International Economic Law and Policy Blog

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

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

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

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

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

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

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

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

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

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

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

Jake Sullivan on the International Economic Agenda, Part 2

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

What happens when the money runs out?

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

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

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

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

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

Are there alternative approaches?

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

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

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

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

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

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

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

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

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

...

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

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

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

...

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

...

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

More (and More and More) Trump on Tariffs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Introduction: The Proposed Regulations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

U.S. Tariffs and Presidential Uncertainties

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

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

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

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

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

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

The 2026 USMCA “Review and Revision”

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

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

Conclusions

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

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

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

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

Guest Post: A Tribute to Frieder Roessler from Werner Zdouc

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

A universalist, shaping destinies, staying true to himself

Werner Zdouc

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Trade Balances and Trade Interventions and Trade Protectionism

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

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

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

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

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

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

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

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

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

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

Pettis answered as follows:

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

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

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

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

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

Box 3

Demographic trends and savings

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

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

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

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

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

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

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

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

Seminar on Legal Architecture of Remedies in the WTO Agreement

Announcement:

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

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

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

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