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FIDDLING WITH IRISH MUSIC ROYALTIES IN THE WTO

irish

FIDDLING WITH IRISH MUSIC ROYALTIES IN THE WTO

The wee organization that took on the U.S. copyright system

Black Velvet BandMolly Malone, ,The Fields of AthenryWild Mountain Thyme and Danny Boy are among Ireland’s most famous exports. Irish bouzoukis, Uilleann pipes and Celtic harps render traditional Irish music as unmistakable as it is beloved – a cultural connection for millions of Americans to their roots.

Over ten percent of the population, or 32.6 million Americans, claimed Irish ancestry in a 2017 U.S. Census Bureau survey. That affinity (along with Irish beers and whiskeys) explains the popularity of Irish pubs throughout the United States.

The Irish music playlist broadcast in thousands of pubs and restaurants is why a small outfit called the Irish Music Rights Organization (IMRO) twenty years ago convinced the European Commission to sue the United States in the World Trade Organization (WTO). At issue is an exception in U.S. copyright law that enables U.S. businesses to play music without paying royalties to the creators. The United States lost the WTO case known as “Irish Music,” but has yet to restore rights to Irish performers.

American Irish

Pay to Play

Generally speaking, when copyrighted music is played in a small boutique, while getting a filling at the dentist, or to motivate your workout at the gym, the creators of the music are owed a royalty. It would be cumbersome for many such businesses to pay that directly, so performance rights organizations (PROs) collect licensing fees that they pass on to registered singers, songwriters and music publishers. In the United States, the two largest PROs are The American Society of Composers, Authors and Publishers and Broadcast Music, Inc.

Section 110(5) of the 1976 U.S. Copyright Act included a “homestyle exemption” to this rule that allowed small commercial establishments to avoid the royalty payment. A business could qualify for the exemption if it broadcasts through a single radio or audiovisual device that is of the type commonly used in one’s home. The Senate report accompanying the Act characterized such use as “for the incidental entertainment of patrons in small businesses and other establishments, such as taverns, lunch counters, hairdressers, dry cleaners, doctors’ offices, etc.” The provision became known as the Aiken exemption after the Supreme Court victory of George Aiken who played his radio for customers in his fast-food chicken restaurant.

Over the years, application of the law was repeatedly litigated due to its ambiguity. Rather than clarifying a narrow interpretation, Congress expanded the exemption through the 1998 Fairness in Music Licensing Act to allow all establishments under a certain square footage to play licensed music for their customers regardless of the type of sound system employed. Going a step further, Congress created the “business exemption” which allows businesses of any size to play licensed music if the number and location of loudspeakers is limited, if the establishment does not charge to see or hear the music transmitted, and if the broadcast is not transmitted beyond that establishment.

Broadcasting from both sides of our mouths

Article 9 of the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) requires WTO members to comply with Articles 1 through 21 of the Berne Convention for the Protection of Literary and Artistic Works that guarantee the rights of copyright owners. Any limitations or exceptions should be confined to certain special cases and should not “unreasonably prejudice the legitimate interests of the right holder.”

In 2000, a WTO dispute settlement panel agreed with the European Communities’ contention that section 110(5) of the U.S. Copyright Act violates the United States’ TRIPS obligations. The “homestyle exemption” as provided in section 110(5)(A) was deemed sufficiently narrow as to not prejudice the rights of copyright owners. Some 13 to 18 percent of U.S. business establishments would be covered. The “business exemption” in section 110(5)(B) however, expanded covered establishments to more than 70 percent of bars and restaurants (and 45 percent of retail), causing unreasonable prejudice to the legitimate interests of copyrights holders.

In other words, if the majority of food and drink establishments could avoid paying royalties to copyright holders of Irish music, the exception had become the rule.

70 percent exempted

An Irish goodbye

The United States accepted the panel findings and agreed to binding arbitration to determine a deadline for compliance and to determine the damages (known in WTO parlance as the level of “nullified or impaired benefits”) to the European Communities, which was set at 1,219,900 euros or about $1.1 million annually. Europe extended a December 31, 2001 deadline to provide time for the U.S. administration to work with Congress on an amendment to the copyright law.

The White House could not secure Congress’ approval so Europe agreed to negotiate a settlement. In June 2003, the United States and European Communities notified the WTO Dispute Settlement Body that the parties had reached a “mutually satisfactory temporary arrangement.”

The United States would make a one-time, lump-sum payment of $3.3 million covering a three-year period paid into a fund set up by European performing rights societies “for the provision of general assistance to their members and the promotion of authors’ rights.” The parties further agreed that, if the dispute has not been resolved three years on, they would enter into consultations to reach a durable resolution, foreshadowing what would become a never-ending exchange of letters.

In a November 2004 document labeled WT/DS160/24, the United States pledged to “work closely with the U.S. Congress and will continue to confer with the European Union in order to reach a mutually satisfactory resolution of this matter.” Every time Europe raises the outstanding item in WTO meetings, it is met with the exact same addendum to WT/DS160/24, restating the U.S. administration’s commitment (whether it be President George W. Bush, Barack Obama or Donald Trump) to work with Congress. As of February 2020, the United States had issued 179 such addendums.

US noncompliance

Unlucky

The WTO’s dispute settlement mechanism was designed to encourage members to resolve disputes through consultation. Consultations can sometimes avert use of formal dispute settlement procedures or avoid the imposition of retaliatory measures once a dispute settlement panel renders a decision.

The intent of consultations is to bring WTO-inconsistent measures into conformance with a member’s obligations. In the “Irish Music” case, the United States provided compensation rather than fix the offending measure (and Europe agreed as a temporary solution). But the WTO’s Dispute Settlement Understanding itself states that compensation should be resorted to “only if the immediate withdrawal of the measure is impracticable and as a temporary measure pending the withdrawal of the measure which is inconsistent with a covered agreement.”

In this case, the United States stretched “temporary” into twenty years of non-compliance, to the detriment of the rights of European music creators and the rights of other WTO members. The outcome also undercuts the very intellectual property rights the United States fought to include in TRIPS on behalf of American copyright holders.

Modern musical arrangements

In the meanwhile, sound systems and methods of “transmission” have evolved rapidly. Streaming delivers 75 percent of the music industry’s global revenues today. At this point, it seems pretty unlikely that your local Irish pub is using a radio on a shelf to play music.

The Recording Industry Association of American (RIAA) says charges for licensing account for 16 percent of total U.S. services exports. RIAA is working to ensure global copyright protections for sound recordings as digital products. Copyright enforcement in the digital realm requires measures to control access to content such as encryption and password protections, clarification of responsibilities by Internet service providers that may play host to copyright-infringing websites, and enforcement actions against so-called “stream-ripping” sites that allow free downloads of copyright-protected recordings. This may require new provisions in trade agreements, even as the United States remains out of compliance with some of its old commitments regarding “Irish Music” copyright protections.

We’re all Irish on St. Paddy’s Day

In its 1995 appeal to the EC to bring the Irish Music case, the Irish Music Rights Organization argued that the Chieftains, The Pogues, and other European creators lose as much as 28 million euros each year, not to mention hundreds of millions for American creators whose royalties also go unpaid.

Instead, it’s American bar crawlers who unknowingly benefit. Now that you know, this St. Paddy’s Day, you may as well hoist a Guinness to toast the U.S. copyright law exception that enables you to belt out a rendition of Molly Malone as it plays on the sound system – for free – at your local Irish pub.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fifteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

shopping

American and Chinese Consumers are Shopping Like There’s No Trade War

What Trade War?

If shoppers are worried about the U.S.-China trade war, it’s not showing up yet in measures of their buying confidence or holiday retail sales.

We are more than a year into dueling tariffs between the United States and China, and we know that tariffs add costs to supply chains, but how much of those costs are passed on the consumer depends on decisions by manufacturers, buyers and retailers as well as the “import-intensity” of the products we buy.

So far, if prices have risen on consumer products, it’s not dampening American appetites to buy. And Chinese consumers don’t rely to a great degree on imports in general, so China’s retaliatory tariffs on U.S. imports don’t appear to be the biggest factor in their personal spending either.

Spending and the U.S. Economy

At the end of the third quarter, the Bureau of Economic Analysis reported that U.S. consumer spending was on track for $14.67 trillion this year, reaching an all-time high.

Personal expenditures make up 68 percent of the U.S. economy, and it’s consumer spending that’s keeping growth of our economy from slowing further. (By comparison, our “negative net exports” or total exports minus total imports, comprise five percent of U.S. GDP.)

Two-thirds of spending is on services such as housing and health care, which are largely impervious to the trade war. The remaining third is spent on non-durable goods such as clothing and groceries, and on durable goods such as cars and appliances.

Brimming with Confidence

The Conference Board’s Consumer Confidence Index is a monthly report on consumer attitudes and buying intentions. Despite analysts’ expectations that concerns related to trade disputes would cause U.S. consumers to become cautious, the index shows a trend of rising consumer confidence since 2009.

Breaking Records Online

Retail sales figures tell us whether that confidence is translating into spending. Indeed, American consumers are still filling their real and virtual shopping carts to the brim.

According to the National Retail Federation (NRF), more than 165 million people were expected to shop over the five-day Thanksgiving holiday weekend. Online sales for last holiday weekend are already being reported and appear to be breaking records.

Americans spent $7.4 billion online on Black Friday, up 19.6 percent from last year. We spent another $3.6 billion on Small Business Saturday, up 18 percent from last year. And while surfing from our desks at work, Americans spent $9.2 billon on Cyber Monday, up 16.9 percent from last year. More than half of Americans surveyed by NRF said they start their holiday shopping the first week of November. Online sales for November came in at a whopping $72.1 billion.

Chinese Consumers Outspent Us All

Cyber Monday is so successful in driving online sales in the United States that Canada, the UK and Germany have all adopted Cyber Monday to kick off their holiday shopping seasons. Australia launched “Click Frenzy” day. The Netherlands’ equivalent is linked to the December 5 Sinterklaas holiday.

But hands down, the world’s largest 24-hour online shopping day goes to China’s Singles Day held on November 11 annually. This year, Chinese online shoppers bought $38.3 billion on Singles Day alone. Think of it this way – that’s more than $1 billion every hour.

This is not a one-day phenomenon. If you were to overlay China’s consumer confidence index with that of the United States, they would look similar. Despite being slightly lower for China and with a dip in 2016 that we didn’t see in the United States, consumer confidence rose between 2014 and remained high in 2019, trade war notwithstanding. In mid-2019, retail spending in China surpassed retail spending in the United States for this first time.

Retail Spending in China Exceeds US

Beyond the Tariff Headlines

Financial analysts are watching China’s consumer spending carefully amidst the trade war. Many said this summer’s drop in car purchases was a harbinger that shoppers are growing wary, but the slowdown also coincided with the end of big discounts. Others say retail sales actually underestimate the strength of China’s overall consumer spending because those numbers offer just a partial picture of personal spending on goods and services, which include large expenditures on healthcare, education and leisure activities.

For this reason, some prominent Chinese investors are nonplussed by the Trump Administration’s tariffs. They look at a decline in certain manufacturing and exports as a structural shift in China’s economy – an “economic rebalancing” – that began long before the current trade war. In their view, household consumption will drive most of China’s future economic growth, and China’s consumer spending is not very dependent on imports.

According to World Bank data, consumer imports comprise just 13 percent of China’s overall imports. Most of the large multinational consumer goods companies now produce in China for the Chinese consumer. According to McKinsey analysis, across key consumer categories including personal digital devices and personal care products, Chinese brands have become credible competitors to foreign brands, acquiring greater market share – and shielding Chinese consumers from tariffs on U.S. imports.

Consumer Spending to Play Bigger Role in China’s Growth

Consumption is playing a much larger role in China’s economic growth than just a few years ago. In 2011, consumer spending accounted for less than 50 percent of China’s GDP growth. Last year, it accounted for 76 percent of GDP growth, outpacing both manufacturing investment and exports.

In fact, China’s total exports of goods and services as a percentage of GDP has dropped from a high of 36 percent in 2006 to 19.5 percent in 2018, with exports to the United States at just four percent.

That why China’s central bank is also monitoring consumer sentiment. In recently released results from its biennial survey of 18,600 residents in 31 provinces, nearly 80 percent of respondents expressed caution about spending and a preference for saving.

China’s politburo has directed the government to focus on turning up the tap of consumer spending by China’s growing urban middle class and to kick-start spending in rural areas. The government already cut personal income taxes and began offering subsidies for large ticket energy-saving home appliances and energy efficient vehicles. The government is expected to announce more measures in the coming months designed to goose household spending.

WB Chart Title China Exports as % of GDP

Business is Ill at Ease

Economists worry the trade war is causing a drag on economic growth, not just in the United States and China but globally. Businesses say the trade war with its escalating tariffs is a “wild card” in their planning. Uncertainty is causing them to hold back on capital expenditures.

It’s looking less likely the United States and China will agree to a “Phase 1” trade deal by the end of the year, but even if they do, the partial deal may not be enough to restore business confidence. If businesses continue to hold back on investments and reduce inventories, it could start to negatively impact jobs and incomes. This may be particularly true in China where a larger portion of the population is dependent on manufacturing jobs.

Consumers Keep Calm and Shop On

Meanwhile, holiday shopping is in full swing. Some holiday merchandise is already subject to tariffs on Chinese imports, but the tariffs the United States plans to impose on December 15 will affect many more consumer products. If imposed, buyers and retailers will have to decide how much cost to pass on to their suppliers and consumers in the coming year.

For now, shoppers are keeping calm and shopping on with resilience. But as a last line of defense against slowing growth, their confidence can be fragile. Where the trade war is concerned, buyer beware.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

drugs

WHAT TODAY’S USMCA DEBATE HAS TO DO WITH THE DRUGS OF TOMORROW

The political winds seem to be blowing in favor of a Congressional vote on the U.S.-Mexico-Canada Free Trade Agreement (USMCA) yet this fall. But before they vote, some Members of Congress want to talk over a few issues with the Trump administration’s negotiators. They are pressing the administration to lower intellectual property protections for the U.S. biopharmaceutical industry because they say the agreement’s provisions protecting original data generated by pharmaceutical inventors will drive up the price of prescription drugs.

Their arguments strike a political nerve but don’t offer a complete picture of this complex and evolving industry. The USMCA debate reflects a domestic difference in views. While the United States works to develop its regulatory framework for newer drugs, many other markets are further behind. As important as it is, the issue of data protection for biologic drugs is not well understood. We’ll try to cover the top lines.

Pieces of the Intellectual Property Puzzle

For American innovators of biopharmaceuticals, gaining access to overseas markets requires not only securing regulatory approvals; the policy environment must also be conducive to marketing their products, which includes a value-based approach to pricing, procurement, reimbursement policies – and intellectual property protections.

There are various facets to the intellectual property (IP) protections needed to incentivize massive investments in pharmaceutical innovation and to enable the recovery of those costs once a drug is commercialized. Patents are part of the package and so is the protection of proprietary data, the issue at the fore in discussions about USMCA.

These protections are particularly important to American companies. The intellectual property attached to 57 percent of the world’s new medicines was created in the United States. That’s no accident. Research and development activities flourish in countries where IP frameworks are well developed and enforced.

70% drug dev

What is Data Protection?

To achieve marketing approval from a regulatory oversight agency such as the U.S. Food and Drug Administration and its counterparts in other countries, innovator pharmaceutical companies submit data on the outcomes of their research and years of clinical trials demonstrating the drug is effective and safe. The cost and risks of developing the original data and product fall to the inventor.

When a generic producer or producer of a “biosimilar” seeks approval, they are often afforded the short cut of relying on the inventor’s data. To ensure a balance between incentivizing drug discovery and development while also providing opportunities for lower-cost copies to become available, the inventor’s data may be protected for a period of time against disclosure to generic or biosimilar producer. During this time, any competitor is free to undertake their own data and seek marketing approvals on that basis.

For How Long?

Provisions on data protection are not new in domestic regulations or in trade agreements. Since the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) in 1995, World Trade Organization (WTO) members have agreed not to disclose clinical data submitted to regulatory authorities to obtain marketing approval for pharmaceutical products, thereby protecting such data “against unfair commercial use”.

Negotiators of the TRIPS Agreement contemplated specifying that data protection should be no less than five years, but ultimately refrained from including a specific timeframe, leaving it to the discretion of WTO members in their national regulations. NAFTA, which took effect in 1994, provides a minimum of five years.

Enter a New Type of Drug

The timing of these provisions is relevant to the debate today. The TRIPs and NAFTA provisions apply to new “chemical entities,” meaning small molecule drugs – that is, most drugs on the market to date. These types of drugs are capable of being replicated through chemical synthesis to make generic drugs. For this reason, regulators tend to agree that requiring duplicate data from generics would be an inefficient use of resources and unnecessary testing of patients, as long as the generic product is proven “bioequivalent” to its reference product.

Biologics are newer medicines. They are large, complex molecules that are made from living cells to produce the required proteins. This manufacturing process is vastly more complex. A follow-on product is not identical, but rather structurally similar and thus called a “biosimilar”. An exact replica is not possible, and patients cannot automatically be switched from a biologic to its biosimilar without risk of adverse effects.

Given the differences between biologics and small molecule drugs, they are regulated differently, and the IP protections have been applied differently. Biologics are largely defined by their manufacturing processes and regulatory approval of biosimilars does not require identity with the reference product, so biologics must often rely only on process patents versus a product patent. Innovator companies argue a longer term of data protection is needed to bridge the differences in patent protection or to offset the lack of patent protections in some countries, while allowing them to recover the increased cost of generating the original data.

New Trade Provisions for Biologics

Given the longer innovation cycle and the increased cost and complexity of biologics, many governments have provided longer periods of data protection for biologics than for small molecule drugs.

In the United States, the Biologics Price Competition and Innovation Act signed into law by President Obama in 2016, provides for a 12-year period of regulatory data protection for biologics. American companies have sought the same standards from trading partners.

With new agreements in the WTO largely stalled, the focus of trade negotiations over the last decade has shifted to bilateral and regional trade agreements where provisions are often more detailed and tailored. In negotiations toward the Transpacific Partnership Agreement (TPP), the United States pushed for 12 years, but agreed to eight years for biologics from the date of first marketing approval and allowed flexibility in how data protections could be administered. When the United States withdrew from the TPP, the remaining members suspended the relevant provisions.

In the USMCA, American biopharmaceuticals again did not get everything they wanted. Canada and Mexico do not have to match the United States in providing 12 years but agreed to increase the duration of data protection to 10 years from the current standard of five years in Mexico and eight years in Canada.

10 years in USMCA

Why Push Trading Partners to Increase Data Protections?

Beyond North America, the so-called “pharmerging” markets (generally the large developing countries) are growing faster than the stable developed markets. China is by far the largest emerging market for pharmaceuticals. In many developing countries, patent systems are weak or poorly enforced. Regulatory data protection provides some buffer against IP exposure, making it viable and more attractive for companies to introduce their products in that market.

Less data protection and lack of enforcement diminish the potential for U.S. exports. It also leaves the door open for competitors to access unprotected U.S. data without the originator’s authorization. Trade agreement obligations help guard against the unfair commercial use of proprietary data and expand the degree of IP protections in global markets, which is a precursor to greater diffusion of innovative drugs to patients worldwide.

Back to the Core Concerns – Availability and Costs to Patients

Critics of USMCA’s provisions argue data protections keep the prices of biologics high by delaying the introduction of biosimilars. The first biosimilar product was approved in the U.S. market in March 2015. By March 2019, 18 had been approved. Many experts suggest biosimilars have lagged in the U.S. market due to slower changes to the U.S. regulatory system and patent litigation as the industry goes through the same growing pains it did with generic regulation.

As well, drug development is an inherently expensive and risky business, characterized by high failure rates. On average, the process of discovery and commercialization takes 10-15 years at a cost of $2.6 billion. Less than 12 percent of drug candidates make it all the way from lab to patient.

Because of the complexity and high fixed costs required to develop the capacity to manufacture biosimilars, it takes eight to 10 years for biosimilars to come to market, there are fewer entrants than is the case with generics, and the cost savings realized are 10 to 30 percent off the brand, versus an average of 80 percent achievable by generics. Considering the length of time normally required to achieve safe and reliable production of biosimilars, the data protection period in USMCA is unlikely to be a cause of undue delay in getting them to market. Data protection terms are also often less than the remaining patent term.

Your Loss is My Gain

The prominent healthcare research firm, IQVIA, forecasts the biopharmaceutical industry stands to lose $121 billion between 2019 and 2023 as periods of market exclusivity end. Eighty percent of that impact, or loss for innovators, will be in the U.S. market as nearly all of the top branded drugs will have generic or biosimilar competition.

IQVIA says competition among biosimilars is on a path to grow three-times larger in 2023 than it is today. If that’s so, savings over branded biologics could produce approximately $160 billion in lower spending just over the next five years, even as overall spending on biologic drugs grows.

This is part of the business cycle of the pharmaceutical industry and why the innovators maintain strong pipelines because they have limited exclusive time in the market before competitors arrive. That’s good for patients. The data protections in USMCA are not likely to materially impact this cycle or spending. When Canada and Japan lengthened their duration of data protection, drug spending as a percentage of GDP remained nearly flat.

ME losses

Reason for Optimism

Biologics are called the drug of tomorrow. They comprise nearly 70 percent of the innovation pipeline which includes some 4,500 drugs in development in the United States and another 8,000 globally.

Breakthrough products are expected for cancer treatments, autism and diabetes. This is great news, but specialty and niche products tend to come at a higher price so spending may increase as these new drugs enter the market. According to IQVIA, average spending on the brand versions will nonetheless decline from 8.2 percent of the U.S. market to 6.7 percent, a demonstration there’s a healthy market for originals and copies.

There would be no copies without the originals, which is why pharmaceutical regulatory and legal frameworks are full of public policy trade-offs to strike a balance that will support return on innovation while not impeding the availability of affordable drugs. As we make scientific progress, the systems that include IP protections must evolve to accommodate new types of drugs, new capabilities in data analytics and clinical practices, and even changing business models. Not doing so can imperil the pace of progress at precisely the moment when breakthroughs are on the horizon.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

BREAKING BAD TRADE: FENTANYL FROM CHINA

The Real Poison Pill in U.S.-China Trade

Following a historic dinner between President Trump and President Xi last December in Argentina on the margins of the G20 Summit, many of us awaited news on tariffs. We were surprised when, as part of a trade announcement, President Trump hailed a commitment from China to step up its regulatory oversight of fentanyl, the opioid that the Centers for Disease Control says has caused a “third wave” of drug-related overdose deaths in the United States.

It seems the seedy underbelly of e-commerce involves a steady stream of online purchases of deadly variants of the drug fentanyl, made in China and shipped to American doorsteps through the U.S. postal service.

Deadly Parcels from China

Fatal drug overdoses have doubled over the last decade, rising from 36,010 in 2007 to 70,237 in 2017. Synthetic opioids other than methadone – mainly fentanyl – now account for 40 percent of all drug overdose deaths and 60 percent of opioid overdose deaths.

China is the primary source of illicit fentanyl, fentanyl analogues, and fentanyl precursor chemicals in the United States. According to U.S. Customs and Border Protection, almost 80 percent of fentanyl seized in 2017 was interdicted at U.S. Postal Service and express consignment carrier facilities, having been shipped in small quantities from China.

Fentanyl precursors are also shipped from China to Mexico, and to a lesser degree Canada, before being synthesized, often mixed with heroin or cocaine, repackaged, and then trafficked over U.S. land borders in the southwest.

Fentanyl third wave of overdoses

STOP

Last March, the White House stepped up its campaign against opioid abuse, seeking to address factors driving both demand and supply. The Initiative to Stop Opioid Abuse (referred to as STOP) includes education programs, measures to curb over-prescription, expanded access to treatment and recovery, and – a focus on cutting off the flow of illicit drugs from China.

According to Homeland Security, more fentanyl in larger volumes is seized at land crossings, but the fentanyl seized from mail and express consignment carrier facilities is far more potent with purities of over 90 percent versus Mexico-sourced fentanyl that is often diluted to less than 10 percent.

The president’s initiative would require the postal service to provide advance electronic data for 90 percent of all international mail shipments within the next two years, offering data that will help law enforcement identify and seize illegal substances shipped through mail. Private shippers such as UPS and FedEx routinely require such electronic data.

The administration is also scaling up the Department of Justice’s “darknet” enforcement efforts. Fentanyl in its various forms is relatively cheap and easy to buy from China online paying with cryptocurrencies, or even credit cards or money transfers.

fentanyl shipments from China

Over One Million Pills a Day – In One Factory in China

China has grown to become the largest mass producer of generic drugs and pharmaceutical ingredients in the world with over 5,000 pharmaceutical manufacturers. Upwards of 90 percent of the active pharmaceutical ingredients used in U.S. production of finished dosage forms of medical pharmaceuticals is imported from just two countries: India and China.

In addition, China has over 160,000 chemical producers and hundreds of thousands of pharmaceutical and chemicals distributors. The explosion in volume and number of producers has far outstripped China’s FDA (CFDA) from adequately regulating and monitoring them.

Faster Than Can Be Regulated

Unlike opioids derived from the poppy plant, fentanyl is a synthetic painkiller produced in a laboratory. It is 50 times more potent than heroine and 50-100 times more potent than morphine. Inhaling just two milligrams of pure fentanyl can be lethal.

In the United States, most fentanyl products are classified either as Schedule I chemicals, those that have no accepted medical use and high potential for abuse, or as Schedule II chemicals, those with medical use but only available through a non-refillable prescription.

Fentanyl’s molecular structure can be easily modified to create new derivatives, putting regulators constantly behind in evaluating and classifying each new variant one-by-one. From furanyl fentanyl, acetyl fentanyl, acryl fentanyl, to carfentanil — to name just a few — fentanyl has hundreds of analogues that differ slightly from the original, enabling criminal producers to operate in a gray territory while regulators struggle to ban the new substances. Legislation passed in 2017 now allows U.S. FDA to schedule fentanyl analogues immediately on a temporary basis while the agency conducts its investigations.

President Trump has urged President Xi to implement a similar approach. China currently controls around 25 types of fentanyl-related products. President Trump wants China to establish fentanyl as its own class of controlled substances, restricting all fentanyl analogues, including future fentanyl-like substances. Doing so would be a start.

Busting Drug Trade

Such a commitment by China is not, however, likely to put a dent in its fentanyl exports to the United States absent real enforcement. In recent years, CFDA has imposed stricter licensing requirements for pharmaceutical and chemical producers, but diversion, adulteration, and clandestine production remain significant problems.

“Chinese chemical manufacturers export a range of fentanyl products to the United States, including raw fentanyl, fentanyl precursors, fentanyl analogues, fentanyl-laced counterfeit prescription drugs like oxycodone, and pill presses and other machinery necessary for fentanyl production.” — U.S China Economic and Security Review Commission Staff Research Report

CFDA has undergone several reorganizations in the last few years. In the most recent, some of its regulatory responsibilities have devolved to provinces and counties with little accountability. Pre-marketing approvals will be managed separately from post-market inspections and surveillance. With just a little over 2,000 inspectors, authorities have little hope of effectively overseeing legal compliance, let alone spotting even a fraction of criminal activity.

The central government has assisted U.S. drug and law enforcement agencies, sharing information and intelligence that helps U.S. agencies target Chinese nationals trafficking illicit drugs in the United States. To alleviate the free flow of fentanyl from China, the Chinese government should also prosecute transnational criminals operating in China in high-profile cases with severe penalties.

Soybeans, Tech Transfer, and Fentanyl

Trade talks over soybeans and intellectual property protections for American technologies seem an unlikely setting for addressing illicit trade in deadly fentanyl.

There are some in the United States who are frustrated with this administration’s willingness to toss out the traditional trade policy playbook, but this is one case where it can welcomed by everyone.

 

 

Interested to read about fentanyl trade in more detail?

See two key reports produced by U.S.-China Economic and Security Review Commission analyst Sean O’Connor: Fentanyl: China’s Deadly Export to the United States, February 2017 and Fentanyl Flows from China: An Update, November 2018

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

trade

TRADE AND AMERICA’S PASTIME

Play Ball

In a popular mid-summer tradition, the best players in the American League squared off earlier this month against the best players in the National League in an All-Star Game, with the American League pulling off its seventh straight win.

No sport is more American than baseball. Credit goes to colonists who invented variations on games played in England. By 1845, the New York Knickerbocker Baseball Club codified rules of play that define the game today, including a diamond-shaped infield and the three-strike rule.

So many of us grew up playing Little League and we’re still throwing the ball to our kids (if you want to see a grown man cry, cue the last scene of Field of Dreams). Baseball and softball combined had 25 million participants in 2016, making them the most-participated team sports in the United States. That means we buy a whole lot of gloves, bats and protective gear for millions of our little leaguers in addition to top-of-the-line professional gear to support the big leagues.

Gearing Up

Americans buy over $47 billion from sporting goods stores every year at a Dick’s Sporting Goods, Bass Pro Shop, Sports Authority and others. We import much of the lower-cost equipment for amateur play, but there’s a rich tradition of high-quality baseball equipment made in the U.S.A. that thrives alongside imports, demonstrating that trade enables a diverse marketplace that benefits us as consumers.

Louisville Sluggers are still made in the United States. Rawlings’ pro gloves are made in Missouri but has production overseas for other lines. Rawlings also makes Major and Minor League official game balls, producing them in Costa Rica. Most athletic footwear is produced outside the United States, but New Balance is banging out high-quality cleats in Boston.

All-American Baseball Graphic TradeVistas ADurkin

Buy Me Some Peanuts and Cracker Jack

Trade helps bring us the physical gear needed to play, but it also ensures that viewers can watch the game when they aren’t in the stadium. The All-Star Game was televised nationally by FOX Sports but was also broadcast worldwide by network partners in more than 180 countries. Broadcasting rights are a form of trade in services (see our article on Super Bowl Broadcast: Who Has the Rights?).

A Different Kind of North American Trade Deal

In 2016, 27.5 percent of players on the opening day rosters in the Major League were born in 18 countries other than the United States. Now Major League Baseball is expanding its borders in other ways by exploring whether to bring a team back home to Montreal, Canada and create a club in Mexico City, which would be the start of a truly North American Major League.

Exporting American Culture

Baseball has been popular in this hemisphere for decades and we all know that Japanese super fans go crazy for their Tokyo Yakult Swallows, Hanshin Tigers and Yomiuri Giants. Experts who track the baseball industry are seeing significant growth in interest worldwide.

In March 2017, the fourth World Baseball Classic featured teams from the Netherlands, Australia, Taiwan and Israel. The qualifying tournaments saw teams fielded by South Africa, Czech Republic, Spain and Pakistan. While millions of Americans watched the final game between the United States team and Puerto Rico, perhaps even more significant was the attendance of more than one million fans at ballparks around the world from the Tokyo Dome to Gocheok Sky Dome in Seoul to Estado Charros de Jalisco in Mexico.

Major League Baseball is also helping to drive global interest in the American pastime through its PLAY BALL initiative. Players from the majors and minors travel to schools throughout the United States and internationally to give kids the opportunity to learn and participate in baseball and softball.

MLB Play Ball Initiative

Credit: PlayBall spends a week teaching kids baseball and softball in the greater London area, MLB.com

Tariffs are Not Hitting a Home Run with Sporting Goods Industry

It’s nearly impossible to write about trade these days without touching on tariffs, which have crept into our weekend sports.

Days before the All-Star Game, Bill Sells of The Sports & Fitness Industry Association testified regarding the administration’s proposed tariffs on products from China. He was representing the association’s 300 companies and 750 brands that manufacture and sell sports and fitness products. The association stated support for the President’s efforts to bring China into compliance with international standards for protecting intellectual property, but expressed concern the tariffs would add costs to final goods, straining family budgets to pay for more expensive helmets, baseballs and other sports equipment exported from China.

The association also said the cost of component parts to make equipment like customized golf clubs in the United States would be higher and that member companies’ supply chains cannot pivot fast enough to change sourcing patterns. For products that require leather, like baseball and boxing gloves and athletic footwear, there’s hardly a domestic producer to replace China’s production because American capacity for manufacturing apparel and leather goods dropped 85 percent in the last three decades.

Bleacher Report

Bart Giamatti is a former president of the National League and commissioner of baseball. Writer Donald Kagan has described Giamatti’s romantic depiction of baseball as a Homeric Odyssey:

“The batter is its hero. He begins at homebut his mission is to venture away from it, encountering various unforeseeable dangers. At each station opponents scheme to put him out by strength or skill or guile. Should they succeed he dies on the bases, defeated. If his own heroic talents are superior, however, he completes the circuit and returns victorious to home, there to be greeted with joy by the friends he left behind.”

We get it. Our family loves taking in a Washington Nationals game and seeks out Minor League games when on summer road trips. But by far the best seat in the house is on the bleachers at our local field where my daughter plays. The grace and athleticism of this sport is worn beautifully on the girls and women who play the game. There’s something fabulous about the juxtaposition of bows and braids sliding into the dirt at home plate. And we agree, every at bat offers suspense, strategy, and the opportunity to build inner strength for every girl on the field.

Trade is part of our lifestyle – play ball!

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

RENEWING RARE EARTH THREATS, CHINA DIGS DEEP FOR LEVERAGE IN TRADE WAR

Optics and Symbolism

On May 28, the South China Morning Post reported that upon visiting one of China’s major rare earth mining and processing operations in Jiangxi Province, President Xi Jingping commented he would give priority to domestic demand over exports. Beside him was his lead negotiator in trade talks with the United States. At the same time, his top economic planning agency leaked it would not rule out using rare earths as a bargaining chip in the trade war.

The visit and Xi’s signal came just days after the Trump administration ratcheted up U.S. tariffs on $200 billion worth of Chinese goods followed by China’s response that it would increase in tariffs on $60 billion worth of U.S. goods.

When it comes to trade in rare earths, we’ve been here before. It’s a story worth unpacking as yet another cautionary tale about the perils of China’s meteoric rise to dominance in supplying the world with critical inputs, in this case the metals that lie behind today’s — and tomorrow’s — modern electronics, high-tech and advanced military applications

Magic Pixie Dust in the Earth’s Crust

There’s a group of 17 chemical elements on the periodic table that are classified as rare earth elements or rare earths. They can discharge and accept electrons and mix well with other elements to convey magnetism, luminescence, added strength and other key properties.

For example, neodymium helps power the magnets in hard drives and hybrid cars; praseodymium is deployed to create strong metals for aircraft engines; gadolinium is used in MRI scanning equipment; yttrium, terbium and europium are used to produce our computer, TV and device screens.

As our consumer tech and industrial products become more sophisticated and new uses are discovered, demand for rare earths will only grow. Rare earths also play a key role in some of our military’s most advanced defense tools from stealth technologies to guidance systems and armored vehicles.

REE table

Not Rare, But Hard to Harvest

The issue is not that rare earth deposits are scarce, but that they are challenging and costly to mine. Rare earths tend to be scattered rather than clustered, and bond easily with other minerals, so the elements must be separated in painstaking and costly processes that produce toxic and hazardous waste. Significant investments over years are required to get a mine and processing facility up and running and to control for environmental risks.

China’s Rise to Top Producer, User and Exporter

Although China began mining rare earths in the 1950s, the Chinese government put the capacity to mine and produce rare earths on its critical path toward economic modernization in the 1980s. Rare earths are now part of China’s Made in China 2025 plan to achieve global advantage in advanced manufacturing, high tech and green technologies.

As was the case in other industries such as steel, glass, paper and auto parts, the Chinese government deepened its intervention in the rare earths sector in 1990s to ensure access to low-cost supplies for domestic producers. Government support enabled Chinese companies to ramp up mining and processing of rare earths even while operating at a loss.

As production grew, exports were encouraged through export rebates, attracting more Chinese entrants to the industry. Excess production flooded global markets, setting in motion a downward spiral in prices and profitability for producers in other countries. Between 2002 and 2005, rare earth prices dropped to historic lows, forcing most of the world’s mines outside China to close.

Chinas Share of REE

An Overplayed Hand?

Having achieved global dominance, producing over 90 percent of the world’s rare earths, China created a two-tier pricing system through a variety of export controls. According to data from the U.S. International Trade Commission, by the beginning of 2010, U.S. importers were paying an average $5,589 per metric ton for rare earths from China.

When China announced in July 2010 it would restrict exports of rare earths by 70 percent and impose minimum export price levels, rare earth prices surged by the fall of 2011 to $158,389 per metric ton. By applying export duties, quotas and price floors to exports, China created a two-price system, keeping low-priced supplies for itself. U.S. manufacturers had no alternative but to curb spending on Chinese rare earths, causing a drop in U.S. imports.

In March 2012, the United States, European Union and Japan initiated a dispute settlement case in the WTO against China’s rare earth restrictions. Two years later, a WTO dispute panel agreed that China had violated commitments it made when it joined the WTO to eliminate dual pricing practices, certain export duties, and price controls. The panel also found China violated other aspects of other WTO agreements such as those governing the administration of export quotas. After losing its appeal, China agreed to remove quotas by December of 2014 and abandon its export tariffs by May 2015.

Damage Done

Life goes on in the global economy and for industry players over the two years that WTO cases are being decided. In a 2017 National Review article, Mike Fredenburg explains what happened to the U.S. company Molycorp that owned the Mountain Pass mine in California, which at one time was the largest producer in the world.

“In 2012, U.S.-based Molycorp, attracted to the higher prices that resulted from the Chinese government’s efforts to boost profits by restricting REE [rare earth elements] exports, made plans to ramp up domestic REE production, investing nearly $800 million in state-of-the-art mining operations in California. At the moment when the project was poised to succeed, China flooded the market with REEs just long enough to knock Molycorp out of the market. After its Chapter 11 bankruptcy reorganization, Beijing is allowing Molycorp to continue operations in China. But once again, the U.S. has no domestic REE production.”

China lost in the WTO. But in effect, China no longer needs the trade tools that violated its WTO obligations. The Molycorp mine was bankrupt, its rare earth assets sold to a consortium of buyers that included a Chinese firm with ties to the government.

The Next Chapter for Rare Earths Production and Use

China’s experiments restricting exports served as a wake up call for global manufacturers and foreign governments, who are working on Plan B to China’s dominance in rare earths. Leading manufacturers including General Electric and Toyota among others have openly announced they would cultivate and support alternative suppliers while finding ways to reduce their use of rare earth elements by reengineering their product designs.

China controls 36 percent of the world’s reserves, so government agencies have stepped up efforts to find more deposits. Mining companies around the world are reevaluating old rare earth prospects for possible development and are working to develop innovative extraction techniques to achieve what fracking did for the natural gas industry in the United States.

World REE Production and Reserves

Back to the China Playbook

China will not go quietly into that good night when it comes to the advantage it created in rare earths production. Following its playbook, China is working to consolidate the number of domestic rare earths producers (all have ties to the state) and tighten oversight of resource use and production rights. No need for WTO-illegal export restrictions when state-owned or state-directed companies can directly limit their business sales with foreign buyers.

Recognizing that domestic demand could outstrip production, China is hedging its bets by purchasing rare earth resources in other countries, though not always successfully. Notably, the China Non-Ferrous Metal Mining Co. made a $250 million bid for Australia-based Lynas back in 2009-10, but was rejected by Australia’s Foreign Investment Review Board.* The Chinese state has also acquired multinational firms with science and technology assets critical to helping Chinese manufacturers move up the value chain to produce the intermediate goods and advanced technologies that use rare earths.

Meanwhile, China is stockpiling rare earths. Why?

Is the government trying to induce foreign manufacturers to produce in China? Would China withhold rare earths in the race to global use of 5G on Chinese technology platforms? Or does China simply need to ensure access to this valuable resource for the development of its own advanced manufacturing sectors?

When commenting about the role of rare earths in the trade war, a representative from the National Reform Development Commission said, “If anyone wants to use the products made from our rare earth exports to try to counter China’s development, then the people from the southern Jiangxi Communist revolutionary base would not be happy, and the people of China will not be happy.”

Perhaps the stockpiling is emblematic that China thinks the United States is trying to contain China’s economic expansion. Threatening to withhold rare earths could be China’s way of digging into this trade war with the United States.

More reading:

For context see Congressional Research Service ReportChina’s Rare Earth Industry and Export Regime

For contemporary commentary see Stewart Patterson’s Rare Earths: The Threat of Embargo and the Clash of Systems

*Editor’s note: this sentence contains a correction from the originally posted version.

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

U.S. DOLLAR PROVIDES THE MUSCLE FOR ECONOMIC SANCTIONS

Money Talks

From drug kingpins to terrorists and from human traffickers to money launderers, the United States has nearly 8,000 economic sanctions in place, and the list is growing. Particularly in the post-9/11 era, the U.S. government has leveraged the global preeminence of the U.S. dollar to turn off spigots of funding for sinister activities and unwanted behaviors by state actors.

Among additional sanctions against Iran, Russia and Venezuela, The Trump administration earlier this month tightened travel restrictions to Cuba stating, “Cuba continues to play a destabilizing role in the Western Hemisphere…these actions will help to keep U.S. dollars out of the hands of Cuban military, intelligence, and security services.”

The muscle behind an array of U.S. financial sanctions derives from the reach and power of the U.S. dollar as the “lead currency” in the global economy. This status makes it possible to not only prevent U.S. individuals and companies from doing business directly with a sanctioned entity, it makes it risky to do business with third-country companies that do business with sanctioned entities. Acutely aware of their vulnerability, non-U.S. companies also frequently take steps to minimize their exposure to possible violations of U.S. sanctions lest they jeopardize their access to the U.S. financial system.

The U.S. Dollar Reigns

How strong is the dollar’s foothold in the global economy? The U.S. dollar was used in 88 percent of global foreign exchange transactions in 2016. For comparison, the euro was the medium of exchange in 31 percent of transactions in 2016, the Japanese yen in 22 percent, the British pound in 13 percent, and China’s renminbi in four percent (as two currencies may be involved in exchange, these numbers will add up to more than 100 percent).

Companies selling their goods and services outside the United States often accept dollars as payment because they can easily turn around and use dollars to pay for imported products and inputs. Or, they can hold onto their dollar revenues with confidence they are storing value.

Why is the Dollar Preferred?

The dollar is the world’s lead currency because it meets three key conditions.

First, the dollar is fully tradable and exchanged at relatively low costs. The U.S. government does not restrict the purchase or sale of the dollar.

Second, the dollar holds its value against other currencies. The United States is still considered a stable and open market economy, current tariff vagaries notwithstanding. At the end of last year, just under 62 percent of all central bank reserves were held in U.S. dollars.

Third, the United States is still the largest economy in the world, equivalent to 24 percent of global GDP. Below is a snapshot from the International Monetary Fund comparing the world’s largest economies. We have a large money supply, providing liquidity for the global economy.

Into the Arms of Another

Some have argued bad actors like North Korea will find always find ways to evade U.S. sanctions. Buyers of Iranian oil will seek alternative currencies for their transactions, both diluting the effect of sanctions and hastening reduced dependence on the dollar.

Several European countries developed a clearinghouse to enable companies to avoid the U.S. financial system in transactions involving Iran as part of their effort to salvage the nuclear pact the Trump administration pulled out of last year before restoring a slew of sanctions against Iran.

Despite initial discussions about a wider scope, Europe’s Instrument in Support of Trade Exchanges (INSTEX) will, at least for now, only facilitate trade in humanitarian goods such as pharmaceuticals, medical devices and agri-food products, all of which are already permissible under U.S. sanctions. Despite European government grumbling about being beholden to the U.S. dollar, there appeared to be little appetite on the part of European companies and commercial banks to risk U.S. penalties by using such a clearinghouse for other types of transactions.

Will the Euro or Renminbi Overtake the Dollar?

Not anytime soon.

The euro covers a large economic zone featuring sophisticated financial market institutions, but the politics surrounding continued support by members of the euro zone and unresolved debt discussions with southern states (we were talking about Grexit long before Brexit) are holding the euro back in overtaking the U.S. dollar.

Although the renminbi’s share in global transactions is still low, it should be noted that usage and overseas holdings of China’s currency by individuals, businesses and central banks has expanded in the last decade, enabling China to break through in 2016 to join the top five most-used currencies. The Chinese government is making a big push to internationalize its currency through global infrastructure investment funds associated with its Belt and Road initiative and through renminbi-denominated commodities futures contracts, among other initiatives.

China’s currency, however, is not freely convertible, its performance has been volatile, and the degree of state and private debt in China’s financial system remains murky.

The Dollar’s Achilles Heel

For the time being, most experts believe there’s no real threat to the U.S. dollar’s dominance. Europe would need to address skepticism regarding the monetary union’s future, China would need to implement significant reforms to its financial sector, and much-hyped cryptocurrencies still have long way to go to challenge the conventional system of global payments.

These are all big “ifs”. Instead, the dollar’s Achilles’ heel is of our own making. One of the biggest risks to the dollar’s long-term value is continued fiscal imbalances in the United States and the sustainability of our debt burden.

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. She is a nonresident Senior Fellow at the Chicago Council on Global Affairs and an adjunct fellow with CSIS. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught International Trade for the last fourteen years as an Adjunct Associate Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.