Trade and Prosperity

November 4, 2021

Trade policy reviews get exciting (but for the wrong reason)

TPRM in the news. Perhaps for the first time ever, the WTO Trade Policy Review Mechanism (TPRM) made the news (at least here in Australia). During a meeting for China’s ‘review’, Australia called out China on its politically motivated and trade disruptive practices affecting Australian exports. The statement of Australia noted how these are undermining agreed trade rules and the multilateral system. Some other economies also made statements on China’s trade policies.

The WTO’s ‘other’ function. The TPRM is one of the lesser known functions of the WTO. Trade policies of members- across the economy- are ‘reviewed’ periodically by the membership for adherence to WTO agreements and progress toward liberalisation goals and market oriented reforms. Taking into account the views of other members and analysis of the policy settings, the WTO Secretariat and member under review prepare a report which is then made publicly available.

Power to transparency. The process is intended to be informative and non-confrontational, providing an objective evaluation of each economy’s trade policies and practices and their impact on the multilateral trading system. The idea is to increase transparency and accountability – of both the ‘good’ and the less good aspects of the trade policy regime – and to encourage alignment with agreed rules. The peer assessment brings legitimacy to the process. The comprehensive and detailed Secretariat reports are a great resource for analysts, like us, for what they both say and don’t say.

The real news. The value of the TPRM was not really mentioned in the news stories. Also missed was the fact that it is still a functioning part of the WTO, while others – a forum for trade negotiations and a body for dispute settlement – are struggling. It is one of the few forums in which major traders, differences or not, still actively and willingly participate. That seems more newsworthy.

Investment ‘diversification’ relies on open settings at home

Investment the ‘ new’ diversification. Earlier this week, Minister for Trade, Tourism and Investment Dan Tehan gave an interview touting Australia’s plans to increase – and diversify – inward foreign investment. Since late last year, there has been significant funding and policy attention to support Australian exporters develop and expand trade across markets. Now the focus appears to have moved toward investment.

Barriers to diversification. There are perceptions that investing in Australia has become more, not less, difficult for foreign sources of capital. It is well known that before the pandemic, the Foreign Investment Review Board (FIRB) rejected multiple key proposed acquisitions in energy infrastructure and agricultural land. While investing during the pandemic was made easier through temporarily reduced screening thresholds, any investment from any investor – even FTA partners – that impacts on national security, is now subject to broad veto powers. This can extend investments in large parts of the economy. These extra obstacles have made it difficult for many Australian companies to access international capital.

Holding back trade.  Ultimately, obstacles to investment limit the capacity of Australian business to develop new industries and expand trade and exports. This year the FIRB rejected a Chinese bid to take a stake in WA rare earths player Northern Minerals, which constrained the company’s funds, impeding its expansion and development plans -policy to protect Australia’s critical minerals in effect put the brakes on development of those minerals. The company was forced to scramble to sell shares locally at 2c each, rather than access the 6.2c per share that the Chinese buyer had offered.

Competition for capital. The current environment is one of increasing global competition for scarce sources of capital. Australian inward FDI was down 48% from all sources in 2021, and 61% from China. Australia’s competitors are now firmly focused on attracting FDI to support economic recovery.

Australia’s economic wellbeing relies on ready access to global capital for employment creation and economic growth. More than this, Australia’s FDI supports strategic partnerships with other nations, drives increased two-way trade, and underpins integrated value chains. It’s fine to seek ‘diverse’ investment, but all investment needs a welcoming destination.

In brief

UK and NZ reach agreement in principle on their bilateral FTA. Both governments reported significant market access gains, including zero-rate tariffs on bilateral goods trade (with some phase in periods).The agreement also includes what appear to be ‘new’ commitments related to climate change, fossil fuel subsidies, trade and gender equality and animal welfare standards.

The UAE renews interest in FTAs. Eight economies have been targeted for ‘fast track ‘ negotiations – South Korea, India, the UK, Turkey, Indonesia, Ethiopia, Israel and Kenya. Talks with Indonesia have already commenced. Negotiations with Korea are likely to commence in the next few months.

ASEAN/Australia elevate economic relationship. Addressing the first ASEAN – Australia Summit on October 27, the Australian Prime Minister Scott Morrison affirmed Australia’s support for ASEAN’s centrality in the Indo-Pacific region. ASEAN and Australian leaders agreed to elevate bilateral ties to a comprehensive strategic partnership.

The US seeks deeper ties with ASEAN through TIFAs. USTR Tai is reported to be exploring expanded trade and investment ties with ASEAN through trade and investment framework agreements. ASEAN and the US recently finalized the US-ASEAN Expanded Economic Engagement (E3) Initiative to ‘promote increased trade, investment, and economic cooperation.’

Surprise! ‘Trump tariffs’ have not reduced the size of the US trade deficit. As pointed out by PPI, barring some unexpected economic shock this November, the 2021 US deficit in manufactured goods will top USD1 trillion. In 2020, it was $900 billion. This was a four-year jump of $252 billion from 2016 (when it was USD650 billion). The deficit was USD317billion in 2000.

October 7, 2021

USTR talks more about China, less about trade

In a much anticipated speech before the Center for Strategic and International Studies, United States Trade Representative Katherine Tai was expected to detail how the US plans to redefine its trade policy relationship with China. A significant policy change would have profound changes for Australia and the region.

In the end, the Ambassador barely mentioned trade at all. The focus of the speech was how the Biden administration plans to stimulate its industries, and how China’s policies hurt the prospects of US workers.

Biden time on Phase 2. One question on the minds of many is whether the Biden administration intends to maintain the punitive tariffs put in place by President Trump. Ambassador Tai’s speech hints that the tariffs will remain in place, and additional products will be considered for inclusion. China is to be held to its Phase 1 Agreement commitments to purchase American goods. Although there was a reference to raising broader policy concerns with Beijing, the speech did not mention the prospect of a second phase agreement.

Call for collaboration. As well as referring repeatedly to China’s damaging effects on the prosperity of US workers and others around the world, the USTR ended her speech with the goal of reaching shared prosperity that is “good for our workers, producers, and businesses; good for our allies; and good for the global economy.” In what is a significant break from the Trump era, the Biden administration is actively recruiting a coalition of those willing to stand up to China.

Spot the difference. A key part of the speech was the approach to industrial policy – on both sides of the Pacific: “China’s government continues to pour billions of dollars into targeted industries and continues to shape its economy to the will of the state”, whereas “[the US government] ha[s] to make smart domestic investments to increase our own competitiveness. We must invest in research and development and clean energy technology, strengthen our manufacturing base, and incentivize companies to Buy American.” Hint: apparently, one is good and the other is bad.

All in all, the USTR speech reads less like a comprehensive plan to guide US-China trade relations, and more like the launch of President Biden’s mid-term election campaign.

CPTPP gets expansive 

A bigger CPTPP. China’s application to join the CPTPP in September was met with mixed reactions from across the region. Commentators generally point out that China would find it difficult to meet CPTPP standards under its current policy settings, particularly on labour, digital trade and state-owned enterprises. Taiwan’s application – submitted just one week later – was generally welcomed, including by Japan. The UK’s accession process also got underway with a meeting of the Working Group set up to progress its membership.

All existing CPTPP members must approve new members (signatories Malaysia, Brunei and Chile are yet to ratify). Malaysia has publicly welcomed China’s application. Australia however has stated that it will not support China’s bid until there is engagement on China’s compliance with its existing trade arrangements with Australia.

Notably Canada and Mexico are bound by a non-market economy provision in the USMCA, which requires parties to consult with other FTA partners on negotiations to enter an FTA with an non market economy, including China. This means the US would factor into any decision of Canada and Mexico on China’s participation.

These issues won’t be resolved quickly. Should China be admitted to join, the process will be long. Taiwan’s application may move more smoothly – it has been preparing for accession for the last three years – provided China doesn’t get admitted first. The UK, which applied in June, will likely be first off the rank. The process will provide a guide to members’ expectations and flexibilities.

Even bigger ambitions. The CPTPP’s 11 members cover around 13 per cent of global GDP; adding China would more than double that. More action on the FTA track is always welcome, provided it is running in the right direction, i.e. toward more open and certain frameworks for trade. Potential new members that are committed to meet the CPTPP’s high standards should be welcome. The greater the coverage of the agreement, the greater the benefits. Recall the ambitions of the CPTPP agreement itself, wherein the parties expressed their intention to ‘expand the partnership by encouraging the accession of other States or separate customs territories in order to further enhance regional economic integration and create the foundation of a Free Trade Area of the Asia Pacific.’

Note: Article Three directors have previously undertaken an analysis of Taiwan joining RCEP. Although some of the findings are outdated, it still has relevance to regional integration and FTAs.

Australia and India re-engage

A nice cup of Tehan. An India/Australia trade agreement could be realised by end of 2022, with an ‘early harvest’ or ‘interim’ deal to be agreed by December this year. Trade Minister Dan Tehan recently met in New Delhi with his Indian counterpart Piyush Goyal.

The interim deal will cover ‘goods, services, investment, energy and resources, logistics and transport, standards, rules of origin, and sanitary and phytosanitary measures’. It’s not likely to be ambitious; Goyal indicated it would cover the ‘low hanging fruits’ where both sides have an interest in expanding trade. Offers will be exchanged by the end of the year.

Sources have reported that more difficult issues that have been proposed for inclusion in the final agreement include e-commerce, global value chains and government procurement. Agricultural services and the regulatory environment faced by Indian software firms in Australia have also been mooted.

Aligning strategic goals. A trade agreement with India has eluded Australia for more than a decade, despite efforts at both the bilateral and regional level. It is likely that the conditions that have led to a warmer approach from New Delhi this time around include the desire of both economies to reduce their dependence on China. Recent upgraded strategic cooperation between Australia and India – along with Quad allies the US and Japan – seems to have helped pave the way for closer economic cooperation as well.

A comprehensive challenge. As pointed out by a former Australian trade negotiator, while the outlook for an early harvest deal is promising, the challenge will be to develop a package that is commercially meaningful, and does not reduce the prospects for a comprehensive deal further down the path. A high-standard FTA with India would be a significant benefit for Australia, improving access for exports to one of the world’s fastest-growing economies and helping to diversify our export markets and import sources.

Will AANZFTA move beyond an upgrade?

Calling AANZFTA from across the Pacific. In September Chile’s trade ministry expressed interest in joining the AANZFTA – a move that was welcomed by ASEAN, Australia and New Zealand Ministers. Officials have been instructed to ‘undertake necessary follow up actions.’

Expansion of the agreement to include Chile, and perhaps other economies in the region, would be interesting: could it pave the way for a larger regional agreement linking ASEAN, Latin American and Australia and New Zealand economies?

In this context the upgrade of the AANZFTA currently underway takes on a new importance, as newly agreed disciplines could have a broader reach. Chile has existing FTA commitments with CPTPP members (Australia, NZ, Singapore, Vietnam, Malaysia, Brunei), and with some ASEAN and Asia Pacific economies under bilateral agreements (with Australia, New Zealand, Singapore, Indonesia, Thailand, Malaysia, Vietnam).

In brief

No thaw in China-Australia trade relations. Beijing has expressed displeasure at the increasing profile of the US-led Quad dialogue, and disdain at Australia and India’s efforts at cooperation. Australia remains the target of a range of Chinese trade sanctions. Treasurer Josh Frydenberg has indicated that these measures have largely failed to inflict damage on the Australian economy; however, recent falls in iron ore prices and Chinese curbs on steel production may change that picture.

Korea proposes digital trade pact with ASEAN. Korea has indicated it wants to negotiate a digital trade agreement with ASEAN countries, similar to the Digital Economy Partnership Agreement (DEPA), which currently comprises Singapore, New Zealand and Chile. Korea has also expressed recent interest in joining the DEPA. A digital economy agreement could build on e-commerce provisions in the RCEP.

Article Three in the News

Article Three Director Jon Berry appeared at the Joint Standing Committee on Foreign Affairs, Defence And Trade’s Inquiry into expanding membership of the CPTPP on behalf of Article Three. He stated:

“The greater the coverage of the agreement, the greater the benefits. These benefits include better market access for Australian exporters, and increased participation in expanded regional value chains. The agreement’s commitments on government procurement, SOEs, technical barriers to trade, labour standards and the environment, and accompanying dispute settlement mechanisms, provide improved avenues for Australia to pursue its ambitions and address trade irritants. Increasing the membership of the agreement would extend these benefits.It’s important to note that CPTPP’s aim is to liberalise trade and raise standards. But it cannot completely prevent trade disputes from arising between any of its parties. Nor can it prevent foreign policy disputes. That is not what it was designed for

August 31, 2021

Abbott in Delhi: On an FTA ‘fast track’?

FTA announcements abound. Two weeks ago there was some buzz around an announcement that India would ‘fast track’ trade agreements with the UAE, UK, Australia, EU and Canada. The Secretary to India’s Minister of Trade stated that the UAE would likely be the first completed. Then a week later Indian Trade Minister Goyal stated that “Australia is first on the list, UK, then the UAE, and if the UAE happens, the pact with GCC [Gulf Cooperation Council] will also be expedited. We have already started the dialogue with the UAE and one more country from the Middle East.”

This statement was made following another announcement that a deal with the US – first floated several years ago – was off the table for now. 

Both of these announcements have come off the back of a visit to India by former Prime Minister Tony Abbott, and the declaration that an ‘early harvest’ agreement is being pursued.

Is Australia on the ‘fast track’ to an FTA with India? Less than two years ago India walked away from the RCEP negotiations at the last minute after eight years of negotiations. The review of the regional agreement between India and ASEAN has hit serious stumbling blocks. Even when agreements are in force, India’s customs authorities don’t always make it easy for exporters to utilise trade agreements.

A lot has changed in the last two years. Australia and India have cemented a Strategic Economic Partnership, and there appears be new impetus from India to reengage in the region. But an FTA is likely still some way off. India is yet to demonstrate it can commit to market opening beyond that set out in its current agreements- what was struck in RCEP before talks fell away would be a start.

Realistic expectations. In our view, setting expectations for Australian constituents and a dose of realism will be key to a path forward. For example, India is relatively open on log exports, but less so on sawn timber and other timber products. This is not because its log supply is poor, but because its timber processors and manufacturers seek protection.

There may be greater gains in pursuing technical market access and reducing non-tariff barriers than in seeking tariff reductions. Partial and targeted outcomes may be more prospective. As we’ve pointed out previously, tariff reductions always look great on paper, but whether they actually promote trade is another matter.

Will EU environmental measures boost trade?

Significant trade impacts. The European Commission has undertaken modelling on two of its proposed ‘Green Deal’ environmental regulations and their impact on trade, specifically the ‘Farm to Fork’ strategy and its biodiversity policies.

The modelling reveals that the trade impacts are reasonably significant. They note that the measures – through reducing domestic supply – will result in greater net imports of cereals, oilseeds, meat and poultry. The only positive trade change for the EU is an increase in net dairy products, primarily whey.

The report predicts that sheep meat quotas into Europe will largely become overfilled with exports from Australia, New Zealand and to a lesser extent Mercosur countries. There is a similar pattern predicted in beef trade. More broadly the report projects that EU producers’ competitiveness will be eroded further.

No going back? This is significant because the EU is highly unlikely to unwind any of these measures. They are generally politically popular. EU farm lobbies have already put forward arguments against introducing the measures. The response from Brussels is more likely to be either a different form of financial support, or an attempt to level the playing field by indirectly applying these regulations to imports in some way.

This is precisely what has taken place with the EU Emissions Trading System, which has reduced competitiveness for a number of European sectors, and the subsequent introduction of the Carbon Border Adjustment Mechanism to remedy this loss of competitiveness.

Australian and global exporters to the EU – particularly those involved in trade negotiations – should be well aware of these ongoing risks.

Mixed Signals: the US, Asia and APEC

Less trade, more geopolitics. US Vice President Kamala Harris’ Asia sojourn has been less than the triumphant visit that many had hoped for. The visit has taken place on the back of the final withdrawal of the US from Afghanistan, which has given many economies second thoughts on US commitment beyond its own borders.

Harris’ choice of destinations – Vietnam and Singapore – has also been viewed by some commentators as a clear snub to the region’s relative powerhouses, Indonesia and Thailand. Some have even gone so far as to argue that this may actually undermine ASEAN more broadly – resulting in an own goal for the US.

The choices by the administration are militarily strategic; they have much less to do with economics and trade. The administration has made clear that trade is not a high priority.

US indifference? Does this mean there is US indifference to trade and investment in the region? Or is it a small stepping stone? The announcement by Harris that the US is offering to host APEC in 2023 is welcomed in this regard. While the US has no clear ambition to open trade negotiations with any Asian economies, or join the CPTPP any time soon, it is at least a step toward engagement.
But a US APEC year would be two years away. And as we have seen, a lot can happen in a short time. 

Australia’s bind on trade, diversification and travel

Going nowhere. Australia businesses are acutely aware of curbs on both departures from Australia as well as arrivals within the region. The tighter caps on arrivals that are in place for several more weeks were exacerbated by Singapore’s border closure, which meant that most routes into Southeast Asia were closed.

However, this has been followed by an announcement by Germany and Singapore that the two countries will host a vaccination corridor – well ahead of planned a travel bubble between Australia and Singapore.

Trade diversification needs mobility. The correlations between trade and travel – for both business and leisure – have been well studied.
Like every other part of the world, Australia’s arrivals and departures have been greatly impacted by pandemic-related travel restrictions.

In addition to attempting to re-start exports, Australia is under economic pressure to diversify its export markets. This is difficult under the best of circumstances, but even tougher under current conditions.

Although bulk commodities can generally be sold on price and a very limited set of variables, selling more elaborate services and goods gets tougher without meeting face to face, or maintaining relationships with suppliers and customers – and it’s currently impossible to have those meetings.

The corridor narrows for Australia. The opening up of international movement is generally taking place between the US, Mexico and other Central American countries, some of which are operating above 2019 capacity. Travel between the UAE and India, as well as Spain and other European economies has rebounded from recent falls. Although much of this is regional, travel between Australia and its biggest travel pairings – New Zealand and Southeast Asia – are still heavily impacted.

None of this bodes well for an export strategy, diversified or otherwise. It’s worth noting that despite some rosy headlines around Australian exports, many have fallen to multi-year lows. All eastern seaboard states have had falls in total exports. Western Australia’s exports – and Australia’s more broadly – are being propped up by resources.

All economies are acutely aware of this, and many are feeling the pressure to diversify away from China. The risk for Australia is that other businesses and economies will beat Australia to it.

July 23, 2021

Carbon border adjustments: Getting real

Two proposals, half the detail. Two major economies made announcements around carbon border tariffs over the past few weeks. The European Commission finalised its proposal for its Carbon Border Adjustment Mechanism which, at this stage, is slated to apply to steel, iron, fertiliser, cement and electricity. The US Democrats have outlined a budget proposal that will include a ‘polluter import fee’, with very few details. There are indications it will apply to fugitive methane emissions, signalling that it may be focused on energy.

What does this mean for Australian exporters? At this stage it’s not of major significance. Australia’s fertiliser exports tend to go to Asia; similarly iron and steel exports stay in the region or go to the US. The details will be significant to Australian companies going forward –  how the pricing works, and how any carbon price within the EU Emissions Trading System (ETS) can dovetail with systems elsewhere.

A leaky level playing field. There are, however, longer term risks. CBAM is designed to prevent ‘carbon leakage’ from the EU ETS, which EU stakeholders say is undermining European manufacturing and making it less competitive. CBAM is part of Brussels’ bigger play to ‘level the playing field’ on environmental regulation. The proposal still has some way to go through the European Parliament and Council of the EU.

Negotiations between the three arms of the EU could give rise to regulatory creep. For example, European farmers will likely pay higher prices for fertiliser. Will they therefore demand that agriculture is somehow incorporated into CBAM to level the playing field further? This could have an impact on Australian exports.

Supply chain reactions. On the other hand, Australia may find itself much closer to an Asia-oriented value chain. Global steel supply chains are already fragmented between geographical areas; carbon pricing – and a broader reluctance among Asian governments to support it – may fragment them further.

Companies may reorient their supply chains accordingly to supply markets with the lowest costs; many firms already excel in this form of regulatory arbitrage. A good example was how companies pivoted in the face of Trump’s China tariffs. Sure, carbon tariffs aren’t Trump tariffs, but they are still a cost to be borne by businesses.

Businesses simply need to factor this emerging policy area as part of a ‘new trade reality’ – along with greater scrutiny on labour and human rights in supply chains.

Or perhaps another way. How about liberalising trade rather than taxing it? An example is APEC’s approach to reducing barriers to environmental goods. This has recently been emphasised by Australian trade minister Dan Tehan. Is it more effective in terms of environmental outcomes? That’s hard to say, but it’s definitely more politically palatable for global trading partners.   

A US Indo-Pacific digital trade deal?

An Indo-Pacific starter. The Biden administration is reportedly considering plans for a digital trade deal with economies in the region. This follows comments by Kurt Campbell, US National Security Council coordinator for Indo-Pacific affairs, that the US is “quietly exploring” potential trade initiatives with Indo Pacific countries. The administration has made clear its priorities are focused on domestic recovery, vaccines and addressing China – analysts point out that smaller, sectoral trade deals are more prospective than engagement in multilateral or regional FTAs at this point.

Take your FTA pick. A digital trade deal could build on outcomes of the various digital agreements in the region. The USMCA and CPTPP agreements both cover digital trade. The more recent Digital Economy Partnership Agreement (DEPA) involving Singapore, Chile and New Zealand provides a broader framework, as does the Singapore-Australia Digital Economy Agreement (SADEA). APEC has a Cross Border Privacy Regime for data flows (CBPR). Australia’s FTA with the US – the 2005 AUSFTA – does not include provisions on digital trade, and is yet to be updated.

No TPA needed? Trade Promotion Authority (TPA), a necessary legislative precondition for a full FTA, expired in July (see below), making any US FTAs requiring more than executive authority almost impossible. Could a US digital trade deal be negotiated as a ‘trade executive agreement’ (agreements between executive branch agencies and other governments that have some relationship to trade but are not subject to congressional review like an international treaty)?

Recent research reveals the US has in place more than 1,200 ‘trade executive agreements’ with 130 countries that create binding commitments, build on or clarify FTAs and serve as the foundation for later binding arrangements. In recent years there have moves by the US towards more executive trade deals, including the US/China Phase One agreement, as well as arrangements with India and Brazil. The 2019 US Japan Digital Trade Agreement was passed as an executive agreement.

More Asia Pacific digital deals on the way. In June Vietnam and Singapore agreed to set up a joint technical working group on Digital Partnership, examining the potential for developing a bilateral agreement. Singapore is also negotiating digital agreements with Korea and the UK. Disciplines governing digital trade are also likely to be considered as part of ‘upgrades’ of older bilateral agreements with trading partners in the region – for example the review of the AANZFTA between Australia, New Zealand and ASEAN.

Good timing. Cross border data restrictions aren’t going away. The Information Technology and Innovation Foundation points that the number of countries restricting the flow of data across borders has nearly doubled over the past four years, rising from 67 barriers across 35 countries in 2017 to 144 restrictions in 67 countries. More measures are under consideration – a good time for digital economy agreements that support open rules for data flows, create mechanisms for cooperation and encourage regulatory interoperability.

In brief

FDI falls as screening policies, tax uncertainty rises. A new report of Global Trade Alert reveals that foreign direct investment screening mechanisms have proliferated in recent years, becoming less conducive to foreign direct investment. It ‘contends that if multinational enterprises are to play a greater role then policy needs to be reset to restore the commercial viability of FDI.’ The Tax Foundation notes uncertainty for global FDI remains high, with the ongoing international tax negotiations at the OECD being a contributing factor. The recently released annual UN World Investment Report shows that foreign direct investment (FDI) fell by a third in 2020 compared to 2019, well below the low point reached after the global financial crisis a decade ago.

TPA expires, will it return? Trade Promotion Authority (TPA), the legislation that enables the US to sign new trade agreements following a straight up-or-down vote from Congress, has expired. Politico points out that there is no sign that the Biden administration intends to ask Congress for a renewal anytime soon. USTR Tai views TPA as a longer-term objective – the focus is on setting a broad agenda and addressing issues with respect to China. The last time the legislation expired, in 2007, it was eight years before Congress renewed it.  TPA’s expiry is not good news for the UK’s ongoing negotiations with the US, now effectively on hold, nor any potential future US trade agreements outside of the executive branch.

China takes Australia to WTO. China has responded to Australia’s WTO complaint about Chinese anti-dumping tariffs on wine by bringing its own challenge to Australia’s anti-dumping duties on Chinese wind towers, railway wheels and steel sinks. The move comes as Wine Australia reports that China’s punitive duties have resulted in a 45% reduction in exports for the year to June 2021.

Thailand progresses ‘mini’ trade deals. Thailand signed an MoU in July for a ‘mini trade deal’ with Kofu City in central Japan. It is advancing similar deals to ‘form deeper trade partnerships’ with Hainan, China, Telangana, India and Gyeonggi province in Korea. Alongside this, Thailand is seeking to move ahead with broader bilateral FTA negotiations with the EU, as well as EFTA, the EAEU and the UK. It is still considering accession to the CPTPP, and exploring the potential for an agreement with Hong Kong.

US and Mexico resolve first USMCA labor complaint. The US and Mexico have reached a resolution in their first labor dispute under USMCA over alleged violations of auto worker protections in Mexico. A remediation plan was negotiated under the agreement’s ‘rapid-response mechanism.’ As noted by Politico, the plan is a first for USTR, and it allows the governments to avoid a labor dispute settlement panel that could have resulted in harsher penalties.

The UK and Australia have just concluded an ‘in principle’ agreement for a free trade agreement. Efforts by UK farmers lobbying the Johnson government not to give Australia greater market access for red meat seem to have been overcome.

June 18, 2021

UK-Australia FTA: first in the region, positive in principle

The UK and Australia have just concluded an ‘in principle’ agreement for a free trade agreement. Efforts by UK farmers lobbying the Johnson government not to give Australia greater market access for red meat seem to have been overcome.

Beef, wine and cars. The details of the agreement that have been released so far are largely positive for Australian export interests. Access for Australian agricultural exports is a particular bright spot.

According to a statement released by Trade Minister Dan Tehan, Australian beef will be granted a 35,000-tonne tariff-free quote from year one, increasing to 110,000 tonnes over ten years. After a five-year period in which the quota will be replaced by a rising safeguard threshold, Australian beef will have unlimited duty-free access to the UK. Sheepmeat, wine, sugar and dairy products will also benefit from significant duty-free access.

In return, UK FMCG (fast-moving consumer goods), alcohol and auto exporters appear set to improve their access to the Australian market.

Work and holidays. There is less detail about investment and services trade commitments, although Minister Tehan did refer to mutual recognition of qualifications. An increase from 30 to 35 in the maximum eligible age for working holiday-makers was also announced, as well as an extension of the maximum duration of that visa from two to three years. Additional working visas will also be made available for agricultural workers.

Cheers, Australia. Many analysts were surprised at the quantum of access that Australia has reportedly been granted under the agreement. These outcomes likely reflect the relatively strong position that Australian negotiators have had since the beginning of the negotiations. Politically and economically, the UK needs this agreement more than Australia does. Australia already has multiple agreements with China, Japan, South Korea, ASEAN members, as well as with the US. The UK has only ‘continuity’ agreements (that carry over the terms of the EU agreements it was part of) at this stage. Australia completing a low-ambition deal would have had a larger political cost – with the Australian farm sector – than no deal at all. However, no deal would have been a massive blow to UK trade minister Elizabeth Truss and the Johnson government’s trade credibility.

A step toward CPTPP. The UK has formally commenced the accession process for joining CPTPP, and that will be much more difficult than an agreement with Australia. Although continuity agreements exist with a number of CPTPP parties, the agreement with Australia will be a good template for the UK as it moves toward negotiations with a broader range of parties. That may be more of a challenge. The UK’s prospective FTA partners expect more than a political agreement; they want genuine liberalisation. Seasoned negotiators throughout Asia-Pacific will be just as willing as their Australian counterparts to dig in until they get real improvements – or walk away from the table.

Both the AU/UK agreement and CPTPP interest underline the UK’s politically driven approach to trade right now, promising a ‘global Britain’ to its voters.

A step away from US/UK FTA. On the other side of the globe, the UK and US are holding off on further negotiations on their trade deal until after the US mid-terms next year. This may work for both sides. If the UK politics of a deal with Australia are difficult, they would be almost unmanageable with the US, land of “chlorinated chicken”.

It is expected that the details of the Australia/UK agreement released so far – and therefore approved for circulation by both sides – will survive the final stages of negotiations. It is hoped the agreement can be finalised and signed soon.

APEC’s 2021 rebalancing act

APEC’s hopes for a less challenging year (after Chile’s cancellation of Leaders’ Week in 2019, and the pandemic hitting in 2020), are looking up with New Zealand as host in 2021.

Welcome statement. The statement from the APEC Trade Ministers’ meeting last week is exactly the kind of sentiment that many trade policy observers have been looking for since the pandemic hit. It plumped for using open trade as means of fighting the pandemic, reinforcing the importance of the rules-based trading system with a particular emphasis on the WTO’s 12th Ministerial Conference later this year, as well as implementation of the WTO trade facilitation agreement and advances in digital trade.

FTAAP is back? But the statement also included something many had forgotten: FTAAP (the Free Trade Area of the Asia Pacific). First conceived in the heady and idealistic trade-liberalising era of the Bush administration in 2006, FTAAP was eventually endorsed by APEC leaders in 2016. Its ambition is high: a free trade area comprising all APEC economies (yes, that includes both China and the US), with greater liberalisation than the WTO Doha round.

The statement notes the call from the APEC Business Advisory Council (ABAC) to “ensure FTAAP remains the organising principle for regional economic integration”; this isn’t a commitment towards anything new, but at least there is some idealism left in a world of trade policy that is increasingly dominated by geopolitics. And it’s still a good idea.

US supply chains and regional trade

The Biden administration has released its ‘100-day Review’ into ‘Building Resilient Supply Chains’. The report was commissioned earlier this year with a focus on four key product groups: semiconductors, large-capacity batteries, critical minerals and pharmaceuticals.

Domestic threats, international opportunities. The report identifies potential threats to supply chains: insufficient domestic capacity, ‘misaligned’ incentives in the private sector, industrial policies among competitors, concentration in some supply chains, and lack of international coordination. It contains two recommendations clearly relevant to international trade policy.

The first is “Strengthen international trade rules, including trade enforcement mechanisms.” The key mechanism is the establishment of a ‘trade strike force’ under USTR. However, it’s not entirely clear what the trade strike force is or what powers it will be given.

The second is to “Work with allies and partners to decrease vulnerabilities in the global supply chains.” The report recommends a new ‘Presidential Forum’ to cover supply chain issues as well as working through the Quad and G7. It also recommends using the US Development Finance Corporation (its development lending institution) to support supply chain resilience.

Implications for Australia. One of the recommendations also states that the ‘strike force’ will examine how existing US trade agreements as well as future trade agreements and measures can help strengthen the United States and collective supply chain resilience. Precisely what this might look like isn’t clear.

However, the overall message is one of having the US’ strategic trading partners move closer into its orbit. This, as Australia and many other countries in the region have shown, is easier said than done. The US had a significant policy opportunity to encourage greater cooperation in its supply chains with strategic partners during the Obama administration; back then it was called the Trans Pacific Partnership, now the CPTPP.

Article Three in the media

Jon Berry spoke with ABC News on the UK-Australia FTA, in particular Australian beef exports to the UK going forward;

Kristen Bondietti was a panel member for Global Victoria’s virtual trade mission on Vietnam;

Khalil Manaf Hegarty presented at a webinar with Indonesian think-tank INDEF on agricultural commodity certification in Indonesia and ASEAN.

May 30, 2021

UK-Australia FTA scare campaign hits fever pitch

No gold rush. There is high expectation that the conclusion of UK-Australia trade negotiations will be announced at the G7 meeting in mid-June. The Johnson Government will hail this as the ‘first of many’ trade deals struck by the UK following Brexit.

Coverage of the agreement in Australia has been relatively muted. Although the UK appears to be a large trading partner, around 80 per cent of Australia’s exports to the UK are in the form of gold and precious metals. The value of exports of other goods (around USD2 billion annually) puts the UK on par with Thailand and the Philippines. The services trade – around US16 billion annually in both directions – is significantly larger. Investment more so – the UK is Australia’s second largest investment partner after the US.

It’s just not (trade) cricket. Despite this, a scare campaign against the agreement is well underway in the United Kingdom. The big concern among the UK agricultural sector is that Australia will gain tariff- and quota-free access in the agreement, likely after a 15-year phase in period.

Some news reports have cited an Australian beef exporter claiming exports to the UK might increase tenfold. Whether this is the case or not, the UK already imports significant quantities of beef, chiefly from Ireland. Better access for Australia would likely result in Australian exporters taking market share for premium cuts from their Irish counterparts rather than squeezing UK domestic producers out of the bulk market.

The scare campaign appears to be about something bigger. The UK opposition’s much larger concern is that the UK will offer similar market access as it goes forward with other deals. Liberalisation in an FTA? Shock no!

It’s not just tariffs either. In our view, the UK’s anti-trade cohort has some homework to do. Tariffs are a blunt instrument for protecting markets, as the last four years of ‘trade wars’ have shown us. Non-tariff measures are now the most effective way for impeding trade – not news to Australian beef (and timber and seafood) exporters. Until Brexit, the UK had ceded much of its ‘red tape’ authority to Brussels, who mastered the art. But, in a new age of social and environmental trade restrictions (see below), anything is possible.

US China trade tensions are not easing

Washington’s new consensus. There was some expectation that a Biden administration might ease trans-Pacific trade tensions. However, trade wonks are well aware that this is simply not the case. Talks between China’s Ministry of Commerce Vice-Premier Liu He and US Trade Representative (USTR) Katherine Tai seemed to yield precisely nothing. Sure, the table-thumping attitude of the Trump area is gone, but in its place is a new set of measures aimed at China.

One key difference is that the White House now has significant congressional support. Senate Finance Committee Chair Ron Wyden and Senate Majority Leader Chuck Schumer have introduced the “Combating Oppressive and Manipulative Policies that Endanger Trade and Economic Security (COMPETES) Act.” According to the two very powerful Democratic senators, the bill “will level the playing field for American workers, farmers, fishers and families by taking aim at China’s worst practices. The proposal is intended to be part of a Senate-wide effort to assure that the United States is positioned to out-compete China in the economy of the future.”

Labour pains for China. What the proposed legislation aims for is fourfold. It puts forced labour accusations around China front and centre, with new Customs and Border Protection (CBP) enforcement and a special emphasis on the fishing sector; it seeks to broaden USTR’s mandate on digital trade; it increases inspections on counterfeit goods; and it also requires USTR to undertake additional reporting on China.

This is broadly in line with overall US policy direction under Trump, but with the added weight of Congress. The move on seafood imports is relatively new; although some lawmakers have been pursuing illegal, unreported and unregulated (IUU) seafood imports since the Obama era, the US ITC moved in February this year to pursue new policies. It looks like China will be in CBP’s sights, as well as Vietnam, India and to a lesser extent Indonesia.

This approach is already yielding action; late last week CBP issued a new withhold release order – effectively a seizing of goods – against Dalian Ocean Fishing, a Chinese fishing company.

No longer just tariffs. The key difference emerging between the Trump and Biden eras is that the former relied primarily on tariffs under a banner of economic nationalism to curb imports, the latter is likely to be dominated by targeted and specific regulation under environmental, human rights or labour banners. Australia take note.

De-risking and on-shoring: Can Australia capitalise?

The supply chain keeps crunching. Supply chain disruptions continue throughout the region in the wake of COVID. A number of companies that pursued a diversification strategy in 2020 have not escaped unharmed; disruptions have continued to emerge in markets outside of China, notably Vietnam and India.

A recent survey by Baker McKenzie points out that diversification will continue; 46 per cent of respondents are onshoring operations, 78 per cent are near-shoring; 67 per cent are insourcing, and 42 per cent are pursuing a ‘Mainland China + 1’ strategy.

However, the survey is notable for its emphasis on Australia. Seventy-six per cent of respondents are looking to Australia as an alternative source of supply, above other sources including the UK (66 per cent), Europe (62 per cent) and North America (62 per cent).

Investment policy settings matter. Australia’s membership of the CPTPP and RCEP, as well as having an FTA with the United States, puts it in a reasonably unique position. The big question is whether Australia’s investment policy settings will be attracive to foreign investors as the global race for capital heats up.

CBAM? No thank you, ma’am?

Does carbon pressure result in diamonds? The EU’s proposal on the carbon border adjustment mechanism (CBAM) is gaining pace in Brussels as well as Washington. The most recent calls for a rapid introduction of a new tax have come from European manufacturers, who are struggling with EUR50/tonne carbon prices. This has prompted some companies – e.g. Tata Steel – to add carbon surcharges to products and argue for a ‘level playing field’. This isn’t quite the spirit of the original carbon price, which was designed to prompt investment in low-carbon energy sources.

The EU’s problem now is that it will face growing international opposition to the CBAM. Japan, among others, has voiced its concern at the WTO. It has stated that “discussions on carbon border adjustment measures need to be stimulated at the WTO to avoid future trade conflicts … carbon border adjustment measures should be formulated based on the GATT principles.” China and Russia also both raised concerns at the Council for Trade in Goods. Similarly, the WTO’s Deputy DG Alan Wolff has stated “Carbon border adjustment measures will likely result in conflicts unless Members engage in joint efforts to find mutually beneficial solutions.”

Club rules. There’s a rising awareness of the possible pitfalls of the CBAM approach. As a response, Germany is pushing Brussels to consider a ‘carbon club’, which would include Japan, China and the US, in order to avoid trade-environment skirmishes. The EU has said countries can bypass the CBAM if their climate ambition “matches” that of the EU. But is this achievable? Does it require new agreements? Will it be based on ambition, or actual reductions? Instead of carbon reductions, the world could end up with a new protectionist cartel and higher-priced goods.

China keeps Australia at arm’s length

Australia-China relationship status remains as “it’s complicated”. China continues to express displeasure at a series of Australian policies. Official and unofficial trade measures affecting billions of dollars’ worth of Australian exports persist. The latest symbolic move from Beijing has been the official suspension of the China Australia Strategic Economic Dialogue – a supposedly annual meeting that has not taken place since 2017.

Beijing: do not walk further on the “wrong path”. There were scant hopes for the Strategic Economic Dialogue even before its official suspension and this move will further complicate efforts for mid-level officials to cooperate. Although Australia’s ministers have been left in the cold for some time now, lower-level embassy staff have been able to keep their working relationships. These relationships may now be increasingly difficult to maintain. Although China is yet to really land a punch with the measures it has taken against Australia’s exports, Beijing has shown that it is willing to incur economic damage – for example paying over the odds for inferior coal – in order to make a political point. This fact will be causing sleepless nights among all major Australian exporters, and among the political leaders who represent their constituencies.

Picture credit Andrew Parsons / 10 Downing Street

March 10, 2021

Is the United States ‘back’?

The Biden administration’s nomination and appointment of USTR Katherine Tai and the appointment of US Indo Pacific Co-ordinator Kurt Campbell have prompted some analysts to argue that the US is ‘back’ when it comes to trade liberalisation. But a reality check is needed.

Biden wasn’t elected on a free trade platform – quite the opposite – and his trade policies aren’t that different to Trump’s. So far most of the ‘Trump tariffs’ remain firmly in place. WTO Appellate Body appointments are still being blocked. Trade Promotion Authority, which limits Congress’ input on trade deals to a yes-no vote, will expire soon.

The bright note is that the US is seeking likeminded partners when it comes to trade – such as members of the CPTPP. But US Congress support for a new trade agreement – including the CPTPP – is tepid, and the broader appetite for free trade in the US has waned somewhat. This may signal a new orientation to the EU – but is this realistic given the EU’s antipathy towards free trade (see below)? Another positive is that the US hasn’t completely given up on WTO reform; and there appears to be some areas in dispute settlement reform where Brussels and Washington see eye to eye.

Our take: don’t expect a look-in for trade in Washington until after the mid-terms. The US will talk about supporting Australia, but that’s not going to extend to buying wine, barley and timber.

The EU gets a green reality check

The EU has issued a bolder call for its approach on sustainability to be implemented in trade deals. The document, which was issued in February, caught a number of negotiating counterparties completely off guard. At its heart are calls for tougher enforcement of trade and sustainable development chapters in its agreements, which currently have little legal weight.

At the same time, Brussels has made a bold call for a carbon border tax. In simple terms, this will require the taxation of imported goods from countries that don’t put a price on carbon, i.e., most of the world.  

Although the principles may be noble, Brussels’ approach has had a massive reality check both internally and externally. Inside the EU, France and Austria have both said they won’t approve the EU’s completed trade agreement with Mercosur because of sustainability concerns, though the veto is very much about protecting the agricultural sector in a stagnant Eurozone economy. Outside, the EU-China investment agreement looks dead in the water; China has effectively sanctioned a boycott of EU brands such as H&M in China after they ceased using China’s Xinjiang cotton – for human rights concerns. The likelihood of EU Member States signing the agreement is now close to zero.

Our take: the EU is going to have trouble getting any external trade deals over the line; expect it to move to ‘Green Managed Trade’.

China’s circulations

China’s geopolitical and human rights confrontations with the US, EU and Australia have been on clear display over the past few weeks. Trade and economic diplomacy have been part of the conversation.

The US has put its cards on the table by maintaining tariffs and promising to secure supply chains of strategic commodities (such as lithium) with key security allies. But China’s approach is less clear, particularly in the region. For trade partners such as Japan – despite historical animosity – it’s business as usual.

What’s become more important for China is the implementation of the ‘dual circulation strategy.’ It was first announced in May of last year but became clearer in early March 2021 with the endorsement and publication of the 14th Five Year Plan and the National People’s Congress.

In short, the policy is about reorienting Chinese economic development away from state-led investment and exports, and towards private investment and domestic consumption. These are the ‘dual circulations’, i.e., maximising economic activity in the internal market while sourcing inputs and exporting final products externally. According to state media, “China will promote the liberalization and facilitation of trade and investment, and steadily advance institutional openness, which stresses rule-based, transparent regulatory models and business environment that better aligns with international norms.”.

There is some scepticism towards the ambition of the policy. However, no one came close to predicting China’s economic rise when it acceded to the WTO 20 years ago.

ASEAN caught in the middle?

Southeast Asia – like Australia – is somewhat caught in the middle of all these developments. Despite the hope among the Quad nations (the US, Japan, India and Australia) that ASEAN would hitch itself to the Western-leaning bandwagon, ASEAN observers are acutely aware that the region immensely dislikes being forced to make a choice. This is nowhere more apparent than with a country like Indonesia – the fourth-most populous in the world – which rightly values forging its own path.

On trade, however, Southeast Asia leans heavily towards North Asia. China, Korea and Japan are major partners that are expanding trade regionally and simultaneously investing heavily in Southeast Asia – RCEP is the crystallisation of this process. The EU (see above) is considered an important trade partner, but the prevailing view is that it is losing relevance in the region. Its emphasis on non-trade issues (human rights and environment) is going to make negotiations more complicated with Southeast Asian partners; and US overtures in the region are no match for the sheer size of trade flows between Southeast and North Asia. 

And for Australia …

Australia is still adjusting to the ‘new normal’ of the post-2020 regional trade architecture. Although some export commodities continue to be hit by the withdrawal of Chinese purchasers or punitive trade measures, some bulk commodities have simply been redistributed to other markets. For higher value consumer goods – particularly wine – the situation remains more difficult.

There appears to be a bipartisan political support – bordering on coercion – for exporters to find other markets,and also increase capacity for domestic manufacturing, particularly for supply of critical goods. Business is acutely aware of the need for resilient and flexible supply chains.

But regional supply chains need investment, both at home and from abroad. And in our view, this is particularly the case for Australia. But this is easier said than done. Although Australia can be considered a stable and mature market for international investors, securing investment in Australia is getting harder to do. International investors need certainty on decision-making processes for their investments anywhere, whether it’s investing in mining, agriculture, infrastructure, or manufacturing. It might make more sense for investors to take advantage of friendlier taxation and investment incentives in Singapore and Vietnam. The next 12 months to two years in Australia and the region will be critical for attracting investment post-COVID. Both trade and investment settings need to be ready for the world’s new economic paradigm.

December 18, 2020

All eyes are still on President-elect Joe Biden’s approach to trade policy in 2021. Reports indicate that he was to nominate a new US Trade Representative last week, but that has not eventuated.

Two additional tugboats sped Sunday to Egypt’s Suez Canal to aid efforts to free a skyscraper-sized container ship wedged for days across the crucial waterway, even as major shippers increasingly divert their boats out of fear the vessel may take even longer to free.The massive Ever Given, a Panama-flagged, Japanese-owned ship that carries cargo between Asia and Europe, got stuck Tuesday in a single-lane stretch of the canal. In the time since, authorities have been unable to remove the vessel and traffic through the canal — valued at over US$9 billion ($11.78 billion) a day — has been halted, further disrupting a global shipping network already strained by the coronavirus pandemic.

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