments to American farmers help generate gluts on world markets that depress the prices received by farmers in countries such as Mali and Zambia. The European Union is blamed for balking at opening up its markets for products such as beef, poultry, and dairy because of the political clout of its cosseted farmers—and the same for Japan and South Korea, which zealously protect their rice growers with tariffs hundreds of percentage points high. The rich nations, for their part, contend that developing nations aren't offering enough concessions to make it worthwhile for them to undertake politically painful measures. In particular, big and fast-growing emerging markets such as Brazil, India, Indonesia and South Africa are rejecting demands to slash their barriers to manufactured imports; India is also taking a very tough stance against opening up its agriculture to more foreign competition.

A year ago, those fundamental gaps in negotiating positions led WTO Director General Pascal Lamy to declare a "suspension" of the Round. Hope rose anew earlier this year that U.S. Trade Representative Susan Schwab and her counterparts from other leading member countries might be able to rejuvenate the process and secure at least the broad outlines of a final pact before the expiration of Trade Promotion Authority, the legislation that ensures any deal struck by the administration will get an up-or-down, amendment-free vote in Congress. But the debacle in Potsdam has dashed those hopes, and now an even more daunting hurdle is looming—the 2008 U.S. election campaign, which makes it harder than ever for the Bush administration to offer meaningful concessions lest voters in key farm districts turn against Republican candidates. Other countries, meanwhile, will be loath to move as long as the administration lacks Trade Promotion Authority, because any deal that is struck among WTO members could be subject to crippling amendments when it comes up for approval on Capitol Hill.

Given all that, prospects are nil for a far-reaching agreement of the sort envisioned at Doha, which would have sharply lowered tariffs and subsidies for both agricultural and industrial goods while also significantly expanding trade in services. The best that can be hoped for prior to the U.S. election—and even for this scenario, chances aren't bright—is a "Doha Lite" deal, which would accomplish a few worthwhile goals (eliminating the most offensive sorts of farm subsidies, for example) but fall far short of dramatically changing the rules of trade for developing countries. The most probable scenario is that the Round will be put in abeyance for a couple of years, in the hope that a new U.S. administration will put a high priority on gaining congressional negotiating authority and concluding the Round—hardly an assured outcome, since trade has become such a contentious issue in the U.S. political debate. Even if the Round staggers to a finish in, say, 2010, it will likely be the Lite version, for the same reasons that have kept the main parties from coming together so far.

Why does this make for a disaster story? It is not that global trade will grind to a halt in the absence of a Doha accord; existing international trade rules will remain in effect. But in addition to the lost opportunity for improving the rules, a Doha failure would endanger the WTO, the institution charged with preserving the multilateral system that has governed commerce among nations since the end of the Second World War. That system, created to prevent a recurrence of the protectionism and exclusive trade blocs that helped deepen the Great Depression, gives basic rights to all countries that accept the rules—in particular, "most favored nation" treatment, which means member countries cannot capriciously discriminate against the products of other members. Its dispute settlement system gives even small and poor countries the right to bring grievances against rich and powerful ones—witness the victory won in the last couple of years by tiny Antigua over the United States in a case involving internet gambling.

The WTO is already at risk of being sidelined as the main rule-setter for global trade, thanks to the proliferation in the past few years of bilateral and regional free-trade agreements such as the ones the Bush administration has struck with Australia, Bahrain, Morocco, Oman, Singapore, the Dominican Republican and five Central American countries plus several more that are pending congressional approval. Failure to achieve a respectable result in the Doha talks could call the organization's credibility further into question, conceivably undermining its authority to adjudicate disputes. Hurt most would be developing countries, because in a world dominated by bilateral and regional accords, they are much more likely to be bullied by trade negotiators from rich countries, who can use their big markets as leverage to extract concessions from the smaller fry.

See why this tale appeals to a journalist? Too bad for the rest of humankind.

Authors

Paul Blustein

No More Second-Best Trade Solutions

Chad P. Bown — Fri, 13 Apr 2007 00:00:00 -0400

The United States recently announced two "second best" trade policy initiatives that had everything to do with China and nothing to do with real leadership and solutions for the global trade agenda.

The first "second best" initiative is the Korea-U.S. Free Trade Agreement (KORUS-FTA), which was recently negotiated by the administration and sent to Congress for approval. To the extent this free trade agreement is about trade at all -- as opposed to Pacific regional security interests -- it is certainly not about "free" trade. Rather, this agreement focuses on discriminatory trade, and a major target of the implicit discrimination is China.

This discrimination is apparent when you examine how the free trade agreement proposes to grant Korean automotive and parts manufactures (think Kia and Hyundai) preferred access to the U.S. market vis-a-vis U.S. imports from the imminently competitive Chinese auto industry. What's the harm in this? Plenty.

While this type of preferred access could prove beneficial if Korean imports help reduce the number of inefficient producers who are only in business because of U.S. trade barriers, it is more likely that this preferential treatment for Korean firms would instead immobilize efficient Chinese competitors in the U.S. market, thereby forcing out strong and able producers in the name of favoritism. This is the type of market and trade interference that the United States complains about frequently to other countries when U.S. producers are locked out of markets, and it does the United States more harm than good to play the game in reverse.

The KORUS-FTA is also problematic because it will likely retard progress in the more economically important multilateral negotiations under the Doha Round of World Trade Organization (WTO) negotiations. For if beneficiaries, such as the Korean auto industry, lock in discriminatory access to the U.S. market, the same Korean firms that pushed for "free" trade in bilateral negotiations with the U.S. will be given an incentive to discourage additional multilateral liberalization under Doha, as this would reduce the value of their hard-earned discriminatory access to the U.S. market. This type of disincentive to negotiate broader multilateral trade deals hurts overall well-being of the U.S. and Korea in the long run.

The second "second best" initiative is the Commerce Department's decision to reverse a 23-year policy against using the U.S. anti-subsidy law to restrict imports from China. The decision was announced following an investigation of allegedly subsidized "coated free sheet paper" (think glossy store catalogs), and resulted in a new U.S. tariff on Chinese imports ranging from 10.90 to 20.35 percent.

This decision rolled back more than 20 years of Commerce Department policy not to use the anti-subsidy law to restrict imports from non-market economies, such as China and the former Soviet Union. However, this policy did not indicate a lenient stance toward China because the anti-dumping law -- a better known law -- also provided for discriminatory import restrictions. In fact, data on the United States' use of the anti-dumping law since the mid-1980s indicate that U.S. policy has discriminately targeted Chinese firms more than firms from any other country.

This policy is a second best way to confront concerns over the pace of China's subsidy reform programs. Once U.S. companies learn of the new availability how to utilize the law to protect their industry from market competition, they request it again and again. This can fuel a vicious cycle of new trade barriers at home leading to retaliatory protectionism abroad. In fact, data from the WTO show that U.S. exporters are now the fourth largest target of foreign anti-dumping laws, showing that in trade, you often get what you give.

Beyond this tit-for-tat issue, U.S. import restrictions actually do the country more harm than good economically, as they shield inefficient domestic industries from foreign competition. Why does this matter? Restricting import competition can reduce the U.S.'s own industrial competitiveness over time. If other "downstream" U.S. producers have to face higher costs because of restrictions on imported inputs, this puts jobs and wages in these industries at risk.

And these two "second best" initiatives do not even begin to address two more WTO disputes in which the U.S. alleges insufficient Chinese enforcement of intellectual property over movies, books and music. (Pursuit of such a potentially precedent-setting case entails such an extensive set of trade-offs regarding political pitfalls and international ramifications so as to require its own op-ed.)

So what can be done to stop this "second best" trend and put a progressive trade agenda back in place?

First, the United States needs to take a stand by halting all of its remaining bilateral trade negotiations as a step towards a good-faith effort to rekindle the multilateral Doha negotiations. This action would signal leadership and commitment to successfully pursuing and completing the Doha round, which holds the greatest potential for substantial increases in well-being both at home and abroad.

Second, the United States needs to put the anti-subsidy law genie back in the bottle before it is too late. When presented with the opportunity in the final determination of this coated free sheet paper case this summer, the Commerce Department should reverse its preliminary decision.

Third, to the extent the United States feels political pressure to challenge China's ongoing privatization programs and subsidy policies, it needs to articulate these concerns through the relatively effective, transparent and multilateral auspices of the WTO dispute settlement provisions rather than tackling them on a one-off policy basis at home. The United States Trade Representative has already indicated a step in this direction by formally initiating such a subsidy dispute in February, and this is the best way to continue.

Finally, history offers a guide and hope on restarting and concluding a successful Doha trade round. During a similarly stalled Uruguay Round of multilateral negotiations in the late 1980s and early 1990s, frustration with the WTO's predecessor -- the General Agreement on Tariffs and Trade (GATT) -- led the U.S. to proceed with similar "aggressively unilateral" actions. Like the KORUS-FTA of today, the U.S. then negotiated a major discriminatory trade agreement with Canada, which was later expanded to include Mexico via the North American Free Trade Agreement (NAFTA). Like the unilateral initiative to use the anti-subsidy law against China today, the U.S. increasingly resorted to the internationally unpopular Section 301 policy that threatened tariff retaliation if foreign governments did not open their markets to U.S. export interests.

While these earlier (and current) U.S. actions can be viewed as bad behavior (at best) or counterproductive (at worst) to proponents of a rules-based, nondiscriminatory trading system, one interpretation of history is that these policies clarified to trading partners how the trade world might work where the multilateral talks failed. The argument is that once the major trading partners were confronted with how U.S. unilateralism would adversely affect them, they became more amenable to a multilateral deal.

While this type of unilateral "second best" strategy is definitely not preferred, one can hope for a similarly positive result for concluding today's multilateral negotiations.

Authors

Chad P. Bown

Publication: washingtonpost.com

Making Trade Agreements Relevant for Poor Countries: Why Dispute Settlement is Not Enough

Bernard M. Hoekman and Chad P. Bown — Thu, 01 Feb 2007 00:00:00 -0500

Poor countries are rarely challenged in formal WTO trade disputes for failing to live up to commitments, reducing the benefits of their participation in international trade agreements.

This paper examines the political-economic causes of the failure to challenge poor countries and discusses the static and dynamic costs and externality implications of this failure. Given the weak incentives to enforce WTO rules and disciplines against small and poor members, bolstering the transparency function of the WTO is important to make trade agreements more relevant to trade constituencies in developing countries. While our focus is on the WTO system, our arguments also apply to reciprocal North-South trade agreements

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Authors

Bernard M. Hoekman
Chad P. Bown

Brookings: Topics - Trade Disputes

Value-Added Trade and Its Implications for International Trade Policy

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The U.S., China and Japan in an Integrating East Asia

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Could the WTO Better Serve the Poor?

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A Dangerous Game of Trade 'Chicken'

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Classification and Statistical Reconciliation of Trade in Advanced Technology Products: The Case of China and the United States

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The Future of American Multilateralism

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Global Trade Talks: The Doha Disaster

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No More Second-Best Trade Solutions

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Making Trade Agreements Relevant for Poor Countries: Why Dispute Settlement is Not Enough

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