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Global trade policy: A year-end stocktaking

Even as East Asian regionalism gives some hope, 2023 ends with growing apprehensions

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Photo: Bloomberg
Amita Batra
6 min read Last Updated : Dec 27 2023 | 10:48 PM IST
For trade policy, this last year has been ominous. The few positive developments towards greater economic integration in accordance with the World Trade Organization (WTO) provisions pale in face of the increased defiance of the rules-based trade order, most notably evident in unilateral trade policy measures formulated and implemented by developed economies, individually, led by the United States (US) and in alliance with one another.

The Inflation Reduction Act (IRA) in the US and the Carbon Border Adjustment Mechanism (CBAM) by the European Union (EU), which became effective in January and October 2023, respectively, have been the most significant expressions of unilateral trade policies violating the multilateral trade order. Both measures, proposed to combat the challenge of climate change and while promoting intra-regional economic integration and trade in North America and the EU, respectively, are discriminatory with respect to non-members. The former, which involves billion-dollar state subsidies for, primarily, electric-vehicle battery manufacturing, with clear specifications of local content rules, preferences being restricted to only free trade agreement (FTA) partners and prevention of use of any components from China, is blatantly in violation of Article XXIV of the General Agreement on Tariffs and Trade (GATT). The CBAM, by extending the EU Emission Trading System (ETS) and thereby enforcing compliance by exporting countries in select sectors, disregards the most favoured nation (MFN) and national treatment (NT) principles of the WTO (see my article in Business Standard, June 23, 2023).

While the US and EU lead the way, friendly allies have followed suit with trade restrictions and protectionist measures. For example, in 2023, in the chip-making industry, which is at the heart of US-China trade and technology competition, the Netherlands announced export restrictions on certain advanced semiconductor equipment and Japan on some chip-making metals, as part of a three-way deal with the US to protect national security. Earlier this month, the UK followed the EU and announced, though with prospective implementation, a carbon border tax on select carbon-intensive imports.
 
In the case of the US, there have been a series of contradictions in its trade policy. The underlying rationale for the US’ unilateral, protectionist trade policies, coupled, more recently, with inward-looking industrial policies, has been punitive with regard to China for violating the rules-based multilateral trade order. However, the US seems to be doing much the same and in larger measure. The big difference, of course, is greater transparency in US trade barriers. In the period 2017-23, the US made the maximum (5,198) contribution to harmful trade and industrial policy interventions while China followed with a smaller number (3,469) of interventions (globaltradealert.org).

Furthermore, the US-led Indo-Pacific Economic Framework (IPEF), the first trade and economic initiative of the Biden administration that was strategically aimed at containing China by establishing a rules-based economic order, stands diluted after the November meeting of trade ministers, held in the US, failed to arrive at an agreement on its most crucial trade pillar. This pillar had been expected to build on the rules-based multilateral trading system and extend it to cooperation in newer areas of labour, environment, and digital trade. Added to this is the question of survivability of the IPEF, given the variation in the perception of the value of this strategic construct across the political spectrum in the US and in view of the Presidential elections due next year.

The incongruities are similarly apparent in the reported US-led informal talks, earlier this year, on reforms in the dispute settlement mechanism (DSM). The lack of interest on the part of the US to revive the DSM with a functional appellate body as an integral component is by now well established. The proposal to normalise a bilateral settlement of disputes as a means towards achieving the June 2022 ministerial commitment to restore a fully functioning DSM does not augur well for the rules-based trade order. The DSM has been a unique pillar of the WTO and the most significant administrative reform in the transformation from the GATT to the WTO. The established procedure for dispute settlement went a long way in ensuring stability in the global trade system. Bilateralism and reduced precedential status, as desired by the US, will bring in an element of uncertainty and arbitrariness in dispute resolution and hence adversely impact global trade.

Trade driven by geopolitical compulsions is also leading to a reconfiguration of global value chains (GVCs). Friend-shoring has been increasingly evident since the first quarter of 2022. Trade is getting concentrated within major trade relationships and there is a decline in diversification of trade partners. Furthermore, the average change in bilateral trade among geopolitically close nations is observed to be positive and increasing while that between geopolitically distant and very distant partners is decreasing, with the latter happening faster than the former (Global Trade Update, December, 2023, UNCTAD).

The tendency to reshore/onshore manufacturing back home by the developed economies has meant that the intermediate goods trade from the emerging markets has registered a decline even as GVCs continue to be the predominant mechanism for trade. Similarly, friend-shoring, which is securing inputs from within a ‘trade bloc’, may further negatively impact the intermediate goods trade. Trade policy aimed at diversification away from single-source dependence for inputs has brought about a reconfiguration of GVCs in Asia. Regional economies, predominantly Vietnam and Taiwan, which have benefited from trade diversion away from China, have simultaneously intensified their supply chain integration with China.

Amidst these growing trade policy uncertainties, we must acknowledge some positive developments too. Global trade has remained remarkably resilient to shocks, recording the highest rate of growth in 2022 after several years of slow growth followed by positive, though modest growth in 2023. WTO-abiding FTAs and economic integration continue as evident from the expanding membership of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). The UK attended its first CPTPP meeting as a member in November 2023 and six more formal applicants await consideration of their requests. Also, with both Indonesia and the Philippines ratifying the agreement in 2023, the Regional Comprehensive Economic Partnership (RCEP) is now effective for all its 15 member economies, further enabling it to consolidate intra-regional trade in Asia.

So, even as East Asian regionalism gives some hope, 2023 ends with growing apprehensions of it being overwhelmed by the increasingly protectionist unilateralism in the other regions. 

The writer is professor of economics, School of International Studies, JNU, and author of  India’s TradePolicy in the 21st Century, Routledge: London, 2022. The views are personal

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Topics :BS Opiniontrade policyEast Asian employeesWorld Trade OrganizationFTA talks

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