Trade and Prosperity | March 2021

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.