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Buy America and subsidies mix with national security to see off the rules-based order



Author: Editorial Board, ANU

Today the global trade system faces three systemic challenges. None are new, but strategic competition between China and the United States has brought a dangerous edge to each of them.

The first is the dramatic shift in the composition of international economic interaction. When the Bretton Woods system was first set up, global trade was overwhelmingly in physical merchandise. Over time, the importance of services trade and, in the past few decades, data flows, has left large parts of global trade under regulated or uncovered by global rules entirely. While this is a long-standing issue, the increasing weight of China in the digital economy has caused major angst in Western countries, some of which have gone as far as banning Chinese companies from building key infrastructure like 5G.

The second, related challenge is the increasing imbrication of national security and economic policy. The two have never been entirely divorced, but in recent years the use of economic weapons to extract political outcomes, particularly by China and the United States, has risen markedly. Article XXI of the GATT always allowed countries to impose restrictive measures for genuine national security reasons. The exemption was never intended to be a blanket one, though: there was an implicit agreement not to overstep the mark that stopped the rules of the GATT and then the WTO from being shredded in the name of national security. Donald Trump’s steel tariffs were an overt violation of that agreement, as the WTO’s ruling on those tariffs demonstrated despite American protestations.

It is not, of course, the case that national security concerns might not ever override economic ones. There might be legitimate, if rare, occasions when a nation might choose to curtail trade or investment because there is no way to make the transaction ‘safe’ (trade in certain kinds of weapons is an obvious example). But as Gary Hufbauer notes in the first of this week’s lead articles, the policy apparatus for determining these decisions is not set up to evaluate trade-offs, and are deeply opaque. ‘US decisions as to whether a country, company, product or technology threatens US national security are shielded both from public and judicial scrutiny and deliberately ignore economic costs.’

As Hufbauer argues, the damage might be limited under a Biden administration in which there are still some pockets of internationalist sentiment. The important speech of National Security Advisor Jake Sullivan on the Biden administration’s international economic policy at least pays lip service to the idea that American policy must consider the good of the world economy as a whole, even if that idea is missing in its specific policy action. A returning Trump administration — which remains a live possibility — will not even honour both with lip service. It is much more likely to heighten the use of national security excuses to inflict irreparable harm on the global trade system.

The third challenge facing the system is another old problem with a new twist: the return of industrial policy in the North Atlantic, particularly in the form of protection for ‘green’ industry. Here the opinions of economists are mixed. The introduction of massive subsidies for green technology in Biden’s Inflation Reduction Act are on the one hand a recognition of the political reality that a first-best solution to the climate change problem — a nation-wide carbon price — would never make it through Congress.

Addressing this political reality through subsidies, however, comes with major risks to the global system, as well as to the American economy. The GATT and the WTO have always struggled with industrial policy: discriminatory subsidies are forbidden under their disciplines, but the prohibition has constantly been flouted, sometimes with the tacit approval of the original guarantor of the system, the United States. Even under GATT rules prior to the Uruguay Round, special and differential treatment of some protective policy was given to developing countries, recognising that transition to full and complete free trade would be more difficult for those countries than for advanced economies. But there was at least a general recognition that discriminatory subsidies, and other protective measures, were to be eliminated in the long term.

The return of North Atlantic industrial policy has more or less blown away that consensus, and the ramifications for the rules-based trading regime will be significant. Many of the provisions of the…

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Policy failure with Italian characteristics?



Italian Prime Minister Giorgia Meloni at a press conference after the Council of Ministers, Rome, Italy, 3 November 2023 (Photo: Reuters/Augusto Casasoli).

Italy’s participation in China’s Belt and Road Initiative may end in 2024. The decision to join in 2019 led to political and economic costs that have not been offset by expected benefits.

Italy’s Withdrawal from the Belt and Road Initiative

Italy’s participation in the Belt and Road Initiative (BRI) may soon come to an end, as the country entered China’s initiative in March 2019. A Memorandum of Understanding (MoU) was signed in Rome by former Italian prime minister Giuseppe Conte and Chinese President Xi Jinping. Less than five years later, the whole BRI story risks becoming a major foreign policy failure for Italy.

Debating Italy’s Participation in the BRI

The MoU will be automatically extended in March 2024, unless terminated by either party at least three months in advance. As the deadline approaches, the government of current Prime Minister Giorgia Meloni is expected to announce its decision soon. In 2019, the Conte I government’s decision to sign the MoU was made amid a heated yet highly ambiguous political debate.

The Downside of Italy’s BRI Gamble

Italy’s gamble in joining the BRI has not paid off as expected. Critics have scrutinized Italy’s involvement in the BRI, and the COVID-19 pandemic has affected anticipated economic benefits. As a result, Italy has been unable to fully leverage the MoU and engage effectively with Chinese stakeholders, leading to a shift away from emphasizing its involvement in the BRI.

Source : Policy failure with Italian characteristics?

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Australia’s troubled EU trade deal still second best



Sheep run into a holding pen at a farm near Delegate, in New South Wales, Australia, 19 November 2023 (Photo: Reuters/Peter Hobson).

The proposed trade agreement between Australia and the EU is in trouble due to EU protectionism, particularly in agriculture. This offers lessons for both parties and poses a potential threat to the Asia-Pacific region’s trade diplomacy.

Trouble in the Australia-EU Preferential Trade Agreement

Author: Ken Heydon, LSE

After five years of intense negotiation, the proposed preferential trade agreement (PTA) between Australia and the European Union is in trouble. On 29 October 2023, talks were suspended, with little immediate prospect of resumption. This setback, plus other recent developments in EU preferential trade policy, offer some broad lessons — for both Australia and the region.

Issues and Challenges

The failed negotiation is, in part, a victim of current times. With liberal trade policy in retreat, government-fuelled industrial policy is on the rise, and, according to the Eurobarometer Poll of July 2022, the majority of Europeans now view protectionism positively. The immediate cause of breakdown in the talks was, unsurprisingly, agriculture. This is the sector that, given EU intransigence, was a key factor in the failure of the Doha Development Round of multilateral trade talks.

Implications and Lessons

Australia’s particular concerns during negotiations with Brussels arose from EU resistance to opening up its market to Australian beef and sheepmeat, and protective geographical indications that would restrict the labelling of Australian feta cheese and prosecco. As highlighted by the WTO Trade Policy Review of the EU, the number of products subject to EU ‘geographical indication protection’ continues to rise. Looking ahead, there are still some broad strategic factors that might favour a deal. For the European Union, this includes gaining secure access to Australia’s critical minerals, such as lithium and copper.

Source : Australia’s troubled EU trade deal still second best

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New US–China working groups bridging bilateral gaps



US Treasury Secretary Janet Yellen walks with China's Vice Premier He Lifeng during their meeting at the Diaoyutai State Guesthouse, Beijing, China, 8 July 2023 (Photo: Reuters/Pedro Pardo).

US-China economic and financial working groups established in September 2023 aim to stabilize relations and prevent economic decoupling, addressing trade imbalances and fostering dialogue between the world’s largest economic powers.

US–China Economic and Financial Working Groups

The establishment of the US–China economic and financial working groups in September 2023 marked a significant turning point in the often uneasy relations between Washington and Beijing. In the midst of increasing tensions due to great power rivalry, these working groups have the potential to promote greater stability between the world’s two largest economic superpowers.

Challenging the Notion of ‘Decoupling’

While ‘decoupling’ has become a popular term representing the United States and China’s efforts to separate their economies, the establishment of the working groups challenges this idea to a certain extent. Policymakers on both sides understand the risks associated with complete economic decoupling, as bilateral economic ties are characterized by intrinsic interdependence.

Promising Benefits and Potential Challenges

The working groups, supported by high-level officials from both countries, offer a structured channel for ongoing dialogue. They have the potential to promote trust, transparency, and direct communication while also addressing challenges such as structural trade imbalances and intense rivalry in high-tech competition.

Source : New US–China working groups bridging bilateral gaps

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