International Economic Law and Policy Blog

Guest Post: Are the USMCA’s rules of origin for automobiles enough to stop Chinese sourced parts coming into the US/Canada?

This is a guest post by Karen Soriano, a recent Masters graduate in international economic policy from the Norman Paterson School Of International Affairs

With President-elect Donald Trump’s frequent social media pronouncements on trade, it would be a futile practice to fact-check every claim made. However, recent comments by Trump have sparked a flurry of reactions from Canadian officials on the dangers of Mexico as a back door for Chinese goods to enter the US and Canada. In this regard, Ontario Premier Doug Ford stated:

“You look at Mexico, they're importing cheap products – undercutting our hard-working men and women not only here, but in the U.S. – from China. They're slapping a ‘Made in Mexico’ sticker on and shipping it up and taking our hard-working men and women’s jobs away from them. Unacceptable.”[1]

In the days following this statement, Deputy Prime Minister Chrystia Freeland made the following comment along the same lines: 

“We are perfectly aligned with the United States and that means we are not a back door to unfair Chinese traded goods. The same cannot be said about Mexico.”[2]

The Deputy Prime Minister further noted that Canada, unlike Mexico, had imposed tariffs on Chinese EVs and aluminum/steel, matching similar tariffs imposed by the U.S.

The perceived economic threat from China has many aspects these days, including the economic impact of Chinese imports on nascent industries and security concerns resulting from Chinese investment. In the context of the USMCA, as the Ford and Freeland statements allude to, one of the big concerns is that the rules of origin for autos may act as a loophole that allows Chinese auto parts used by factories in Mexico to be incorporated into finished vehicles sold in the U.S. and Canadian markets. This post explores the validity of this concern.

Auto Rules of Origin

Under the USMCA’s rules of origin, in order for a passenger vehicle to receive preferential treatment it must contain a regional value content (RVC) of 75%. This leaves only 25% of the car’s value to be potentially sourced from China. Moreover, the difficulty of meeting this threshold is increased, as there are different RVC thresholds for different parts of the car (core parts: 75%, principal parts: 70%, and complementary parts: 65%). Particularly significant is the core parts threshold, which includes the engine of a car, and in the case of an electric vehicle, the battery. Core components make up nearly 50% of a car’s value and in the case of electric vehicles, the battery alone makes up 40% of the value. This implies that an engine or battery wholly sourced from China would make the car ineligible for preferential treatment. This is particularly significant if one of the main Canadian concerns relates to its nascent electric vehicle industry.

Two more factors to take into consideration that limit Chinese components' presence in a USMCA-traded vehicle are the labor value content and the steel and aluminum requirement. The labor value content rule requires 40% of the automobile to be made by workers earning at least US$16 per hour. This means that of the 75% RVC, 40% of that must be, practically speaking, produced in the US or Canada. The labor value content further reduces the window of opportunity to claim Chinese products as Mexican after assembly. As previously mentioned, especially in the case of an electric vehicle, a battery with Chinese components assembled in Mexico would cause the car to no longer qualify given its large contribution to a vehicle’s value.

Finally, if the concern is centered around dumped materials being used to create these components and how that would affect key Canadian industrial sectors (i.e. steel and aluminum), it is further required that 70% of the total steel and aluminum used for the vehicle must be sourced from North America. This would essentially imply that not even the raw materials could be imported into Mexico and then sufficiently transformed to meet the requirements.

If vehicles with a certain percentage of Chinese components cannot meet the USMCA’s rules of origin, they would likely be classified as non-USMCA products and subject to the 27.5% tariff for Chinese vehicles and 102.5% tariff for electric vehicles.

With all this in mind, a large influx of “unfair Chinese traded goods” stemming from Mexico in the auto sector, particularly for electric vehicles, is unlikely, as the existing rules place limits on how much Chinese content can be included in these vehicles and still qualify for the USMCA’s zero tariffs. While it does not come as a surprise that Canada would want to align closely with the US to avoid Trump’s new tariffs, concerns that Mexico could act as a backdoor in the auto industry are probably overblown.

Nevertheless, with Canadian officials expressing these concerns publicly, there is a good chance that revisions to the existing rules of origin could be put on the agenda for the 2026 USMCA review. The current rules are strict, but they can always be made stricter, and there are likely to be calls for making it even more difficult to qualify for the USMCA tariffs while using Chinese content in a finished vehicle.

 

[1] Ford calls for Mexico to be excluded from North American trade deal,

https://www.ipolitics.ca/news/ford-calls-for-mexico-to-be-excluded-from-north-american-trade-deal

[2] Canada shares U.S. concerns about Mexican trade with China as possible trade talks loom,

https://abcnews.go.com/International/wireStory/canada-shares-us-concerns-mexican-trade-china-trade-116027009

Will "Post-Neoliberalism" Mean Unfettered Markets or Unfettered Industrial Policy? (Or Are We Post-"Post-Neoliberalism" Now?)

There has been a lot of talk over the past eight years about whether we are now in a period of "post-neoliberalism," with efforts to flesh out exactly what that means for economic policy. To some extent, it even seemed as though there was an alliance between those on the left and those on the right who had objections to "neoliberalism" (although there is no consensus on what this term means), and I've seen a number of left-right anti-neoliberal alliances involving American progressives on the left and "populists" on the right. One thing people on the left seem to think post-neoliberalism should mean is less reliance on markets. Maybe that's what post-neoliberalism proponents on the right believe as well, but it has been a little harder to follow their arguments.

With Trump's victory, I have been curious about what the anti-neoliberal left wing's take would be on the future of economic policy. In their view, are we still in post-neoliberalism, but just with the right wing populist version of it in effect? Did Trump's first election set the shift in motion, Biden's governing philosophy cement things, and now under Trump again post-neoliberalism is the present and future? 

One prominent proponent of the left-wing post-neoliberalism movement is Financial Times columnist Rana Foroohar. In the middle of the Biden administration's industrial policy push, she was ardently making the case that we were in a post-neoliberal world. But now with Trump's second election, she seems worried that things have gone off the rails a bit, and that we are now headed for even more reliance -- even "unfettered" reliance -- on markets. In a recent piece entitled "The return of the techno-libertarians: Silicon Valley billionaires are selling a dream of unfettered markets — but reality is not so certain," Foroohar puts forward the view that under Trump, U.S. economic policy will now be based on a "a philosophy that aims to end all constraints on markets."

 

But is that really what the tech folks have in mind? Are they "libertarians" who want "unfettered markets"? Let me present an alternative theory of where U.S. economic policy may be headed.

 

There is clearly a tech crowd that has some influence with Trump at the moment, but what we are seeing from them is not full-fledged libertarianism. While we are likely to see some targeted deregulation in a few policy areas, another part of what they are looking for is more government spending on things they sell (space travel, defense tech, etc.), and this government spending is a form of industrial policy. Under this version of industrial policy, instead of picking winners based on ideas about overall the economic well-being of the country, private sector people who are trying to influence policymaking simply want to channel the industrial policy to ... well, themselves. (It might even be said that they are pushing for an almost "unfettered" industrial policy.)

 

Such a result should not be too surprising, and in fact this is one of the main reasons many of us have concerns about industrial policy. While there may be a handful of people who want to use industrial policy for what they see as benevolent central planning and are immune to lobbying, once the policy is in motion, it inevitably gets captured by interest groups. (Interestingly, Foroohar herself recognizes at times in her piece that the tech actors in question are seeking and getting lots of government money: "Trump’s band of techno-libertarian “volunteers” — as Musk rather disingenuously put it, given Tesla and SpaceX get more federal funding than NPR ..."; "As Trump builds his new administration, the gains have already been stupendous. Watch as Palantir takes over the military-industrial complex, ...")

 

With all this in mind, I'm not sure what is in store for "post-neoliberalism" going forward. The Biden administration certainly pushed its "anti-neoliberal" economic policy agenda pretty far, and then the Democrats fared poorly in the 2024 election. Will the Democrats go back to this same playbook next time they are in power? Or will they rethink what policies work politically? And if at least some of the post-neoliberal crowd on the left wants to disown the populist right wing version of post-neoliberalism, does anything remain of the alliance against neoliberalism? Perhaps now we are nearing the end of the debate over whether there was or is something called "neoliberalism" or "post-neoliberalism," and we can just focus the discussion on what degree of market-orientation we want the economy to have.

Foreign Savings and U.S. Budget Deficits

In the context of expressing concern with trade imbalances, a recent piece by Michael Pettis and Erica Hogan argues that high foreign savings in some countries (e.g. China and Germany) is linked to the growing U.S. fiscal deficit (among other things):

The global trade system is broken. Current trade rules allow and even incentivize the perverse flow of capital away from where it is most needed and most productive toward the wealthiest parts of the world. Beyond depriving countries of much needed investment, the global trade system reflects broader problems that negatively impact consumers worldwide. By failing to recognize that industrial policy acts as a form of trade policy, current rules have perpetuated a system characterized by large, persistent, trade imbalances. Taking advantage of the free flow of capital, surplus countries subsidize their manufacturing industries but pass on the costs of these subsidies to deficit countries.

This has had important implications for U.S. manufacturing, unemployment, and debt. American assets are among the most attractive in the world. As a result, countries that subsidize their production via industrial and trade policy are acquiring American assets to balance their surplus and, in turn, the United States is running trade deficits. Because surplus countries have subsidized their manufacturing at the expense of domestic consumption, the U.S. manufacturing industry has been forced to indirectly subsidize American consumption. This has caused the decline of American manufacturing and a shift of global manufacturing from deficit countries to surplus countries over the past five decades. It has also depressed U.S. savings rates through a combination of higher unemployment, higher household debt, investment bubbles, and an ever-growing fiscal deficit, all caused by the influx of excess savings from surplus countries.

(emphasis added)

The quote above attributes a lot of things to excess savings in foreign countries, but I want to focus here on the reference to "an ever-growing fiscal deficit." If I'm reading this correctly, they think that excess savings in other countries is a significant cause of the U.S. fiscal deficit.  

I have some thoughts on this, and may have expressed them on social media or even in some long forgotten blog post, but first let me point to a good response from Kim Clausing as part of an FT interview with Soumaya Keynes:

Soumaya Keynes:

... So just sort of analysing, thinking about some of the Trump team’s arguments about tariffs, one of the big bugbears you hear about is the size of the US trade deficit, right? And so this idea is it’s very large. I’m not talking about bilateral trade deficits here. I’m talking about the overall trade deficit. The idea is that that is the product of kind of global imbalances. Something needs to happen to get it in check. And of various imperfect options, tariffs are the best one.

Kimberly Clausing:

It’s quite unclear to most economists that look at this situation that the tariffs will on that improve the US trade deficit. So let me explain why that’s unclear. First, we need to know not just what happens to the volume of US imports, but what happens to the value of US imports. If we’re buying fewer of them at a higher price, right, that doesn’t change the total value of the imports. Second, we need to know what happens to exports. If our trading partners retaliate to our tariffs, that undoes the positive effects on the trade balance through the export channel. But perhaps even more fundamentally than those two questions I just raised, we know that trade deficits are basically the flip side of a savings and investment imbalance. So let me explain that.

The US every year consumes more than it produces. Right? We don’t save enough to fund all of our investment. And because of that, we must borrow from abroad. And the flipside of that borrowing from abroad is a large trade deficit. If you look at why it is that we consume more than we produce, a big factor there is the US budget deficit. And we’re forecast to have budget deficits in excess of 6 per cent of GDP for every one of the next 10 years, and that’s before you take into account any tax cuts including the extensions that we spoke of earlier. So the US has this massive fiscal imbalance and doesn’t have high savings rates. Yet we want to blame the rest of the world for the fact that we’re borrowing from them. So there’s something a little bit hypocritical about that.

Now you may say, OK, well, some other countries have imbalances of their own. China, Germany tend to run surpluses because they have distortions in their own economy. And so the US is just this recipient of all of this excess savings abroad. And, you know, I’m sympathetic to elements of that argument, but I just don’t think you can say that the US Congress is deciding every year to spend 6 per cent of GDP more than it raises in taxes because people in China and Germany have saved a lot. I just don’t see the mechanism there, maybe because that drives down global interest rates and therefore the deficit doesn’t seem as challenging. But I don’t think if you’ve met a few members of Congress that this is exactly what’s motivating that. I think it’s much more political considerations.

So I would suspect that absent a fundamental US macroeconomic adjustment or likewise adjustments in other countries, that our trade deficit will be every bit as large after these tariffs as it would have been before the tariffs, which is, by the way, exactly what we saw with respect to the China tariffs. It’s true we diverted some trade from China elsewhere, but it didn’t reduce the US trade deficit at all.

(emphasis added)

I think Kim is right that the explanation for U.S. budget deficits is mainly "political considerations." To elaborate on that a bit, my impression of U.S fiscal policy over the past 30+ years is that for the most part budget deficits have not been a major political concern, but every now and then something gets people motivated to rein them in. For example, in response to the 1990-1991 recession, and with Ross Perot making it an issue, the mid-1990s saw a concerted effort reduce deficits. Then after the 2007-2008 financial crisis and the Obama administration's stimulus, there was another effort. And in recent months, there has once again been some talk about reducing spending, although there has also been more concrete talk about lowering taxes, so I don't think it's likely we'll see a move towards fiscal balance soon. (Strangely, U.S. fiscal policy is somewhat pro-cyclical rather than counter-cyclical, with recessions often motivating people to balance the budget and strong economies leading to more borrowing).

The main point here is that explanations for U.S. fiscal policy come almost exclusively from domestic politics. Excess savings in other countries doesn't enter into the political thinking. As Kim says, there is a logic to how excess savings could drive down interest rates and make borrowing easier. But practically speaking, from what I've seen, I don't think that plays much of a role in the fiscal decision-making.

The trade policy upshot, of course, is that when you have both government savings and personal savings in the U.S. being relatively low, you end up with a trade deficit, which causes concerns for some people. But unless they are willing to address the macroeconomic causes, I don't think the trade deficit is going away.

Georgetown Law Looking for Executive Director of IIEL

I'm pleased to let readers know that Georgetown Law's Institute of International Economic Law is looking for a new Executive Director.  

Here's an excerpt from the posting:

The Institute of International Economic Law (IIEL) at Georgetown Law is seeking an Executive Director to lead the organization. IIEL is the focal point for the study of international economic law at Georgetown University and the leading center for international economic law and policy in the world. IIEL’s faculty includes scholars and practitioners at the forefront of all areas of international economic law including international trade, investment, tax, finance, economic security, development, fintech and monetary affairs. Engaged with students, legal practitioners, the DC and global policy communities, IIEL administers a robust calendar of executive education and academic programs. 

The full post with additional detail on desired qualifications and experience is available here:

https://georgetown.wd1.myworkdayjobs.com/en-US/Georgetown_Admin_Careers/details/Executive-Director--Institute-of-International-Economic-Law---Georgetown-University-Law-Center_JR19854.

 

Agreement on Climate Change, Trade and Sustainability (ACCTS) among Costa Rica, Iceland, New Zealand, and Switzerland, 15 November 2024

 

In mid-November 2024, four small trading states entered into an historic agreement.  Its purposes are stated as follows (Art. 1.1):

 

• removing tariffs on environmental goods;
• liberalising trade in environmental and environmentally related services;
• disciplining and eliminating harmful fossil fuel subsidies in order to mitigate their adverse impact on the environment and contribute to global efforts to rapidly reduce greenhouse gas emissions resulting from production and consumption of fossil fuels; and
• providing guidelines for voluntary eco-labelling programmes and mechanisms.

 

The ACCTS provides a general definition of “environmental goods,” Parties undertake to eliminate import and export duties on listed environmental goods.  (Arts. 2.5, 2.6)

 

The ACCTS provides a general definition of “environmental and environmentally related services,” as well as an Annex listing specific services to be included.  (Art. 3.3(c)).  Parties make market access (3.5), national treatment (3.6), and domestic regulation (3.10) commitments similar to those contained in the WTO GATS Agreement in relation to these services. 

 

As to fossil fuel subsidies (FFS), the ACCTS begins by providing a definition of FFS.  It follows the WTO Agreement on Subsidies and Countervailing Measures definition of a “subsidy,” except that it defines FFS as subsidies having a specific “benefit.”  Art. 4.3(b). The special benefit definition relates generally to subsidies that target generation, production, transport, marketing, or consumption of fossil fuels (as defined).  Parties are prohibited from introducing or maintaining listed FFS, and may not introduce other new FFS beyond a de minimis limit.  Art. 4.5.  There are a number of exceptions to these commitments, set out in Art. 4.6(2), including certain support to low-income, remote or vulnerable communities or population groups and public stockholdings for energy security. 

 

Perhaps most importantly, the ACCTS introduces a “’Standardised Carbon Rate Measurement’ (SCRM), [which] means the net total price applying to Carbon Dioxide (CO2) emissions from fossil fuel use as a result of policy instruments that increase or decrease the CO2 price, including carbon and energy taxes.”  (Art. 4.4). The SCRM mechanism is a facility pursuant to which parties may make binding commitments.   

 

Finally, Art. 5.4 set out a list of guidelines that the parties agree to promote for voluntary ecolabeling programs. 

 

Chapter 7 provides for binding arbitration as a form of dispute settlement regarding implementation of ACCTS. 

 

The ACCTS is open to accession by any WTO member, “subject to such terms and conditions as may be agreed between the Parties and the accession candidate and approved in accordance with the applicable legal procedures of each Party.” (Art. 8.6)

 

The environmental goods and services trade liberalization obligations seem to operate on an MFN basis, as appears to be confirmed by Art. 1.5:  “the Parties affirm their intention to apply this Agreement in accordance with their obligations under paragraph 1 of Article I of GATT 1994 and paragraph 1 of Article II of GATS.” 

 

This is an encouraging initiative that addresses important issues.   Especially intriguing is the possible utility of the SCRM, which is simply a facility for now.  The Remaking Trade Project has addressed the issues addressed by ACCTS in detail and identified a number of additional important issues that might be included in ACCTS in the future, or in other agreements.  These additional areas include reducing environmentally harmful subsidies beyond FFS, promoting sustainability-promoting subsidies, establishing standards for carbon border adjustments (here the SCRM provides an interesting basis for interoperability), establishing and ensuring permission for production standards to promote sustainability, and several others. 

 

 

 

 

Will Trump's Early Tariffs Be Used To Fight Digital Regulatory Barriers?

CNN reports that some of Trump's early tariffs might be used to fight foreign digital regulations:

The campaign has commissioned its own studies on the economic impact of these tariffs, with levies not far below the levels Trump has suggested, according to people familiar with the effort.

Some more targeted tariffs could be implemented sooner, these sources say. Trump has weighed a tariff on electric vehicles manufactured overseas, kvetching about how cheap Chinese electric vehicles are, compared to US EVs. And Trump’s advisers have expressed frustration with countries – like Canada and the European Union, for instance – that have slapped US tech companies with new taxes on their overseas profits, and retaliation could come soon.

“That’s directly in response to something the EU has already done,” one source said. “The EU is robbing US tax base. There’s a general view that the [broader] tariffs will come later.”

(emphasis added)

I have written about the issue of digital trade barriers in the context of some proposed Korean digital regulations (with a Korean colleague who has actual expertise on these regulations!). One of the underlying points I had in mind in that context was that, in my view, a core purpose of the world trading system is to discipline protectionism, and thus a situation where a domestic regulation merely has a disparate impact on foreign products/services is not necessarily a problem. In other words, disparate impact alone is not sufficient to find that the regulation violates trade rules. To determine whether such a regulation is a problem, I would look at the objective intent of the regulation (i.e., its design, structure, etc.). (As current U.S. Trade Rep. Katherine Tai once put it, "we have to really be cognizant that measures that may look like they have a discriminatory effect may or may not be advanced with a discriminatory intent.")

My sense is that many people in the trade policy field agree with this view, at least in broad terms, although there are quibbles about whether to look at intent as part of the obligations or the exceptions, as well as over what specific test should be used to determine the intent. 

On the other hand, I also have the sense that some people -- and importantly, people who are likely to be setting trade policy in the Trump administration -- have a different view of how to assess digital regulations. For them, at least in the context of U.S. companies selling abroad (I'm not sure how they see things when foreign companies are selling in the U.S.), if a foreign regulation has a disparate impact on U.S. companies, that is sufficient cause for the U.S. government to take action. And in the case of these particular digital regulations, the U.S. action seems likely to be unilateral.

For me, this approach leads to concerns about policy space or regulatory autonomy or sovereignty (or whatever your preferred term here is). I don't think the people who support this approach are as worried as I am though, and as the CNN article indicates, we may see early action here. (An alternative explanation is that they do, in fact, worry about these things, but in the context of the digital regulations in question, they believe they have evidence of the protectionist intent of the foreign governments. I have not seen that evidence presented though.)

Beyond the big picture questions about the appropriate scope of the trading system as it applies to domestic regulation, a practical question in relation to the Trump administration's response to foreign digital regulations is whether unilateral action will be effective in dissuading the foreign governments from adopting these regulations. From what I can see, unilateral action has not had a good track record in recent years (or in long ago ones). However, if the Trump trade folks go ahead with it on this issue (and others), we'll have more data to analyze so that we can make an assessment of exactly how effective it is these days.

ADDED:

Just to clarify, the CNN piece only mentions digital taxes, but in my previous writings on this subject linked to above, you can see former Trump administration trade officials explicitly targeting digital regulations. For the purposes of this post, I've lumped the taxes and regulations together.

Guest Post: Reining in the Foreign Subsidies Regulation through international investment law

This is a guest post from trade lawyer Victor Crochet and law professor Bin Ye

1. Comes the Foreign Subsidies Regulation

The European Union’s Foreign Subsidies Regulation entered into force a year ago. It grants the European Commission far reaching power to screen mergers and acquisitions as well as companies engaging in economic activities in the internal market to assess whether they have received foreign subsidies which distort that market. If it finds such subsidies, it can impose remedies ranging from blocking the transaction to divestment of assets and disclosure of R&D. The Commission has thus far used its new powers carefully. Although it raided the EU facilities of Nuctech, a Chinese X-ray scanner manufacturer, it has so far refrained from imposing any remedy. It has also scanned many mergers and acquisitions but has only taken action once. It recently agreed with the investors on conditions on the acquisition of PPF Telecom Group B.V. by Emirates Telecommunications Group Company PJSC, a telecom operator controlled by the United Arab Emirates’ sovereign wealth fund. These conditions took the form of commitments to not rely on certain beneficial bankruptcy laws available to Emirates Telecommunications and to not finance EU operations through the UAE entities.

The new powers granted to the Commission are so far relatively unchecked. EU law is unlikely to constrain them much (Nuctech Warsaw Company Limited and Nuctech Netherlands v Commission, Case T-284/24) and so are the rules of the World Trade Organization given the institution’s paralysis. In this post, we suggest that international investment law might fill in this gap. Indeed, remedies imposed by the Commission under the Foreign Subsidies Regulation will affect ongoing investments as well as established investments in the EU, which might result in violations of investment agreements. More broadly, as the EU continues to legislate, enacting new tools giving it executive powers in EU Member States such as the Foreign Subsidies Regulation, questions of responsibility and attribution under international law for the EU’s actions might become increasingly relevant.

2. substantive issues

For those investment agreements which cover the pre-establishment phase, the Foreign Subsidies Regulation’s merger and acquisition instrument is likely to lead to violations of the national treatment obligation. This is so because the merger and acquisition instrument under that regulation requires investors to notify the Commission of foreign financial contributions received before the transaction takes place and allows the Commission to block, or impose conditions, thereon. In such cases, action taken might constitute de facto discrimination. While this screening of merger and acquisition applies to all companies regardless of their nationality, foreign investors are much more likely to have received subsidies by non-EU governments than domestic ones. Subsidies by EU governments are covered under the EU State aid framework but there are salient differences between the EU State aid framework and the Foreign Subsidies Regulation which might lead to de facto discrimination: (i) the EU State aid framework applies to EU Member States directly (Article 108(3) of the Treaty on the Functioning of the European Union) and not to companies and (ii) there is a growing number of exceptions to the EU State aid framework (for example under Commission Regulation (EU) No 651/2014, known as the General Block Exemption Regulation) which are not available under the Foreign Subsidies Regulation.

Concerning investment agreements which only cover the post-establishment phase, actions taken by the Commission against established investment under the ex officio instrument are likely to also lead to violations of the national treatment obligation for the same reasons as explained above. They may also constitute unlawful expropriation. According to the Article 7 of the Foreign Subsidies Regulation, the Commission can impose on entities established in the EU commitments and redressive measures such as reducing capacity or market presence and divestment of certain assets. These measures can significantly deprive investors of their property rights and diminish the value of the investment. They might thus constitute expropriation which must be compensated under investment agreements.

3. no applicable agreements with the EU itself

The main issue however is that investors likely to be impacted do not come from countries which have investment agreements with the EU directly such as Canada. They come mostly from State-led economies such as Middle East countries and China. This is logical given that these countries’ economic model implies much greater government interventions and, hence, the likely provision of foreign subsidies. But these countries do not have investment agreements with the EU itself, they have such agreements solely with EU Members States.

In our view, this should not prevent affected from thinking redress under international investment law. They could do so by going after the EU Member State where the affected investment is located.

The first argument that could be developed in that sense is that the actions taken by the EU against the investment is attributable to the host EU Member State. In its award, the tribunal in Micula, S.C. European Food S.A v Romania stated that obligations undertaken under EU law cannot be used to depart from investment agreements. In the same vein, the delegation of power to the EU to regulate investment by EU Member States cannot absolve them from responsibility. This is particularly so if the investment agreement dates back to before the delegation of power regarding investment by EU Member States to the EU which took place mostly under the Treaty of Lisbon in 2009. Arguing otherwise would mean that a State can walk back protection it agreed to grant to investors by delegating enforcement powers to an international organization such as the EU (Dissenting opinion of Thomas Johnson, Sapec SA v Spain). Even in case the investment agreement dates back to after the delegation of power, it would mean an imbalance in the scope of coverage of the agreement between the parties. If the other party to the agreement was to take measures similar to those under the Foreign Subsidies Regulation by the Commission, these measures would fall within the scope of the agreement.

In that regard, Article 58 of the Articles on the Responsibility of International Organizations is useful given that the EU is technically an international organization. It provides that a State which aids or assists an international organization in the commission of an internationally wrongful act is internationally responsible for doing so if two conditions are met, namely that the State does so with knowledge of the circumstances of the internationally wrongful act and that the act would be internationally wrongful if committed by that State. In that sense, it could be argued that the actions of the Commission could be attributed to the host EU Member State if that Member State assists the Commission during the investigation, for example by conducting dawn raids and collecting evidence.

Similarly, Article 61 could be relied on if the host EU Member State pushes the Commission to act against an investor. It provides that State member of an international organization incurs international responsibility if, by taking advantage of the fact that the organization has competence for the relevant matter, it circumvents that obligation by causing the organization to commit an act that would have constituted a breach of the obligation for that State.

4. EU Member States’ obligations

But the standards to establish responsibility under these provisions are high. They might not provide an appropriate avenue in each and every instance.

Another solution is to use the standard of full protection and security enshrined in most investment agreements. While initially interpreted as covering the physical security of the investor, it has now been expanded to ensure regulatory security (CME v Czech Republic ). In that sense, EU Member States must guarantee the security of investors vis-à-vis EU actions to the best of their abilities (AAPL v Sri Lanka). This might not be an obligation of result, but it might mean that the host EU Member State must take all necessary actions to protect the investment. Indeed, as explained in Micula, S.C. European Food S.A v Romania, respecting obligations under EU law is no justification for not respecting commitments made under an investment agreement. This might imply refusing to cooperate with the Commission in conducting dawn raids and collecting information. It might also imply opposing any remedy imposed on the investor during the committee vote by EU Member States under Article 48 of the Foreign Subsidies Regulation and taking all possible actions to ensure that no remedy is imposed.

Similarly, arguments regarding the frustration of legitimate expectations under the fair and equitable treatment obligation (Tecmed v Mexico) could also be developed against a host State. This could be used where the host EU Member State makes specific representation that the investment will not be targeted under the Foreign Subsidies Regulation. However, the value of promises in this regard by the government of a host State which does not have the power to enforce the Foreign Subsidies Regulation remains unclear and so is the availability of this legal avenue as a result.

The Foreign Subsidies Regulation has proven to be a useful, and potentially needed, instrument in the EU’s toolbox given its own internal constraints on State aid. As it currently stands without much judicial oversight, it is however a pandora’s box, prone to abuse and likely to add fuel to the fire of ongoing geoeconomic tensions. International investment law might not be the ideal legal tool to curtail it. But it might be one of the only ones at hand.

Security Exceptions Redux

In April 2017, the US Secretary of Commerce initiated an investigation under Section 232 of the Trade Expansion Act of 1962 to evaluate the effect of imported steel and aluminium on national security. In 2018, the United States imposed Section 232 tariffs on foreign steel and aluminium products from several allies on the basis that a surge of increased imports adversely affected domestic production, which was essential for national security. Sharp, smart commentary characterised the actions as classic protectionism.

Several WTO Members brought claims to the WTO, arguing that the United States had raised tariffs in a way that was inconsistent with the disciplines set out in the GATT 1994 and the Agreement on Safeguards. At the time, policy analysis, including my own analysis, debated how the United States would justify these tariffs—what form and approach it would take when invoking the security exceptions of the GATT 1994.

But not just the 232 tariffs case was at the WTO’s doorstep. In an equally interesting dispute between the United States and Hong Kong (US–Origin Marking Requirement), the United States invoked security interests in August 2020 to defend a measure stating that imported goods ‘produced in Hong Kong … may no longer be marked to indicate “Hong Kong” as their origin but must be marked to indicate “China”.'

For both the US–Certain Steel and Aluminium Products and the US–Origin Marking Requirement cases, the United States adopted a position that (roughly) equated to: “We have always, since the inception of the GATT, taken the position that the security exceptions are wholly self-judging and, therefore, exclude any review of the challenged measures.”

However, separate WTO panels have found that the United States’ interpretation was incorrect.

As set out by the Russia–Traffic in Transit panel report, a WTO panel must first evaluate the circumstances under which a respondent Member took its challenged measures, as dictated by the interests protected. The crux of the panel’s objective assessment was whether the defendant, subject to an obligation of good faith, could adequately articulate its essential security interests based on the emergency at issue. After that, the panel could determine whether the measures were ‘minimally plausible’ to serve essential security interests (paras. 7.81, 7.1, 7.135-7.138).

To put a very long story short, all WTO panels have interpreted the applicable circumstances to invoke Article XXI of the GATT (or its equivalent in the TRIPS Agreement) narrowly to deter members from shielding protectionist measures. Members could not invoke the security exceptions to protect economic interests, but rather only ‘military and serious security-related conflicts.’ (Russia–Traffic in Transit panel report, para 7.81)

All WTO disputes to date have involved a respondent Member invoking a specific circumstance within the GATT security exceptions that required action taken ‘in time of war or other emergency in international relations’ within the meaning of subparagraph (b)(iii) of Article XXI of the GATT 1994. In US–Origin Marking Requirement, the United States committed to these circumstances somewhat begrudgingly, not genuinely finding itself in a position to argue anything else but not having the factual evidence to demonstrate that the ‘China’ mark of origin was necessary to protect US security interests in time of an international emergency (para 7.258). In US–Certain Steel and Aluminium Products, the United States also argued that the ‘publicly available information’ concerning its measures ‘could be understood to relate most naturally to the circumstances described in Article XXI(b)(iii).’ (para. 7.150).

As explained in more detail elsewhere, the WTO panels in US–Steel and Aluminium Products interpreted the terms ‘emergency in international relations’ in the sense of subparagraph (b)(iii) of GATT Article XXI as ‘equally grave or severe’ to ‘war’ in terms of the impact on international relations. The WTO panel report went further in the US–Origin Marking Requirement. It concluded that for an emergency to impact the US’s essential security interests, the United States must show that its relations with Hong Kong, China had reached a ‘point of breakdown’ to constitute an emergency in international relations (para 7.353).

The Origin Marking Requirement panel concluded:

As we know from daily media reports, we live in a world driven by a range of political, economic, social, and environmental tensions and divergences. At the same time, in the midst of these tensions and divergences Members will in most cases continue to manage their relationships within a range of international legal frameworks aimed at ensuring predictability and stability within the international system. Article XXI(b)(iii) stands for the principle that situations of war or other emergency in international relations represent an exception to this. (para 7.311)

The United States failed to provide evidence of such a breakdown.  In the US–Origin Marking Requirement, the United States’ evidence did not clarify the threats to US security arising from the Government of China and Hong Kong, China authorities’ actions concerning human rights and freedoms of people in Hong Kong and the autonomy of Hong Kong (panel report, paras. 7.331, 7.340, 7.345, 7.353). For the 232 tariffs, the United States could show a domestic emergency but not one that demonstrated a total collapse of relations – quite hard to do, considering the tariffs were imposed strategically on allies to address the United States’ overcapacity concerns stemming from Chinese exports. (US–Certain Steel and Aluminium Products panel report, para 7.155) Reading the reports together, the panels accorded deference to a respondent Member’s connection of means to ends. Still, they set a strict standard for identifying the circumstances that gave rise to the challenged measures.

In 2022, I found the WTO panel reports cumulative findings on identifying the circumstances concerning. Even while carefully evaluating the treaty’s meaning in textual and historical context, the reports’ restrictions on using the WTO security exceptions could have the opposite desired effect. Members could adopt harsher policies- such as terminating economic relations or actions of ‘near-comparable gravity’ – to show that peaceful or friendly relations no longer existed. Nothing prevents a government from walking this back years later, suggesting this might be a sound, short-term strategy, leaving the longer-term consequences for the future (assuming the United States is troubled with how they frame arguments in disputes involving security measures).

Could the intention to curb abuse of the security exceptions now form a part of a strategy that justifies an escalation of US-China tensions?

Some may wave this concern away, noting, for example, a bypass found in the indeterminacy of subparagraph (b)(ii) of GATT Article XXI, whereby a respondent Member takes action relating to the traffic of goods carried on for the purpose of supplying a military establishment. Invoking this provision would require factual evidence of a direct or indirect connection to military purposes. However, demarcating “strategic goods” based on an intrinsic military quality is unhelpful as an analytical limit to trade restrictions. All trade has the potential to be strategic. Invoking this subparagraph does not enable a respondent Member to evade the circumstances giving rise to security interests. Depending on the time and place, a “strategic good” can be nickel, grain, leather shoes, or munitions, making the review of trade restrictions in the name of security a complex endeavour.

Now, with speculation as to what the second Trump Administration will do, I worry that we are in a far more dire situation than in 2018. Knowing what Trump presented when campaigning, we have clues that the Trump Administration could withdraw (again) from the Paris Agreement, pull back from collective security commitments, and terminate its MFN treatment of China.

Should China bring a dispute to the WTO if the Trump administration imposes 60% tariffs on all Chinese imports or more, or any other WTO Member brings a dispute concerning across the board tariff increases, there may be scope to argue that such actions are ‘political’ or ‘economic’ (Panel Report, Saudi Arabia – IPRs, para. 7.263). This will come down to the facts presented.

When Russia first invoked the GATT security exceptions, swiftly followed by the United States, there were concerns that the turn to security exceptions would destroy the rules-based multilateral trading system. We know that since these WTO dispute settlement reports, the United States has sought to reform the WTO dispute settlement mechanism and the scope for judicial review of its security measures. In the e-commerce joint statement initiative, the United States has pointed out that the existing security exceptions text ‘falls short’.

In a future dispute, would Members be willing to have the United States declare a total breakdown of economic and diplomatic relations with China? Panels’ underlying intention was to limit the abuse of the security exceptions, but the effect of the reports could inadvertently provide the United States with the political cover it needs to take a much more extreme position if pushed to defend Trump 2.0 tariffs. In the end, Members might avoid pushing the United States to defend country exemptions and product exclusions on the basis that a political minefield is better than a divided world. Nevertheless, it might be wise to use litigation to illuminate negotiations and to make clear that the United States’ benefits with the system come with commitments.

 

 

* Complainants were China, Norway, Switzerland, and Turkey. Note that while not consolidated, the same panellists adjudicated these disputes, leading to four nearly identical reports: US–Steel and Aluminium Products (China) DS544, (Norway) DS552, (Switzerland) DS556, (Turkey) DS564.

Whither the Worker-Centered Trade Policy?

The Biden administration changed U.S. trade policy significantly when it adopted a “worker-centered” trade policy that justified entering into “frameworks” and not trade agreements. That policy didn’t win many accolades from the trade crowd. Many critics felt that it forewent critical opportunities by refusing to discuss market access in new trade contexts. Without getting into that debate, this post discusses whether the Biden administration’s worker-centered trade policy – and notably, use of that policy under the United States-Mexico-Canada Agreement (USMCA) Facility-Specific Rapid-Response Labor Mechanism (RRM) – will outlive the administration.

I think it will, but it will look different. And some, including labor rights advocates like myself, might prefer the Trump administration’s approach.

Before delving into the Trump trade agenda, a recap of the Biden administration’s worker-centered trade policy is in order. I won’t go deeply into it because I’ve discussed it at length both here and here. Relevant for our purposes is how that administration used the USMCA’s RRM – negotiated by the Trump administration – to assure U.S. trade unions, concerned members of Congress, and influential non-governmental organizations (NGOs) that it took worker rights seriously. It did so by aggressively enforcing the labor rights stipulated in the USMCA’s RRM in Mexican auto sector facilities; well, at least in politically advantageous auto sector facilities.

At Cornell University, I partnered with Alex Covarrubias-V, an expert in the Mexican auto sector at El Colegio de Sonora, and Cirila Quintero Ramirez, a labor union and feminist scholar at Unidad Matamoros, to ask workers in the Mexican auto sector directly about their experiences under the USMCA and its RRM. Our report is forthcoming at Cornell, but it can be found here in the meantime. We asked 130 Mexican workers about what they knew of their labor rights, unions, election procedures, and the RRM’s petitions and hotline processes.

In a nutshell, our study (albeit exploratory in nature) failed to find evidence that working conditions had improved in the Mexican auto sector despite the hundreds of thousands of dollars of U.S. assistance in Mexico and dozens of RRM cases USTR launched. That general finding stood starkly against the enormous benefits that some workers had received through direct assistance from the U.S. government under the USMCA RRM and its extensive remediation plans. Notably, all facilities that faced RRM investigations and remediation plans had workers who were assisted by U.S. unions and NGOs. While that transnational solidarity is a welcomed development, the disparity in empowerment and working conditions between those workers who were at facilities investigated under the RRM and those at facilities that had not raises significant questions about the object and reach of Biden’s worker-centered trade policy.

At this point, you might be asking why we’re talking about empowering workers in Mexico in the wake of a second Trump term. Many assume that the Trump administration merely agreed to include the USMCA RRM to appease a progressive Congress. Tomorrow’s Congress will look quite different following recent elections. With a Republican Congress, and with U.S. union support of current USMCA RRM enforcement, why should the incoming administration worry about broadening enforcement to encompass additional workers in the Mexican auto sector (or other trade and service sectors, for that matter) who are not affiliated with U.S. unions and NGOs?

Having spent four years working for Lighthizer’s Office of the United States Trade Representative, I’ll provide you two reasons that the new Trump administration will, or at least should, be thinking about expanding USMCA’s enforcement under the RRM to encompass more Mexican workers in trade sectors.

First, the RRM was more than a political compromise. It fits squarely within Trump’s objectives to ensure Mexican facilities pay workers the same wages and offer the same types of (costly) workplace benefits as U.S.-based facilities. Think about it this way: So long as facilities in Mexico avoid unions, pay low wages, and mistreat their workers, they produce goods and services for less, creating a competitive advantage in Mexico and incentivizing offshoring.

Those effects in Mexico directly hurt workers in the United States.

When companies in the United States move to Mexico to save on production costs, U.S. workers lose their jobs. When companies in the United States threaten to move to Mexico if workers do not accept their demands, workers lose their salaries, benefits, and bargaining power in desperate efforts to keep their jobs. In other words, the costs of inadequate Mexican labor protections are born by the same U.S. workers that the first Trump administration cared deeply about.

Second, our report offers some evidence that the current scope of enforcement is inadequate to change those unfair competitive practices in Mexico. As I recently explained at a U.S. ITC hearing, by only protecting those workers in Mexico who are privileged to have an inroad to U.S. stakeholders, the Biden administration missed critical opportunities to disseminate information about grievance and election procedures more directly to workers in the trade sectors in Mexico. If the Trump administration wants fair competition, it needs to ensure, as it did when it negotiated the USMCA’s RRM, that workers throughout the trade sectors that compete with workers in the United States have protected opportunities to build their power and fight for better working conditions.

How should things improve under the incoming administration? The Trump administration must ensure that no companies we compete with profit from breaking the rules, including very basic rules governing workers’ rights to join and form the unions that will fight for higher wages and better workplace benefits. It should redirect federal funding to ensure that workers in trade partner countries know their rights and how to enforce them. It should also publicize all petitions filed by workers – not just those supported by U.S. stakeholders. If the administration decides, as is its right, not to pursue a petition, it should be prepared to explain why; otherwise, workers strapped for resources in Mexico and elsewhere may become disincentivized, and we need their participation on the ground to identify rule breakers. Transparency is critical to keeping any administration consistent, and when it comes to production costs and disincentivizing rule-breaking, consistency is key.

As a parting consideration, the trade community is spending a lot of time right now debating the utility of tariffs as a measure to protect U.S. businesses and workers. The USMCA RRM offers an alternative by addressing the root causes of unfair competition, the elimination of which could reduce the trade deficit. By focusing on the causes of unfair competition rather than its results, the Trump administration could attack the trade deficit without increasing the costs of goods on U.S. consumers – again, the same workers that the Trump administration pledges to fight for.

I look forward to hearing your thoughts. Feel free to write in the comments, which are always cause for joy and great amusement, or directly at [email protected].

What To Look For In a Trump II Trade Policy

It has only been a few hours since the election results came in, so at this point I have lots of questions but few answers as to what the incoming Trump administration will do on trade policy. Here are a few of the questions.

Personnel

Who will Trump put in key positions at USTR and the White House NSC/NEC? I don't know if this is a definitive list, as I might have missed a couple people, but at USTR last time we had Robert Lighthizer as U.S. Trade Rep., Dennis Shea, C.J. Mahoney, and Jeffrey Gerrish as Deputies, Stephen Vaughn as General Counsel, and Jamieson Greer as Chief of Staff; and at the White House we had Everett Eissenstat, Clete Willems, and Kelly Ann Shaw. Will these people reprise their roles? Or will there be some new people brought in?

Tariffs

As you may have noticed, Trump talked a lot about tariffs during the campaign. Actually, let me amend that: Trump talked A LOT about tariffs during the campaign. So, we should probably expect some more tariffs, and we shouldn't be surprised if he pushes the boundaries of the power that has been delegated to him by Congress. What are the main statutory authorities he might use for this purposes? Here are a few:

- Trade Remedies (AD/CVD/Safeguards)

- Section 301 of the Trade Act of 1974

- Section 232 of the Trade Act of 1962

- Section 338 of the Tariff Act of 1930

- Section 122 of the Trade Act of 1974

- International Emergency Economic Powers Act (IEEPA) of 1977

Exactly how far will he push? And what will the courts have to say about it? It's very hard to say at this point.

What will they do with the Biden administration's industrial policy?

The Biden administration took some serious steps towards industrial policy. What will the Trump administration do with these measures? With the Republicans likely to control Congress, both the Chips Act semiconductor subsidies (Trump sounded skeptical about them here) and the various Inflation Reduction Act incentives could be at risk, although we may end up with tweaks rather than a wholesale repeal.

What will they do with the Biden administration's trade-adjacent policies?

The Biden administration trade folks put a lot of effort into things like protecting labor rights (through the USMCA rapid response labor mechanism) and coordinating supply chains (through the IPEF and critical minerals partnerships). What will the Trump administration think of these initiatives? Will they pursue them, and to what extent?

Trade Negotiations and Renegotiations

In the first Trump administration, we saw the Phase 1 deal negotiated with China, NAFTA renegotiated into the USMCA, a slight revision to the KORUS FTA, and an agreement with Japan covering a few products and digital trade. USMCA is set to be reviewed automatically in 2026, so we know some sort of renegotiation is coming there. Will the other ones be reopened? Will there be a Phase 2 agreement with China? Will Phase 1 see any enforcement actions? (There are no public reports of any Phase 1 enforcement actions so far).

And will there be any new trade negotiations or market access pushes? Trump is mostly focused on protecting U.S. manufacturers from foreign competition, but some of the people who have given money to him and some of the people likely to work for him seem concerned about barriers to selling in foreign markets. Will they push U.S. trading partners on this? If so, how will they do it? Section 301? Something else?

Finally, there is a group of Republicans that has been pushing for a trade deal with the UK. I've always been skeptical that Trump would sign a trade liberalizing deal of any sort, and now the UK is governed by the Labour Party, so I have doubts about the prospects for this.

I'm not sure how much, if anything, other countries are going to be willing to concede to Trump in negotiations this time around. Retaliation may be more likely than a negotiated deal. Traditionally, U.S. trading partners have targeted U.S. agriculture interests, but based on the experience during the first Trump administration, I'm not sure how effective that will be. Instead, when threatened with tariffs, other countries might try to go after his coalition of supporters (e.g., Elon Musk and Tesla).

What will they do at the WTO?

Last time around, the Trump administration raised China's non-market practices at the WTO General Council. That effort seems to have died under the Biden administration. Will the Trump folks revive it?

And what position will they take on the upcoming WTO DG appointment? On dispute settlement reform? On the e-commerce negotiations? Fisheries subsidies?

Security issues

And finally, how will Trump and his administration see the various trade and security issues? I would imagine the connected car regulations the Biden administration is working on will move forward. On the other hand, unlike the many Republicans who seem wary of Chinese investment in the U.S., Trump often sounds like he supports it. How will this internal debate play out? Does he really believe what he says when he talks about China building car factories in the U.S.? Will the people he hires find a way to convince him otherwise or just somehow take policy in a different direction?

Conference on “Navigating the Future: Industrial Policy and Global Competitiveness”

Centre for International Trade and Business Laws, NALSAR University of Law, Hyderabad in collaboration with World Trade Institute, University of Bern and Centre for Trade and Investment Law (IIFT) and The WTO Chairs Programme in India is organising International Conference on “Navigating the Future: Industrial Policy and Global Competitiveness” on 17-19th January 2025.

The conference aims to foster an in-depth discussion on the resurgence of industrial policy, focusing on underlying motivations, new approaches making such policies fit for purpose in the 21st century, and implications for global trade. Dedicated sessions will critically evaluate the trade and industrial policies of India, the European Union, the United States, China, and other emerging economies, assessing their effectiveness and strategic impact on global trade frameworks. The conference will explore key lessons from past successful and failed industrial policies, particularly in relation to welfare, efficiency, sustainability, and inclusivity, thereby identifying approaches and conclusions that can inform future policy design. Additionally, the role of the WTO in today's evolving economic landscape will be a central theme, examining whether its current rules can effectively address the challenges posed by modern industrial policy or if new reforms to the WTO's rulebook are necessary to support strategic objectives. By addressing these issues, the conference will contribute to shaping economic development strategies that balance national policy priorities with global trade norms, fostering sustainable and inclusive growth, economic and political stability, and the integration of strategic industrial policies with broader economic and environmental goals.

CONFERENCE THEMES

This conference will focus on four key themes:

• Climate Change Mitigation and Inclusive Sustainability
• Building Resilient and Adaptive Regional and Global Supply Chains
• Advancing Competitiveness in Critical and Emerging Technologies
• Ensuring National, Economic, and Food Security

Each theme will include sub-themes such as:

• Green Industrial Policies
• Motivations for Industrial Policy: Technological Advancements, Retaliation, National Security, and Geopolitical Rivalries
• Economic Rationale of Industrial Policy: Externalities, Market Failures, and State Intervention
• WTO's Evolving Framework and Role in Industrial Policy: Subsidy Rules, Enforcement, and Trade Tensions
• China’s Industrial Policy and Its Engagement with the WTO
• Impact of Industrial Policy on Global Trade Dynamics: Digitalization, Global Value Chains (GVCs), and Regional Trade Agreements
• Industrial Policy and Comparative Advantages in Emerging Economies: Sectoral Development and the Role of State-Led Innovation
• Geopolitics and Industrial Policy: Reshoring, Deglobalization, and Strategic Competition
• The Role of Security Exceptions in Critical Mineral Trade and Industrial Policy
• India’s Industrial Policy: ‘Aatmanirbhar Bharat,’ PLI (Production Linked Incentive) Scheme, and Trade Strategy in a Global Context
• Ensuring Coherence Between Green Transition and Strategic Autonomy Industrial and Trade Policies: The EU and Global Examples
• Environmental, Industrial, and National Interests in the WTO: GATT Article XX and Climate Change
• International Coordination and the Need for a Green Industrial Policy Framework
• Industrial Policy as a Development Strategy in the Knowledge/Digital Economy
• Intersections Between International Institutions, Private Sector, and State Finance in Shaping Industrial Policy
• Social Equity, Inclusiveness and International Trade: Cooperation in Sustainable Development, Social Cohesion, and Good Governance

The sub themes are suggestive only and not exhaustive.

TIMELINE

Last Date of Abstract Submission	30th November (Midnight IST)
Announcement of Selected Abstracts	10th December 2024
Last Date for Registration Fee Submission	20th December 2024
Paper Submission	5th January 2025

LINK FOR ABSTRACT SUBMISSION

https://docs.google.com/forms/d/e/1FAIpQLSdq84SGyxKhk0nPxT5k9m76d4hj7tofVPxg17nw8O-D8I1YIw/viewform?usp=sf_link 

LINK FOR CONFERENCE BROCHURE

  https://nalsar.ac.in/international-conference-navigating-future-industrial-policy-and-global-competitiveness

Risky Futures: Indonesia's Nickel and EV Production

Can governments future-proof their economic power in a green(er) global economy? This question seems to lie at the heart of many governments’ trade policies. It is not a new question per se. In 1974, many resource-rich countries resolved that it was time to create a new international economic order (NIEO) to preserve:

Full permanent sovereignty of every State over its natural resources and all economic activities. In order to safeguard these resources, each State is entitled to exercise effective control over them and their exploitation with means suitable to its situation, […].

Within this new model of governance, such primary commodity producers would take back control over resources and their exploitation, free of coercion (and domination). Developing countries demanded a break from their trajected dependencies through unconditioned access to modern science and technology to facilitate indigenous development. These proposals required regulatory interventions and restricted border access to change the future redistribution of global wealth. Yet, for many critics, the NIEO remained an uneasy bedfellow with the rules-based multilateral trading system, reduced to special and different treatment to developing countries but not a reimagining of global markets.

Recent developments in Indonesian development policy recall these earlier debates. Contextualising Indonesia’s strategy in NIEO terms is necessary, for Indonesia argued in Indonesia–Raw Materials, a complaint brought by the EU, that its ‘policy space’ must be interpreted in connection to the international law principle of Permanent Sovereignty over Natural Resources (PSNR), which informs the normative context for the WTO’s commitment to sustainable development (Annex B-2, para 8). The principle of PSNR reflects an NIEO argument against an unabated commitment to supply raw materials to the advanced capitalist world.

“Moving Indonesia” – Building Indonesia’s EV Production Market

Indonesia accounts for one-quarter of global nickel reserves and is expected to ‘dominate’ nickel ore production by 2040. In the Raw Materials dispute, Indonesia argued that throughout the 2000s, nickel ore production increased ‘more than seven-fold, with dire consequences for Indonesia’s environment and the sustainability of its nickel resources.’ Until a few years ago, the growth of the nickel market corresponded with the increased demand for producing stainless steel (Indonesia–Raw Materials panel report, circulated 30 November 2022, para 2.29). Such production did not stem from Indonesia’s activities but rather from ‘predatory’ foreign mining that caused significant ecological damage and depleted Indonesia’s reserves, leaving ‘environmental destruction as a legacy for the Indonesian people.’ (Annex B-2, 2, emphasis in original). Strong words from Indonesia and yet necessary to understand their decision to resist a push from Western, advanced economies and, instead, to claim absolute economic sovereignty and lay the foundations for a new strategy.

While the European Union’s (EU) complaint stemmed from Indonesia’s present measures, Indonesia’s goal was the future. Indonesia’s submissions detailed how demand for nickel ore as an input to produce electric vehicle (EV) batteries was to ‘explode in the next 20 years’ (we may note it took even less time). Though Indonesia framed its measures as part of ‘sustainable mining and mineral resource management,’ Indonesia’s sustainable economic development lies in its future EV battery production industry. Nickel ore is ‘essential’ for Indonesia’s future. Yet, this is exactly why Europe also needs Indonesia’s nickel – the EU’s EV battery strategy is likewise tied to a move away from fossil fuels and carbon emissions reduction. Though nickel is a critical resource for exporting countries’ green industrialisation, they are not a global public good –– they remain in the interest of the Indonesian people’s ‘national development’ first.  

Indonesia’s Challenged Measures

The EU’s claims concerned two measures: an export ban on nickel ore (regardless of concentration) and a domestic processing requirement (DPR) within all mining business licenses and permits that obliges all mineral processing and/or Indonesia’s nickel ore to be purified domestically (report, paras. 2.2-2.4, 2.13). Indonesia’s regulatory framework prioritises value added to the domestic economy and a ‘sustainable’ approach that puts domestic needs first (panel report, 2.35). There is also an environmental element to the regulation, as all businesses must prepare environmental impact assessments that consider the goal of sustainable development and ‘global issues on environment.’ (panel report, para 2.36). The EU contended that the DPR has ‘the consequence of preventing exports of the raw materials concerned unless they have been duly processed and/or purified.’

In effect, Indonesia will no longer export raw nickel ore. Still, Indonesia will export products from nickel ore purification, such as nickel pig iron, ferronickel, and nickel matte (panel report, para 2.23). Indonesia’s measures have huge consequences for nickel demand, which is projected to increase due to the production of lithium-ion batteries (panel report, para 2.31). The United States (US) has targeted refined nickel imports as vital for building ‘resilient’ ‘American manufacturing’ and broad-based growth. A study from the Carnegie Endowment showed that Japan and China have been the largest sources of foreign direct investment in Indonesia’s mineral sector since 2017.

Indonesia’s future, therefore, lies in its control of the exportation of raw materials, environment monitoring, and the ‘development of the upstream and intermediate industry’ dependent on its natural resources (panel report, paras 2.37-2.38). At the time of the panel’s establishment, Indonesia continued to use pyrometallurgical processes for sulfide nickel deposits. Indonesia intended to have new refining facilities that use hydrometallurgical processes, such as pressure acid leaching, operational in the future (panel report, paras. 2.46-2.47). The panel report devoted considerable space to addressing the growing environmental concerns with nickel mining and purification techniques.

Indonesia’s Sustainable Future

Indonesia did not dispute that it has restricted nickel ore exports in some form since January 2014 (panel report, para 7.38). Indonesia did argue that its DPR, which also addresses domestic actors, was an internal measure and did not fall within the scope of GATT Article XI:1 (panel report, para. 7.61).

Upon review, the panel concluded that the DPR regulated the sale of nickel ore to ‘create a situation where there is no nickel ore available for exporters to sell abroad’ but instead must be sold to domestic processors who then transform it into something other than nickel ore. The panel concluded that Indonesia’s DPR created a limiting effect on exports and, consequently, was inconsistent with Article XI:1 of the GATT and eligible for exclusion from that obligation contained in Article XI:2(a) if the elements of that provision were satisfied.

Article XI:2(a) of the GATT provides the following:

Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party.

The assessment of GATT Article XI:2(a) requires panel assessment of the following terms: i) temporarily applied measures; ii) to ‘prevent or relieve’; iii) ‘critical shortages’; and iv) ‘foodstuffs or other products essential to the exporting’ Member. Ultimately, the panel found that Indonesia had not demonstrated that nickel ore is an essential product, that the export restrictions were not temporarily applied, and that Indonesia failed to demonstrate an ‘imminent critical shortage’ of nickel ore that the challenge measures sought to prevent (panel report, para 7.153). Indonesia responded to the report by appealing into the void (on 8 December 2022), leaving the EU with few options but to negotiate an arrangement or unilaterally respond in defiance of the EU’s WTO obligations. For this blog, I am focusing on Indonesia’s efforts to carve out its measures by invoking Article XI:2(a) of the GATT by exploring a few of the elements examined in terms of Indonesia’s future power in EV battery production.

Nickel Ore as an Essential Product

Indonesia identified three reasons why its nickel was ‘essential’: i) the contribution of mining to Indonesia’s government revenue and to employment; ii) the contribution of nickel to Indonesia’s steel industry, which accounts for 3.95% of total industrial GDP; and iii) the implementation of a plan to expand EV battery production in Indonesia ‘in the short term.’ (panel report, para 7.87).

Other WTO members crafting their own industrial strategy in a greener global economy weighed in on Indonesia’s efforts to safeguard an industry it did not yet have a foothold in but did possess the critical materials for.

The US joined the EU in observing that the term ‘foodstuffs’ in Article XI:2(a) sets the context for conveying how to interpret the term ‘essential’ in this provision. (US Responses, para 7; US Executive Summary, para 12). The EU had contended that, per the Appellate Body, ‘essential’ did not equate to ‘great economic importance’ but addresses a ‘vital need of the population’ (panel report, 7.90). Japan and the US accepted ‘the possibility that securing inputs for a domestic industry could be allowed’ under GATT Article XI:2(a). However, Japan noted that a Member must explain how the ‘development’ of a domestic industry is ‘absolutely necessary or indispensable to meet the basic needs of the population,’ making an input in that industry an ‘essential’ one to the Member (panel report, para 7.92). The United Kingdom adopted a position similar to that seen in the India-Solar Cells Appellate Body report, arguing that a Member seeking to buffer its domestic supply should assess whether imported inputs could satisfy domestic industry demands.

South Korea turned to a single document referring to the GATT drafting history, specifically a working group report that debated the use of export restrictions to ‘protect or promote a domestic fabricating industry.’ The assessment must be understood in context, whereby the draft GATT had the following general exception (then Article XX(I)(i)):

Involving restrictions on exports of domestic materials necessary to assure essential quantities of such materials to a domestic processing industry during periods when the domestic price of such materials is held below the world price as part of a government stabilization plan; provided that such restrictions shall not operate to increase the exports of or the protection afforded to such domestic industry, and shall not depart from the provisions of this Agreement relating to non-discrimination.

Such restrictions may be justified when associated with a governmental stabilisation plan, provided the restrictions met the other non-discrimination requirements and Article XX’s chapeau (Department of State Publication 3107, April 1948). The Working Group concluded that a contracting party cannot promote a domestic industry ‘by reducing the supply of such materials available to foreign competitors.’ However, this conclusion was tempered by the group’s decision to clarify that the objective of any restriction required scrutiny as part of any individual determination (para 12).

During the Indonesia–Raw Materials dispute proceedings, the panel asked a question that considered the relevance of Indonesia’s strategy to foster an industry:

Is the desire to develop a particular industry in a Member enough to make an input product in that industry “essential” to the Member within the meaning of Article XI:2(a) of the GATT 1994? Is Article XI:2(a) of the GATT 1994 meant to address a Member’s development goals?

The US answered that ‘the fact that a product is one of the input products for an industry which the Member desires to develop can be a supporting factor for the product’s “essentialness” to the Member’ (emphasis added). The US seemed to water down this argument by distinguishing between products that ‘may be “important to” the responding Member’ and those products ‘that are “essential” within the meaning of Article XI:2(a).’ Nonetheless, this statement is the only one that suggests a US position whereby a panel could consider safeguarding essential materials for a potential domestic industry. Arguably, this could be quite a remarkable evolution from the safeguards area, involving a surge of imports that causes (or threatens) serious injury to an established domestic industry.

In its findings, the Indonesia–Raw Materials panel agreed with the panel in China–Raw Materials that the determination of what is an essential product within the meaning of Article XI:2(a) of the GATT depends upon the circumstances faced by a Member at the time restrictions are imposed (panel report para 7.94).

The panel asked Indonesia to provide information concerning Indonesia’s EV battery industry. At the time of the panel proceedings, Indonesia confirmed that when the measures were adopted, ‘there was no employment in the EV battery industry, but there were estimates that building an EV ecosystem would contribute significantly to GDP’ (panel report para 7.99). Moreover, Indonesia confirmed that at panel establishment (and certainly not when first imposing restrictions), ‘EV battery production had not yet started in Indonesia.’ Nor could Indonesia demonstrate how stainless steel and EV batteries were ‘important products’ to Indonesian manufacturing (panel report, para 7.101).

Ultimately, the panel acknowledged the need to protect ‘essential’ –understood as ‘indispensable’– ‘industrial input products’ to maintain an industry ‘through a passing need’ but not to protect that industry from ‘the vagaries of competition.’ The temporality of the means to protection served as the analytical focus rather than a scrutiny of the Member’s determination of the necessity of the input. As the instigation of protection must be able to ‘pass,’ the panel excluded from scope the use of trade restrictions to ‘create an industry that did not yet exist.’ (panel report, para 7.100).

The panel distinguished the circumstances of Indonesia from that of China in China–Raw Materials, for China sought to protect refractory-grade bauxite as an existing input in iron and steel Chinese production, already a ‘significant source of employment.’ (panel report, para 7.100). Moreover, China had already established footholds in the downstream sectors, another factor distinguishing China from Indonesia’s case. In effect, Indonesia could not rely on the carveout to justify the creation of a domestic industry, as the carveout was only applicable to harm caused to existing industries. Indonesia could not demonstrate a critical shortage without an established industry. The panel observed: ‘Unlike the situation of bauxite in China, however, nickel ore is not already an input to important downstream industries in Indonesia.’ (Panel report, 7.101). Critical, in this case, translated to something critical to an existing industry.

Establishing a timeframe for Indonesia’s measures

Furthermore, the panel observed that the Appellate Body agreed with the panel in China–Raw Materials that ‘temporarily’ in the sense of Article XI:2(a) refers to ‘relief in extraordinary conditions to bridge a passing need,’ confirming a finite timeframe (panel report, 7.112). Additionally, technological development would be critical to Indonesia’s refining and processing of low-grade iron ore, yet Indonesia could not determine where or when the technology would be needed. In listening to Indonesia’s arguments for the measures, the panel repeatedly referred to Indonesian projections, noting that Indonesia failed to show evidence of increased domestic capacity or new technology that would set specific achievable criteria for concluding all restrictive measures. This made it difficult to set a timeframe, leading to the conclusion that the measures would last indefinitely (panel report, para 7.119-122).

Existing WTO jurisprudence has failed to grapple with the idea of forecasting development.  The Appellate Body in China–Raw Materials relied on dictionary definitions to unpack the terms ‘temporarily’ to ‘prevent or relieve’ critical shortages, as found in Article XI:2(a). Yet, both the Appellate Body in China–Raw Materials and the panel in Indonesia–Raw Materials derived their assessment from a normative assumption of returning to normality – ordinary market conditions – a moment whereby ‘critical’ transitions to ‘not critical’ and restrictions are lifted (panel report, para 7.138).

Later, the Indonesia–Raw Materials panel interpreted the term critical as ‘a turning point’ (panel report, para 7.149). For example, the Appellate Body in China–Raw Materials stated, ‘the notion of criticality is the expectation of reaching a point in time at which conditions are no longer “critical”.’ (Appellate Body Report, para 328). But this is analytically distinct from technological evolution, whereby supply and demand develop as industries grow (or, conversely, shrink) in response to innovation over time. In simpler terms, technology and environmental business outpace the legal conceptualisation of normal market conditions, so policymakers may be unable to set parameters to a ‘passing need’ or return to normality.

The existing definitions offered by the Appellate Body exclude policy that seeks to prevent critical shortages through longer-term reconstructions of supply problems. Most notably, the text does not suggest that a respondent Member must show a critical shortage is imminent. Yet, the Appellate Body injected a short-term logic to Article XI:2(a), most evident in their assessment that Article XI:2(a) provides a basis for ‘preventative or anticipatory measures adopted to pre-empt an imminent critical shortage.’ (Appellate Body report, para 327). A government may only act when immediately necessary. The Appellate Body confirmed the exceptional circumstances to escape Article XI of the GATT. However, the  Indonesia-Raw Materials panel adhered to this assessment, which may explain why there was no further probing into what Indonesia sought to do in this case.

The panel concluded that Indonesia’s invocation of PSNR must remain consistent with its WTO obligations (panel report, para 7.137). However, the panel did not consider how Indonesia’s invocation of PSNR may strengthen its argument that control over resources was protection from economic interference and exploitation. A significant part of the NIEO was to establish value-added production (or, in this case, purification) processes domestically. Restricting the use of export restrictions for creating an industry -- explicitly prohibits the use of restrictions to move up a complex supply chain. There is a fallacy to the logic that only industrialised countries could benefit from the carveout by preventing established industries’ critical shortages, yet arguing that the WTO obligations exist to help all Members coordinate their economic growth.

We may contrast this panel’s interpretation to the similarly worded requirements in Article XX(j) of GATT 1994, as demonstrated in India–Solar Cells. As I have explained elsewhere, the India-Solar Cells panel found Article XX(j) did not cover prospective shortages, such that India needed to evidence actual disruption in imports to justify restrictions of products in short supply (panel report, paras. 7.244, 7.250, 7.262, Appellate Body Report, para 5.75). In both instances, the respondent Members could not rely on hypothetical future industries, for the panel required present-day evidence to explain the use of trade restrictions.

In the interest of future-proofing its resource power in the greener economic order, Indonesia’s regulatory objectives are mixed. Indonesia confirmed to the panel that its export ban on low-grade nickel related to the prevention of environmental degradation ‘typically associated with export-oriented shallow strip mines.’ In addition, Indonesia’s efforts to shut down the export of low-grade ore relate to concerns of ‘fraudulent customs declarations’ that claim low-grade ore, which are exporting illegal high-grade ore. Even if technological innovations may one day allow Indonesia to improve domestic processing of low-grade ore, Indonesia could not identify an ‘imminent shortage’ of low-grade ore when adopting the measures (panel report, para 7.147-148).

Two questions emerge. First, what empirical research is available to show that export restrictions are necessary tools for industrialisation? Second, if large industrialised countries are reorganising so-called risky supply chains (for security or resiliency reasons), could this change the rule calculus regarding new entry into industries?

With respect to the first question, the OECD has noted tremendous growth in the use of export restrictions, producing ‘negative spillover effects cascading down global supply chains.’ Is this a rehash of import substitution industrialisation (ISI), or do today’s geopolitical and climate change concerns alter the calculus? One of the most significant parts of the panel report is the panel’s struggle to identify a plan to phase out restrictions from Indonesia – could strict export restrictions continue far longer than necessary? One evaluation of ISI has been that, upon assessment, buffered domestic producers have little incentive to consider efficiency, consumer preferences, or quality (381-382). Without existing firms operating in a sector, how sustainable is a government’s top-down approach to establishing growth?  If Indonesia incentivises foreign firms to build exclusively in Indonesia, would those firms have greater access to government decision-making?  When does domestic promotion turn into protectionism, and what domestic political structures exist to enable the distribution of the economy’s gains from these higher productive activities (namely, skill and technology transfer)? How far can domestic processing requirements take industrialisation ambitions if governments should account for spending and tax calculations that factor multiple production sources to guarantee ‘resilience’ in global supply chains?

Almost a decade ago, Mark Wu observed of cases concerning China’s rare earths export restrictions (from 2009 to 2016) that China appeared willing ‘to endure the negative externalities associated with upstream producers and processing’ if left in control of rare earth minerals for downstream industries with ‘large future commercial potential.’ Indonesia’s appeal into the void of the Indonesia–Raw Materials panel report – affords its policymakers an indefinite ‘free pass’ to the restrictions. Does this likewise label Indonesia a ‘bad faith’ actor intent on protectionist trade policy? Indonesia has committed to becoming a leader in EV production and put consumption subsidies and tax incentives for EV sales in place. Indonesian policymakers have learned from China’s rare earth mineral export restrictions –– with evidence that Chinese and Vietnamese manufacturers have moved EV production to Indonesia.

Projections and Precedence? Canada and the WTO’s Next Steps

With respect to the second question above, Canada’s recent decision to likewise establish a high tariff wall against Chinese EVs proves that future-proofing sectors needed for green industrialisation is another complex negotiation for the WTO membership.  Considering how panels have interpreted GATT Articles XI:2(a) and XX(j) regarding Members’ future demands and growth of yet-to-exist sectors, Canada will likewise face difficulty defending its measures. For now, Canada and Indonesia’s measures suggest that economic and political domestic gains outweigh any international tensions from WTO illegal actions. Perhaps it is time to dig deeper into the meaning of critical supply beyond dictionaries and ahistorical references (something I am working on). To close, what are the EU and other Members left to do?

One potential way forward is to lean into the WTO’s efforts to reimagine its functions and press Indonesia to settle with the EU rather than block the panel report (or complete FTA negotiations), attach export duty commitments to Indonesia’s schedules, coordinate with the WTO Secretariat on the timeframe of measures, invite foreign industry expertise to understand development ends better and commit to more frequent, more transparent details of practices for calculating negative externalities at the WTO (with harmed trading partners).  

Beggar-Thy-Neighbor vs. Protectionism as Frameworks for the Trading System

In a recent piece, Dani Rodrik argues that current global trading rules interfere too much with domestic regulation and that "the world economy desperately needs a clear normative framework to determine the rules of the road." In this regard, he distinguishes between two options: (1) "policies with adverse cross-border spillovers"; and (2) "policies that truly are beggar-thy-neighbor." He says that "[i]t would indeed be hopeless – and counterproductive – to try to discipline all policies of the former type," and argues for establishing disciplines that focus on "beggar-thy-neighbor" policies.

I agree with him that "policies with adverse cross-border spillovers" is very broad and wouldn't work well as the basis for the trading system. It's worth noting here that, for the most part, this is not, in fact, the current basis for the system, although I do think there are interest groups who try to push the existing rules in this direction: If a foreign regulation hurts their business, they try to convince their government to challenge it as a "trade barrier," even if the regulation has a similar impact on their foreign competitors.

But I don't think "beggar-thy-neighbor" is the best alternative. "Beggar-thy-neighbor" is a well-known term from economics, but what exactly does he mean by it? He illustrates the concept as follows:

Consider two policies in particular. First, when the Chinese government subsidizes research and development that enhances the country’s competitiveness in high-tech products and lowers their prices on global markets, the US and other advanced economies are hurt, because these are the areas of their comparative advantage. Despite the harm, however, we would not consider it proper to ask China to remove such subsidies, because our intuition tells us that supporting R&D is a legitimate tool to promote economic growth, even if others incur losses.

The second policy is an export ban on rare earths or other critical minerals for which China is the principal global supplier. China benefits by increasing prices on world markets and making its exporters more competitive, owing to their access to cheaper inputs. But this is a clear instance of a beggar-thy-neighbor policy. China’s gains are the result of an exercise of global monopoly power that forces losses onto foreign producers.

A policy is beggar-thy-neighbor when the benefit provided to the domestic economy is made possible only by the harm that it generates for others. Joan Robinson coined the term in the 1930s to describe policies such as competitive devaluation, which, in a situation of generalized unemployment, shifts employment from foreign countries to the domestic economy. Beggar-thy-neighbor policies are generally negative-sum for the world overall.

I see what he is getting at, but speaking as a lawyer, I don't think the concept works very well as a basis for disciplining domestic policies. I'm not sure how you would write a rule that looks at "when the benefit provided to the domestic economy is made possible only by the harm that it generates for others." How would you determine whether there is a "benefit" here? Does this mean an overall benefit, or just a benefit to a particular interest group? And how would you demonstrate the connection between that benefit and the "harm that it generates for others"? What exactly is "made possible by" here?

Fortunately, we do not need to agonize over crafting such a rule, because we have existing concepts that work better. Rather than try to make "beggar-thy-neighbor" happen, we can rely instead on the concept of "protectionism," which I think of as a policy that has the objective of giving an advantage to domestic firms over their foreign competitors. GATT Article III:1 captures this idea pretty well:

The Members recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.

There are some nuances to deal with here, including situations where the advantage being given relates to competition in a foreign market. But the general principles are well understood, and can be applied fairly easily by trade adjudicators. Of course, in practice we have debates about burdens of proof,  "aims and effects" tests, and the meaning of "necessary" in the exceptions. And there are carveouts from the principle for ordinary tariffs, trade remedies, and public policy and security exceptions (all of which make it clear that protectionism is not prohibited, but rather the system simply sets out mutually agreed constraints on it). But the debated issues are fairly clear and we just have to pick an approach. With "beggar-thy-neighbor," by contrast, we would be starting from scratch, and I'm not even sure where exactly we would be starting.

Jake Sullivan on the International Economic Agenda, Part 2

In April 2023, White House National Security Advisor Jake Sullivan gave a speech at Brookings on the Biden Administration's international economic agenda, and I had some comments in response. Yesterday, Sullivan returned to Brookings to, as the event page describes it, "reflect on the progress and challenges of the past 18 months and respond to the variety of responses and criticisms of his April speech." I don't have as much to say this time, but I did have two reactions. The first relates to the money available for the administration's international industrial agenda; the second relates to whether there are alternative approaches that would achieves the administration's goals.

What happens when the money runs out?

In his remarks, Sullivan explained that the administration's industrial investment agenda was a cooperative one that could be implemented in conjunction with other friendly countries:

As more and more countries adopt this approach, we will continue to build out the cooperative mechanisms that we know will be necessary to ensure that we're acting together to scale up total global investment, not competing with each other over where a fixed set of investments is located. ...

All of this high tech investment and development hasn't come at the expense of our partners. We've done it alongside them. We're leveraging Chips Act funding to make complementary investments in the full semiconductor supply chain, from Costa Rica to Vietnam. ... Simply put, we're thinking about how to manage this in concert with our allies and partners and that will make all of us more competitive.

If I understand the administration's international economic policy agenda correctly, a central feature is to spend lots of money to subsidize advanced U.S. production, and then also to subsidize less advanced parts of the production process in certain allies. In this regard, you can read more about the semiconductor efforts with Costa Rica here, here, and here (the second link states that Commerce Secretary Raimondo "welcomed Costa Rica’s efforts to elevate the country as a key market for semiconductor assembly, testing, and packaging"; the Vietnam efforts use similar language).

Regardless of whether or not this is good policy, it is clearly dependent on the U.S. spending a lot of money, and for now that's still happening. But history tells us that the spending will come to an end. It may end through a new administration that has different priorities and approaches, but it may also just end because deficits/debt get too high and/or an economic downturn arrives. U.S. fiscal policy is strange, because basic economics tells us to balance the budget during a strong economy and then run deficits during a recession to stimulate the economy, but in recent decades U.S. politics has sometimes given us a pro-cyclical fiscal policy in which we increase deficit spending when the economy is doing well and try to rein in deficits during recessions. Right now we are in an expand deficit spending when the economy is doing well phase, but when the inevitable downturn comes, I suspect there will be some fiscal panic and a call to cut spending. In that event, what happens to the Biden administration's spending on these policies? Money given to production abroad is likely to be the first batch to dry up.

Are there alternative approaches?

In defending the Biden administration's policies, Sullivan says that critics should offer alternatives:

Anyone who says, well, this isn't quite the answer, I think, does have responsibility to come forward and lay out, how do we meet the challenges I laid out, which I think are basically indisputable. Challenges relating to the clean energy transition, to the rise of a massive non-market economy that distorts global economic integration, challenges of geopolitical competition, challenges of fractured supply chains and economic coercion. So those are all challenges we've seen, all challenges we need to deal with. So if this isn't the answer, you have to have an alternative answer. ... and that answer has to be sustainable economically, geopolitically, and politically, actually, also in this country and in many countries around the world. ...

I believe that what we have put forward can contribute to that, particularly to outcomes at a crucial moment of technological change and the clean energy transition. But I acknowledge the risks that come with it, and the need for us to be clear eyed and how we deal with them. The argument I would make is, people pose these questions and in posing these questions, I think they also need to develop an answer that says, if not this, then X. And to me, the X of let's just go back to the status quo in light of what we have seen is not going to work.

Challenge accepted! I would go with a carbon tax, non-discriminatory consumer subsidies, and trade liberalization of clean energy goods and services for the clean energy transition; and I would use WTO complaints to address non-market practices and economic coercion. On supply chains, strategic stockpiling probably makes the most sense. (Geopolitical competition is a foreign policy problem, and I'm not going to weigh in on that one for the moment.)

But wait, you might say, do those suggestions meet Sullivan's test of being politically sustainable? It's a fair point, but I may wait to come back to it until after we find out in a couple weeks if the Biden administration's approach has been sustained politically.

Sullivan also says he doesn't think we should go back to "the status quo," but I'm not sure which status quo he has in mind. What specifically does he not like about past eras of international economic policy? For the most part, I wasn't particularly happy with past U.S. international economic policy either, although probably for different reasons. So on that point, I think I'll just agree with him that we shouldn't go back to the status quo, although we probably disagree as to what it is we're not going back to.

Do Foreign Digital Regulations "Discriminate" against U.S. Firms? The Case of Korea

Just about everybody agrees that "non-discrimination" is a core principle of the trading system, but what exactly do we mean by it? What is the role of intent and effect? Governments who feel like their companies are being hurt by a foreign regulation often focus on the effect, while governments who are regulating prefer to talk about their intent. One way to get some clarity is through cases that adjudicate the issues, and the U.S.-South Korea conflict over digital trade regulations that I wrote about with Haeyoon Kim could be a good one if it goes to litigation: 

New legislation introduced in the US Congress suggests that a major US-South Korea digital trade dispute could be unfolding, with Korea’s recently proposed regulation of online platforms in the crosshairs of US policymakers. Despite a shift by the Korea Fair Trade Commission (KFTC) from its earlier regulations, tensions remain, mainly stemming from conflicting views and misunderstandings regarding the goals of Korean regulators. While US critics highlight the negative effects on US tech companies, Korean regulators emphasize that the intent of the proposed law is neither discriminatory nor protectionist but instead aims to address challenges in the Korean digital market today.

...

Despite the KFTC’s announcement of a more measured approach, pushback from major US policy voices persists. Much of the debate is framed within the US-China competition, with claims that South Korea’s new regulation could disadvantage US tech companies and benefit Chinese ones. In this regard, there have been arguments in Washington that Seoul is targeting and discriminating against US tech companies.

This view was stated during a recent congressional hearing by Representative Carol Miller (R-WV), who expressed deep concern that a key ally like South Korea is “pursuing economic policies that target and discriminate against US technology companies” while “welcoming state-owned Chinese companies with open arms.” On September 27, she introduced legislation, titled the U.S.-Republic of Korea Digital Trade Enforcement Act, to “stop the Korean government from implementing these blatantly discriminatory laws that will cause an unnecessary irritant to such a vital relationship [between the two countries].”

The bill notes that South Korea is considering “additional discriminatory digital regulations that would unduly burden United States businesses while benefiting Chinese technology companies.” To “ensure a fair and nondiscriminatory regulatory environment,” it requires the United States Trade Representative (USTR) to report to Congress if Korea enacts laws or regulations that “predesignate or post-estimate a United States online or digital platform operator and impose discriminatory business restrictions.” The report will include a determination of whether a US entity was negatively impacted, if any trade agreement violations exist, and whether the law or regulation burdens or restricts US commerce as outlined in Section 301 of the Trade Act of 1974. Following the report, USTR may take action to protect US commerce, such as initiating a WTO dispute, a Section 301 investigation, a KORUS FTA dispute, or reaching an agreement with Seoul to mitigate the impact.

...

At the heart of the potential US-South Korea dispute lies a fundamental question: what is discrimination? US officials contend that South Korea’s new regulation disproportionately affects US tech firms compared to Chinese and Korean ones, which they believe constitutes discrimination. However, Korean antitrust authorities argue that the regulation is designed neutrally and lacks any discriminatory intent, thus not meeting the criteria for discrimination. Ultimately, in their view, the regulation is essential to ensure a fair and anti-monopolistic digital environment, without fear or favor over company nationality.

...

... the KFTC Chairman responded to Representative Miller’s bill [by saying] that the Korean competition law “has historically been enforced without favoring domestic operators.” He added that the upcoming amendments “will also be applied without discrimination between domestic and foreign businesses,” reflecting Seoul’s desire to provide a balanced treatment of large platforms, regardless of nationality.

More (and More and More) Trump on Tariffs

As I mentioned last week, Trump constantly talks about tariffs, but that hasn't led to voters thinking of tariffs and trade as a top policy issue. After I did my post, Trump gave an interview in which he talked about tariffs even more than usual. (Normally I provide full text quotes, but in this case there was just too much, so you can watch the video here if you are interested.) And while there wasn't anything particularly new and interesting about what he said, but rather just more of the same thing, it nevertheless triggered a few thoughts from me.

To start, Dmitry Grozoubinski has written a whole book on "Why Politicians Lie about Trade," and I can imagine some people will think Trump is lying when he talks about this issue. But as best I can tell, Trump actually believes his arguments. He's wrong, in large part because he misunderstands the causes of trade deficits (I'll get back that in a moment), but that doesn't change the fact that he believes it. 

As an alternative (or complementary) explanation, some people present this as Trump "negotiating," and I acknowledge that it's possible he thinks his remarks constitute some sort of negotiating tactic. In his mind, when he threatens these tariffs, other countries will be likely to make trade (or other) concessions, perhaps because of the general economic and security leverage the U.S. has over them or perhaps because he thinks the U.S. trade deficit means that trade wars will hurt others more than they hurt us. But I think he is mostly wrong about this. The reality is that other countries have domestic politics too, and political leaders in other countries can't go to their public and say "we totally caved to Trump." As a result, major changes to the balance of existing trade commitments based on this negotiating tactic seem unlikely at the moment. In his first term, Trump was able to get tweaks to the USMCA, KORUS, and US-Japan trade arrangements. (On China, there was the Phase One deal, but it's not clear to me that it had an impact on Chinese policies and practices.) But going back to the same countries with follow-up demands is not likely to achieve much. At a certain point, for the domestic political reasons noted, they just have to say something like, "fine, withdraw from the agreement or impose tariffs if you want, but we can't keep conceding things."

Part of the reason for the difficulty with renegotiating the existing balance of trade arrangements, which Trump and his advisers seem to think is unfair to the U.S., is that a lot of people would say it is actually unbalanced in the favor of the U.S., pointing to things like the TRIPS Agreement as an example. So why do Trump and his trade advisers see things differently? In large part, it's because they fundamentally misunderstand the trade deficit. For them, the U.S. trade deficit is, in and of itself, evidence that the existing trade arrangements are unfair to the U.S. In their view, foreign protectionism and unfair practices must be the main cause of the trade deficit. I think they are wrong about this, and I agree with the consensus view of economists that macroeconomic factors are the most important driver of the trade deficit, but unfortunately I have had no success in getting anyone from the Trump side to engage on this issue. I would ask them this question: In a world where the U.S. has a relatively low savings rate and the dollar is the reserve currency, how do they expect the U.S. not to have a trade deficit? I'm baffled by their views, and aside from them offering vague and general denials that macroeconomic factors are the cause, I've never heard any of the trade deficit hawks address this.

Another point that occurred to me when listening to this Trump interview is that if you are thinking about how Trump might govern on trade, certainly we should all expect lots of new tariffs, but at the same time it's worth noting that there is likely to be an internal Trump vs. his administration debate on trade policy. Some people he hires will be looking to pry open foreign markets a bit (and even Trump indicated during the interview that he was worried about foreign regulations that affect U.S. companies), which cuts against him imposing the full range of tariffs he has proposed, as foreign retaliation is certain to be the response to his tariffs. A related point here is that in his remarks in this interview, Trump seemed to suggest, as he has before, that he would be OK with Chinese-owned factories in the U.S. But many other Republicans (and a few Democrats) seem adamantly opposed to that. Who would win that internal battle?

Is Trade Policy on the Ballot in the U.S. Presidential Election?

A recent AP piece on U.S. Trade Rep. Katherine Tai's trade policies is entitled: "Top US trade official sees progress in helping workers. Voters will decide if her approach continues." It then leads off with this:

As the U.S. trade representative, Katherine Tai is legally required to avoid discussing the presidential election. But her ideas about fair trade are on the ballot in November.

Voters are essentially being asked to decide whether it is best to work with the rest of the world or threaten it. Do they favor pursuing worker protections in trade talks, as Tai has done on behalf of the Biden-Harris administration? Or should the United States jack up taxes on almost everything it imports as Donald Trump has pledged to do?

I'm not sure this tells the full story. I do agree that there is a difference between the approach of Trump and his Trade Rep. Bob Lighthizer on trade policy, on the one hand, and the Biden/Tai approach, on the other (although I don't think the article captures the differences very well), and therefore it is true that the election will decide the near term future of U.S. trade policy.

However, the piece makes it sound like these issues are of crucial importance for the election, as it states: "Voters are essentially being asked to decide whether it is best to work with the rest of the world or threaten it." While voters are certainly being asked to choose a president, I doubt this choice will tell us much about voters' trade policy views. Polling indicates that trade is not a top priority for voters and I'm skeptical that it will have much impact on who wins this election. Very few voters are likely to base their choice of Trump or Harris on the distinctions between the trade policies pursued by Lighthizer during Trump's time in office and those pursued by Tai now. I find it noteworthy that tariffs and trade are one of the few issues that Trump seems to genuinely care about, but even though he talks about them constantly voters still aren't particularly interested.

Trade policy is not totally irrelevant in this election, of course, and could affect a few votes here and there. But I think there are many more important issues. As an example, an issue that I think is clearly "on the ballot" is immigration, where the Republicans and Democrats are far apart. This is an issue that voters say matters to them, and is one of the key policies that will decide the election. I think it's fair to say the voters' decision on who should be president will tell us something about which direction they want to go on immigration (the electoral college distortion of these preferences notwithstanding). However, I doubt the election will tell us much about their preferences on trade policy.

Guest Post: Commerce Department Regulations on “Connected” Vehicles: Potential Impacts on Chinese, Mexican, and other Automotive Imports to the United States

This is a guest post from David A. Gantz, JD, JSM, Will Clayton Fellow for Trade and International Economics, Rice University’s Baker Institute for Public policy, Houston and Michelle Michot Foss, PhD, Fellow in Energy, Minerals and Materials, Baker Institute

Introduction: The Proposed Regulations

On Monday, September 23, The U.S. Department of Commerce (DOC) issued wide-ranging regulations which, when finalized, likely before the end of 2024, would significantly restrict U.S. imports of software and hardware for “connected vehicles,” whether separately or imbedded in either electric (EV) or internal combustion engine (ICEV) powered vehicles (Connected Vehicles Proposed Regulations). The ban applies to software or hardware originating in either  China or Russia, although we are not aware of any such products currently imported from Russia. “Connected" is a term of art that typically refers primarily to the sophisticated computers that are essential for control of EVs, but they are also found in one form or another in most modern ICEVs. The EV computers are more sophisticated than most systems in gasoline powered vehicles and can, if properly programmed, update the vehicle’s software as well as record and transmit driver data and photos (e.g., of military bases, ports or electric power plants) to the manufacturer (or perhaps others such as agents of the Chinese Communist Party). Tesla and some other US-made EVs already have such systems. For example, Tesla uses them to transmit software exports to Tesla vehicles and to receive driver data.

Baker Institute non-resident fellow Simon Lester has provided an excellent summary of what the notice provides. It would:

• (1) prohibit VCS [Vehicle Connectivity System] hardware Importers from knowingly importing into the United States certain hardware for “VCS hardware” . . .
• (2) prohibit connected vehicle manufacturers from knowingly importing into the United States completed connected vehicles incorporating certain software that supports the function of VCS or ADS (VCS and ADS software are collectively referred to herein as “covered software,” as further defined below);
• (3) prohibit connected vehicle manufacturers from knowingly selling within the United States completed connected vehicles that incorporate covered software; and
• (4) prohibit connected vehicle manufacturers who are owned by, controlled by, or subject to the jurisdiction or direction of the PRC or Russia from knowingly selling in the United States completed connected vehicles that incorporate VCS hardware or covered software. (China Trade Monitor Summary).

Vehicles made by American companies in China and exported to the United States (e.g., Tesla, General Motors and Ford) whether EVs or ICEVs would presumably incorporate VCS hardware that is not capable of Chinese spying in the United States. However, many owners and prospective owners of passenger vehicles capable of directly communicating with the manufacturers may be concerned about potential violations of operator privacy. Such concerns seem justified in light of the revelation earlier in 2024 that General Motors was using its “Onstar” communications system to record driver data and sell it to insurance companies (Your car is spying on you).

It seems wise of the DOC to focus on imports of software and hardware for "connected" vehicles, rather than just the vehicles themselves. The new regulations could cut a wide swath, including, for example, the Buick ICEV SUVs that GM has been importing for several years and Tesla vehicles coming into the U.S. from China. (Those imports are likely to cease anyway because of the recently ordered 100% tariffs) (White House Fact Sheet). However, the proposed regulations, because of the grace periods, noted below, do not appear to effectively address Volvos (both ICEVs and EVs) and Polestars (EV only) produced in South Carolina, with both brands controlled by Chinese auto maker Geely (Polestar and Volvo US Production).

The EV import numbers for both brands are apparently very small at present, but our understanding is that about 128,000 Volvos (almost all ICEVs) were sold in the US last year (Volvo's US sales). Some were made in South Carolina and some in the EU and a few in China but all have computer systems and are potentially under the ultimate influence of Geely and thus potentially the Chinese Communist Party.  Thus, all or nearly all of those vehicles are capable of recording data and communicating it to Volvo (whether or not they are actually doing so), and some will have cameras, although we of course have no way of knowing whether any of the computer systems are or will be used for suspect purposes.

The proposed regulations, when adopted later in 2024, would not be effective for software until the 2027 model year and the hardware for them 2030 model year. The lead time is probably necessary for the industry to make sourcing changes but if Polestar sales increase now that they are being assembled in SC a lot more vehicles potentially capable of spying could be on the road in the next several years. 

One does not need EVs to be concerned about connectivity (or autonomous driving if that is the end game). Late model ICEVs are loaded with technical equipment that seems to fly under the radar, so to speak, since no one pays much attention to it. Others worry about cybercrime and have tried to bring attention to those potential vulnerabilities.

The Biden administration, in Executive order 13873,  is acting under authority of the International Emergency Economic Powers Act (IEEPA), “to deal with any unusual and extraordinary” foreign threat to the United States’ national security, foreign policy or economy, if the President declares a declares a national emergency…(Proposed Rulemaking)

These bans on connected automotive technology issued on national security grounds will have broad bipartisan support, including Biden/Harris and Trump, although some critics would have liked to see action sooner. A prohibition of this kind could arguably be justified under the USMCA Article 32.2 exception, which permits a Party to take actions to protect its “own essential security interests.” The US could decide without any review by other parties or in a USMCA panel. Otherwise, it would probably be a USMCA violation. (National Security under USMCA) The US use of Section 232 to restrict steel and aluminum has survived several court challenges.

Mexico and Other Potential U.S. Suppliers of Connected Vehicles, Software and Hardware

For the time being—at least until the beginning of 2026 and probably longer—there will be no Chinese EV production in Mexico. It also seems exceedingly unlikely that the Chinese origin software or hardware relating to the “connected” technology covered by the regulations is or will be produced in Mexico, although trans-shipment may be a potential concern.

This DOC proposed action is focused on China rather than on Mexico or other potential exporters of Chinese made EVs to the United States, although the prospect of manufacturing of EVs for export to the US by BYD or other Chinese manufacturers is obviously of serious concern to the US auto industry and policymakers (Mexican EV threat). As noted above, a ban on such imports based on national security grounds would be difficult to attack under the USMCA. (Among other reasons, Lopez Obrador has cited national security as a broad basis for attacking objections to constructing the Mayan Tourist train) (National security for Mayan train).

Despite the global breadth of the regulations, Mexico may ultimately be affected more than any other U.S. trading partner, except China. The Mexican auto/auto parts industry has been the most significant driver of Mexico's manufacturing sector since before NAFTA went into effect in 1994 and established an integrated North American automotive market, amounting for about 22% of total trade under the USMCA, and 17.4% of total world auto production (North American auto industry).

Still, the trade situation goes way beyond Mexico and will probably frustrate other auto-producing governments. For United States and European original equipment auto manufacturers, these US restrictions remind many of the flooding of US and EU markets by Japanese and Korean auto producers on steroids, recalling in particular the  huge inroads made in the United States market by major Japanese auto producers and the various steps the United States took 40 years ago  to protect the U.S. automotive industry (US-Japan Auto Deal 1985).

If nothing else, the likelihood that the next US president will impose high duties on imports of EVs made by Chinese firms in Mexico or elsewhere (see below) may convince BYD that their proposed Mexican facility should be further postponed. It is uncertain whether Elon Musk could convince Donald Trump that Tesla vehicles from Mexico could be imported at low duty rates into the US; otherwise, the proposed Tesla Nuevo León plan might also be abandoned altogether, after having been postponed once already.

It is worth keeping in mind that many Chinese auto parts imported into or manufactured in Mexico are routinely used in producing autos sold in the US, without any apparent concern by the US government (or even Mr. Trump). Under the USMCA rules of origin, up to 25% of a vehicle's components (down from 35% under NAFTA) can come from outside North America, e.g., China, India, Korea or elsewhere) (USMCA automotive sector).

U.S. Tariffs and Presidential Uncertainties

At this writing, a few weeks before the U.S. Presidential election, policies in 2025 toward US imports of EVs will depend in major part on who is president, although the Biden administration’s 100% tariffs on EVs from China and the DOC regulations banning software and hardware imports from China and Russia would probably be continued in force. If one can rely on campaign rhetoric—which is always problematic—a second Trump administration is likely to affect US motor vehicle imports,  both ICEVs and EVs, and parts and components, from every U.S. trading partner, given that the proposed across the board 10%-20% new tariffs would apply to autos and auto parts as well  as other goods (10-20% Proposed Trump Tariffs). Whether these tariffs if imposed would survive court challenges, even if national security were cited, or possible Congressional challenges, is uncertain.

Trump promised on September 23 that if elected he would impose 100% customs duties on all passenger vehicles imported from Mexico, both ICEVs and EVs (although he may not know or care about the full implications) (100% tariffs on Mexican autos). The objective stated by Trump apparently has nothing to do with national security. He says he would be delivering jobs to the US. Such duties particularly against Mexico alone would be illegal under WTO, USMCA, and US customs law, and likely would be enjoined by the Court of International Trade, a federal court which has exclusive jurisdiction over trade and customs cases. However, one can question whether the proposal would survive beyond November 5. Mr. Trump is beholden to many executives in the US automotive industry and their lenders, so it so it seems to us unlikely to be implemented.

Ms. Harris if elected would probably impose 100% duties on Chinese/Mexican EVs to match the Chinese tariffs (if they have not already been imposed by Biden), which could probably be done on the same national security grounds as the DOC regulations discussed herein. Once final DOC regulations are published, probably by December 2024, “connected” EVs, including Mexican EVs with imbedded “connected” software and hardware made by Chinese-owned factories, will be banned from the US. One could argue that with the US ban on imports of connected vehicle software and hardware the 100% tariffs are not necessary, but a Trump administration typically loves tariffs, and a Harris administration could take a “belt and suspenders approach.” Separately, Harris has complained that the USMCA negotiated by Trump has made it “far too easy” for auto companies to outsource jobs and promised (without providing any details) to address her concerns in the 2026 USMCA review (Harris on auto rules). Her pronouncements, like Trump’s 100% tariff proposal, do not distinguish between ICEV and EVs.

It might also be considered advisable by Harris to apply the 100% duties to potential Chinese-produced EV imports into the United States from Turkey, the EU, Thailand and Brazil among others, where Chinese-owned EV factories are or will soon be producing EVs. (ICEVs made by Mercedes, BMW and Audi also have sophisticated computer systems, although EU privacy rules may limit their scope, and their spying capabilities are far less suspect.) As far as we can tell, there has been some handwringing about potential spying within the EU, but the proposed penalty duties of up to about 40% are focused on Chinese subsides and protecting the EU industry and its workers (EU auto tariffs).

With current imported Chinese-origin EV sales in the EU accelerating, it is probably too late for the EU to respond effectively. The EU reportedly imported about 300,000 EVs from China in 2023, although more than half of were made by Tesla or BMW, Renault and other EU-controlled facilities in China (EU imports of Chinese EVs). If we were the US military, we would not want any of those EVs visiting the many U.S. bases in Europe, and US policy makers should be wary about re-export of some of those EVs to the United States.

Finally, if one is sufficiently cynical, one can argue that a Harris administration, even if would never impose 100% tariffs on all autos imported from Mexico, would generally favor a “Buy American-invest in America-Employ Americans” policy that may not differ in major respects from Trump’s except in tone.

The 2026 USMCA “Review and Revision”

EV rules of origin will very likely be on the agenda for the mandatory 2026 USMCA "review and revision," at the request of the United States or the other Parties although it seems unlikely that the US would wait until 2026 to deal with this critical trade issue. Based on their statements to date, it seems likely that either a Harris or a Trump administration would be pushing for rules of origin that are even more favorable to the US than those negotiated in the USMCA and subsequently advocated by the United States, even though some observers have urged increased flexibility on automotive trade rules within North America (Looking Forward). We recall that when the Trump administration was negotiating a replacement agreement for NAFTA, its original auto rule of origin proposal was for 85% North American content, of which 50% would have had to be US content.

In any event, it seems unlikely that the Parties (with the US demurring) will be able to agree in 2026 to extend the USMCA for 16 more years due to disagreements on autos or other key issues. More likely, there will be no agreement on changes in 2026, making another review necessary in 2027 and perhaps thereafter, until 2036, when the USMCA would terminate unless the Parties agree on a 16 year or any other extension which would have unanimous support (USMCA article 34.7). We believe this is the most likely case whether Harris or Trump is president from 2025-29.

Conclusions

The prospective regulations banning US imports of “connected” software and hardware, whether imported alone or imbedded in vehicles, should greatly assist the US government in protecting the United States from the dangers of the presence of such vehicles in the United States. The delay in imposing the bans until the 2027 and 2030 model years is somewhat troubling but probably inevitable. U.S. policy in this area has been far more proactive than in the EU and is welcome.

That said, the rapidly expanding ability of adversarial interests to attack microelectronics like those in vehicles in order to undermine and threaten economic and national security in the United States and among allied nations currently exceeds our abilities to invoke broad, economy-wide anti-tampering tactics. Strategies are needed at the materials science level (and are being addressed at Rice University), for “smart materials” research and development, to harden critical systems. As well, there are huge considerations beyond autos when it comes to market penetration of electronic devices with telecommunicating capacity that present any number of both competitive and security concerns and rivalries. Whether ICEVs or EVs, a goal is “vehicle to everything” or V2X systems integration, which increases the need for anti-tampering and other hardening even more. We doubt that the United States has the capacity, anywhere, to handle all of this, even if our inertia could easily be overcome. Thus, going forward we expect these fragilities to become deeply embedded in politics and policies surrounding international trade, well beyond that in automotive vehicles.

With the USMCA, it is problematic whether the agreement would survive four more years of Mr. Trump if either the 10%-20% increased tariffs on all goods including autos and auto parts were imposed, let alone the 100% tariffs on all auto imports. The Harris proposals to date raise fewer concerns, since it has been widely assumed for some time that no U.S. administration would permit the importation of connected vehicles into the U.S. from Mexico or anywhere else. While USMCA tariffs are zero if a product meets the rules of origin, the MFN tariff otherwise applicable to passenger cars imported into the United States (except currently from China) is only 2.5% (other than China), and an insignificant barrier to auto imports from Mexico, Europe or elsewhere (US import duties).

The combination of US concerns about Chinese origin connected vehicles, U.S. “Buy American” policies and Mexico's return to an autocratic, single-party state with an anemic rule of law (Judicial "Reform" and the rule of law) could together become a devastating blow to the Mexican economy in general, leading to the worst recession in many years. This has serious negative implications for the United States as well, particularly with regard to controlling illegal immigration, but also to the continued global competitiveness of the North American automotive sector.

Guest Post: A Tribute to Frieder Roessler from Werner Zdouc

This is a guest post by Werner Zdouc. The piece will be published in a forthcoming issue of the World Trade Review.

A universalist, shaping destinies, staying true to himself

Werner Zdouc

Frieder Rössler was a principled pragmatist, who throughout his career never compromised on his high intellectual and ethical standards. He strove for himself and others to thrive in intellectual and professional freedom, creativity, happiness, and as years passed, serenity.

Two universities, more than others, marked his academic upbringing: The university of Freiburg, Germany, renowned for its ordoliberal school in economics, shaped his economic thinking. The Fletcher School in Boston widened his horizon on political science, the rationality and emotionality of political processes and the policy aspects of law. Since his childhood most striking for his intellectual and professional drive was the catastrophic experience of his and his parental generation of Germany morally, economically and politically in shatters after Nazism. He often said to me, the mission of his generation was to work for a multilateral system built on rules, ethical standards, human rights, social welfare, equity and inclusiveness so this could never happen again. Early in his life he was convinced that he had to leave Germany to learn abroad from other political, legal, economic and cultural systems, which was somewhat unusual at this period of the country’s reconstruction. 

Frieder mastered legal science and economic theory but equally tried to explore and question political paradigms and to comprehend both rational and irrational realities of political processes and international negotiations. Fully mindful of these realities throughout his international career, he was convinced being passive was not an option. Relentlessly, he tried, wherever he could, to shape these processes and make them more driven by legal and economic science, facts and data, and fundamental rights standards. He was not content to be a witness or bystander of change, he felt a mission to actively co-shape the transition from the GATT 1947 to the WTO multilateral trading system and at the Advisory Centre for WTO Law to empower developing and least-developed countries to take their destiny in their own hands. When he felt he had reached the limits of steering the system and making a difference in a function he held, he did not hesitate to jump ship, work for a different international organization, join academia or engage in capacity building. He left a mark in whatever he touched.

It is generally known but nevertheless under-researched mystery of the WTO Marrakesh Agreement that some of its most powerful features seemed not to emerge from thorough reflection and fully transparent, inclusive discussions. By the end of the Uruguay Round negotiations, the single-undertaking idea was of course on the table, but quite a number of countries were convinced they would be able to pick and chose from the many covered agreements those that served their interests most, while abandoning those agreements that they considered obstacles to economic development. Had the single-undertaking approach been a certainty throughout the Uruguay Round, many developing countries and LDCs would have approached the negotiations differently, invested more time and efforts in the discussion process and insisted on different rules for key agreements like TRIPS or Agriculture. Some claimed they had not been fully aware that WTO Members (with extremely few plurilateral exceptions) would not be able to pick and choose from the agreements resulting from the Uruguay Round.

Like India, also other developing countries thought of a creative way out: Invoking the non-discrimination clauses of GATT 1947 would allow them not to sign up to some or most WTO covered agreements, while being entitled to the conferral of all the benefits of the WTO Uruguay Round results by the trading partners ratifying the full package, by virtue of GATT 1947. In other words, Members not signing up to all Uruguay Round agreements could take a free ride on the commitments and obligations which Members ratifying all Uruguay Round agreements would be required to extend on a non-conditional MFN basis. The consequence of those attempts are known. With Frieder’s expert advice as GATT Legal Division Director, a legal solution was found whereby GATT Contracting Parties and Uruguay Round negotiating parties adopted all the results of the Round as a single package, including GATT 1994 being a part of the covered agreement. At the same time, they terminated the GATT 1947 to prevent such free-riding. Some developing countries felt trapped and protested such “coup” by the powerful countries that deemed the WTO covered agreements an inseparable package.

When I joined the WTO Secretariat in September 1995, this was still the talk of the day. Frieder was profoundly convinced that this was legally, politically and historically the right solution but he was visibly affected by the reaction of some Members. For him this was not a matter of using a legal construct to help the powerful impose their will through a single package of agreements; for him this was innovative institution-building of historic dimensions. In the “window of opportunity” period right after the fall of the iron curtain the unique chance arose for the world trading system to take a big leap forward towards bindingness and rule-orientation. In the longer run, this would protect developing countries and the less powerful better than ad hoc opting out from an innovative, rule-based package of agreements confronting the realities of trade in goods, services and trade-related intellectual property rights towards the end of the 20^th century. Perennializing the provisional application of GATT 1947 with partially grandfathered protectionism when the ITO failed was in Frieder’s conviction ultimately much more damaging for developing and least-developed countries.

Frieder was a relentlessly creative, visionary thinker, questioning and reinventing constantly his viewpoints. Contrary to other contemporaries, he did not lose his youthful approach to intellectual curiosity as he aged and advanced professionally. He never stopped thinking about the challenge of reconciling – within an internationalized binding system – trade  liberalization  with the pursuit of  legitimate “non-trade” objectives by governments and citizens. Long before the term “regulatory space” was coined, having spent all of his GATT life fostering rule-orientation through  dispute settlement and assisting in rule-making by negotiators, he often said when the Uruguay Round outcomes started taking shape, that the exceptions of GATT Article XX was not sufficient to resolve the regulatory challenges Member governments and societies faced in the 20^th century. He felt  the objectives listed were too limited and the burden of proof applicable under exceptions too burdensome. For him, the Tokyo Round Technical Barriers to Trade Agreement was a first step in the right direction, but as the breadth and depth of WTO rules gained momentum through the Uruguay Round, his dialectic mind prompted him to incessantly look for ways to preserve regulatory autonomy.

Just before the WTO Agreement had entered into force, Frieder passionately embraced the aims and effects test developed by the panel in the US - Taxes on Automobiles case. Some critics at that time wondered why this approach had been proposed when US Congress deliberated on whether to approve or reject the WTO Marrakesh Agreement with its impressive number of covered agreements and debates centered around the superpower’s regulatory sovereignty. It is common knowledge that kind of “aims and effects” was almost passionately rejected by subsequent panels and the Appellate Body. I am nevertheless convinced that Frieder (and those who thought alike) anticipated, if not steered, subsequent developments in the jurisprudence. They asked the right question, being mindful that increased judicialization and adequate regulatory space are two sides of the same coin. There were good reasons for rejecting the test endorsed by the US-Autos panel, but the underlying rationale may well have paved the way for the legitimate regulatory distinction test under the TBT agreement and other twists and turns in Appellate Body jurisprudence under GATT Articles I, III and XX. In Japan-Alcohol, EC-Bananas III and later, the Appellate Body eloquently voiced criticism rejecting the test under the GATT and GATS non-discrimination clauses, much to Frieder’s chagrin. However, the Appellate Body changed course, inter alia, in EC-Asbestos and Dominican Republic-Cigarettes, realizing it may have gone too far. It modulated its prior approach largely excluding regulatory motivations and design under the less-favorable treatment step of the analysis. For example since the Dominican Republic-Cigarettes case, measures that did not distinguish between products on the basis of the origin benefited from more simplified scrutiny in discrimination claims. In EC-Asbestos, the Appellate Body compared the entire categories of imported with domestic products  and widened the horizon of analysis of consumer perceptions to include regulatory motivations and design. In this way, raising such concerns was no longer limiting to justification under the exceptions of Article XX. Frieder felt vindicated, but still struggled with the Appellate Body’s caution in refining its jurisprudential course.

The US-Autos Gas Guzzler tax case was the lawyers’ talk in town when I appeared for my job interview in 1994 in Geneva. Frieder impatiently drew the questioning to hearing my opinion on the US-Autos panel report. I expressed the way the aims and effects test had been designed and executed by the panel under the analytical steps of likeness and less favorable treatment was suboptimal. The test seemed twice to perform very similar analyses of aims and effects, thereby making the two-step analytical process under national treatment, and importantly, also the analysis of objectives and the way challenged measures were implemented under Article XX and its chapeau partially or wholly redundant. I raised my criticism but Frieder – at least in the hiring interview scenario – was carefully listening and did not insist on being right that this test was for him the solution to the production and processing (PPM) problem and the limited and arguably incomplete list of legitimate policy objectives in Article XX. He wanted to hear how I would plead and stand my ground based on my line of reasoning in addressing his concerns about regulatory space in alternative ways under a “traditional” line of analysis under GATT Articles I, III and XX. Despite such disagreement and me being inexperienced, fresh from graduate law school he hired me eventually. But when I finally joined the Legal Affairs Division (LAD), he had already - literally - sailed away on his boat across the Atlantic to join Georgetown university.

Frieder told me he strongly felt it was the right thing to hire staffers with their own legal mind, regardless of the extent or nature of prior experience. While he considered GATT-insider knowledge an asset, it was far less important to him than creative legal analytical and genuine oral and written argumentation. And he had lived what he said. When I joined, I was amazed by the unique characters and brilliant minds populating the small Legal Division at the time. His successor as the director, Bill Davey at times also seemed shell-shocked by the collection of characters Frieder had bequeathed to him, and I don’t hesitate to count myself in here. Both Bill and Frieder led this team with serenity, passion, intellectual curiosity and self-confidence. Frieder had surrounded himself with a range of extremely different personalities, some stubborn, others not, some great drafters, others not, some great thinkers, others not, some policy-prone, others principle-oriented, some academically interested, others pragmatic and suspicious of too much academic tendency in the division. In management class, they tell to beware of the mistake that supervisors often tend to hire their likes, when managers should hire staff that complement their skills and those of incumbent staff. Frieder certainly followed this advice, hiring the broadest range of different, creative, sometimes outright peculiar legal minds and practitioners, because his thirst for intellectual debate and incessant self-reflection would be best served in a professional environment of diversity, creativity, modesty, passion and innovation. This legacy undoubtedly strongly influenced me later when striving to build a similar kind of intellectually free and stimulating environment at the Appellate Body Secretariat.

The diverse LAD composition stretching vast skills and experiences would in Frieder’s view strongly benefit those participating in dispute settlement proceedings and ultimately the WTO Membership at large. Frieder treated ambassadors and delegates not differently than his staff and panelists. For him, it was no doubt indispensable to know what different Member representatives thought, but this neither constrained his thinking, nor determined his actions; he rather listened to them with intellectual curiosity, often taking their wishes as interesting starting points for debate, much to the surprise, and sometimes exasperation, of delegates, especially those from the most powerful Members, who were inspired by the mantra of the Member-driven organization. But those delegates could also be sure that Frieder would not lightly agree, and rather reflect, and stimulate debate with other delegates holding opposing views. This was not the easiest way to establish his strong reputation of independence, coupled with competence, foresight and serenity, but it was effective in building his unmatching standing among Members and at the Secretariat.

Some most powerful Members though, were less impressed with so much freedom of thought, panel reports perceived as unduly promoting trade liberalization and insufficiently accounting for fair trade concerns. When I last met Frieder in spring, he admitted he questioned himself when the responsibilities for dispute settlement were divided and the Rules Division was created with the competence of handling trade remedy cases, servicing relevant committees and engaging in capacity building with national trade remedy authorities. It was staffed with civil servants of certain trade remedy authorities and specialized practitioners with great depth but less breadth of knowledge, sometimes righteous and with political acumen, different from Frieder’s way of composing a team. The price for this structural change was increased numbers of unadopted panel reports under GATT 1947 and Tokyo Round Codes. In hindsight, Frieder said he came to terms with this decision of senior management and Members because being taken out of line of fire on trade remedy disputes, he could experiment and break new ground in other areas of trade law and dispute settlement, publish and pursue academic interests, which eventually led him to academia.

When Frieder felt he had done his job supporting the creation and transition to the WTO and the new DSU at the Legal Affairs Division, he quit for academia and then for the new Advisory Centre for WTO Law (ACWL). The ACWL was the epitome of his cherished career, at an age when others enjoy calm retirement. He often said that none of his previous positions prompted so much rewarding feelings and positive feedback as empowering developing and least-developed countries. Frieder again hired a diverse, multi-skilled and strongly motivated group of lawyers passionately advancing the ACWL’s mission and vision. It is fair to say that Frieder “made” the ACWL, building its reputation from scratch, investing his own personal stature in the new venture. The ACWL enormously benefited from Frieder’s reputation of competence, independence and wisdom in its first years. While nobody (openly) questioned the need for capacity building and ensuring that developing countries should be at par in dispute settlement proceedings, some donor governments were criticized openly by others why they would fund and sponsor an institution that would train developing countries to sue them. Frieder’s answer was short and sweet: since developed countries would undoubtedly always strive to act consistently with WTO law, there was no reason to fear developing countries having a better (legal) voice. To the contrary, they would know better how to act consistently with WTO law in litigation and negotiations.

When only few dispute settlement cases were initially raised before the ACWL, Frieder temporarily shifted this new-found mission in life to focusing on expert legal opinions advising Member governments. Thanks to Frieder’s making, the ACWL first made its name by being diametrically different from a litigative law firm, sometimes telling its clients to refrain from initiating a panel case and instead autonomously repairing WTO-inconsistent domestic regulation. This impressed ambassadors and delegates, even the Indian ambassador at the time, who once told me, he tried to explain (not always successfully) to capital and constituencies how many millions they had saved by following Frieder’s advice not fighting lost cause cases. Maybe precisely because the ACWL and the legal advice given was often non-litigious and not profit-maximizing, it was well-regarded and the Centre built the unmatched reputation it enjoys today.

During my final visit to Frieder last spring in Perroy overlooking Lake Geneva he said that sailing epitomized what he cared most about, ultimately, freedom: He spoke of the freedom to decide when, on which pathway, and which destination to reach – in  sailing and in legal discourse. He was the only visiting professor who ever sailed on boat across the Atlantic to Georgetown University. Developing this image further, sitting on his favorite bench overlooking vineyards, lake and the port with his boat, Frieder said, sailing demonstrates that the freedom the ocean promises is not without limitations. When currents, winds and weather change, the breeze turns into storms, the captain may hold against, but ultimately has to oblige to what cannot be controlled. Though, this is not the end of the story for a seasoned captain: what appears unpredictable and uncontrollable to the layperson, if the captain studies navigation, technology and meteorology, he can learn to influence and master what seems at first uncontrollable: humanity has learned to sail even against the wind. But this takes skills, competence, experience, motivation, stamina and serenity. Frieder was convinced what is true for a captain navigating a boat, is also true for the director of a division, institution or system.

Sailing gives you the time to think, when winds recede and calm reigns the ocean. Then there is plenty of opportunity to reflect and question entrenched viewpoints. Pristine waters and expanses of the ocean liberate the mind to think outside established patterns, to break new innovative intellectual grounds. But when the tides turns and storms take over, the captain needs to turn multi-faceted reflections quickly into effective action, implement conclusions, and achieve instant, potent results, or capsize and drown. True for the sailor and for the WTO.

Frieder, in my belief, will somehow continue doing exactly that, inspired by the spirituality he found again in recent years at the interreligious Romainmôtier monastery that for more than thousand years propagated from the Jura mountains values in symbiosis with Frieder’s.

Requiescat in pace, they say in Latin. Se vidimo nad zvezdami (we’ll see each other again above the stars) we say in Slovenian.

Trade Balances and Trade Interventions and Trade Protectionism

Last week, finance professor Michael Pettis spoke at an event about a new paper he co-authored. From what I can tell, Pettis has had some influence recently on the U.S. trade policy debate, but I have found his views hard to decipher. He and I have interacted a bit on Twitter, but none of the exchanges provided much clarification. After listening to him at this event, though, I feel like I might have a better understanding of why it's so hard, as someone in the trade policy field, to figure out where he is coming from: It's because what he is saying doesn't have much to do with trade policy as it is generally understood.

That's not to say the issues he raises aren't interesting. However, they are not closely tied to the debate over protectionism vs. free trade, which is at the core of trade policy. (Unless I missed it, the term protectionism did not even come up at his event).

That's fine, of course. He doesn't have to be interested in protectionism. But that's what trade policy is about: The never ending battle between export and import interests over where we end up on the free trade-protectionism continuum.

Instead, his focus is on trade balances, and he focuses on them in a way that mostly excludes a discussion of protectionism. What he's talking about is interesting as a separate economic policy matter, but it doesn't help us much in thinking about the core trade policy issues.

Let me illustrate all this through some quotes from the event.

Pettis suggests early on that he is for "free trade," in some sense of that term: "The point of our booklet is that free trade is a great idea, but we are nowhere near that ideal. And so in that case, policies that are implemented in order to push us closer towards that ideal are actually free trade policies." That sounded like it might be going somewhere good, but then as he continues with this thought, he does not seem particularly concerned with protectionism. Instead, he focuses on trade balances: "Those are the kind of things that we should be doing. Ultimately, they mean reducing the deficits of the persistent deficit countries, which, by definition, means reducing the surpluses of the persistent surplus countries." Getting more specific, with regard to these surpluses, he elaborates as follows:

And I think one of the great genius of Keynes was that he recognized the problem is the surpluses, right? It's one of the big criticisms I have of the WTO. We define the problem very narrowly and very incorrectly, so we never really solve the problem. So we say tariffs are trade interventions, so you can't implement tariffs without going through all of these various hoops. And what Keynes would have argued, and certainly what we argued is, yeah, tariffs are trade intervention, repressing interest rates are trade intervention, subsidizing research is trade intervention, putting downward pressure on wages, breaking up unions as trade intervention, China's hukou system is trade intervention. All of these things effectively intervene in trade, because anything that changes the balance between savings and investment domestically is automatically a trade policy. And since it's impossible to identify all the different ways you can distort trade, all the different forms of industrial policy, we need to go back to Keynes's argument, which is, you see, whenever there's a problem, you see the problem in the trade imbalances. So go after the trade imbalances.

As part of his argument for going after surpluses, he offers the concept of "trade interventions," which, as he lays it out, includes a wide range of domestic policies. I don't doubt that policies such as the ones he mentions affect trade in some way. I just don't think it is very useful to try to create a category of domestic measures that affect trade. Just about all domestic measures will do so to some degree, so what do we gain by having this category? To me, calling something a trade intervention just doesn't tell you much. And it ignores the categorization that tells you a lot: Is a measure protectionist?

Getting back to the trade imbalances, which he says he wants to "go after," as I understand it, the view of most economists is that if you want to have more balanced trade, you would need to address the macroeconomic factors affecting levels of savings and investment, which are the actual cause of the imbalances. Here, Pettis tries to make the case that this is something he wants to address, but based on the example he offers related to Germany, I'm not convinced. In this regard, he had an exchange with Greg Ip of the Wall Street Journal, and it left me thinking that he may not actually be willing to deal with issues such as differences in savings rates between countries. Here was Greg's question: 

You've identified a lot of distortions in the book that have led surplus countries to run very high saving rates, all associated with China, but there's a lot of countries that persist with large surpluses that do not have those distortions. Germany, most notably, arguably, the currency, part of a common currency, might fall into the category of undervalued currency, but none of the others apply. Germany is a very liberal economy, no restrictions on mobility, no restrictions on interest rates, etc. And even South Korea and Japan have evolved considerably to get rid of most of those distortions, yet still run surpluses. So I guess my question is, even if you moved to a world where the distortions you identify were eliminated, aren't there underlying marginal propensities to save and consume, that would result in the persistence of deficits, including in deficit countries like the United States, and doesn't that therefore suggest that there are things the United States must do in its own domestic policy framework to correct these imbalances?

Pettis answered as follows:

Well, see, I would disagree that those economies don't have distortions. They have all sorts of distortions. You can argue that the euro is a huge distortion for all of the economies of Europe, including Germany, because the euro is an undervalued currency for Germany, it may not be for other countries. Remember, inflation in Germany -- after the adoption of the euro -- inflation in some countries of Europe was much lower than inflation in other countries. So what that means is that the real value of the currency in those other countries went up, and the real value of the currency in Germany went down. Why does an undervalued currency matter? Because an undervalued currency, like everything else in economics, is simply a transfer. An undervalued currency hurts importers and it helps exporters, and households are all net importers, and the manufacturing tends to be exporters.

But Germany is even a clearer case, because before 2003 German savings rates were much lower and Germany ran a deficit. We forget that, but in the 1990s Germany was running current account deficits. So what happened in 2003, 2004, 2005 that shifted Germany into, at one point, the highest surpluses in the world, maybe in history? And we all know what it was. It was the Hartz labor reforms. ... before the labor reforms, as German GDP went up, German wages went up just as quickly. After the reforms, as German GDP went up a little bit more slowly, German wages flatlined. So notice what happened in Germany. The household share of GDP after the labor reforms declined, right? And as the household share declined, not surprisingly, the consumption share declined. And as the consumption share declined, by definition, the savings share soared. And everyone started talking about those thrifty Germans. If you look at household savings, it didn't change at all. The reason savings went up is because wages went down and business profits went up. And business profits are savings, right? So the famous savings of the German people was really caused by a labor reform that transferred income from German workers to German businesses. German business profits went up 50% in a couple of years right. So I would argue that that was a policy issue.

I think Greg nails a key problem with Pettis's argument here, and I don't think Pettis gave a convincing response. In particular, Pettis doesn't seem willing to deal with the basic point about "underlying propensities." Cultural factors are real, and I'm not sure why he is so reluctant to acknowledge this. Germany has been famous for its thriftiness for a long time, not just since 2003-2005, something that comes out clearly in the data. With regard to the 1990s, what I think Pettis may be missing here is the impact of German reunification, which led to increases in spending, but I'd have to look into this more. Regardless, saying that Germany started being thrifty in 2003 seems clearly wrong. So, this isn't very credible as it relates to Germany, and it ignores Greg's point about U.S. savings rates as well. Pettis is very focused on reducing the surplus in surplus countries, but I'm not sure he's willing to support the changes in deficit countries that would be required.

Also on the Germany vs. U.S. savings issue, a new essay from Andreas Freytag and Phil Levy has some interesting insights:

The question of why savings are low can often be answered by examining an economy’s demographic structure (Box 3).

Box 3

Demographic trends and savings

The individual savings rate tends to be a function of age. Most people are net savers during their years in employment or self-employment (i.e., between 15 and 64 years). During their early, formative years before joining the workforce, they live on other people’s savings (e.g., parents, grandparents, or credit institutions) to pay for education. Once their working years are over, they dissave to finance their retirement. This implies that a younger population will save less than an aging population.

In the United States, which has a relatively younger population than other Western nations, people tend to save a smaller share of their income. On the same token, a young and growing population needs capital. Thus, the business sector tends to invest at a higher level. The resulting shortage of savings relative to investment demand drives the current account deficit.

Germany, in contrast, is more of an aging society. The supply of labor and human capital is in relative decline, while the savings rate remains high, at least as long as most people remain below retirement age. As members of an aging society, Germans invest a larger part of their savings abroad, creating net capital outflows and a trade surplus. The differing trade balances between the United States and Germany, therefore, have nothing to do with competitiveness or unfair trade practices.

Like the regular US current account deficit, the German current account surplus is the rational result of underlying economic and demographic factors.

As a final, and mostly unrelated, point, Pettis has this to say about Japan, Germany, and South Korea and their surpluses:

If you look at Japan, if you look at Germany, South Korea, if you look at the surplus economies, their manufacturing share of GDP is higher than the global average, and if you look at the advanced deficit economies, it's lower than the global average.

It is certainly true that Japan, Germany, and South Korea manufacture a lot. It's worth noting here, however, that this is an unsurprising result given their relative lack of natural resources and farm land. If they had oil, for example, they would probably spend more time on extracting that oil and less time on manufacturing.

Summing up, there are a whole bunch of trade policy fights going on right now, and the issue of trade balances is often thrown into these fights in unhelpful ways. Some people seem to want to see the trade balance as a scorecard of who is winning and losing in international economic relations, but that's not what it is. Trade balances are mostly driven by macroeconomic factors, and my sense is that international coordination on those issues will be extremely difficult, with governments of both surplus and deficit countries not very eager to make changes.

Seminar on Legal Architecture of Remedies in the WTO Agreement

Announcement:

Interested WTO lawyers are invited to a one-hour academic feedback seminar on Zoom, hosted by Prof. Geraldo Vidigal, University of Amsterdam, to comment on a draft article by Lothar Ehring, written to pay tribute to Frieder Roessler. The paper explains the legal architecture of remedies in the WTO Agreement and how certain parts of it importantly depart from the standard GATT Article XXIII model. These differences have been disregarded in a majority of relevant cases in the practice of WTO adjudicative decisions.

This could be of interest to WTO litigation practitioners and other WTO lawyers who are sufficiently interested in these intricacies. The draft paper and the connection details will be shared with the participants ahead of the session, which is planned for Monday, 7 October at 2 p.m. Brussels time. After a rapid summary of the findings, the participants will be invited to share their remarks on the draft paper. To participate, please register in advance for this meeting:

https://uva-live.zoom.us/meeting/register/tZIqduCsrTktH9OIgsz1ao3InY63e_Tlhfd6 

After registering, you will receive a confirmation email containing information about joining the meeting.

The EU-Singapore Digital Trade Agreement: Experimentation with Data Flows Obligations and Exceptions Continues

Over the past couple years, I've been looking at how digital trade agreements set out data flows obligations and exceptions. I've got a new one to examine, as the EU has published a pre-legal scrub version of its digital trade agreement with Singapore, building on their previously signed FTA. In prior posts, I've looked at the EU-Japan trade agreement and the EU-NZ trade agreement provisions in this area, so I'll throw in some comparisons to those agreements.

First off, I'll just note quickly the appearance of the right to regulate in Article 3 of the EU-Singapore digital trade agreement:

The Parties reaffirm their right to regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, social services, public education, safety, environment or public morals, social or consumer protection, privacy and data protection, and the promotion and protection of cultural diversity.

I'm skeptical that these provisions have much impact, but someone seems to like putting them in there (the EU-NZ agreement has one too).

Now we get to the core data flows obligations:

ARTICLE 5 - Cross-border data flows

1. The Parties are committed to ensuring the cross-border transfer of data by electronic means where this activity is for the conduct of the business of a covered person.

2. To that end, a Party shall not adopt or maintain measures which prohibit or restrict the cross-border transfer of data set out in paragraph 1 by:

a. requiring the use of computing facilities or network elements in the Party's territory for processing of data, including by imposing the use of computing facilities or network elements that are certified or approved in the territory of the Party;
b. requiring the localisation of data in the Party's territory for storage or processing;
c. prohibiting storage or processing of data in the territory of the other Party;
d. making the cross-border transfer of data contingent upon use of computing facilities or network elements in the Party’s territory or upon localisation requirements in the Party’s territory; or
e. prohibiting the transfer of data into the territory of the Party.

In the same Article, we then get an exception for "legitimate public policy objectives":

4. Nothing in this Article shall prevent a Party from adopting or maintaining a measure inconsistent with paragraph 2 to achieve a legitimate public policy objective FN1, provided that the measure:

a) is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade; and
b) does not impose restrictions on transfers of information greater than are necessary to achieve the objective. FN2

FN1: For the purpose of this Article, “legitimate public policy objective” shall be interpreted in an objective manner and shall enable the pursuit of objectives such as to protect public security, public morals, or human, animal or plant life or health, to maintain public order, to protect other fundamental interests of society such as social cohesion, online safety, cybersecurity, safe and trustworthy artificial intelligence, or protecting against the dissemination of disinformation, or other comparable objectives of public interest, taking into account the evolving nature of digital technologies and related challenges.

FN2: For greater certainty, this provision does not affect the interpretation of other exceptions in this Agreement and their application to this Article and the right of a Party to invoke any of them.

The structure of data flows obligations and exceptions here looks a little more like the EU-Japan version than the EU-NZ one, with standalone public policy exceptions embedded directly within the data flows obligations Article.

One thing that was noteworthy about the EU-NZ digital chapter was the separate Article on "Protection of personal data and privacy" that seems to be a broad exception-like provision, of a scope that is a bit uncertain to me. The EU-Singapore agreement also has something that is perhaps along these lines:

ARTICLE 6 – Personal data protection

1. Parties recognise that individuals have a right to privacy and the protection of personal data and that high and enforceable standards in this regard contribute to trust in the digital economy and to the development of trade.

2. Each Party shall adopt or maintain a legal framework that provides for the protection of the personal data of individuals.

...

4. Each Party shall ensure that its legal framework under paragraph 2 provides non-discriminatory protection of personal data for natural persons.

...

11. Nothing in this Agreement shall prevent a Party from adopting or maintaining measures under its respective legal frameworks referred to in Paragraph 2 that it deems appropriate, including through the adoption and application of rules for the cross-border transfer of personal data, provided that the law of the Party provides for instruments enabling transfers under conditions of general application for the protection of the data transferred.

12. Each Party shall inform the other Party about any measure it adopts or maintains according to paragraph 11.

The wording here is different from the EU-NZ one, with the EU-Singapore version reading more like a traditional trade agreement exception ("Nothing in this Agreement shall prevent ..."), but the "deems appropriate" language in para. 11 perhaps gives it a similar scope to what we saw in EU-NZ, with a broad exception for privacy and personal data protection.

And then finally, in case the various exceptions and exception-like provisions set out above don't give the respondent what it wants, some of the exceptions set out in the EU-Singapore FTA apply to these digital trade agreement obligations as well, so you can try them too:

ARTICLE 29 – General exceptions

Articles 2.14 and 8.62 of the Free Trade Agreement shall apply mutatis mutandis to this Agreement.

ARTICLE 30 – Security exceptions

Article 16.11 of the Free Trade Agreement shall apply mutatis mutandis to this Agreement.

I have no idea whether we are ever going to see litigation under any of the digital trade texts that are proliferating these days, but if we do, making sense of the provisions of any particular agreement, given the context of all the textual variations in other digital agreements, is going to be a challenge.

Will USMCA Be Renewed in 2026?

At a Baker Institute event last week, C.J. Mahoney, who was a Deputy U.S. Trade Representative during the Trump administration, argued that renewal of the USMCA under the Article 34.7 review clause was unlikely to happen in 2026. He first provided some background on the provision:

... USMCA is up for renewal in the summer of 2026. Unlike prior trade agreements, USMCA has a fixed term of 16 years. But at the six year anniversary mark, the parties have the opportunity to extend the agreement for another 16 years. If they fail to do so by July of 2026, a 10 year clock will start to run for the eventual termination of the agreement.

The idea behind this provision, which I maintain was a sound one, was to create an incentive for policymakers to continue to upgrade the agreement periodically, so that we never find ourselves again in a situation like we were in 2017, with an agreement that was badly outdated and politically unpopular.

And then here is his argument about why it is unlikely USMCA will be renewed in 2026:

[Regardless of who is elected president,] next year will be dominated by domestic issues, mainly taxing and spending. I therefore expect that a year from today, the negotiating agenda for the United States will be unsettled and the fate of USMCA uncertain. My best guess is that the chances for an immediate renewal are quite low.

Mexico and Canada, which are heavily dependent on trade with the United States, would renew the agreement tomorrow, preferably with no changes. But from the US perspective, the costs of not renewing the agreement at the six year anniversary mark are relatively low. The agreement would still have 10 years to run. US leverage in the negotiations arguably would increase rather than decrease during that period. Yet for both a president Harris and a President Trump, the political costs of renewal would be non-trivial.

The passage of USMCA was, in my view, one of the great political hat tricks of recent years. ... name the last time that the AFL-CIO, the Teamsters, steelworkers, the Business Roundtable, Chamber of Commerce, the Farm Bureau, Nancy Pelosi, Mitch McConnell, Joe Biden and Donald Trump agreed on something. It was USMCA. Unfortunately, I don't see that same political constellation of stars aligning anytime soon.

...

So if I'm right, we are headed towards an anti-climax in the summer of 2026. The parties will miss the renewal date, at which point the slow clock towards the theoretical termination of the agreement will start to run.

Finally, he put forward some things that might change this assessment:

Now what could change the dynamics? I can think of a couple things.

One is the attitude that Mexico and Canada take to the negotiations. ... the typical [negotiating] playbook is for the parties to take very extreme positions at the beginning and hold all concessions to the end. I would suggest to my friends in Mexico and Canada that that would be an unwise strategy in this instance. The biggest challenge that Mexico and Canada will face in urging a swift renewal will be getting the attention of the next administration. An indication to move in the US direction early on, on issues like energy, labor, dairy, auto rules of origin, just might grab the attention of White House. This is an unusual approach, but unique times call for novel strategies.

The second way to break the impasse would be if the next administration sees USMCA as a way to reset US trade policy generally. That could be done by expanding the scope of the agreement to strengthen the critical minerals supply chain in North America, adding new disciplines on AI governance, export controls and inbound investment restrictions, and, perhaps most intriguingly, opening the door to new members of USMCA. The two most promising candidates, in my view, would be Australia and the United Kingdom. Think of it as a merger of USMCA and AUKUS. ... it would allow the United States to bring its closest security and economic partners together under a common umbrella. In time, this bloc might use its combined leverage to negotiate with other techno democracies, like Japan, India and the EU. One might see this perhaps as the start of a new global trading system, at least one for the US and its allies, that could eventually take over, or at least supplant, the WTO. This vision might strike one as farfetched, but I think that outside of the box thinking will be necessary if we have any hope of an immediate or even near term renewal of USMCA.

Just a couple quick thoughts on his suggestions for how to get USMCA renewed in 2026. First, I'm not sure it makes sense for Canada and Mexico to give up so much to get a renewal of USMCA in 2026. It's true that they rely heavily on trade with the U.S., but if the deal starts to look unbalanced, the Canadian and Mexican governments will have a hard time defending it to their own citizens, and that puts them in a bad political position domestically.

On the expansion of USMCA, I can imagine some new rules being added, although that could be tricky because there is disagreement within the U.S. on what the rules on issues such as AI governance should look like, so it might be hard to negotiate them internationally. On the possibility of adding new USMCA members, I hear a fair amount of talk about some sort of trade club of allied democracies, but it's hard to see Trump getting on board with that because it would involve liberalization. I suppose Harris might consider it though.

Meredith Lilly of Carleton University later weighed in to agree with Mahoney on the prospects for renewal in 2026:

C.J. set this up very well, talking about the review clause. We didn't have one of those in NAFTA. It was an ongoing agreement that would last forever. And so this review clause actually is less than a page of text in the overall agreement, yet it actually stands to potentially really, really jeopardize it, frankly. And so, as C.J. outlined, if all three countries don't agree to renew the agreement in 2026, then we go into this period of annual reviews. I agree with him, that I don't think we're going to see a renewal in 2026. There are absolutely zero reasons for politicians to do that. And so I do think we're going to be in a world of annual reviews every year for 10 years.

Tony Payan of the Baker Institute then expressed some surprise about these assessments and also some reluctant acceptance:

This is the first time ... that I hear that the renewal of the USMCA is not a given. I thought it was 99%, but now I'm beginning to think, oh-oh, there's a lot of political interests underneath that, and there's a lot of different dates that don't make it politically convenient for renewal.

I was where Tony was on all this. I thought renewal in 2026 was very likely under a Harris administration (less so under Trump, as he would try to extract more concessions), and I was surprised to hear this skepticism. But the more I thought about it, the more I thought the skeptics may very well be right. At the same time, it's hard to say anything with much certainty until we see the results of the 2024 U.S. elections, the 2025 Canadian elections, and how new Mexican President Claudia Sheinbaum governs.

And just to restate my (politically unrealistic) position on all this, I would use the 2026 review process to remove the existing Article 34.7 and replace it with one that involves more frequent reviews (maybe every two years rather than no reviews for the first 6 years) but no automatic termination mechanism (there are separate provisions under which the parties are able to amend the agreement and to withdraw, so there is no need for this termination provision). In addition, on the U.S. domestic side of things, I would make the withdrawal decision a joint one by Congress and the President, with U.S. withdrawal contingent on support from both branches.

New Discussions of Appeal/Review in the DS Reform Process

In July, I mentioned that the the WTO Dispute Settlement Reform Process is underway, and that people can follow it a few weeks behind the actual developments, as meeting minutes are derestricted.  The Minutes of the Heads of Delegation meeting from July 18 are now available.

Focusing on the Appeal/Review aspects of the discussions, here are some excerpts from the report by Jessica Dickerson (Australia), on behalf of the Co-Convenors, on the technical work under the DS reform process:

I will turn now to our recent discussions on Appeal/Review. Since our last update, experts have discussed the following sub-topics:

a. Reducing or changing incentives to appeal,
b. Clarifying Members' expectations of adjudicators,
c. Form of the mechanism, and
d. Access to the mechanism.

At each of the meetings, Mr. Joel Richards (Saint Vincent and the Grenadines) and I – as the responsible Co-Convenors – provided a summary of the previous discussions and ideas from the informal process under each of these sub-topics, noting the direction from our Ministers and the Facilitator, to build on the progress already made.

In the discussion on reducing or changing incentives to appeal, many Members underscored their interest in preserving the right of appeal so as to correct legal errors. This notwithstanding, several Members also emphasized the importance of establishing guardrails to reduce tactical or frivolous appeals. Further, it was noted by some Members that there needed to be a degree of caution and some balance in not reducing legitimate incentives to appeal. Against this backdrop, there appeared to be some shared interest in exploring how Members could address incentives to appeal through:

a. making better use of interim review at the panel stage;
b. a political commitment to reduce appeals;
c. adjusting the reasonable period of time (RPT) for compliance; and
d. establishing parameters for the scope and standard of review.

With respect to clarifying Members' expectations of adjudicators, several Members agreed that it was important to clarify expectations with respect to timeframes, word limits, as well as the output expected from adjudicators. In this regard, several Members expressed the view that it was important to ensure that timelines were met, and that adjudicators' reports focused only on what was being argued by the appellants. Furthermore, several Members thought that it would be beneficial to build on the work from the informal process such as with respect to issues of precedent and judicial economy, which can be applied to appeal/review adjudicators.

In the discussion on the form of the mechanism, Mr. Joel Richards and I encouraged Members to focus on interests and solutions, rather than on whether there should be a two-tier or single-tier dispute settlement system. Many Members underscored that a standing adjudicative body met their interests, which included correctness of decisions, legitimacy, efficiency, predictability, and consistency. However, another perspective expressed was that a standing body did not guarantee correct decisions, and created a perception that the body had greater authority and legitimacy than other adjudicators such as panellists. It was suggested that it could be fruitful to consider the different features of the institutional design of the appeal/review mechanism, with a view to identifying potential reforms. To give an example of one such feature, experts could consider the appointment process for appeal/review adjudicators.

Regarding access to the mechanism, we again encouraged Members to focus on their interests by responding to some discussion questions. Many Members said that automatic, compulsory access was essential to meet their interests. It was noted by several Members that such access protected them against power dynamics and was particularly important for developing Members. Some Members observed that compulsory jurisdiction was vital for the system's legitimacy and for Members' trust in the system. An alternative view expressed was that automatic access to an appeal/review mechanism was not essential to have a system that supported parties to resolve their disputes. Under this view, the parties could decide the features of the system would be useful to them, which would go towards addressing a concern about the perceived superiority of the second tier and the consequences flowing from that perception. In view of the difficulty of finding a middle ground on this sub-topic, it was suggested by some Members that it may be more beneficial to focus on other ideas, including those that would reduce incentives to appeal/review, and by establishing guardrails with respect to the scope and standard of review. In this connection, some Members also considered it important to assess the overall package of reforms and not view the issue of access to the mechanism in isolation.

This is a useful summary, but it leaves me wondering about the prospects for success here. The report mentions "another perspective" and an "alternative view," and presumably that is the United States. So what are the chances that a solution can be found here? Can this question only be answered after we know the results of the U.S. presidential election?

ANZSIL International Economic Law Interest Group: Call for Papers

This is from the ANZSIL International Economic Law Interest Group (IELIG):

2024 Workshop

The 2024 IELIG Workshop will be held via Zoom on Friday 29 November 2024. Its aim is to provide an informal setting for discussion of topical issues and works in progress.

We are honoured to have Prof Em Thomas Cottier as this year’s keynote speaker.

Thomas will speak on ‘The Impact of the Multi-Party Interim Appeal Arbitration Arrangement’. We invite paper proposals from ANZSIL members, practitioners in the field as well as staff from MFAT, DFAT, and the Attorney-General’s Department. We encourage PhD students and early career practitioners and academics to submit a proposal. Paper proposals may be on any topic within the work of the IELIG. All speakers are invited to submit their paper following the workshop to the Australian Year Book of International Law or the New Zealand Yearbook of International Law for possible publication. We also invite ANZSIL members and MFAT/DFAT/AGD staff to attend the workshop even if not presenting a paper.

Submission of proposals

If you wish to submit a paper proposal, please submit an abstract of 300 words by email to [email protected] by 10 November 2024. Please include the heading on your email message ‘ANZSIL Conference IELIG Workshop Proposal: [Your Name]’.

Best wishes,

Prof Chris Riffel (University of Canterbury) and Mr Jose-Miguel Bello Villarino (University of Sydney)
IELIG Co-Chairs

Designing an Economic Security Safeguards Mechanism to Reform the WTO Security Exception

During the WTO Public Forum, the TradeExperettes published a report entitled, Ten Quick Wins for: Re-globalization and Resilience in Trade. The report captures a collection of terrific trade analysts (who happen to be women) short, policy briefs that capture ideas and potential solutions for urgent issues for the multilateral trading system – from investment facilitation, AI, and climate adaptation. Please do check them all out!

My contribution (reproduced below) carries forward my work on economic security and is a (very) short snapshot of a working paper of mine on reimagining safeguards (though consistent feedback I receive is to not call these safeguards, for it folds in WTO safeguards jurisprudence). A consistent theme of the WTO Public Forum was how to think about rules reform in light of members' industrial policies, which may or may not have to do with defence concerns. This mechanism focuses on how to preempt economic security problems; before risks turn to damage. The solutions governments take need not be limited to production subsidies. A goal is for open, inter-connected cross-border cooperation to sift security out - and to enable members to design and evaluate their policies in light of spillovers.

*    *    *

Responding to the perception that aspects of international trade create economic security risks, some WTO members have implemented unilateral, trade-inhibiting measures that lack clear endpoints. Members may justify violations of trade rules by invoking the WTO security exceptions, provided all requirements are met. However, security exceptions are not a long-term solution for persistent, unpredictable challenges and may even preclude multilateral approaches to anticipate and mitigate economic security risks. It is time to view security as more than an exception to WTO rules and principles. Members should build a new mechanism for economic security issues using the WTO’s safeguards procedures as a model.

A new Economic Security Safeguards (ESS) mechanism could create ‘breathing space’ for protecting domestic industries that are strategic to economic security objectives while setting limits on the duration and the extent of remedy. When designing such a mechanism, members should decide how to characterize economic security safeguards and deliberate on a framework for evaluating risks. Members may agree that traditional wartime interests do not characterize economic security or that the assessment of economic security should strictly control how a product could indirectly contribute to a member’s defense capabilities .

While existing WTO safeguard rules require a demonstration of injury to industries caused by increased imports, the ESS could instead target industry risks associated with economic security. ESS implementation would thus depend upon improved information sharing concerning economic security risks rather than strict causation analysis. Practically speaking, knowledge of risk may be hard-to-observe for applying the ESS, as supporting evidence establishing chains of cause and effect may be difficult to show.

To resolve this tension, Members could coordinate their strategic foresight practices that examine future government planning and contingencies and weigh their implications. As part of this, members could the short-term and long-term risks for economic security. They would need to agree on an approach that assesses how imports create supply dependencies and related risks in relation to domestic manufacturing capacity and consumption. Finally, the WTO could work with the OECD’s risk likelihood and impact framework to design an ESS impact assessment based on different risk levels. Domestic authorities would rely on this risk assessment to evaluate the relevant factors for the right to impose trade restrictions. For example, to reduce uncertainty or early mitigation of risks, members could prioritize source diversification and set a high standard for imposing limited trade restrictions. In contrast, for vital products at high risk of severe impacts, members could set a deferential standard for evaluating the situation of the domestic industry. On this basis, there may be scope for members to choose between ESS that apply universally to all imports or moderate risk exposure from specific sources.  Members could carefully circumscribe ESS usage by conditioning the duration of ESS implementation with a ‘corrective action’ plan.

WTO security exceptions for extraordinary circumstances may still be required. However, to address ongoing concerns with economic interdependence, the ESS could allow members to advance economic security goals as part of, and not exceptional to, members’ long-term commitments to work together.

Guest Post: A Tribute to Frieder Roessler from Petros Mavroidis

This is a guest post by Petros Mavroidis of Columbia Law School. The piece will be published in a forthcoming issue of the World Trade Review.

An Uncommon Mind: Frieder Roessler’s Legacy

Petros C. Mavroidis*

*Columbia Law School

1. Doubts, Persistent Doubts

“U-huh”. This is what I recall being Frieder’s routine reaction whenever he was exposed to an argument. He rejected nothing, but at the same time he agreed to nothing right away. He needed his time to process, and would reach his conclusions only at a later stage. He applied this standard to his own, spontaneous thinking which might have sounded entirely convincing to me when we were working together, but not to him. “Let us think this issue through” he would say to me, a literal translation of the German “durchdenken” that we on occasion spoke together.

The scope of his intellectual endeavors was breathtaking. With his often interlocutor, Bob Hudec, he shared the urge to transcend the ostensible. Nothing was taken for granted irrespective who the source of information was. “Nullius in verba”, as the motto of the Royal Society dictates. I recall numerous discussions about what some might have considered obvious. Frieder was never shy to confront well-established dicta, and bring to light inconsistencies and errors. He was irreverent towards the past, but in an honest, intellectually challenging manner.

Nothing in my view exemplifies his strive for improving on past knowledge than his contributions to the understanding of non-discrimination in the GATT (General Agreement on Tariffs and Trade).

2. Likeness in GATT: the House That Frieder Built

GATT case law did not seriously delve into the question of “like products”, the foundational element in understanding non-discrimination, until the end of the 1970s. For reasons eminently explained in Baldwin (1970), and Jackson (1969), the “bite” of behind-the-border policies was hard to assess (and anyway a concern of secondary order) in presence of high import duties. Japan-Alcoholic Beverages I emerges as the first panel report that provided a comprehensive discussion on this score adopting what later became known as the “marketplace” test: consumers would define “likeness”.

The theoretical underpinning of this interpretation was the construction of Article III of GATT (where the term “like products” appears) as an instrument to avoid concession diversion. Were it left to governments to decide on likeness, they might be led (for political economy reasons) to adopt an understanding of the term that would reduce the value of tariff concessions. Trading nations, so the thinking goes, would not sit idle. For what is the purpose of reciprocally reducing the level of tariffs if protection can reemerge through the back door under the guise of unilateral regulatory distinctions? Consumers’ choices on the other hand, are heavily guided by scarcity of economic resources, hence buying national is definitely not the cardinal preference for the critical mass of the citizenry.

There you go. A sound rational basis for substantiating a plausible outcome. Who would disagree with this construction?

At that time (1978), Frieder was not dealing with panels. Indeed, there was no GATT Legal Office back then to start with.[1] But he understood only too well the importance of the question, as well as the potential shortcomings of the approach adopted in the aforementioned case. In his subsequent writings, namely Roessler (1996), (2003), after he had left the GATT/WTO, Frieder left no doubt that he was siding with the approach developed in the two reports I discuss next.

2.1 Change (the House that Frieder Help to Build)

US-Malt Beverages[2] was an odd case. A tax distinction favoring a variety that only seldom appears and was present in the territory of the regulating state, was challenged for violating non-discrimination. The outcome is irrelevant for the purposes of our discussion. What matters is §5.25 of the report:

The purpose of Article III is thus not to prevent contracting parties from using their fiscal and regulatory powers for purposes other than to afford protection to domestic production. Specifically, the purpose of Article III is not to prevent contracting parties from differentiating between different product categories for policy purposes unrelated to the protection of domestic production. The Panel considered that the limited purpose of Article III has to be taken into account in interpreting the term "like products" in this Article. … While the analysis of "like products" in terms of Article III:2 must take into consideration this objective of Article III, the Panel wished to emphasize that such an analysis would be without prejudice to the "like product" concepts in other provisions of the General Agreement, which might have different objectives and which might therefore also require different interpretations.[3]

This paragraph provided the impetus for what became known as the “aims and effect” test to define likeness. The advent of this test did not wait for long. In US-Taxes on Automobiles,[4] the panel held in §5.10:

The Panel then proceeded to examine more closely the meaning of the phrase "so as to afford protection." The Panel noted that the term "so as to" suggested both aim and effect. Thus the phrase "so as to afford protection" called for an analysis of elements including the aim of the measure and the resulting effects. A measure could be said to have the aim of affording protection if an analysis of the circumstances in which it was adopted, in particular an analysis of the instruments available to the contracting party to achieve the declared domestic policy goal, demonstrated that a change in competitive opportunities in favour of domestic products was a desired outcome and not merely an incidental consequence of the pursuit of a legitimate policy goal. A measure could be said to have the effect of affording protection to domestic production if it accorded greater competitive opportunities to domestic products than to imported products. The effect of a measure in terms of trade flows was not relevant for the purposes of Article III, since a change in the volume or proportion of imports could be due to many factors other than government measures.

The regulatory aim pursued emerged the centerpiece of the analysis of “likeness”. As Frieder used to say, governments may very well make legitimate distinctions across goods that consumers treat as “like products”. What is wrong with that?

Indeed, what is wrong with that? And yet, this understanding of “like products” flies against the previous understanding of “likeness”, does not it? Can they both be right?

It defies the purposes of this short paper to analyze in more detail Frieder’s thinking. The house that he built, like all ideas that he was consistently willing to discuss and debate, was not meant to be a permanent edifice. Frieder wants to bring in a platform, a more complete background that would host new ideas so as to build a better house than the one before. And so he did. 

2.2 Onto the WTO

WTO case law rejected the aims and effect analysis as practice in the first likeness dispute. But it did not dismiss the relevance of regulatory aim in deciding on likeness out of hand. Few have observed that in Japan-Alcoholic Beverages II, the panel conspicuously added that Japan had advanced no regulatory justification for its tax differential between sochu (a predominantly Japanese drink) and a series of predominantly Western drinks. This report then, adopted the marketplace-test when dealing with a domestic tax differential for which no (plausible) justification had been advanced.

And of course, the Agreement on Technical Barriers to Trade (TBT) explicitly endorsed the legitimacy of distinctions based on the process of production of competing goods.[5]

I would not be far off from the truth stating that the basic intuition of Frieder (the relevance of regulatory aim in likeness-analysis) has gained pace over the years. The manner in which it has been practiced has been rightfully (in my view) criticized.

3 Frieder and Me

It is hard to over-estimate Frieder’s influence on my thinking. He hired me in the GATT Legal Office in 1992, and did not lose time to realize that he had seen too much in me. But he gave me the time and space necessary for me to understand the basic logic of the system, by asking me to continue the excellent work of Friedl Weiss in updating the GATT Analytical Index. He then threw me to panel work, and involved me in a various of his discussions with luminaries in the field: Bob Hudec, John Jackson, David Palmeter, and Ernst-Ulrich Petersmann were his preferred “Stammtisch” and he generously offered a seat at that people to the “Nachwuchsgeneration” including me. My years next to him were the best complement I could have hoped for to add to my years in various schools.

In my eyes, he did everything right. He even picked the most able and suitable successor in Bill Davey who headed the Legal Office during the first years of the WTO, and picked up from where Frieder had left.

As years passed by and I started forming my own opinions on the issues we had discussed in the early nineties, I came to realize that he was secretly proud of all of us as we developed through time. And it is not the case that we all agreed.[6] What mattered to him most I discovered, was the internal coherence of the argument. The external validation could wait. For Frieder was a legitimate intellectual. 

I never managed to pay him back. I did (and continue to do) try to pay forward. I know that this is the way he would have liked it anyway.

Frieder lived during good times, or maybe times back then were good because people like Frieder made them good. While preparing this short note, I turned back to a re-reading of the reports I mention above (and a few other where Frieder was involved as legal advisor to panels). At the risk of waxing lyrical here, I was overwhelmed with nostalgia. I would kindly ask the reader to focus on the choice of words in the cited passages. And then take a step back and reflect on the logical construction permeating the quoted paragraphs.

These passages reflect a deep thinking about the most fundamental issues circumscribing trade integration. They also embed a coherent approach when expressing these ideas: how understand agreed contractual terms in context? What is the most plausible across competing interpretations? Why is it the case? In a few pages, a solution to a dispute is provided, and its intellectual underpinning is explained as well. I dread the moment when a new report is issued these days, as I know I am in for a repetition of platitudes, a concatenation of empty sentences and lengthy citations the usefulness of which is hard to discern.

When thinking about Frieder and his generation, I am reminiscent of Benjamin Franklin, the American polymath and Founding Father. When asked during the negotiations that led to the enactment of the US Constitution about the choice of regime that he and the others had made, he replied (almost stoically):

    - A Republic, if you can keep it.

Frieder and his generation bequeathed us with a Republic. I am afraid this is not what we will leave to those who come next.

References

Baldwin, Robert E. 1970. Non-Tariff Distortions in International Trade, The Brookings Institution: Washington, D.C. 

Charnovitz, Steve. 2002. The Law of Environmental PPMs in the WTO: Debunking the Myth of Illegality, Yale Journal of International Law 27: 59–109.

Grossman, Gene M., Henrik Horn, and Petros C. Mavroidis. 2013. Domestic Instruments, pp. 205-345 in Henrik Horn and Petros C. Mavroidis (eds.), Legal and Economic Principles of World Trade Law, ALI, The American Law Institute Reporters’ Studies on WTO Law, Cambridge University Press: New York City.

Hudec, Robert E. 1998. GATT Constraints on National Regulation: Requiem for an Aims and Effect Test, International Lawyer, 32: 619-649.

Hudec, Robert E. 2000. “Like Product”: The Differences in Meaning in GATT Articles I and III pp. 101-123 in Thomas Cottier and Petros C. Mavroidis (eds.), Regulatory Barriers and the Principle of Non-discrimination in World Trade Law, 101–123, University of Michigan Press: Ann Arbor, Michigan. 

Jackson, John H. 1969. World Trade and the Law of the GATT. Bobbs-Merrill: Indianapolis, Indiana.

Marceau, Gabrielle (ed.) 2015. A History of Law and Lawyers in the GATT/WTO, Cambridge University Press & the WTO: Geneva, Switzerland.

Mavroidis, Petros C. 2019. Last Mile for Tuna (to a Safe Harbour): What is the TBT Agreement All About? European Journal of International Law, 30: 279–301.

Petersmann, Ernst-Ulrich. 2000. International Trade Law and International Environmental Law: Environmental Taxes and Border Tax Adjustment in WTO Law and EC Law, pp. 127-165 in R. Revesz, P. Sands, and R. Stewart, (eds.), Environmental Law, The Economy and Sustainable Development, 127–165, Cambridge University Press: Cambridge, United Kingdom.

Roessler, Frieder. 1996. Diverging Domestic Policies and Multilateral Trade Integration, pp. 21-64 in Jagdish Bhagwati, and Robert E. Hudec (eds.), Fair Trade and Harmonization, vol. 2: Legal Analysis, 21–64, Cambridge University Press, Cambridge, United Kingdom.

Roessler, Frieder. 2003. Beyond the Ostensible: A Tribute to Professor Robert Hudec’s Insights on the Determination of the Likeness of Products under the National Treatment Provisions of the GATT, Journal of World Trade, 37: 771–781.

 

[1] Marceau (2015) edited an excellent volume tracing the history of the Legal Office of the GATT/WTO.

[2] https://www.wto.org/english/tratop_e/dispu_e/gatt_e/91alcohm.pdf

[3] On this last issue, see Hudec (2000).

[4] https://www.wto.org/english/tratop_e/dispu_e/gatt_e/93autos.pdf

[5] Even though case law has turned the logic behind Arts. 2.1 and 2.2 TBT to its head, as I have argued in Mavroidis (2019). See also Charnovitz (2002), and Petersmann (2000).

[6] In Grossman et al. (2013), for example, while we see the relevance of regulatory aim, we take distance from the “aims and effect” test as practiced.

Trump the China Trade Deficit Hawk and China Security Dove?

Trade policy came up at last week's presidential debate, with a somewhat traditional discussion of tariffs at the start, and then a shift at the end to security-related issues.

Kamala Harris started it off by referring to Trump's proposed universal baseline tariffs as a sales tax:

... My opponent has a plan that I call the Trump sales tax, which would be a 20% tax on everyday goods that you rely on to get through the month. Economists have said that Trump's sales tax would actually result for middle-class families in about $4,000 more a year because of his policies and his ideas about what should be the backs of middle-class people paying for tax cuts for billionaires.

She has been consistent in criticizing his tariffs, going all the way back to when she was running for president in 2019.

Trump then responded as follows:

First of all, I have no sales tax. That's an incorrect statement. She knows that. We're doing tariffs on other countries. Other countries are going to finally, after 75 years, pay us back for all that we've done for the world. And the tariff will be substantial in some cases. I took in billions and billions of dollars, as you know, from China. In fact, they never took the tariff off because it was so much money, they can't. It would totally destroy everything that they've set out to do. They've taken in billions of dollars from China and other places. They've left the tariffs on. When I had it, I had tariffs and yet I had no inflation. 

(Let me interject a couple points here: 1) Trump continues to misrepresent who pays tariffs; 2) I would like to hear what Harris has to say about keeping some of Trump's tariffs in place; and (3) saying there was "no inflation" is a distraction from that fact that prices rose for the goods on which the tariffs were imposed.)

Moderator David Muir then asked this follow-up:

Mr. President, I do want to drill down on something you both brought up. The vice president brought up your tariffs, you responded, and let's drill down on this because your plan is what she calls ... essentially a national sales tax. Your proposal calls for tariffs as you pointed out here, on foreign imports across the board. You recently said that you might double your plan, imposing tariffs up to 20% on goods coming into this country. As you know many economists say that with tariffs at that level costs are then passed onto the consumer. Vice President Harris has argued it'll mean higher prices on gas, food, clothing medication arguing it costs the typical family nearly four thousand dollars a year. Do you believe Americans can afford higher prices because of tariffs?

Trump responded with more of the same:

They aren't gonna have higher prices, what's gonna have and who's gonna have higher prices is China and all of the countries that have been ripping us off for years. ... I was the only president ever, China was paying us hundreds of billions of dollars and so were other countries and you know if she doesn't like 'em they should have gone out and they should have immediately cut the tariffs but those tariffs are there three and a half years now under their administration. We are gonna take in billions of dollars, hundreds of billions of dollars. I had no inflation, virtually no inflation, they had the highest inflation, perhaps in the history of our country because I've never seen a worse period of time. ...

Muir then asked Harris the question I had in mind about Biden keeping some of the tariffs: 

Vice President Harris, I do want to ask for your response and you heard what the president said there because the Biden administration did keep a number of the Trump tariffs in place, so how do you respond?

In response, Harris criticized Trump's tariffs in general terms, and then, interestingly, turned this into more of a China security issue:

Well, let's be clear that the Trump administration resulted in a trade deficit, one of the highest we've ever seen in the history of America. He invited trade wars, you wanna talk about his deal with China, what he ended up doing is under Donald Trump's presidency he ended up selling American chips to China to help them improve and modernize their military, basically sold us out when a policy about China should be in making sure the United States of America wins the competition for the 21st century. Which means focusing on the details of what that requires, focusing on relationships with our allies, focusing on investing in American based technology so that we win the race on A.I. and quantum computing, focusing on what we need to do to support America's workforce, so that we don't end up having the, on the short end of the stick in terms of workers' rights. ...

Trying to figure out what Trump thinks can be a challenge, but it seems to me that his big concern on trade is the trade deficit, and the fix he wants to use is tariffs. (He misunderstands both of these issues, but let's put that aside). By contrast, he does not appear to be particularly concerned about the security issues related to China that most Republicans and many Democrats in Washington are worked up about these days. For example, Trump has said several times that if Chinese companies want to sell autos in the U.S., they should produce them here. But I'm not sure many other national Republican politicians would want to let such investments happen. And while a lot of people in Washington are focused on winning the technology race with China, Trump seems to envision the economic contest as one over older industries such as steel and traditional autos, rather than advanced tech. I don't think I've ever heard him talk about the Chinese accessing Americans' data, which many other people in Washington worry about and which is why there are concerns with Americans driving Chinese autos full of software that can gather data.

More broadly, I'm not sure Trump thinks of China as much of a security threat. The main threat that he sees -- from China, the EU, and others -- is a trade threat. He thinks their trade policies and our trade policies, working together, have cost American jobs. His analysis is all wrong here, but that seems to be what he thinks.

Having said all that, I wouldn't say this means a Trump administration would not have a security focus. In all likelihood, Trump will hire a lot of people who share the security concerns that most Washington policymakers have.

Tariff History Emerges as a Key Issue in the U.S. Presidential Contest (Just Kidding!)

As the culture wars have dominated the political debate in recent years, it feels as though the quality of the economic policy discussion has suffered. Some of the economic topics that keep coming up are of little interest to most voters, and are being talked about in a way that is disconnected from reality. Here's an illustration from a recent speech by former president Trump, in which he makes reference to some events in U.S. tariff and economic history:

Under my leadership, America will encourage domestic production instead of punishing it. As you know, our country's vast manufacturing wealth was created at a time with very little domestic taxation, few regulations, and most revenue came from tariffs from other countries. That was when we were at the wealthiest ever. Proportionately, we were the wealthiest country ever during those days. That was before income tax came along. Now we foolishly do the opposite. We impose lower tariffs and no tariffs on foreign producers. We have the lowest tariffs of any nation in the world, and we relentlessly punish our own companies for doing business in America. You do business in America, you're punished tremendously. I had many, many companies come to me, sir, I can't compete. They're sending kitchen cabinets, washers and dryers, everything ... motorcycles, they're sending them here, sir, we can't compete. And I made it so they could compete and thrive. Every one of those people, we should get them up and talk to you one day, because every one of those people comes up to me, and every time I see them, they hug me, they kiss me, they love me, because I saved their businesses.

I intend to reverse this model and once again turn America into the manufacturing superpower of the world. We can do that just with being intelligent. The key to this effort will be a pro-American trade policy that uses tariffs to encourage production here and bring trillions and trillions of dollars back home. ... My plan is that if you open your factory in Wisconsin, Pennsylvania, Michigan, Minnesota, anywhere else in our country, you don't pay a tariff tax, you don't pay a tax. You make the product here. But if you move your production outside of the United States and send it back here, which people are doing now, and I stopped it, stopped it cold. But they've changed that already. Then you'll have to pay a very substantial tariff to get your product back into the country. The result will be that everybody in the world will want to be here, and they'll want to produce here. They're going to want to produce their product in America. It's going to say made in the USA. We will be able to build ships again. We will be able to build planes again. We will be able to build our military again from within, all from within. We will create the biggest, greatest and strongest middle class in the history of our country. We will have 10s of millions of high paying jobs in manufacturing, transportation, defense, as well as all of the sales and support of export jobs. Our auto industry will be the biggest beneficiary.

In short, it will be a national economic renaissance just by using our heads, by being smart, by not letting other countries take advantage of us. They've been doing it for so long. It's so sad to see, and I know them all, and they laugh at us behind our back. They can't believe how stupid our leadership has been for so many years.

We will ensure that the United States has a giant steel industry, and aluminum industry, a manufacturing base and a defense base. We want a industrial base that can take care of our defense needs 100%.

And you can call it what you want. Some might say it's economic nationalism. I call it common sense. I call it America first. This is the policy that built this country, and this is the policy that will save our country. In the words of a great but highly underrated president, William McKinley, highly underrated, the protective tariff policy of the Republicans has ... made the lives of our countrymen sweeter and brighter. It's the best for our citizenship and our civilization, and it opens up a higher and better destiny for our people. We have to take care of our own nation and her industries first, in other words, take care of our country first. This is when we had our greatest wealth. He was assassinated, and he left his group of people that followed him. Teddy Roosevelt became a great president spending the money that was made by McKinley. So McKinley got a bad deal on that one. He built tremendous wealth.

They had the Tariff Act of 1887, and they had a committee that studied, what are we going to do? They had a big problem, a problem like I hope to have with this country someday, so much money was coming in from foreign countries that they didn't know how to spend it. They had no idea. So they set up a committee. We'll set one up with the people in this room. How do we distribute the wealth that we have? And Roosevelt built dams and built railroads and did national parks, but he did it with the money that was made with tariffs from McKinley. So you have to remember that very highly underrated, a very underrated president, let's give them both credit. Smart tariffs will not create inflation. They will combat inflation. I had almost no inflation, and I had the highest tariffs that anyone seen. They were going a lot higher. Foreign nations will pay us hundreds of billions of dollars, reducing the deficit and driving inflation down to largely reduce our deficit. In my first term, we imposed historic tariffs with no effect on consumer prices or inflation.

The anti-tariff people, many of them, I believe, honestly, work for these other countries in some form, get tremendous amounts of lobbying money and other money, because it doesn't make sense what they're saying.

As you might expect, I have some reactions. It's hard to know where to start with this, but maybe let's go with McKinley's tariffs, which Trump has been talking about for many years. One thing to note here is that the McKinley Tariff took effect in October of 1890 while McKinley was in Congress, whereas during McKinley's presidency the big tariff increase was implemented through the Dingley Act in 1897. It's not clear whether Trump realizes this. Anyway,  some people have studied these issues in great depth. In Clashing over Commerce, Doug Irwin points out that Teddy Roosevelt, who Trump mentions, was not happy about the impact the McKinley Tariff had on the tariff-supporting Republican party in the 1890 midterm elections, saying: "The overwhelming nature of the disaster is due entirely to the McKinley bill." (Irwin also notes that "[t]he perception that high tariffs protected monopolistic big businesses and trusts also contributed to the unpopularity of the McKinley Act.")

With regard to Trump's references to the relative wealth of the U.S. during that period, for anyone who has this sort of nostalgia, there are some things you may want to consider because they complicate the more simplistic hot takes. For those on the right who are anti-immigration as well as being protectionist, keep in mind that this was a period of very open immigration, which helped drive economic growth. And for anyone who likes Social Security and Medicare, note that those programs didn't exist at the time, which is why the relatively low amount of revenue brought in by tariffs could fund the much smaller level of government spending from this period. If Trump wants the tax system to rely on tariffs for revenue rather than on income taxes, that would almost certainly mean the end of those programs.

Turning to the impact of Trump's first term tariffs on U.S. prices, Trump says they had no impact, but numerous economic studies show otherwise. (And obviously "foreign nations" don't pay tariffs, but rather importers do.)

As to whether the U.S. has the "lowest tariffs in the world," the WTO tracks this data. I would first note that New Zealand, Australia and a few others actually have lower MFN applied average tariffs. In addition, it's worth noting here that trade remedy tariffs don't get tracked as part of this calculation, and with the U.S. being such an active user, I'm not sure the U.S. tariffs would look as low in relative terms if trade remedy tariffs were included, although I haven't seen a calculation that takes this into account (it would be great if someone did one!)

On the issue of the role of lobbyists in trade policy, just about all policies have lobbyists on both sides, but I don't think there is much doubt that it is lobbyists (corporate and union) that are the driving force pushing for tariffs. It's nice for them that Trump believes in their cause, and may save them some lobbying money, but it's pretty clear that lobbying is and has always been the main source of support for tariffs.

And finally, there's the matter of retaliation by other countries, which happened before with Trump's tariffs and will happen again. Trump seems to think the U.S. could start exporting more manufactured goods such as autos (which does not seem particularly likely at the moment), but regardless of whether the U.S. production and export mix shifts away from agriculture, natural resources, and services and towards manufacturing, U.S. trading partners will have plenty of possible targets for retaliation.

There was also this:

China was built on doing exactly what we're going to be doing, and what I started doing four years ago.  What we're putting forward is the most pro-American manufacturing and jobs policy in modern history for any country. This plan will bring jobs and growth into our country at levels never seen before. Every business on earth will flock to America, from Europe, Asia, the Middle East and all over the world. By contrast, comrade Kamala Harris wants to sacrifice our wealth, kill the economy and drive jobs overseas to punish businesses, more businesses will leave.

So on the one hand, Trump admires what he thinks are the tariff policies of the Chinese Communist Party and wants to emulate them (although in reality, China actually reduced its tariffs considerably as part of its accession to the WTO), but on the other hand he is suggesting that "comrade Kamala" is a communist. That's a hard one to get my head around.

Why the US Should Respond Honestly to China's WTO Complaint

Why the US Should Respond Honestly to China's WTO Complaint

Comments by Steve Charnovitz

Federal Register m0n-2px7-nq3f

3 September 2024

China has properly lodged a lawsuit (DS623) against the United States (US) at the World Trade Organization (WTO) regarding the domestic content conditions of US subsidies granted in 2022 in US Public Law 117-169.  Such unfair, discriminatory regulations are a blatant violation of the law of the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement).  SCM Article 3.1(b) prohibits "subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods."  During the Biden-Harris Administration, the US has increased its reliance on nonmarket economic nationalism to the detriment of the US economy and the broader interests of all WTO Members.

Environmental instruments need not be, and should not be, protectionist.  In 1992, Rio Declaration reiterated the norm that governments should use economic instruments "without distorting international trade and investment" (Principle 16).  For the climate regime, the United Nations Framework Convention on Climate Change (UNFCCC) articulated the climate law principle that "Measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade" (Article 3.5). Thus, the discriminatory US measures detailed in China's complaint are anathema to both world trade law and global climate law. 

Although subsidies can be appropriate policies to lessen climate change, subsidies are much less likely to reduce emissions than first-based policies of carbon taxes.  Unilateral subsidies are also inferior policies because climate change is a global problem that necessitates multilateral solutions. Without effective transborder environmental solutions, trade disputes can ensue.

The US overcapacity in dollars allows the US to engage in excessive subsidization. Most other countries with their budget constraints cannot afford to bestow subsidies on the same scale that the US does.  Yet because the effectiveness of any US climate measure depends on the measures being taken by the rest of the world, the US overreliance on subsidization sets a bad example for other countries, particularly developing countries.  This dysfunction could be corrected in part by more generous US government funding of climate investments in developing countries, but those US programs are pathetically small. 

Whatever unilateral US climate subsidies could accomplish will be further diminished when US subsidies are conditioned on import substitution policies.  Such a beggar-thy-neighbor scheme raises the costs of clean energy domestically while making it more difficult for many other countries to grow their clean energy input sectors through exports.  Supply chain resiliency — even for the largest economies — is more likely achievable through economic integration than through dogmas of autarky. 

Although the Office of the US Trade Representative (USTR) has falsely claimed that China's lawsuit "seeks to undermine US efforts to address the global climate crisis...", the truth is that the protectionist US efforts in dispute make it harder for the US and other countries to address the global climate crisis.  China seeks to challenge the lack of cooperation by the US to use nondiscriminatory measures in addressing the worsening global climate crisis. China is right to seek to hold the US accountable to respect both international trade law and international climate law.  China recognizes that the effectiveness of US climate efforts (and indeed the efforts of all countries) is impeded by unjustified US trade discrimination.  While WTO law does not prohibit a government from lavishing financial benefits on politically favored beneficiaries, WTO law does prohibit granting subsidies in a manner that externalizes costs on other countries. 

In lodging this WTO case against the US, China seeks to encourage US policymakers to respect the rule-based international order.  China (but not the US) appears to understand that governments need not violate international trade law to achieve multilateral environmental objectives.   Thus, China's cause of action against the US functions as a public good in the international legal system. China's bold lawsuit should be applauded by everyone who supports the transnational rule of law

With China's overdue litigation against the US now going forward, the Biden-Harris Administration should stop undermining the WTO judicial system by blocking the appointment of WTO appellators.  If the US is unwilling to stop despoiling the Appellate Body —even though the lack of effective judicial review continues to imbalance the WTO — USTR should pledge to the WTO Dispute Settlement Body that the US will (join China to) support immediate adoption of the panel report.  During its time in office, the Biden-Harris Administration has shown bad faith in appealing four (!) WTO cases that the US has properly lost knowing full well that the appeal cannot be heard because of the US sabotage of the WTO appellate tribunal (see DS 539, 544, 552, 556, 562, 564, 597).

Because China's SCM Art. 3.1 claim against the US is correct in WTO law, the US should not engage in facetious (and time-wasting) defenses as USTR frequently does.  Since the SCM Agreement does not contain an environmental exception, USTR should not assert an environmental defense which, in any event, would be unjustified because the UNFCCC makes clear that discriminatory trade measures must not be used.  Since the SCM Agreement does not contain a national security exception, the US should not assert a national security defense as the US did unsuccessfully in the Steel and Aluminum Products case.  (That bogus US claim was rightly dismissed by the WTO panel.)  Since the SCM Agreement does not provide for reverse SCM Article 29 defenses, the US should not assert that it needs to discriminate against China because the US is in the process of transformation from a market, free enterprise economy into a centrally planned economy. 

Because China is acting responsibly to uphold the multilateral trading system and to challenge US illegality in a peaceful way, the US should cooperate by facilitating the rapid response mechanism envisioned in the DSU for the adjudication of trade complaints.  Let the panel do its job to call out the US for engaging in a cadence of protectionism that flagrantly violates WTO law.  

If the US stopped treating China unfairly in trade — including for example, cancelling the WTO-illegal US Sections 301 and 232 tariffs — China might become more willing to act cooperatively to address the most pressing global problems.