International Economic Law and Policy Blog

Guest Post: Trade Remedies and the GASSA

This is a guest post from law professors Timothy Meyer & J. Benton Heath

Much of the commentary on the ongoing negotiations over the Global Arrangement on Sustainable Steel and Aluminum (GASSA) have focused on legal issues, especially WTO compatibility. In large part, this focus has been driven by the EU’s insistence that it will not agree to any GASSA proposal that it does not think is WTO consistent, while at the same time rolling out its Carbon Border Adjustment Mechanism (CBAM), which other WTO members and commentators have alleged is discriminatory because it exempts non-EU countries if and only if they link a domestic emissions trading scheme to the EU’s ETS. Meanwhile, the world just experienced the hottest month on record and 2023 is likely to replace 2016 as the hottest year on record. A recent study estimated that there were 62,000 heat-related deaths in Europe during the summer of 2022. Given the climate emergency, we (and others) have suggested that strict WTO compliance should not be the guiding principle in designing trade and climate policies. Rather, climate effectiveness should be the lodestar.

In that vein, Simon Lester has questioned whether the United States’ GASSA proposal will lead to greater decarbonization. Simon’s basic point is that antidumping (ADD) and countervailing duties (CVDs) will undercut GASSA’s effectiveness. Simon points out that the United States already subjects steel and aluminum to significant ADDs and CVDs. Simon worries both that these duties have limited bilateral metals trade between the US and China, and that escaping a carbon tariff will not provide a sufficient incentive for producers to decarbonize if they still face ADDs and CVDs. He is also concerned that subsidies that governments (presumably GASSA members or aspiring GASSA members) give to companies to decarbonize will be met with countervailing duties on import.

We agree with Simon that the imposition of trade remedies, especially CVDs, in response to subsidies designed to decarbonize the metals sector would be undesirable and could undercut the effectiveness of GASSA. But the problem of trade remedies undercutting the effect of decarbonization measures is not a problem with GASSA specifically. It is a problem with the relationship between the subsidies necessary to decarbonize and any kind of market access restriction indexed to decarbonization, such as the EU CBAM. For example, although Simon does not mention it in his post, in a Twitter exchange the other day Simon raised the oft-touted argument that the EU CBAM will take account of non-price approaches to decarbonization, such as subsidies and regulation employed by the United States, because decarbonizing production will result in a lower CBAM duty. Of course, if Simon is right, that reduced CBAM could be undercut by EU CVDs that respond to US subsidies for decarbonization. The US and the EU thus face the problem of trade remedies undercutting decarbonization as a result of their efforts to impose duties on carbon-intensive imports generally, not because of anything about GASSA specifically.

GASSA, though, has some significant advantages over unilateral CBAMs in dealing with this problem because it offers the opportunity for like-minded countries to negotiate how to handle the effect of trade remedies on decarbonization. In the original Green Steel Deal proposal, one of us, writing with Todd Tucker, called for a “peace period” among club members, in which they would not challenge each other’s decarbonization efforts. Although the proposal did not separately discuss trade remedies, it would be sensible to include them in the peace period as well. GASSA negotiations are ongoing (a point to which we return below), and negotiation over trade remedies would provide GASSA parties an opportunity to develop new rules for Green Box subsidies that differentiate generic state support from state support primarily aimed at decarbonization.

Simon’s other concern is that the prevalence of trade remedies will remove any incentive for countries and/or producers that are likely to be outside of GASSA at the outset (such as China) to decarbonize. This misunderstands both the dynamics through which clubs can induce policy changes in non-members, as well as the kinds of injuries that green producers in the US and EU face from carbon-intensive competition.

First, both the literature on clubs that induce changes in government policy via preferential trading rules and the evidence that these approaches can work is so large that we cannot summarize it here. Because it involves trade in environmentally harmful products, the most on-point example, to which we referred in our piece, is the Montreal Protocol, although the GATT/WTO itself, the EU, and the expansion of the Canada-US Free Trade Agreement to include Mexico would all be examples of preferential trading regimes that expanded over time as non-member states became willing to change their policies.

These clubs do not work instantaneously! Rather, they work through a series of iterative negotiations that resolve problems over time and admit new members as they are able to meet the club’s terms. Criticizing the US’s initial GASSA proposal because it does not immediately offer China incentives to decarbonize seems to misunderstand not only the GASSA project, but the way in which preferential trade can and has induced changes in government policies. Although the US and EU have given themselves until October 2023 to reach an agreement, experience suggests that negotiations will continue after that date even if an agreement is reached. Details will remain to be worked out, new problems will emerge, new members may wish to join, and the parties will wish to deepen and expand cooperation.

Second, a club for trade in green metals that includes a market access restriction on dirty metals offers considerably greater economic benefits for decarbonizing producers within the club than either unilateral carbon duties or, obviously, no policy at all. The United States can, of course, impose duties on steel and aluminum on its own, as can the EU. Both either have (the 232 duties) or are in the process of doing so (EU CBAM). But a common market for green steel and aluminum provides considerably greater incentives for members within the club to decarbonize because the green producer has “breathing room” not only in its home market, but also in the markets of other members of the club.

For this reason, expanding the club over time is critical to its success. Simon uses Chinese imports to the United States as his example, but this example is neither here nor there. The United States imports steel from other countries that are more likely to change their behavior, as does the EU. As Simon notes, it is clear that countries like Canada, Turkey, Mexico, Korea, etc., care about the additional 25% duty on imports. Much of the world spent a considerable amount of time and diplomatic effort trying to get out from under the Trump tariffs. Indeed, GASSA itself is part of the agreement to lift the 232 duties on the EU.

Moreover, the quantity of dirty steel from China suppresses global prices in export markets, a problem that countries have been grappling with for years. GASSA thus offers firms within member states an additional incentive to decarbonize. They stand to gain market access and potentially market share within the club, not just within their home markets. Depending on the details of a final deal, this market access comes not only in the form of exemption from the club’s restrictions on non-members. It also would entail fewer administrative burdens on exporters as compared to a proliferation of unilateral CBAMs, each with its own record-keeping requirements and crediting/exemption mechanisms.

Significantly, there is no reason that GASSA membership has to be limited to steel producing countries. As Maha Rafi Atal argued in her Roosevelt essay, developing countries that are primarily steel consumers could join GASSA if given the right incentives. For those countries, joining GASSA could mean imposing the common market access restriction and receiving development aid. Although including developing countries is likely an issue of expansion that would have to be addressed down the road, rather than by October 2023, it offers the promise of drying up the global market for dirty steel and aluminum while expanding the global market for green steel and aluminum.

These days, much of the world is literally on fire in the summer. The perfect cannot be the enemy of the good. It is important to think through how solutions to the climate emergency might work, but without a doubt, it is solutions that we need.  

Questions about IPEF Enforceability

At a Wilson Center event on the Indo-Pacific Economic Framework (IPEF) last week, when asked about the enforceability of the IPEF, Commerce Secretary Gina Raimondo said the following:

There is something to the fact that this is not a trade agreement. It's more flexible. It's responsive to a few specific needs: supply chain, decarbonization, infrastructure, digital, and so it allows us to move fast.

Is it enforceable? I would say yes and no. It's not a traditional trade agreement. You know, it's not enforceable insofar as the tariffs don't come back up if there's non-compliance.

But it is enforceable because countries that don't follow the rules or live up to their commitments don't receive the benefits. So if there's a country who is not following, as according to the agreement, then they won't receive the benefits. We have, for example, we've set up an IPEF Supply Chain Council. Every country has an appointed person to that Council. That's a way to facilitate commerce, a way to deal with issues, a way to share data, a way to predict supply chain problems before they happen. All incredibly valuable to all of our economies. You want to be part of that club.

So this is more of an incentive. We want to provide an incentive to participate. And in that respect, it's enforceable, because if you don't participate, you don't get the benefit. But it is true, there's no legal enforceability per se.

I have a couple questions about this.

First, I understand that without tariff concessions as part of an agreement, you can't withdraw tariff concessions for the purposes of enforcement. But the bigger enforcement issue is, without an adjudication process, how do you determine if there is non-compliance? Will this just be a unilateral judgment that any IPEF party can make about another party's action or inaction? If so, that seems like it takes us away from a rule-based international economic system and moves us toward a power-based system. (To be clear, this won't be an issue if a government, for whatever reason, declares it is not complying. However, if the rules are vague, as they often are, and there is disagreement about whether there is compliance, it could be a problem.)

Second, how well does a power-based system work these days? What will the reaction of IPEF parties be to this kind of unilateral judgment?

And finally, also related to the issue of effectiveness, what exactly are the benefits of IPEF? What is it that parties are getting out of it? Why do they want to be in it, and why do they worry about getting kicked out? I have a vague sense, taking into account what Raimondo said above, that there will be some government financing and private sector business that goes to the parties, but it's unclear to me exactly what this will look like in practice. It would be great if someone could document this a bit more than it has been so far. For what it's worth, a Commerce Department press release describes the IPEF Supply Chain Council as follows:

The IPEF Supply Chain Council: The proposed Agreement would establish a mechanism for the IPEF partners to work collaboratively to develop sector-specific action plans for critical sectors and key goods to enhance the resilience of IPEF partner’s supply chains, including through diversification of sources, infrastructure and workforce development, enhanced logistics connectivity, business matching, joint research and development, and trade facilitation.

ADDED:

I want to throw out one more point here: Enforcement without a formal adjudication process is likely to result in a system with little transparency. How will the public know what governments are pushing each other to do in terms of compliance? These sorts of actions benefit greatly from public scrutiny, and it seems like that will be lacking in the IPEF as currently envisioned.

Nikki Haley on China/China Trade

As I cover what the Republican candidates say about trade policy, I keep hoping for some general statements on these issues, but what we mostly see is talk about China trade. Nikki Haley was interviewed recently by a couple CNBC people -- in the transcript below, I didn't bother to distinguish between the CNBC people asking questions -- on China/China trade issues. While they covered a mix of general and trade issues related to China, I included everything, because often these days it's hard to separate out the trade from the non-trade issues when we talk about U.S.-China relations. Here's the transcript:

CNBC Person:

We have such a strange relationship with China. It's so important to the world and yet so fraught with risk and peril. Do you have a way to try to walk that line?

Haley:

Well first, let's open our eyes. Let's be honest about what's happening. You know, you sit there and you see Blinken going and and trying to appease China, and Yellen saying "oh let's do more business with China." But the reality is, you know, if you look at Yellen's conversation, she said, "Well, you know, it shouldn't be a winner take all scenario, it should be something where, you know, we play by the rules and we can be fair competitors." But to even say that means you don't understand China. China only plays with a winner take all scenario. They've never played by the rules. They don't see us as a competitor. They see us as an enemy. This is the biggest threat we've had since Pearl Harbor. And just look at what they've done. The infiltration they've done in our country. They bought 400,000 acres of US soil, most recently near Grand Forks Air Force Base, where our most sensitive drone technology is. They bought the largest pork producer in the country. They have spy balloons going over us. But you look, they go and they spend millions of dollars in our universities to spread Chinese propaganda. They have Chinese front companies lobbying our Congress on behalf of the Communist Party. And then you look at the military, at what they're doing. The largest naval fleet in the world, 350 ships, they'll have 400 ships in two years. We won't even have 350 ships in two decades. And now they've become a big developer of neuro strike weapons, which go and impair brain function. And they use that for military leaders, for major populations. They're developing hypersonic missiles. We barely started. I mean, the list goes on in how much ... they're stealing $600 billion of intellectual property from us every year.

CNBC Person:

What do you say to American companies that are doing business there? Do they need to get out?

Haley:

I think American companies need to look at what happened with the Europeans in Russia. What I said -- I spoke to 400 CEOs last summer -- and what I said is, if China pulls the rug out from under us tomorrow, will you be ready? Every company needs to have a plan B. And the way America needs to look at is just from a national security lens, are we ready?

CNBC Person:

But is it a Plan B when something happens? Or is it a Plan B right this minute? I mean, are you saying if Tim Cook is watching right now, are you saying, Tim Cook and Apple you need to actually withdraw from China, both for yourself and for the country? Is that what you're really saying?

Haley:

Let's first talk about what Americans need to know. President Xi started a commission that he personally chaired, that says any company that does business in China has to cooperate with the Chinese military. So look at our tech companies. Look at all of our financial data. Look at all of our health care data. Look at our children's lifestyle data. And now know the Chinese military has it. What I'm saying is we look at it through a national security lens. So when COVID happened, they wanted you to put on a mask. It was made in China. They wanted you to take a COVID test. It was made in China. You go to the drugstore and everything is made in China. Let's just say if China pulls the rug out from under us tomorrow, will we be ready. And for American companies, what they need to understand is, this is no longer a competitor, this is an enemy. And they need to start looking at doing business with our friends: India, Australia, Japan, South Korea. Let's start doing more business with our friends. And let's become less dependent on China. That's what India is doing. ...

CNBC Person:

Right, but the message is "get less dependent on." It's not, "you need to get out right now, because ..."

Haley:

Well, I mean, look, the number one cause of death of adults 18 to 49: Fentanyl. Don't think for a second China doesn't know what they're doing when they have the cartels do that. You know, I personally think if it means us ending normal trade relations, you go to China and say we'll end normal trade relations until you stop killing Americans, look at how ...

CNBC Person:

Would you be prepared to do that?

Haley:

I think China's an enemy. I think we have to take them incredibly seriously. And the problem is, you can look at dollars and cents, or you can look at a threat to America. And I will tell you that companies and people have said for too long, we'll deal with China tomorrow. But China's dealing with us today. We've got to address this.

CNBC Person:

Nationalism is not something that is foreign in this country either. America First. Is it absolutely impossible that China just wants to be a superpower along with us in this great world that we have, with us selling to them, them selling ... ?

Haley:

No, I think if you look, everything they say is about destroying the West. Everything.

CNBC Person:

So it's not just about coexisting in the future?

Haley:

They never once said they want to coexist. Everything they've said is about defeating the West. And read President Xi's own statements where ...

CNBC Person:

You don't think there are elements of things that we need to work on with China to actually have a future as a globe ...

(Other) CNBC Person:

You don't want to destroy your biggest trading partner that you sell all your stuff to ...

Haley:

So that's the problem. Too many people are thinking about the dollars and cents. Are you still going to be thinking about the dollars and cents, do you still think about the dollars and cents knowing that China's now a military installation in Cuba and if they put Chinese military there, are you still going to think about dollars and cents? Because that's what they're doing.

CNBC Person:

The scariest things that people don't even speak about have been written on the op-ed pages of the Wall Street Journal. One is developing a bio weapon that you could inoculate your own population against first, by saying it's a flu vaccine, and coinciding with a cyber attack. They could wipe off the map with those two things.

Haley:

They are trying to beat us on artificial intelligence. They are already doing it with cyber, they're doing it with space. They are coming at all fronts to us and we keep thinking, "oh, but they're such good trade partners." If we don't wake up, we will end up like the Europeans did with Russia. This is the biggest wake up call we've had. And no one's talking about China, but I will continue to talk about it. We can do business with other friends. We can do business with other partners. But if we don't wake up to what they're doing ... and don't listen to what I'm saying, look at what China's done. Look at that infiltration. And if that doesn't send a chill up your spine, I don't know what else to say.

There are a lot of mischaracterizations and exaggerations here, but she is speaking as a politician running for office rather than as someone trying to provide an objective analysis of the situation, so that's to be expected. Regardless, how politicians (and media people) talk about things has a big impact, so it's useful to see what they say, because their views filter down to the public.

On trade, I thought it was interesting that when asked directly about repealing normal trade relations, she avoided answering. It may be that she wants to keep her options open on that point. Vague toughness can be politically useful, whereas specific toughness can get you in trouble.

The Effectiveness of the GASSA in Reducing Carbon Emissions

Over at the Roosevelt Institute blog, there are some new pieces on the Global Arrangement on Sustainable Steel and Aluminum (GASSA). Todd Tucker and Tim Meyer have a piece that responds to a paper by Bruegel. Maha Rafi Atal has a piece on development aspects. And Ben Heath and Tim Meyer have a piece in which they argue for pursuing the GASSA even if it violates WTO rules. Putting aside the WTO-consistency issue (and the broader issue of trade conflict and retaliation that will likely be a result of implementing this agreement), I disagree with something at the core of the arguments for GASSA: I don't think it's very likely that GASSA will reduce carbon emissions.

Here's what Ben and Tim say about how GASSA could reduce carbon emissions:

US and EU negotiators have given themselves an October 2023 deadline to finalize a deal on the Global Arrangement on Sustainable Steel and Aluminum (GASSA). As envisioned by US negotiators, the GASSA will combine tariffs and other trade policies to create a market for less-carbon-intensive steel and aluminum, while also combating the market-distorting subsidies that have led to global overcapacity. In so doing, it will give US and European steel producers breathing room to invest in decarbonizing their production processes without fear of being undercut by the cheap, dirty, and heavily subsidized imports that have led to massive global overcapacity in the metals sector and put pressure on the industry on both sides of the Atlantic.

A problem with analyzing the impact of the U.S. GASSA proposal is that no text has been made public, as far as I know. However, some media sources have seen it and reported on it, and here's how Ana Swanson of the NY Times described it last December:

The Biden administration on Wednesday sent a proposal to the European Union suggesting the creation of an international consortium that would promote trade in metals produced with less carbon emissions, while imposing tariffs on steel and aluminum from China and elsewhere, according to a copy viewed by The New York Times.

The document, a concept paper drafted by the Office of the United States Trade Representative, provides the first concrete look at a new type of trade arrangement that the Biden administration views as a cornerstone of its approach to trade policy.

The proposed group, known as the Global Arrangement on Sustainable Steel and Aluminum, would wield the power of American and European markets to try to bolster domestic industries in a way that also mitigated climate change. To do so, member countries would jointly impose a series of tariffs against metals produced in environmentally harmful ways.

The levies would be aimed at China and other countries that did not join the group. Countries that did join would enjoy more favorable trade terms among themselves, especially for steel and aluminum produced more cleanly.

To join the arrangement, countries would have to ensure that their steel and aluminum industries met certain emissions standards, according to the document. Governments would also have to commit to not overproduce steel and aluminum, which has pushed down global metal prices, and to limit activity by state-owned enterprises, which are often used to funnel subsidies to foreign metal makers. While the concept paper does not mention China, these requirements appear likely to bar it from becoming a member.

...

The concept paper proposes a tiered system of tariffs that would rise with the level of carbon emitted in the production of a particular steel or aluminum good. Additional tariffs would be levied on any product coming from countries outside the consortium.

The tariff rate would start at 0 for the cleanest products from member countries. Beyond that, the paper does not specify rates, instead representing them as X, Y or Z.

The idea seems to be that, through the use of tariffs, there will be an incentive for countries to join the agreement, and an incentive for companies from the countries in the agreement to lower their carbon emissions. 

If my understanding of all this is roughly correct, I think it's very unlikely that this approach will reduce carbon emissions in these sectors to any significant degree. Here's why.

First of all, it's important to keep in mind that even beyond the U.S. Section 232 tariffs on steel/aluminum imports, trade in these products is not particularly free. For countries both inside and outside the prospective GASSA, no matter how much they lower the emissions from making their steel/aluminum, those products can still be subject to very high AD/CV duties, as they often are now. This is a little out of date, but still informative: "As of April 19, 2017, [the U.S. Commerce Department] has 152 antidumping (AD) and countervailing duty (CVD) orders in place on steel from 32 countries." (The "breathing room" Ben and Tim mention seems like it already exists.) The AD/CVD regime operates under a particular set of rules that are well understood based on decades of experience, and it seems pretty clear that if foreign steel/aluminum companies have any success in exporting their low emissions products to the U.S., they will be at high risk of being hit with AD/CVDs. (Also safeguards, but I'm trying to simplify things a bit.)

As a result, there will be little incentive under the GASSA for foreign companies/governments to reduce carbon emissions in these sectors, as doing so would not have much impact on the ability of foreign producers to export to the U.S. Avoiding a 25% "green steel" tariff doesn't help much if a 100% anti-dumping tariff is still out there. 

To be clear, it's not that a 25% tariff doesn't matter at all. As we've seen, when foreign producers are suddenly hit with tariffs at this level, they complain. But the suggestion here is that these tariffs will lead to a reduction in carbon emissions, and that's where I have doubts. Lowering carbon emissions is going to cost someone some money, and when considering whether that expense is worth it, companies will be thinking about what the payoff is in terms of increased sales. In this regard, the threat of anti-dumping tariffs on these exports is something that they will need to take into account. In addition, if the government offers subsidies to help the companies lower their carbon emissions (which seems to be a likely way that companies will be convinced to do this), there's a potential CVD waiting for them.

If people are thinking here about China (and they clearly are!), China's exports of steel to the U.S. are pretty limited because of existing AD/CVDs imposed on them. As a result, the GASSA doesn't provide much of an incentive for China to decarbonize. China knows more than any country that any low emissions steel/aluminum it tries to export to the U.S. would be hit with AD/CVDs. Anyway, as Ana Swanson notes, certain requirements "appear likely to bar [China] from becoming a member." But of course, if we want to reduce carbon emissions, getting China to act is crucial, so this seems like a major flaw in the plan. Perhaps the idea is that creating a club that excludes China will prompt China to act? If so, I have doubts. 

I've made all these points before, but I haven't heard a response to them, so I'm not sure what to do except make them again. If Tim or Todd or Ben, or anyone else, has an explanation for how the GASSA tariff plan will have an impact on carbon emissions when AD/CVDs on steel/aluminum are out there, I'd love to hear it. How exactly do people expect the GASSA tariffs to play out in a way that would lead any steel/aluminum companies, in the U.S. or abroad, to lower their carbon emissions? I've been very skeptical about all of this, but walk me through it and try to convince me.

Finally, while I said at the outset that I would be "putting aside the WTO-consistency issue (and the broader issue of trade conflict and retaliation that will likely be a result of implementing this agreement)," let me just note that this is a serious issue. The trade conflict that GASSA tariffs create could be substantial. I think it is likely that many governments will retaliate rather than go along with this, in part because they see the U.S. as one of the biggest problem countries in terms of carbon emissions.

Guest Post: The EU’s CBAM-Regulation stands in contrast to fundamental EU-obligations under the Paris Agreement

This is a guest post from Reinhard Quick, Saarland University and Isha Das, University of Passau.[1]

Summary

By not accepting differentiation and by insisting on a uniform European carbon price the CBAM-Regulation elevates the avoidance of carbon leakage to an overarching principle to which all other obligations are subordinate. This leads to a violation of the EU’s Paris Agreement obligations.

Introduction

The Paris Agreement offers parties flexibilities when adopting their national climate actions. It is a combination of legal obligations and flexible approaches to addressing climate change, respecting sovereignty, differentiation, local conditions, and developmental issues coupled with a gradual increase of ambition over time. All parties have to act and to implement climate mitigation and adaptation measures. Yet some – the developed countries – have to shoulder more ambitious measures given their historic pollution activities. The Agreement does not prescribe the measures parties have to adopt and leaves them the choice. The EU has formulated the CBAM-Regulation as a sovereign climate change measure in furtherance of their Paris Agreement commitments, pursuant to which they impose a CO₂-price on domestic production and importation of carbon-intensive goods to prevent carbon leakage. It is this pricing-mechanism which raises concerns under the Paris Agreement.

Adherence to the Paris Agreement is regulated by an Oversight System through (1) a transparency mechanism to hold each party accountable for their sovereign climate actions; (2) a periodic assessment of the collective contribution of all parties to the Paris goals; and (3) a facilitative compliance with the mandates of the Agreement. The implementation and compliance proceedings under the Paris Agreement are based on the prerogative that no party can unilaterally decide on the adequacy of other parties’ climate actions, only the Oversight System enables such determination. The goal is to achieve implementation of more ambitious national commitments by each member in a facilitative, non-intrusive, non-adversarial and non-punitive way. Ironically, this bold goal is not reflected in the Oversight System’s procedures. Despite the System’s existence and clearly stated objectives, its non-binding nature precludes a party’s sovereign actions from being addressed in any way other than by peer pressure. This may not always be successful, given the difference in power dynamics between the parties to the Agreement. The non-binding nature of the System precludes legal enforceability of the Agreement’s commitments, thereby severely watering down its overall utility.

Common But Differentiated Responsibilities and Respective Capabilities (CBDRRC)

The EU’s CBAM-Regulation will become operational by the end of 2024 and the beginning of 2026 respectively. The pertinent feature of the Regulation is the purchase of certificates by importers of covered carbon-intensive products for every ton of carbon emitted during the production process. European installations are subject to a carbon price assessed on their actual emissions via EU-ETS. Whereas imported products, while being assessed on the GHG emissions during their production, would be subject to the European carbon price as per the CBAM-calculation.  

The CBAM-Regulation applies to imported products independent of their origin. It is assumed that all potential exporting countries (except those mentioned in Article 2.4) do not have policies in place that “result in the same level of climate ambition as the Union” (Explanatory Memorandum CBAM Proposal). This justification is surprising and arguably Paris-inconsistent. The Paris Agreement does not require all parties to adopt the same climate policies as the EU. Its underlying objective is to achieve the temperature goals with ambitious self-determined national contributions in light of different national circumstances. Hence it accepts asymmetrical contributions by the parties. The CBAM-Regulation rejects differentiation based on the assumption that developing countries could increase their GHG emissions by exporting more ‘dirty’ products to the EU if they were exempted. This rejection of differentiation cannot be reconciled with the CBDRRC-principle. Developed countries have to take the lead and ‘peaking’ will take longer for developing countries with the inherent consequence that these countries can emit (in relative terms) more GHG emissions than developed countries. More precisely, this asymmetry allows a developing country to produce, for a limited period of time (until peaking), a specific product in a climate unfriendly way provided that, overall, the country follows its Paris obligations. The EU’s rejection of differentiation is not based on climate but on economic considerations: given the ambitious climate protection measures taken by the European Union, Europe can only protect its industry with equivalent climate requirements for imports and therefore cannot accept any form of differentiation. This position elevates the avoidance of carbon leakage to an overarching principle to which all other obligations are subordinate and renders the differentiation requirements nugatory. Yet, the avoidance of carbon leakage can, in our view, only be considered a legitimate climate measure if it is interpreted in accordance with the Paris Agreement’s obligations, in this case the asymmetrical differentiation requirement. Recitals 71 to 74 of the Regulation seem an implicit admission that the Regulation has a differentiation problem in that they discuss support for developing countries through dialogue, cooperation, negotiations, and financial support. Yet in the absence of an agreed solution with these countries the Regulation contravenes the CBDRRC-requirement.

Can Parties Impose a Carbon Price on Others?

The CBAM-Regulation imposes a European carbon price on covered imported products. It foresees that importers have to pay on the verified embedded GHG emissions of the imports a carbon price which they would have to pay had these products been produced in the EU. The focus on an EU carbon price is, again, justified with carbon-leakage reasons. The carbon-pricing mechanism of exporting countries can be credited in so far as importers can reduce the number of CBAM-certificates to be surrendered by the respective ‘carbon prices’ of those countries (Article 9). The Regulation defines carbon-prices narrowly (Article 3 (29)), only a carbon tax or an ETS can be credited, other climate policy measures of the exporting countries cannot. The Paris Agreement leaves parties the choice of adopting carbon-pricing or non-price regulatory measures. They decide which commitments contribute best to their highest possible ambition in light of different national circumstances. By not accepting adjustments of non-price regulatory measures the EU deprives other parties of their freedom of choice and imposes on them, in a punitive way, a European carbon price. Such a mechanism contravenes the Paris Agreement as it wrongly assumes that only carbon prices ensure compliance with Paris.

The economic character of the CBAM-Regulation becomes evident in case the exporting country has an emission trading system or a CO₂-tax in place. If either system results in a lower CO₂-price than the EU’s, the importer still has to buy CBAM certificates paying the difference. This ‘gold-plating’ of the value of carbon emissions up to the EU-price does not consider whether a third country’s national CO₂-price ensures that country’s compliance with Paris and is hence a measure equivalent to what the ETS is for the EU. Rather, the CBAM-Regulation constitutes an extraterritorial imposition of Europe’s CO₂-price on other countries, and so, its climate goals on these countries.  

Default Values

The CBAM-Regulation also maintains that in case a country does not have any emissions’ trading system, or a CO₂-pricing system, or indeed any measure which ‘sufficiently addresses climate change’, then it would impose a default value for calculating the emissions, hence allowing them to unilaterally impose a CO₂-price. Furthermore, this default CO₂-price is to be calculated based on the X% of the worst performing EU installations, where the value of X is to be product-specific and hence different for each good covered under the CBAM-Regulation. Further, the Regulation allows for alternative default values where it can be demonstrated based on ‘reliable data’ that the CO₂-emission is lower than the EU’s calculation. The Regulation does not specify what data would be reliable in this regard. Given that the Agreement does not require parties to address climate change by imposing a CO₂-price, the Regulation’s grounds for permitting the EU to impose a default value are vague and allow much room for discrimination against third countries in this regard.

Can the EU assume that other Parties are not in compliance with Paris?

During the discussions of the CBAM proposal it has been argued that a European carbon price is necessary given the EU trade partners’ lack of climate ambition. With the adoption of the Regulation the European Union now unilaterally judges the appropriateness and sufficiency of the climate measures taken by their trading partners. Such judgment contravenes the Paris Agreement’s Oversight System which aims at helping Parties to comply with their obligations in a non-intrusive and non-punitive way. In case the ambition of a Party is deemed insufficient, Articles 13 and 15 of the Agreement will elicit suggestions of more ambitious NDCs. The Oversight System promotes cooperation and facilitates compliance through a structured process yet is hostile to ‘punitive’ measures. By imposing a ‘penalty’ on the imports from alleged ‘climate laggards’, the CBAM-Regulation contravenes this aspect of the Paris Agreement. The EU cannot unilaterally decide that almost all its trading partners are not complying with the Agreement’s requirements.

Conclusion

One would assume that the EU would heed the different violations of the Paris Agreement and agree with exporting countries during the CBAM transition period on a Paris-compatible application of its regulation. But why should the EU react in this way? It can escape this defiance of the rule of law scot-free! Under the Paris Agreement dispute settlement remains wishful thinking! The Conference of the Parties has not taken any action to give effect to the arbitration mechanism provided for by Article 14 (2) (b) UNFCCC which is also applicable in the Paris context. Therefore, no authoritative body exists to give a finding of inconsistent conduct of a party. Moreover, exporting countries cannot challenge the EU’s claim that almost all its trading partners are incompliant with their Paris commitments, since the Katowice Guidelines from 2018 explicitly exclude implementation and compliance issues from the theoretically available Paris dispute settlement.

Ironically, in the absence of such a mandatory dispute settlement system, violations against foundational legal principles of the Paris Agreement would continue without any possibility of redressal. This is the price to pay for an agreement which opts for a diplomatic rather than a mandatory dispute settlement. More importantly, this situation puts the mandatory WTO dispute settlement under severe stress given the fact that the CBAM-Regulation is arguably inconsistent with the EU’s WTO obligations[2]. In a WTO case the Paris Agreement enters through the backdoor concerning the interpretation of the chapeau of GATT Article XX. If the climate-related activities of the complainant are in line with its Paris obligations the attacked and GATT-inconsistent trade measure (CBAM) could be considered as an arbitrary or unjustifiable discrimination since the EU has not taken the different conditions into account which occur in the exporting country (as per paragraphs 164-165 of the US-Shrimp Appellate Body Report).    

Another consequence of the CBAM-Regulation has been an eruption of attempts by some countries to formulate their own ETS or other CO₂-pricing systems. This ripple effect of unilateral actions undermines the multilateral approach of the WTO and Paris Agreement, or at least the plurilateral approach taking place at the WTO currently. Without a collaborative effort, the main goal of reducing rising temperatures and addressing climate change, seems to be getting lost in a tit-for-tat attempt to formulate unilateral CO₂-pricing-related trade measures.  It is high time that either the WTO or the Paris parties agree on permissible response measures to protect the climate and to avoid carbon leakage.   

 

[1] The guest post is based on our article ‘Can Paris Strike Back? On the Paris Agreement’s Inability to Cope with Unilateral Trade-Related Carbon Measures such as the European Commission’s CBAM-Proposal, pp. 75 – 102, in: THE EU and the WTO: Ever the Twain Shall Meet, Liber Amicorum Marco Bronckers; Freya Baetens and Stefaan Van den Bogaert (eds.), 2023, Alphen an den Rijn, the Netherlands.

[2] Reinhard Quick, Carbon Border Adjustment, A dissenting view on its alleged GATT-compatibility, ZEuS 4/2020, pp. 549 – 596.

Was There a Free Trade Era, and Is It Over?

This is something I posted on the Baker Institute site last week:

Was There a Free Trade Era, and Is It Over?

In recent months, there have been excited proclamations from both traditional media voices and Substack upstarts about the end of “neoliberalism” and free trade, and a search for what comes next. The narrative being pushed here seems to be that for all his faults, former President Donald Trump recognized an important political flaw with U.S. “free trade” policies, and the sensible Biden administration wonks have been trying to translate Trump’s instinct into a coherent set of new policies.

But that narrative gets some fundamental points about the policy arc wrong. For one thing, “neoliberalism” is a vague and unhelpful term when it comes to describing actual policies. For another, we were never close to anything resembling free trade. Where we really are with trade policy today is where we have always been: Export and import interests are battling it out over the direction of policy, with geopolitics doing its usual work of making it more difficult to construct a sensible path forward.

The “Neoliberalism is Dead” Bandwagon

Economic policy is complex and nuanced, and many people respond by coming up with shorthand terms to make their points in political discussions. One of these terms is “neoliberalism,” which in the public discourse (as opposed to the scholarly/academic community) is used in a number of different ways: Some people use it to refer to extreme reliance on free markets; others may think of it as simple crony capitalism, with the government favoring well-connected corporations. For those who use the term, free trade is generally considered to be a core component of neoliberalism.

Whatever is meant by the term, there has been a mad rush to proclaim its death. Economist Branko Milanovic announced on Twitter that “I have seen two big ideologies fall apart in my lifetime: communism and neoliberalism.” In New York Magazine, journalist Eric Levitz told us that “The Biden Administration Just Declared the Death of Neoliberalism.” And as journalist David Wallace-Wells put it in the New York Times, “America’s ‘Neoliberal’ Consensus Might Finally Be Dead.”

To get a sense of the specifics here, for Wallace-Wells, the Inflation Reduction Act (IRA), with its electric vehicle and battery subsidies, “signal[led] the end of ... America’s uniform rhetorical commitment to the global reign of free markets.”

The reality, of course, is that electric vehicle subsidies are not new. Nor are airplane subsidies, farm subsidies, or solar power subsidies.

Are the IRA subsidies bigger than the subsidies that came before? Is the rhetoric different in the sense that more people are willing to use the words “industrial policy”? Maybe. But the change is more of a subtle shift than an old policy dying and a new one rising from its ashes.

Did We Really Have Free Trade?

Along with “neoliberalism,” free trade is also being buried. Economics pundit Noah Smith wrote a piece entitled, “The new industrial policy, explained,” in which he notes that “[w]e’re starting to learn what replaces the old free-trade consensus.” Along the same lines, a Politico piece states, “The president and his critics agree that the free trade era is over in Washington.” And the Washington Post editorial board proclaimed, “The era of unfettered free trade is over.”

Now, it may be that some of these pundits are using the term “free trade” loosely, in the sense of a policy that is merely in the direction of free trade. Nevertheless, people in the trade policy field will be forgiven if they scratch their heads and ask, “Did we really have a free trade era?” For someone who spent a career as a trade lawyer fighting off protectionist “fetters,” such statements are puzzling.

Part of the problem here may be the framing that policymakers have used over the past couple decades. Many trade agreements had “free trade” in the title even when they didn’t have full free trade as the content of the agreement. Free trade was a good marketing tool but not the actual preferred policy.

To be clear, many of these agreements were trade liberalizing, in the sense of moving us toward freer trade. However, the gaps in their coverage were quite large, and many of their provisions were not even about trade liberalization.

To take a few examples, in addition to the various subsidies noted above, there have been: abusive and arbitrary “anti-dumping” tariffs, such as the tariffs on Canadian lumber; protectionist provisions in statutes and regulations; Jones Act restrictions on shipping; “Buy American” procurement programs; tariff “peaks” such as a 25% tariff on imported trucks; import restrictions on baby formula; and a wide range of regulatory barriers to trade in services.

In addition, the much criticized bilateral “free trade” agreement isn’t some free market panacea. In fact, economists like to point out that these sorts of discriminatory arrangements could actually divert more trade than they create.

With all this in mind, calling this era the “free trade era” or talking about a “free trade consensus” seriously mischaracterizes the actual trade policy of the past several decades.

Enter China

Of course, everything is different because of China. China is something we have never seen before: The world’s second largest economy, a military threat, and an ideological rival all wrapped into one. The new “great power competition” and resulting security concerns, people argue, have changed everything.

But are things really that different? Haven’t we seen all this in some form before?

Back in the 1980s, Japan was widely seen as an economic rival that could overtake America, with the supposedly instinctive Donald Trump running ads stating that “for decades, Japan and other nations have been taking advantage of the United States.” And the dawn of the Cold War played a role in the development of the General Agreement on Tariffs and Trade, as governments grappled with ideological and defense questions related to the participation of Eastern European countries. Maybe the China concerns of today combine these economic and security issues in a way that adds to the complexity of the problem, but nothing here is fundamentally new for trade policy.

It is also worth noting in this context that China has a lot of potential internal economic problems on the horizon. As a result, the geopolitical situation that has everyone panicking today may look very different in the not too distant future.

Back to Work on a Boring Old Mixed Economy

Policy debates would be easier and clearer if there were just two camps with opposing views — free market supporters and industrial policy advocates — and one or the other was always totally in charge. That would give us a true test of how well each policy works. But as described above, actual economic policy is messy and reflects a mix of each of these policy views.

Over time, policy does shift a bit in one direction or the other, often at the urging of specific interest groups. Whether it’s the domestic steel industry arguing for tariffs on imported steel, or labor unions pushing to restrict trade with competitors in developing countries, someone will be trying to exert influence to restrict imports. At the same time, the U.S. also has export interests, and these groups will continue to push for more market access abroad. This battle between export and import interests has always been the core of what shapes U.S. trade policy and will continue to play that role.

The media, of course, has an interest in attention-grabbing headlines, so proclaiming the death of this or that will always generate clicks. But behind the scenes, it’s mostly the same old policy debate about how to structure the economy and trade policy. Pro-trade people will make their arguments; protectionists will make their arguments; businesses and other interest groups will weigh in; and geopolitics will get in the way. Out of all that we will get some version of the mixed economy we have always had.

The trading system has always been a carefully calibrated balance of modest constraints on protectionism. That characterization doesn’t make for a great headline, but it’s the boring yet important work that trade policymakers around the world are doing.

Just to add a bit, to be clear here, I do think the degree of movement along the continuum is an interesting discussion. It's a difficult thing to quantify though. How far exactly did Trump/Lighthizer move things in the direction of protectionism? And where are we now under Biden/Tai? But regardless of those answers, I think there is some significant exaggeration in the public debate over where we were on trade/industrial policy/economics for the several decades leading up to Trump. I understand why that exaggeration happens, but I also think it's worth pushing back on it, which is why I write this sort of piece from time to time.

Finally, let me make a pitch to those who want more protectionism. Can't we at least have a better sort of protectionism? For example, let's think about shifting away from anti-dumping and Section 232 towards a workable safeguards regime.

Journal of International Economic Law New Issue (26:2) Available Now: Contents

The Journal of International Economic Law is pleased to announce its new issue (Vol. 26, Issue 2), now available on the Journal website.

This issue features the following articles:

• Trade Agreements and Sustainability: Exploring the Potential of Global Value Chain (GVC) Obligations by James Harrison
• Supporting the Transition to Climate-Neutral Production: An Evaluation Under the Agreement on Subsidies and Countervailing Measures by Roland Ismer, Harro van Asselt, Jennifer Haverkamp, Michael Mehling, Karsten Neuhoff, Alice Pirlot
• Risk, Reward, and Resilience Framework: Integrative Policy Making in a Complex World by Anthea Roberts
• Managing Externalities in the WTO: The Agreement On Fisheries Subsidies by Bernard M Hoekman, Petros C Mavroidis, Sunayana Sasmal
• A Climate Change Carve-Out for Investment Treaties by Joshua Paine and Elizabeth Sheargold
• From Bananas to Large Civil Aircraft: An On-Going Quest for Value-Added in the Computation of Countermeasures at the WTO by Marc-Antione Couet
• The Use of Trade Coercion and China’s Model of ‘Passive-Aggressive Legalism’ by Ben Czapnik and Bryan Mercurio
• The WTO and Vaccine Supply Chain Resilience during a Pandemic by Chad P Bown
• Blockchain and its Applications: A Conceptual Legal Primer by Ross P Buckley, Anton N Didenko, Mia Trzecinski

It also features the following book reviews:

• Preserving the Crown Jewel, Stratos Pahis reviewing The WTO Dispute Settlement System: How, Why and Where? by Petros Mavroidis
• Review, R V Anuradha reviewing Emerging Powers and the World Trading System: The Past, Present and Future of International Economic Law by Gregory Shaffer

Don’t miss these great articles and reviews!

Some Responses to Lighthizer's Recommendations for the WTO

Former U.S. Trade Rep. Robert Lighthizer has a new book on trade policy. I haven't read the whole book, and I'll leave a full review to others. However, I did come across an excerpt of his seven specific recommendations for the WTO, and I had some reactions to each.

Lighthizer recommendation #1:

First, we need a reset on the global tariff system. This practice of countries having wildly different tariffs for the same products is unfair, inefficient, and historically anachronistic. We need a new baseline for all tariffs. There should be some small number of exceptions permitted to accommodate grave political and economic situations in some countries. The average tariffs of industrialized countries would be a good starting point for discussions on this baseline.

I assume he is upset that the U.S. has lower tariffs than many other WTO Members (although not the lowest). But it's worth noting here that tariffs aren't the only policy negotiated at the WTO. When thinking about the overall balance of obligations, you have to take into account non-tariff policies, such as IP protection. So, if the U.S. decides at some point that it wants other countries to lower their tariffs from existing levels (or the U.S. wants to raise its own tariffs), it will almost certainly have have to give up some of what it fought for and got on IP or some other issue.

Lighthizer recommendation #2:

Second, we need to stop the FTA end run around MFN treatment. Clearly, defined custom unions of contiguous states, such as USMCA or the European Union, should be permitted, but otherwise countries should have to treat all trading partners equally.

The USMCA is not a customs union, but putting that aside, GATT Article XXIV/GATS Article V do not currently have this kind of limitation on FTAs. I'm not sure what his goal is here. It is probably not to shift from trade-diverting to trade-creating FTAs, as some economists might suggest, so maybe he's just trying to reduce the number of FTAs? In a WSJ op-ed from 2020, he made this point in a way that suggests it is directed at the EU: "As multilateral trade negotiations have foundered, the most-favored-nation norm has eroded as well with the proliferation of bilateral free-trade agreements that discriminate in favor of preferred trading partners. By entering into trade deals with smaller economies—72 at last count—the European Union has effectively resurrected the system of colonial preferences that prevailed in the pre-GATT era. The EU uses its trade deals in many cases not to advance trade liberalization, but to force other countries to adopt thinly veiled protectionist measures like “geographic indications,” which prohibit the use of common labeling terms for wine and food items produced outside the EU."

Lighthizer recommendation #3:

Third, special and differential treatment has to be cut back so that only the poorest countries in the world get special treatment. The rest are either in the trading system or they are not.

Lots of people are interested in this issue right now. Jim Bacchus and Inu Manak had some suggestions here.

Lighthizer recommendation #4:

Fourth, the WTO needs new rules to stop Chinese economic aggression. Clearly, compensatory tariffs should be allowed in prescribed circumstances. Further, if necessary, countries should have the ability to act unilaterally to counter predatory, mercantilist policies.

On this issue, it's probably worth exploring the rules China agreed to in its accession protocol and working party report. There are some broad obligations in there that have been mostly overlooked. Having said that, it could be helpful to have certain policy areas covered a bit better by WTO rules, e.g., bring CPTPP SOE rules into the WTO. As for "the ability to act unilaterally to counter predatory, mercantilist policies," if this means AD/CVD, that has been heavily utilized for a long time now, without much impact on Chinese policies.

Lighthizer recommendation #5:

Fifth, the concept of a sunset should be incorporated into the WTO agreements. Economies change, and so should the obligations of members. No business would sign an eternal contract with its suppliers, nor should any country.

I'm against all sunset provisions, with the exception of policies I don't like, in which case I am for them. That's a joke! But seriously, it seems like people generally want sunset provisions for things they don't like, and I haven't come across many arguments for sunset provisions on principle.

Lighthizer recommendation #6:

Sixth, the WTO must adopt a mechanism that assures long-term balanced trade. Commitments must be flexible when a country such as the United States runs up trillions of dollars of deficits for decades.

If Lighthizer is concerned about the U.S. trade deficit, he'll need to address its core causes, which are mainly macroeconomic in nature. If he wants, for example, a WTO mechanism to increase U.S. savings and end the dollar's use as the dominant reserve currency, he can push for that.

Lighthizer recommendation 7:

Finally, the dispute settlement system should be scrapped. A new one, modeled after commercial arbitration, should be put in its place. There should be a one-stage panel process with a vote of the WTO member states being able to overturn the decisions. Further, the decisions should be the basis of party negotiations and not be binding.

Lighthizer also mentioned commercial arbitration in the WSJ op-ed, where he said: "The current two-tier system should be replaced with a single-stage process akin to commercial arbitration, in which ad hoc tribunals are impaneled and resolve particular disputes in an expeditious manner. The rulings of these one-off panels should apply only to the parties in the dispute, and not become part of an ever-evolving body of free-trade jurisprudence." I don't know much about commercial arbitration, and perhaps the methods used there work well for those disputes. But from what I do know about them, they don't seem well-suited for WTO law. At the WTO (and in bilateral and regional trade agreements), we need reasoning that clarifies what the vague terms of the rules mean, so parties know what their obligations are. If the meaning of national treatment, for example, is up for grabs in every dispute, it will be very difficult for governments to act in compliance with the principle.

More Ron DeSantis on China Trade

As I track U.S. presidential candidates' statements on trade policy, I'm not always going to offer commentary. Sometimes I'll just post the full text, as part of an effort to document everything being said. Here is Ron DeSantis talking to Maria Bartiromo on Fox News last weekend:

DeSantis:

I think we need to recognize [that] this experiment with the CCP over the last three decades where they were granted most favored nation status, put in the World Trade Organization, you know, that's been a failure. We need independence from China. We cannot subcontract out key aspects of our industrial base to a country that doesn't have our interests at heart and that is our number one geopolitical threat, and we will get that done as well.

Bartiromo:

And yet, Janet Yellen just went to China and bowed to Communist Party officials; a couple of weeks after Antony Blinken pretty much did the same. What are you going to do to stop this aggression from communist China in your first week in office then? Give us specifics that you want to change with regard to the relationship with China. Will you reverse the most favored nation trade status on China? What else can be done?

DeSantis:

So I favor doing that. I think we probably need Congress, but I would take executive action as appropriate to be able to move us in that direction. Too, I would recognize that China's a threat. This idea of the happy talk that you hear from Yellen, oh, we're just, you know, it's a healthy competition. No, they're the number one geopolitical threat this country faces. And what we're gonna do is we're going to have a new commitment to hard power in the Indo Pacific. At the end of the day, what China respects is strength. And if you're showing strength and we have hard power to back it up, they're going to be much less aggressive ...

A WTO DS Workaround for Appeals Into the Void

Where the party complained against in a WTO dispute appeals into the void and thereby blocks an adverse panel report from having legal effect, can the complaining party just treat the panel report as the final word and move forward with retaliation? The EU has set up a process for doing so, and may now give it a try for the first time. In a sense, the EU is declaring that "appeals into the void" are void.

The European Commission announced on Friday that it "has launched a public consultation on the possible use of the Enforcement Regulation in its dispute settlement case on Indonesian nickel export restrictions." It explained that "[t]his step was taken after Indonesia appealed the World Trade Organization (WTO) Panel Report on the matter – which was favourable to the EU – to a non-functional Appellate Body, thus effectively blocking the final and binding resolution of the dispute through the WTO." The Commission emphasized that it "will continue efforts to reach a mutually agreed solution to the nickel ore dispute, including continuing to invite Indonesia to join the Multi-Party Interim Appeal Arrangement (MPIA)."

The EU's public consultation notice is here, with a deadline of August 11 to submit comments. The notice explains the Enforcement Regulation as follows:

Regulation (EU) No 654/2014 of 15 May 2014 concerning the exercise of the EU's rights for the application and enforcement of international trade rules as amended by Regulation (EU) No 2021/167 provides the legal basis to address blockages in the WTO dispute settlement system and to prepare the EU for such situations where important economic interests in the effective enforcement of rules would be undermined.

Where action is necessary to safeguard the EU's interests in such cases, the EU may take appropriate commercial policy measures in response, on the basis of objective criteria.

And it estimates the amount of nullification or impairment -- which provides the basis for any countermeasures under the Enforcement Regulation -- in the Indonesian nickel case as follows:

The Commission has estimated the direct effect of the nullification and impairment to be around €350 million, while the indirect impact would be up to four times higher. The Commission has at this stage identified steel and stainless steel products as possible products for countermeasures.

Is the EU regulation consistent with WTO rules? Is appealing into the void consistent with those rules? Whatever the answer to those questions, what many people are looking for right now is a practical way forward in resolving trade disputes while the Appellate Body crisis continues. The EU approach is not ideal in terms of the rule of law (and I'm sure they would agree with this), but it may be the best option under the circumstances.

Some other questions I have are:

- How will Indonesia react to this? As I understand it, there are a number of EU-Indonesia trade issues in play right now, so the resolution of this dispute could end up being part of a broader package.

- How would people in the U.S. react to the EU taking this approach in some future dispute involving an EU complaint against the U.S.? (When I say "people in the U.S.," I'm thinking specifically of USTR, the White House, and members of Congress.) And what impact would such an EU action have on the current U.S. approach to WTO DS?

In other WTO appeal news, China and the EU have agreed to use DSU Article 25 in the event of an appeal in the DS610 and DS611 disputes. Both China and the EU are parties to the MPIA.

The New U.S.-Taiwan Trade Agreement and Its Approval

This post is by Kathleen Claussen & Timothy Meyer.  It is cross-posted on Lawfare.

On June 1, the United States and Taiwan signed a new trade deal. The agreement, which spans eight chapters and 75 pages in the English version, creates obligations for both parties to enhance trade facilitation, adopt good regulatory practices, eliminate barriers to trade in services, heighten anti-corruption efforts, and support trade by small and medium enterprises. Although it does not reduce tariffs, it contains binding commitments for both governments designed to reduce barriers to trade and enhance market access in both directions. The Biden administration has announced that this is the first of at least two trade agreements that it intends to negotiate with Taiwan. Upcoming trade deals will address agriculture, state-owned enterprises, and labor and environmental issues—areas that the United States has identified as issues of greatest importance in its trading relationship with Taiwan. 

The Biden administration’s negotiation of this agreement, and Congress’s response, raise four major complications for U.S. trade and foreign policy.

First among the complications created by the U.S.-Taiwan trade agreement is an authority problem: Congress never authorized the executive to enter into (in other words, sign) such an agreement, let alone bring it into force. This is not a new issue. As we outlined in a previous piece on Lawfare, the U.S. Constitution gives Congress the power to regulate commerce with foreign nations. Trade agreements are thus different from other kinds of international agreements. The executive branch has no constitutional authority over foreign commerce and thus can bring trade agreements into force only when authorized by Congress. In most instances, Congress—via successive trade promotion authority (TPA) statutes—also has mandated that it approve any agreement before that agreement can enter into force. Although those statutes grant the executive branch the authority to enter into trade agreements that meet certain conditions, they implicitly or explicitly withhold authorization if those conditions are not met. Despite this long statutory practice agreed by both branches through the legislative process, the Biden administration argues that it can negotiate, enter into, and bring into force trade agreements of many types on the basis of its delegated authority set out in 19 U.S.C. § 2171, which is part of the 1974 Trade Act. But 19 U.S.C. § 2171 merely designates the U.S. Trade Representative (USTR) as the lead office in the executive branch responsible for trade negotiations; nothing about § 2171 gives the USTR the authority to enter into or bring into force trade-related agreements.

Second is a political challenge that intersects with the authority problem. While members of Congress have raised concerns about the administration’s trade executive agreement practice, they have also long sought a trade deal with Taiwan. So, in an effort to support the deal in principle and reassert its authority on trade, the House passed a bipartisan bill on June 21 called the United States-Taiwan Initiative on 21st-Century Trade First Agreement Implementation Act.

This Taiwan Initiative Act makes a couple of key moves. First, it sets out Congress’s approval of the new deal. Even though members maintain that Congress never authorized the USTR to engage in the negotiations or enter into the agreement with Taiwan in the first place, the act would authorize the president to provide for the Taiwan agreement’s entry into force, resolving at least part of the authority problem. It makes entry into force subject to conditions similar to those found in traditional TPA statutes under which U.S. free trade agreements have been concluded.

More innovatively, it also sets out requirements for the USTR’s interaction with Congress regarding any future proposed agreements with Taiwan. In particular, the proposed Taiwan Initiative Act would require the USTR to provide agreement text that it intends to table to Congress before it provides it to Taiwan, and to give Congress an opportunity to review and comment. It would tightly control the timelines for negotiation by effectively constraining the USTR from tabling text before members have completed their review. It would also require the USTR to provide Congress with any text that Taiwan has offered. This language goes beyond what TPA has required. TPA focuses on consultation and obligates the USTR to share documents upon request. The restrictions in the Taiwan Initiative Act undoubtedly complicate the USTR’s negotiating plans in ways that may be ultimately unproductive vis-a-vis the U.S. negotiations with Taiwan, but they nevertheless remain within Congress’s prerogative to regulate commerce. Since the president has no independent constitutional authority in trade as he does in other areas of foreign relations, Congress may assert these restrictions on its designee. 

Taken together, the initial absence of authority to enter into the agreement and the subsequent effort to approve the agreement subject to new prospective restrictions on the executive branch reflect an increase in assertiveness by both the executive and legislative branches. In other areas of foreign relations law, the executive has countered congressional efforts to restrict or limit executive freedom by statute with arguments about the executive branch’s constitutional authority over foreign affairs. But, as we have noted, that constitutional authority does not extend to foreign commerce, which the Constitution places exclusively within Congress’s powers. As a result, there is little doubt that Congress can restrict the executive branch’s ability to negotiate, enter into, or bring into force trade agreements. To be sure, the executive may enjoy more latitude to engage with trading partners in the absence of legislation to the contrary. But once Congress has spoken, the executive is bound to adhere to any rules or restrictions that Congress may make. 

A third issue is how to think about this proposed legislation in the broader conversation about trade agreements. As noted, the act addresses only this deal and future deals with Taiwan. Members have proposed that Congress authorize negotiations for trade agreements with, in addition to Taiwan, the United Kingdom, Kenya, and Ecuador, hoping to urge the administration to enter into free trade agreements with those countries. But the country-specific approach has not taken hold until now, and it did so as a matter of necessity since the Taiwan deal has already been signed. This ex post approach raises questions about the status of other trade executive agreements and whether Congress will seek to treat those in the same way, picking and choosing approvals among them in ways that would make U.S. trading partners quite nervous and that would complicate the legal status of the unapproved agreements even more. Far more likely is that efforts on the Hill will continue to try to scope out clear rules on the USTR’s trade agreement authority for future agreements, including for the Indo-Pacific Economic Framework for Prosperity—the cornerstone of the administration’s present negotiating efforts.

A final problem is a wrinkle in the U.S. treatment of Taiwan. Although this is not the first trade-related agreement between the U.S. and Taiwan—the U.S. has entered into more than two dozen since the 1970s—if the Taiwan Initiative Act were signed into law, it would be, to our knowledge, the first expression of approval by Congress of a new trade deal between the United States and Taiwan in several decades. Under the Taiwan Relations Act and Executive Order 12143, agreements concluded after Jan. 1, 1979, that are intended to create commitments for the United States and for Taiwan are negotiated and signed by their nonprofit organization representatives. Those agreements are transmitted to the Congress, and such agreements have full force and effect under the law of the United States. But to our knowledge, none has received congressional approval (although the Taiwan Relations Act itself approved the continuance of all international agreements then in force between Taiwan and the United States). This enhanced role for Congress thus represents a degree of political blessing that undoubtedly sends a strong statement. Approving this deal is not enough to change the delicate U.S. position on recognition, but it would hold Congress out more than has been customary. 

While the U.S.-Taiwan deal may not require changes to U.S. statutes, it does commit the United States under international law to maintain certain trade laws, among other obligations. Congress no doubt has not just an interest but the constitutional privilege of dictating what those laws ought to be. The new agreement and the Taiwan Initiative Act again bring familiar issues into focus—this time with bipartisan support for greater congressional intervention but in the context of a tense international relationship that the executive has historically closely controlled.

Is Everything We Thought about the World Economy Wrong?

This post is a response to a NY Times piece from a couple weeks ago called "Why It Seems Everything We Knew About the Global Economy Is No Longer True," by the Times' global economics correspondent Patricia Cohen. In my view, there are a number of overstatements and mischaracterizations in the piece that are worth talking about, because they come up often in trade policy discussions these days. I will note at the outset that I'm not dealing with every issue in the piece, so there is plenty of room for others to chime in as well. (Dan Drezner responded to it here.)

The piece starts out with an assertion that "it has suddenly seemed as if almost everything we thought we knew about the world economy was wrong":

A lot has happened between [2018] and now: A global pandemic hit; war erupted in Europe; tensions between the United States and China boiled. And inflation, thought to be safely stored away with disco album collections, returned with a vengeance.

But as the dust has settled, it has suddenly seemed as if almost everything we thought we knew about the world economy was wrong.

If everything we thought was wrong, I hope this means we are going to rethink policies such as anti-dumping and import restrictions on baby formula!

More seriously, I think her assertion overstates what's going on in U.S. international economic policy these days. For those of us in the field, we've seen today's debates about the direction of trade policy and the role of government in the economy before -- in fact, pretty much all along. (Fred Bergsten was lamenting stalled progress on trade liberalization back in 1971!)

From what I can see, it's not that suddenly what we knew was wrong, but rather that the same debates are taking place and one side -- the domestic industry and associated unions -- is doing a little better than it did 10 or 20 years ago. How much better? That's hard to say. Two successive administrations have adopted language that is sympathetic to protectionism and more skeptical of trade liberalization, which makes it feel like a big change is upon us. However, the actual policies have not changed as much as some people think. (For example, Buy America procurement programs have been with us for a long time.)

It's true that the pandemic was a new variable in the trade equation, but war, great power competition, and inflation have been with us in some form and to some degree for a long time, and the trade regime is very familiar with them. As for the pandemic, it should have taught us some lessons, such as the importance of stockpiling goods that will be needed in emergencies, but I'm not sure how much we've learned.

Let me turn now to some specific topics that Cohen raises in the article.

The role of free markets

Cohen presents the last 30 years of policy as dominated by free market thinking:

The economic conventions that policymakers had relied on since the Berlin Wall fell more than 30 years ago — the unfailing superiority of open markets, liberalized trade and maximum efficiency — look to be running off the rails.

...

While the collapse of the Soviet Union cleared the way for the domination of free-market orthodoxy, the invasion of Ukraine by the Russian Federation has now decisively unmoored it.

Where are people seeing "domination of free market orthodoxy" in policy, trade or otherwise? It's true that there has been a bit of deregulation and privatization in some sectors, but there has also been a high degree of regulation and government involvement in the economy in other sectors (as well as permanent stimulus in fiscal policy). The reality is that the U.S. (and all the other market-oriented democracies) have mixed economies. There are some free market folks in each one who are making the case for their position, but if you tell them they are "dominating" things, you are going to hear a long burst of laughter.

Similarly, with regard to policymakers relying on "the unfailing superiority" of open markets, liberalized trade, and maximum efficiency, there are a handful of people who believe in this, but they have never been the most influential, as evidenced by countries' actual policies.

I understand that progressives have been frustrated over the years by the mix of free markets and government intervention in the economy, because they prefer more government intervention. But free market folks have been just as frustrated on the other side.

Can trade stop war?

Cohen then tries to rebut claims that trade brings peace:

The idea that trade and shared economic interests would prevent military conflicts was trampled last year under the boots of Russian soldiers in Ukraine.

But this is an overstatement of what people believe here. No one is saying that economic integration will prevent all military conflict. But surely we are better off in terms of war and peace while trading with each other than not, right? Think of Western Europe before WWII and Western Europe after WWII, when they got started with their deep economic integration.

As to Russia-Ukraine, I've read enough of the debate over why Russia invaded Ukraine to know that trade is basically a non-factor. Trade can't stop a war when someone is determined to have one. 

The actual argument about trade and peace is more nuanced: Open trade generally contributes to peaceful relations. It's possible that somewhere along the line this point was overstated by someone, but the more nuanced version of the argument seems pretty strong. If someone wants to argue that peace is more likely with trade restrictions in place than with open trade, go for it, but I don't think many people will be convinced.

Did trade lead to anti-immigrant views?

Cohen tries to connect trade to anti-immigrant sentiments:

Companies embarked on a worldwide scavenger hunt for low-wage workers, regardless of worker protections, environmental impact or democratic rights. They found many of them in places like Mexico, Vietnam and China.

Television, T-shirts and tacos were cheaper than ever, but many essentials like health care, housing and higher education were increasingly out of reach.

The job exodus pushed down wages at home and undercut workers’ bargaining power, spurring anti-immigrant sentiments and strengthening hard-right populist leaders like Donald Trump in the United States, Viktor Orban in Hungary and Marine Le Pen in France.

I occasionally hear the view that trade has led to anti-immigrant sentiment, and I'm a little surprised by it. I know people who are anti-immigrant, and I've talked to them about it, and trade just doesn't enter into it at all. These particular people are not from areas that have been affected by trade, and they don't like immigrants for the traditional reasons people don't like immigrants. 

Is it possible that someone, somewhere was hurt by trade and that translated into anti-immigrant feelings that weren't otherwise present? Yes, it's possible, but mostly in the "anything is possible" sense. The practical reality of anti-immigrant sentiment is very different, and pointing to trade as a significant cause obscures the main reasons for anti-immigrant sentiment. If we are going to deal with the issue of anti-immigrant sentiment, we are going to have to confront it head on, rather than blaming it on something else.

Does trade bring democracy?

Cohen complains that trade did not bring democracy as was promised:

The proliferation of economic exchanges between nations also failed to usher in a promised democratic renaissance.

Communist-led China turned out to be the global economic system’s biggest beneficiary — and perhaps master gamesman — without embracing democratic values.

...

The World Trade Organization was established in 1995 to enforce the rules. China’s entry six years later was seen as transformative. And linking a huge market with 142 countries would irresistibly draw the Asian giant toward democracy.

How and why do governments move from authoritarianism to democracy? South Korea joined the GATT in 1967 and became a democracy a couple decades later. Did trade contribute to this at all? Without its integration into the trading system, would South Korea have become a democracy sooner or later than it actually did? These are difficult questions to answer! 

Nevertheless, if you have any confidence in democracy (and I still do, despite all the people at the extreme wings of the political spectrum losing faith in it!), it seems natural to think that when people in authoritarian countries have more contact with democracies, they will appreciate the benefits and internalize those views. That doesn't lead to a definitive timetable for when a whole country will shift away from authoritarianism, but it probably helps a bit.

On the other hand, I think that calling on "economic exchanges" to "usher in" a "democratic renaissance" demands too much. I don't know who "promised" this, but if someone did, they shouldn't have. The reality of what they said is probably more along the lines of a "hope" than a "promise," though.

Climate change and inequality

Finally, Cohen talks about trade's impact on the climate and on equality:

The favored economic road map helped produce fabulous wealth, lift hundreds of millions of people out of poverty and spur wondrous technological advances.

But there were stunning failures as well. Globalization hastened climate change and deepened inequalities.

...

In the United States and other advanced economies, many industrial jobs were exported to lower-wage countries, removing a springboard to the middle class.

...

Nor were they able to prevent damaging environmental fallout. Transporting goods around the globe increased greenhouse gas emissions. Producing for a world of consumers strained natural resources, encouraging overfishing in Southeast Asia and illegal deforestation in Brazil. And cheap production facilities polluted countries without adequate environmental standards.

There's more research here than I feel like digging up at the moment, but let me just ask a couple pointed questions:

-- Did globalization actually hasten climate change? Would a shift away from trade and towards smaller-scale, less efficient, domestic-oriented production reduce carbon emissions?

-- Did globalization deepen inequality? Compared to when? The 1950s? The 1980s? Do some people thing we were more equal back then?

Conclusions

Over the past few months, I've come across a number of pieces declaring that we are seeing the end of free trade/globalization, or the end of "neoliberalism." In my view, these pieces are not going to age well. International economic policy is certainly in flux at the moment, but most of the pieces commenting on this aren't doing a very good job with the nuances of what we had before, how things are changing, and where it all might be going.