Biden’s trade policy issues

What are Biden’s trade policy issues? Let’s assume that he takes office and that there is no Democratic majority in the U.S. Senate. What does all this mean for international trade? Firstly, it’s not clear that policy will change very much directly. The reason is that the Democratic Party concerns about international trade are rather like those of the Trump administration. The Democratic Party platform contains very similar emphases on the unfair activities of other countries. The Democratic Party platform does not approve of the way the Trump administration has been handling China, but it seems to share the same concerns. There is slightly more emphasis on workers’ rights in other countries, but to some extent these issues are also being taken up by Republicans in the Senate, at least as regards forced labour.
In one respect however the new administration may help international trade, if only indirectly. International engagement, and U.S. involvement in multilateral agreements, will be restored to some extent. This means that WTO may see a revival if the U.S. helps to restore its role in dispute resolution by allowing the appointment of new tribunal members. There will be less resort also to trade measures as a tool of general policy. Countries will always introduce countervailing duties in response to antidumping or subsidy activity, but tariffs mean pain for consumers immediately while hurting producers only in the longer term. If the United States wishes to punish some other country for perceived misbehaviour that is not trade-related, it could do so more effectively by financial measures, freezing of assets, and control of movement, or more positively although less easily through new investment agreements.
Another way in which things may change is in government spending. Infrastructure was supposed to be improved under President Trump but little actually happened. Now it may be the only way a stimulus package can be agreed politically. This would not be as beneficial for international trade as a consumer-based stimulus would be, but if the emphasis was on climate there would be more to it. Advances in transport systems, renewable energy, food production and manufacturing processes and recycling technologies will encourage innovation that will benefit the world economy as a whole.
Biden’s trade policy issues also include two outstanding questions on pluri-lateral agreements. Firstly, will the US re-join the Trans Pacific Partnership (TPP), now slightly transformed into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)? The new administration is more committed to international cooperation, but the CPTPP agreement does not include provisions that the US had insisted on in the original agreement, so membership would have to be re-negotiated.
The second question is that of an agreement with the EU, the Transatlantic Trade and Investment Partnership (TTIP). This will take longer to be realized. There is not so much enthusiasm on the EU side, and, precisely because the scale of economic integration between the U.S. and Europe is already very large, it is not so easy to identify and agree on very beneficial improvements. Furthermore, Brexit complicates the dynamics: the UK had been a strong TTIP advocate. However, Canada already has an agreement in operation with the EU, the Comprehensive Economic and Trade Agreement (CETA). Canada is also a member of CPTPP. This may provide a stimulus to negotiations and a model for some aspects of TTIP, especially in the area of investment dispute resolution, which was one area of difficulty in earlier TTIP negotiations.

Should governments help the airlines? (part 1 of 2)

In the early stages of the pandemic, international flight linkages were actually the main transmission channel for the virus. In fact, flight connections proved to be an even more accurate predictor of infection spread between two countries than the presence of common land borders or trade connections.

Aviation is an interesting but volatile sector. And now the economic destruction wrought by the corona virus has battered the airline industry. Passenger travel has almost disappeared.  Many large airlines have grounded their fleets altogether.  How long can the airline companies survive?  Some are already sending out SOS messages, saying that their collapse is imminent and calling for government support. In the US, the historic $2.2 trillion stimulus bill signed into law on March 27 included $61 billion in relief for the airline industry. More support is part of the current negotiations in the US Congress. Many other governments have also provided relief to their own country’s airlines. In Singapore, for example, the government-owned investment fund has extended credit of $19 billion to Singapore Airlines. In Europe, the fees that airlines pay for air traffic control have been deferred.

Should governments rescue airlines?  The idea is that these are strategic services, essential to providing international linkage not only for emergency supplies but to maintain and enhance existing trade and Investment links.  But if you think about it, there is nothing very special about an airline.  It provides more or less standardized services, using more or less standard capital goods, and more or less standard human resources. There is of course some differentiation, but nothing fundamental: an airline may have a more sophisticated planning and pricing mechanism than its competitors, or it may become well known for the quality of its food, or the kindness of its cabin crew. A few airlines have a poor safety record, but they always (understandably) have a small share of world markets. 

Airlines come and go: do you remember PanAm, TWA, BOAC, UTA, Sabena, and Swissair?   If an airline collapses, what often happens is that its assets (planes, landing slots, etc.) are taken over by some other airline. The planes are repainted. The staff get new uniforms. And flights continue. And so why should governments rescue airlines and what are the alternatives? (More to come on this)

Trade agreements: breaking them up is hard to do

A possible trade agreement between the UK and the US has become a controversial issue in the UK elections. The Labour Party alleges that the UK’s National Health Service (NHS) is on the table in negotiations.  (In Northern Ireland, at least, the NHS seems to be on the floor, and in general is delivering no more than average results in European terms. Nevertheless it is much prized in the UK) . For the Conservatives, a trade agreement with the US is a big priority after Brexit. The US Secretary of State, Mr Pompeo, had earlier said that this will also be a priority for the US. The then US National Security Advisor, Mr Bolton, suggested that there could be a series of partial agreements on individual sectors. But this was a bad idea for lots of reasons. Let’s take just three of them. Firstly, no US-UK agreement, even partial, can be finalized until the nature of the future UK- EU relationship is clear, and those negotiations have not yet begun. Secondly, the tendency is always in modern economies for sectors to become more and more interrelated, and so it’s harder and harder to treat them separately. Thirdly, statisticians will recognise the related question of ” degrees of freedom”:  making a number of partial agreements ends up by putting an impossible burden of adjustment on the final sector to be negotiated.

Brexit and trade agreements for the UK

First of all,  Brexit doesn’t just mean that the UK is leaving the EU. It also means that the UK is leaving all the trade agreements that the EU made when the UK was a member, and we can assume that the UK had things to say all through those negotiations. For the partners, it’s also difficult. To understand why, think about how trade deals are negotiated. Lots of detail, industry after industry, commodity after commodity, the tariffs, the quotas, and the non-tariff measures. Tariffs are essentially taxes on the imports, and non-tariff measures are things such as technical regulations that can be used to block imports, or else impose painful testing on the imports to make sure that they conform to the rules. For the EU and its negotiating partners, a balance has to be struck, a balance between hope and fear: hope that they’ll be able to export more, fear that there’ll be more competitive imports from the other side. The important point to remember is that these agreements were based on hundreds of detailed calculations of costs and benefits, and the assumptions made on both sides were that the EU included the UK. Brexit has damaged the UK’s reputation for keeping agreements, and it has, in particular, undermined the logic of all the trade agreements that the EU has made up to now. This means that, even before the UK negotiates any new trade agreements with other parts of the world, there may already be negative perceptions of the UK on the other side.

Although the UK has managed to negotiate what are called trade continuity agreements with Switzerland, Chile, Israel, Eastern and Southern Africa, the Palestinian Authority and the Faroe Islands, it is a long way from replacing all the existing EU agreements, and even farther from more ambitious ones. Most recently, Japan was reported as being upset over the UK’s implied criticism of them for being slow in this regard. There was a suggestion that the UK saw it as a simple matter of “cutting and pasting” the existing EU-Japan agreement. (In fact “cutting and pasting” has been the general UK approach to all trade negotiations since they lack the human resources to renegotiate in detail).

As we have seen above, reaching a trade agreement requires the fine balancing of a lot of detailed considerations. For a third country, the calculations involved in reaching a deal with the UK cannot be the same as those that were involved in the negotiations with the EU. Those in the UK who supported Brexit tended to minimise the difficulties of replacing the EU’s trade agreements, and they have pointed to the possibilities of better agreements as a result of Brexit. But no such better agreements are yet in the pipeline.

A further issue is that of the UK’s future trade relations with the EU. To date there is only the “Political Declaration” which outlines in very general terms the priorities for the future. In the section on “Goods”, paragraph 20 states that “The Parties envisage having a trading relationship on goods that is as close as possible, with a view to facilitating the ease of legitimate trade”, paragraph 22 says ” the Parties envisage comprehensive arrangements that will create a free trade area…”, and paragraph 23 says “The economic partnership should ensure no tariffs, fees, charges or quantitative restrictions across all sectors”. Similarly, under “Services”, paragraph 29 states that “The Parties should conclude ambitious, comprehensive and balanced arrangements on trade in services and investment in services and non-services sector.” All these statements are positive, but none of them are commitments. The precise nature of the agreement that will be negotiated is not yet known. Third countries considering a trade agreement with the UK will wait until there is clarity.

Finally, consider the question of relative weights in negotiations. When the EU negotiates with most countries, it is usually the stronger partner because of its market size and economic clout. But if the UK is on its own, it is not necessarily in as strong a negotiating position. This is particularly so with regard to a proposed UK-US agreement.