WITA’s Friday Focus on Trade | March 17, 2023




The IRA and the Meaning of “Free Trade”

Excerpts from a piece by Peter S. Rashish, who will moderate WITA’s upcoming event, We’ve Got a Deal for You! The U.S.-EU Mini Trade Negotiation. To register for this event please click here.
The Inflation Reduction Act (IRA) approved by the U.S. Congress last August continues to provoke transatlantic frictions. The European Union has welcomed the climate investments in the IRA that will help the United States meet its net-zero commitments under the Paris Agreement. It is concerned, however, that the local content provisions in the bill’s $369 billion in subsidies for electric vehicle (EV) purchases not only violate World Trade Organization (WTO) rules but also favor U.S.-based producers and suppliers.
…The Administration has already taken steps to assuage European concerns. At the end of December, the U.S. Department of the Treasury issued updated guidance clarifying that U.S. consumers who lease (rather than purchase) imported European electric vehicles will be able to take advantage of the $7,500 in tax credits the IRA provides for “commercial vehicles,” which do not have to meet the stringent North American (United States, Canada, Mexico) requirements for the supply of battery components and critical minerals and as a location of final assembly.
By next month the department has also indicated that it will clarify one key aspect of the IRA with bearing on imports from the European Union, Japan, the UK, and other foreign automobile producers: the language in the bill that exempts imports of EV critical minerals from the North American origin rules if they come from countries with which the United States has a “free trade agreement.”
The Treasury Department has already pointed out that “the term ‘free trade agreement’ is not defined in the Inflation Reduction Act (or in any other statute).” That flexibility suggests there should be room to take steps to further reduce transatlantic tensions. One option could be to negotiate a new, plurilateral critical minerals or raw materials agreement among the United States, the European Union, and other economies. Such sectoral deals are normally allowed under WTO rules. Another approach would be to apply the term “free trade agreement” to the 48-member WTO Government Procurement Agreement that includes the EU and other key U.S. trading partners.
A third option would involve taking a more expansive view of what can and should lead to increased trade.
While the U.S.-EU Trade and Technology Council (TTC) launched in 2021 does not include new, de jure market access commitments through tariff reductions, it does commit the two sides to “promote U.S. and EU competitiveness and prosperity and the spread of democratic, market-oriented values.”
If the TTC can achieve its specific objectives—among them, strengthening transatlantic supply chains, forging common rules for artificial intelligence, and creating joint approaches to sustainable trade and decarbonization—it will lead de facto to more trade across the Atlantic. The end results of the TTC and a traditional free trade agreement (for example, the Transatlantic Trade and Investment Partnership launched in 2013 but never concluded) would then be similar, even if the means differ.
02/06/2023 | Peter S. Rashish | The American Institute for Contemporary German Studies



Free Trade: The Strongest Spell Against Economic Decline

In J.K. Rowling’s novel “Harry Potter and the Sorcerer’s Stone” Professor Albus Dumbledore opines that humans have a knack for choosing precisely those things that are bad for them. The same could be said for United States and European Union leaders’ affection for interventionist industrial policies.
There is never a right way to do a wrong thing, and this is particularly true when it comes to governments picking business winners and losers, drowning politically favored companies in taxpayers’ money and claiming they are turbo-charging progress. The US’ Inflation Reduction Act (IRA) – doling out $369 billion to subsidize electric vehicles, turbines, and battery projects – and the EU Recovery and Resilience Facility (RRF) – an instrument for providing grants and loans to support reforms and investments in the EU Member States totaling over €700 billion – are the latest examples of this self-destructive tendency.
Both the European and American political appetite for dirigiste industrial policies is rooted in a wrong-headed desire to beat China at its own self-destructive game, buying into the notion that the government has reliable foresight in which technologies and materials to invest in. History has shown that state aid invariably becomes a vehicle to support uncompetitive companies and pour money into politically favored initiatives, rather than support innovation and cutting-edge technologies. Do America and Europe really want to let China shape their economic strategies?
Excessive interventionism is bad for business, consumers, and the economy, as it gives bureaucrats the authority to redirect resources to projects and businesses based on political considerations, rather than economic ones. This creates a lack of competition, which often leads to higher prices, fewer choices, and poorer product quality.
Even beyond the high economic importance of keeping global markets competitive, decision makers must remember that subsidies and tariffs distort markets and often lead to conflict in international trade relations. This is an especially critical point during a time when international instability is on the rise, whether it’s the Russian war on Ukraine or the worrisome prospect of China invading Taiwan. Ensuring strong relations with our allies, both economically and military, is crucial. Unfortunately, the US and EU have indulged in a number of internecine trade wars over recent decades, covering everything from aircraft and aluminum to steel and poultry. The results have led to needless trade tensions with international partners and comparative advantage losses in a variety of industries and sectors.
02/22/2023 | Glen Hodgson, Brooke Medina | RealClearWire



A New Horizon in U.S. Trade Policy

U.S. trade policy—and with it the rules and institutions that constitute global economic architecture—has rarely been static. But over the past five years, beginning with the passage of the U.S.-Mexico-Canada-Agreement (USMCA) and continuing with the Biden administration’s innovative trade initiatives currently being negotiated with partners in Europe, Asia, and the Americas, the future of U.S. trade has never been more open-ended.
Climate, once largely absent from global trade rules and agreements, has vaulted to the forefront of U.S. trade priorities. By contrast, market access, long considered the fulcrum of trade deals, is absent from the Biden administration’s signature trade initiatives in the Asia-Pacific and is being deployed selectively in a sectoral arrangement with the European Union involving steel and aluminum. These new policy directions are occurring against several major shifts in domestic economic policy and global economic governance: 1) a pivot toward industrial policy in the United States driven by three major pieces of legislation—the Inflation Reduction Act, the CHIPS and Science Act, and the Infrastructure Investment and Jobs Act (IIJA); 2) a dramatic turnabout in global attitudes toward supply chain management and the balance between efficiency, resilience, and security in cross-border trade; and 3) the obsolescence of the World Trade Organization (WTO) as a forum for resolving trade disputes.
This issue brief examines some of the key trade initiatives pursued by the Biden administration to date. It then sets out key questions facing U.S. trade policy in a global environment defined by volatility and renewed ambition to tackle the great challenges of the 21st century, such as climate change, inequality, and great power competition.
Over the past two years, the Biden administration has pursued a number of innovative trade initiatives that in different ways aim to redefine the scope and purpose of U.S. trade relations. These initiatives differ both in structure from traditional free trade agreements (FTAs) and also in their substance, most notably in the emphasis they place on climate aims and worker empowerment over tariff reductions.
03/14/2023 | Trevor Sutton, Mike Williams | The Center for American Progress



The Four Horsemen of the Apocalypse at the WTO

Excerpts from remarks by Alan Wm. Wolff, former Deputy Director General of the WTO, delivered at the panel “Pestilence, Famine, War…Death? The Future of Trade” at the EU @ South by Southwest Conference (EU@SXSW) in Austin, Texas
The EU chose a marvelously provocative title for this panel: “Pestilence, Famine, War. . . Death? The Future of Trade”. With the use of foresight, one can see the four horsemen of the apocalypse from the WTO’s headquarters building on the shores of Lake Geneva.
…Updating and making more perfect the WTO will not cause the threats to human life that are attributable to disease, famine, and war to disappear. But the adoption of trade rules can reduce the impact of those threats. Being prepared for the next pandemic by having the right trading arrangements in place can greatly reduce the loss of life. Vastly improving the Agreement on Agriculture can reduce the risks of famine and food insecurity. Finding effective means to combat climate change must include cooperating on creating and living by trading rules that facilitate the movement of food from where food is available to areas where it is needed.
The fourth horseman, death, must not be allowed to triumph. WTO Members need to recall that the multilateral trading system they have inherited is by nature a peace project. This mission is still vitally important and current. The WTO must be updated and made more effective…
The institutional reforms for the world trading system must emphasize strategic foresight – scanning for what is on the horizon, and what may be just over the horizon, that will affect the well-being of the WTO’s members and their peoples. This should be combined with active policy planning. Reliance will be needed on a stronger, more independent executive, consisting of the Director-General, Deputy Directors-General and expert Secretariat.
The four horsemen of the apocalypse do not represent black swan events — extremely negative events that are impossibly difficult to predict, that are unexpected and unknowable. Rather they represent a category that has come to be called “gray rhino events” that consist of highly probable, high impact, yet all too often neglected, threats that we can see and acknowledge yet do nothing about.
Without improvements in the world trading system, in its rules and its procedures, the nations of the world will remain underprepared and overexposed to threats where trade can make a vitally important positive difference. The costs are too great not to put into place the means to deal with global challenges where trade can be an important part of an effective response.
03/13/2023 | Alan Wm. Wolff | Peterson Institute for International Economics


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