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NUCLEAR OPTIONS: THE TRUMP ADMINISTRATION’S TRADE RESPONSE TO URANIUM PROTECTION

nuclear

NUCLEAR OPTIONS: THE TRUMP ADMINISTRATION’S TRADE RESPONSE TO URANIUM PROTECTION

Rocks for Jocks

High school has started online in our household. At our dinner table the other night, we were discussing different science courses and their workloads. My husband recalled that Earth Science (before political correctness) was affectionately known as “Rocks for Jocks,” playing into a stereotype that introductory geology was an easy way to get science credits. If you’re paying attention to trade policy, it’s time to dust off the Earth Science textbooks.

Over the last few years, the national security dimensions of trade policy have come into sharper focus. It has become a lens through which a broad spectrum of trade policies is viewed, including those affecting extraction and trade in the minerals and metals mined from the earth. These materials have vast commercial and vital military applications and are the bedrock of today’s modern and emerging technologies.

Explosive Potential

The United States has had a tepid love affair with nuclear energy, yet nuclear holds an important place in the U.S. energy mix. Nearly 20 percent of U.S. electricity is generated by 96 nuclear reactors in 29 U.S. states. Nuclear accounts for more than 55 percent of U.S. carbon-free electricity.

Beyond consumer electricity, nuclear powers U.S. Naval submarines and aircraft carriers as well as spacecraft and the amazing NASA probes now roving Mars. Nuclear plants produce isotopes used in medical imaging, cancer treatments and radiation that kills bacteria in our food. Globally, advanced reactors are being used to bring fresh water to the Middle East and African countries by powering desalination facilities. It is the only carbon-free energy source that can deliver world energy supplies on a large scale.

What fuels nuclear energy is uranium, a naturally occurring radioactive material containing fissionable isotopes that once concentrated, or enriched, can produce the chemical chain reaction required to generate electricity.

Policy-Enriched Uranium

After World War II, the U.S. government sought to promote the development of the civil nuclear power industry. Nuclear generated electricity would stimulate demand for U.S.-mined uranium, which would in turn assure the supply for military needs.

In 1964, Congress amended the Atomic Energy Act of 1954 to enable private ownership of nuclear fuel. Prior to that, the U.S. Atomic Energy Commission ran the only enriching operations in the free world – a large and dedicated client for U.S. uranium. To shield the U.S. uranium industry from competition as commercial nuclear operations came online, Congress prohibited the importation of foreign-sourced uranium destined for domestic end use. Enriched uranium could not be imported, but the U.S. industry could import natural uranium and enrich it for domestic use and for export. Congress estimated such restrictions would only be required for ten years until civilian demand would grow to such volumes as to sustain uranium production in the United States.

Whether those restrictions constituted a violation of U.S. obligations under the General Agreement on Tariffs and Trade went uncontested by U.S. trading partners, the largest of which were – and still are – Canada and Australia, which boast cheaper, higher-grade sources of uranium.

The import prohibition remained in place from 1969 to 1977. It was phased out from 1977 through 1984 as demand for uranium increased and domestic mining reached capacity. The 1980s would turn out to be a heyday for U.S. uranium, its fate bound with the ups and downs of the U.S. nuclear industry. Nuclear utilities were negatively impacted by conservation efforts during the oil embargos of the late 1970s and suffered major regulatory and policy setbacks in commercial expansion following high profile accidents at Three Mile Island and Chernobyl. Slowed production and plentiful stockpiles for both commercial electricity and defense uses dramatically reduced demand for newly extracted uranium.

U.S. Uranium’s Implosion

The timing of the uranium mining industry downturn coincided with a seminal free trade agreement with Canada, which is a major exporter of uranium for nuclear fuel. The 1989 U.S.-Canada Free Trade Agreement (a precursor to NAFTA and USCMA), exempted Canada from any restrictions the United States imposes on imported uranium.

Although the FTA incorporated GATT national security exemptions under which the United States could derogate from this obligation, Canada and the United States explicitly agreed to limit use of such exemptions in North American trade in energy goods.

The agreement effectively threw open the door to cheaper, high-grade uranium that would displace U.S. uranium. As Canada could fill the majority of U.S. demand, remaining restrictions on imports from other foreign sources would have little benefit to the U.S. uranium industry.

The U.S. industry resorted to filing its first petition to the U.S. Department of Energy under the 1962 Trade Expansion Act Section 232, which required the U.S. Energy Secretary to determine whether uranium was being imported “in such quantities and under such circumstances as to threaten to impair the national security of the United States.” If so, options would include raising tariffs to block foreign imports of uranium.

The Secretary issued a negative finding and President Reagan rejected tariffs on imported uranium. Rather than preserving national security, tariffs were believed to have the potential to disrupt critical supplies, therefore impairing it. The Reagan administration instead established a Uranium Revitalization fund – a government purchase program – to buy up unneeded resources, helping to create space in the market and restore prices for the U.S. uranium industry.

US Uranium Production Falls

The Half-Life of Industry Protection

The term “half-life” derives from nuclear physics. It describes the length of time that stable atoms survive before exponential radioactive decay occurs. Uranium-238 has a half-life of 4.5 billion years. Uranium-235 has a half-life of just over 700 million years. Trade protections for U.S. industries typically have a half-life of around 2 to 3 years.

Artificial and temporary protections (for example: tariffs on imports from foreign competitors) may provide immediate relief for the domestic industry, but that advantage quickly drops off unless the industry makes investments to improve efficiencies or other market conditions change in the domestic industry’s favor.

Since the late 1980s, U.S. nuclear energy producers have steadily increased their purchases of cheaper foreign uranium, primarily from Canada, Australia and Russia. As more uranium circulated in global markets, the U.S. government privatized its uranium enrichment operations during the 1990s, releasing more uranium into the U.S. market. Kazakhstan and producers in Africa also came online, ramping up the use of cheaper and environmentally harmful extraction techniques, exacerbating a growing glut of inventory in global markets, depressing prices and creating more strain on a struggling U.S. uranium industry.

Uranium Resources

Uranium’s Future is Bound with Nuclear

Of the 442 nuclear units in the world, the United States operates 96 nuclear reactors – one-quarter of the global total – compared with 57 in units in France, 48 units in China, and 38 units in Russia. The U.S. fleet produces more electricity from nuclear energy than any other country – two times more than France, three times more than China, and four times more than Russia.

Nuclear energy dominance, however, may be shifting hemispheres. China has 44 reactors under construction and 168 planned. India has 14 reactors under construction and Russia has 24 under construction with as many planned. In contrast, the United States has just three reactors under construction and 18 planned.

Energy expert Jane Nakano points out that, while exporting nuclear materials to supply power plants is largely a private sector endeavor in the United States (though heavily regulated to mitigate proliferation risks), both Russia and China have state-owned or directed industries and are deploying aggressive export and overseas investment strategies with both commercial and foreign policy objectives. As these countries forge ahead with global partnerships, U.S. exports of natural and enriched uranium continue to decline as a share of global exports, dropping from 29 percent in 1994 to 3.4 percent in 2019.

Global Uranium Exports

From Fission to Fizzle

Nuclear generation capacity in the United States may decrease over the next decade depending on the life of existing reactors. Recent financial losses in the U.S. nuclear sector have led to shutdowns and scaling back of investments, further reducing opportunities for U.S. uranium.

Although global demand for nuclear power is projected to grow, especially in East Asia and the Middle East, that’s not necessarily good news for uranium mining and trade.

The OECD Nuclear Energy Agency and International Atomic Energy Agency produce a biannual Red Book, assessing the state of world supply in uranium. The 2018 Red Book indicated that identified recoverable uranium resources are sufficient to power the global nuclear reactor fleet at 2016 levels of installed nuclear capacity for the next 130 years.

Uranium exploration and mine development expenditures have been declining almost everywhere in the world in response to oversupply. At the same time, nuclear plants are being run more productively on fewer uranium resources.

The impact on the U.S. uranium industry is evident in its steep decline in production output. The U.S. Energy Information Agency (EIA) reported uranium mining in the United States produced 78.9 tons in 2019, representing an 88 percent drop from 2018 production of 656.8 tons. It is the lowest output recorded since 1948. For context, 2019 production contributed 0.3 percent of the uranium fuel requirements for U.S. nuclear reactors. The remainder was supplied by foreign producers.

US uranium contribution to fuel US reactors

Good Chemistry

The near-total collapse of the industry prompted the few remaining U.S. uranium mining, milling, and producing companies to file a new Section 232 petition to the Trump administration in January 2018, asserting that reliance on imported uranium constitutes a threat to U.S. national security. U.S. nuclear energy and utility companies opposed new import tariffs, saying the strain of increased costs would threaten the viability of their own operations.

Although fuel for defense purposes is adequately supplied by government stockpiles of highly enriched uranium, the Secretary of Commerce rendered a finding in favor of the uranium industry. President Trump, however, made a choice that diverged from this recommendation and from his use of Section 232 tariffs to protect the U.S. steel and aluminum industries.

Instead, the President issued a memorandum in July 2019 establishing a Nuclear Fuel Working Group to develop recommendations about how to “reinvigorate the entire nuclear fuel supply chain.” In April this year, the working group issued a Strategy to Restore American Nuclear Energy Leadership.

The first step in the plan is a throwback to the Reagan era, creating a uranium reserve through which the Department of Energy will buy uranium directly from domestic mines and contract for uranium conversion services. As for trade restrictions, the Strategy supports the Department of Commerce measures to counter uranium imports from Russia that are “dumped” in the U.S. market at below fair market prices (representing no change from current trade policy). It also explicitly enables the U.S. Nuclear Regulatory Commission to deny imports of nuclear fuel fabricated in Russia or China on national security grounds.

US Strategy

Nuclear Options

The nuclear industry may represent the same or higher strategic importance to national security as the uranium industry. They are interconnected in the same way semiconductors provide brains to your smartwatch and to military weaponry, or the way rare earths drive hybrid cars as well as armored vehicles. They are emblematic of how U.S. industries are affected by global markets regardless of whether their sales are primarily domestic.

What the administration’s approach to the uranium Section 232 petition recognizes is that import tariffs to deliver temporary protections to one domestic industry inherently harm the American buyers of those inputs and the workers in downstream industries.

And, it recognizes that national defense relies on commercial companies to sustain its technology needs. However, the government as a sole buyer cannot support innovation or sales growth for private companies. U.S. companies benefit from tapping into fast-growing foreign markets to be profitable and to reinvest in innovation. It’s a balancing act. “Nuclear options” in trade policy ultimately damage both commercial and national security interests.

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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.

trade

THE “HOMEBODY ECONOMY” AND TRADE

Mindful Spending

An estimated 2.6 billion people – one-third of the world’s population – continue to live under some form of quarantine conditions. These are trying circumstances for individuals and businesses. From a consumer demand perspective, the longer we all engage in some form of quarantine or social isolation, the more likely our new habits will take hold.

The emergence of this “homebody economy” is becoming apparent in consumer spending. Only China seems to be rebounding in consumer spending – the rest of us are still cutting back on discretionary spending. We are focused on essentials, being cost-conscious and cutting back on services and travel. We are even spending less on apparel and footwear, which impacts millions of jobs worldwide as workers in global value chains face uncertainty in their employment.

According to the International Labor Organization (ILO), 93 percent of the world’s workers live in countries experiencing workplace closures due to COVID-19. ILO estimated the reduction in working-hours for the second quarter of 2020 as equivalent to the loss of 400 million full-time jobs. Job losses, reduced hours and foregone income are having a clear dampening effect on spending habits and demand in international trade, which in turn creates more job insecurity.

No Contact

In most countries, the vast majority of people have turned to e-commerce and other digital or contactless services such as curbside pickup and drive-throughs. Many consumers are likely to delay resuming “normal” shopping and other behaviors until after a vaccine is widely available. That includes, unfortunately, the resumption of preventative healthcare. The hidden health impacts of foregoing routine health screenings and other interventions will be felt in national economies for years to come.

On top of all this, we know that the impacts of recession – layoffs, loss of income and the growing effects of income equality are closely correlated with reduced health outcomes and life expectancy. The World Health Organization has cautioned about the long-term consequences of lockdowns and isolation on mental and physical health, noting that depression and anxiety under normal circumstances cost the global economy an estimated $1 trillion per year in lost productivity.

No doubt we’re all feeling some level of anxiety, mood swings, and changes in sleep patterns. McKinsey’s consumer sentiment survey shows, in another twist of cruel circularity, that people are spending more time inactively, consuming digital content, which could have negative implications for people’s happiness.

Trade Antidote for the Irritable, Anxious and Exhausted Among Us

Lest we leave you further depressed, might trade in some goods and services provide a much-needed antidote to the mental and physical wear and tear of COVID-19? We think so. Here are some ideas.

Yoga – Global demand for PVC has been hit hard with a major drop in demand in China. So, why not do your small part by buying yourself a fresh, new vinyl mat. The PVC-based mats are cushy, which might be nice for your next savasana. If you’ve gained a little weight during the lockdown, you can rely on American textile engineers – the same ones medical personnel turn to for durable emergency wear – to also deliver yoga pants that will hold your belly in place as you stretch in downward dog.

Guided Meditation – Evidence of meditation practice dates back to approximately 1500 years BCE, but we generally thank Chinese Taoists and Indian Buddhists from the 6th to 4th centuries BCE for developing forms of practice that spread throughout the world. These days, Andy Puddicome, a Brit who studied meditation in the Himalayas and became ordained as a Tibetan Buddhist monk in Northern India, can be credited for making meditation accessible, modern – and available online – for the masses through his app, Headspace. Through Headspace and others, you can have guided meditation through an app on your phone, a service traded across borders thanks to the Internet.

incense

Incense – The use of incense can be traced back to ancient Egypt where it was used by priests for fumigating ceremonies and tombs. It was thought to hinder the presence of demons and served as an offering to their gods during worship and ritual, which is how incense came to be used in India and throughout southern Asia and China. Resin-based incense such as frankincense traveled to Europe and the Mediterranean along a trading route known as the Incense Route. Today, you can buy very high end and exotic incense like the brand, Astier de Villatte, which is handmade on the Japanese island of Awaji by masters of aroma who have been honing their craft and handing it down for hundreds of years. Also popular is incense made from palo santo (which means holy wood), a tree that grows along the coast of South America.

A Cleanse – If you’ve tried any form of keto, paleo or cleanse diet these days, chances are you had to look online to find far-flung ingredients from around the world. Popular ingredients include Maca powder derived from root vegetables grown in the Andes mountains in Peru, carob, which is native to the eastern Mediterranean region, and the Schisandra berry, which comes from mountainous regions throughout China. Another exotic ingredient is moringa, a nutrient-rich plant derived from “the miracle tree” native to North India. If your diet has you cutting back on caffeine, you can also try teas that taste like coffee, such as from Teecino. Their herbal teas use herbs and nuts like ramón seeds harvested in rural communities in Guatemala through programs that support educational and nutritional programs for women and children in Central America.

inredients

The Struggle is Real, Trade Can Help

The WTO issued a news release in June that estimated an 18.5 percent decline in merchandise trade in the second quarter of 2020 as compared to the same period last year. By any measure, the impact on trade, on livelihoods, and on our well-being has been profoundly negative. But as we work toward collective resilience, one thing you can do is to work on being healthy at home. And, with all of the products and services available to us through trade, we have lots of ways to do just that.

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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.

tomatoes

IS A TOMATO A FRUIT OR VEGETABLE? BOTANISTS AND TRADERS DISAGREE.

Adults sometimes stop asking questions like “Is a tomato a fruit or a vegetable?” Recently, my middle school-aged daughter quizzed us over dinner on this. She knew the answer because one of her classmates had recently presented on the legal answer in debate class. I was bemused that it came down to a Supreme Court decision emanating from a customs dispute. Here’s the answer, and some trade trivia on which countries export the most tomatoes. Some of the up and comers are quite intriguing.

Nix v. Hedden

In a decision rendered on May 10, 1893, the Supreme Court handed down its answer to whether the tomato is a fruit or a vegetable. Under the Tariff Act of March 3, 1883, vegetables were assessed a tariff of 10 percent ad valorem. Fruits could be imported duty-free. In Nix v. Hedden, Mr. John Nix brought a case against Edward Hedden, a customs officer at the port of New York, seeking to recover duties he paid under protest on tomatoes imported from the West Indies. Nix had to prove the tomato should be considered a fruit for the purpose of determining the import duty.

In Commerce and Common Parlance

Nix’s counsel read from Webster’s Dictionary, Worcester’s Dictionary, and the Imperial Dictionary, all of which defined “fruit” as the seed of plants or that part of plants containing the seed, reinforcing the textbook categorization of the tomato as a fruit. (To the botanist or natural historian, that’s the final word. The tomato is a fruit of the vine.)

But then the court heard from longtime sellers of fruits and vegetables. The witnesses suggested, and the court agreed, that in the common language of consumers and sellers, tomatoes are considered more like other vegetables than fruits. As Justice Gray put it in his summary, “vegetables…are usually served at dinner in, with, or after the soup, fish, or meat, which constitute the principal part of the repast, and not, like fruits, generally as dessert.” To this day, tomatoes are classified as a vegetable in Chapter 7 of the U.S. Harmonized Tariff Schedule.

We Grow a Lot More Tomatoes Today

The United States is one of the world’s leading producers of tomatoes, second only to China. According to the U.S. Department of Agriculture, fresh and processed tomatoes generate more than $2 billion in annual U.S. farm cash receipts.

Every U.S. state produces fresh market tomatoes. About twenty produce at a commercial scale. California and Florida devote 30-40,000 acres each to fresh market tomato production – somewhere between two-thirds and three-fourths of production – followed by Virginia, Georgia, Ohio, Tennessee, North Carolina, New Jersey, and Michigan.

Trade Allows Us to Eat Tomatoes All Year

We grow a lot of tomatoes, but we also eat a lot of tomatoes. Commercial sales of fresh tomatoes in the United States are strongest in the spring when they aren’t competing with availability of local tomatoes. But we can enjoy fresh-market tomatoes all year-round because of imports. Mexico tends to fill in the seasonal supply gap for consumers in western U.S. states, and to a lesser degree in the east since Florida produces a winter crop. U.S. greenhouse and hydroponic tomatoes also make up some the difference, but generally, about one-third of the fresh tomatoes we consume are imported. Mexico also accounts for more than 70 percent of the U.S. import market for greenhouse tomatoes. Canada supplies another 27 percent.

Chapter 7 of the Tariff Schedule Again

Mexican producers are competitive with California and Florida producers in the U.S. market. Worried about imports from Mexico eating into their sales, U.S. tomato producers petitioned the U.S. Department of Commerce to investigate whether Mexican producers were selling fresh-market tomatoes in the U.S. market below fair market value, undercutting the U.S. price. The investigation was suspended when Mexico entered into a negotiated agreement in 1996 that required the majority of fresh-market tomatoes imported from Mexico to adhere to an agreed minimum price.

In subsequent and more recent revisions to that agreement, the types of tomatoes covered under the agreement expanded, the tomato season was split into two periods to cover the summer and winter seasons —each with a separate minimum price, and the floor price was increased. The period between July 1 and October 22 targets competition between California and Baja, Mexico. From October 23 to June 30, Mexican fresh-market tomatoes must meet a higher minimum price to address competition between Florida and Sinaloa, Mexico. While we don’t impose duties on imports from our free trade agreement partners, the general duty for imports from other countries also varies depending on when in the growing season the tomatoes are imported. Either way, it’s the American consumer that foots the bill of the higher prices.

Outside North America, Azerbaijan is a Fast Grower

American fresh-tomato growers typically export 6 to 7 percent of their supply. About three-fourths of those exports go to Canada. U.S. exports to Mexico are a distant second. While American, Mexican — and to a lesser extent – Canadian, growers battle for North American market share, these fifteen countries globally exported the highest values of tomatoes during 2016, accounting for over 92 percent of global trade in tomatoes.

What might surprise you the most is the last four on this list. At number 13, Azerbaijan’s exports have grown 380 percent since 2012. China’s exports grew over that period by 119 percent, Belarus by 55.5 percent, and India grew its tomato exports by 42 percent.

World Tomato Exports in 2016

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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.

censorship

INTERNET CENSORSHIP IN CHINA IMPACTS GLOBAL TRADE

Unfree Speech

Online censorship can take many forms. With over four billion global Internet users in 2019, the lines around how we express ourselves online are being drawn and redrawn around the world.

In Europe, democratic governments are considering bans on so-called fake news and fines on social media companies that fail to delete “harmful” content. In the United States, tech companies are under fire for under- or overdoing their monitoring and expunging of material on their platforms that may be “extremist,” “hateful,” or merely repugnant or wrong-headed to some. Although free and open speech is fundamental to any democracy, U.S. culture is growing ever more hostile to dissenting opinions or genuine debate. The “cancel culture” is a harmful form of societal censorship.

When it comes to systemic state-sponsored censorship, North Korea, China, Russia, and Iran impose the harshest restrictions on Internet use by citizens and companies. Censorship is a tool of state control over the populace in those countries.

In China, political dissent or criticism of the Chinese Communist Party is punished, independent bloggers silenced, credentialed journalists from international publications denied access, and scholars made to fall in line with party views. But it isn’t only political speech that is banned or filtered. China maintains a system of surveillance and blocking technologies that comprise the “Great Firewall” between its citizens and many of the world’s largest commercial websites. The Senate recently held a hearing to discuss censorship of foreign companies in China as well as the government’s use of market power to extend the reach of censorship beyond its borders.

Firewalls and Filters

China’s State Internet Information Office appears to spearhead the monitoring and filtering of Internet traffic into and within China, but the endeavor is so extensive that as many as twelve other agencies comprise China’s censorship apparatus. The government exercises control over information technology infrastructure and deploys sophisticated software to scrub, deflect or block content and sites it deems illegal. China’s telecommunications companies, including China Telecom, China Unicom and China Mobile are enlisted to carry out and enforce state censorship measures, as are Baidu, Alibaba and Tencent, China’s main Internet platforms. Controlling much of the allowable content in China, these companies maintain strict filters – censoring themselves and their users – to comply with government requirements.

China ISPs enlisted

Content deemed illegal is required to be removed or sites are blocked altogether. The U.S. Trade Representative’s 2019 Report to Congress on China’s WTO Compliance cites industry calculations that “China currently blocks more than 10,000 sites, affecting billions of dollars in business, including communications, networking, app stores, news, and other sites.” Blocked sites include Dropbox, Facebook, Instagram, YouTube, Google search and Gmail, and foreign news services such as The Guardian and the Wall Street Journal. Services required for day-to-day business operations such as cloud storage are restricted to service portals approved by the Ministry of Industry and Information Technology, not privately-owned or controlled channels where the government could lose visibility and access to the data transmitted.

As a second line of defense, the Chinese government prohibits or strictly licenses wholly- or partially owned foreign firms seeking to provide value-added telecommunications services such as Internet-based calls, videoconferencing services, online search and data processing, or virtual private network (VPN) services.

Corporate Choices and the Cost of Censorship

In 2010, Google famously defied the Chinese government’s requirements to filter the content returned by its search algorithm. When Google redirected its users to its uncensored Hong Kong site, the Chinese government blocked it. Taking it a step further, the government throttled Google’s services, degrading them to the point where users become inclined to abandon the service, causing Google to lose substantial market share and withdraw from China. Washington DC-based think tank Information Technologies and Innovation Foundation (ITIF) estimates Google lost $32.5 billion in potential search revenue from 2013 to 2019. Eventually, Google began developing Dragonfly, a search engine designed to comply with China’s censorship requirements.

Other U.S. companies have contorted themselves to avoid censorship. U.S.-headquartered Marriott International apologized for listing Taiwan as a separate country after Chinese authorities shut down its website. International airlines fell in line too, changing their websites to refer to Taiwan as part of China under threat they would be banned from operating in China.

The Chinese government is also becoming more brazen about leveraging its market power to ensure foreign corporations and their employees avoid criticizing its policies outside of China. We are all familiar with the NBA’s backpedaling after initially supporting its employees’ right to exercise free speech in the United States in expressing support for Hong Kong. Increasingly, foreign firms will face a choice between protecting their right and the rights of their employees to freedom of expression or protecting their business dealings in China.

Foreign firms face choice rev

Not Just a China Problem

According to an analysis from Google, more than 40 governments now engage in broad-scale restrictions of online information, “a tenfold increase from just a decade ago.” Among the examples cited, YouTube has been blocked in Turkey. Several countries in Eastern Europe interfere with the popular blogging service, LiveJournal. Guatemala suppressed WordPress blogs during its 2009 political crisis. Iran stifles dissent by blocking social media platforms. Vietnam actively filters political content from social media.

Censorship Map revised

Do Global Trade Rules Address Censorship?

Within the trade community, voices are growing louder that China’s Internet controls constitute a barrier to market access and are therefore a violation of China’s global trade obligations.

Foreign companies and industry have argued that China’s censorship measures are not even-handed; they are applied to non-Chinese products or service providers selectively and in ways that are more restrictive than those applied to domestic providers. They point to examples of similar content that draws a permanent ban of a foreign site whereas the domestic site is merely required to remove specific content.

The Chinese government’s guidelines for permissible or illegal content are vague, unpublished and not transparent. The criteria for IP addresses, domains and website addresses that are permanently or routinely blocked are a state secret. Foreign companies operating in China or seeking to export to China have no way to understand the basis or seek redress for limitation on their access to the Chinese market.

Weakening foreign industry’s case, however, is their acknowledgement that the market access commitments many WTO members have undertaken may not apply to all Internet trade. In the WTO agreement on services, a member’s commitments to national treatment and market access apply only to services specifically listed by members in their schedules. When the agreement was negotiated, many of today’s value-added Internet services did not exist.

The WTO agreements covering trade in goods and services permit measures “necessary to protect public morals,” to maintain public order or to protect national security, with the limitation that those measures should not be applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination or “a disguised restriction on international trade.” Legal experts debate whether a WTO suit against China’s censorship is winnable, and China experts are dubious whether China would comply regardless.

Trade Rules Cant Fight Censorship

Cyber Sovereignty or Cyber Superpower?

China’s policy footing is unabashedly oriented to exercise absolute control over access to Internet content and services within its own borders. Centrally, the Chinese Communist Party will thwart communication it perceives “subverts state power or undermines national unity.”

The question is, how far will the government go to exercise influence over international norms for cyber governance? And how much state support will be thrown behind freeing itself from dependence on foreign technologies and services to become a global cyber superpower? Is censorship being used to lock foreign competitors out of China’s market to protect local competitors? How far will China go to censor communication it perceives as a threat outside China?

The apps we use that are created by mainland Chinese companies likely contain code to scan and block prohibited websites or language the Chinese government finds objectionable. But beyond sanitizing content, the government may specifically target sites for censorship outside of China.

The Chinese government recently disabled a social media platform in Hong Kong that was used to organize anti-China protests. Its actions may portend a broader approach to Internet censorship in Hong Kong which, according to the Hong Kong Internet Service Providers Association is home to more than 100 data centers operated by local and International companies that transit over 80 percent of web traffic for mainland China.

The Nexus of Censorship and Trade

Government measures to disrupt Internet access or prevent the dissemination of information online are generally considered to infringe upon the basic human right to freedom of expression. Now, industry actors along with open Internet advocates are leading the charge to consider censorship antithetical to the global trading system. At the center of the debate is China, the country with the most extensive censorship program in the world and which holds significant market power in the global economy.

The implications of commercial censorship run the gamut, from stifling key sales channels for exporters to China, to limiting or prohibiting foreign companies from providing Internet services in China, to extraterritorial censorship of overseas Internet sites and services. At a recent hearing on censorship and trade, Senator Bob Casey (D-PA) stated, “The actions undertaken by China are clearly insidious and counter to the necessary conditions of a fair global economic system.” That may be so, but global trade rules and institutions as they exist today are inadequate to alter China’s approach or mitigate the global impacts of China’s censorship.

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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.

trade policies

HOW ARE COUNTRIES MAINSTREAMING GENDER IN TRADE POLICIES AND PRACTICES?

Tracking How Much She Trades

On July 7, the International Trade Centre rolled out a new tool to track the types and prevalence of trade policies designed to promote more trade by women-owned businesses.

Called “SheTrades Outlook” and funded by the UK, the index initially covers 25 countries as wide-ranging as Australia and Canada to Mauritius, South Africa, Rwanda, and Samoa, applying quantitative and qualitative data to rank them across 83 indicators and six policy areas. Analysts interviewed more than 460 institutions and organizations in these countries, evaluating factors including women’s access to opportunities for skills development, finance, and global markets, and networks.

Dashboard of SheTrades

The index also queries whether governments and national organizations offer tailored support to enterprises owned and run by women to enable them to grow their businesses globally, whether programs exist to help women entrepreneurs win government contracts, and if governments have begun to collect gender-disagreggated data that might better inform policies to support women in trade.

Finally, SheTrades Outlook compiles recommended practices across these policy areas to share the experiences of countries covered in the index as a global resource.

Example of SheTrades Tracker

Starting to Get the Picture

SheTrades Outlook seeks to create a more complete picture of how women participate in the global economy through trade. Doing so will help inform trade policies and national trade promotion programs that better serve women as critical drivers of productivity and economic growth worldwide.

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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.

blacklisting

BLACKLISTING DEPLOYED IN THE BATTLE OVER TECH TRADE

National Security an Overriding Consideration

If there is one defining feature of current U.S. trade policy, it is that national security has become an overriding consideration in how the United States engages China. It is also a focal point of U.S. engagement with its main allied trading partners.

The Trump administration has added many tools to its arsenal in combatting what it refers to as “vectors of economic aggression” by China. Tariffs are only the most visible. The United States – and other countries – are increasingly turning to the practice of “blacklisting” persons and companies that pose a national security risk.

Through controls on exports of particular technologies, governments can either prohibit their sale to foreign entities, governments or individuals, or require the technologies be sold only upon issuance of a government license.

Not New, But Expanded

Controlling the export of commercial technologies that have “dual use” or military applications is a longstanding practice. The General Agreement on Tariffs and Trade 1994 includes a general prohibition on quantitative restrictions on both imports and exports, but contains built-in exceptions that allow for export control regimes.

In the United States, the Export Control Act requires the Secretary of Commerce to establish and maintain a list of controlled items, foreign persons, and end-uses determined to be a threat to U.S. national security and foreign policy for the purpose of regulating the export, reexport and in-country transfer of those technologies and to those entities.

countries turning to blacklisting

Futureproofing

At today’s blistering pace of tech innovation, the lines between technologies that are used commercially in the products we buy as private sector businesses and consumers are increasingly blurred with their potential applications in a military setting.

Under the 2018 Export Control Reform Act, Congress authorized the Commerce Department to review its list of controlled technologies to consider “emerging and foundational technologies” that should be added to its control list.

The technologies contemplated include a hit parade of Sci-Fi innovations such as neural networks and deep learning, swarming technology, self-assembling robots and smart dust (whatever that is), in addition to more recognizable technologies such as quantum computing, additive manufacturing and propulsion technologies.

Special Designations

In addition to technologies that may be controlled for export, the Commerce Department also maintains a Restricted Entity List. Entities designated are subject to a policy of presumed denial for all products, whether on the controlled technologies list or not. American companies may not export to entities on this list except through waivers and specific licenses.

Huawei Technologies, the Chinese telecommunications giant that is chasing global market share in 5G mobile technology, finds itself on the Restricted Entity List, along with all of its overseas affiliates. Other Chinese companies on the list include FiberHome Technologies Group, another 5G network equipment provider, as well as China’s leading artificial intelligence startups Megvii, SenseTime and Yitu Technologies.

The U.S. government is concerned with entities that could engage in industrial and electronic espionage and infiltrate critical U.S. military systems. But the Commerce Department also took the novel step recently of adding companies to its Restricted Entity List that furnish the Chinese state and its security bureaus with technologies used to surveil and repress civil society.

In October 2019, the United States blacklisted 28 Chinese governmental and commercial organizations, citing human rights violations and abuses in China’s campaign targeting Uighurs and other predominantly Muslim ethnic minorities in the Xinjiang Uighur Autonomous Region. The companies included Hangzhou Hikvision Digital Technology Co. and Zhejiang Dahua Technology Co. which are two of the world’s largest producers of surveillance products as well as several of China’s leading companies in facial and voice recognition.

A Chinese Finger Trap

Last month, as U.S.-China relations continued to deteriorate in very public ways, the U.S. government added two dozen more Chinese governmental and commercial organizations to the Restricted Entity List. The Department of Commerce said they have ties to weapons of mass destruction and military activities.

As with a Chinese finger trap, American companies are now ensnared at both ends. They must comply with U.S. export restrictions but doing so may land them on China’s newly created “Unreliable Entity List”. China created the list as a countermeasure and says it will go after American companies for causing “material damage to the legitimate interests of Chinese companies and relevant industrial sectors” and creating a potential threat to China’s national security.

American cos caught in trap

More Can Play at That Game

The global landscape is actively shifting as countries work to shore up and modernize their export control regimes.

In 2009, the European Union (EU) set up a community-wide regime for the control of exports, transfers, brokering and transit of dual-use items to ensure a common EU list of dual-use items, common criteria for assessments and authorizations throughout the EU.

Last year, Japan and Korea got into a major trade spat when the Japanese government removed South Korea from its so-called “white list” of preferred trading partners for strategic technologies, subjecting some Japanese exports to South Korea to new screening.

Japan’s placement of three chemicals used to make computer chips on the control list resulted in delayed shipments that affected the entire global semiconductor industry since South Korean companies account for nearly two-thirds of the world’s memory chips. South Korea retaliated by dropping Japan from its white list.

One Good Turn Deserves Another

For its part, China deemed its own “Unreliable Entity List” to be unreliable. In January this year (on the same date the U.S.-China Phase One deal was signed in Washington) the National People’s Congress in Beijing published a draft of China’s first comprehensive national Export Control Law, providing China with increased leverage to apply and counteract U.S. export control measures. Safe to say we’ll be reading a lot more about blacklisting in the coming years.

An interesting report to dive deeper:

2018 Report on Foreign Policy-Based Export Controls, U.S. Department of Commerce Bureau of Industry and Security

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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.
cashless

TOWARD A GLOBAL CASHLESS ECONOMY

Going Cashless During COVID-19

When we originally published this article in November 2018 during holiday shopping season, we could not have foreseen that a global health crisis would accelerate cashless payments worldwide. But new precautions in place due to COVID-19 have propelled us faster in the direction of contactless transactions everywhere.

Transmission of the disease from handling banknotes has consumers concerned, but the risk is reported to be low compared with touching credit card terminals and PIN pads. Yet the plexiglass that divides customer from cashier urges less reliance on bills and coins in favor of using point of sale machines to swipe your credit card.

Central banks around the world are taking steps to quarantine and sterilize banknotes to promote retained trust and universal acceptance of cash. Even so, many financial industry analysts are predicting that truly contactless payments through mobile e-wallets may be upon us sooner than previously forecast as consumers and retailers become more accustomed to eschewing cash.

Mobile Payments are the Future

According to Statista, 259 million Americans routinely bought products online in 2018.

That wasn’t the case just a few years ago when many of us were hesitant to punch in our credit card numbers to a website. But as ever more business is transacted online, financial services and “fintech” companies have built and continue to improve a secure payments ecosystem that consumers and businesses can be confident will protect their most vital assets: their private information and money.

Pretty soon we might not need to pull out a physical card as our credit card information gets linked with mobile payment systems. All you need is your finger, your phone, or a watch – items you probably already have on hand, literally. As more consumers adopt this convenience, “e-wallets” will eventually replace cash altogether.

The United States and Emerging Markets Lead

Mobile payments in the United States, China, Russia and India are driving the global trend – the United States by sheer volume of cashless transactions and the big emerging markets by virtue of how fast they are growing. In 2017, non-cash transactions grew 34.6 percent in China, 38.5 percent in Russia, and 38.5 percent in India.

Russia’s surge owes to the Central Bank of Russia’s implementation of a National Payment Card System that boosted growth of cashless transactions by 36.5 percent after it was introduced in 2015-2016. AliPay and WeChat Pay are keeping China on a sustained upward trajectory. Mobile payments in China climbed from $2 trillion in 2015 to $15.4 trillion in 2017, an amount greater than the combined total of the global transactions processed by Visa and Mastercard. India has improved its regulatory environment for digital payments as smartphone penetration expands.

TradeVistas | growth of global cashless transactions, World Payments Report 2019

Growth of global cashless transactions

Leapfrogging in Developing Countries

According to the 2019 World Payments Report, developing markets as a group contributed 35 percent of all non-cash transactions in 2017 and are close to reaching half of all non-cash transactions if they maintain the current rate.

Financial inclusion initiatives in developing countries that are designed to pull citizens into the formal banking system combined with an increase of mobile phone ownership means developing countries are leapfrogging over credit card use, going from cash to mobile payments.

Remittances, which comprise a high percentage of GDP in many developing countries, are being facilitated increasingly through person-to-person mobile money transfers. In one example, Western Union and Safaricom, a mobile provider in Kenya, have teamed to enable 28 million mobile wallet holders to send money to family and others over Western Union’s global network.

The Global Mobile Industry Association predicts the number of smartphones in use in sub-Saharan Africa will nearly double by 2025, enabling previously “unbanked” individuals to send and receive money by phone. For merchants in developing countries, scanning a QR code on a phone is faster and cheaper than installing point-of-service terminals that require a continuous electrical supply for reliability.

TradeVistas | cashless transaction volumes grew 12% during 2016 and 2017

Developing countries will account for half of cashless transactions soon.

Mobile People with Mobile Phones

Chinese tourists are also driving global proliferation of mobile payments as vendors work to accommodate Chinese travelers in airports, restaurants, hotels, and stores. China’s Alipay advertised popular “outbound destinations without wallets” for Golden Week, when millions of Chinese go on vacation. Last year, prior to travel restrictions, there was a boom in Chinese tourists to Japan, with over 9.5 million visitors in 2019. China’s WeChat Pay teamed with Line, Japan’s popular messaging app service to offer mobile payments to Japanese retailers seeking to accommodate the influx of Chinese tourists. WeChat’s rival, Alipay, is also partnering to extend services in Japan.

Global Standards and Interoperability are Needed

Through national financial inclusion programs, a steep increase in the accessibility of mobile phones, and with trade driving more global business transactions online, a cashless global economy could be in our future.

What’s standing in the way of faster integration globally of mobile payments, however, is a lack of international standards and common approaches to security, data privacy, and prevention of cybercrimes.

Companies in this space are continually evolving layers of protections such as the chips on your credit cards, encryption, tokens, and biometrics to stay ahead of cybercriminals, but it’s a constant battle against fraud and hacking of personal account information. For example, tokenization is a technology that safeguards bank details in mobile payment apps. That’s how Apple Pay works – rather than directly using your credit card details, your bank or credit card network generates random numbers that Apple programs into your phone, masking valuable information from hackers.

Differing national regulatory approaches to data authorization and distributed ledger technology (like blockchain) could fragment markets and inhibit adoption of the underlying technologies that permit mobile payments. Industry groups say international standards should be modernized to reflect technological innovations, but also harmonized to avoid developing different payments systems for different markets.

Interoperability is then the cornerstone of expanding trade through global digital payments. Groups like the PCI Security Standards Council advocate for international cooperation not only to set standards for ease of consumer use but because no single private company or government can stay continually ahead of hackers. They say that sharing information and best practices can raise everyone’s game, prevent attacks, and disseminate alerts quickly to stop the spread of damage when an attack occurs.

Mobile Payments Slim My Wallet in More Ways Than One

By 2023, there will be three times as many connected devices in the world as there are people on Earth. (And that prediction was made pre-pandemic.) Young people with new spending power are favorably disposed to cashless transactions and shopping through their devices. Mobile payments help connect poorer and rural citizens to the formal economy just through SMS texts. Even tourism is spreading a culture of mobile payments. And many brick and mortar retailers say online browsing can drive in-store sales and help the bottom line.

Small businesses are making great use of mobile payment readers to take payments anywhere on the go, from selling jam at farmers markets to selling band t-shirts at small music venues. Business executives surveyed in the World Payments Report also cite increasing use of such rapid transfer payments to speed the settlement of business-to-business invoices and for supply chain financing, particularly across borders.

Experts are realistic, however, that cash isn’t dead yet. In most countries, cash payments as a share of total payment volume is declining, but cash in circulation is stable or rising – and that seems to be holding true despite the pandemic.

For a little while anyway, I conserved both cash and mobile spending during the pandemic. I’m back to routinely overspending at Starbucks where my thumb is all it takes to reload the card on the app using a preloaded credit card. If my behavior is any indication, the ease of mobile payments will probably cause many of us to spend more as the cash doesn’t have to physically leave the grip of our hands. The increase in availability and accessibility of cashless, mobile payments will be good for economic recovery and good for global trade.

Editor’s Note: This post was originally published in November 2018 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.
services

WITH ZOOM, WE ARE ALL TRADING IN SERVICES

New Modes of Living and Working

As we struggle to maintain continuity in our work and school lives during the pandemic, technology has come to our aid.

Those of us who work on teams spread throughout the country or the world have already unlocked the secrets of online collaboration platforms like Slack and Quip. (We use Quip at TradeVistas for project management.) Others are quickly moving to them or discovering functionality they previously overlooked in Microsoft Teams or similar business software.

“Zoom” has become a verb for online video conferencing the way Skype had been for years for international communication. The class I teach at Georgetown is completely online. (We were already extensively using the learning management system called Canvas). The university reported last week they reached a high of 1,459,100 minutes of instruction on Zoom in just one day.

Biggest Week Ever in Business App Downloads

Video conferencing apps Google Hangouts, Houseparty, Microsoft Teams and ZOOM Cloud Meetings saw major jumps in use in the United States and Europe. According to App Annie, during the week of March 15-21 alone, business apps surpassed 62 million downloads worldwide across iOS and Google Play, apparently the biggest week ever.

With the exception of middle and high schoolers hanging out on Houseparty, many of us working online are exchanging professional, technical, business and other commercial services. If your client or customer is overseas, you are likely delivering what’s called a cross-border service. No better time to appreciate this major component of global trade.

The WTO Modes of Services

In the World Trade Organization (WTO), negotiators divided up services trade into four “modes of delivery” related to where the supplier and consumer are located at the time of the transaction. In Mode 1, known as cross-border trade, the parties are in separate countries and the service is most likely provided digitally via email or through an online platform. One example is consulting services – perhaps a report delivered over email.

In Mode 2, known as consumption abroad, the consumer travels to another territory to receive the service. Examples include hospitality services associated with tourism, medical treatment, or a “semester abroad” at a foreign university. Mode 3 involves putting out a shingle to provide services in another country, known as commercial presence. Finally, in Mode 4, the service provider travels to the customer such as a software engineer working on a project overseas on a temporary visa.

Ascendant Modes of Trade in Services

Every day we engage in or benefit from some form of globally traded services, though we rarely think of it. Among the biggest traditional components of global trade in services are transport and travel – including the trains and ships that move cargo, and the planes that move people across international borders for work and tourism. We’ve written before about how important the tourism is to the global economy – global travel exports were worth $1.7 trillion in 2018.

But other less obvious components of globally traded services have grown larger in recent years. According to the WTO’s 2019 World Trade Statistical Review, the “use of intellectual property” as a service exceeded $3.1 trillion in 2018. The most dynamic services sector continues to be telecommunications, computer and information services (or ICTs), which grew more than 15 percent in 2018.

The Multiplier Effect of Digital Technologies

Telecommunications, computer and information services offer multiplier effects – they create efficiencies and infrastructure that enable new products and new services. Financial technologies bring about cashless payment systems, online platforms like Spotify enable music streaming, technologies embedded in your thermostat promote smart energy use through an app on your phone, sensors on machines inform computers when repairs may be needed. Micro-entrepreneurs sell their products globally through Etsy, eBay or Amazon Web Services.

Enterprise software, cloud computing, data processing and analytics services can help make any business more productive and profitable. They are the backbone of production, distribution and marketing of many physically traded goods while facilitating trade with customers anywhere in the world digitally.

Eighty percent of all U.S. jobs are in services-providing industries. The definition of a “tradable service” is constantly changing and expanding. In 2018, U.S. exports of ICT services alone were valued at $71.4 billion while service exports enabled by ICTs added another $451.9 billion. The U.S. Bureau of Economic Analysis estimates that services potentially enabled by ICTs accounted for 55 percent of total U.S. services exports. Yet the United States is fourth in globally exported ICT services, narrowly behind China, India and far behind the European Union.

Growth in ICT enabled services

The Doctor Will “See” You Now

The scourge of the COVID-19 pandemic, with its prolonged and widespread “stay at home” restrictions, is forcing all of us to shift or accelerate our digital habits. We have no choice but to buy non-essentials online. Our kids are e-learning. Doctors are seeing patients online when not critical. Graduating students will have virtual commencements. And most of us are forced into video conferencing all…the…time.

And while many people will be binge watching or gaming (WarnerMedia, Disney Plus, Netflix and Hulu all reported 65 and 70 percent jumps in number of streaming hours), some of us are trying to continue working online, despite these bandwidth hogs. Some businesses have no choice but to cope by providing virtual services – tax advisors are using secure document portals and phone consultations while fitness instructors check your form by webcam. These are stopgap measures now that might augment their businesses when things go back to “normal”.

LinkedIn With One Another

Recently, I decided to join a LinkedIn Live presentation by one of my favorite business gurus. I was astounded at the scrolling list of locations from where viewers were joining: United Kingdom, South Africa, Romania, Tunisia, Qatar, Poland, Pakistan, Jamaica, India, Colombia, Sudan, Turkey, Lebanon, Yemen and Afghanistan. On and on it went – I stopped writing them down. Nearly the entire world is experiencing the effects of the pandemic in some way, but through modern telecommunications and information technologies, we stay connected.

Those of us who can provide our global services online are the lucky ones. Our appreciation goes out to those workers who are keeping factories running to make essentials, who drive trucks and who staff pharmacies and grocery stores to ease our ability to work and learn from home, out of harm’s way.

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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.

trade deals

Is It Just a Phase? Redesigning Trade Deals in the Age of Trump.

Comprehensive is Out, “Phased” is In

Within the first few months of the Trump Administration in 2017, the U.S. Trade Representative issued a report identifying intellectual property theft and forced technology transfer as crucial sources of China’s growing technological advantage at the expense of U.S. innovation. Tariffs would be applied until a trade deal to address these practices could be reached.

But expectations had to be reset early in the negotiations – China’s offenses cannot be pinpointed to one set of laws, regulations or practices, and so the complex wiring of China’s national approach cannot be untangled or rewired in one pass, in one agreement, even if China shared that goal. An agreement this ambitious would have to be built in phases.

In presenting the “Phase One” agreement signed between the United States and China on January 15, U.S. Trade Representative Robert Lighthizer said the deal represents “a big step forward in writing the rules we need” to address the anti-competitive aspects of China’s state-run economy. And it is a serious document.

Beyond its detailed provisions, the strategic and commercial impact of the deal will take more time to evaluate. What is clear in the meanwhile, is that this administration has departed from the standard free trade agreement template.

Comprehensive agreements are out. Partial or phased agreements are in.

Something Agreed

It’s common in trade negotiations to whittle down differences, leaving the hardest issues to the end. Early wins keep parties at the table, building a set of outcomes in which the parties become invested and more willing to forge compromises around the remaining difficult issues. One way to avoid settling for deals that leave aside the most meaningful – and often hardest – concessions is to stipulate that “nothing is agreed until everything is agreed.”

For this administration, however, the art of the deal is – quite simply – closing the elements of the deal available. With China, that may be the best and only way for the United States to achieve a deal. And it may very well represent significant progress. At turns, a larger deal looked as if it would collapse under its own political weight in China. Some things agreed is probably a better outcome than nothing agreed.

A Way Out or a Way Forward?

The deal lays down tracks for more detailed intellectual property rights and newer prohibitions on forced technology transfer. Among other commitments, the deal also breaks ground on previously intractable regulatory barriers to selling more U.S. agricultural and food products in China including dairy, poultry, meat, fish, and grains. But it does not address subsidies provided to China’s state-owned enterprises, a complaint shared by all of China’s major trading partners, Having dodged the issue for now, China may have created an advantage by stringing out its commitments over phases.

The Trump administration brought China to the table with billions in tariffs on imported goods. While compelling, it is not a durable approach. The U.S. macroeconomy is withstanding the self-inflicted pain, but tariffs have real and negative effects on U.S. farmers and business owners who will vote in November. Even a temporary tariff détente is a welcome respite, but uncertainty remains. And while we wait to see if the provisions on intellectual property and technology transfer prove fruitful, what of the lost agricultural sales for U.S. farmers and sunk costs for U.S. businesses?

As part of the deal (a part that gets phased out), China committed to shop for $200 billion in American goods and services over the next two years, including more than $77 billion in manufactured goods, $52 billion in energy products, $32 billion in agricultural goods and $40 billion in services. If fulfilled, the purchases in Phase One would appear to solve the problem of waning U.S. exports to China, but that was a problem of our own making so the administration might only merit partial credit for this part of the deal.

Journey of a Thousand Miles

Of course, the Trump administration’s phased and partial approach to reaching trade deals may simply stem from impatience or a focus on the transactional – comprehensive deals take too long to complete. But the approach may also make sense if these deals are stepping-stones in a bigger, longer game.

In a June 2018 report, the White House offered a taxonomy of 30 different ways the Chinese government acquires American technologies and intellectual property, including through U.S. exports of dual-use technologies, Chinese investments in the United States, and the extraction of competitive information through research arms of universities and companies in the United States.

Ambitious as it is, the administration is not limiting itself to the new Economic and Trade Agreement to solve all the problems it identified. The Department of Justice has initiated intellectual property theft cases, the Department of Commerce is expanding controls over the export of dual-use technologies, and the Treasury Department oversees a process to tighten reviews of proposed inward investments.

A Chinese proverb says that “a journey of a thousand miles begins with a single step.” Concerns the administration will not limit or end its quest with Phase One were evident in the letter from President Xi read aloud at the signing which urged continued engagement to avoid further “discriminatory restrictions” on China’s economic activity in the United States.

Just a Phase?

Beyond engagement with China, the administration has nearly consistently favored partial deals, with the U.S.-Mexico-Canada agreement (USMCA) the exception. NAFTA needed to be modernized. Our economies have changed too much for the deal to keep pace without some upgrades. Could the modifications have been achieved without replacing the deal? Probably, but perhaps not politically, or it might have been done years sooner. NAFTA’s facelift as USMCA offered a chance for the administration to fashion provisions it intends for broader application, such as those on currency and state-owned enterprises. Though it replaced NAFTA, USMCA changes constitute a partial re-negotiation.

With Japan, the administration set much narrower parameters, hiving off-market access and digital trade as an initial set of deliverables. Last September, President Trump finalized a partial trade deal with Prime Minister Abe that went into effect on January 1. Limited in scope, it encompasses two separate agreements that only cover market access for certain agriculture and industrial goods and digital trade.

The White House characterized the partial deal as a set of “early achievements,” with follow-on negotiations on trade in services, investment and other issues to commerce around April this year. But crucially, the partial deal enabled the United States to avoid addressing its own tariffs on autos and auto parts, which comprise nearly 40 percent of Japan’s merchandise exports to the United States, while securing access to Japan’s market for U.S. agricultural exports.

The United States also restarted talks in 2018 on a partial trade agreement with the European Union that is stalemated over whether to include agriculture.

Walking Alone?

Preferential market access deals are an exception to WTO commitments. WTO members have agreed that free trade agreements outside the WTO should cover “substantially all trade” among the parties and that staging of tariff reductions are part of interim arrangements, not an end state. But with comprehensive negotiations stalled in the WTO itself, members are trying new negotiating approaches such as focusing on single sectors, like information technologies.

Although there was little mention of state-owned enterprises and subsidies in the U.S.-China Phase One deal, something important happened on the margins of that ceremony that received little attention: The trade ministers of Japan, the United States and European Union released a joint statement proposing ways to strengthen the WTO’s provisions on industrial subsides, which they called “insufficient to tackle market and trade distorting subsidization existing in certain jurisdictions,” a reference to China. The statement proposed elements of new core disciplines – a first phase if you will in launching more formal negotiations among WTO members.

The deal signed with China this week envisions reforms to China’s laws, regulations and policies as they apply to any foreign company operating in China, not just the American ones. Perhaps our trading partners see it (only partially) as a go-it-alone strategy and partially as a way to create a corps of provisions that can be migrated to the WTO.

Phase One trade deal - foundation for future US-China trade relations?

Construction Phases: Trump’s Real Estate Mindset

How is the real estate business like trade policy? It isn’t, except in the mind of Donald Trump. Buildings can be demolished or imploded in seconds. A giant hole is dug before its replacement is built. The builder then pours the concrete foundation constructs the frame long before wiring the interior and installing the finishes.

Maybe a phased trade deal represents the opportunity to reset the footing and frame out a solid structure for the future of US-China trade relations – and the finishing touches will come later.

Access the full agreement.

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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.
soybean

Soybean Prices are a Proxy for How the Trade War is Going

Soybeans are in your cereal, candles, crayons and car seats

Soybeans have more far uses than most of us realize. After harvesting, soybeans are dehulled and rolled into flakes as its oil is extracted. Soybean oil has become an ingredient ubiquitous in dressings, cooking oils and many foods, but is also sold for biodiesel production and other industrial uses.

Soy flours feature prominently in commercial baking. Soy hulls are part of fiber bran cereals, breads and snacks. Soybeans are even part of building materials, replacing wood in furniture, flooring and countertops. They are in carpets, auto upholstery and paints. Soybean candles are popular because they burn longer with less smoke. Soy crayons are non-toxic for children. And – because soybeans are high in protein – they are a major ingredient in livestock feed, which provides much of the impetus for globally traded soybeans.

Bean counting

Given this panoply of applications, it should be no surprise that global demand for soybeans is growing, but it’s mostly animal mouths we are feeding. Demand for soybean meal for livestock feed drives two-thirds of the export value of traded soybeans.

According to the Agricultural Market Information System, three countries produce 80 percent of the world’s soybeans to fill this demand: the United States, Brazil and Argentina.

At 123.7 million metric tons produced in 2018, U.S. farmers accounted for 34 percent of world production. Brazil’s farmers yielded 117 million metric tons, accounting for 32 percent of world production, but Brazil exported larger volumes than the United States.

Rounding out the top three, Argentina accounts for 15 percent of world production but exported just 6.3 million metric tons in 2018. China is fourth, producing 15.9 million metric tons in 2018 – just four percent of world production.

America’s second largest crop

Grown on more than 303,000 farms across the United States, soybeans are the second largest cash crop for American farmers. Conventional soybeans are grown in 45 U.S. states while high oleic soybeans are grown in 10 states. Though output varies each year, at 4.54 billion bushels in 2018, U.S. growers are so productive they can now yield twice as many bushels of soybeans as two decades ago. (At SoyConnection.com, you can click on this map to see the number of farms, acres, and bushels produced in each state.)

Three countries produce 80 percent of the world's soybean

China’s insatiable appetite

China cannot get enough soybeans. When China entered the WTO in 2001, the country was already consuming 15 percent of the world’s soybeans, driving 19 percent of global trade in soybeans. By 2018, China’s appetite had grown 815 percent according to the U.S. Farm Bureau, which says China’s demand now supports 62 percent of world trade in soybeans.

According to the Farm Bureau’s calculations, China consumes one-third of every acre harvested in the world – an amount equivalent to or more than total U.S. soybean acreage. Around 60 percent of U.S. yields were sold to China in 2017, which means there was a lot at risk for U.S. farmers caught in the crosshairs of the trade war that unfolded in 2018.

A pawn in the trade war

In July 2018, the United States fired the first tariff shot in its efforts to seek redress for the intellectual property theft cited in its Section 301 investigation into China’s practices, by imposing tariffs on $34 billion worth of China’s imports. China responded with 25 percent tariffs on an equivalent amount, including on soybeans from the United States. The tariff has remained in place as leverage in the trade war – a proxy for whether China perceives progress is being made or not in the negotiations.

In intermittent gestures of goodwill, China agrees to make purchases but has often not fulfilled orders for the promised amounts. When President Trump angrily tweeted on August 23 this year that China was not negotiating in good faith and that U.S. tariffs would cover more imports from China, China responded in part by adding five percent to its tariffs on soybeans.

A factor in price fluctuations

The Food and Agricultural Policy Research Institute at the University of Missouri recently offered a gloomy forecast for lower prices for soybeans: $8.43 per bushel for 2019-20, dropping further to $7.94 per bushel for the 2020-21 marketing years. They say lower prices are resulting from a combination of adverse weather, African swine fever disease that is decimating herd inventories throughout Asia and therefore weakening demand for feed – and the ongoing trade dispute.

On May 13 this year, coincident with some fiery presidential tweets expressing frustration with China, soybean prices reached a 10-year low. USDA estimates that, at 4.54 billion bushels produced last year, a drop in average price per bushel from $9.33 in 2017 to $8.60 in 2018 translates to losses for U.S. soybean farmers of $3.3 billion.

Soybean Prices react to China trade war

Bait and switching

Adding to the strain of lower prices, China has drastically pared back its soybean orders from the United States. In 2016, the United States shipped 36.1 million metric tons of soybeans to China. In 2018, sales dropped to just 8.2 million metric tons.

The Chinese government is able to avoid its own tariffs by directly purchasing U.S. soybeans which it then sells to private users in China. The government has also granted tariff exemptions to Chinese soybean crushers. Just this week, the government granted an exemption to state-owned, private and international companies to import 10 million metric tons of U.S. soybeans tariff-free. Overall, the quantities purchased through these mechanisms is not nearly enough to make up for the vast shortfall in supply from the United States.

So, China is buying more from Paraguay, Uruguay, Argentina, Canada and in particular from Brazil, which has moved in to supply 75 percent of China’s total imports. For U.S. soybean exporters, lower prices per bushel have attracted new buyers from Europe, Mexico and elsewhere, but those sales are not enough to replace lost sales in China.

Plummeting U.S. Soybean Exports to China

Homegrown

China is hedging its bets by rejiggering the incentives it provides to its own farmers. Upon releasing a new white paper, the head of the National Food and Strategic Reserves Administration said that even though China’s food production and reserves are strong, “We must hold the rice bowl firmly in our hands, and fill it with even more Chinese food.”

In addition to directly investing in agricultural infrastructure in Brazil, neighboring Russia, and other suppliers, the Chinese government has set a goal to increase domestic soybean production in five years from 16 million to 24 million metric tons, according to the U.S. Soybean Export Council.

News China reported in January that Chinese farmers in Heilongjiang, China’s main grain producing province, are being provided incentives to switch from wheat and corn to planting more soybeans. For years, the Chinese government has offered price supports for corn. Under new policies, crop rotation can earn Chinese farmers $322 per hectare in subsidies in addition to subsidies of between $373 and $430 per hectare offered by provincial authorities.

The Ministry of Science and Technology is also supporting trials of hybrid soybean seeds that are more weather-resistant and could more than triple the average yield for soybeans grown in China.

China's Soybean Journey

Long term disruptions

It’s possible the United States and China will ink a partial deal in the coming weeks that provides relief for American soybean farmers.

The American Soybean Association says it is “hopeful this ‘Phase 1’ agreement will signal a de-escalation in the ongoing U.S.-China trade war… rescinding the tariffs and helping restore certainty and stability to the soy industry.”

China has reportedly promised to purchase $40 billion to $50 billion in U.S. agricultural goods, which would be scaled up annually. That would be double the $24 billion China spent on American farm goods in 2017.

When seeds are in the ground, the acreage is committed, but as American farmers wait and watch the trade war, they are surely thinking about how to plant around these disruptions in outer growing years.

Over the last year, some reliable overseas customers are buying up stocks of U.S. soybeans that would otherwise have gone to China and some new customer relationships are being forged in emerging markets such as Egypt, Bangladesh, Pakistan and Southeast Asia.

When the tariffs are permanently removed, it will remain to be seen whether trading patterns will also have permanently shifted.

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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.