International Economic Law and Policy Blog

What Would Joe Stiglitz Do about WTO Subsidies Rules?

In a recent Foreign Policy piece, economist Joe Stiglitz makes several references to WTO rules "forbidding" industrial subsidies:

The current moment is a good illustration. It is the product of longstanding beliefs and power relations. Under this system, industrial subsidies were a no-no, forbidden (so it was thought) not just by World Trade Organization rules, but also by the dictates of what was considered sound economics. 

...

... there is no global government to ensure that the powerful countries obey an agreement, as we are seeing today in the case of U.S. industrial subsidies. The World Trade Organization (WTO) generally forbids such subsidies and especially disapproves of some of the provisions—such as requiring domestic manufacturing (“Made in America”)—in legislation passed recently by the U.S. Congress, including the CHIPS and Science Act.

...

The neoliberal rules forbidding subsidies effectively meant that developing countries couldn’t catch up to the advanced countries; the rules condemned them to being commodity producers, reserving the higher value-added production for the advanced countries.

These statements leave me with some questions about how those who criticize "neoliberalism" (as Stiglitz regularly does) want to change international rules on subsidies.

As this blog's readers will know, Stiglitz's explanation of WTO rules on subsidies is a bit off. Yes, those rules "especially disapprove of" the domestic content requirements that were included in some recent U.S. subsidies legislation (and similarly disapprove of export subsidies). But no, the WTO doesn't "generally forbid" industrial subsidies. Instead, these subsidies can be subject to a WTO complaint in specific circumstances (if they cause "adverse effects" to other WTO Members). There haven't been very many of these adverse effects complaints, and the ones that have been brought haven't had much impact (I would say this is because of the particular cases that were chosen, rather than a fundamental flaw in the rules). Thus, in practice, industrial subsidies haven't been constrained much by the WTO's adverse effects rules, and there have been plenty of these subsidies over the past few decades by governments who could afford to provide them (which gave their industries an advantage over the poorer countries who couldn't afford them).

The other big thing the WTO does on subsidies is allow governments to impose countervailing duties when they find that subsidized imports from other countries have injured their domestic industry. However, the WTO also imposes certain constraints on the use of these countervailing duties. It's not clear to me what critics such as Stiglitz, who seem to want more leeway for governments to provide subsidies, think of either countervailing duties or the WTO rules that constrain them.

With all that in mind, my questions for Stiglitz, or anyone else with similar views who wants to respond, are:

• Do you want to eliminate the WTO rules (SCM Agreement Articles 3 and 4) that prohibit domestic content and export subsidies? (And relatedly, do you want to amend GATT Article III:4 so that it does not prohibit domestic content requirements)?
• Do you want to eliminate or modify the WTO rules (SCM Agreement Articles 5, 6 and 7) that provide a remedy for subsidies that cause adverse effects? If you want to modify them, in what way?
• What is your view of governments using countervailing duties as a response to foreign government subsidies? And what do you think of the WTO rules that constrain the use of those duties?

Katherine Tai on Negotiating at the WTO

Here's an exchange between Rep. Don Beyer (D-VA) and U.S. Trade Rep. Katherine Tai at a House Ways and Means Committee hearing in mid-April:

Beyer: I, with a number of my colleagues here, visited the WTO a couple of years ago, in the midst of all the ongoing multi-decade fights over the Appellate Body. You mentioned that you made more progress in the last year than in the previous 20 years. And I was fascinated by noting that it was a shift in emphasis from leading negotiations based on positions to being asked to identify and share the interest that they want served. Could you explain what that means in English?

Tai: Thank you so much, Mr. Beyer, for tracking this very closely because this is one of the areas that is so important to us. Myself personally, having litigated at the WTO, appreciate how many challenges we have with the dispute settlement system, but also, I remain very, very committed to a vision for having a dispute settlement system that's effective, that can be accessed by everyone at the WTO, and not just a small handful of the WTO Members.

The interest based approach to negotiations at the WTO: We really endorsed this idea from the beginning because we know we have very, very deep extensive concerns with how the Appellate Body was operating before and other aspects of the dispute settlement system. And that if we were to approach these negotiations on dispute settlement reform in the traditional Geneva-based way, where you have to think through what your ideal outcome is, and kind of what you can live with, and then from there, because it's a paper based exercise, you're incentivized then to dial up every single one of your proposals to 150 or 200 just to be able to survive a negotiation process that involves almost 200 other participants. That for us looked like it was going to be a very, very long, tortured and unsuccessful road to move forward. Because we are genuinely in good faith interested in a reform project.

What we really endorsed and got behind was an approach at the WTO to identify not what your position is, which creates that dynamic of dialing up 150 this way, dialing back 150 this way, and then fighting your way to the middle, but to encourage a conversation that was inclusive, that started not with the question of what's your position, but starts with the question of what is the interest that you want as a WTO Member served by a dispute settlement system. And as a result of that approach to the negotiations, we were collectively able to make more progress in one year than in the 20 years before of dispute settlement understanding reform that was run along a positional basis. So I think the most critical question in terms of dispute settlement reform going forward is how do we continue this work? My negotiators and my legal advisors in Geneva have told me that this is the one negotiation area in an institution that is showing a lot of age and brittleness, that is dynamic, where negotiators come and they're actually talking to each other and listening to each other rather than just reading points at each other. So it's tremendously consequential. We're very invested in this process.

I know this is going to sound naive and a bit off the wall, and will demonstrate to the world that I've never been a trade negotiator, but what if instead of dialing things up to 150, governments just proposed sensible things that they believed in, and put forwarded strong defenses of those things? Maybe this is just crazy enough to work!

In terms of how the interest based negotiations on WTO dispute settlement have gone, I feel like this situation is a bit unique, because there is an underlying disagreement about the Appellate Body that brought everyone to the table. These circumstances have made governments willing to talk constructively about a lot of dispute settlement related issues. But have they made progress on the big issue here, which is dealing with the Appellate Body crisis so as to eliminate appeals into the void? It is not clear to me whether they have, so I'm going to reserve judgement on whether this new approach works until we see how things play out with fixing that.

Is AD/CVD the Answer to Chinese Non-Market Policies and Practices?

In a recent Washington Post op-ed, Brian Deese, the former director of the National Economic Council in the Biden administration, calls for a coordinated use of AD/CVDs as a way to "discourage" China's "anti-market behavior":

Responding to China’s anti-market behavior strongly enough to discourage it — and yet not so strongly as to inadvertently replicate it — is challenging but essential to the well-being of our economy and that of our peers.

The right approach is for the United States to build an international coalition to send a clear message to China that its current policy choices are neither acceptable nor sustainable. Other countries are moving in this direction. In recent months, Brazil has launched several investigations into the alleged dumping of Chinese industrial products. Vietnam, Thailand, South Africa and Mexico have each taken steps to protect domestic industries from Chinese exports. The European Union has undertaken an anti-dumping investigation into Chinese EVs. And India already has more anti-dumping orders than any other country.

A global coalition could start with harmonized tariffs targeting Chinese exports.

These tariffs should focus on areas such as steel, where manufacturing capacity is already projected to meet global demand, and clean energy components, where China’s strategy to dominate the market is evident and the economic and planetary costs of concentration are especially acute. ...

I have previously expressed skepticism about the use of CVDs to induce changes to other countries' subsidy policies. My sense is that, generally speaking, when countries are the target of CVDs (or AD measures), they see these measures as biased and protectionist, and are unlikely to change their behavior in response. I suppose you could argue that Deese's proposed coordination among a number of countries could change how targeted governments see things, but I still have doubts. Governments don't like to be bullied (and China particularly doesn't like it), so this will probably not induce the changes people are hoping for.

It's worth noting here that there have been extensive AD/CV duties in place on Chinese steel and other products for a long time, and they don't seem to have had much impact on Chinese policies. As the Commerce Department described it a few years ago in relation to steel, "[a]s of April 19, 2017, Commerce has 152 antidumping (AD) and countervailing duty (CVD) orders in place on steel from 32 countries," and "[t]wenty-eight of the 152 orders (18%) are on steel products from China – 16 AD and 12 CVD." Importantly for Deese's international coalition argument, this long-standing use of AD/CVD against China is not unique to the United States. Deese highlights Brazil's new investigations, but Brazil's most recent report to the WTO on its anti-dumping practices shows that it has been using anti-dumping measures against China for a while now (see the Annex at the end).

Fortunately, there is an alternative to AD/CVD: complaints filed at the WTO, against either subsidies or broader non-market practices. What you get with WTO complaints is an objective international ruling that often leads to some degree of compliance by the responding party. It's not perfect, but it seems like the best option that exists for discouraging Chinese subsidies and protectionist/non-market practices.

(Just to state the obvious, WTO dispute settlement is not an option for the U.S. right now because it has blocked Appellate Body appointments, but (1) the U.S. could change course here and (2) other countries have signed on to the MPIA and could therefore use WTO dispute settlement to file complaints of this sort against China).

Overcapacity and future discussions in the SCM Committee.

Finbarr Bermingham reported on Wednesday, April 23, 2024, that in the recent SCM Committee meeting, there were ‘sharp’ exchanges between the US and China related to Chinese ‘overcapacity’ in key sectors owing to subsidies. China objects to the term ‘overcapacity,’ arguing that there is no clear definition within the WTO treaty architecture. Some of the US’s (and other members’) concerns at the SCM Committee stem from a related problem: WTO members lack information about the extent of Chinese industrial subsidies, making it difficult to know which elements of so-called overcapacity issues require closer inspection and governance. For China, overcapacity is a cloak for concerns with domestic competitiveness and ‘an excuse for protectionism.’

Is the absence of consensus on the legal requirements of ‘overcapacity’ a problem for WTO members seeking to address Chinese policies? I’d argue no. In fact, there’s a long history of trading partners working through government interventions through the GATT’s nullification and impairment clause.

According to the Rhodium Group, '[t]he simplest and most widely accepted definition of overcapacity is when factories’ production capacity is under-utilized.' This has a knock-on effect on global markets. When domestic production capacity far exceeds demand, firms lower their prices and search for foreign markets for their excess capacity. In 2015, the OECD reviewed growing imbalances in steelmaking. The OECD noted that the problem of growing imbalances stemmed from both the extent of and variety of government interventions that distort markets, including government subsidies, foreign investment controls and administrative hurdles that limit entry of new steel facilities.

In addressing China’s continued subsidies, Simon proposes members bring adverse effects cases to the WTO, citing the key parts of Article 5.

    Article 5: Adverse Effects

    No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members, i.e.:

    (a) injury to the domestic industry of another Member11;

    (b) nullification or impairment of benefits accruing directly or indirectly to other Members under GATT 1994 in particular the benefits of concessions bound under Article II of GATT 1994¹²;

    (c) serious prejudice to the interests of another Member.13

    ----------------------------------------------------------------------------------------

    11The term "injury to the domestic industry" is used here in the same sense as it is used in Part V.

    12The term "nullification or impairment" is used in this Agreement in the same sense as it is used in the relevant provisions of GATT 1994, and the existence of such nullification or impairment shall be established in accordance with the practice of application of these provisions.

    13The term "serious prejudice to the interests of another Member" is used in this Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT 1994, and includes threat of serious prejudice.

Article 5(b) addresses nullification or impairment of benefits, with a note that connects this term to the relevant ‘practice of application’ of the GATT provisions.

As many of you know, the non-violation nullification and impairment clause enables members to deal with contract incompleteness - government measures not covered by any WTO agreement (see also Horn, Maggi, and Staiger (2010) and Hudec 1990 and 1993). As Alan Sykes and Robert Staiger (2013) observe, the clause played a critical role in facilitating the ‘shallow integration’ approach that the GATT adopted – a non-violation claim creates a legal right for a complainant to receive compensation, in response to which the responding member can either pay or remove the measure in question, eliminating the nullification or impairment of the complainant’s benefits. The origins of the nullification and impairment clause stemmed from interwar trade negotiations concerning a formula of equitable treatment for trade agreements. In the League of Nations’ economic work, an American negotiator proposed ‘nullification or impairment’ language for future trade agreements that recognised that when it came to uncertain or indirect forms of administrative protectionism, governments needed a formal right to address frustrations with anticipated commercial benefits of negotiations. Robert Hudec reflected on the GATT concept of ‘nullification or impairment’ from this history, noting that it provides ‘equitable remedies for trade injuries not involving a breach of legal obligations.’

The main purpose of the GATT is to facilitate a balanced exchange of tariff reductions, along with requiring all contracting parties (now WTO members) to act in a manner consistent with the principle of non-discrimination. However, if a government must act in a way that distorts markets, the GATT includes commitments that a government consider concepts of fairness and equitableness when participating in global markets. For example, Article XVI:3 of the GATT 1994 evolved into prohibiting export subsidies within the SCM Agreement. However, at its root, the contracting parties ‘seek to avoid’ export subsidies (on primary products). When a government does ‘directly or indirectly’ subsidise exports, the subsidising government cannot receive ‘more than an equitable share of world export trade.’  (Aside: as per Ad Article XVI:B.2, a “primary product” was vital to development and understood to be any product of farm, forest, fishery, or any mineral). Another reference is found in Article XX(j) of the GATT, whereby if members purchase products that are globally in short supply, that member must remain consistent with the principle that all members ‘are entitled to an equitable share of the international supply of such products.’

I do not want to mask the causality problems involved with the ‘equitable’ language. In 1982, Colin Phegan wrote about the political sensitivity captured by GATT XVI:3, raising questions about the disciplining of ‘equitable sharing’, such as the threshold by which a country’s share in global markets becomes ‘inequitable’ or demonstrating causality between a subsidy and the increase in the share of global export trade.

But I do want to suggest that, where there are concerns about overcapacity, it seems entirely possible for the US and other members to bring an adverse effects case and seek non-violation nullification and impairment remedies, resting on the idea that when a government’s subsidies create global imbalances, there is a legal foothold to question whether the situation is equitable, even drawing parallels to the early consideration of export subsidies for taking ‘more than an equitable share of world export trade.’ Could this apply to domestic surplus across many industrial sectors? Perhaps not. Yet it seems that the multilateral trading system did embed these principles into the GATT knowing that state trading economies existed and would trade in global markets, explaining why we have non-violation cases and references to commitments that such state trading economies accord to the trade of other members’ fair and equitable treatment. At the very least, raising the concept in a non-violation nullification and impairment case seems a starting point for WTO engagement.

Whether this could work in the current state of WTO dispute settlement remains crucial. At the bare minimum, it may be time to examine the origins of these subsidy commitments and consider whether the EU, US, and other members have legal footing to open a discussion in the SCM Committee.

Developing country status in the WTO

Buried deep in the EU - Palm Oil report (paras. 7.911-7.915, on page 250!) is a nugget on developing country status in the WTO.  Malaysia asserts, in the TBT context, that it is a developing Member.  It cites as support that: (a) according to the World Economic Situation and Prospects (WESP) dataset, it is considered to be a developing economy; (b) UNCTAD lists it as a developing country; (c) its status as a developing country has never been contested in the framework of the WTO; and (d) in the framework of the WTO Trade Policy Review, reference is made to Malaysia as a developing country. The EU does not dispute Malaysia's status, and the Panel concludes that this evidence is "more than sufficient" to demonstrate that Malaysia is a developing country Member.

Leaving aside the accuracy of the assertion that Malaysia's status has never been contested in the WTO context -- the US for example does not treat Malaysia as a developing country for purposes of CVD de minimis rules, which implement a WTO obligation -- it is notable that Malaysia does not assert self-designation as a basis for its developing country status, nor does the Panel ever suggest that this status is self-judging or non-justiciable.    

Katherine Tai on WTO Complaints against China

U.S. Trade Rep. Katherine Tai had a couple exchanges at last week's Senate Finance Committee hearing in which she suggested that WTO complaints against China had not been effective, and for that reason the Biden administration had moved away from filing these complaints. I disagree with her on the effectiveness of these WTO complaints. I'll first set out the Senate exchanges, then I'll comment on the issue in more detail.

Here's an exchange between Tai and Senator John Cornyn (R-TX) (1:08:10):

Cornyn: Has the administration taken any enforcement actions against China?

Tai: The administration absolutely has moved forward with an aggressive set of policies against China across the administration.

Cornyn: Have you taken any enforcement actions?

Tai: I suppose it depends on what you mean by enforcement actions.

Cornyn: I mean enforcement actions.

Tai: With respect to export controls on semiconductors, ... you've seen enforcement there.

Cornyn: I'm not just talking about talk, I'm talking about actual enforcement actions against China.

Tai: I think that those actions have certainly moved markets.

...

Cornyn:  [China is] accessing the World Trade Organization seeking to dispute provisions of the Inflation Reduction Act. Meanwhile, China continues to subsidize and prefer their products by spending a lot of money, making it much harder for American businesses to compete. Has the administration taken any sort of enforcement actions against China at the World Trade Organization or anywhere else to go after them? They are taking advantage of that access to the World Trade Organization against us. But are we doing it against them?

Tai: We have in the past taken lots of actions against China at the WTO.

Cornyn: When was the last time you did it?

Tai: Well, let me put it this way. Let me answer your original question.

Cornyn: When did you do it?

Tai: Well, it's been ineffective, Senator Cornyn, which is why we no longer do the things that aren't effective. We are focused on being effective. ... We initiated an enforcement action today under Section 301 on Chinese non-market policies and practices affecting the maritime industry and shipbuilding industries. So yes, we have, this morning.

And here's an exchange between Tai and Senator Marsha Blackburn (R-TN) (1:38:59):

Blackburn: I want to talk to you about enforcement actions against China, because I hear a lot about this in Tennessee. Theft of intellectual property, the genocide, the crimes against the Uyghurs, what all is happening in Xinjiang, the military aggression against Taiwan, and of course, you've got TikTok, and what we're seeing there. So I know you've just announced the 301 on shipbuilding. What other enforcement actions have you taken against China?

...

Tai: Every single day what we do, whether it's directly vis-a-vis China, or it's work that we are doing with other partners and allies ...

Blackburn: OK, but no new cases against China at the WTO on your watch.

Tai: I mean, cases against China at the WTO have not netted us structural change in China.

Blackburn: Okay, so you're not going after them, and you failed to use the dispute settlement mechanisms under the Phase One agreement, correct?

Tai: The Phase One agreement enforcement, we absolutely are advancing in terms of raising the issues with China. We have done that. Right now, I think probably the most important aspect of China enforcement, set aside the 301 that we just started today on shipbuilding, comes to the review of the existing tariffs and how we can make them more effective and strategic.

With regard to the effectiveness of WTO complaints against China, I looked at this in a paper with Jim Bacchus and Huan Zhu a few years ago, and our conclusion was that the evidence points to WTO complaints against China being pretty effective at inducing changes to China's practices and policies (about as effective as complaints against the U.S. or the EU anyway -- no one is perfect here). Weihuan Zhou has also looked at this issue, and he reached a similar conclusion. (By contrast, from what I can tell, unilateral approaches that some people appear to believe will induce change in China, such as Section 301 or AD/CVD, have not had much impact on China's practices and policies.)

When I point to these conclusions on the effectiveness of WTO dispute settlement, some people try to push back in very general terms, but they never offer anything concrete. They have an impression or a sense that the WTO complaints were ineffective, but no specific contradictory details on the overall results. Of course, they may point to a particular case that didn't get a good outcome, but there are cases like that in relation to the U.S. and the EU as well. What I'm talking about here is the broad impact across all the cases. It's true that you don't always get something, but you often do. If someone thinks they have evidence that contradicts me on this overall impact, please feel free to offer it!

In terms of getting "structural change" in China through WTO dispute settlement, here I would say that someone would need to bring a structural changes-type complaint -- e.g., a complaint invoking para. 46 of China's working party report -- in order to get that kind of change.

It's also worth noting here that the Biden administration's lack of WTO enforcement is not just about China, as the U.S. hasn't brought any WTO complaints against anyone under the Biden administration. Obviously, the U.S. blockage of Appellate Body appointments plays a role in this, and the absence of recent U.S. complaints is, at least in part, tied to that. But there are a range of compromises that could satisfy the U.S. concerns about the Appellate Body (or it could join the MPIA) if it wanted to use WTO dispute settlement.

And finally, on enforcement of the Phase One agreement, I have not come across any public information on how this enforcement mechanism has been used. As I've written, the Phase One enforcement mechanism is not likely to be effective at inducing policy change, because it just internationalizes Section 301 tariffs. Nevertheless, it would be interesting to hear the details of what USTR has been doing with this mechanism. I'd like to see more in depth questioning from members of Congress on this point in order to get USTR to disclose more information.

Katherine Tai on Trade Policy Pitting Americans against Americans

At a House Ways and Means Committee hearing last week, U.S. Trade Representative Katherine Tai said a couple times that she wanted "to stop pitting Americans against Americans" in U.S. trade policy: 

• "Trade should work for all Americans. Our goal is to stop pitting Americans against each other in our trade policy."
• "... our approach is built on the basic principle that we should not be pitting Americans against Americans and American sectors against American sectors."
• "... we need to do trade in a way that stops pitting Americans against other Americans. One of the things about the traditional free trade agreement is that it has done very, very well for American ag[riculture], especially big ag[riculture]. But it's actually not done well for our heavy industries or industrial workers and that's created this pitting of Americans against each other."

The first two statements are more general, but the last one gets a bit specific, arguing that agricultural and industrial workers have been pitted against each other through trade agreements.

As I see it, there are tradeoffs inherent in all trade policy choices, including both domestic measures and international agreements. If we impose tariffs on imported steel, for example, a small number of corporations and their employees benefit considerably due to reduced competition and higher prices/profits, while a large number of people feel a smaller negative impact from the higher prices, retaliation by other countries, etc. Most economists would say that aggregate economic welfare is reduced through these policies, and some people lose jobs due to the overall negative impact on the economy.

In this way, trade policy choices always "pit Americans against other Americans." You can make different choices, but you can't avoid making a choice that helps some and harms others.

The agriculture vs. industry tradeoff is an interesting one. For whatever reason, U.S. economic policy has long promoted agriculture production and exports. It has done the same for certain industrial sectors (e.g. large civil aircraft), but not others. Is there some alternative version of U.S. economic policy where U.S. steel and autos, for example, were promoted as export-oriented industries? I feel like this is unlikely given certain natural advantages and long-standing domestic policies of the U.S., and corresponding disadvantages and policies of particular other countries, but I'd have to give this some more thought.

It's also worth noting that politicians and policymakers have a choice as to how to approach these tradeoffs, and while the approaches vary over time, political factors almost always plays a crucial role here (politicians and policymakers are looking to reward certain groups in order to reap a political benefit). Regardless of how the choice is made, however, I'm not sure I see a way to avoid the tradeoffs. It would be nice if the overall economic well-being of the country played a bigger role in the decision-making, but I suspect that politics will continue to be the driving force.

Senator Whitehouse and Ambassador Tai Talk About Getting Rid of ISDS

Here's an exchange between Senator Sheldon Whitehouse (D-RI) and U.S. Trade Rep. Katherine Tai at a Senate Finance Committee hearing today (2:32:00):

Whitehouse:

The other thing I wanted to talk with you about is the loathsome ISDS process. We are not putting ISDS provisions into any new treaties, but they exist as hangovers from past treaties. I'm told that it's actually possible to remove ISDS from existing free trade and bilateral investment agreements and that you are looking at the best way to go about doing that. Can you give me a progress report on that? ... The quicker we can get rid of that, as a vehicle for putting private interest over public interest, and putting size and weight over virtue, the better off we will be, and I'd ask for your thoughts on how we can remove ISDS from those existing agreements and treaties. 

Tai:

Well, I think we have a number of tools with respect to ISDS that, whether they're in bilateral investment treaties, or standalone, or they are incorporated into FTAs, we're looking at this question actively right now with respect to existing ISDS provisions ...

Whitehouse: So you have no report on ... ?

Tai: ... how they can be improved. Again, this is one of those things where we're very, very interested in the views of members of Congress, especially those who sit on the Judiciary Committee and are lawyers.

Whitehouse:

The US was responsible for pushing a lot of this ISDS nonsense into those treaties in the first place, correct? 

Tai:

I think that's absolutely correct.

Whitehouse:

Well, godspeed. Stay in touch with us on the conclusions that you draw. I would add to my [Question for the Record] for any further information you have on this [that] might be useful to me and my team as we look to try to rid our trade agreements of this really noxious agreement.

I think of ISDS as more misguided than loathsome, but putting that aside, I was intrigued to hear that USTR is actively thinking about how to get ISDS out of existing trade agreements and investment treaties. What is the likelihood of anything happening here? What does the State Department, which has a big role to play on ISDS, think of all this?

ADDED:

A friend of mine argued that I was misinterpreting Tai, who only said she was considering improvements to ISDS, and did not mention removal herself. I emailed the USTR press office for clarification, and they replied as follows:

President Biden has made it clear that he does not support the inclusion of ISDS in new trade agreements. When Ambassador Tai has been asked by Members of Congress about removing ISDS from existing trade agreements, she has let them know she would like to work with them to identify the best path forward, respecting the role of Congress in such matters.

Subsidies, Overcapacity, and Domestic Demand/Savings

There has been a lot of discussion recently about how Chinese subsidies and other government support has led to industrial overcapacity, which can have a negative impact on the manufacturing sector of other economies. If domestic supply exceeds domestic demand, the Chinese-made products that won't be sold in the domestic market will be exported, and foreign producers have trouble competing with these Chinese products.

If I understand their argument correctly, some people attribute this situation largely to government policies that cause weak demand and excess savings in China, with these factors leading directly to the subsidized manufacturing. And it seems as though these people believe a key part of the solution is that China should stimulate domestic demand so that its consumers buy more of the Chinese production.

Finance professor Michael Pettis is leading the charge on this. As he recently put it: "In [persistent surplus economies such as China], weak domestic demand is simply the flip side of policies that result in manufacturing competitiveness. The manufacturing sector is subsidized directly or indirectly by households, which leaves them more competitive and leaves households less able to purchase a substantial share of what they produce."

Others who may be on board with this view are Treasury Secretary Janet Yellen, who recently said this: "I am particularly worried about how China’s enduring macroeconomic imbalances—namely its weak household consumption and business overinvestment, aggravated by large-scale government support in specific industrial sectors—will lead to significant risk to workers and businesses in the United States and the rest of the world. China has long had excess savings, but investment in the real estate sector and government-funded infrastructure had absorbed much of it. Now, we are seeing an increase in business investment in a number of 'new' industries targeted by the PRC’s industrial policy. That includes electric vehicles, lithium-ion batteries, and solar." Along the same lines, Yellen said the following in response to a question at a press conference on what could be done about Chinese overcapacity:

Well, there's supply and then there's also demand. And so we've had conversations with our Chinese counterparts about the demand side of the equation and the fact that China's saving rate is among the highest in the world, and even at this advanced stage of development remains close to 45%. The flip side of a very high saving rate is that consumer spending as a share of GDP is quite low in China relative to other countries at this level of income. So one possible approach would be to boost demand and to see a larger share of GDP accrue to households to bolster their income, or and/or to, for example, bolster retirement security, the ability to afford education for one's children and so forth, which are motives for very high saving, and call that rebalancing. And this is a matter that we have discussed over more than a decade in China and I too have talked to many officials and members of the academic community who think that that needs to be part of the solution. If consumer spending were higher as a share of GDP, there would be less need to have such large investment going into building supply.

While I agree that subsidies and overcapacity can lead to trade conflict, I have doubts about the focus on levels of domestic demand and savings. In particular, I'm skeptical that demand and savings are the most important factors here, and that the solution is for governments to try to influence these factors so as to address the trade problems. As I see it, governments pursue the fiscal and other domestic economic policies that affect demand and savings mainly for domestic political reasons, and while trade might be affected by these policies to a degree, the trade impact is not a significant part of the policy calculation. As a result, even if the trade impact is pointed out by affected countries, the governments pursuing these policies are not likely to make major adjustments. Yes, high or low savings levels can affect trade balances where national economies diverge in these areas, but governments see these as domestic choices that are mostly decided based on national politics. International coordination here is difficult and rare.

As support for the view that domestic demand and savings levels are not the main factors driving overcapacity and the resulting exports, let's look at another example of subsidies that support production which exceeds domestic demand. (And just to be clear, I know it's not a perfect parallel in terms of the nature and amount of the subsidies, but nevertheless I think it illustrates the point.) In the U.S., an area in which we have long seen a high level of subsidies is agriculture. This has led to the U.S. having significant "overcapacity" in certain agricultural products, in the sense that we produce more at home than we can sell here. Just like with Chinese industrial subsidies, U.S. agriculture subsidies support capacity that outpaces domestic demand. And as with Chinese manufacturing of electric vehicles, lithium-ion batteries, and solar products, here we see domestic subsidies going to a sector for which a significant amount will be exported. 

Notably, it's pretty clear that U.S. demand is not being repressed, either in general or in agriculture; I don't think anyone would say that the U.S. government is taking actions to limit the demand of U.S. consumers. And foreign economies that are affected by the U.S. exports don't call on the U.S. government to stimulate internal U.S. demand for these products in order to deal with the trade effects they experience.

And on savings, no one is accusing the U.S. of having excess savings.

The lesson I take from this is that you can have sectoral overcapacity and spillovers into global markets even without weak demand or excess savings, and this supports the view that domestic demand and savings are not the right focus when addressing overcapacity issues. Instead, the overcapacity causes that need to be addressed are on the supply side: Governments subsidize and otherwise support domestic industries for political reasons, leading to more supply than domestic demand can handle.

Fortunately, if you want to deal with the trade effects of subsidies and other governmental support, we have international tools that could be used here (with the caveat, of course, that international rules can’t solve every trade conflict). Thus, rather than calling on China to increase demand or reduce savings, it would be more productive for the U.S. to use these tools to push China to scale back the subsidies and other government support. 

One response might be that the Chinese subsidies for domestic manufacturing are intended to support jobs, and the Chinese government (at various levels) sees that as crucial for maintaining citizens' support. Failed companies and bankruptcies would not be well received, and therefore trying to address demand/savings issue is the easier course. I understand the difficulties here, but at the same time the trading system imposes obligations that China and everyone else has agreed to live up to. Practically speaking, you are free to ignore those obligation, but if challenged successfully you will have to offer compensation or accept retaliation. And with regard to the people affected if the subsidies were eliminated, there are lots of options to help them that don't violate trade obligations.

As to the demand and savings issues, to me these seem harder to address. What is the "right" level of demand or savings? Do the Chinese consume too little and save too much? Do Americans consume too much and save too little? I'm not sure there are definitive answers to these questions. Domestic policy choices on these issues vary, both by country and over time. Policies are decided by internal debates, and are constantly evolving based on the party in power and the mood of the country. They reflect deep-seated cultural attitudes as well. That makes it difficult to address these issues through international governance and coordination, with coordination a particularly daunting task between China and the U.S. at the moment. As a result, I'm skeptical that either side is going to convince the other one to change much on these issues.

Free Trade and Peace Sells ... but Who's Buying?

I remain puzzled by some recent statements questioning whether free trade promotes peace. When I read another one in the Boston Review, I thought I was going to have to go through all my old rebuttals again. The article starts off this way:

To many today, the idea that free trade brings peace looks like bygone naïveté at best and neoliberal apologism at worst. 

From what I can tell, most people agree that free trade does not guarantee peace. And most people also agree that free trade does promote peace (or to put it another way, it reduces conflict). So does free trade bring peace? I'm not sure! It depends on whether you are using "bring" to mean "guarantee" or "promote."

But putting that nitpicking aside, I liked a lot of things about the article by Kate Yoon, which is a review of Pax Economica: Left-Wing Visions of a Free Trade World by Marc-William Palen. I have not read the book yet, so this is a review of a review. (I should also note that Palen offers an overview of his book here, but I was already mostly done with this post by the time I saw it, so I'm going to focus on the Yoon piece).

Yoon says that Palen "has excavated a history of those who believed that free trade and peace went together," describing a "wide range of nineteenth- and twentieth-century thinkers he considers were united by opposition to war. They thought that trade barriers were just war by other means—and that free trade could create a world without war."

This does sound like an interesting history to excavate, but I want to point out at the outset that it is not just historical. A lot of people -- including me! -- still believe that free trade and peace go together. Of course, free trade by itself won't create a world without war; you have to do a lot of other things too. And to state the obvious, the idea of free trade promoting peace hasn't really been tested, because we haven't been anywhere close to free trade in the past few decades (although I understand how the existence of so many "free trade agreements" has confused some people about this). The review puts it this way:

[Palen] offers an instructive reckoning with what has passed for free trade until now, allowing us to see that actually existing free trade since the 1970s let us down because it was never free. Instead, neoliberal trade was burdened by unilateralism all along, amounting to little more than war by other means. In our increasingly nationalist moment, he asks, is there a pro-peace, anti-imperial vision of free trade still available to us?

As this blog's readers are aware, I don't think the term "neoliberal" is useful in general, and the passage above is no exception. (The neoliberals were unilateralists? Wait, I thought they were globalists! Forget it, that discussion is hopeless.) Nevertheless, I do agree that trade since the 1970s wasn't anywhere near as free as some people imagine.

The article then talks about free trade, anti-war, anti-imperialism folks such as Richard Cobden, and contrasts their views with those of economic nationalist, pro-imperialism people such as Friedrich List.

While Cobden was a free-trade pacifist, that perspective lost its place over time. As Yoon explains: "Palen argues that the left-liberal and pacifist associations of free traders were lost to the geopolitical fracturing of the Cold War," as trading blocs emerged and the U.S. used force "to deal with nations outside its sphere of influence" (along with economic coercion).

(We then get back into the "neoliberal" problem, as Yoon says "the neoliberals who were ascendant by the 1970s dramatically shifted the meaning of free trade—all but rejecting Cobdenite commitments to peace and democracy and coopting the multilateral organizations that an earlier generation of free traders had pushed hard to create." Are we talking about neocons here? Some people lump them together with neoliberals, but I'm not sure how good a fit that is).

Yoon then describes the period starting in the 1970s as more about unilateral efforts to dismantle foreign protection than about promoting free trade. I see the point here, although I would note that there's an overlap: There is actual foreign protectionism that exists, and trying to reduce it through trade agreements does bring us towards freer trade.

Next there are references to the views and interests of the developing world, which as far as I can tell play very little role in U.S. policy debates today, which is unfortunate. 

Finally, Yoon says: "In light of escalating nationalist rhetoric, we need serious thinking about what a liberatory vision of free trade could look like." I think that would be great! So what might it look like? Yoon offers the following:

These are significant challenges, but an alternative is necessary to the escalating nationalist rhetoric that harms minorities at home and forces countries to choose sides in geopolitical struggle abroad. As Jake Werner has argued, progressives should reject the escalating zero-sum competition with China and instead support remaking the global economy through creating demand in the Global South. The realities of global commerce demand serious thinking about what a liberatory vision of free trade could look like, and on this score Palen’s book is a necessary and welcome provocation, if not a blueprint.

Any such vision will have to make careful distinctions between the kinds of markets we want to open up and the kinds of barriers to trade that should be dismantled. It will also have to be clear-eyed about putting countries in the Global South on level footing after centuries of extraction and structurally disadvantageous terms of trade—and thus about being genuinely global in the legitimacy and consensus it commands.

I strongly agree with two points in the second paragraph: (1) We need to put some thought into "the kinds of barriers to trade that should be dismantled," in particular distinguishing between protectionist barriers, on the one hand, and non-protectionist barriers that merely affect trade, on the other; and (2) we need U.S. policies that can help promote economic development in the Global South (and move beyond seeing those countries just as sources of natural resources).

Summing up, I don't consider myself to be on the left (or on the right, for that matter), but I am solidly in the free trade can promote peace and reduce conflict camp. I think it would be great if we could get our own version of horseshoe theory politics working, with people on the left and right (and center) coming together for a version of free trade that maximizes the potential here.  (Although the Megadeth album I adapted for this post's title suggests that even popular support might not be enough to turn this into policy.)

The Role of the WTO in Planetary Sustainability

The Role of the WTO in Planetary Sustainability
Steve Charnovitz
6 April 2024

Promoting planetary sustainability is within the legal competence of all multilateral organizations.  As a result, no international organization is likely to have an exclusive competence to effectuate any major sustainability goal.  A recognition of such overlapping legal jurisdiction can be seen as early as the 1972 Stockholm Declaration which affirms that States "shall ensure that international organizations play a co-ordinated, efficient and dynamic role for the protection and improvement of the environment" (Principle 25).

Environmental sustainability should be, and should be viewed as, a fundamental purpose of the World Trade Organization (WTO)*  This normative point should be self-evident.  Anyone doubting this proposition should consider that: (1) opportunities to trade have always been an important driver for economic prosperity, especially for the small and mid-size economies; (2) the Preamble to the General Agreement on Tariffs and Trade (GATT) affirms that international relations "in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand", and  (3) the Preamble to the Agreement Establishing the WTO anticipates trade relations as "allowing for the optimal use of the world's resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development...."  One should also note that the centrality of sustainable development for the WTO was reinforced in the early jurisprudence of the WTO judiciary.  In its notable Shrimp decision, the WTO appellate tribunal relied upon the " the explicit recognition by WTO Members of the objective of sustainable development in the preamble of the WTO Agreement....' (para. 131).

In early 2024, a transnational group of Experts proposed the "Villars Framework for a Sustainable Global Trade System "(https://shridathramphalcentre.com/wp-content/uploads/2024/02/Villars-Framework-2.0.pdf). This document (2.0) puts forward numerous recommendations for improving the international trading system and includes several specific proposals for the WTO.  In future discussion of these proposals within (and alongside) the WTO, the question may arise as to whether the WTO is an optimal, or at least an appropriate forum, for agreeing to new rules and/or recommendations regarding global sustainability.

Let me offer five reasons why the WTO is an appropriate platform for promoting sustainability.

First, WTO's critical mission is to help governments maintain and enhance the channels of trade in an open international trading system.  Doing so is consistent with the basic principles of Rio Declaration (1992) which provides that "states should cooperate to promote a supportive and open international economic system that would lead to economic growth and sustainable development in all countries, to better address the problems of environmental degradation" (Principle 12).  

Second, in its role of sponsoring trade negotiations, including those "directed to the substantial reduction of the general level of tariffs and other charges on imports and exports..." (GATT Art. XXVIIIbis:1), the WTO should assure that such negotiations do not undermine sustainable development.  Moreover, even when such multilateral negotiations fail — and one can contrast the WTO's weak record with that of the GATT which sponsored eight successful trade negotiating rounds — the WTO continues to be in the best position to assess how the failure of such negotiations is undermining sustainable development.  The WTO is also in a good position to analyze the impact of the movement of trade on pollution and resource depletion.  Like any human freedom, the freedom to trade, and the freedom to travel, has consequences beyond the benefits to those who voluntarily exercise their freedoms.   

Third, although the WTO certainly does not have the exclusive competence to govern national subsidies, the WTO contains numerous sub-agreements regarding subsidies such as accession agreements, the Agreement on Subsidies and Countervailing Measures (SCM), the Agreement on Agriculture, and the Agreement on Fishery Subsidies.  The common principle of this anti-subsidy space is to restrict government subsidies, and this can be very important to sustainability when subsidies undermine environmental protection, for example, with fossil fuel subsidies.   Of course, subsidies can also have positive effects on the environment, but so far, no WTO sub-agreement seeks to increase subsidies for public goods. 

Fourth, the WTO is the best-positioned international organization to supervise the use of governmental protectionist measures that externalize costs on other countries (or deprive expected benefits to them).  A robust WTO role is especially important when governments weave in protectionist features into so-called green measures.  Such a supervisory role for the WTO helps to achieve one of the key norms of the United Nations Framework Convention on Climate Change (UNFCCC) which states 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" (Art. 3.5). 

Fifth, governments have long recognized that international cooperation will often be useful to provide solutions to problems that transcend national territorial borders.  For many classes of problems, cooperation can be essential among the specially affecting countries.  Sometimes the essentiality is a physical or economic one.  For example, if four states are responsible for overfishing, cooperation by three of them may be ineffectual.  Sometimes the essentiality is political (or geopolitical).  Governments may decline to regulate if regulatory action will put their economic actors at a competitive disadvantage vis-a-vis other countries and markets.  One tool of international law in promoting collective action is the concept of reciprocity, viz., that governments move (if they move at all) in tandem with each other.  The quantum of reciprocity sought in a treaty differs across the fields of international law. One design feature (and in my view flaw) of the climate regime is that it does not build in much reciprocity. 

The multilateral trading system is notable in inscribing a principle of reciprocity.  For example, the Preamble to the WTO Agreement suggests that WTO contracting parties are "desirous of contributing" to WTO "objectives by entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations." To be sure, the WTO contains many derogations from reciprocity.  But the WTO's legal commitment to reciprocity, combined with its reciprocity-sensitive negotiating practices, can make it a good forum for negotiating issues of clean energy implementation in which reciprocity may be an important contributor to successful new collective action. 

*Steve Charnovitz, "The WTO as an Environmental Agency," in Institutional Interplay: Biosafety and Trade (United Nations University Press, 2008).

USTR's New Vision for Foreign Trade Barriers

Last week, in the press release for its 2024 National Trade Estimate Report on Foreign Trade Barriers, USTR said that over the years, the identification of trade barriers in this annual report has strayed from the original purpose of the statute, and that in the 2024 report it was going to narrow the scope of the barriers it was targeting:

The NTE Report has received unprecedented attention this year because we are taking steps to return it to its stated statutory purpose. We respect that each government—including our own—has the sovereign right to govern in the public interest and to regulate for legitimate public policy reasons. Over the years, the NTE Report expanded from its statutory purpose to include measures without regard to whether they may be valid exercises of sovereign policy authority. Examples include efforts by South Africa to render its economy more equitable in the post-Apartheid era; import licensing requirements for narcotics and explosives; and restrictions on imports of endangered species. By carefully editing and returning the NTE Report to the statute’s intent, USTR is making it a more useful document that enumerates significant trade barriers that could be addressed to expand market opportunities and help our economy grow.

In February, Katherine Tai had said something along these lines at a CFR event:

I think that there is an important space that we need to leave for other countries and other partners to be regulating legitimately in the public interest ...

I have a few thoughts here.

First, I'm sympathetic to what I think is their general point: "Trade barrier" is a vague term, and a broad interpretation can intrude too much into domestic sovereignty/policymaking/regulatory space. In USTR's view, not all foreign government measures that affect U.S. trade should be challenged as trade barriers, either through formal trade complaints or unilateral measures. Instead, when identifying foreign measures of concern, they will try to strike an appropriate balance between addressing trade concerns and interfering with policymaking.

My own view is that the right balance, taking into account both politics and economics, between trade and other public policies can be achieved with a focus on whether a measure is protectionist (identified using a combination of intent and effect). USTR's language perhaps get at this idea with the reference to legitimate public policy regulation and governing in the public interest. If a policy is said to be "legitimate" and in the "public interest," that could be taken to suggest it has a non-protectionist purpose. But USTR didn't say that explicitly, instead focusing at the end on whether trade barriers are "significant." How do we measure a trade barrier's "significance" though? That can be tricky, both qualitatively and quantitatively.

The examples of overreach that USTR provides seem, on their face, to be non-protectionist measures (although every measure could have a protectionist component, of course), and based on those examples if feels as though they are going in the same direction I am. In terms of how to get there, it may be that they are thinking of some sort of flexible balancing test, in which the the importance of the policies pursued is weighed against the impact on trade. To me, that seems a bit uncertain and non-transparent, as balancing sovereignty with trade effects is an exercise with a lot of inherent discretion in it. For example, it's not clear how USTR did the weighing and balancing as it reached its controversial decision not to include the EU's Digital Markets Act in the 2024 NTE report, after it had been included in 2023. Whoever is in charge of trade policy at a given moment will have some discretion in their decision on what is included, and approaches will vary. 

Speaking of whoever is in charge, another issue is whether this approach would carry over to a future administration. My guess is that it probably would not be used in a second Trump administration. Bob Lighthizer might not be U.S. Trade Representative again in such an administration, but I suspect his influence will still be felt, and I think he would go in a different direction. As to a second Biden term, whether this approach carries on may depend on whether Tai will stick around for another term, and if not who will take over as U.S. Trade Representative.

And finally, I had some questions about the purpose/intent of the statute under which USTR provides this report, which the USTR press release says we have strayed from: What exactly was the intent of the drafters? And what role should their intent play in current considerations? Can the meaning of the statute evolve? Maybe the current Congress should try to clarify what it thinks USTR should be doing with this report.

ADDED:

A blog reader points me to a Politico article that changes how I think about the new USTR approach:

Local content subsidies: In another notable change, USTR’s latest request for comments no longer asked commenters to provide examples of foreign “local content subsidies … contingent on the purchase or use of domestic rather than imported goods.”

The U.S. trade official demurred when asked if that was because the United States is now making heavy use of such subsidies under the Inflation Reduction Act, especially for electric vehicles and clean energy production as China pointed out in a case it filed this week at the World Trade Organization.

“We know that in our conversations with other countries, they are struggling to figure out how to make sure that their industries can be competitive in the face of extensive nonmarket policies and practices, especially from [China],” the official said. “We think that local content requirements might be the only way to create that incentive since a lot of the PRC strategy is price undercutting and market economies struggle to compete with that.”

Local content requirements/incentives are protectionist, so they should definitely be included in a list of foreign trade barriers. Even under the USTR balancing test, these are significant trade barriers that have little connection to non-protectionist public policies or the public interest. If these measures, which violate both GATT Article III:4 and SCM Agreement Article 3.1(b), are not included on the list, I'm not sure there is much point to the list. (Also, rather than try to copy China's practices, it would be better to challenge them at the WTO.)