37609 (Author at Cato Institute) https://www.cato.org/ en What Will the US‐​China Deal Accomplish on Tech Transfer, IP Protection and Innovation? https://www.cato.org/blog/what-will-us-china-deal-accomplish-tech-transfer-ip-protection-innovation Simon Lester, Huan Zhu <p>The <a href="https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf">US-China Economic and Trade Agreement</a>, described as a "phase one" deal, entered into force today (30 days after signature, pursuant to Article 8.3, para. 1). The Agreement has created a temporary tariff truce. For the time being, it seems that tariffs will not be raised further, and both sides lowered their retaliatory tariffs to some extent, which is good news.</p> <p>But with all the talk of tariffs, it is easy to lose sight of the U.S. concerns about Chinese trade practices. How does the Agreement do in terms of addressing the purported basis for the trade war?</p> <p>The trade war began with a Section 301 investigation and report by the U.S. Trade Representative's Office on China’s "Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation." Pursuant to the Agreement, China has agreed to undertake new obligations in these areas. Will these new obligations successfully address the concerns? In this blog post, we offer some preliminary observations on this question, based on the text of the Agreement. A full analysis will have to await China's actions to implement the Agreement. (Under Article 1.35, "Within 30 working days after the date of entry into force of this Agreement, China will promulgate an Action Plan to strengthen intellectual property protection aimed at promoting its high-quality growth.")</p> <p>The main findings of the Section 301 report <a href="https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2018/june/section-301-investigation-fact-sheet">were as follows</a>:</p> <p>• “China uses joint venture requirements, foreign investment restrictions, and administrative review and licensing processes to require or pressure technology transfer from U.S. companies”;<br /> • “China deprives U.S. companies of the ability to set market-based terms in licensing and other technology-related negotiations”;<br /> • “China directs and unfairly facilitates the systematic investment in, and acquisition of, U.S. companies and assets to generate large-scale technology transfer”;<br /> • “China conducts and supports cyber intrusions into U.S. commercial computer networks to gain unauthorized access to commercially-valuable business information.”</p> <p>In addition to these four findings, USTR <a href="https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF">also concluded</a> that certain “other Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation may also burden or restrict US commerce.”</p> <p>We will now go through each of the findings and evaluate whether, and to what extent, it has been addressed in the Agreement.</p> <p><em>Forced technology transfer</em></p> <p>In the Section 301 report, USTR found that China uses its foreign investment policy to encourage technology transfer by foreign companies to their Chinese joint venture partners. American (and other foreign) companies are forced to partner with Chinese companies in exchange for entering the Chinese market, and as part of this arrangement, the foreign companies have to share their technology with the Chinese partners.</p> <p>Ideally, the requirement that foreign investors use joint ventures would be eliminated. In the Agreement, China does not make commitments to open its market (other than the financial services sector) to wholly owned foreign investments. However, recently, outside the context of the Agreement, China announced that it would lift foreign capital restrictions in some manufacturing sectors, including aircraft and automobile manufacturing, within several years. This will help ease forced technology transfer concerns to some extent.</p> <p>In addition, the Agreement has more detailed and clearer rules on forced technology transfer than are found in existing WTO rules. Article 2.1, para. 1 states that: "Natural or legal persons (“persons”) of a Party shall have effective access to and be able to operate openly and freely in the jurisdiction of the other Party without any force or pressure from the other Party to transfer their technology to persons of the other Party." Article 2.3 then offers more specific obligations:</p> <blockquote><p>1. Neither Party shall adopt or maintain administrative and licensing requirements and processes that require or pressure technology transfer from persons of the other Party to its persons.</p> <p>2. Neither Party shall require or pressure, formally or informally, persons of the other Party to transfer technology to its persons as a condition for, inter alia:</p> <p>(a) approving any administrative or licensing requirements;<br /> (b) operating in the jurisdiction of the Party of otherwise having access to the Party’s market; or<br /> (c) receiving or continuing to receive any advantages conferred by the Party.</p> </blockquote> <p>This language identifies a wide range of administration actions through which technology transfer may be encouraged. At first glance, it looks like it could be effective in the fight against foreign technology transfer.</p> <p>In some instances, international pressure can help push domestic reforms, and that may be the case here, as the US-China trade negotiation might have helped the Chinese government in incorporating these policies into domestic law. China’s new Foreign Investment Law has language that prohibits administrative officials from forcing technology transfer (Article 22). And the Implementing Regulation of the Foreign Investment Law also has specific language that prohibits agencies and officials from forcing technology transfer through licensing, inspection, penalty and other administrative actions (Article 24) and stipulates administrative punishment for officials who are involved in forced technology transfer (Article 43). Whether these laws are effective in stopping forced technology transfer will depend on the implementation.</p> <p>In addition to forced technology transfer, the Section 301 report points out that the reviewing process may also lead to forced disclosure of information and leakage of such information to parties with a competing interest. To address this, paragraph 2(d) of Article 1.9 of the Agreement prohibits personnel with business interest from gaining access to such information.</p> <p>In this regard, China’s Foreign Investment Law already prohibits government officials from disclosing confidential information to others (Article 23), and the Implementing Regulation has further detailed provisions. But the language of the Agreement goes beyond the current law and would have a broader scope of application. It applies not only to government officials, but also to all third-party experts and consultants who may be involved in the administrative process.</p> <p><em>Licensing restrictions</em></p> <p>The Section 301 report concluded that there has been discriminatory treatment of U.S. companies and U.S. intellectual property in China. In particular, it found that Chinese laws impose restrictions on licensing terms, which discriminate against foreign IP and provide an unfair advantage to domestic licensees.</p> <p>These practices would likely be found in violation of China’s WTO obligations under Article 3 (national treatment) and Article 28 (IP rights conferred) of the Agreement on Trade-Related Aspects of Intellectual Property Rights. In this regard, the United States filed a WTO complaint against China in 2018. Soon after, China abolished the relevant provisions or laws cited in the U.S. claims, and now the case <a href="https://www.bloomberg.com/news/articles/2019-06-14/u-s-asks-wto-to-temporarily-pause-its-ip-dispute-with-china">is suspended</a>. (The EU has a similar case on China’s IP practice, but the EU’s claim is broader and the case is still ongoing.) Since the relevant practices have already been revoked, this issue is not addressed in the Agreement.</p> <p>Since the relevant laws and regulations have already been revoked, this issue is not a main focus of the Agreement. Article 2.1, para. 2 does provide a general principle that should apply to licensing: “Any transfer or licensing of technology between persons of a Party and those of the other Party must be based on market terms that are voluntary and reflect mutual agreement.” To this end, China’s new Foreign Investment Law promises to protect the intellectual property rights of foreign investors and companies (Article 22, para.1). It also has provisions that “encourage” technical cooperation on voluntary principles and commercial rules, and require the terms of such technical cooperation to be determined by fair and equal negotiations between the parties. (Article 22, para. 2). This, hopefully, will prevent future administrative intervention in licensing terms in contracts.</p> <p><em>Outbound investment</em></p> <p>Another focus of the Section 301 report is China’s outbound investment policy and how China is using outbound investment to acquire foreign technology in sectors with strategic importance.</p> <p>In the Agreement, China agrees to a general obligation not to “support or direct” outbound investment to reach its industrial goals in a way that would distort the market. (Paragraph 3 of Article 2.1). There are aspects to the language used in this provision that are vague and might be difficult to enforce. As a result, it could be a challenge to assess China’s compliance with the Agreement on this point.</p> <p>A more powerful tool may be America’s domestic law. Separate from the Agreement, the United States has also taken some unilateral actions to tighten technology transfer that takes place through outward investment. For instance, the Foreign Investment Risk Review Modernization Act (FIRRMA) passed in 2018, and related implementing regulations, are designed to enhance the screening of Chinese investment in many sectors. This move will make it more difficult for Chinese companies to invest in the United States and would probably have more impact on curbing the Chinese practice of acquiring technology through foreign investments than the provision in the Agreement.</p> <p><em>Cyber theft</em></p> <p>The Section 301 report also concludes that the Chinese government has supported cyber intrusion to steal confidential business information. It distinguishes the Chinese government’s cyber activities from those of Western countries <a href="https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF">because</a> “the intrusions occur within the framework of China’s extensive state-driven economic development model,” which allows China to use government intelligence for economic gains.</p> <p>There are provisions in the Agreement that deal with private behavior, as Article 1.4 requires China to “enumerate additional acts constituting trade secret misappropriation, especially: (a) electronic intrusions.” China’s Law Against Unfair Competition already has language that restrains individuals or companies from stealing information through cyber intrusion.</p> <p>However, the Agreement fails to include specific commitments on cyber theft at the government level. It is probably because the two nations are <a href="https://www.theatlantic.com/politics/archive/2019/08/inside-us-china-espionage-war/595747/">still at odds</a> on the terms of cyber espionage: China considers it to be the same as the spying that every country is doing and that the same rules should be applied to all government-led cyber intelligence activities, while the United States insists on a difference between economic espionage that targets companies and intelligence work for national security purposes. The conversation on this issue is most likely to happen in other bilateral dialogues.</p> <p>Domestically, the Trump administration recently launched a China Initiative, led by the Department of Justice and the Federal Bureau of Investigation. <a href="https://www.justice.gov/opa/page/file/1122686/download">One of the objectives</a> of the China Initiative is to identify and prosecute trade secret theft and cyber espionage from China. This will help curb cybertheft activities by China.</p> <p><em>Other acts, policies, and practices</em></p> <p>The Section 301 report also raises concerns over other acts, policies and practices related to technology transfer, intellectual property, and innovation. These concerns include activities and policies on national security, cyber security, inadequate IP protection, anti-monopoly law and practice, standardization law, and talent acquisition policy. Some of these issues are addressed in the Agreement, mainly in the area of IP protection, including counterfeit internet products, bad faith trademarking, and IP enforcement, including civil, criminal and administrative enforcement.</p> <p>To this end, China makes some promises in the Agreement to strengthen its IP protection. This blog post will only mention a few examples. For instance, China agrees to grant patent term extensions (Article 1.12) for new pharmaceutical products and methods of making or using a new pharmaceutical product. Patents offer patent holders the right to exclude others from making, using or selling the products, but the effective patent term may be shortened by a lengthy administrative process, including the patent examining procedure at the patent office and a market approval process by related agencies (it is the Food and Drug Administration in the United States and the State Administration for Market Regulation in China). To make up for the time lost and ensure patent holders’ profit, the Agreement requires China to extend patent term to make up for “unreasonable delays” that occur during the administrative process.</p> <p>Previously, China’s Patent Law granted a 20 year-patent term for pharmaceutical products without any possibility of extension. When China started to revise its Patent Law a couple years ago, the proposed Patent Law amendment allowed the patent term to be extended by the State Council for pharmaceutical products (the extension would be five years at maximum, and the total effective patent term would be no more than 14 years after the marketing approval.) The proposed revision only covers pharmaceutical products. But the Agreement requires patent extension to be available for methods of making or using a new pharmaceutical product, as well as new pharmaceuticals. This will require China to further revise its proposed law to fulfill its commitment under the Agreement.</p> <p>China also agrees to help IP holders safeguard their rights. For instance, China promises to make or amend laws with regard to preliminary injunctions, the burden of proof in some cases, and a mechanism for early resolution of patent disputes. All of these should help boost IP protection in China.</p> <p>Commentary on the Agreement has highlighted the shifting the burden of proof in trade secret civil cases. Traditionally, the plaintiff would have to provide proof for its claims in civil cases. Under the Agreement, to prove it is a trade secret, a right holder would only need to prove that measures have been taken to protect the confidentially of such information. Then the burden of proof shifts to the accused party to prove such information is generally known and not confidential. In addition, a right holder needs to prove that the accused party has the opportunity for access to such information, which is the same as the information used by the accused party; or the trade secret has been or risks being disclosed or used by the accused party; or other evidence of misappropriation by the accused party. After that, it is up to the accused party to prove there is no trade secret misappropriation, such as the information being obtained through other means (Article 1.5). The provisions are similar to China’s Law Against Unfair Competition (Article 32), which was recently revised in April 2019. The Law Against Unfair Competition also requires the right holder to prove the trade secret has been misappropriated. This is not explicitly required in the Agreement, but one may argue it is implied in the text. How this provision will be implemented and whether it helps trade secret right holders to protect their interests in practice remain to be seen.</p> <p>China also makes some commitments to deter IP infringement. For instance, China agrees to increase penalties for IP infringement in the Agreement (Article 1.27). China’s current law stipulates that in patent infringement, the compensation amount should be determined according to the patentee’s actual losses, or unlawful gains of the infringer, or a reasonably multiplied amount of the royalties. If all the above are hard to determine, the court will determine the amount within the range of 10,000 Yuan and 1 million Yuan (Article 65 of Patent Law). For the past couple years, China has been in the process of amending its Patent Law. The proposed amendment would raise this range to 100,000 Yuan and 5 million Yuan. This means that when the amount of actual losses, unlawful gains and royalties are hard to determine in a patent infringement case, the infringer will face a much higher fine than before, raising the cost for patent infringement. Such change is in line with China’s commitment under the Agreement. Once finalized and passed, it will make IP infringement more costly and consequential.</p> <p>Summing up, the Agreement, in combination with some other legislative and administrative actions by either China or the United States, addresses a fair number of the issues raised in the Section 301 report. But the actual implementation remains to be seen. Some issues are still waiting for China’s amendment of its current laws. For the issues left out of the Agreement, some are addressed through unilateral actions either by China or the United States. The remaining issues, such as cyber theft, cyber security, and standardization, are untouched by the Agreement and could be the source of tension in the future.</p> <p></p> Fri, 14 Feb 2020 15:37:21 -0500 Simon Lester, Huan Zhu https://www.cato.org/blog/what-will-us-china-deal-accomplish-tech-transfer-ip-protection-innovation Will Free Trade Suffer after Brexit? https://www.cato.org/multimedia/cato-daily-podcast/will-free-trade-suffer-after-brexit Simon Lester, Caleb O. Brown <p>The United Kingdom is out of the European Union, so how does that impact the freedom to trade? Simon Lester comments.</p> Mon, 10 Feb 2020 14:59:02 -0500 Simon Lester, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/will-free-trade-suffer-after-brexit A Better Trade Arrangement with Kenya? https://www.cato.org/blog/better-trade-arrangement-kenya Simon Lester <p>The trade specialty publication Inside US Trade <a href="https://insidetrade.com/daily-news/us-kenya-agree-open-trade-talks-lighthizer-says-deal-will-be-pursued-under-tpa">reports</a> that the Trump administration is looking to convert the current tariff preferences offered to imports from Kenya into a&nbsp;bilateral trade deal:</p> <blockquote><p>The U.S and Kenya have agreed to begin negotiations toward a&nbsp;free trade agreement, the Trump administration and Kenyan President Uhuru Kenyatta announced on Thursday.</p> <p>…</p> <p>[U.S. Trade Representative Robert] Lighthizer has said the U.S. was seeking a “model” trade agreement with an African country that will become a&nbsp;template for other deals and, eventually, replace the African Growth and Opportunity Act, which is set to expire in 2025.</p> </blockquote> <p>If they can pull this off with a&nbsp;truly liberalizing trade deal, I&nbsp;think this is a&nbsp;good idea. Unilateral tariff preference programs such as the Generalized System of Preferences (GSP) and the <a href="https://ustr.gov/issue-areas/trade-development/preference-programs/african-growth-and-opportunity-act-agoa">African Growth and Opportunity Act</a> are full of problems. My former trade policy colleague Sallie James&nbsp;<a href="https://www.cato.org/sites/cato.org/files/pubs/pdf/tpa-043.pdf">had this to say</a> about them back in 2010:</p> <blockquote><p>It is clear that the GSP is in need of reform. Product exclusions; anti‐​competitive limits on imports that are triggered just when an exporter becomes successful; outdated eligibility criteria; and complex administrative and customs requirements all serve to limit the usefulness of the program to the ostensible beneficiaries and to U.S. consumers.</p> </blockquote> <p>My concern here is that, so far,&nbsp;the template used by the Trump administration for trade deals is a&nbsp;pretty bad one. The USMCA is <a href="https://www.cato.org/blog/evaluating-new-usmca-0">kind of a&nbsp;mess</a>. But if a&nbsp;U.S.-Kenya trade agreement focuses on&nbsp;tariff reduction&nbsp;and the&nbsp;liberalization of services, has an enforceable&nbsp;dispute mechanism, and has no <a href="https://www.cato.org/publications/commentary/new-naftas-sunset-clause-ticking-time-bomb">sunset clause</a> like the one in the USMCA, it could be a&nbsp;good model for future U.S. trade agreements, with other African countries and with the rest of the world.</p> Mon, 10 Feb 2020 08:47:32 -0500 Simon Lester https://www.cato.org/blog/better-trade-arrangement-kenya The U.S.-China Trade War: Is There an End in Sight? https://www.cato.org/publications/cato-journal/us-china-trade-war-there-end-sight Wed, 05 Feb 2020 03:00:00 -0500 Simon Lester, Huan Zhu https://www.cato.org/publications/cato-journal/us-china-trade-war-there-end-sight Core Principles for a U.S.-UK Free Trade Agreement https://www.cato.org/blog/core-principles-us-uk-free-trade-agreement Simon Lester, Daniel J. Ikenson <p>With Brexit Day upon us&nbsp;and the United Kingdom poised to reclaim control of its trade policy for the first time in 47&nbsp;years, it’s worth sharing some preliminary thoughts about an eventual free trade agreement between the United States and the United Kingdom.</p> <p>The first thing to keep in mind is that this process could take a&nbsp;while. The United Kingdom and the European Union are entering a&nbsp;transition period during which the terms of their existing relationship will continue, while they seek agreement on the terms of a&nbsp;new one. Understanding the rules and contours of that new relationship will be crucial to other governments interested in negotiating with the United Kingdom. In other words, it will be difficult to conclude a&nbsp;comprehensive U.S.-UK trade agreement until the terms of the new UK-EU relationship are settled.</p> <p>Meanwhile,&nbsp;some less comprehensive deals between the two countries that build toward a&nbsp;full‐​fledged agreement are possible. But, eventually, there is likely to be a&nbsp;U.S.-UK free trade agreement, which we hope will move both countries closer to a&nbsp;state of free trade. Such a&nbsp;deal would reflect certain principles and include broadly liberalizing terms, as we described in a&nbsp;<a href="https://www.cato.org/publications/white-paper/ideal-us-uk-free-trade-agreement-free-traders-perspective">collaborative paper</a> last year.</p> <p>The core provisions of trade agreements concern market access for goods, services, and investment. The U.S.-UK deal should provide for the elimination of tariffs as quickly as possible, on as many goods as possible, and to the lowest levels possible. It should limit the use of so‐​called trade remedy or trade defense measures, as well as measures rationalized as national security imperatives. It should open all government procurement markets to each other’s goods and services providers. It should open all sectors of the economy to investment from businesses and individuals in both countries. It should open all services markets without exception to competition from providers of the other country. It should ensure that the rules that determine whether products and services are originating (meaning that they come from one or both of the agreement’s parties) are not so restrictive that they limit the scope for supply chain innovations. Those rules should reflect the fact that globalization has made it difficult—and sometimes arbitrary—to define a&nbsp;product’s origin. Because of cross‐​border investment and global supply chains, the DNA of products and services is very difficult to trace nowadays, and that is good. Finally, the agreement should simplify, streamline, and make transparent all administrative procedures governing customs clearance for goods and the admission of all qualifying persons for the purpose of conducting business services.</p> <p>In addition to those free‐​market requirements, the U.S.-UK agreement must also include rules governing e‑commerce. Digital trade—data flows that are essential components in the provision of goods and services in the 21st century—must remain untaxed and protected from misuse and abuse. Rules that prohibit governments from imposing localization requirements or any particular data architecture that reduce the efficacy of digital services should be included, and obligations should be imposed on entities to ensure data privacy, consistent with the requirement that data flow as smoothly as possible.</p> <p>When border barriers come down, the potentially protectionist aspects of regulation and regulatory regimes become more evident. If those regulations are comparable when it comes to achieving the same social outcomes—consumer safety, product reliability, worker safety, environmental friendliness—there may be scope to allow businesses to comply with only one set of rules. A&nbsp;regulatory cooperation mechanism to promote mutual recognition would be a&nbsp;useful innovation, as a&nbsp;means to reducing business costs (provided no deep cultural aversion or science‐​based reason exists for considering one regulation better than the other and worth the greater cost).</p> <p>Finally, the rules must be enforceable. What’s the point of a&nbsp;trade agreement if its terms are just suggestions? To make sure governments keep their promises, the agreement should include a&nbsp;binding and enforceable dispute settlement mechanism. That mechanism would not be a&nbsp;true court, with the power to order governments to comply. Rather, the standard mechanism used in most trade agreements—with recourse to a&nbsp;third‐​party adjudicator for a&nbsp;ruling and then self‐​enforcement through authorized suspension of the trade agreement obligations—is sufficient.</p> <p>On the other hand, some common free trade agreement provisions simply don’t belong in free trade agreements. Among the more prominent examples is overly protective intellectual property rules. It is important that intellectual property rules protect what is actually intellectual property and do not go beyond that or create rights where none actually exist.</p> <p>Other examples include provisions on labor rights and environmental protections. These rules have expanded the scope of trade agreements far beyond traditional trade and commercial issues. The scope and reach of labor laws and environmental protections are a&nbsp;controversial domestic policy issue, and the use of international agreements to create a&nbsp;one‐​size‐​fits‐​all solution in these areas is problematic.</p> <p>Furthermore, the United States and the United Kingdom are open, transparent, and free market‐​oriented economies. But if a&nbsp;U.S.-UK FTA is to be a&nbsp;model that applies to others, it is useful to set it up in a&nbsp;way that deals with issues that may arise down the road. Other countries’ economies are less open and have more state intervention; therefore, it is worth having the United States and the United Kingdom work out rules in this FTA that could apply to others who might want to join later. Examples include rules promoting transparency and disciplining the behavior of state‐​owned enterprises. The United States and United Kingdom should be able to agree to very high standards in these areas, standards that other parties might not reach. And then through the open accession clause, parties that wanted to reap the benefits of this agreement would have to accept these disciplines.</p> <p>Summing up, an eventual U.S.-UK FTA should remove barriers to trade in goods and services, open up all sectors of the both economies to investment, and, ultimately, go as far as possible to remove all administrative impediments to economic integration without encroaching on the sovereignty of governments to pass laws and regulate in the public interest in ways that do not discriminate against foreign goods, services, and companies.</p> <p>In practical terms, that means (subject to good faith, non‐​discriminatory public policy exceptions):</p> <ul> <li>Zero tariffs on all goods (agricultural commodities, primary industry resources, and manufacturing industry goods);</li> <li>Zero discriminatory non‐​tariff barriers, which means no discrimination by either party in the content or exercise of the laws, regulations, or practices affecting the provision of services of either party, including no restrictions on the entry of business people in the conduct of the provision of business services;</li> <li>Zero restrictions on competition for government procurement;</li> <li>Zero restrictions on foreign direct investment in the economy;</li> <li>Zero restrictions on cross‐​border data flow;</li> <li>Elimination to the fullest extent possible of impediments to expeditious customs clearance procedures for both imports and exports;</li> <li>Preclusion of antidumping or safeguard measures between the parties and special consideration for waivers when either party imposes trade restrictions for national security reasons.</li> </ul> Thu, 30 Jan 2020 14:37:58 -0500 Simon Lester, Daniel J. Ikenson https://www.cato.org/blog/core-principles-us-uk-free-trade-agreement Can the Us‐​China Trade Deal Be Enforced? https://www.cato.org/publications/commentary/can-us-china-trade-deal-be-enforced Simon Lester <div class="lead text-default"> <p>President Trump&nbsp;and Chinese Vice Premier Liu He signed the U.S.-China “phase one” trade deal this month. President Trump&nbsp;<a href="https://www.whitehouse.gov/briefings-statements/remarks-president-trump-signing-u-s-china-phase-one-trade-agreement-2/" target="_blank">touted the significance of this deal</a>, stating: “Nobody has ever seen anything like it. This is the biggest deal there is anywhere in the world, by far.”</p> </div> , <div class="text-default"> <p>But trade observers understand that much of the U.S.-China trade deal is a&nbsp;restatement of current trade obligations. Many of the deal’s substantive obligations already exist at the WTO, where China previously agreed, among other things, to protect intellectual property and refrain from forced technology transfer. There are some expanded obligations in the new deal as well, but the agreement mirrors current coverage to a&nbsp;great extent.</p> <p>What is most different about the U.S.-China deal is a&nbsp;brand new “dispute resolution” chapter. Unfortunately, this enforcement mechanism is a&nbsp;step backwards, and is less likely to induce reform in China on intellectual property, technology transfer, and other issues than the dispute provisions found in most other trade agreements. That’s a&nbsp;shame, because if these new rules are good ones, we need them to be enforceable.</p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>The U.S.-China deal’s “dispute resolution” mechanism is a&nbsp;step backwards, and is less likely to induce reform in China on intellectual property, technology transfer, and other issues than the dispute provisions found in most other trade agreements.</p> </div> </div> </aside> , <div class="text-default"> <p>Trade enforcement typically works as follows. If one government thinks another is not complying with the obligations in a&nbsp;trade agreement, the complaining government can raise its concerns through a&nbsp;request for consultations. If the consultations do not resolve the issue, the complaining government can ask for a&nbsp;neutral panel of experts to consider whether the other government’s actions violate the terms of the agreement. That panel will issue a&nbsp;ruling on the legal question of whether the respondent government is in compliance. If there is a&nbsp;violation, there will also be a&nbsp;neutral entity to determine the harm from the violation and the appropriate trade retaliation that can be imposed in response.</p> <p>The WTO has the most advanced version of this process, with 593 complaints since it was established in 1995, and hundreds of panel reports and appellate reports reviewing those complaints (the Trump administration may have just killed off the appellate review mechanism, at least in its current form, but the panels remain). Bilateral and regional trade agreements have their own version of panels, without appellate review.</p> <p>The neutral adjudication provided through these panels makes it possible to enforce the agreements. One government’s view that another is in violation is not seen as objective: It is simply the position of the government, rather than an impartial conclusion. An unbiased adjudicator, by contrast, has the credibility to determine whether a&nbsp;violation exists. This process brings the “rule of law” to international trade disputes. Rather than “frontier justice,” under which a&nbsp;complainant would decide on its own whether a&nbsp;violation exists and what retaliation is justified, there is a&nbsp;quasi‐​judicial approach to resolving disputes.</p> <p>Of course, compliance with trade obligations cannot be achieved in every case. Some government policies are too politically sensitive to change, regardless of an international ruling. But without this neutral ruling, it can be very difficult to convince a&nbsp;government that it is in the wrong.</p> <p>With the U.S.-China trade deal, the Trump administration appears to be trying to move away from this conventional wisdom and away from the rule of law. The U.S.-China trade deal does not have the typical adjudication mechanism, but rather has a&nbsp;mechanism under which either side can determine on its own if the other is not in compliance, and can then — after a&nbsp;consultations process — take what it considers to be appropriate action in response (most likely, this will take the form of tariffs).</p> <p>The Trump administration may see this as a&nbsp;tough enforcement mechanism, and it is certainly going to be a&nbsp;quick one if there is no need to adjudicate the dispute. But think about this: If China believes it is in compliance, but the United States does not, these unilateral tariffs probably will not induce China to take any action. Why would China change based on what it considers to be an incorrect view of the meaning of the agreement?</p> <p>If, on the other hand, there were a&nbsp;ruling by a&nbsp;neutral adjudicator that China is not in compliance, China might take some action.&nbsp;<a href="https://www.cato.org/publications/policy-analysis/disciplining-chinas-trade-practices-wto-how-wto-complaints-can-help" target="_blank">It has done so in response to WTO rulings</a>, and it would likely do so in this context as well.</p> <p>What we have with the U.S.-China trade deal, then, is not really an enforcement mechanism at all. Rather, it is merely a&nbsp;process to restart the tariff war if one side is not happy about something. Presumably this could be done without any special process, though, as there was no such provision that served as the basis for starting the tariff war initially. The Trump administration has proved that governments who want to start tariff wars can do so whenever they want. Thus, it is not clear what these new dispute provisions in the U.S.-China trade deal will accomplish. If the Trump administration is not happy with China’s behavior, it can find reasons to impose tariffs without these provisions, as it has done before.</p> <p>The Trump administration touted its deal as&nbsp;<a href="https://www.washingtonpost.com/business/economy/trumps-new-china-deal-cements-emergence-of-managed-trade/2020/01/15/7892c446-372b-11ea-bf30-ad313e4ec754_story.html" target="_blank">“a momentous step — one that has never been taken before with China.”</a>&nbsp;In its current form, however, it is not. If the Trump administration wants the obligations in the deal to have an impact, it needs to include a&nbsp;neutral adjudication mechanism to hear claims of violation, which will offer the credibility and legitimacy that could actually induce China to comply.</p> </div> Thu, 30 Jan 2020 09:44:35 -0500 Simon Lester https://www.cato.org/publications/commentary/can-us-china-trade-deal-be-enforced Simon Lester discusses U.S.-E.U. trade with the European Trade Commissioner on CGTN America https://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-us-eu-trade-european-trade-commissioner-cgtn Mon, 20 Jan 2020 11:05:43 -0500 Simon Lester https://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-us-eu-trade-european-trade-commissioner-cgtn Reasons for Concern in Two New Trade Deals https://www.cato.org/multimedia/cato-daily-podcast/reasons-concern-two-new-trade-deals Inu Manak, Simon Lester, Caleb O. Brown <p>Between the “starter” trade deal with China and the revamped North American trade deal just approved by the U.S. Senate, there are still reasons to be concerned that this administration will again launch trade wars. Simon Lester and Inu Manak comment.</p> Sat, 18 Jan 2020 15:19:46 -0500 Inu Manak, Simon Lester, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/reasons-concern-two-new-trade-deals Simon Lester discusses U.S.-China trade and the USMCA on KNUS’ The Jimmy Sengenberger Show https://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-us-china-trade-usmca-knus-jimmy Sat, 18 Jan 2020 12:06:56 -0500 Simon Lester https://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-us-china-trade-usmca-knus-jimmy Agriculture Purchase Commitments Under the U.S.-China Trade Deal: The Case of Beef https://www.cato.org/blog/us-beef-exports-china-are-rising-not-much Simon Lester, Huan Zhu <p>Yesterday, President Trump and Chinese Vice Premier Liu He signed a “phase one” <a href="https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf">U.S.-China trade deal</a>. A “phase two” deal may be coming, although the timing is unclear, and many people (including us) are skeptical that it will happen any time soon. There are some technical and complicated parts of the phase one deal, and it will take some time to digest it all and come up with an overall evaluation. But it’s worth exploring some specific aspects right away. One of the most talked about parts of the phase one deal is the commitments by China to purchase large amounts of U.S. products, including agricultural products. Article 6.2, paragraph 1 of the deal has broad details of these purchases:</p> <blockquote><p>During the two‐​year period from January 1, 2020 through December 31, 2021, China shall ensure that purchases and imports into China from the United States of the manufactured goods, agricultural goods, energy products, and services identified in Annex 6.1 exceed the corresponding 2017 baseline amount by no less than $200 billion.</p> </blockquote> <p>Given that U.S. exports to China in 2017 were about $180 billion, an additional $200 billion over two years would be a massive increase. The deal further divides up these purchases into manufactured goods, agricultural goods, energy, and services, with specified amounts for each. It then provides sub‐​categories, but it does not publicly break down the purchase amounts by sub‐​category (apparently it does so in a confidential version of the text).</p> <p>This is not a typical trade deal. A normal trade deal would focus on liberalizing trade in both directions (although modern trade deals have gone beyond that and do a lot of regulating). By contrast, this trade deal is an extreme version of managed trade, with China agreeing to buy designated amounts of U.S. products (supposedly “based on market conditions”).</p> <p>Beyond the problematic policy goals, it remains to be seen what all of this means in practice. Here are a few questions that arise: How exactly will China quickly ramp up its purchases? What is the role of the government in this shopping spree? What domestic process will the Chinese government use to induce companies to make these purchases? Are there accounting tricks they can rely on (e.g. reclassifying current Hong Kong imports as Chinese imports)? Will these companies shift current purchases of these products away from other countries’ producers and over to U.S. producers (and will those other countries be annoyed)? Can U.S. producers scale up production to meet these targets?</p> <p>A wide range of products have been mentioned in this context, and how this plays out might vary by product. To help assess this, we thought it might be useful to focus on one product in particular. We are going to use beef as an example (a former Trump administration trade official was recently <a href="https://www.scmp.com/economy/china-economy/article/3046047/trade-war-china-us-may-not-release-full-details-phase-one">reported</a> as having confirmed that “there would be purchases of poultry and beef – estimated at US$1.5 billion apiece – in the phase one deal, with American farmers gaining re‐​entry to the market after years of being left out in the cold due to China’s ban on certain hormones and additives used in US farming.”)</p> <p>So how might U.S. beef exports to China fare as part of China’s promised purchases? Two years ago, <a href="https://www.cato.org/publications/free-trade-bulletin/wheres-beef-finding-better-way-resolve-us-china-trade-conflicts">we wrote about</a> the possibility of increased U.S. beef exports to China. The removal of Chinese restrictions on U.S. beef — which had been put in place by many countries in 2003 after a BSE scare — was a key component of the 100‐​Day Action Plan reached between the Trump administration and Chinese officials in May 2017. As we explained then, China had become a big consumer of beef, and imports of beef into China were increasing. While many countries saw their beef sales rise, U.S. beef exports to China had been negligible due to the BSE restrictions. Removal of the Chinese restrictions was likely to help.</p> <p>Unfortunately, the U.S.-China trade war got in the way. As a result of the retaliatory tariffs that China imposed in response to U.S. tariffs, most U.S. beef exports to China faced additional tariffs, beyond the normal Chinese tariffs, of between 10 percent and 35 percent, much higher rates than faced by their competitors in other countries. (Some of those competitors had negotiated free trade agreements with China, giving them an even bigger advantage).</p> <p>As shown in Table 1, after the 100 Day Action Plan, the United States increased its beef exports to China from a negligible amount to $63 million in 2018. That was a good start. However, that number is only a small fraction of the total growth of imports of beef into China in that period, from $2.6 billion to $4.9 billion. Imports from other major beef‐​exporting countries, including Argentina, Australia, Brazil, New Zealand, and Uruguay, all witnessed a much larger jump than U.S. beef did.</p> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="7bb700ad-2639-4da5-8955-542575ee6cd7" data-langcode="en" class="embedded-entity"> <p><img srcset="/sites/cato.org/files/styles/pubs/public/2020-01/infographic.jpg?itok=1rhRNGoB 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-01/infographic.jpg?itok=qZc2G9mV 1.5x" width="700" height="725" src="https://www.cato.org/sites/cato.org/files/styles/pubs/public/2020-01/infographic.jpg?itok=1rhRNGoB" alt="Table 1 Beef Imports in China (in Millions of USD)" typeof="Image" class="component-image" /></p></div> <p>For a long time, Chinese consumers preferred other meat products over beef, but as China has grown wealthier, their tastes have changed. As the table shows, their interest in beef has increased considerably. This is a development that U.S. producers should be able to take advantage of, but so far have done so only to a limited extent, whereas their rivals are moving much more quickly. Without a doubt, the Chinese retaliatory tariffs have been a significant factor.</p> <p>Now with the phase one deal in place, it is likely there will be a tariff waiver on the relevant agricultural products, which will give U.S. producers a better chance to compete. In addition, language in the deal on certain regulatory issues may also help boost beef exports to China. For instance, China promised to remove the age limit for U.S. cattle, which had prohibited sales of meat from cattle over 30 months old at the time of slaughter.</p> <p>However, U.S. beef sales will still face some hurdles: Their competitors have a big head start and have been developing relationships with Chinese customers for years; some competitors have free trade agreements with China and thus their products are subject to special, low tariffs; and China has had restrictions on sales of hormone‐​treated beef, which is a significant portion of U.S. production. (Under Annex 4 of Chapter 3, it looks like the issue of restrictions on hormone‐​treated beef will be addressed to some extent, which would be a big deal for U.S. producers.)</p> <p>Market‐​sharing managed trade arrangements are a bad way to approach trade agreements, but even putting that aside, there is still the question of whether they work. It will be interesting to see how the U.S. strategy is effective here. Regardless of how it plays out, a better strategy would have been to push for an agreement like the ones Australia and New Zealand have with China, in order to get China to lower its tariffs further, rather than just restoring them to the pre‐​trade war level.</p> Thu, 16 Jan 2020 17:17:56 -0500 Simon Lester, Huan Zhu https://www.cato.org/blog/us-beef-exports-china-are-rising-not-much Simon Lester discusses U.S.-China trade on NPR’s All Things Considered https://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-us-china-trade-nprs-all-things-considered Thu, 16 Jan 2020 12:36:17 -0500 Simon Lester https://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-us-china-trade-nprs-all-things-considered The UK and the EU Need a New Approach to Trade Remedies https://www.cato.org/publications/commentary/uk-eu-need-new-approach-trade-remedies Simon Lester <div class="lead text-default"> <p>Whatever your view is on the merits of the European Union, it would be hard to dispute that it is one of the most innovative international economic arrangements ever created. Its founders had a&nbsp;general vision, but it took a&nbsp;wide range of institutional and policy innovations during implementation to make it all work.</p> </div> , <div class="text-default"> <p><strong>Seeking institutional innovation</strong></p> <p>As the UK and the EU undertake the difficult process of undoing their relationship and developing a&nbsp;new one, there will be a&nbsp;need for some additional innovation. Trying to use traditional trade agreement obligations as a&nbsp;replacement for this deep and complex economic relationship will be insufficient.</p> <p>One area of particular difficulty will be trade remedies, which include tariffs imposed in response to import prices that are deemed too low (anti‐​dumping duties) and to foreign government subsidies (countervailing duties).</p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>As the UK and the EU undertake the difficult process of undoing their relationship and developing a&nbsp;new one, there will be a&nbsp;need for some additional innovation.</p> </div> </div> </aside> , <div class="text-default"> <p>The term ‘dumping’ is sometimes thrown around loosely in trade policy discussions, but it has a&nbsp;technical meaning that involves a&nbsp;determination of whether the export price of a&nbsp;product is ‘unfairly’ low. A&nbsp;tariff can then be imposed to counteract the impact of this pricing. With regard to subsidies, there is a&nbsp;calculation of the amount of the subsidy, and, similarly, a&nbsp;tariff is imposed to counteract it.</p> <p>The EU is one of the rare trade agreements that eliminates the use of trade remedies on internal trade. As a&nbsp;result, trade between the UK and other EU countries is not subject to trade remedies.</p> <p>I have argued previously that tariffs imposed as trade remedies are unnecessary and problematic here, and should be kept out of the UK-EU economic relationship. This relationship would be permanently soured by recurring claims of ‘unfair trade’ by one side or the other.</p> <p>Nevertheless, trade remedies are an established part of domestic trade policy and are difficult to avoid. Interest groups demand them, and it is hard to have a&nbsp;proper debate over their merits.</p> <p>The UK has already set up a&nbsp;Trade Remedies Authority to oversee a&nbsp;domestic trade remedies regime, and trade remedies are likely to be part of the future UK-EU economic relationship.</p> <p>But perhaps there is room for some innovation here that can make the situation better.</p> <p>One of the issues with the imposition of trade remedies is allegations of bias on the part of the domestic agencies who oversee things. These agencies are thought by many to favour the point of view of domestic industries who complain about unfair foreign trade, and to discount the arguments of importers and foreign producers.</p> <p>But what if the these bias concerns could be addressed with an institutional innovation? Perhaps the trade remedy process could be moved to the international level, with neutral adjudicators, rather than domestic agency officials, deciding the issues.</p> <p><strong>The WTO and NAFTA approach to resolving trade remedy disputes</strong></p> <p>As things stand now, domestic trade remedies are subject to challenge pursuant to the rules of the World Trade Organization on these issues (the Anti‐​Dumping Agreement and the Agreement on Subsidies and Countervailing Measures).</p> <p>If a&nbsp;government does not like how its companies were treated in a&nbsp;domestic trade remedy proceeding, it can bring a&nbsp;WTO complaint against the government responsible. As part of this complaint, the determinations by domestic agencies are reviewed to see whether — loosely speaking — they were reasoned and adequate, and consistent with WTO obligations. That process is useful, but it takes a&nbsp;good deal of time, and given resource constraints only a&nbsp;few domestic determinations&nbsp;are challenged each year.</p> <p>In the North American Free Trade Agreement — NAFTA — there is a&nbsp;unique set of rules that allow the companies subject to the trade remedy proceedings to bring a&nbsp;complaint against the determination themselves. A&nbsp;NAFTA panel will be set up to review the domestic agency’s decision for consistency with domestic law.</p> <p><strong>Going further</strong></p> <p>The WTO/NAFTA approach still allows the domestic agency to hear the case first. But instead of domestic agencies hearing the case initially, and then an international body reviewing that decision, we could start with an international body that would take the place of the domestic agency and examine each of the trade remedy elements:&nbsp;Whether dumping and subsidization took place, and in what amounts; and whether the domestic industry suffered injury as result.</p> <p>To this end, an international Trade Remedies Tribunal could be established by the UK and the EU and staffed with experts who would evaluate all of these issues and render a&nbsp;decision.</p> <p>If we take the traditional approach to trade remedies, it is sure to create tension between the UK and the EU. Companies subject to trade remedies generally believe the foreign agency that is imposing tariffs on them is behaving unfairly.</p> <p>They see these determinations as inherently biased, and a&nbsp;years long process of review at the WTO is of only limited help. If, on the other hand, the initial determination was international in nature, and therefore seen as more objective, it would have more credibility.</p> <p>It might seem like the wrong moment for international tribunals in UK-EU relations. The people in the UK who support Brexit are looking to get out from under institutions such as the ECJ.</p> <p>But tariffs are a&nbsp;special situation. There is not much appetite in the UK or the EU for new tariffs, and people are going to be surprised and unhappy that a&nbsp;tariff‐​free, quota‐​free UK-EU relationship will still involve tariffs under the normal operation of trade remedies.</p> <p>Thus, an independent tribunal that oversees these tariffs and ensures that they are legitimate and necessary could be acceptable here. This tribunal would not interfere with domestic regulation, as the ECJ does; it would only act as a&nbsp;check on tariffs.</p> <p>Ideally, of course, there would be no trade remedies at all between the UK and the EU, as is the case now. But the political realities suggest there will be. If we can limit their abusiveness, the UK-EU relationship will be more peaceful and stable.</p> </div> Thu, 16 Jan 2020 08:34:01 -0500 Simon Lester https://www.cato.org/publications/commentary/uk-eu-need-new-approach-trade-remedies Just Say No To UK-EU Tariffs https://www.cato.org/blog/just-say-no-uk-eu-tariffs Simon Lester <p>It’s hard to figure out sometimes whether Twitter reflects reality, but I’ve seen some <a href="https://twitter.com/snlester/status/1208152360041758720">discussion</a> there suggesting that as part of the Brexit negotiations, the UK and the EU may be negotiating about the extent to which they will impose tariffs on each other. My measured and calm response to this is as follows: Stop it, stop it, stop it! The following is a&nbsp;brief elaboration of that response.</p> <p>The debate over Brexit is a&nbsp;complex one. Oversimplifying quite a&nbsp;bit, from what I&nbsp;can tell, the majority of people in the UK hold the view that the economic integration aspect of the EU is good, but there is a&nbsp;sizable group that is concerned about the political integration aspect. Brexit is mainly a&nbsp;withdrawal from the political integration, but it necessitates a&nbsp;rethinking of the economic integration.</p> <p>There are several key components of the economic integration: Zero tariffs on trade between the UK and EU; a&nbsp;common external trade policy; and regulatory alignment (also some complicated stuff about <a href="https://www.bbc.com/news/science-environment-46264303">fishing rights)</a>. I&nbsp;want to focus here on the first one.</p> <p>EU economic integration involves zero tariffs and zero quotas on all trade among EU member states. That’s the status quo. That’s where we are now. And that’s a&nbsp;great achievement. You don’t often see that in economic integration agreements. Tariffs are generally lowered, but not eliminated.</p> <p>Normally, a&nbsp;trade negotiation would take place between countries who impose tariffs on each other, and they haggle over how much to bring them down. But the UK and EU are in a&nbsp;different situation, with a&nbsp;different starting point. There are no tariffs, so there should be nothing to haggle about it.</p> <p>What this means is that when the UK and EU start negotiating their new economic relationship, they don’t have to haggle about tariffs. They can declare at the outset that tariffs (and quotas) will stay at zero, and they can move on to other things.</p> <p>Now, there are some tariff‐​related issues they do have to talk about: Rules of origin (which products qualify as products of the UK or the EU and therefore benefit from the zero tariffs) and trade remedies (anti‐​dumping, countervailing duties, safeguards). I&nbsp;favor loose rules of origin and <a href="https://www.cato.org/publications/commentary/beware-unfair-trade-trap-any-brexit-deal">no trade remedies</a>, but I&nbsp;acknowledge that these are hard issues and there is no way to avoid discussing them in the negotiations.</p> <p>But with regard to ordinary tariffs, there is nothing to talk about. The current situation is great. Don’t mess with it!</p> <p>I’ve heard two specific arguments for bringing up the possibility of ordinary tariffs in the UK-EU negotiations. First, the EU might want tariffs on agriculture, for instance if the UK deregulates food safety (e.g. the famous <a href="https://www.huffpost.com/entry/transatlantic-chicken-littles-the-chlorine-is-falling_b_597d27d1e4b06b305561d172">chlorinated chickens</a>). But tariffs here make no sense. If the EU is concerned about imported UK products based on food safety issues, it can adjust its own regulations accordingly. Trying to set a&nbsp;tariff that accounts for the regulatory differences would be an ineffective approach.</p> <p>The second argument is that the UK’s new regulatory approach (whatever it may be) could lead to trade barriers, and tariff‐​free trade is a “bargaining chip” the EU can use as part of the negotiations on regulation. (This could go in the other direction as well). In my view, this is a&nbsp;dangerous tactic. The idea seems to be that the other side will be more afraid of losing tariff‐​free trade than you are, and thus will cave to your demands on other issues. But there is a&nbsp;big risk that by putting tariffs on the table, you don’t achieve your other goals and you just end up with tariffs.</p> <p>As hinted at in the previous two paragraphs, the really difficult issue is going to be regulation. As things stand now, the EU involves significant mutual recognition and some harmonization related to goods and services regulation, creating a “single market” for goods and many services. How do the two sides move to a&nbsp;new economic relationship that preserves as much of that as possible? There are no easy answers.</p> <p>But on tariffs, there is an easy answer:&nbsp;Stay away from the tariff haggling, and move directly to the real issues that need to be negotiated.</p> Mon, 23 Dec 2019 08:54:40 -0500 Simon Lester https://www.cato.org/blog/just-say-no-uk-eu-tariffs A Highly Restrictive North American Trade Pact https://www.cato.org/multimedia/cato-daily-podcast/highly-restrictive-north-american-trade-pact Daniel J. Ikenson, Simon Lester, Caleb O. Brown <p>The USMCA trade agreement among the U.S., Mexico, and Canada is moving forward, but forward into what? Simon Lester and Dan Ikenson discuss the deal’s terms.</p> Sun, 22 Dec 2019 09:41:47 -0500 Daniel J. Ikenson, Simon Lester, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/highly-restrictive-north-american-trade-pact Simon Lester discusses the U.S.’ approval of the U.S.-China trade deal on CTV https://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-us-approval-us-china-trade-deal-ctv Fri, 20 Dec 2019 12:59:23 -0500 Simon Lester https://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-us-approval-us-china-trade-deal-ctv The USMCA Is Moving Forward (Too) Quickly https://www.cato.org/blog/uscma-moving-forward-quickly Simon Lester, Inu Manak <p>Despite some last‐​minute additions that make substantial changes to the deal, the congressional approval process for the <span>U.S.-Mexico-Canada Agreement (USMCA) </span> is hurtling forward. The House <a href="https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/USMCA%20Final.pdf"><span><span><span>implementing bill</span></span></span></a><span> was posted late Friday afternoon. As per the </span><a href="https://fas.org/sgp/crs/misc/R43491.pdf"><span><span><span>Trade Promotion Authority</span></span></span></a><span> (TPA) rules under which the agreement was negotiated, Congress will cast an up or down vote on this bill, with no amendments. A&nbsp;vote is expected in the House on Thursday, with a&nbsp;Senate vote likely coming in January.</span></p> <p><span>There are over 200 pages of text in the implementing bill, and there is a&nbsp;lot of detail spelled out therein about how the agreement will operate as part of U.S. law. We want to highlight here three issues of importance</span>—<span>we offered a&nbsp;discussion of a&nbsp;broader range of issues <a href="https://www.cato.org/blog/evaluating-new-usmca-0">here</a></span>—<span>and how the implementing bill addresses them. T</span>hese issues warrant careful deliberation and consideration before a&nbsp;vote is cast, although they may not get it.</p> <p><span>First, one of the biggest trade issues in the USMCA is the extent to which the agreement pulls back</span>—<span>as compared to NAFTA</span>—<span>from free trade in autos and auto parts between the U.S., Canada, and Mexico. At least on paper, it will now be much harder to fulfill the conditions for qualifying for zero tariffs on these products. However, there is still a&nbsp;question of how these conditions will be applied in practice. The implementing legislation creates a&nbsp;new interagency committee for the purpose of reviewing the operation of the updated, and far more stringent, rules of origin (RoO) requirements for automotive goods. Rules of origin are part of every trade agreement and specify the amount of production that has to happen within the territory of the parties to the agreement in order to qualify for a&nbsp;preferential duty. RoO can have a&nbsp;big impact on whether or not companies even bother to utilize the preferential rates of a&nbsp;trade agreement (if they are </span><a href="https://www.cato.org/blog/protectionist-love-child-labor-left-nationalist-right"><span><span><span>too burdensome</span></span></span></a><span>, sometimes companies just pay the normal tariff rate). </span></p> <p><span>In Section 202A, Special Rules for Automotive Goods, the legislation creates an interagency committee to implement these rules. The Chair of the interagency committee is the U.S. Trade Representative. It also includes the Secretary of Commerce, the Commissioner of Customs and Border Protection, the Chair of the International Trade Commission, and “Any other members determined to be necessary by the Trade Representative.” This oversight mechanism places a&nbsp;significant amount of discretion in the hands of the executive branch in implementing these new rules. There is no role for Congress here. Such an important change to a&nbsp;highly integrated manufacturing sector across the three countries warrants, at the very least, a&nbsp;consultative role for Congress. How these provisions are implemented will have a&nbsp;significant impact on how much the new rules raise the cost of manufacturing autos in North America.</span></p> <p><span>The second issue is one of the biggest changes announced last week: There is a&nbsp;<a href="https://ielp.worldtradelaw.net/2019/12/a-first-look-at-the-new-labor-provisions-in-the-usmca-protocol.html">vast and uncertain new process</a> created to oversee Mexican labor reforms, including special panels to review practices at specific Mexican factories (someone on Twitter referred to this as a&nbsp;<a href="https://twitter.com/toddntucker/status/1204888244212699137">Labor Avengers Squad</a>). </span>Again, there will be an interagency committee to decide whether to pursue cases; there will be U.S. labor attach<span>é</span>s assigned to monitor the situation in Mexico (this caused some outrage in Mexico, resulting in a&nbsp;<a href="https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/december/ustr-responds-mexico-usmca">letter</a> from Ambassador Lighthizer to smooth things over); there will be the possibility of “rapid response” panels made up of independent labor experts to evaluate specific complaints; and the remedy will be penalties applied to imports from the factories in question. There is definitely the potential here for a&nbsp;litigation boondoggle and a&nbsp;powerful new mechanism to restrict trade.</p> <p><span>And finally, with regard to congressional/​executive separation of power issues, one of the most important parts of the implementing bill is the provision that explains how the “sunset clause” will function. We addressed problems with the </span><a href="https://www.cato.org/publications/commentary/new-naftas-sunset-clause-ticking-time-bomb"><span><span><span>sunset clause</span></span></span></a><span> late last year when the USMCA was signed. The most troubling aspect of the legislation is that it appears the role of Congress will only be consultative, as described in Section 611, Participation in Joint Reviews with Canada and Mexico Regarding Extension of the Term of USMCA and Other Action Regarding USMCA. </span>Consultations are great, but t<span>he most important element of congressional involvement is not addressed: a&nbsp;vote. While USTR is obligated to <em><span>consult </span></em><span>with Congress regarding the review of the agreement, Congress does not have a&nbsp;final say on whether or not to extend the agreement. This is a&nbsp;problem, as it means that the executive has the sole power to decide whether or not to extend the USMCA as part of the joint review/​sunset clause process.</span></span></p> <p><span>Similarly, in Section 621 on Termination of USMCA, no additional clarity is provided with regard to USMCA Article 34.6 (the withdrawal provision). In the context of NAFTA and other trade agreements, there has been a&nbsp;big debate on who has the power to withdraw from trade agreements. Through this implementing legislation, there was a&nbsp;chance to clarify that Congress has a&nbsp;crucial role, and that a&nbsp;president cannot withdraw on his/​her own. A&nbsp;failure to clarify this issue here is a&nbsp;missed opportunity.</span></p> <p>Many politicians and interest groups involved in the debate over the fate of NAFTA seem eager to put everything behind them and ratify USMCA as quickly as possible. We think it is worth discussing and debating what’s in USMCA first. A&nbsp;lot of these changes will have serious consequences, and it’s worth understanding them better before plunging forward.</p> Mon, 16 Dec 2019 17:34:06 -0500 Simon Lester, Inu Manak https://www.cato.org/blog/uscma-moving-forward-quickly A Few Details on the US‐​China “Phase One” Trade Deal https://www.cato.org/blog/few-details-us-china-phase-one-trade-deal Simon Lester, Huan Zhu <p>Last Friday, the U.S. Trade Representative’s Office released a “<a href="https://ustr.gov/sites/default/files/US-China-Agreement-Fact-Sheet.pdf">fact sheet</a>” about the U.S. — China trade deal that it had just announced. Reports suggest that the deal will be signed in early January, with the text released some time after that. A&nbsp;full analysis of the deal will have to wait until then, but in this post, we offer some comments on the details set out in the fact sheet.</p> <p>The first issues mentioned are intellectual property and technology transfer. The fact sheet addresses these as follows:</p> <blockquote><p>• Intellectual Property: The Intellectual Property (IP) chapter addresses numerous longstanding concerns in the areas of trade secrets, pharmaceutical‐​related intellectual property, geographical indications, trademarks, and enforcement against pirated and counterfeit goods.</p> <p>• Technology Transfer: The Technology Transfer chapter sets out binding and enforceable obligations to address several of the unfair technology transfer practices of China that were identified in USTR’s Section 301 investigation. For the first time in any trade agreement, China has agreed to end its long‐​standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a&nbsp;condition for obtaining market access, administrative approvals, or receiving advantages from the government. China also commits to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms. Separately, China further commits to refrain from directing or supporting outbound investments aimed at acquiring foreign technology pursuant to industrial plans that create distortion.</p> </blockquote> <p>With regard to these issues, two points are worth noting. First, there are already rules on these issues at the World Trade Organization (the “For the first time in any trade agreement” claim related to forced technology transfer is <a href="https://ielp.worldtradelaw.net/2018/12/new-eu-consultations-request-on-alleged-chinese-forced-technology-transfer.html">not accurate</a>). When the text of the U.S.-China&nbsp;deal is released, it will be interesting to compare and see if there is anything new here, or if the deal just restates existing WTO obligations.</p> <p>Second, China was in the process of making domestic law changes in these areas anyway (examples can be found in a&nbsp;new <a href="https://www.scmp.com/news/china/article/2179723/china-releases-details-new-law-foreign-investment-ahead-trade-talks-us">Foreign Investment Law</a>, and in 2019 Chinese&nbsp;amendments to&nbsp;its Trademark Law and pending revisions to its Patent Law), so the commitments in this deal will not necessarily lead to any new legislative actions.</p> <p>Next up is agriculture:</p> <blockquote><p>• Agriculture: The Agriculture Chapter addresses structural barriers to trade and will support a&nbsp;dramatic expansion of U.S. food, agriculture and seafood product exports, increasing American farm and fishery income, generating more rural economic activity, and promoting job growth. A&nbsp;multitude of non‐​tariff barriers to U.S. agriculture and seafood products are addressed, including for meat, poultry, seafood, rice, dairy, infant formula, horticultural products, animal feed and feed additives, pet food, and products of agriculture biotechnology.</p> </blockquote> <p>With regard to “structural barriers to trade,” there are rules at the WTO as well. Again, when we see the text, we can see if there is anything new here. In addition, China is having some problems with meeting its demands for agricultural products (most famously pork, due to an outbreak of swine flu), so it would not be a&nbsp;surprise to see an increase in Chinese purchases of these products.</p> <p>And on financial services, the fact sheet says:</p> <blockquote><p>• Financial Services: The Financial Services chapter addresses a&nbsp;number of longstanding trade and investment barriers to U.S. providers of a&nbsp;wide range of financial services, including banking, insurance, securities, and credit rating services, among others. These barriers include foreign equity limitations and discriminatory regulatory requirements. Removal of these barriers should allow U.S. financial service providers to compete on a&nbsp;more level playing field and expand their services export offerings in the Chinese market.</p> </blockquote> <p>China was in the process of <a href="https://www.cnbc.com/2019/10/16/china-opens-up-finance-industry-to-foreigners-as-trade-war-with-us-simmers.html">changing its domestic law here as well</a>, and there are also some existing WTO obligations in this area to compare this with.</p> <p>With regard to other issues, the fact sheet talks about currency, which will probably mean provisions similar to those in the U.S.-Mexico-Canada Agreement.</p> <p>And then there is a&nbsp;section indicating that China will buy a&nbsp;massive additional amount of U.S. exports of goods and services, as follows:</p> <blockquote><p>• Expanding Trade: The Expanding Trade chapter includes commitments from China to import various U.S. goods and services over the next two years in a&nbsp;total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion. China’s commitments cover a&nbsp;variety of U.S. manufactured goods, food, agricultural and seafood products, energy products, and services. China’s increased imports of U.S. goods and services are expected to continue on this same trajectory for several years after 2021 and should contribute significantly to the rebalancing of the U.S.-China trade relationship.</p> </blockquote> <p>Total U.S. exports of goods and services to China in 2017 was <a href="https://fas.org/sgp/crs/row/RL33536.pdf">$188 billion</a>. Exceeding that amount over the next two years by “no less than $200 billion” is a&nbsp;little hard to fathom. Do U.S. producers have that much to sell to China? Will there just be a&nbsp;shift of purchases by buyers and sellers, so U.S. companies sell less to the rest of the world and more to China? In a&nbsp;press conference last Friday, Chinese officials&nbsp;<a href="http://www.xinhuanet.com/fortune/2019-12/14/c_1125346014.htm">emphasized that trade expansion would be based on market principles and WTO rules</a>. How will this work when there is an express trade volume quota to meet?</p> <p>Finally, there is dispute resolution. The fact sheet tells us this:</p> <blockquote><p>• Dispute Resolution: The Dispute Resolution chapter sets forth an arrangement to ensure the effective implementation of the agreement and to allow the parties to resolve disputes in a&nbsp;fair and expeditious manner. This arrangement creates regular bilateral consultations at both the principal level and the working level. It also establishes strong procedures for addressing disputes related to the agreement and allows each party to take proportionate responsive actions that it deems appropriate.</p> </blockquote> <p>The fact sheet details are vague, but based on <a href="https://ielp.worldtradelaw.net/2019/02/internationalizing-unilateralism.html">other</a> <a href="https://ielp.worldtradelaw.net/2019/12/unilateral-enforcement-in-the-us-china-phase-1-trade-agreement.html">statements</a> by the Trump administration, it seems like this process will not involve neutral adjudication of disputes about compliance. Rather, if consultations fail, the United States will simply decide on its own whether China is in violation of the agreement, and then decide on its own what tariff penalties are appropriate. In our view, this is not really a&nbsp;dispute resolution mechanism, but simply a&nbsp;process to restart the tariff war if one side is unhappy with the arrangement (and which could have been restarted without such a&nbsp;provision in place). But this is still a&nbsp;bit speculative, and we need to see the final text first.</p> Mon, 16 Dec 2019 14:43:31 -0500 Simon Lester, Huan Zhu https://www.cato.org/blog/few-details-us-china-phase-one-trade-deal Evaluating the New USMCA https://www.cato.org/blog/evaluating-new-usmca-0 Inu Manak, Simon Lester <p><span>Yesterday's biggest trade news was that the House Democratic leadership reached a deal with the Trump administration on changes to the U.S.-Mexico-Canada Agreement (USMCA), which was signed by Canada, Mexico and the United States last year. The agreement was an effort to renegotiate the North American Free Trade Agreement (NAFTA). Reception of the new deal was mixed, and after taking leadership of the House in January of this year, Democrats wanted to leave their own imprint on the new trade agreement. </span></p> <p><span>In light of yesterday’s announcement and today’s release of the <a href="https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Protocol-of-Amendments-to-the-United-States-Mexico-Canada-Agreement.pdf">Protocol of Amendment</a> by the Office of the U.S. Trade Representative, we repeat our <a href="https://www.cato.org/blog/grading-new-nafta">analysis</a> from October 2018 in this blog post, with updates to take into account the recent changes. This is by no means a comprehensive analysis, since there is a lot in the 2000-page document that makes up the USMCA, as modern trade agreements go well beyond traditional trade issues. Some of what is in there is good and some of it is bad (with many of the non-trade issues, there is likely to be disagreement as to which provision falls into which category). </span></p> <p><span>In this blog post, we offer our thoughts on some of the key provisions, after which we provide an initial overall assessment of the agreement. For each item, we indicate in a parenthetical whether there have been changes from the USMCA signed last year to the amendments released today. We break it down into the good, the interesting, the whatever, the worrying, the bad, and the ugly.</span></p> <p><span><strong>The Good:</strong></span></p> <p><span><strong><em>Canadian agriculture</em></strong> (no changes): In terms of liberalization in the USMCA, the most important component is the liberalization of Canadian agriculture imports, such as dairy products, eggs, wheat, poultry, and wine. Dairy market access was a key concern for the United States, which has long complained about Canada’s strict supply management and quota system. The Office of the United States Trade Representative (USTR) has noted the opening of Canada’s dairy market as a <a href="https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2018/october/united-states%E2%80%93mexico%E2%80%93canada-trade-fact">key achievement</a>, because it gives the U.S. additional access to what was agreed in the Trans Pacific Partnership Agreement (TPP). In addition, Canada agreed to give up a <a href="https://ipolitics.ca/2017/04/22/dairy-101-the-canada-u-s-milk-spat-explained/">pricing system</a> for certain types of milk, as well as expanding the U.S. quota for chicken, eggs, and turkey. On wine, the U.S. and Canada agreed in a <a href="https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/US%20CA%20Side%20Letter%20-BC%20Wine%20Letter%20.pdf">side letter</a> that the Canadian province of British Columbia (BC) would adjust its <a href="http://worldtradelaw.typepad.com/ielpblog/2017/02/is-the-us-complaint-on-bc-wine-measures-an-easy-win.html">measures</a> restricting the sale on non-BC wine in its grocery stores. The United States agreed to give BC until November 2019 to make this adjustment, before advancing a <a href="https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds531_e.htm">complaint</a> it already put forward at the World Trade Organization (WTO) on this issue. As of <a href="https://www.cbc.ca/news/canada/british-columbia/imported-wine-cider-allowed-on-bc-grocery-store-shelves-1.5207747">July 2019</a>, BC has allowed for imported wine to be sold in grocery stores. Canadian agriculture liberalization is the most positive part of the new agreement, as it gives U.S. producers greater access to the Canadian market, and will be good for consumers in Canada. </span></p> <p><span><strong><em>de minimis</em></strong>: The de minimis threshold for products that you buy online and can be imported duty free has been raised for Canada and Mexico. Since 2016, the United States allows people to purchase goods up to <a href="https://www.cbp.gov/newsroom/national-media-release/de-minimis-value-increases-800">$800 duty free</a>, and has been pushing for Canada and Mexico to raise their limits as well. It did not persuade them to do so in the TPP. In the USMCA, however, Canada raised its de minimis threshold to CAD $150—a significant increase from the previous CAD $20 limit. In addition, sales tax cannot be collected until the value of the product reaches at least CAD $40. This is good for Canadian consumers and small businesses making online purchases. Additionally, a <a href="https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/E-brief_Rights%20of%20Passage_June16.pdf">2016 study</a> showed that increasing the duty free limit would be cost-saving for Canada. Mexico also increased its de minimis level, from USD $50 to USD $100, with tax free de minimis on USD $50. USTR has <a href="https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2018/october/united-states%E2%80%93mexico%E2%80%93canada-trade-fa-1">noted</a> that this will be especially helpful for small businesses.</span></p> <p><span>There was, however, a <a href="https://www.cato.org/blog/how-footnote-usmca-undermines-economic-liberty">concerning footnote</a> in Article 7.8 that would allow the United States to <em>lower </em>its de minimis threshold to a reciprocal level of another party’s if that party’s de minimis is lower. This just means that the United States could potentially reduce its de minimis threshold to that of Canada or Mexico’s. This effort received bipartisan pushback, and reports <a href="https://www.reuters.com/article/us-usa-trade-usmca-taxbreaks/u-s-to-drop-item-on-tax-free-threshold-from-north-american-trade-pact-sources-idUSKBN1YE2TI">suggest</a> that in the final implementing bill, the footnote will be removed (though this is not specified in today’s amendments). This would be a positive development for preserving Congress’ role in regulating commerce.</span></p> <p><span><strong><em>State-to-state dispute settlement</em></strong>: In order to ensure that the obligations that have been agreed to in a trade agreement are followed, there needs to be an enforcement mechanism. Chapters 11, 19, and 20 of the original NAFTA are often bundled together as “dispute settlement” chapters, but they <a href="https://www.cato.org/blog/knowing-nafta-chapters-11-vs-19-vs-20">all do different things</a>. Chapter 20 is the basic provision that allows one government to complain that another government is not complying with its obligations. The original NAFTA Chapter 20 did not work very well, and unfortunately the original USMCA <a href="https://thehill.com/opinion/finance/409498-the-fundamental-flaw-in-the-new-nafta-deal">failed to fix</a> <a href="http://worldtradelaw.typepad.com/ielpblog/2018/10/the-us-mexico-canada-and-nafta-trade-deal-state-state-dispute-settlement.html" target="_blank">its flaws</a>. With the 2019 update, though, it looks like most of these problems <a href="https://ielp.worldtradelaw.net/2019/12/the-naftausmca-panel-blocking-issue-looks-like-it-has-been-fixed.html">have been fixed</a>. A roster of panelists will now by established by the date of entry into force of the agreement, and the formation of a panel can no longer be blocked. While we still have some questions regarding certain language, overall, this is a substantial improvement.</span></p> <p><span><strong>The Interesting:</strong></span></p> <p><span><strong><em>Investment protection/ISDS</em></strong> (no change): These provisions have been <a href="http://worldtradelaw.typepad.com/ielpblog/2018/10/the-us-mexico-and-maybe-nafta-trade-deal-investment-protectionisds.html?utm_source=feedburner&amp;utm_medium=feed&amp;utm_campaign=Feed%3A+ielpblog+%28International+Economic+Law+and+Policy+Blog%29">significantly scaled back</a>. We see this as a positive, because the evidence does not show much, if any, impact on investment flows due to these provisions. They mostly just mean lots of litigation and controversy. The business groups and GOP members of Congress who support these provisions have been willing to accept the change.</span></p> <p><span><strong><em>Regulatory cooperation</em></strong> (no change): One notable addition to USMCA was an expansive chapter on Good Regulatory Practices, which builds upon the TPP Regulatory Coherence chapter, the Canada-EU Comprehensive and Economic Trade Agreement (CETA), and <a href="https://www.cato.org/blog/regulatory-cooperation-makes-its-debut-nafta-round-2">bilateral initiatives</a> that have been in place between the U.S. and Canada, as well as with Mexico, since 2011. The key items in this chapter are provisions on increasing transparency in the regulatory process, providing a clear rationale for new regulatory actions, as well as encouraging cooperation on minimizing divergence in regulatory outcomes. The general idea is to make regulations less burdensome on trade. It will be interesting to see how this chapter functions in practice, but it appears to be the most comprehensive attempt to address this issue in any trade agreement the United States has signed.</span></p> <p><span><strong><em>Digital trade</em></strong> (no change): The digital trade provisions are very similar to what was in the TPP. In theory, these provisions can help facilitate e-commerce (the U.S. International Trade Commission says they will provide "certainty," but we <a href="https://nationalinterest.org/feature/will-new-nafta-boost-digital-trade-55707">are skeptical</a>). They are still untested and it is not clear what impact they will have. There were rumors that Democrats would push to remove language in the USMCA borrowed from Section 230 of the Communications Decency Act, which removes liability for third-party content hosted on online platforms, in addition to providing flexibility for these platforms to exercise a good-faith effort to moderate this content. However, after the amendment, this language remains in place, and the tech industry appears pleased with this status quo.</span></p> <p><span><strong>The Whatever:</strong></span></p> <p><span><strong><em>Chapter 19</em></strong> (no change): The special review mechanism for anti-dumping/countervailing duties in the famous Chapter 19 has been shifted to Chapter 10, but remains essentially the same. This provision does not have much, if any, commercial impact, but Canada insisted on keeping it nonetheless, and was able to push back on U.S. demands to eliminate it.</span></p> <p><span><strong>The Worrying:</strong></span></p> <p><span><strong><em>Currency</em></strong> (no change): This is the first trade agreement with binding provisions related to exchange rates, although not all of this chapter's provisions are enforceable. There are few concerns with Canada's and Mexico's practices in this area, so this provision is really just a marker to lay down for future agreements. The test of this provision will be if another country for which such concerns have been raised (e.g., Japan) agrees to it. While there may be real issues with currency intervention here and there, the problems here have been exaggerated, and have been used by politicians as an excuse to impose tariffs.</span></p> <p><span><strong><em>IP provisions</em></strong>: The intellectual property chapter strengthened IP protections, going beyond what was agreed to in the TPP. For example, in the original USMCA, the parties agreed to 10 years of data exclusivity for biologic drugs (up from 5 to 8 in the TPP), copyright protection to a minimum of the life of the author plus 70 years, and 75 years for copyrights not based on the life of a person. As part of the 2019 update, the provisions that established a 10-year market exclusivity period for biologic drugs were deleted, and certain other provisions were modified or removed as well.</span></p> <p><span><strong><em>Section 232 auto tariffs</em></strong> (no change): As part of the NAFTA renegotiations, Canada and Mexico had hoped to secure an exemption from the potential imposition of additional Section 232 tariffs on autos. However, instead of an outright exemption, there are two separate side letters to the USMCA for <a href="https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/US%20Canada%20232%20Side%20Letter.pdf">Canada</a> and <a href="https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/US%20Mexico%20232%20Side%20Letter.pdf">Mexico</a> that exempt a set quota of passenger vehicle imports and auto parts, as well as all light truck imports, from 232 tariffs that may be imposed in the future. The United States also agreed not to impose 232 tariffs on <a href="https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/US%20Canada%20232%20process%20side%20letter.pdf">Canada</a> or <a href="https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/US%20Mexico%20232%20process%20side%20letter.pdf">Mexico</a> for at least 60 days after the measure is imposed, allowing the U.S. to negotiate separate agreements within that timeframe. The exemption levels are high enough that all auto exports from Canada and Mexico could be exempt, which is good news. </span></p> <p><span>However, the principle is an awful one -- applying these tariffs and then establishing export quotas is bad policy and undermines the rule of law. Democrats should have pushed for a guarantee that our closest trading partners would not be impacted by future 232 action on autos. At this point, the whole issue may be moot, as the deadline has, arguably, now passed for the imposition of these tariffs.</span></p> <p><span><strong>The Bad:</strong></span></p> <p><span><strong><em>FTAs with China</em></strong>: The agreement <a href="http://worldtradelaw.typepad.com/ielpblog/2018/10/the-us-mexico-canada-aka-the-new-nafta-trade-deal-limit-ftas-with-nmes.html">discourages the NAFTA parties</a> from negotiating trade deals with non-market economies, which means China and a few others. (Canada and China were talking about negotiating an FTA, but those discussion were derailed by non-trade issues.) Generally speaking, a limitation in one FTA on negotiating another FTA is a bad idea. <a href="https://www.georgetownjournalofinternationalaffairs.org/online-edition/2019/2/28/the-canada-china-fta-in-peril-part-1-the-usmca-non-market-country-provision">We are skeptical</a> that the provision will have much impact, but it is nonetheless a bad precedent to set.</span></p> <p><span><strong>The Ugly:</strong></span></p> <p><span><strong><em>North American auto trade</em></strong>: The new rules of origin are likely to be extremely restrictive, raising costs for auto production in North America. This could lead to more production being done outside of North America, or higher costs for consumers. This is the most negative part of the new agreement. In order to qualify for duty free entry, regional value content (that is the amount of production that happens in North America) was increased from 62.5% to 75% (starting at 66%, to be increased over three years) for passenger vehicles. In addition, there are rules requiring that a portion of that content has to come from workers making at least $16/hr, a provision that is entirely targeted at Mexico. Finally, there is an additional Buy America provision that requires producers to source 70% of the steel and aluminum used in their production to originate in North America.</span></p> <p><span>The 2019 update made this final provision even worse by making the requirements for use of North American steel even more strict. Beginning at year seven after entry into force of the agreement “for steel to be considered as originating…all steel manufacturing processes must occur in one or more of the Parties,” including “the initial melting and mixing and continues through the coating stage.” This was a request not made by Democrats, but by USTR. It also includes the possibility to extend these restrictions to aluminum in ten years’ time.</span></p> <p><span>This is the part of the USMCA that takes a lot of the free trade out of the North American Free Trade Agreement. The specific impact will depend on how the provisions are implemented, which is likely to involve a big fight among various interest groups. It could also lead to the auto supply chain being significantly scaled back, with companies retaining the option of simply paying the 2.5% most-favored-nation tariff for cars instead of complying with the more stringent USMCA rules. At any rate, we can expect auto production costs to increase.</span></p> <p><span><strong><em>Labor rights</em></strong>: The labor rights provisions <a href="http://worldtradelaw.typepad.com/ielpblog/2018/10/guest-post-the-us-mexico-canada-aka-the-new-nafta-trade-deal-labor.html">go further</a> than past U.S. trade agreements. For some people on the left, this could offer a reason to support the agreement. If you are skeptical about including labor provisions in trade agreements, as we are, this is a negative aspect to the agreement. During the 2019 update, the House Democrats pushed for stricter enforcement of these provisions. What they wanted was for U.S. labor inspectors to have access to Mexican factories in order to evaluate whether they were meeting their obligations. Mexico resisted, however, and in the end what the parties agreed to was a new annex to the labor chapter (Annex 31-A), which sets up specialized expert panels who can hear complaints about these practices. </span></p> <p><span>There are a number of concerning elements regarding how the labor provisions and a new “facility-specific rapid response labor mechanism” will operate. First, the burden of proof has shifted to the defendant in demonstrating that the alleged violation is not in a manner affecting trade or investment between the Parties. Second, inspections are not eliminated, but rather incorporated into the panel process, to serve as a fact-finding exercise. This will ultimately put a heavier burden on Mexico in future labor disputes. Third, the use of remedies appears similar to U.S. antidumping petitions and is ripe for abuse. Finally, it is notable that there is not one, but two annexes, one between the U.S. and Mexico and another between Canada and Mexico. In theory, Mexico could bring a complaint against the United States, but Canada and the United States have no recourse to these panels between them. Such an action locks in symbolic asymmetry among the North American partners.</span></p> <p><span><strong><em>Sunset clause </em></strong>(no change): We have raised concerns about this issue <a href="https://www.cato.org/publications/commentary/new-naftas-sunset-clause-ticking-time-bomb">before</a>, because it triggers a renegotiation and possible termination after only six years in force. After six years, the governments will have to make a decision about whether to extend the agreement. If they do not extend, they have to make that same choice in years 7 through 16, after which the agreement will terminate if it has not been extended. The revised provision may end up being harmless if the parties decide to extend, but <a href="http://worldtradelaw.typepad.com/ielpblog/2018/10/the-us-mexico-canada-nafta-trade-deal-the-sunset-clause.html">there are risks</a>, and it would be better to take it out. As we noted <a href="https://www.cato.org/publications/commentary/new-naftas-sunset-clause-ticking-time-bomb">here</a>, one aspect of the problem with the provision is the transfer of power over trade agreements from Congress to the Executive branch. This unnecessarily politicizes the process as well, and leaves the future of the agreement to the whims of whoever is in the White House. Some of the negative impact of this clause could be alleviated by giving Congress a role in the process. Unfortunately, Democrats did not push for clarification on the role of Congress. Ideally, the implementing legislation could spell this out, but at this point it is hard to tell if this baked in uncertainty can be resolved. </span></p> <p><span>**********************</span></p> <p><span>Overall, the package agreed to here looks like a mixed bag. There are some good things, some bad things, and many unknowns. The biggest loss might be unseen, however. If only the Trump administration had just implemented the TPP, or had begun negotiating with countries with whom the U.S. did not already have a trade agreement, it could have achieved a great deal more trade liberalization. On the other hand, people may feel that the biggest gain was preserving most of the zero tariffs under the NAFTA. But somehow, just keeping what you already had does not seem like that big of a win to us. NAFTA needed an update, but it would have been better if that update had been carried out by a president who was a free trader.</span></p> <p>The next step for ratification is to draft the implementing legislation and put it to a vote in Congress. The House seems ready to act right away, while the Senate may not act until January. In our view, the USMCA is a significant change from the status quo, and should not be rushed. It sets out the U.S. relationship with two of its main trading partners and allies, and also has an impact on a wide range of domestic policy. At this point, what we need is careful and deliberate consideration of this major new international economic arrangement.</p> <p></p> Wed, 11 Dec 2019 16:47:39 -0500 Inu Manak, Simon Lester https://www.cato.org/blog/evaluating-new-usmca-0 Simon Lester discusses the Trump Administration’s proposed tariffs on French products on Hearst TV https://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-trump-administrations-proposed-tariffs-french Fri, 06 Dec 2019 11:00:39 -0500 Simon Lester https://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-trump-administrations-proposed-tariffs-french China’s Implementation of the Rulings of the World Trade Organization https://www.cato.org/multimedia/events/chinas-implementation-rulings-world-trade-organization Weihuan Zhou, James Bacchus, Simon Lester <p>Does China comply with its obligations at the World Trade Organization (WTO)? Is the WTO system effective at dealing with China? Doubt about China’s behavior and the effectiveness of the WTO has been growing in both the popular press as well as among some U.S. trade experts and officials. One way to evaluate these questions is to consider China’s reactions to WTO complaints brought against it. Through a&nbsp;review of these complaints, including China’s response and its compliance record when there is a&nbsp;ruling, Zhou provides the most comprehensive analysis on this issue to date. His book’s conclusion may surprise some people: China’s implementation of WTO rulings has not been perfect, but it has been as good as that of other trading nations. In addition, we will discuss China’s compliance with its WTO obligations more generally.</p> <p>This forum tries to bring some objectivity to the analysis, and to help guide the United States and other countries in the ongoing debate about China’s participation in the world trading system.</p> Wed, 04 Dec 2019 11:46:59 -0500 Weihuan Zhou, James Bacchus, Simon Lester https://www.cato.org/multimedia/events/chinas-implementation-rulings-world-trade-organization Trade Justice Delayed Is Trade Justice Denied: How to Make WTO Dispute Settlement Faster and More Effective https://www.cato.org/publications/free-trade-bulletin/trade-justice-delayed-trade-justice-denied James Bacchus, Simon Lester <div class="lead text-default"> <p>International law is not known for being quick or effective. Cases can drag on for years, have limited legal force, and are infamous for noncompliance. Until recently, the World Trade Organization (WTO) dispute settlement process had served as a&nbsp;beacon of hope for being one of the fastest and most effective international dispute settlement systems in the history of the world.</p> </div> , <div class="text-default"> <p>It may still hold that title, but it has slowed down considerably. Cases take much longer to complete today than they did at the start of the WTO in 1995.</p> <p>These delays have undermined the WTO’s usefulness as a&nbsp;way to resolve trade disputes. Today, with the process so much slower, governments can have a&nbsp;three‐​year or longer “free pass” to implement illegal protectionist measures while litigation drags on. Even the most obvious violation of the rules can take a&nbsp;long time to adjudicate. For the rule of law to work, there must be some degree of timeliness in the litigation process.</p> <p>We are in the midst of a&nbsp;major crisis in WTO dispute settlement, as the United States has challenged various aspects of the Appellate Body’s operation and possibly its very existence. Although this crisis will be difficult to resolve, perhaps raising such fundamental issues offers an opportunity to think about a&nbsp;broader reform agenda. A&nbsp;key element of such reform should be finding ways to make dispute settlement faster and more effective. The adoption of reforms toward that end could be a&nbsp;positive step forward at a&nbsp;time when much of the world trading system is moving backward from trade liberalization and the rule of law.</p> </div> , <h2 class="heading"> The Big Slowdown in WTO Dispute Settlement </h2> , <div class="text-default"> <p>The WTO Dispute Settlement Understanding (DSU) sets out tight time frames for each stage of the litigation process. In its early years, WTO dispute settlement stayed close to those time frames. For a&nbsp;variety of reasons, many of those time frames have been abandoned. This section describes the formal timeline for a&nbsp;WTO dispute and provides data on how actual practice has diverged from the requirements.</p> </div> , <h3 class="heading"> DSU Time Frames for WTO Disputes </h3> , <div class="text-default"> <p>WTO dispute settlement has a&nbsp;number of key time frames built into it, with minimum and maximum periods for certain stages of the dispute as well as overall limits for the panel and appellate process.</p> <p>A WTO dispute begins with a&nbsp;formal request for consultations. A&nbsp;complainant can only move to the next stage, which involves a&nbsp;request for the establishment of a&nbsp;panel, after 60&nbsp;days have elapsed from the consultations request.<sup><a href="#_ednref1" id="_edn1">1</a></sup></p> <p>When a&nbsp;party does request a&nbsp;panel, it must place its request on the agenda of a&nbsp;Dispute Settlement Body (DSB) meeting, which requires 10&nbsp;days’ notice. The responding party is allowed to block the request at the first DSB meeting where it is on the agenda, but at the second meeting the panel will be established.<sup><a href="#_ednref2" id="_edn2">2</a></sup></p> <p>Once the panel has been established, panelists must be appointed. The parties may be able to agree on panelists, but if they cannot do so after 20&nbsp;days, either party may request that the WTO director‐​general compose the panel. Panel composition must take place 10&nbsp;days after this request.<sup><a href="#_ednref3" id="_edn3">3</a></sup></p> <p>After the panel has been composed, the litigation begins. As part of this process, there will generally be two rounds of written submissions, two panel meetings, and written questions from the panels to the parties. There is flexibility with the scheduling of each of these steps, but generally there are maximum periods set for the process as a&nbsp;whole. Article 12.8 of the DSU says, “the period in which the panel shall conduct its examination, from the date that the composition and terms of reference of the panel have been agreed upon until the date the final report is issued to the parties to the dispute, shall, as a&nbsp;general rule, not exceed six months.” And Article 12.9 says, “[i]n no case should the period from the establishment of the panel to the circulation of the report to the Members exceed nine months.”</p> <p>A panel will issue an interim report to the parties, who then can offer comments.<sup><a href="#_ednref4" id="_edn4">4</a></sup> The panel then issues the final report to the parties in the language in which the litigation was conducted. After translation into the other official WTO languages, the report is circulated to WTO members.</p> <p>After circulation, within 60&nbsp;days, the panel report will be adopted by the DSB or appealed.<sup><a href="#_ednref5" id="_edn5">5</a></sup> If it is appealed, Article 17.5 states that “[a]s a&nbsp;general rule, the proceedings shall not exceed 60&nbsp;days from the date a&nbsp;party to the dispute formally notifies its decision to appeal to the date the Appellate Body circulates its report.” But it also says that “[i]n no case shall the proceedings exceed 90&nbsp;days.” In the event of an appeal, a&nbsp;30‐​day adoption period applies.<sup><a href="#_ednref6" id="_edn6">6</a></sup></p> <p>After adoption of the panel report and/​or Appellate Body report, WTO members will be granted a&nbsp;reasonable period of time to comply with an adverse ruling.</p> </div> , <h3 class="heading"> WTO Dispute Time Frames in Practice </h3> , <div class="text-default"> <p>There will always be some variation in the time frames that WTO litigation follows, depending on the complexity of the case, scheduling issues faced by the parties, and the workload of panelists in their normal jobs, among other factors. Nevertheless, comparing the first 10 WTO panel reports to the most recent 10 WTO panel reports (as of this writing) provides a&nbsp;clear illustration of how cases take much longer today than they did at the start of the WTO in 1995. Time frames between panel establishment and circulation of the panel report to the public for the first 10 cases ranged from 226 to 455&nbsp;days.<sup><a href="#_ednref7" id="_edn7">7</a></sup> By contrast, today’s figures are around twice as long: time frames between panel establishment and circulation of the panel report to the public for the most recent 10 cases ranged from 365 to 1,117&nbsp;days.<sup><a href="#_ednref8" id="_edn8">8</a></sup></p> <p>Similarly, with appeals, the first 10 ranged from 57 to 114&nbsp;days (with 7&nbsp;of them being completed in 68&nbsp;days or less). A&nbsp;fair comparison with today is difficult because of the Appellate Body crisis that has resulted in a&nbsp;reduced number of Appellate Body members. However, if we count 10 cases beginning in January 2015, before the crisis emerged, we see a&nbsp;range of periods from 117 to 170&nbsp;days.<sup><a href="#_ednref9" id="_edn9">9</a></sup></p> <p>There are a&nbsp;number of possible explanations for this change: parties may be making a&nbsp;greater number of claims in cases these days; the wide‐​ranging jurisprudence that developed over the years makes litigating and judging more complex; and the WTO litigation culture has become more legalistic as the role of private lawyers has grown. Regardless of the reasons, the change in WTO litigation has been clear: it takes much longer for parties to have their complaints litigated today.</p> <p>To take a&nbsp;recent example, in <em>DS464: United States—Antidumping and Countervailing Measures on Large Residential Washers from Korea</em>, the total time between the request for consultations (August 29, 2013) and the end of the implementation period (December 26, 2017) was more than four years. The most time‐​consuming periods in the process were the 779&nbsp;days between panel establishment and the circulation of the panel report to the public (it was 630&nbsp;days between panel composition and circulation to the public); the 141&nbsp;days between the notice of appeal and the circulation of the Appellate Body report; and the 15 months set by the arbitrator for implementation.<sup><a href="#_ednref10" id="_edn10">10</a></sup></p> </div> , <h2 class="heading"> Possible Areas for Reform </h2> , <div class="text-default"> <p>Shortening the WTO dispute settlement process would be of great value. At the same time, there were reasons for the delays in the process that led to the long time frames. Thus, any changes could be politically contentious. What follows are suggestions for a&nbsp;number of areas where time frame reductions might be possible.</p> <p>At the start of the process, the time frame set aside for consultations is something carried over from the more diplomatic approach during the General Agreement on Tariffs and Trade (GATT) era. Of course, governments are always free to consult in advance of litigation. However, it may be desirable to allow governments the option of going straight to a&nbsp;panel request, as there are many disputes where formal consultations are unlikely to produce a&nbsp;resolution. In disputes where this option is taken, notice of perhaps 30&nbsp;days could be required before the filing of a&nbsp;panel request. This notice could include the same information that is currently included in a&nbsp;request for consultations.</p> <p>Next, before a&nbsp;panel is established, there are two related events that can slow the process down. First, establishment must take place at a&nbsp;DSB meeting. Second, at the first DSB meeting where establishment has been requested, the responding party can block establishment. The process could be streamlined by removing the ability to block the first panel request or even by allowing every panel request to lead directly to the appointment of panelists without a&nbsp;formal establishment step at the DSB. (Of course, DSB meetings could still provide a&nbsp;forum to talk about the disputes at this stage.)</p> <p>With regard to panel composition, the time frames for party agreement on composition and composition by the director‐​general are fairly short, but each one could be reduced by a&nbsp;few days. In many disputes, it takes the parties a&nbsp;long time to agree on panelists. Sometimes this reflects a&nbsp;hesitancy on the part of the complainant to move ahead with the process, but usually it is a&nbsp;consequence of the difficulty of securing agreement by the parties on who the panelists ought to be. The parties should be encouraged to speed up this process.</p> <p>Turning to the litigation stage in dispute settlement proceedings, there is only so much shortening that can occur. Litigation requires the presentation of arguments and evidence, which means written submissions and hearings. But there are some areas where change is possible. For example, instead of always having two panel meetings, one panel meeting could be the norm, and a&nbsp;second meeting could be held on an exceptional basis (as is the case in Article 21.5 compliance proceedings); panel meetings could be held over secure video calls rather than in person in Geneva; or there could be page limits for parties’ written submissions.</p> <p>A more systemic way to improve the efficiency of the panel process would be to rely on a&nbsp;standing body of panelists rather than continuing to draw panelists on an ad hoc basis in each dispute largely from the diplomatic community or broader trade‐​law community. Currently, most panelists have full‐​time jobs, and they have to fit in their panel work around their other work. It would be helpful if at least the panel chairs were full‐​time adjudicators. Establishing a&nbsp;standing body of panel chairs would continue to allow other panelists to be chosen from among the many other people in the world who meet the qualifications in DSU Article 8.1, thus making available a&nbsp;broad choice of expertise in disputes that are increasingly very highly specialized.<sup><a href="#_ednref11" id="_edn11">11</a></sup></p> <p>Shifting back to the litigation itself, one easy way to cut time from the process would be to remove the interim review stage. This stage largely consists of pointing out typos and grammatical errors, relitigating arguments that parties lost, and occasionally convincing the panel to slightly revise or, on rare occasions, reverse its conclusion. So long as there is an appeals process, this step does not add much to the resolution of disputes.</p> <p>The process could also be shortened by permitting the circulation of the panel report once it is issued to the parties in the language in which the proceeding was conducted, which would allow for the immediate filing of an appeal. Circulation in the other official WTO languages after translation has been completed would take place later.</p> <p>In addition to the litigation process, there is also the problem of the length of the reasonable period of time granted for implementation pursuant to DSU Article 21.3. This provision states: “If it is impracticable to comply immediately with the recommendations and rulings, the Member concerned shall have a&nbsp;reasonable period of time in which to do so.” Yet the word “immediately” in Article 21.3 has sometimes been overlooked.</p> <p>If the parties to a&nbsp;dispute cannot agree on a&nbsp;reasonable period of time for implementation, then the reasonable period of time is determined through arbitration under Article 21.3(c) of the DSU. This provision states: “In such arbitration, a&nbsp;guideline for the arbitrator should be that the reasonable period of time to implement panel or Appellate Body recommendations should not exceed 15 months from the date of adoption of a&nbsp;panel or Appellate Body report. However, that time may be shorter or longer, depending upon the particular circumstances.”</p> <p>In a&nbsp;long series of Article 21.3 arbitrations, arbitrators have frequently referred to “particular circumstances” that justify a&nbsp;longer period for implementation. On average, the length of time granted for implementation in these arbitrations has been 11 and a&nbsp;half months.<sup><a href="#_ednref12" id="_edn12">12</a></sup> In our view, generally, a&nbsp;period of 6&nbsp;months to one year should be long enough to navigate the domestic political processes that are needed to implement WTO rulings and recommendations.</p> </div> , <h2 class="heading"> Recommendations </h2> , <div class="text-default"> <p>As part of the transition from the GATT to the WTO, there was a&nbsp;shift to a&nbsp;more legalistic dispute settlement culture. Nevertheless, there are diplomatic elements to the system that remain, and some of these should be preserved, such as the DSB’s formal role in establishing panels and adopting panel reports. It is important to emphasize the value of settlements and not steer every trade dispute toward contentious litigation. At the same time, procedural delays that serve no diplomatic purpose simply undermine the process.</p> <p>With that in mind, we propose the following ideas for reform:</p> <p><strong>Eliminate the consultations requirement.</strong> Encouraging consultations is important because settling disputes is usually the best solution. However, a&nbsp;requirement that consultations occur before there is a&nbsp;panel request may be excessive in some instances. For example, the governments involved might have already raised and discussed the issue in a&nbsp;WTO committee. Or they might have directly spoken outside the context of the formal trade agreement. Provided notice is given to the responding party setting out the measures at issue and the claims of inconsistency of those measures with WTO obligations, complaining parties should have the option of requesting the establishment of a&nbsp;panel without first engaging in formal consultations under the DSU.</p> <p><strong>Eliminate the ability to block the first panel request.</strong> Diplomacy and settlement are valuable, but the ability to block the first panel request does not appear to contribute much to either. It only delays the beginning of the dispute settlement process. Governments can always talk and settle, but forcing them to take several extra weeks to establish a&nbsp;panel has a&nbsp;marginal impact. This provision, left over from the GATT, takes up more time without adding much value.</p> <p><strong>Eliminate the second panel meeting.</strong> The DSU provides for two meetings of the panel with the parties. At a&nbsp;time when communication was difficult, these meetings were useful. In the 1970s, if a&nbsp;GATT panel had follow‐​up questions for the parties after the first meeting, compiling written questions and conveying them to the parties was a&nbsp;major task. Today, by contrast, coordinating such questions and getting answers from the parties is fairly easy. For that reason, we think the second panel meeting could be eliminated.</p> <p><strong>Eliminate interim reviews.</strong> For cases where the information is available (some panels have not reported the relevant information), the average time between the issuance of the interim report and the issuance of the final report is about 48&nbsp;days.<sup><a href="#_ednref13" id="_edn13">13</a></sup> There is a&nbsp;lot of variation in that period — some interim reviews go quickly, while some take longer. Nevertheless, an interim review does not add much value to the process, and eliminating this step is worthwhile. At the least, the interim review meeting with the panel could be eliminated, and the scope of the review could be restricted to pointing out important factual errors made by the panel. Relitigating legal issues and correcting typographical errors is not worth this effort.</p> <p><strong>Establish permanent panel chairs.</strong> At a&nbsp;time when WTO disputes are becoming ever more complex, it makes sense to continue allowing the option to choose the majority of panelists from among experts in specialized fields, such as intellectual property or food safety. At the same time, the quality of the dispute settlement process is likely to be enhanced and the speed of the process accelerated when WTO panels are chaired by those with experience in the WTO dispute settlement system. Moreover, choosing experienced panel chairs is also likely to help ensure the security and predictability of the system. For these reasons, a&nbsp;standing body of panel chairs is needed.</p> <p><strong>Shorten compliance periods under DSU Article 21.3.</strong> WTO members and Article 21.3 arbitrators should adhere to the wording of the DSU. As a&nbsp;rule, WTO members should comply with WTO rulings and recommendations immediately. Only “[i]f it is impracticable to comply immediately with the recommendations and rulings” should they do otherwise. Mere political inconvenience should not be considered evidence of immediate compliance being impracticable. Moreover, where Article 21.3 arbitration is needed to determine a&nbsp;reasonable period of time for implementation, the guideline of no more than 15 months should be treated as an outer limit, with a&nbsp;shorter time frame chosen whenever possible. Generally, where panel and Appellate Body rulings and recommendations cannot be implemented immediately, a&nbsp;period of six months to one year should suffice.</p> <p>Together, these reforms would help shorten the WTO dispute settlement process considerably, although the impact of some aspects, such as permanent panel chairs, is difficult to quantify. Referring to the example of <em>U.S.—Washing Machines </em>as noted above, reforms to the dispute settlement process should aim to reduce the total time between the filing of the complaint and the end of the implementation period to two and a&nbsp;half or three years instead of the more than four years and four months that it actually took. The complexity of WTO litigation today compared with what was anticipated in 1995 means that the original DSU time frames may not be achieved, but a&nbsp;significant improvement is possible nonetheless. To some extent, the culture of the litigation process will be crucial to these efforts, as the mindset of the panelists, the secretariat, and the members themselves will affect how much can be achieved.</p> </div> , <h2 class="heading"> Conclusion </h2> , <div class="text-default"> <p>The Trump administration has caused a&nbsp;crisis by raising questions about the role of the Appellate Body. The political axiom “never let a&nbsp;crisis go to waste” may be appropriate here. With so much attention on WTO dispute settlement, it is worth directing that <a id="_idTextAnchor000"></a>attention at a&nbsp;pressing problem: WTO disputes take too long, which means that protectionism stays in place longer than it should. An important step toward correcting this flaw is to adopt the reforms proposed above to speed up the process.</p> </div> Wed, 20 Nov 2019 03:00:00 -0500 James Bacchus, Simon Lester https://www.cato.org/publications/free-trade-bulletin/trade-justice-delayed-trade-justice-denied Does China Comply with Its WTO Obligations? https://www.cato.org/blog/does-china-comply-its-wto-obligations Simon Lester <p>Over on twitter and elsewhere, I&nbsp;often hear vague allegations along the lines of “China cheats on its WTO obligations” (<a href="https://www.baldwin.senate.gov/press-releases/play-by-the-rules-act">here’s something</a>&nbsp;from Senator Tammy Baldwin: “China has refused to play by the international trade rules they agreed to and they should be held accountable”).</p> <p>There are two aspects to the issue of China’s compliance with WTO obligations. First, when governments file WTO complaints against China, how does it respond in general and, more specifically, does it comply with WTO rulings against it? And second, does China comply with its WTO obligations more broadly?</p> <p>Along with my Cato colleagues Jim Bacchus and Huan Zhu, I&nbsp;tried to answer the first question in <a href="https://www.cato.org/publications/policy-analysis/disciplining-chinas-trade-practices-wto-how-wto-complaints-can-help">a&nbsp;policy paper</a> last year. Now law professor Weihuan Zhou has written <a href="https://www.bloomsbury.com/au/chinas-implementation-of-the-rulings-of-the-world-trade-organization-9781509913558/">an entire book</a> on the subject. Our conclusions are similar: China may not be perfect, but it does a&nbsp;reasonably good job of responding positively to WTO complaints and complying with rulings against it. This conclusion becomes even more apparent when you compare China’s behavior to that of other Members, including the United States and the European Union, who have ignored rulings in several WTO cases.</p> <p>The more difficult question is whether China complies with its WTO obligations more broadly. That’s a&nbsp;hard question to answer without the development of facts and the discussion of law that comes about as part of WTO litigation on a&nbsp;particular case. You will see many allegations that China is not complying with the rules as a&nbsp;general matter, but without a&nbsp;detailed elaboration of the particular government actions at issue and the legal obligations that apply, it’s hard to evaluate these claims.</p> <p>If these issues interest you, I&nbsp;encourage you to come to our Cato book forum for Weihuan’s book at noon on December 4, where I&nbsp;will be moderating and Jim will be offering comments. You can register here: <a href="https://www.cato.org/events/chinas-implementation-rulings-world-trade-organization">https://​www​.cato​.org/​e​v​e​n​t​s​/​c​h​i​n​a​s​-​i​m​p​l​e​m​e​n​t​a​t​i​o​n​-​r​u​l​i​n​g​s​-​w​o​r​l​d​-​t​r​a​d​e​-​o​r​g​a​n​i​z​ation</a></p> <p>We will discuss both of the issues noted above, as well as China’s participation in the WTO and U.S.-China trade relations generally. Some additional questions we will try to tackle are: Are the current terms of China’s WTO participation “fair”? What changes, if any, need to be made? Are there WTO rules that can be used to bring cases against China, but have been overlooked?&nbsp;What is the best way for the U.S. government to address China’s state intervention in its economy? How do the efforts of past administrations compare to those of the Trump administration? What should the next administration do?</p> Tue, 19 Nov 2019 09:25:02 -0500 Simon Lester https://www.cato.org/blog/does-china-comply-its-wto-obligations Negotiating Trade Deals with China https://www.cato.org/blog/negotiating-trade-deals-china Simon Lester <p>In the midst of the big U.S.-China trade talks/​tariff wars that are ongoing, it is worth noting some much smaller trade talks that have been taking place between New Zealand and China. The basic story is that New Zealand and China signed a trade deal in 2008, and have just now completed an “upgrade” to that deal. There are some differences in the nature of the U.S.-China talks and the New Zealand‐​China talks, but nevertheless, there may be some lessons to draw from the New Zealand‐​China situation.</p> <p>The first thing to mention is that both sides consider the original deal to be a success. Here’s how New Zealand <a href="https://www.mfat.govt.nz/assets/Trade/China-FTA-Upgrade/NZ-China-FTA-Upgrade-Outcomes-Document-Final.pdf">described it</a>:</p> <blockquote><p>The New Zealand‐​China Free Trade Agreement (FTA) has been a success story. Since the FTA came into force in 2008, two‐​way trade (exports and imports of goods and services) has more than tripled from $9 billion to over $32 billion, and the FTA has been a catalyst for trade and economic cooperation between our countries.</p> </blockquote> <p>Like most economists, I am skeptical that we can learn much from bilateral trade balances, but nevertheless, take a look at the evolution of the <a href="https://www.stats.govt.nz/news/new-zealand-trade-in-the-red-with-eu-in-the-black-with-china">New Zealand‐​China trade balance</a> after the agreement was signed, after which New Zealand’s deficit turned into a surplus:</p> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="e8e98722-8372-48a3-b673-8212c934e1ca" data-langcode="en" class="embedded-entity"> <p><img srcset="/sites/cato.org/files/styles/pubs/public/2019-11/nz_china2.jpg?itok=rjEhps1E 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-11/nz_china2.jpg?itok=0yGaKC0T 1.5x" width="700" height="310" src="https://www.cato.org/sites/cato.org/files/styles/pubs/public/2019-11/nz_china2.jpg?itok=rjEhps1E" alt="Trade Balance with China" typeof="Image" class="component-image" /></p></div> <p>So what are New Zealand and China selling to each other?</p> <blockquote><p>In the March 2019 year, the top exports to China were milk powder, butter, and cheese, reaching $4.5 billion and accounting for one‐​quarter of New Zealand’s exports to China.</p> <p>Logs and wood were the second‐​largest export, worth $3.1 billion.</p> <p>Travel was also a significant contributor to New Zealand’s overall surplus with China, worth $3.0 billion. Spending by holidaymakers and international students made up most of this.</p> <p>…</p> <p>In the March 2019 year, imports from China were valued at $13.1 billion. Top imports were electrical machinery and equipment (such as mobile phones), mechanical machinery and equipment (such as portable computers), and textiles and textile articles (such as clothing).</p> </blockquote> <p>The upgrade to the FTA is not revolutionary, but rather just adds a bit of liberalization and updates a few provisions:</p> <blockquote><p>Trade rules and business practices have evolved significantly over the past decade. It is against this backdrop that New Zealand and China agreed in November 2016 to launch negotiations to upgrade the New Zealand‐​China FTA; to ensure the Agreement continues to reflect the modern realities of our dynamic trading relationship. Nine rounds of negotiations were held over three years in both New Zealand and Beijing. New Zealand and China announced the conclusion of the FTA upgrade negotiations on 4 November 2019 on the sidelines of the East Asia Summit.</p> <p>The upgrade will make the New Zealand‐​China FTA China’s most modern and highest quality FTA.</p> </blockquote> <p>Here are a <a href="https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-concluded-but-not-in-force/nz-china-free-trade-agreement-upgrade/key-outcomes-to-the-nz-china-free-trade-agreement-upgrade/">few examples</a> of the new additions:</p> <blockquote><p>New Zealand has secured tariff elimination, over a 10 year implementation period, on 12 wood and paper products.</p> <p>…</p> <p>Further operational improvements cover procedures for handling ’perishable goods’ (introducing expedited six‐​hour clearance times, release of such goods outside normal business hours and appropriate storage) as well as an extension of the scope of advance rulings in the existing free trade agreement.</p> <p>…</p> <p>new chapters have been added on competition policy, e‑commerce, government procurement and environment and trade.</p> <p>…</p> <p>The improvements include new market access in several service sectors, including:</p> <ul><li>Environmental services</li> <li>Airport operation services</li> <li>Speciality air services</li> <li>Ground handling services</li> <li>Audio visual services.</li> </ul></blockquote> <p>The New Zealand‐​China FTA was a much simpler negotiation than the one the United States is currently conducting. New Zealand was mainly pushing for basic liberalization, rather than the wholesale changes to the structure of the Chinese economy that the Trump administration is said to be asking for (although the “<a href="https://www.cnbc.com/2019/11/17/china-and-us-had-constructive-discussions-about-phase-one-trade-deal.html">phase one</a>” deal being talked about now is pretty limited). This made the negotiation much easier. New Zealand had a handful of products and services it wanted to sell more of to the Chinese, and it was able to achieve that.</p> <p>Despite these differences, I’m struck by the fact that an industrialized country was able to make a trade deal with China and was happy with the outcome, and then—without the use of tariffs!—was able to open up the text and negotiate further liberalization. In my view, some key lessons here are that it is important to be realistic about what can be achieved, and to be willing to give something in return.</p> Sun, 17 Nov 2019 19:23:27 -0500 Simon Lester https://www.cato.org/blog/negotiating-trade-deals-china Losing Ground to the EU on Trade with China https://www.cato.org/blog/losing-ground-eu-trade-china Simon Lester <p>Politico <a href="https://www.politico.eu/article/eu-and-china-strike-deal-on-protected-food-names/">reports</a> the following on a&nbsp;new EU‐​China trade agreement:</p> <blockquote><p>Beijing and Brussels have struck a&nbsp;deal to protect regional food names such as Gorgonzola, Champagne, Nanjing salted duck and Lapsang Souchong tea.</p> <p>The agreement protects <a href="https://ec.europa.eu/agriculture/sites/agriculture/files/newsroom/2017-06-02-gis.pdf" rel="noopener" target="_blank">a&nbsp;list of 100 European regional food specialties </a>in China and<a href="https://ec.europa.eu/agriculture/sites/agriculture/files/newsroom/2017-06-02-notice-pub.pdf" rel="noopener" target="_blank"> 100 Chinese delicacies in the EU</a>.</p> <p>…</p> <p>The deal is set to anger U.S. agriculture producers who say the EU is boxing them out of their main growing markets, as its system of geographical indications builds <a href="https://www.politico.eu/article/europe-eats-trumps-lunch/">an increasingly strong foothold</a> worldwide.</p> <p>Indeed, the agreement means that a&nbsp;cheese, for example, can only be labeled and sold as “Roquefort” in China if it was made in the French commune of Roquefort‐​sur‐​Soulzon. American blue cheese producers will have to find a&nbsp;different — lesser‐​known — name for their product.</p> <p>…</p> <p>People following the accord said that the EU’s goal is to expand the list to another 175 geographical indications, four years after entry into force of this agreement.</p> </blockquote> <p>Let me note a&nbsp;couple things here. First, I&nbsp;have a&nbsp;great deal of skepticism about geographical indications. To me, they mostly seem like a&nbsp;way to protect your products from competition. When the EU promotes these principles in trade deals, it spreads this protectionist idea to other countries.&nbsp;My former colleague Bill Watson wrote about these issues <a href="https://www.cato.org/publications/policy-analysis/reign-terroir-how-resist-europes-efforts-control-common-food-names">here</a>.</p> <p>Second, the U.S. government should actively push back against these EU policies. In general, the United States&nbsp;has done so, although I&nbsp;have not heard anything about this issue in relation to the U.S.-China talks of the past couple years. It should be a&nbsp;focus of U.S. trade talks, and if the Trump administration is ignoring it, they are making a&nbsp;big mistake.</p> <p>Finally, I&nbsp;will also point out that the EU was able to achieve this result without threatening China with tariffs. Perhaps there is a&nbsp;lesson there.</p> Tue, 05 Nov 2019 09:46:11 -0500 Simon Lester https://www.cato.org/blog/losing-ground-eu-trade-china Simon Lester discusses the new tariffs on European goods on NPR’s Marketplace https://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-new-tariffs-european-goods-nprs Thu, 17 Oct 2019 11:14:42 -0400 Simon Lester https://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-new-tariffs-european-goods-nprs