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The coronavirus pandemic has caused both governments and businesses to question some of the assumptions that have underpinned global trade for decades. By the time the dust settles, the world’s approach to trade could look quite different.

Extended global supply chains brought unprecedented economic efficiencies generated by extreme specialization of production and the ability to reduce costs through just-in-time inventories. These benefits are now being weighed against the risks created by the lack of redundancy and the consequences of severe disruption when key suppliers are not available. Rising economic nationalism and strategic rivalries are prompting multinational companies to rethink their investment and production strategies.

Weighing security over efficiency

In the balance between economic efficiency and security of supply, the pendulum may be swinging back toward security. This shift will apply not only to essential medical supplies and medicines but across the full spectrum of trade. Many automotive production facilities in South Korea, Japan and elsewhere were forced to suspend operations at the onset of the coronavirus outbreak when the flow of critical components from China was interrupted.

Companies may not only rethink supplier relationships. They might also consider further diversifying their own production. Take for example the recently announced decision by Taiwanese semiconductor giant TSMC to build a $12 billion production facility in the state of Arizona, which may represent an attempt to mitigate business risks emerging as a result of geostrategic rivalries, in particular between the United States and China. The compelling economic rationale for TSMC’s Arizona facility is not readily apparent. The costs of semiconductor fabrication are relatively higher when compared to TSMC’s facilities in Taiwan, where the bulk of its manufacturing is done.

Reducing over-dependence on Asia supply chains

The TSMC facility might represent an industry step toward a more U.S.-based high technology supply chain. But there might actually be less to the proposed plant than meets the eye. By the time it is operational in 2024, it is expected to produce semiconductors based on existing (rather than next generation) technologies, and it will lack capacity to produce at a game-changing scale. The 20,000 silicon wafers the Arizona plant is expected to produce each month is only one-fifth the capacity of the larger Taiwan-based fabrication facilities.

However, as the Trump Administration has been vocal in its desire to repatriate elements of vulnerable supply chains wherever possible, the move could also represent an opportunity to hedge against the risk that more production of critical industrial products will be compelled to be manufactured and procured in the United States, something other governments are contemplating as well.

At the recent G20 Finance Ministers meeting in Riyadh, French Finance Minister Bruno Le Maire — a staunch advocate of deepening economic integration — posed a question which just a few years ago would have seemed inconceivable:
“Do we want to still depend at the level of 90 per cent or 95 per cent on the supply chain of China for the automobile industry, for the drug industry, for the aeronautical industry or do we draw the consequences of that situation to build new factories, new productions, and to be more independent and sovereign? That’s not protectionism — that’s just the necessity of being sovereign and independent from an industrial point of view.”

Le Maire’s comment captures the policy debate officials around the world are wrestling with, even in countries that have traditionally been strong pro-trade and pro-integration advocates.

Doubling down on regional trade agreements

Broader strategic considerations were undoubtedly at play in the decision. Taiwan’s position as a global supplier of chips – as well as a highly sensitive flashpoint in U.S.-China relations – means that TSMC is inevitably caught up in the technology and strategic rivalry between the U.S. and China.

TSMC’s investment may not be a bellwether that U.S. companies will re-shore or that multinationals will flock to the United States. More likely, companies will build more diversity into their supply chains with more emphasis on regional trade and less reliance on a single trade partner.

This could have big implications for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Although neither China nor the United States are currently parties to the CPTPP, the agreement is a useful vehicle to achieve greater trade and investment diversification for its current members. As a self-selected, voluntary grouping of economies ostensibly committed to promoting trade and investment among members, the CPTPP could provide some degree of insulation against the surge of export restrictions.

With the CPTPP positioned to take on greater relevance in the post-COVID-19 world, Thailand, South Korea, Indonesia and the Philippines have indicated interest in joining. Japan seems to be the informal new member recruitment manager, with Japanese officials already working closely with their Thai counterparts on the mechanics of accession.

Japan’s role is not a matter of happenstance. Japanese officials understand the dangers of over-reliance on a single market. Japan relies on China for about 37 per cent of its imports of automotive parts and 21 per cent of its imports of intermediary goods overall. In light of the COVID-19 disruptions, Japan is making a concerted effort to reduce its supply chain dependencies on China. The recent stimulus bill passed by the Japanese legislature allocated US$2.2 billion to help Japanese manufacturers shift production out of China.

A lasting impact

The COVID-19 pandemic will recede at some point. But its impact on trade will endure. The world can expect to see less China-reliant supply chains and increased use of regional trade agreements, providing a particular boost to the economies of Asia that multinationals see as the alternative to China.


Stephen Olson is a Research Fellow at the Hinrich Foundation. Over the course of his 25 year international career, Stephen has lived and worked in Asia, the Middle East, and the United States, holding senior executive positions in the private sector, international organizations, government, and academia. He is currently a Visiting Scholar at the Hong Kong University of Science and Technology.

This article originally appeared on Republished with permission.
New NAFTA would govern North American shipments of export cargo and import cargo in international trade.

Needed: A rational debate on the new US trade philosophy

The current US Administration has been accused of incoherence in its trade policy.  In reality, a very clear philosophy is discernible in at least some aspects of its approach to trade.  Since this philosophy flies directly in the face of the basic principles which have governed trade since the end of WWII, an informed and reasoned debate on this new view of trade is sorely needed.

The architects of the post-war trade system—having lived through the Great Depression and two world wars in three decades—came to the conclusion that stability, predictability, and a robust set of multilateral trade rules and norms would best serve the national interests of the US and its partners. These simple principles have provided the foundational pillars for the global trade system for more than seven decades and have become so deeply ingrained that they have been accepted without question. At least until now.

The current US Administration, and in particular US Trade Representative Robert Lighthizer, are adhering to a much different philosophy. Having reflected on the past seven decades of history, Ambassador Lighthizer (and those in the Administration who share his views) have come to the conclusion that stability, predictability, and robust rules often serve the interests of other countries (which are seen as competitors rather than partners), at the expense of US interests.  According to this alternative philosophy, US interests are frequently best served – and its comparative advantages are best maximized – in a world of unpredictability and lax rules which provide ample scope for unilateral actions.

Although strands of this philosophy are evident in most of the recent US trade actions, it comes through most clearly in the US negotiating positions in NAFTA.  Perhaps the biggest stumbling block in NAFTA is the US insistence on a “sunset clause” which essentially means that NAFTA would be terminated in five years unless all three parties agreed to continue it. Some observers have gone so far as to question whether this is a serious proposal, or if it is a “poison pill” designed to sink the negotiations. Such a clause would make it difficult, if not impossible, for companies to do long-term or even medium-term planning, critics point out.  But that is precisely the point.  According to the Lighthizer mindset, the predictability and stability created by NAFTA has facilitated, and perhaps even encouraged, US companies to move operations and jobs across the border, with disastrous results for US workers.  A “sunset clause” would undermine that predictability and rebound to the advantage of the US. The presumption being that companies would prefer the safe harbor of the United States if they no longer can count on the terms of the NAFTA remaining in place in perpetuity.  In this way, by fostering uncertainty, the US is maximizing some of its most important comparative advantages:  the world’s single largest consumer market and strong domestic rule of law.

The same philosophy is apparent in the US negotiating position on NAFTA’s Investor-State Dispute Settlement (ISDS) provisions. These provisions essentially allow private companies to bring cases in a private tribunal against government policies which they believe diminish the market access they reasonably expected to receive. They are designed to improve stability and predictability in countries that might not have as robust a legal system as the US, and as such have been regarded as quite helpful for US companies with operations abroad.

Ambassador Lighthizer is attempting to remove or water down ISDS provisions, openly questioning how and why it is in the best interests of the US government to minimize the risks associated with US companies moving operations out of the US and into foreign jurisdictions.  In this sense, uncertainty about whether fair and unbiased legal judgments can be obtained in a foreign country is considered a good thing: It discourages US companies from setting up operations in such countries.  ISDS provisions are seen as perverse: They remove one of the most important comparative advantages the US posseses vis a vis competing jurisdictions: strong rule of law.

One may agree or disagree with Lighthizer’s negotiating stance, but it’s difficult to assail his logic:  ISDS provisions do undeniably minimize the risk US companies face in moving operations abroad.  Once again, from this point of view, an existing system that provides predictability and stability are seen as working against US national interests.

Canada and Mexico are approaching the NAFTA renegotiations with an intention to update the 23-year-old pact in the many places where it is needed and to make other common-sense modifications, as defined by their individual national interests. The US approach is fundamentally different, seeking to overturn the core principle on which the agreement is based: the establishment of a largely open and integrated North American production base and market. Many of the US proposals are in fact intended to undermine continental integration and to establish a set of incentives and disincentives that will result in more production being shifted to the US.

The extraordinarily stringent automotive rules of origin proposed by the US is perhaps the most direct way this objective is being pursued. Interestingly, this negotiating position is being leveraged by a unilateral trade action—the Section 232 investigation into automotive imports—which could result in substantial tariffs being applied.  The current US automotive tariff is only 2.5 percent, so if the US overplays its hand on the automotive rule of origin, companies will be tempted to ignore it, source from wherever they want, and then simply pay the minimal 2.5 percent tariff.

Obviously, that calculation would be dramatically altered if unilateral trade action under Section 232 results in a substantially higher automotive tariff.  Companies would have little choice but to shift production to the US in order to meet the rule of origin and avoid the higher tariff.  Lax trade rules and/or enforcement which permit (or at least fail to prevent) the US from taking such unilateral actions are therefore seen as an integral part of the United States’ ability to protect and promote its national interests.  Undermining the efficacy of the WTO, the global trade referee, either by asserting the US’ right to ignore decisions, or by undermining dispute settlement by blocking Appellate judges, is part of the broader strategy.

Contrary to the conventional wisdom, there is a fair degree of coherence (and an underlying philosophy) behind current US trade policies – at least those being driven by the US Trade Representative.  Ambassador Lighthizer, a deeply experienced trade professional with credentials beyond question, is convinced that the traditional approach to trade is flawed, and that his very different approach is in the best interests of the United States. Is he right or wrong?  This is the debate we need to be having – now.

Stephen Olson is a research fellow at the Hinrich Foundation. This article originally appeared here.

Trump has imposed tariffs on steel and aluminum shipments of export cargo and import cargo in international trade.

Time for leadership in trade—not victimhood

The turmoil in today’s global trade system—spawned by perceived unfair trade practices that have led to unilateral US tariff actions—provides an opportunity for leadership that should be eagerly embraced. But first, countries need to move past a sense of victimhood. Far too much time is being wasted on hand-wringing over the controversial nature of US actions, and a sense that the trade system is under assault by the US. This frame of reference produces an inherently defensive posture at a time when the exact opposite stance is needed.

The point is not whether the various complaints about US trade actions are legitimate, or whether the potential damage to the global trade system could be as severe as some fear. In many cases the complaints—and the fears—are thoroughly justified.

The real issue however is who will exercise the mature, proactive leadership needed to propel us forward towards resolution? The starting point should be to move away from an “us versus them” mentality typified by back and forth accusations, and towards a “we’re all in this together” mindset. Given that open and mutually beneficial trade has driven economic development and higher standards of living across the globe for the past seven decades, all trading nations have a deep interest in ensuring that trade is sustainable. One need not be in agreement with US trade actions – nor a fan of the US President – in order to recognize that the current trade system is fundamentally broken, and therefore not sustainable.

The US has walked away from its traditional role as leader of the global trade system, and in fact seems more interested in taking a sledgehammer to the system rather than repairing it. The playing field is wide open. Which country can and will assume the mantle of mature leadership?

Depending on which metric you use, China is either the first or second largest economy in the world and by any measure will be the largest within a decade or two. It is the largest trading nation, and access to the global trade system, along with transformative FDI, have powered China’s economic ascent. It would be difficult to find another country or jurisdiction which has benefited as much from the global trade system.

So China is certainly one logical candidate to play a greater leadership role in ensuring we have a sustainable trade system which produces mutually beneficial trade. Since its entry into the global trade system in 2001 however, China has been, for the most part, a follower. And its approach, at least up until now, has been to leverage the trade system in order to maximize narrow national economic development objectives. While it’s perfectly normal for any country to engage in trade in order to promote its national interests, China now needs to take on greater responsibility for the overall viability of the system – a system which has enabled its economic rise, and which will be no less important for China moving forward. A trade system which facilitates China’s unprecedented developmental trajectory, but leaves partners feeling aggrieved, will not be sustainable, and is not in China’s best interests.

China is not the only country which can and should show more leadership. An equally strong case could be made for the EU, Japan, Korea, Australia, and others. With the US on the sidelines, joint responsibility and joint leadership is needed. This is a golden opportunity. The recent EU proposals on modernizing the WTO could be an encouraging indication, although it raises the question of how much progress is possible in the WTO.

Importantly, the problems which are stressing the trade architecture to the breaking point today are not merely bilateral US-China issues. As China continues to grow, the various flash points – on IPR, on technology transfer, on predatory trade practices, and so on – will eventually impact virtually every trading nation. And as more developing countries follow China’s state-directed capitalist model, the friction points will only multiply further. So all leading trade nations have a vested interest in ensuring we have a sustainable trade system which delivers mutually beneficial trade and is resistant to manipulation and evasion.

Don’t get hung up on the vehicle that gets you there. If progress in the WTO is unworkable, progress in a plurilateral or regional setting could also prove to be immensely helpful. But whatever the path, a victimhood mentality or a trade war mindset will never get us to where we need to be.

When confronted with punitive tariffs in response to perceived unfair trade practices, a victim draws up a defensive retaliation list, and hunkers down for a trade war. A mature leader, invested in the sustainability of the trade system, says “There are legitimate problems here; how can we fix them?” The major trade nations now need to take a long, hard look in the mirror and decide whether they prefer to be victims or leaders.

Stephen Olson is a research fellow at the Hinrich Foundation. This article originally appeared here.

The demise of TPP will have little impact on US shipments of export cargo and import cargo in international trade.

The Death of TPP

Any lingering hope for passage of the Trans-Pacific Partnership (TPP), at least in its current form, was extinguished by President-elect Trump’s recent announcement of his intention to formally withdraw the United States from the agreement. So ends seven years of controversial negotiations, and intense public debates over the content, coverage, and anticipated consequences of the pact.

Let’s take a deep breath, set aside the heated rhetoric and partisan bickering, and try to unpack in straightforward and practical terms what the demise of the TPP actually means. Here are a few key points to keep in mind.

Do not expect any dramatic economic consequences from TPP’s demise. All credible estimates of the agreement’s impact on the U.S. economy were generally within the range of a rounding error (no more than 0.50 percent of GDP spread out over 15 years). Even TPP’s most vigorous supporters in the United States were not attempting to argue on the basis of profound economy-wide benefits flowing from the agreement’s implementation.

Granted, some other TPP partners, such as Vietnam, were projected to experience more significant economic benefits (roughly eight percent GDP growth over 15 years), so failure to implement the accord will carry a bigger bite there. However, TPP’s impact across all of its 12 signatory countries was estimated to be merely 1.1 percent of GDP by 2030. So, despite the agreement’s relative merits or demerits, failing to implement the accord will clearly not be a defining economic event.

Trade will continue. The TPP would have removed some but not all barriers and restrictions on trade between its 12 members, and as a consequence would have increased trade flows. But keep in mind, trade is already open and flowing at robust levels amongst many TPP partners—and that will continue. The United States already has free trade agreements in place with six of its 11 TPP partners, most significantly the NAFTA agreement with Canada and Mexico, and trade among the NAFTA partners amounts to a staggering one trillion dollars.

Out of the remaining five countries where FTAs do not exist, four of them are remarkably small economies—Brunei, Malaysia, Vietnam, and New Zealand—with no real prospects to significantly alter or impact trade flows. The fifth country, Japan, is indeed a large economy, so additional liberalization would likely have increased trade, although it should be pointed out that TPP skeptics charged the TPP would have done little to address the real market access issues in Japan.

So what’s the bottom line? Although the agreement would have increased trade within the region, trade will continue flow—in some cases, at very robust level—amongst the erstwhile TPP partners.

Trade liberalization will not stand still—with or without the United States. Even before the fate of the TPP was sealed many countries were speaking openly of having a Plan B in place, should the United States fail to ratify the agreement. In some cases, countries will step up the pace of bilateral agreements, and there has even been talk about trying to move forward with the TPP without the United States, although it’s unclear if this idea has any traction.

The demise of the TPP will also give renewed impetus and a greater sense of urgency to completing the Regional Comprehensive Economic Partnership (RCEP), a China-led trade initiative including the ten ASEAN members plus Japan, South Korea, India, Australia, and New Zealand. With TPP off the radar screen, RCEP becomes the most important game in town.

It should be noted however that the level of liberalization envisioned under RCEP is a far cry from what TPP provided and therefore the agreements are not directly comparable. But symbolism is important, and a successful completion of the China-led RCEP will leave the impression that trade liberalization in East Asia has moved forward without the U.S.

China will naturally be looked to for leadership. As a corollary to the point above, the repudiation of TPP is being widely interpreted as an abdication of the United States’ traditional trade leadership role in the region. The vacuum left by the United States will almost by default be filled by China, which, as the world’s second largest economy and largest developing country, continues to press the case for liberalization.

Indeed, Chinese President Xi Jinping received a standing ovation at the recent APEC leaders meeting in Peru for a keynote speech which strongly emphasized China’s commitment to globalization and further trade and investment opening. Standing in stark contrast to the trade positions espoused by President-elect Trump, many APEC observers concluded that the baton of trade leadership in the region had passed from the United States to China.

One result is that trade agreements will be more likely to sanction the activities of the state-directed capitalism model favored by China. Efforts to apply trade discipline to the activities of State Owned Enterprises (as provided for in TPP) will be far less likely.

Opponents of trade agreements feel the wind at their back. Opposition groups organized themselves since the era of bilateral and regional free trade agreements began in earnest in the 1980s. Up until now, the most significant victory for these groups has been the successful blocking of the launch of the Seattle round of WTO negotiations in 1999, the so-called Battle for Seattle.

The defeat of the TPP might actually be a victory of greater long-term consequence, given the extent to which negative trade messages gained momentum and assumed a position of prominence in the U.S. presidential campaign. Trade—cast almost entirely as a discussion about lost jobs and diminished wealth—has never played such a prominent role in a presidential election, nor has opposition to trade agreements been such a central plank in an incoming president’s agenda.

This success in dictating the terms of the trade discussion, raising it to the highest political levels, and rendering TPP untenable will embolden trade opponents to press their case even more forcefully, potentially undermining the prospects for other pending agreements, such as the Transatlantic Trade and Investment Partnership.

So, what does the death of the TPP really mean?

While the direct economic and trade impacts of the agreement’s demise will be modest on an overall basis, the impact on geostrategic and political realities could be profound.

China’s elevated leadership status means that the traditional post WW II global trade architecture, fashioned largely in the image of the United States, could begin to evolve in directions more reflective of China’s philosophies and interests.

The United States faces a dramatically altered domestic political landscape, calling into question its ability to pursue, conclude, and ratify expansive and ambitious trade agreements. It will have little choice but to fundamentally rethink its approach to trade. Over the long-term, this reconsideration of the traditional approach to trade agreements might be the most important legacy of the ill-fated Trans-Pacific Partnership.

Stephen Olson is a research fellow at the Hinrich Foundation and a visiting scholar at the Hong Kong University of Science and Technology. 

This article originally appeared on Used with permission.