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

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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.
silk road

Can the New Silk Road Compete with the Maritime Silk Road?

China’s president Xi Jinping refers the Belt and Road Initiative, aka the New Silk Road, as the “Project of the Century” and according to a recent Bloomberg article, Morgan Stanley anticipates Chinese investments will total 1.3 trillion US dollars by 2027. In addition, more than 150 countries and international organizations have committed to invest in the project as well with infrastructure enhancements, such as roadways and power plants. But will this New Silk Road ever really compete with the firmly established Maritime Silk Road?

Following is a comprehensive analysis by Bernhard Simon, CEO of Dachser, an international logistics solutions provider, Mr. Simon outlines the benefits and challenges associated with the New Silk Road as well as its position as a potential competitor to the Maritime Silk Road.

Over the last few years, the more I hear and read about the New Silk Road, the more grand the expectations.  Politically speaking, the trade corridors between China and Europe, as well as Africa, seem to be China’s key to becoming a leading global power in the 21st century. Logistically speaking, it would seem that infrastructures and networks are emerging on an entirely new scale, taking a gigantic economic area—often described as representing 60 percent of the world’s population and 35 percent of the global economy—to the next level. The New Silk Road could be a kind of high-speed internet for the transport of physical goods.

As with most narratives, it is worth taking a critical look at the facts. I would like to do this now for certain logistical aspects of the Belt and Road Initiative (BRI), as the New Silk Road is officially known.

First, let’s consider the overland connection between China and Europe: the possibility of bringing Chinese consumer goods to us on the east-west route via rail. This transcontinental route was not the brainchild of China’s President Xi Jinping, who made the BRI a national doctrine in 2013.

In fact, goods have been rolling along the Trans-Siberian route from China to Europe since 1973 (with some interruptions due to the Cold War). Today, there are two routes out of northern China, which head via Mongolia, Kazakhstan and Russia to terminal stations such as Duisburg’s Inner Harbor or Hamburg. China’s western region, home to the megacity of Chongqing and its 30 million people, is also connected to the northern routes. This route allows cargo from the west to no longer need to be transported the many miles to China’s coasts.

 High Costs of Rail Freight vs. Ocean Freight

How significant are these rail links for logistics between Asia and Europe? In 2017, 2,400 trains moved about 145,000 standard containers between China and Central Europe. This corresponds roughly to the cargo of seven large container ships. The International Union of Railways (UIC) expects this to grow to 670,000 standard containers—equivalent to 33 container ships—in ten years’ time. Despite this forecast growth, the existing rail links between China and Europe are likely to remain logistical mini-niches. Steve Saxon, a logistics expert from McKinsey in Shanghai, summarizes it nicely: “Compared to sea freight, the volume of goods transported to Europe overland will always remain small.”

This is primarily a matter of cost. Transporting a standard container between Shanghai and Duisburg by rail costs between $4,500 USD and $6,700 USD; compare that to the cost of sending a similar container from Shanghai to Hamburg by ship: currently around $1,700 USD. This difference is simply too great for railway transport to be truly competitive against ocean transport, even though they move the cargo at about twice the speed. Efficiency improvements will not have a big enough impact to shift from ocean transport to rail.

Another factor is that at the moment, China heavily subsidizes these international rail connections. Once that support ends in 2021, competitiveness will erode further. It is not clear whether rail transport will be self-sustaining without subsidies.

Also, in most cases, anyone needing a shipment quickly and flexibly typically sends it via air freight, even if this option costs around 80 percent more than via railway. Thus, freight transport by rail is (and will remain) caught between economic (by ocean) and fast (by air).

Would adding more train routes change the situation?

China is planning an additional railway line in its southern region, which will move cargo to Europe via Central Asian countries, as well as Iran, and Turkey, bypassing Russia entirely. Indeed, a railway line has connected China with Iran since 2018. This route is, geographically speaking, very similar to the “old” Silk Road, a trade route for camel caravans that crossed Central Asia on its way to the eastern Mediterranean. If this railway line is completed one day, it will raise a number of questions from a European perspective: How can safety, punctuality, and reliability be guaranteed? How can delays caused by customs clearance be minimized? What effect will international sanctions have, for example, on transit through Iran? How can the misuse of containers for smuggling immigrants be avoided? In other words, many issues need to be addressed before a railway corridor south of Russia can be established.

There are two more routes in China’s BRI strategy. One is in Southeast Asia: a 2,400-mile railway line from Kunming to Singapore plus a branch to Calcutta. The other is a rail line that starts in China’s far west, then runs through Pakistan to the port of Gwadar on the Arabian Sea. Crossing over various passes in Central Asia, this technically challenging project is expected to cost $62 billion USD. However, both routes have only a very indirect connection to freight traffic between China and Europe.

So the situation will remain much the same into the future–some 90 percent of world trade will go by ship. Rail transport via the New Silk Road will not change this. If all this freight suddenly started rolling along the Silk Road, the route would be like an endless conveyor belt loop—the idea is completely absurd.

And what about the Maritime Silk Road?

More important than Eurasian railway routes is the so-called Maritime Silk Road, i.e., the transport of cargo from China to Europe by sea. As soon as Portuguese sailors opened up China for trade by sea in 1514, the old Silk Road began to fade from memory.

Today, more than 50 percent of global trade takes place on the Maritime Silk Road between China/East Asia and Europe. The world’s largest container ports are on this route: Shanghai, Singapore, Shenzhen, Ningbo-Zhoushan, Busan, and Hong Kong. The development of the Maritime Silk Road needed no Chinese master plan; logistics infrastructure arises wherever corresponding investments pay off.

China has numerous plans for these established shipping routes, including port expansions. Its shareholdings in around 80 port companies—including Piraeus and more recently Genoa and Trieste—support its plans and ensure investments. Why should we take issue with China for pursuing these goals leveraging its position as a leading global economic power? It is not the first country to promote its economic interests with direct investments and financing. Europe, too, should pursue a strategy of developing an enhanced infrastructure to transport freight to and from China/Southeast Asia in order to ensure a reciprocal exchange.

And China’s plan to step up the use of the maritime corridor through the Suez Canal, which shortens transport between China and Central Europe by at least four days compared to the route around Africa, is reasonable and less complicated. The Frenchman Ferdinand de Lesseps completed the Suez Canal in 1869 with precisely this goal in mind.

Conclusion

Nobody denies that the diverse projects of the New Silk Road hold great economic potential; that they would improve the network of connections between Asia and Europe; and that Beijing has a geopolitical interest in pursuing them. China is creating an enhanced infrastructure that will benefit all participants in the global economy. Nevertheless, it would be advisable to evaluate the logistical opportunities with the necessary dose of reality. I would caution against being dazzled by the beautiful visions and the fascinating narrative as it could cloud your vision and lead to using poor judgment and making risky investments.

 

Bernhard Simon is the CEO of Dachser Logistics