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TIME TO REFORM (AND RENEW) THE WTO

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TIME TO REFORM (AND RENEW) THE WTO

Reflect and Appreciate

The window to enjoy the bountiful cherry blossoms in the Washington DC area briefly opens and closes every spring. It would be easy to take them for granted. The show is a fleeting, but a reliable harbinger of spring renewal. Cherry blossom trees have proliferated such that one need not venture to the famous Tidal Basin to enjoy them.

If we find the trade angle in everything, as we are prone to do here at TradeVistas, one could liken the World Trade Organization (WTO) reform process to the Japanese ritual of hanami (flower viewing), where everyone takes pause to appreciate the gift of the sakura cherry blossoms as a community. The current global trading system has generated opportunities for every member to pursue growth and prosperity through increased trade. That’s beautiful and impressive, too. We’ve come to rely on it and rarely stop to appreciate it. As evidenced by the results of our July 2020 poll, the public has very little understanding of the institution’s role.

For the Japanese, the cherry blossoms represent both a recognition of the impermanence of good things, but also renewal and optimism. Viewing parties are organized to lie under the blossoms, stare at the sky, and reflect on whatever calls to mind.

Basho Haiku

Free Trade is Not Inevitable

In his book, The World America Made, scholar Robert Kagan makes the case there is nothing inevitable about either democracy or the prevalence of the global free trade system. World orders are transient. They reflect the beliefs and interests of its strongest powers. History tells us this state is indeed reversible. It can be undone. As Kagan says, “The better idea doesn’t have to win because it’s the better idea. It requires great powers to champion it.”

While the WTO was sown from the seeds of democratic, free-market ideals, WTO members have been unable to cultivate trade deals to counter China’s state-directed economic approach. The WTO’s detractors are free to plant doubts that, left untended, will grow like weeds.

Over the last year, WTO members have initiated serious discussions about how to reform the WTO. But now the organization must choose a new director general, adding a new layer of complexity to the process. Looking ahead at the future of the WTO, perhaps “renew” would be a better term to inspire a renewed appreciation for what global trade agreements have achieved, a renewed communal commitment to its future, and a renewed vision to match that of its founders.

There are at least three areas under discussion by members to renew the purpose and functioning of the WTO.

Fix What’s Wrong

Achieving transparency through timely and meaningful notifications is an important function of WTO committees. Members have an obligation to share information about regulations, policies, and other measures that affect market access for companies seeking to do business in those markets. In the case of subsidies, those measures can affect the volume and prices of commodities trade globally, affecting businesses who may even be selling primarily in their home market. But many WTO members are years behind in reporting and offer incomplete or unverifiable information, which denigrates the integrity of the process and causes other members to query whether WTO violations are being obscured. Some members are so frustrated with this delinquency they are suggesting penalties for failure to meet notification requirements, even creating an “inactive member status” in the most egregious cases.

Another core function of the WTO is to promote the resolution of disputes among members, including through the WTO dispute settlement system. The United States and other members are concerned that the Appellate Body, which can review decisions made by regular dispute settlement panels, has created rights and obligations not agreed by the members through the process of negotiation. The system is now a quarter of a century old. Experience with it offers insights into procedures that can and should be improved as an investment in the system.

Concede that Consensus is Stifling Innovation

WTO members can self-declare as “developed” or “developing” for the purpose of undertaking commitments or availing themselves of exceptions. Despite the underlying validity of acknowledging different levels of capacity or differing economic priorities, this loosey-goosey system has tilted negotiations to focus on what members won’t do, rather than what they commit to do. The United States has called it a self-declared state of paralysis.

Discussions in the WTO are beginning to focus on various data points that can be used to determine who is developed versus developing, but even those exercises might miss the larger point that lowering barriers in a country’s own market will generate economic gains worth pursuing. Take one example: opening one’s market to competition in the provision of telecommunications services creates opportunities to extend broadband access and leverage faster internet connections so that companies can be “born digital” and find their niche in global supply chains. The tendency to opt-out of liberalization commitments can conversely hold countries back in their development pursuits. There’s a philosophical disagreement here that could get glossed over as members dive into data and formulas.

The Doha Round of negotiations collapsed in part due to insistence on a “single undertaking” – that every aspect of a large package deal must be agreed before any single aspect could be agreed and implemented. Members did free an agreement to streamline customs procedures from this consensus capture. On the topic of agriculture, members agreed to move ahead with the elimination of agricultural export subsidies and adopt new disciplines on export credits, international food aid and agricultural exporting state trading enterprises absent a larger deal.

Incrementalism should be welcomed over inaction. Members are now offering papers describing how new negotiations could create agreements among interested members to begin with, with eventual agreement by some or all members. This approach will probably need to apply to the WTO “reform” process itself, with some down payments made and problems fixed without holding up progress.

Negotiate on Issues Relevant to Today’s Economy

In the same vein, willing members should be unencumbered to move ahead with negotiations on “new” issues relevant to today’s economy. For example, the United States, European Union, and Japan announced they would cooperate to develop new rules to address the practices of forced technology transfer and industrial subsidies. A significant subset of WTO members have agreed on the need to facilitate growth of the digital economy in part by ensuring that electronic commerce can flourish. They will begin negotiations and work to bring along other members as talks advance.

What Role Will the U.S. Play?

Questions remain about what role the United States will play in this process of renewal. In spring 2020, the U.S. Congress faced the possibility of a vote – the first since 2005 – on whether the United States should withdraw from the WTO, a body it helped create.

While that vote was eventually scuttled, it amplified growing criticism of the WTO by the Trump Administration – and the general public’s indifference toward the institution. A July 2020 TradeVistas poll found that more Americans either support leaving the WTO or feel “indifferent” or “unsure” about whether to withdraw.

The poll also found that Americans overwhelmingly want the United States to be “leader of the global economy”. They just don’t see membership in the WTO as critical to that goal. But – once they receive some basic information about the WTO’s role, many Americans also see how the organization can benefit U.S. companies.

These results make it clear that trade policymakers should position the WTO’s role more prominently in Americans’ understanding.

The Petals Will Fly Off

The cherry blossoms are impermanent. A strong gust of wind will force them off their branches just at their peak. The leaves fill out, the trees grow, and the blossoms seem to reappear as vibrant as ever the following year. Some trees can survive a century but most cherry blossom species live just 15 to 20 years. New seeds must be planted and the trees cared for. We’ve already lost nearly a generation of progress in the WTO. Now seems as good a time as any for reflection and renewal.

Editor’s Note: This post was originally published in April 2019 and has been updated for accuracy and comprehensiveness. 

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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.

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AMERICAN DOUBTS ABOUT THE WTO ARE GROWING LIKE WEEDS

Polls show that Americans are concerned about the rise of China and what it means for the U.S. economy and global standing.

U.S. leadership in the WTO could serve as a valuable counterbalance to China’s growing influence. But first, Americans need to know why they should care about the WTO.

The jungle is growing back

In The Jungle Grows Back, foreign policy scholar Robert Kagan cautions that the past seven-plus decades of relative free trade and expanding individual freedoms were not inevitable and may be “a great historical aberration” – the jungle grows back.

The World Trade Organization (WTO) was sown from the seeds of democratic, free-market ideals. But China’s state-directed economic approach has growing influence and WTO members have been unable to cultivate modern trade deals to counter it.

Meanwhile, new TradeVistas polling shows Americans are mostly unaware the WTO – which represents the U.S.‘ own free-market principles – has reached this pivotal moment. The WTO’s detractors are free to plant doubts that, left untended, will grow like weeds.

Two-thirds of Americans are ready or open to the idea of leaving the WTO

Presented in detail in our companion article, Do Americans Want the U.S. to Leave the WTO?a TradeVistas poll conducted earlier this month finds that most Americans either support leaving the WTO or feel “indifferent” or “unsure” about whether to withdraw from the organization.

It’s not that Americans are necessarily focused inward, though COVID-19 has stimulated concerns about the extent of America’s reliance on global value chains. Rather, TradeVistas’ poll finds that Americans overwhelmingly want the United States to be “leader of the global economy”. They just don’t see membership in the WTO as critical to that goal.

leave WTO

What should we learn from these results?

While it might be tempting for trade policymakers to concentrate on converting the vocal minority that supports U.S. withdrawal, two undercurrents in the poll results merit close attention.

First, the subset of strong WTO opponents is substantially outnumbered by those whose views are less strongly held, and the consequences of such indifference should not be ignored. The old adage, “you don’t know what you’ve got until it’s gone,” doesn’t necessarily apply to trade institutions. Recall that when President Trump withdrew from the Transpacific Partnership Agreement on day three of his presidency, polls at the time demonstrated that 72 percent had either not heard about the TPP or “not much”. Are they remorseful now? Generally, no, despite the concerns from industry and the trade policy community. As for President Trump, the political gains from withdrawal were minimal, but neither was there a backlash.

Second, asked whether WTO rules help U.S. companies compete on fair terms or help prevent foreign governments from applying unfair requirements to U.S. companies, a clear majority – even those who strongly supported leaving the WTO — felt it was likely true that the WTO accomplishes those goals. With deeper knowledge and greater understanding of what the global trading rules offer American creators, producers and service providers, Americans may be more inclined to support the WTO, or at least support the WTO’s set of agreements, which they perceive to benefit the overall economy.

Restatement of WTO Q on Rules and Unfair Requirements

Engaging Americans on what’s at stake

Unsurprisingly, a survey by the Pew Research Center this spring found that nearly two-thirds of Americans now have a negative opinion of China. And 9 in 10 Americans see Chinese power and influence as a threat to the United States. Where there’s much less agreement, however, is how the United States should manage its relationship with China, including on trade. All too often overlooked in these discussions is the WTO – an institution whose purpose is to set the rules for global trade and through which the United States could exert its influence to restrain the commercial and economic practices it finds damaging.

In our absence, China is seizing that opportunity. If the United States spent decades building an international system in the likeness of its free-market democracy, China is actively working to remake that system in its own image. China now heads the International Civil Aviation Organization, the International Telecommunications Union, the Food and Agriculture Organization and the United Nations Industrial Development Organization. China recently ran a candidate to lead the World Intellectual Property Organization but the United States led a coalition to oppose it.

And what of the WTO’s majority of developing country members? What is the significance of Afghanistan and Liberia choosing to join the WTO, of Belarus, Iraq, and Timor-Leste in the queue? These are conflict-affected nations that seek to rebuild their post-conflict economies. They see WTO membership as a step toward necessary but difficult economic reforms at home – reforms they hope will reap economic gains that will bring more lasting security and stability. As was originally envisioned, American leadership in the WTO enables the United States to gain from trade while supporting democratic transitions and the expansion of prosperity around the world.

China is making significant infrastructure and financial investments around the world, drawing fragile democracies into their ambit. Americans would understand if the WTO were positioned as a way to counter China’s growing economic influence in the developing world.

How trade policymakers can position the WTO as more relevant to ordinary Americans

The global trade policy community mostly agrees the WTO is in need of reforms to restore its core functions of negotiating trade-liberalizing deals and ensuring effective implementation and enforcement of those trade deals.

Let’s be honest, however. Though vital for the health of the WTO, the average American is not interested in the minutia of tweaks to the WTO’s dispute settlement system, in the vernacular “special and differential treatment” for developing countries, or the definition of a market economy. When the trade community is too focused on those details, it risks losing sight of the broader need to attract American public support for the institution itself.

To position the WTO’s role more prominently in Americans’ understanding, trade policymakers should appeal to citizens in the following ways:

To Americans’ sense of fairness:

The average American is interested in basic fairness and in ensuring that major economies play by the same rules. Before the WTO, countries that signed onto its predecessor, the General Agreement on Tariffs and Trade, were called Contracting Parties. The GATT was a contract. Americans like contracts; we are good at writing contracts. We enter them voluntarily when the terms are favorable and mutually agreeable.

The United States negotiated favorable terms under the GATT and then the WTO. If those terms no longer serve the United States well, it can negotiate different or additional terms. But the United States can only do that if it remains a member.

To Americans’ need for control over their own destiny:

The average American feels conflicted about international organizations because they fear a loss of sovereignty. However, WTO rules do not prevent national policies to promote domestic jobs and growth. Rather, the disciplines of the global trading system compel governments to adhere to the norms of transparency and non-discrimination as those policies are developed and implemented.

If the American public perceives the U.S. government has made poor policy choices, that’s on our policymakers, not the WTO. And if we fail to treat companies from other nations in a non-discriminatory manner, we can be sued in the WTO just as we can sue other governments. But: only our elected representatives in Congress can change our laws. It would be helpful for more Americans to understand this.

To Americans’ desire to be left alone:

TradeVistas’ polling affirms that Americans feel contradictory impulses when it comes to their world view. This is nothing new. Americans have shown tremendous generosity when it comes to protecting other nations, but that does not mean most Americans think it is (or should be) our role. Many Americans believe others in the world deserve fundamental economic freedoms, but often feel we should mind our own business. Americans built many of the international institutions that exist, but today exert relatively little influence over them and often feel threatened by them. We’d prefer to be left alone.

Counterintuitively, the global trading rules and the WTO itself mesh well with this approach. As an extension of the American ideals of free-market democracy, the global trading rules are designed to protect individual economic freedoms, not to constrain them. Though governments are its members, the rules are designed to keep government as much out of the way of individuals and companies as possible – to let them thrive under regulations that are no more trade restrictive than necessary. The rules are accepted because most other nations in the world are also aligned with a free-market orientation.

The global trade rules are a scaffolding around a building that rests on the foundations of free-market democratic ideals. Leadership by America and its allies are what holds that building up – not the rules themselves. We are free to hold contradictory views but we have much to risk by acting in contradictory ways. In other words, it’s not enough to support the rules, we have to fight for them. Otherwise, the jungle grows back.

Q on US leader of global economy

To Americans’ concerns about China:

The United States and like-minded nations are the individual bricks in the edifice of free-market democracy. Beyond our own internal disagreements, Americans generally agree that China stands for something else.

Here again, author Robert Kagan cautions:

“History shows that world orders, including our own, are transient. They rise and fall. And the institutions they erected, the beliefs that guided them, and the “norms” that shaped the relations among nations within them—they fall, too. Every international order in history has reflected the beliefs and interests of its strongest powers, and every international order has changed when power shifted to others with different beliefs and interests.”

There is certainly room for criticism that China has “gamed the WTO system,” or that the current global trade rules are insufficient to prevent China from gaining an unfair advantage in global markets where American companies compete. Americans could be convinced that other WTO members share this concern and are willing to follow an American lead to preserve the benefits of the global trading system. More compelling perhaps, is to show them that U.S. withdrawal from the WTO serves China’s interests more than it does ours.

Tend to weeds now before the jungle grows back

Right now, the WTO appears a garden that has not been properly tended. Weeds are growing where they are not wanted.

My former colleague and WTO negotiator Mark Linscott recently wrote, “The drift and malaise in the WTO has been a collective failure [by its members] over a number of years,” attributable to “a lack of leadership, a frequent resort to entrenched bad habits, particularly in pitting the developing world against the developed one, engaging in action-numbing group think, and [failure] to find creative ways to achieve breakthroughs.”

If we continue this way, it will soon become hard to discern the roots of our intentional plantings from those of the weeds as they became intertwined. After all, there is no “weed” in nature – weeds are the state of nature.

What Mark describes is the default that WTO members must fight against. And if the WTO is to endure, we must also compel the American public to fight against its own default – a lack of awareness and indifference.

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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.

invasive

INVASIVE ALIEN SPECIES ARE STOWAWAYS IN GLOBAL TRADE

Murder Hornets, Really?

As if 2020 could get any worse, enter the “murder hornet”. Measuring around two inches, the Asian giant hornet is a particularly nasty variety. They have longer stingers than the honeybee and their venom is more toxic – and they can sting repeatedly.

Sadly, these predators are known to decimate honeybee colonies. A cool fact from National Geographic is that Japanese honeybees have learned to protect themselves by surrounding the hornets and cooking them alive through intense flapping that reaches temperatures of over 115 degrees Fahrenheit. Japanese honeybees developed this defense as they co-evolved with the Asian giant hornet in a common native habitat.

First spotted in the state of Washington last December, the Asian giant hornet is thought to have entered the United States through shipping containers. As an invasive alien species to the United States, our honeybees are defenseless against this hornet.

Stowaways and Hitchhikers

Human travelers and importers sometimes intentionally transplant species to new locations for food, economic, or environmental purposes, such as for use as biological control agents. Though such approaches should be approved by regulators, illicit trade in plants, seeds and wildlife is a significant problem in global trade. And if you’ve seen those adorable agriculture-sniffing beagles in airports, their job is to catch illegal importation of fruits, vegetables, animal products, soil and samples people try to stow in their personal baggage.

These are all vectors for the introduction of invasive alien species, but the much bigger cause of the spread of non-native species throughout the world is international shipping in global trade.

Alien species hitch rides on agricultural commodities, stow away in shipping containers, get ejected into new waters through the purging of ship ballast water or embed themselves in wood packaging materials, among other modes of unintentional introduction through shipping.

Aerial top view of fishing boat

Invasive weeds threaten fishing livelihoods and trade in aquatic goods.

Not Wanted: Moths, Mollusks and Beetles

Cargo ships carry water as ballast. At the end of an ocean voyage, freighters jettison the ballast water they took on at the port of origin but in so doing, they can introduce a non-native and sometimes aggressive and invasive aquatic species like zooplankton into new waters at the port of destination. Other unwelcome travelers include aquatic plants, algae or small animals that attach themselves to the hull of a ship.

Growing up in Michigan, I recall the invasion of Zebra mussels, native to the Caspian Sea region of Asia, that were transported to the Great Lakes region through ballast water discharge. They quickly spread throughout the United States causing infrastructure damage and economic losses along the way, not to mention being unsightly along the Great Lakes beaches.

Asian gypsy moths are another example of a pest whose eggs are easily transported in international shipping containers. USDA’s Animal and Plant Health Inspection Service (APHIS) closely monitors incoming vessels from the gypsy moth’s native lands of Japan, China, Korea and Far East Russia. During the annual Asian gypsy moth infestation season, APHIS requires that vessels from high-risk Asian ports bound for U.S. ports provide pre-departure certifications that they are free of the moths. APHIS also inspects for moth egg masses on incoming ships.

The Asian longhorn beetle is anathema to many species of broadleaf trees in North America and Europe but is suspected to have been introduced through infested wood packing material made of unprocessed raw wood. Because of the pest risk, international standards have been developed to require heat treatment or fumigation of wood packaging materials used in international trade.

Stowaway species

Coming and Going

Invasive alien species can present a major threat to biological diversity by disturbing native ecosystems and habitats, causing native species to decline. The introduction of foreign pathogens and infectious diseases poses a threat to livestock and human health. Trade is the route by which many invasive alien species are introduced to new environments, and ultimately, the disruption to agricultural productivity can end up costing hundreds of billions of dollars every year through lost opportunities to trade.

For example, rats transported on ships are estimated to consume as much as 50 percent of Madagascar’s annual rice production. Fruit fly infestations have spread rapidly in West Africa, devastating mango, citrus and other tropical fruit production for export. The spread of pig disease like the swine flu has required farmers to cull herds and sacrifice exports.

Invasive grasses can ruin pastures important to animal grazing. Harmful algal blooms like the “red tide” along Florida’s Gulf Coast can deplete oxygen in waters and release toxins that kill fish and make shellfish dangerous to eat. Beyond agriculture, invasive alien species have caused the spread of infectious diseases, hampering business travel and tourism, a key economic driver for many countries – just as we’re witnessing now with COVID-19.

Prevent Invasive Species without Unduly Restricting Trade

The Convention on Biological Diversity requires countries to prevent the introduction of invasive alien species, as feasible and appropriate, and to control or eradicate them if introduced.

Because the introduction of alien species occurs largely through trade, the measures governments take to prevent their introduction will – by definition – be trade restrictive to some degree. They often involve controls at ports of entry, appropriate use of quarantine and remediation procedures.

International conventions on biodiversity, plant protection, prevention of animal disease and related trade agreements, preeminently the WTO Agreement on Sanitary and Phytosanitary Measures (SPS), are designed to achieve the objectives of protecting plant, animal and human health without unnecessarily restricting trade. WTO members are encouraged to adopt the guidelines and recommendations developed in global bodies specializing in plant and animal health and to make best efforts to harmonize SPS measures to facilitate trade.

To achieve the twin goals of protecting against the introduction of harmful species while facilitating trade, governments need to have in place transparent standards and procedures based on evidence and science-based risk assessments. Regulatory authorities must have expertise and competencies at the borders as well as phytosanitary and veterinary infrastructure such as diagnostic laboratories and proper storage to conduct inspections at entry points. And, ideally, more governments will implement IT systems to ensure that SPS procedures and certifications are integrated with other border systems. Scientific and regulatory cooperation across agencies and across governments is critical for effective monitoring, prevention and control of the global spread of harmful invasive alien species, which is in everyone’s interest.

Fruit fly hitchhiker

Where Trade and Nature Intersect

A 2017 study in the journal Nature Communications found that the problem of invasive alien species has continuously increased, with more than a third of all new introductions recorded between 1970 and 2014. Introductions of algae, mollusks and insects in particular increased steeply after 1950, mostly likely as a consequence of the growth of global trade.

The arrival of murder hornets on the west coast is just the latest reminder that increased trade volume, changes in trade routes, and the expansion of airport and seaport capacity around the world means having to deal with the unwelcome stowaways in global trade.

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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.
reshoring

CAN WE MEASURE WHETHER “RESHORING” IS REAL?

Ribbon Cuttings and Political Ads

Announcements about plant openings and closings make good political fodder. Politicians from both parties are guilty of extracting trends from single events, leaving context behind: “Jobs are coming home!” “Traitorous companies are leaving the United States!”

A popular claim over the years is that Washington policies have succeeded in either shaming or incentivizing American companies to bring manufacturing “back” to the United States, even if manufacturing overseas had been additive to domestic production. How can we know whether such “re-shoring” is actually occurring, and to what degree?

A Reshoring Index

Kearney recently released the seventh edition of their annual Reshoring Index, which attempts to do just that. The U.S. Reshoring Index tracks total manufactured goods imports from 14 traditional offshoring partner countries including China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka and Cambodia, as a percentage of U.S. domestic gross output of manufactured goods.

After rising almost steadily over the last decade, imports from those 14 countries contracted 7.2 percent in 2019 while U.S. manufacturing output remained steady. The decline is due almost entirely to fewer imported goods from China in reaction to the U.S.-China trade war, which also suppressed U.S. manufacturing exports. Notwithstanding the shock of the trade war, China’s share of the U.S. import market declined for the sixth year in a row.

According to Kearney, the U.S. market imported 12.1 cents worth of offshore production from these Asia-based “low cost countries” (LCCs) for every $1 of domestic manufacturing gross output, down from 13.1 cents in 2018. On the basis of the index, the United States experienced a net reshoring in 2019, as producers chose to source more goods domestically.

imports from LCCs

Diversification Away from China

The Kearney report also began tracking the so-called “rebalancing” of American company-centered supply chains to understand whether U.S. manufacturing imports are diverting from China toward other Asian LCCs. Overall, the LCCs exported $31 billion more in manufactured goods to the United States in 2019 than in 2018, with Vietnam garnering almost half of the shifting imports. Troublingly, a portion of U.S. imports from Vietnam represent China-origin goods diverted through Vietnam to dodge U.S. tariffs.

Nearshoring: Buying More from Mexico

Not only are imports shifting away from China toward the rest of Asia, Kearney finds another trend: increased sourcing of goods from Mexico, characterized as “nearshoring”. Mexico has some advantages over LCCs in Asia and a longer relationship with many U.S. manufacturers through NAFTA.

Over the last seven years that Kearney calculated its near-to-far trade ratio, there were approximately 37 cents worth of manufacturing imports from Mexico for every dollar of U.S. manufacturing imports from Asia LCCs. Last year, however, that ratio increased to 42 cents as U.S. imports of manufactured goods from Mexico shot up 11 percent between 2017 and 2018 and another 4 percent in 2019 as tariffs on goods from China escalated.

Asia LCCs v Mexico

But Not Necessarily for Economic Reasons

As economist Caroline Freund explains, reshoring does not necessarily reduce risk: “A better strategy to reduce the risk of potential supply-chain disruption would be for firms to reduce dependence on any individual supplier.” While it’s not clear the reduction in sourcing from China will benefit domestic suppliers, it does seem apparent that what’s motivating the shift in imports is diversification away from China.

As Freund says, firms will reshore if it is more profitable and less risky to move production close to the market. They will also reshore if compelled to do so through trade and other national policies such as “Buy America” requirements. The big question is whether supply chains restructured on that basis will make economic sense.

We’ll be watching the Kearney Reshoring Index to understand whether continued tension in the U.S.-China trade relationship and post-pandemic policies keep moving the reshoring needle.

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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.
UK

UK TAKES A PROACTIVE APPROACH TO PUBLIC ENGAGEMENT ON TRADE

It seems that studies on the effects of free trade agreements on the U.S. economy have increasingly become exercises in checking a box, with groups for and against simply waiting on a punchline. Surely, we can do better to undertake public-facing intellectual analyses that are both accessible and potentially interesting to a wider swath of the general public – something more akin to what the United Kingdom (UK) has done to prepare for free trade agreement negotiations with the United States.

What’s good for the goose

Reflecting for a moment on U.S. free trade agreement negotiations with Central American countries in 2003, I recall we simultaneously worked with the Central American governments to build their institutional capacity to implement an eventual agreement. We also nudged the governments to engage their public on aspects of the agreement early in the negotiations. (Full disclosure, I was the Director for Central America at the Office of the U.S. Trade Representative at the time.)

Our contention then was that only a very limited segment of the population would be tuned into any calls for input through the countries’ “Diario Oficial,” their version of the Federal Register where the U.S. Government publishes notices of regulatory changes and opportunities for public comment. The Central American negotiators set out to conduct a series of roundtables, even engaging women in rural Guatemala about how their traditional handicrafts could benefit from intellectual property rights and exports under the agreement.

It could have been a moment for introspection on our part, but it wasn’t. After all, interested parties in the United States are very familiar with the process of submitting comments and appearing at a public hearing to express views on a free trade agreement.

But there’s always room for improvement, isn’t there?

A fresh take on public engagement in trade

The UK Department for International Trade has provided an example of how to reinvent the process of public consultation on trade. After all, it had to. The UK hasn’t needed to lead on trade policy development for the last 50 years. Brexit, by definition, means the public is seeking a bigger voice in its affairs, including trade.

The Department’s report titled simply, UK-US Free Trade Agreement, runs about 110 surprisingly readable pages, not including the helpful Glossary of Terms and a detailed summary of feedback from public consultations. It begins where it should, by making the “strategic case” for a free trade agreement with the United States – a clear exposition on the “why”. Then it turns to the “how” with an outline of key components of an agreement. With that as context, the report explains how the government undertook 14 weeks of public consultations that included use of a new online portal, 12 “town halls,” a national Public Attitudes to Trade Tracker, and a series of roundtable events throughout the UK. These engagements were in addition to forming standing advisory committees similar to those the U.S. government relies on for expert perspectives from industry and civil service representatives.

Having presented that material, the remainder of the report is comprised of two pieces. First and importantly, is the government’s response to public input – “we heard you” and here’s how we’ll use your input in the negotiations. And second, is a relatable presentation showing the results of standard econometric modeling to understand the potential effects of a free trade agreement with the United States on the UK economy and workers.

UK-US Economic Impacts of FTA

A great example of effective policy communications

The UK’s Scoping Assessment concluded a broadly liberalizing FTA with the United States would boost UK exports to the United States by 7.7 percent and UK imports from the United States by 8.6 percent. This would induce a 0.5 to 0.36 percent gain in the UK’s productivity, sustained over time. In the long run, almost all sectors of the UK economy would increase output as they more efficiently allocate resources.

The explanation of the modeling’s output breaks down impact to GDP across its components: consumption expenditure, investment, government expenditure and net trade (C+I+G+(X-IM)=Y is the one and only equation I remember from economics classes, so I found that part of the report interesting). The report explains the limitations and imprecision of modeling – in other words, we should not fight over trade policy based on debatable numbers, but rather over directional gains versus losses.

Rather than only present economy-wide effects (after all, everything smooths out in the long run), the report indicates which UK nations and regions stand to gain most (Scotland, Wales, the North East, East Midlands and West Midlands of England) versus those that would expand the least (London, the South West and East of England). This recognizes that employment and industry vary across regions. The report even takes into account the effects on the UK’s trading partner (in this case, us), and developing countries that have a stake in access to both the UK and the United States, but which would be excluded from a UK-US FTA (impact negligible).

Workers affected by US-UK trade

Focusing on jobs

The report is direct in explaining the implications for some workers that would need to find employment in growing sectors. It also concludes workers are expected to experience increases in overall real wages and outlines how those gains are derived. The report breaks down potential changes in average wages by type of occupation and skill level. It also identifies sectors likely to add jobs so that the government and businesses can better prepare workers for shifts into growth areas.

When it comes to job losses, the agreement is not likely to cause any disproportionate change to what different segments of workers would naturally experience in terms of job loss as the economy churns – with one exception. Jobs held by 16-24-year-olds appear to be disproportionately concentrated in sectors where employment could fall. The government responds to this challenge by stating it already increased funding in education for 16-19-year-olds, funding for STEM, technical and digital skills, and new technical qualification programs to address the impact. This a staggeringly different approach than waiting to catch workers with a safety net when they fall.

Importantly, the report was written so that any reader could understand how the analysis was arrived at, what it means for them based on where they work and live, and what the government was prepared to do with the information – and, that the analysis would be updated and repeated to inform negotiations as they proceed.

Most trade reports are Greek to everyone but economists

Why is the UK report so readable? Because it was written to be read by the general public, not merely by congressional staffers who glance at an Executive Summary or economists who perform modeling themselves. This is not a knock on the U.S. International Trade Commission (USITC) which produces U.S. reports, though its report on the economic effects of the U.S.-Mexico-Canada agreement was 376 pages and did contain Greek lettering.

USITC reports are first-rate analyses deploying industry-standard methodologies. A paragraph at the beginning, however, offers a good indication the reports intend to stick to their congressional mandate:

“[The Bipartisan Congressional Trade Priorities and Accountability Act of 2015] requires the Commission to assess the likely impact of USMCA on the U.S. economy as a whole and on specific industry sectors, including its impact on the U.S. gross domestic product (GDP); exports and imports; aggregate employment and employment opportunities; the production, employment, and competitive position of industries likely to be significantly affected by the agreement; and the interests of U.S. consumers.”

So, smart USITC economists set about to use a standard economy-wide computable general equilibrium (CGE) model based on the Global Trade Analysis Project (GTAP) model, among other modeling extensions, to fulfill its analytical mandate, with all the same caveats about econometric modeling limitations the UK describes. The USITC also conducts interviews with industry representatives and collects testimony from a public hearing and written submissions from interested parties.

Greek in USITC report

But the end result is a document that fulfilled a requirement rather than one that informs the negotiations. Neither does it resemble a government strategy to leverage the benefits of a trade agreement or mitigate the negative impacts on some workers. And it is unlikely that most of the general public would feel compelled to read such a report to gain understanding of a major component of national trade policy. Again, this outcome is because that is not what the USITC was asked to do.

Being too careful about what you ask

Everyone has a stake in the direction and outcome of trade policies, but not everyone cares enough to have their say. Nonetheless, the main complaint about trade policymaking is that large organizations with Washington representation know when and how to provide their input. The rest of us do not. For example, the U.S. Chamber of Commerce and U.S.-U.K. Business Council recently published comments on what their groups – that represent millions of workers – would like to see in a U.S.-UK deal.

A big conversation is coming about the value of global trade, which at TradeVistas we think is generally a source of strength and resiliency, not a vulnerability. Perhaps the time has come for the U.S. government to evolve and expand its approach to engage the public on trade before the deal is done, rather than pitch it to the public after the fact.

Given the potential for growing public skepticism, we can’t afford to wait to build awareness, understanding – and support – for trade deals like the one the administration is embarking on with the UK, one of our most longstanding and important allies, and a deal that will likely bring broad benefits to the citizens of the United States.

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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.

pistachios

PISTACHIOS: THE QUIRKS OF AGRICULTURAL TRADE IN A NUTSHELL

Disappearing Red Pistachios

If you’re an American over a certain age, you might recall the experience of staining your fingers while prying open red pistachios. They were a somewhat exotic treat, put out on occasion in a special bowl. That might seem strange to younger Americans who are only familiar with the natural tan pistachios that are ubiquitous as a post-workout food and snack.

The different associations are the result of a dramatic shift in where pistachios were produced and shipped after 1979 when the United States imposed sanctions against Iran in response to the Iran Hostage Crisis involving the taking of more than 50 American diplomats.

Mr. Whitehouse Leaves Washington

Pistachios are a biblical fruit, renowned as a court favorite of the Persian Queen of Sheba, a frequent traveler on the Silk Road and Mediterranean maritime routes. Iran has cultivated them for thousands of years, though large scale commercial production in Iran began just over one hundred years ago. American production is a much more recent phenomenon.

In 1929, American botanist William Whitehouse explored Persia on behalf of the U.S. Department of Agriculture, scooping up pistachio samples from farms located in modern day Iran. He returned in 1930 and planted test plots. When the trees matured a decade later, only one proved fruitful – Whitehouse named it Kerman after a city in Iran’s Rafsanjan central plateau. Pistachio trees can live hundreds of years and take their time to reach peak production – around twenty years.

Ironically, the U.S. pistachio industry – born from a single Iranian seed – matured in the 1970s precisely at the moment Iran’s trade with the United States, including of pistachios in dyed-red shells, came to a crashing halt.

The tale of U.S.-Iran pistachio trade has four plotlines that dramatize the broader quirks of global agricultural trade.

Plotline 1:

Extreme Quantitative Restrictions – A Trade Embargo

For most of history, Iran has been the world’s biggest source of pistachios. They are Iran’s most significant agricultural export by volume and value. Iran was the biggest supplier to the United States, but damaged relations following the Islamic Revolution of 1979 changed that. U.S. sanctions imposed since that time have a complex and layered history but have almost always involved a complete embargo on Iranian exports to the United States.

Following the lifting of the initial embargo in 1981, Iran’s food exports to the United States rebounded somewhat before the embargo was reintroduced in 1987. In an easing of sanctions in 2000, very modest amounts of foods from Iran were imported through Treasury Department-issued licenses. By 2010, imports of foods from Iran were again fully prohibited. The 2015 Iran Nuclear Deal would have enabled Iran to export pistachios and other agricultural products and lifted restrictions on financing, which Iran hoped would inject much needed capital investment in the agricultural sector. U.S. withdrawal of the Nuclear Deal in May 2018 saw a return to strict U.S. sanctions on imports from Iran.

Milestones in US-Iran competition in global pistachio trade

Plot Line 2:

Classic Farm Subsidies

When sanctions were first imposed in 1979, U.S. pistachio production was 7,700 metric tons, up quite substantially from the first U.S. commercial crop in 1976 of just 680 metric tons. In comparison, Iran had averaged 19,504 metric tons per year in the decade leading up to sanctions, but peaked in 1978 at nearly 59,874 metric tons. At the time, Iran accounted for nearly 100 percent of U.S. imported pistachio nuts. After falling off during the embargo, Iran renewed exports when the embargo was lifted in the early 1980s.

In March 1986, the Commerce Department found in favor of a U.S. industry petition that complained the Iranian government was subsidizing pistachio production. Iran (as many developing countries do) was providing supports to its agricultural producers by subsidizing the cost of key inputs such as fertilizer, chemicals, seeds, water and energy and by guaranteeing a minimum price for their output. The investigation resulted in a 99.5 percent countervailing duty on in-shell pistachios and a 318 percent duty on roasted pistachios.

Because Iran was not a signatory to the General Agreement on Tariffs and Trade (GATT) and is not a WTO member (the United States has repeatedly blocked its application for accession), no injury determination was required.

US tariffs on pistachios

Plot Line 3:

“Less Than Fair Value”

In a parallel 1986 investigation, the U.S. International Trade Commission (USITC) found that the volume of raw in-shell pistachios imported from Iran had increased significantly after the embargo was lifted in 1981. U.S. producers had secured 93.2 percent of the U.S. market in 1980, which was about 12.5 million pounds. By 1985, the overall size of the U.S. market had swelled to 61 million pounds, and Iran’s share had grown to 42.3 percent, accounting for almost 100 percent of all imports.

At the same time, the unit value of imports from Iran (import price) fell by around half. The USITC determined that raw in-shell pistachios imported from Iran were being sold at “less than fair market value” (or, being “dumped”) in the U.S. market, causing material injury to the U.S. industry. The Commerce Department calculated an offset in the form of a 241 percent antidumping duty, which would be applied in additional to the 99.5 percent countervailing duty.

In years of embargo, the duties were irrelevant and thus only two reviews have since been conducted to determine whether the duties should remain in place. In both 2005 and more recently in 2017, the USITC determined they should.

Plot Line 4:

Developed v. Developing Country Producers

According to the Iran Pistachio Association (IPA), Iran has around 150,000 farmers, but more than 70 percent of the production is small-scale on orchards of 2 hectares or less. In a “good” year, annual pistachio production capacity reaches 280,000 metric tons in Iran, but harvesting is inefficient. Pistachios are picked by hand from fallen clusters, their hulls removed by hand, and the nuts graded manually. Inadequate water management undercuts Iranian production, but when Iran’s yield is strong, the country’s pistachio exporters hold a price and geographic advantage. And IPA says they are competitive globally based on strong demand for the wide variety of Iranian pistachio cultivars with different flavor profiles and a higher kernel to in-shell ratio.

In contrast, the United States has some 950 growers, mainly in California, whose mechanized production is highly efficient, yielding a whopping 487,500 metric tons over the 2018-19 season (though output is cyclical and weather-dependent so yields may be down over 30 percent this year). Achievements in increased outputs made during a period when the U.S. market was closed to Iran, its only major competitor, enabled the U.S. industry to reach a position where it could both serve the domestic market and challenge Iran for market share all over the world. Iran has barely exported any pistachios to the United States since 1986 but it remains a contender in key third markets.

US leads pistachio production

Combined, the United States and Iran account for more than 70 percent of global exports of pistachios. Iran tends to hold the top spot in the Middle East, India, and Eastern Europe and holds an edge in developing country markets. The key battlegrounds in the U.S.-Iran pistachio wars are Western Europe and China where demand is strong and growing.

American pistachio growers fretted when the Trump administration raised tariffs on products from China. When China retaliated, raising the tariff on U.S. pistachios from five to as high as 55 percent, that created an opportunity for China to substitute Iranian pistachios. However, Iran ultimately suffered a bad crop year and it’s not clear whether China collected the tariffs, so sales of U.S. pistachios in China actually increased.

Not a Happy or Tragic Ending

The U.S. pistachio industry was concerned about the potential for renewed competition from Iran under the 2015 nuclear deal that eased sanctions. Their fears were allayed when the USITC voted to maintain the 1986 legacy of prohibitive tariffs. No matter, the Trump administration has strengthened sanctions and the embargo remains.

In the end, global demand for pistachios is higher than production, leaving room for both American and Iranian producers to find a market for all they can grow.

In an NPR interview four years ago, Brian Blackwell, a grower from Tulare County, CA wasn’t concerned about the reentry of Iranian pistachios in the U.S. market and explained the nature of global commodity markets this way: “This is a global marketplace nowadays. So, if Iran brought a million pounds of pistachios into the United States, that just means there’s a million pounds that didn’t get sold in China or Europe. U.S. pistachios could fill that market.”

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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.

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.