China

WTO Dispute Settlement — How to Handle Allegations That An Appellate Body Member is Affiliated with a Government and Hence Not Properly an Appellate Body Member?

In the first twenty-five years of the World Trade Organization, there have generally been few challenges to Appellate Body members in terms of violations of their obligations under Art. 17.3 of the Dispute Settlement Understanding or of the Rules of Conduct, WTO/DSB/RC/1.

The dispute brought by Canada against a countervailing duty order issued by the United States on supercalendered paper from Canada has resulted in such an issue arising. The WTO summary of the case is contained here, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds505_e.htm. The Appellate Body Report was circulated on February 6, 2020 under the document number WT/DS505/AB/R.

The United States had taken an appeal from certain aspects of the panel report. At the Dispute Settlement Body meeting of February 26, 2020, the U.S. had objected to the DSB considering the Appellate Body report as invalid for various reasons, including the fact that two of the three AB members’ terms had expired and had not received authorization from the DSB to continue to participate in appeals, that the report was issued far beyond the maximum 90 days laid out in the DSU (Art. 17.5 of the DSU). Most importantly, the United States claimed that the third person hearing the appeal was in fact affiliated with a government in contravention of DSU 17.3 and that her participation in the appeal was inappropriate for that reason and the fact that many of the cases relied upon by Canada to establish a practice were cases involving the government of China, the government with which the AB member was allegedly affiliated creating justifiable doubts as to the person’s independence or impartiality (WT/DSB/RC/1, Art. III.1). The U.S. position was that in light of the problems, the only consensus possible would be a positive consensus and that the U.S. would agree to a positive consensus on certain findings by the panel that were not appealed by the U.S.

Canada, the EU, and China all made comments at the DSB meeting in late February. Canada argued that despite the allegations raised by the US which should be looked at but not in the context of a DSB meeting, the DSB would adopt the Appellate Body report absent negative consensus. China agreed and defended the Appellate Body member who was from China. The EU reviewed procedures for raising the types of allegations raised by the US but like Canada and China viewed the DSU as mandating adoption of the AB report where a negative consensus did not exist.

The U.S. did not agree that adoption was permitted or appropriate and continued to oppose. The WTO webpage coverage of the dispute view the AB and panel reports as adopted on 5 March 2020. The minutes of the WTO DSB meeting of February 28 and March 5, 2020 are presented in WT/DSB/M/441 at pages 18-25 (14 May 2020). The document is embedded below and the reader is encouraged to read the discussion on those pages in full to understand the competing positions of the parties and major third parties.

WTDSBM441

While the Rules of Conduct describe a process for presenting information “of a material violation of the obligations of independence, impartiality, or confidentiality or the avoidance of direct or indirect conflicts of interest by covered persons which may impair the integrity, impartiality or confidentiality of the dispute settlement mechanism,” parties are told “at the earliest possible time and on a confidential basis, submit such evidence to the Chair of the DSB, the Director-General or the Standing Appellate Body, as appropriate.” WT/DSB/RC/1 Art. VIII.1. Paragraph 2 of Art. VIII says that the alleged failure to disclose by itself is not a sufficient ground for disqualification “unless there is also evidence of a material violation of the obligations of independence, impartiality, confidentiality or the avoidance of direct or indirect conflicts of interests and that the integrity, impartiality or confidentiality of the dispute settlement mechanism would be impaired thereby.”

Paragraphs 14-17 address how to address alleged violations by a member of the Appellate Body basically calling for the information to be shared with the other party to the dispute and to the Standing Appellate Body.

But the basic premise of the Rules of Conduct is that allegations and resolutions will occur before the panel or Appellate Body process is complete to permit time to substitute a new panelists or Appellate Body member into the dispute before final resolution.

Challenges of the Supercalendered Paper case

After December 10, 2019, there was only one Appellate Body member. The United States communicated with the Director-General of the WTO and the Chair of the Dispute Settlement Body (the other two entities to whom evidence of possible violations could be sent if other than an Appellate Body member) on January 30, 2020 about the alleged violation of the one remaining AB member as she was affiliated with the government of China and the case, while brought by Canada involved mainly cases in which China was involved. While the evidence wasn’t sent to the Standing Appellate Body, that was not a practical option under the circumstances.

It is unclear whether the Director-General or the Chair of the Dispute Settlement Body did anything with the information provided. Certainly, no action was expeditiously undertaken to permit a resolution of the allegation before the time when the DSB would take up the Appellate Body Report and panel report. There is no reference in the minutes of the March 5, 2020 meeting to any action being taken.

The position of Canada and the EU was that the U.S. would have to wait until the Appellate Body was functioning again to have the issue reviewed. Yet such an approach is counter to the need to determine whether a material violation has occurred expeditiously so that corrective action (e.g., replacement of AB member or panelist) could occur if appropriate.

What is clear is that a system which doesn’t permit the timely evaluation of allegations against the propriety of an Appellate Body member, a panelist or other individual involved in the dispute settlement system, serving on a dispute weakens the integrity of the system and the perceived impartiality of the AB members and panelists.

Nor have Canada, the EU, China or others identified what a later review of allegations would permit in terms of correction of the particular dispute if the allegations are deemed to be confirmed. Nor do the Rules of Conduct seem to provide for retroactive correction of earlier disputes where a panelist or Appellate Body with a demonstrated serious violation of obligations served (and hence either there may have been a split decision on certain issues if there was a dissenting view and where you would not have had three proper AB members participate).

One would assume that the U.S. will make addressing these shortcomings in the existing system part of what needs to be addressed before the Appellate Body is reconstituted.

Continuing saga

Despite the fact that Canada agrees that the U.S. has raised serious issues, Canada has sought rights to retaliation and the topic was discussed at Monday’s Dispute Settlement Body meeting (June 29, 2020). The WTO press release on the meeting included this summary of the discussion of supercalendered paper:

“Paper from Canada

“Canada noted its request to suspend concessions against the United States for the US failure to comply with the WTO’s ruling in DS505. Canada said the US has neither informed the DSB of its intentions in regard to complying with the ruling, nor has it proposed a reasonable period of time to ensure compliance. Thus, Canada was pursuing its right to retaliate.

“The United States objects to the premise that the DSB adopted the ruling in this dispute on 5 March. The US position is that there was no valid Appellate Body report, and there was no consensus for the DSB to adopt the ruling. The report was not valid for three reasons: 1) the ruling was issued after the 90-day deadline set under the Dispute Settlement Understanding (DSU); 2)
two of the Appellate Body members were not authorized by the DSB to continue working on the case after their terms as members expired; and 3) the third Appellate Body member — Hong Zhao of China — was disqualified from serving as a member because she currently serves as vice president of an academy which is a public institution under Chinese law and subordinate to China’s Ministry of Commerce (MOFCOM), and thus she was neither independent nor impartial.

“The US also said Canada was not suffering any trade impact from the measures in question, particularly since the countervailing duties had been removed two years earlier. Nevertheless, the US said it had objected to the Canadian request on 26 June, meaning that the matter is automatically referred to WTO arbitration.

“Canada was joined by China, the EU, Japan, Australia and Mexico in rejecting the notion that the Appellate Body ruling in DS505 was not valid and that the DSB never adopted the ruling. Canada said the minutes of the DSB meeting on 5 March show that the ruling was adopted on the basis of Article 17.14 of the DSU, whereby a ruling can only be rejected if all WTO members present agree to reject it. Canada added that its request is based on a formula to ensure that retaliation can be exercised only if and when the US applies its WTO-inconsistent ongoing conduct to imports from Canada in the future.

“China rejected the accusations that Ms Zhao was not impartial and independent, declaring that the Chinese institute with which she is affiliated is an independent legal entity, and that the US raised no objections to her when she was first appointed to the WTO, nor when she was involved in rulings that were favorable to the United States.

“The US countered that China has not denied US statements regarding Ms Zhao’s affiliation with the institute and its affiliation with, and financial support from, MOFCOM.”

https://www.wto.org/english/news_e/news20_e/dsb_29jun20_e.htm.

The United States releases its statement to the Dispute Settlement Body meetings on the US Mission Geneva webpage. See Statement of the United States at the Dispute Settlement Body Meeting, Geneva, June 29, 2020, https://geneva.usmission.gov/wp-content/uploads/sites/290/Jun29.DSB_.Stmt_.as-deliv.fin_.public13218.pdf The relevant portion (pages 20-24) of the U.S. statement this past Monday is copied below.

“12. UNITED STATES – COUNTERVAILING MEASURES ON SUPERCALENDERED PAPER FROM CANADA

“A. RECOURSE TO ARTICLE 22.2 OF THE DSU BY CANADA (WT/DS505/13)

“ On June 18, 2020, Canada filed a request that the DSB authorize Canada to suspend concessions because it considers that the United States failed to comply with the recommendations of the DSB.

“ The United States objects to the premise of Canada’s request, which is that the DSB adopted recommendations in this dispute on March 5, 2020. As we will explain again, the position of the United States is that no DSB recommendation was or could be adopted because there was no valid Appellate Body report, and there was no consensus for the DSB to adopt the reports.

“ The United States has also repeatedly expressed concern that Canada continues to pursue a dispute that has no real world effect on Canadian exporters – a fact conceded by Canada’s recent request.

“ Canada’s request asks for authorization based on speculation – that is, related to an alleged nullification or impairment that occurs ‘if the ‘ongoing conduct’ continues to exist and [if it] applies to exports from Canada in the future’.

“ Canada is unable to even assert that it suffers from any nullification or impairment today because the alleged conduct is not applied to any Canadian good.

“ Only one determination in this dispute involved Canada – Supercalendered Paper – and that countervailing duty order was revoked two years ago.

“ Therefore, Canada suffers no nullification or impairment from the alleged measure, nor can it say that the alleged measure continues to exist, nor that Canada will suffer nullification or impairment in the future.

“ Nevertheless – and without prejudice to the U.S. position that no recommendations were adopted by the DSB – by letter dated June 26, 2020, the United States also objected to the level of suspension of concessions or other obligations proposed by Canada.

“ Under Article 22.6 of the DSU, the filing of the objection by the United States automatically results in the matter being referred to arbitration. Article 22.6 does not refer to any decision by the DSB, and no decision is therefore required or possible.

“ Consequently, because of the U.S. objection under Article 22.6, the matter already has been referred to arbitration. Although unnecessary, the DSB may take note of that fact and confirm that it may not therefore consider Canada’s request for authorization.

“ The United States recalls that at the March 5, 2020, DSB meeting, we did not join a consensus to adopt the reports put forward. There were multiple reasons why the appellate document was not a valid Appellate Body report under Article 17 of the DSU. First, the DSB had taken no action to permit two ex-AB members to continue to serve after their terms expired; second, the report was not issued within 90 days, as required by Article 17.5; and third, one person serving was affiliated with the Government of China, and therefore was not a valid member of the Appellate Body under Article 17.3.12

“ Indeed, separate from this dispute, on January 31, 2020, the United States informed the WTO Director-General and the DSB Chair by letter of discovered information that disqualified a Chinese national, Ms. Zhao, from the Appellate Body.

“ At the March 5 meeting, the United States detailed for Members the evidence demonstrating that Ms. Zhao is not “unaffiliated with any government.” No information has been presented, before, during, or after the March 5 DSB meeting that contradicts that evidence.

“ Because of Ms. Zhao’s affiliation with the Government of China, the appellate document is not a valid Appellate Body report because it had not been provided and circulated on behalf of three Appellate Body members, as required under DSU Article 17.1.

“ At the March 5 DSB meeting, Canada agreed that the allegations of Ms. Zhao’s lack of independence are serious and stated that they deserve full and impartial consideration. Canada asserted that the Rules of Conduct addressed such situations.

“ The United States agrees with Canada’s apparent concern that Ms. Zhao’s participation in the appeal may also be inconsistent with the Rules of Conduct.

“ The procedures under the Rules of Conduct for the Appellate Body itself to conduct an inquiry are not available in current circumstances. However, this does not mean that no inquiry may be conducted. To the contrary, in general the Rules provide for the DSB Chair or the Director-General to conduct the relevant inquiry.

“ The DSB Chair and Director-General would be natural leaders of such an inquiry given their roles in the WTO dispute settlement system and the trust Members repose in them.

“ The United States notes that the conduct at issue also would have constituted a breach of the obligation in DSU Article 17.3 to avoid a direct or indirect conflict of interest.13 Ms. Zhao was demonstrably connected with the Chinese Government, which had a direct interest in this appeal as the “ongoing conduct” complained of related almost exclusively to China.14 This reinforces the importance of an alternative form of ethical inquiry.

“ Therefore, given Canada’s acknowledgement of serious issues of independence and impartiality, the United States would support an alternative inquiry under the Rules of Conduct.

“ Even aside from the fact that Ms. Zhao was not a valid Appellate Body member under DSU Article 17.3, such an inquiry would confirm her disqualification from serving on the appeal.

“Second Intervention

“ Canada asserts that the appellate report must have been adopted by negative consensus. But it is evident that not any document issued with the title “Report of the Appellate Body” is such a document. For example, if such a document were signed by three members of the Appellate Body Secretariat, no one would seriously argue the report must be adopted by the DSB by negative consensus. That is because the alleged “Report” would not be consistent with DSU Article 17, which requires an appeal to be decided by three Appellate Body members.15

“ In this dispute, the facts are not seriously contested. First, the DSB had taken no action to permit two ex-AB members to continue to serve after their terms expired; this is evident from the fact that no such decision was ever proposed to the DSB.

“ Second, the report was not issued within 90 days, as required by Article 17.5; this too is not contested.

“ Third, one Appellate Body member was affiliated with the Government of China; as the United States has pointed out, the evidence of affiliation brought forward by the United States has not been directly contested. Therefore, this affiliated person was not a valid member of the Appellate Body under Article 17.3.

“ Given that there was no valid Appellate Body report before the DSB, the document could not be adopted by negative consensus under Article 17.14 as that rule did not attach to this document. Therefore, the DSB could only adopt the document by positive consensus. The United States made clear at the DSB meeting that it objected and did not join a consensus on adoption.

“ As there was no consensus for adoption, the DSB did not adopt any reports in this dispute. Accordingly, there was no recommendation for the United States to bring a measure into conformity with a covered agreement.

“ Regarding Canada’s comments concerning application of the Rules of Conduct, we note these rules were agreed by Members in order to help preserve the integrity and impartiality of the WTO dispute settlement system. That does not mean that the Rules are all that is necessary to do so. Rather, first and foremost, it is for WTO Members, and all participants in the system, to take responsibility for safeguarding that system.

“ When Canada says only the Appellate Body may apply the obligations of impartiality and independence to a person serving on an appeal, and therefore the Rules cannot be applied now, Canada would actually use the Rules to undermine the integrity and impartiality of the WTO.

“ If there are valid ethical concerns with the service by a person in an appeal, they should be investigated. It would be thoroughly inconsistent with our experience and close relationship with Canada to see it defend the behavior of the Chinese official in this dispute.

“ And there is no question that Ms. Zhao’s professional connections with the Government of China raise serious ethical concerns. For instance, given Ms. Zhao’s professional connections with the Government of China, her participation in the appeal is not consistent with the obligations to be ‘independent and impartial’ and ‘avoid direct or indirect conflicts of interest,’ provided for in paragraph II:1 of the Rules of Conduct.16

“ We therefore look forward to further conversations with Canada to find a shared approach through which we can maintain the integrity and impartiality of WTO dispute settlement.

“ At the March 5 DSB meeting and again today, China has responded to the evidence explained by the United States. Importantly, and revealingly, China has not denied the following:

“o Ms. Zhao serves as Vice President of MOFCOM-AITEC.

“o Ms. Zhao receives or has received a salary for her position of Vice President.

“o MOFCOM-AITEC is an “affiliated” entity “subordinate” to MOFCOM.

“o MOFCOM-AITEC’s budget is part of MOFCOM’s budget, such that the salary for Ms. Zhao’s Vice President position at MOFCOM-AITEC is funded by the Government of the People’s Republic of China.

“ The fact that China did not deny these statements or assert that they are incorrect only confirms that Ms. Zhao is affiliated with the Government of China and is therefore not a valid member of the Appellate Body.

“12 See U.S. Statement at the March 5, 2020, Meeting of the Dispute Settlement Body (Item 8).

“13 See DSU Art. 17.3 (“They [persons serving on the Appellate Body] shall not participate in the consideration of any disputes that would create a direct or indirect conflict of interest.”).

“14 See United States – Countervailing Measures on Supercalendered Paper from Canada (Panel), WT/DS505/R, para. 7.295 and Tables 1-4 (seven of nine proceedings involving China).

“15 DSU Art. 17.1 (“The Appellate Body shall hear appeals from panel cases. It shall be composed of seven persons, three of whom shall serve on any one case.”).

“16 Rules of Conduct, Section II (“Governing Principle”), para. 1 (“Each person covered by these Rules … shall be independent and impartial [and] shall avoid direct or indirect conflicts of interest . . . so that through the observance of such standards of conduct the integrity and impartiality of that mechanism are preserved.”).”

Conclusion

The dispute settlement system at the WTO is facing challenges flowing from long standing concerns about the Appellate Body conforming to the limited role given it by the Dispute Settlement Understanding, the expansive reading of the Appellate Body’s role by AB members over time and the largely ineffective negotiating function of the WTO which has prevented meaningful oversight of the Appellate Body by WTO Members.

Added to the longstanding concerns raised by the United States and others comes a concern that goes to the heart of the dispute settlement system’s legitimacy — the need for impartial decision making and how to ensure prompt resolution of allegations of violations of obligations by AB members or panelists. The allegations against the remaining Appellate Body member raised by the United States in the supercalendered paper dispute have not been addressed by the Director-General of the WTO or by the Chair of the Dispute Settlement Body. Other WTO Members seem to be willing to see challenged reports adopted instead of having allegations pursued. Adopting a report put out by the AB including the challenged member and Canada’s pursuit of retaliation rights make a mockery of a properly functioning system and will do lasting harm to the DSB’s legitimacy. And so the downward spiral at the WTO continues in its dispute settlement function.

COVID-19, EU move to permit some international travel in addition to intra-EU travel, effects on tourism

Many countries have imposed travel restrictions on visitors from other countries during the COVID-19 pandemic. The International Air Transport Association (“IATA”) reports that there are 163 countries that have some travel restrictions and that 96 countries impose quarantine requirements. See IATA, COVID-19 Government Public Health Mitigation Measures, https://www.iata.org/en/programs/covid-19-resources-guidelines/covid-gov-mitigation/.

Travel and tourism is one of the most seriously harmed economic sectors from the global COVID-19 pandemic for many countries. The UN World Tourism Organization has created “the first global dashboard for tourism insights”. https://www.unwto.org/unwto-tourism-dashboard. The dashboard indicates that COVID-19 will result in the reduction of some 850 million to 1.1 billion tourists with a loss of US$ 910 billion to US $ 1.2 trillion in revenues from tourists with the potential loss of as many as 100-120 million jobs in the sector. These are obviously staggering figures for a sector that has contributed to global economic growth over recent decades. The dashboard has ten slides which shows data for tourism through April 2020 with some projected figures for full year 2020 under various assumptions. Data are presented both globally and for some slides by regions and in a few within regions by country. Thus, in slide 2, global tourism grew 2% in January 2020, declined 12% in February, declined 55% in March and declined 97% in April for a January-April total decline of 43.8%. By region, Europe declined 44%, Asia and the Pacific declined 51%, the Americas declined 36%, Africa declined 35%, and the Middle East declined 40%. While data for May and June are not yet available and may be less severe in terms of contraction than April, the decline in global tourism through June will likely exceed 50% and possibly be even more severe. For data through April 2020 see the link, https://www.unwto.org/international-tourism-and-covid-19.

In prior posts, I have provided background on the sector and the likely toll from the COVID-19 pandemic. See April 30, 2020, The collapse of tourism during the COVID-19 pandemic, https://currentthoughtsontrade.com/2020/04/30/the-collapse-of-tourism-during-the-covid-19-pandemic/; May 3, 2020, Update on the collapse of travel and tourism in response to COVID-19, https://currentthoughtsontrade.com/2020/05/03/update-on-the-collapse-of-travel-and-tourism-in-response-to-covid-19/.

As many countries in parts of Asia, Oceania, Europe and a few other countries have seen significant declines following first wave peaks of COVID-19 cases, restrictions within countries and increasingly on international travel are starting to be relaxed.

The European Union is a large tourist destination and on June 30 announced recommendations for member states to consider in opening up for tourists from both other EU countries and for travelers from outside of the area for nonessential travel. Specifically, the Council of the European Union adopted Council Recommendations on the temporary restriction on non-essential travel into the EU and the possible lifting of such restriction on 30 June 2020. See https://data.consilium.europa.eu/doc/document/ST-9208-2020-INIT/en/pdf. Intra EU travel, travel from Norway, Iceland, Switzerland, Liechtenstein and certain other countries is not part of the third country nonessential travel affected by the recommendations (to the extent adopted by EU members).

The EU Council selected third countries whom the Council recommended have access based on criteria which “relate to the epidemiological situation and containment measures, including physical distancing, as well as economic and social considerations, and are applied cumulatively.” Page 6. The Council lists three critieria: (1) whether the number of new cases over the last 14 days per 100,000 inhabitants is close to or below the EU average (15 June 2020); (2) whether the trend of new cases over the prior 14 day period is stable or decreasing; and (3) considering “the overall response to COVID-19 taking into account available information aspects such as testing, surveillance, contact tracing, containment, treatment and reporting as well as the reliability of available information and data sources and, if needed, the total average score across all dimensions for International Health Regulations (IHR).” Page 6.

Based on these criteria, the EU Council recommends that 15 countries (with China being subject to confirmation of reciprocity by China to EU travelers) “whose residents should not be affected by temporary external borders restriction on non-essential travel into the EU” (Annex I, page 9): Algeria, Australia, Canada, Georgia, Japan, Montenegro, Morocco, New Zealand, Rwanda, Serbia, South Korea, Thailand, Tunisia, Uruguay and China. The Council may review every two weeks whether the list should be modified.

Annex II to the Council recommendations provides an identification of travelers with essential functions for whom the restrictions should not apply. These include healthcare professionals, health researchers, and elderly care professionals, frontier workers, seasonal workers in agriculture, transport personnel, diplomatic personnel, passengers in transit, passengers traveling for “imperative family reasons,” seafarers, third-country nationals traveling for the purpose of study and a few others. Annex II, page 10.

The EU Council Recommendations are embedded below as is a Council press release on the recommendations.

ST_9208_2020_INIT_EN

Council-agrees-to-start-lifting-travel-restrictions-for-residents-of-some-third-countries-Consilium

Obviously many countries are not included on the list of third countries where loosening of restrictions on travel is recommended. The United States, Argentina, Brazil, India, Indonesia, Malaysia, Nigeria, Russia, Saudi Arabia and South Africa are just a few for whom nonessential travel restrictions are not recommended to be lifted. For most of these countries, either the number of new cases has not peaked or has not receded significantly.

For the EU, getting agreement among its members to lift travel restrictions for other EU countries and to start lifting restrictions for travelers from thrid countries has been important as the summer holiday season of July-August arrives. Data from EU tourism statistics showed 710 million international visitors in 2018 (when there were 28 EU members, including the UK). 81% or 575 million visitors were intra-EU, that is traveling from one EU country to another. Thus, for the EU, the biggest return of tourism business involves reopening to travelers from other EU countries. By contrast, visitors from third countries in total were some 19% of the total or 135 million visitors. The US accounted for 11.6% of third country visitors in 2017, some 15.7 million in number. While an important source of third country tourists, The U.S. was just a little over 2.2 percent of total EU global visitors. See http://www.condorferries.co.uk (tourism in Europe statistics). Thus, for tourism, the EU’s reopening recommendations will not return travel and tourism to pre-COVID-19 levels. But the partial reopening could result in a significant rebound in its tourism sector which will be good news for EU businesses involved in the travel and tourism space. Time will tell just how much of a rebound actually occurs.

For other nations, the more countries who get COVID-19 under control and are thus able to open international travel and tourism responsibly, the greater the likely rebound in global travel and tourism will be. However, because many businesses in the travel and tourism space in any country are small businesses, the risk for many countries (whether in the EU or elsewhere) is that the rebound whenever it occurs will happen with a much smaller business base to serve customers. While governments can provide targeted assistance through legislative initiatives, operating conditions for many such businesses post opening do not permit profitable operation where social distancing and other important steps remain critical to safe functioning. So unlike other global crises in the past, there may be large and permanent job losses in the travel and tourism sector flowing from COVID-19.

WTO Dispute Settlement – With Appellate Body Currently Non-Operational, AB Secretariat Personnel Have Been Shifted to Other Divisions

As of December 11, 2019, there was only one remaining Appellate Body member whose term had not expired. Agreement amongst WTO Members permitted a number of pending appeals (those where hearings had already happened) to be completed even though this would mean completion by individuals whose terms had terminated but who would operate under AB rule 15. The last Appellate Body reports were released on June 9, 2020. AUSTRALIA – CERTAIN MEASURES CONCERNING TRADEMARKS, GEOGRAPHICAL INDICATIONS AND OTHER PLAIN PACKAGING REQUIREMENTS APPLICABLE TO TOBACCO PRODUCTS AND PACKAGING, WT/DS435/AB/R and WT/DS441/AB/R (9 June 2020).

The WTO has contractual arrangements with the remaining Appellate Body member and with many of the Appellate Body Secretariat staff. As a result, the WTO Director-General has worked to move the AB Secretariat staff to other Divisions within the WTO in light of the reduced 2020 Appellate Body budget, the reduced workload and now the termination (at least temporarily) of any work by the Appellate Body.

For example, the Committee on Budget, Finance and Administration meeting of March 9, 2020 had an appearance by Director-General Azevedo. The write-up on the meeting noted that “Turning to the Appellate Body Secretariat, the Director-General observed that until a political agreement emerges as to the format of the future appeals process, 23 staff members of the Appellate Body Secretariat have been temporarily re-assigned to other Divisions.” Committee on Budget, Finance and Administration, Report of meeting held on 9 March 2020, WT/BFA/185/Rev. 1 at para. 1.10.

Last Friday, June 26, 2020, Director-General Azevedo wrote to all the WTO membership to alert them to the creation of a new Division on July 1 “responsible for Knowledge and Information Management, Academic Outreach and the WTO Chair’s Programme”. The new Division will be headed by Mr. Werner Zdouc who was being reassigned. Mr. Zdouc has since 2006 served as the director of the Appellate Body Secretariat. It is assumed that by July 1st all Appellate Body Secretariat staff have either left the WTO or been reassigned. The June 26 letter is embedded below.

DG-letter-to-PRs-re-New-Division-Zdouc-June-2020

Press accounts from 2019 suggested that Mr. Zdouc was viewed as contributing to the problems at the Appellate Body long complained of by the United States and some others, particularly on the issue of precedent (i.e., whether AB reports were precedential) and on the practical problem of whether the Appellate Body would correct elements of decisions that were viewed as wrongly decided by Members. See Inside U.S. Trade’s World Trade Online, Appellate Body’s future could depend on whether its director keeps his job, December 8, 2019.

Movement of WTO Appellate Body Secretariat staff doesn’t end the conflict on second-tier review

While there has been hope amongst some that WTO Members would continue to pursue in 2020 a path to reform that would permit the reactivating of the Appellate Body, that hope seems to have no short-term prospect for fulfillment.

Parties remain locked in their existing positions. With U.S. elections scheduled for November, some WTO Members may be deciding that they will simply await the outcome of the election before further engaging. Ambassador Lighthizer said at the recent U.S. House of Representatives Committee on Ways and Means hearing on the President’s 2020 trade agenda that it would be ok if the Appellate Body never comes back.

Without an operational Appellate Body, WTO Members have various options including arbitration under DSU Article 25. However, there are ongoing skirmishes at the WTO pertaining to the coverage of costs by the WTO of arbitration costs for Members pursuing arbitration through the interim arbitration agreement to which the EU, Canada, China and many other countries are signatories. See JOB/DSB/1/Add. 12, 13 and 14.

During the 2020 budget discussions held at the end of 2019, the U.S. had pushed for a clarification for how arbitrators would be paid (same as panelists which was significantly lower than AB member daily charges; no monthly retainer) and for a reduction in the Appellate Body budget in light of the lack of sufficient AB members. See, e.g., Committee on Budget, Finance and Administration, Report of the Meeting Held on 12 and 27 November and 5 December 2019, WT/BFA/183 (6 December 2019).

Recent press accounts have reported that there continue to be challenges by the United States to the interim arbitration agreement on various fronts including payment from the WTO budget. See Inside U.S. Trade’s World Trade Online, June 12, 2020, Shea: U.S. opposes use of WTO budget for interim appellate plan (article includes a link to the June 5 letter from Amb. Shea to DG Azevedo). As stated in Amb. Shea’s June 5th letter to DG Azevedo, the U.S. objects to the interim arbitration agreement that the EU, China and others are party to because it “exacerbates some of the worst aspects of the Appellate Body’s practices.” The U.S. also objected “to the use of WTO budget funds for a process that is clearly far more than a simple Article 25 arbitration.” The letter is embedded below.

June-5-2020-letter-from-Amb.-Shea-to-DG-Azevedo

Conclusion

With a reduced 2020 budget for the Appellate Body and with the conclusion of disputes on which Appellate Body reports will be prepared until such time as the Appellate Body is reactivated, the WTO has reassigned Appellate Body Secretariat staff to other divisions and has started a new division which will be headed by the former Director of the Appellate Body Secretariat.

Unfortunately, shifting personnel to different divisions does nothing to eliminate the deep divisions on how to proceed with dispute settlement after panel reports. Moreover, there is no apparent willingness to move reform of the dispute settlement system forward at the present time. Efforts by the EU and others to create an interim process that mirror many of the problems found in the Appellate Body practices have simply moved the deep divisions among Members over the Appellate Body into what is permissible under DSU Art. 25. So we will have a crisis in the dispute settlement area at least until 2021 and probably beyond.

COVID-19 — the global rate of increase of confirmed cases is surging

By the close of business on June 22, there will be more than 9 million confirmed cases of COVID-19 with the rate of growth exploding more than six months after the first cases were reported in China, with deaths approaching a half million. For the two weeks ending June 21, the number of new cases approached 2 million (1,932,024), up 24.0% from the two weeks ending June 7 (1,557,983) which in turn were up 21.5% from the two weeks ending May 24 (1,281,916). Thus, the last six weeks have seen the rate of new cases grow by 50.7%. Indeed, the last six weeks account for 54.25% of total cases since the end of 2019 (roughly 25 weeks).

As the worst of the pandemic has passed (at least the first wave) for most of the developed world (other than the United States and countries in the Middle East), the sharp growth in cases is mostly due to the spread of the virus in the developing world where healthcare infrastructure and ability to handle the challenges of the pandemic are likely less than for the developed world.

Central and South America, parts of Asia and the Middle East are the current hot spots of infections with growth in a number of African countries as well. The United States which peaked during the two week period ending April 26, has by the far the largest number of total cases (more than 2.2 million) and is seeing the number of cases rise again in the most recent two weeks.

Afghanistan, Argentina, Bangladesh, Bolivia, Brazil, Chile, Colombia, the Dominican Republic, Ecuador, Egypt, Guatemala, Honduras, India, Indonesia, Iraq, Kuwait, Mexico, Nigeria, Oman, Pakistan, Panama, the Philippines, Qatar, Saudi Arabia, South Africa and the United Arab Republic all have significant numbers of cases and all but Kuwait, Qatar and the UAE are still growing rapidly in terms of new cases where peaks have not been reached. Thus, the likelihood of even greater number of new cases is a near certainty for the coming weeks.

Some recent developments

Most of western Europe has been engaged in reopening in recent weeks as the rates of infection are dramatically lower than in the March-April period. Indeed, travel within the EU and some neighboring countries is opening up in time for the July-August vacation season. Time will tell if the steps being taken to test, trace and quarantine any cases found going forward will minimize any upward movement in cases.

China and parts of Asia with low rates of infections where economic interruption has been less (e.g., Taiwan, the Republic of Korea, Singapore and Japan), are seeing low numbers of new cases. China has taken strong measures to address a new outbreak in Beijing (numbers are a few hundred cases).

Australia and New Zealand have few if any new cases and the numbers for Canada are also way down with reopening occurring as would be expected.

The U.S. and Canada and the U.S. and Mexico are maintaining travel restrictions between themselves (though excluding movement of goods and services).

In the United States, the story on the control of the pandemic is very mixed as individual states have been engaged in reopening at different rates in part reflecting different infection rates and growth rates. However, reopening in some states is occurring despite conditions in the state not being consistent with the Administration’s guidelines from the Center for Disease Control ad Prevention (“CDC”) on when reopening should occur. Thus, there are states seeing large increases in recent days and weeks while many other states are seeing significant declines or at least stable rates of infection. It is unclear how the infection rate in the U.S. will progress in the coming weeks and months.

Trade Considerations

As my post from last week on the Ottawa Group communication reviewed, there are lots of proposals that have been teed up by WTO Members to keep trade flowing during the pandemic and to potentially reduce the likelihood of such trade disruptions as are being experienced at present in future pandemics.

But large numbers of export restraints remain in place, transparency is better than it was in the first quarter but still not what is needed. However, import liberalization/expedition is occurring in many countries to facilitate obtaining medical goods needed at the lowest price.

The toll flowing from the pandemic and the closing of economies to control the pandemic is enormous despite efforts of governments to provide funding to reduce the damage. This has led the WTO to project 2020 trade flows to decline between 13 and 32% from 2019 levels. As data are available for the March-June period, the severity of the decline for various markets is being fleshed out and resulting in lower global GDP growth projections.

Because the COVID-19 pandemic hit many developed countries hard before spreading to most of the developing world, developing countries have seen economic effects from the pandemic preceding the health effects in their countries. Reduced export opportunities, declining commodity prices (many developing countries are dependent on one or a few commodities for foreign exchange), reduced foreign investment (and some capital flight), higher import prices for critical goods due to scarcity (medical goods) and logistics complications flowing from countries efforts to address the spread of the pandemic are a few examples of the economic harm occurring to many developing countries.

The needs of developing countries for debt forgiveness/postponement appears much larger than projected although multilateral organizations, regional development banks and the G20 have all been working to provide at least some significant assistance to many individual countries. Trade financing will continue to be a major challenge for many developing countries during the pandemic. Harm to small businesses is staggering and will set many countries back years if not decades in their development efforts when the pandemic is past.

As can be seen in developed countries, sectors like travel and tourism (including airlines, hotels, restaurants, entertainment venues) are extraordinarily hard hit and may not recover for the foreseeable future. The need for social distancing makes many business models (e.g., most restaurants, movie theaters, bars, etc.) unworkable and will result in the loss of large portions of small businesses in those sectors in the coming months. For many developing countries, travel and tourism are a major source of employment and income. Losses in employment will likely be in the tens of millions of jobs, many of which may not return for years if at all.

Role of WTO during Pandemic

The WTO views itself as performing the useful functions of (1) gathering through notifications information from Members on their actions responding to the pandemic and getting that information out to Members and the public, (2) providing forecasts of the trade flows during the pandemic, and (3) providing a forum for Members to bring forward proposals on what action the WTO as a whole should consider. Obviously the success of all three functions depends on the openness and engagement of the Members.

WTO agreements don’t really have comprehensive rules for addressing pandemics or for the policy space governments are likely to need to respond to the economic tsunami that may unfold (and will unfold with different intensities for different Members). Some recent proposals would try to address some of the potential needs for the trading system to better respond to pandemics. However, most proposals seem to suggest narrowing the policy space. Last week’s Committee on Agriculture was reported to have had many Members challenging other Members actions in the agriculture space responding to the extraordinary challenges flowing from the pandemic. While Committee activity is designed to permit Members the opportunity to better understand the policies of trading partners, a process in Committee which focuses simply on conformance to existing rules without consideration of what, if any, flexibilities are needed in extraordinary circumstances seems certain to result in less relevance of the WTO going forward.

Most countries have recognized that the depth of the economic collapse being cased by the global efforts to respond to COVID-19 will require Members to take extraordinary steps to keep economies from collapsing. Looking at the huge stimulus programs put in place and efforts to prevent entire sectors of economies from collapsing, efforts to date by major developed countries are some $10 trillion. Concerns expressed by the EU and others have generally not been the need for such programs, but rather have been on ensuring any departures from WTO norms are minimized in time and permit a return to the functioning of market economies as quickly as possible.

Members have not to date proposed, but should agree, that the WTO undertake an evaluation of programs pursued by Members and how existing rules do or do not address the needs of Members in these extraordinary times.

WTO possible actions to facilitate recovery from COVID-19, the Ottawa Group’s June 16 Communication

A number of WTO Members have submitted proposals for action by the WTO Membership to address the global trade challenges flowing from the COVID-19 pandemic including speeding recovery and minimizing future disruptions from later health challenges. Most proposals address what to do about export restrictions, simplifying import procedures and/or reducing import duties, and improved transparency of actions taken.

The Ottawa Group June 2020 Statement: Focusing Action on COVID-19

The latest contribution comes from the “Ottawa Group” and was submitted on June 16, 2020. June 2020 Statement of the Ottawa Group: Focusing Action on COVID-19, WT/GC/217. The Ottawa Group is a group of WTO Members who describe themselves as “champions of WTO reform”. The group consists of the following WTO Members — Australia, Brazil, Canada, Chile, European Union, Japan, Kenya, Republic of Korea, Mexico, New Zealand, Norway, Singapore and Switzerland.

The Ottawa Group statement provides the following introduction followed by six areas for potential WTO action:

“The world continues to grapple with the profound human health and economic impacts of the COVID-19 pandemic. In response to these challenges, thinking has begun on trade policy actions that would support an inclusive, sustainable, and resilient recovery as well as what trade rules should be adapted or developed to guide collaborative policy responses to future global crises. In this context, the WTO must play an important role in helping ensure coordination and coherence between actions its members take. This will require initiative and engagement by WTO Members in order to be successful.

“In this environment, there is an opportunity for the Ottawa Group to provide leadership, critical thinking and analysis, as well as ideas and proposals on potential actions that the broader WTO membership could take. In order to make best use of resources, this paper sets out six areas where concrete actions could be taken.” Page 1

The six action items are identified with a discussion of why the area is important and what steps the Group views as important to take. The Ottawa Group recommendations are summarized at the end of the communication (pages 4-5):

Summary:

Action Item 1: Transparency and Withdrawal of Trade-Restrictive Measures

Action Point: Ministers instruct officials to: 1) ensure any measures introduced in response to COVID-19 are promptly notified in accordance with relevant WTO requirements; 2) support efforts by the WTO Secretariat to collect and share information and best practices on trade-related measures taken in response to COVID-19 5/; 3) discuss the principle of ‘targeted, proportionate, transparent, temporary and consistent with WTO rules’; and 4) lead by example and withdraw or end any trade restrictive measures introduced in response to COVID-19 as quickly as possible.

“5/ Including by: (a) returning to the quarterly cycle of trade monitoring reports as during the financial crisis; and (b) including trade-related economic support measures in the trade monitoring reports and (c) and to the extent possible, making a technical assessment of members’ trade-related economic support measures in reaction to COVID-19.

Action Item 2: Keeping Open and Predictable Trade in Agricultural and Agri-Food Products

Action Point: Ministers instruct officials to: 1) engage in ongoing discussions on the fulfilment of joint declarations on maintaining predictable and open agriculture trade; 2) lead by example, and withdraw or end any emergency measures introduced in response to COVID-19 that may adversely affect trade in agriculture as quickly as possible; and 3) advance analysis and consideration on what steps WTO Members could take to continue improving agriculture trade based on the lessons learned from COVID-19 to ensure that future crises will not undermine trade, food security, and the stability of agricultural markets in the long-term.

Action Item 3: E-commerce

Action Point: Ministers instruct officials to prioritize and accelerate work on the Joint Statement Initiative on E-commerce, including through informal and virtual discussions, ahead of the rescheduled MC12 in 2021, including by the development of a consolidated negotiating text by the end of 2020 at the latest. In this regard, we will support the efforts of the co-convenors.

Action Item 4: Trade Facilitation – Use of Information Technology and Streamlined Procedures

Action Point: Ministers instruct officials to identify ways to take full advantage of the opportunities for trade facilitation in the Trade Facilitation Agreement (TFA) and to promote best practices for the implementation of the TFA. This includes how the adoption of digital solutions can support the movement of essential goods across borders as smoothly as possible.

Action Item 5: Initiative on Medical Supplies

Action Point: Ministers instruct officials to advance analysis and consideration in order to identify what steps WTO Members could take to facilitate trade in medical supplies to help ensure that the world is better positioned to deal with future health emergencies and to help ensure that versatile, diversified and resilient supply chains exist that allow all members access to vital medical supplies. This work should include analysis of the objectives and effects of policies affecting trade of medical supplies in response to the current pandemic and support for international organizations, including the WTO, in analyzing the potential impacts and outcomes of measures and recommending policies.

Action Item 6: Deepen Engagement with Stakeholders

Action Point: Ministers instruct officials to explore how best to pursue intensified engagement with stakeholders in order to better inform policymaking.”

The Ottawa Group proposals include topics not addressed in other proposals, such as the importance of prioritizing conclusion of the e-commerce joint statement initiative. During the pandemic, the critical importance of e-commerce to and expanded use by many businesses and consumers has reduced the damage to economies and to global trade. All Ottawa Group members are participating in the ongoing e-commerce talks, talks involving 84 countries or territories.

On issues like export restraints, the Ottawa Group has some positive ideas while reflecting the reality that some Ottawa Group members have used export restraints on medical goods during the pandemic. The idea of giving definition to the terms “targeted, proportionate, transparent, temporary and consistent with WTO rules” could be useful for administrations to be able to evaluate intended actions. However, the spread of a pandemic such as COVID-19 and internal political pressures to help one’s own population will render any such clarifications of marginal actual assistance if the underlying challenge of global supply/demand imbalance is not addressed on an ongoing basis.

As has been seen in agricultural goods, increasing information on global supplies both reduces the likelihood of countries imposing export restraints and gives trading partners greater leverage in pushing for roll backs of export restraints imposed by individual countries where there is no actual shortage. The Ottawa Group’s recommendations on agricultural goods reflects that the ability to disarm restrictions where shortages do not in fact exist.

The Ottawa Group submission from June 16 is embedded below.

WTGC217

EU’s June 11, 2020 Concept Paper, Trade in Healthcare Products

Some WTO Members, including Ottawa Group member countries, have taken unilateral action to liberalize trade in medical goods by reducing tariffs (at least temporarily) and by streamlining entry of medical goods needed for handling the pandemic. Some members, like the EU, have suggested creating an expanded medical goods duty-free agreement to go beyond the 1995 pharmaceutical agreement. For example, in a concept paper of 11 June 2020 entitled Trade in Healthcare Products, the EU, inter alia, provides in the Annex (pages 9-14) a list of goods that WTO Members could consider for total duty elimination. https://trade.ec.europa.eu/doclib/docs/2020/june/tradoc_158776.pdf The EU notes in a footnote that its concept paper “is meant to contribute to an exploratory discussion on a possible initiative to facilitate trade in healthcare products and is without prejudice to the EU’s position in potential negotiations.” Page 1 footnote 1.

The EU concept paper covers a number of other areas besides tariff eliminations, but for purposes of this note, the discussion will be limited to the product coverage for possible duty elimination. The EU provides a list of 152 6-digit HS categories in its Annex. At the six-digit level, import categories may cover many products not relevant to a particular pandemic, but the six-digit HS level is the most fragmented level of harmonization provided by the Harmonized Commodity Description and Coding Systems. Interestingly the EU Annex does not cover all products identified by the World Customs Organization and World Health Organization as relevant to fighting the COVID-19 pandemic. Specifically, there are thirty products (with accompanying HS numbers that are in the WCO list that are not in the EU proposed Annex. See World Customs Organization Prepared jointly with the World Health Organization, HS classification reference for Covid-19 medical supplies, 2.1 Edition, http://www.wcoomd.org/-/media/wco/public/global/pdf/topics/nomenclature/covid_19/hs-classification-reference_2_1-24_4_20_en.pdf?la=en.

Specifically, under the WCO’s Section II dealing with face and eye protection, there are two face and eye protection products which are not part of the EU list (HS 9004.90 and 3926.90); four of five glove categories are not in the EU list (HS 3926.20, 4015.19, 6116.10, 6216.00); and eight of nine of the other products are not in the EU list (HS 6505.00, 3926.20, 4015.90 and 4818.50, 6210.40, 6210.40, 6210.50, 6210.50).

Similarly, in Section III, disinfectants and sterilisation products, two products in the WCO list are not covered by the EU (HS 2207.10, 2208.90).

In Section IV, oxygen therapy equipment and pulse oximeters, there is one product in the WCO list not covered by the EU Annex (HS 9026.80).

In Section V, other medical devices and equipment, the EU Annex doesn’t cover three products covered by the WCO list (HS 8413.19, 9028.20, 7324.90).

In Section VI, other medical consumables, there are four products shown in the WCO list that are not part of the EU Annex (HS 2804.40, 3923.29, 3926.90, 3926.90).

Section VII of the WCO list covers vehicles; with the exception of wheelchairs (which are covered by the EU Annex), the other three WCO products are not covered — ambulances, mobile clinic vehicles, mobile radiological vehicles (HS 8703, 8705.90, 8705.90).

Finally, in the WCO’s Section VIII, other products, three of four products in the WCO list are not covered by the EU Annex (HS 8421.39, 7311.00, 7613.00).

Because the WCO/WHO list reflects items needed by countries dealing with the COVID-19 pandemic, it is unclear what the logic is of not including such items in a proposed duty-free list compiled by the EU. Many of the items not included in the EU Annex (e.g., gloves, face shields, etc.) would be needed in addressing the current as well as future pandemics. If there is an effort to seek a duty-free agreement on medical goods, presumably the list will change from that put forward by the EU to be more comprehensive.

While the United States under the Trump Administration is not likely to enter into an agreement to eliminate tariffs on medical goods while the pandemic is afoot (as indicated by Amb. Lighthizer), the reality is that nearly all of the goods in the EU Annex are already duty free in the United States. Specifcally, 135 of the 152 6-digit HS items are duty free (Column 1 rate) in the U.S. in 2020. That is 88.8% of the HS categories. On a dollar value basis, 98.4% of imports into the U.S. during 2019 of products in the EU Annex are under HS numbers that are duty free. Of the remaining 1.6% of imports, a large part of the imports would be duty free under an FTA or GSP or other preferential program. Imports from China, some of which may be subject to supplemental duties flowing from the Section 301 investigation and resulting additional tariffs on Chinese goods, are 6.2% of total imports and some of those goods, if covered by additional duties, are subject to existing or potential exclusions.

Stated differently, should there be an effort to do a sectoral duty free agreement, in considering whether there is a critical mass, sponsors should be evaluating the existing tariff structures of non-participants.

The EU Concept Paper and the WCO list are embedded below.

tradoc_158776

hs-classification-reference_2_1-24_4_20_en-1

Deputy Director-General Alan Wolff’s Jun 17 speech, Pandemic underlines need to improve trading system’s relevance and resilience

This past week, Deputy Director-General Wolff spoke at a Think20 virtual panel on Policy Recommendations for a Post-COVID 19 World. DDG Wolff reviewed both actions that the WTO has taken (transparency on actions taken by Members; developing a trade forecast; providing a forum for members to share proposals and consider collective action) and proposals that had been put forward by Members. See https://www.wto.org/english/news_e/news20_e/ddgaw_18jun20_e.htm.

DDG Wolff identified two imperatives — “where the current rules are least prescriptive, they should be strengthened”; “where collective action would be helpful it should occur.” He then reviews WTO Members who have put forward proposals (Korea, Canada, Singapore, New Zealand, Switzerland, the Ottawa Group, the Cairns Group) and provided his summary of some of the suggestions made:

“Some specific suggestions that have been made include the following:

” A major effort can be undertaken to increase transparency. Member notifications can be supplemented by enhanced monitoring and reporting of measures by the Secretariat.

“There is little guidance in the WTO rules as to the appropriate use of export controls where it is felt that there exists short supply. Further guidance could be crafted. Sometimes the existence of extensive policy space is contrary to the common interests of all.

“Government interventions to procure needed supplies reduce the scope for market forces to determine competitive outcomes. A number of the practices witnessed in the last three months in response to the pandemic are not explicitly regulated by the current WTO rules. Included under this heading would be subsidization conditioned on supplying the domestic market, and pre-emptive government purchasing and investment. Additional disciplines could be considered.

“Leaving the allocation of scarce necessities solely to market forces may also not be a completely satisfactory alternative if the poorest countries are priced out of participation.

“Consideration can be given to agreeing, as in the WTO Agreement on Agriculture, to require that a country planning to impose an export restriction consider the effect on others of applying the measure.

“Additional provisions could provide for prior notice before export restrictions are put into place and a commitment to engage in timely consultations.

“Consideration can be given to including in any restrictions a sunset clause and providing for a roll-back of current trade restrictions.

“Multilaterally-agreed guidance could be given for the sharing of scarce medical supplies, including vaccines.

“Concerted efforts could be made to have relevant tariff liberalization, not just for medical goods, equipment and pharmaceuticals, but more broadly.

“Consideration can be given to creating, a Members’ Emergency Task Force or other mechanism to flesh out options for consideration by Members.

“Where options are devised by groups of Members, an effort and process are needed to gain broader Member support for their recommendations and to assure implementation of concrete steps forward.

“A Long-Range Policy Planning Network for the Multilateral Trading System could be created. There is insufficient attention paid to assessing the future needs of the multilateral trading system, in part due to the daily need to deal with current challenges.

“For the recovery, there are at least three immediately identifiable ways
in which the multilateral trading system can contribute. Consideration
can be given to:

“Lowering the costs of trade by lowering tariffs and other impediments to trade broadly;

“Engaging in a collective effort to accelerate the implementation of
the Trade Facilitation Agreement, and

“Working with international financial institutions and banks to
foster the restoration of trade finance.”

A broad array of suggestions have been made at the WTO as can be seen. The challenge, of course, is in generating momentum for group action. If the major players are not pulling in the same direction, it is hard to see how that momentum will be generated. Typically times of crisis create opportunities for bold action. Is today’s crisis such an opportunity considering the significantly different perspectives of China, the EU and the U.S.?

Many developing countries (and those who claim developing status at the WTO) typically have the highest tariffs and can be motivated for short-term tariff action on specific goods (as this pandemic has demonstrated), but have not shown a willingness to lead on tariff liberalization when developed countries typically have very low tariff levels already. Is the pandemic a reason for such countries to rethink their contribution to the global trading system?

A number of the proposals go to the functioning of the WTO and its governance. Considering the desire by many for broader reform but with significant differences in what type of reforms are appropriate, can the proposals identified generate consensus support in the coming months?

With the economic damage to the world’s economies much larger than originally projected, certainly there has never been a greater need for collective action to minimize human health and economic costs from the pandemic and to speed economic recovery. The coming months will show whether the great divides among the majors can be bridged for the good of all.

U.S. approach to trade – USTR Lighthizer’s Foreign Affairs article and Congressional testimony on June 17

Every year, the U.S. House of Representative’s Committee on Ways and Means and the U.S. Senate Finance Committee hold hearings to understand the Administration’s trade agenda for the year. This year both Committees held hearings on June 17 where the sole Administration witness was U.S. Trade Representative Robert Lighthizer.

Ambassador Lighthizer had separately prepared an article for Foreign Affairs entitled “How to Make Trade Work for Workers, Charting a Path Between Protectionism and Globalism” which had been reviewed by many of the Committee members prior to the hearings. The article is available here and presents the Trump Administration’s approach to trade policy. https://www.foreignaffairs.com/articles/united-states/2020-06-09/how-make-trade-work-workers.

The Foreign Affairs article

Ambassador Lighthizer uses the challenges of the COVID-19 pandemic to state that it is time for discussions to reach a new consensus on “the future of U.S. trade policy.” Amb. Lighthizer’s summary of the approach of the current Administration are repeated below:

“That debate should start with a fundamental question: What should the objective of trade policy be? Some view trade through the lens of foreign policy, arguing that tariffs should be lowered or raised in order to achieve geopolitical goals. Others view trade strictly through the lens of economic efficiency, contending that the sole objective of trade policy should be to maximize overall output. But what most Americans want is something else: a trade policy that supports the kind of society they want to live in. To that end, the right policy is one that makes it possible for most citizens, including those without college educations, to access the middle class through stable, wellpaying jobs.

“That is precisely the approach the Trump administration is taking. It has broken with the orthodoxies of free-trade religion at times, but contrary to what critics have charged, it has not embraced protectionism and autarky. Instead, it has sought to balance the benefits of trade liberalization
with policies that prioritize the dignity of work.”

The paper reviews the history of trade liberalization, what the Administration views as its limits, their perception that many trade advocates have extolled the benefits of liberalization while discounting or ignoring the economic costs of liberalization. Unlike other areas of government policy, trade liberalization was viewed as an absolute good and not weighed against the costs of the policy in fact.

The section of the article entitled “The dark side of free trade” reviews the steep economic and human costs for the United States over the period 2000-2016 noting the loss of manufacturing jobs, stagnation of median household incomes, and the devastation to the populations left behind in manufacturing locations. While outsourcing reduces costs, it increases vulnerabilities and reduces the nation’s ability to respond to certain situations, such as the pandemic.

Amb. Lighthizer opines that “A sensible trade policy strikes a balance among economic security, economic efficiency, and the needs of working people.” He reviews how he believes the United States-Mexico-Canada Agreement (“USMCA”) achieves that balance looking at specific improvements from NAFTA.

The article then goes on to look at “two of the most significant trade challenges [the U.S.] will face in the coming years: market-distorting state capitalism in China and a dysfunctional WTO.”

The Trump Administration changed the approach of trying to deal with China’s trade policy issues pursued by prior Administration (e.g., through bilateral talks and through the WTO dispute settlement system) by going after some of the larger issues through the section 301 investigation with resulting tariffs on imports from China which led to the creation of the Phase 1 Agreement and, depending on success of Phase 1, a potential Phase 2.

On the WTO, the article focuses on the WTO’s Appellate Body and its deviation from its original purpose.

“The challenges in the WTO are also vexing. Like many international organizations, the WTO has strayed from its original mission. Designed as a forum for negotiating trade rules, it has become chiefly a litigation society. Until recently, the organization’s dispute-resolution process was led by its seven-member Appellate Body, which had come to see itself as the promulgator of a new common law of free trade, one that was largely untethered from the actual rules agreed to by the WTO’s members. The Appellate Body routinely issued rulings that made it harder for states to combat unfair trade practices and safeguard jobs. This was one of the reasons why the Trump administration refused to consent to new appointments to it, and on December 11, 2019, the Appellate Body ceased functioning when its membership dipped below the number needed to hear a case.

“The United States should not agree to any mechanism that would revive or replace the Appellate Body until it is clear that the WTO’s dispute-resolution process can ensure members’ flexibility to pursue a balanced, worker-focused trade policy. Until then, the United States is better off resolving disputes with trading partners through negotiations—as it did from 1947, when the General Agreement on Tarifs and Trade was signed, until 1994, when the WTO was created—rather than under a made-up jurisprudence that undermines U.S. sovereignty and threatens American jobs.”

Congressional Hearings

The Congressional hearings provide the opportunity for the Administration to present its record of accomplishments as well as identifying pressing issues being pursued and for members of Congress to inquire about specific issues of importance to their constituents, to challenge the narrative of the Administration (typically by the opposition party), to press for commitments on actions deemed of importance and otherwise to gain clarification of matters of interest to Congressional members.

Yesterday’s hearings had all of the above. Amb. Lighthizer’s opening statement to both Committees stressed what the Administration viewed itself as having achieved and the benefits to working Americans with a focus on China (and the US-China Phase 1 Agreement), USMCA, the US-Japan Phase 1, disputes at the WTO and WTO reform proposals as well as the Administration’s game plan for the WTO, for pending negotiations with the U.K. and Kenya and for WTO reform, and enforcement of existing agreements. His opening statement to the U.S. Senate Finance Committee is embedded below but mirrors his prepared statement to the U.S. House Ways and Means Committee.

17JUN2020LIGHTHIZERSTMNT1

Senate Finance Committee Ranking Member Wyden (D-OR) in his opening statement painted a different picture of the first three years of the Trump Administration’s trade agenda and whether successes had been achieved. His statement is embedded below.

061720-Wyden-Trade-Agenda-Hearing-Opener1

There were many questions in both chambers on the USMCA agreement, with particular focus on enforcement of labor, environment and other issues. With the final revised USMCA receiving strong bipartisan support in both houses of Congress and with the agreement taking effect on July 1st, many of the questions flagged areas where one of the countries was viewed as not in compliance with obligations in the Agreement (e.g., energy practices in Mexico) and commitments by Amb. Lighthizer to pursue matters where compliance wasn’t in place.

On the issue of Section 232 tariffs on steel and aluminum products from Canada and Mexico, some members inquired whether examining imposition of such tariffs would be consistent with U.S. agreement with the two countries which had excluded them from the additional tariffs. Amb. Lighthizer reviewed that the agreement excluded Canada and Mexico where volumes remained at historic levels. If the U.S. found surges and decided to impose the tariffs, any retaliation by Canada or Mexico would be limited to the same sectors (i.e., could not retaliate against agricultural products). Amb. Lighthizer indicated that the U.S. was considering whether tariffs should be imposed in light of surges that had been occurring.

There were also many questions about the U.S.-China Agreement with a focus on whether China was likely to meet its obligations on the purchase of goods (with most questions focused on agricultural purchases). Ranking Member Wyden (D-OR) cited a Peterson Institute paper claiming poor compliance with purchase commitments. See https://www.piie.com/research/piie-charts/us-china-phase-one-tracker-chinas-purchases-us-goods Amb. Lighthizer on a number of occasions reviewed what were described as inadequacies in the Peterson data and reviewed strong growth in orders from China on agricultural goods to the present time (vs. exports through April shown in the Peterson graphs which look at January-April, even though the agreement didn’t take effect until February 14, 2020).

There were many questions about reshoring manufacturing of medical goods, particularly personal protective equipment (“PPE”), challenges to such reshoring because of the failure of the Administration to enter into long-term contracts to permit manufacturing to start up, whether broader tariff exclusions should be provided to imports of such products while there were inadequate supplies, concerns about existing supplies of PPEs amidst the ongoing pandemic. The issue featured prominently in Senate Finance Committee Chairman Grassley’s (R-IA) opening statement and in the questions of a number of Senators and House Representatives in the two sessions. Amb. Lighthizer discussed use of tariffs as a longer term issue to support reshoring and contested arguments that the Administration had not done enough to secure supplies during the pandemic. Chairman Grassley’s opening statement is embedded below.

Grassley-at-Hearing-on-the-President

There was also interest in both Houses of the ongoing or soon to be initiated FTA negotiations with the United Kingdom (ongoing, two rounds completed) and with Kenya (to start after July 4). There were questions or statements of support for the U.S.-Japan Phase 1 Agreement particularly by members with agricultural export interests to Japan.

On U.S.-EU trade relations, there were a few questions raised dealing either with the perceived abuse of geographical indications on food products by the EU and its push to get other countries to accept EU indications or with changing EU SPS provisions that appear to members of Congress and USTR as not science based. Amb. Lighthizer characterized both as protectionist trends from our friends in the EU. He also indicated that USTR is considering whether the U.S. should initiate a 301 investigation on the non-science based SPS measures.

On digital services taxes, questions arose about yesterday’s announced U.S. withdrawal from the OECD negotiations. Amb. Lighthizer reviewed USTR’s role in conducting 301 investigations first on France and now on a host of other countries where taxes are being imposed or considered on digital services on a discriminatory basis and on companies with no physical presence in countries imposing the taxes. The OECD effort was started to achieve a global agreement that could be accepted by all. The U.S. withdrew from the talks based on its view that the talks were building in discrimination against U.S. companies. If there is not a solution in the OECD, Amb. Lighthizer made it clear that results from the 301 investigations would permit the U.S. to take appropriate action against countries who proceed without a global agreement.

While Amb. Lighthizer’s opening statement had reviewed various WTO issues relevant to reform efforts — addressing Appellate Body; putting teeth into WTO notification requirements; clarifying which Members are eligible for special and differential treatment, and the concern about bound tariffs which have proven not to reflect current economic realities between countries, there were few questions about WTO reform during the two hearings. Amb. Lighthizer did go through the challenge of a WTO system where tariffs are bound, where the U.S. over 70 years has removed the vast majority of its tariffs and many other countries have maintained very high bound and even applied tariffs with little likelihood that those tariffs would be reduced regardless of the economic advances made by countries with high bindings. India and Indonesia were two of the countries used as examples of where bound tariffs today of such countries were not reflective of their economic advances and hence were unfair to the U.S.

There were also questions that arose from press reports about statements President Trump allegedly made to President Xi in Japan seeking China’s help in his reelection effort and to reports about two USTR professional staff members who had set up a webpage and been contacting automotive companies about helping them with USMCA compliance at a time when they were still USTR employees. Amb. Lighthizer was in a meeting with the U.S. and Chinese Presidents in Osaka, Japan in 2019 and denied that any request for assistance was made by President Trump at that meeting. On the latter issue, Amb. Lighthizer indicated that political appointees clearly could not do what was done by professional staff and that the professional staff had reportedly sought and obtained clearance from the USTR ethics office.

Conclusion

It has long been obvious that the Trump Administration was adopting a significantly different approach to trade policy than had been pursued by prior Administrations over recent decades. Ambassador Lighthizer’s Foreign Affairs article provides an articulation of the underlying concerns that have driven the Administration to the current policy approach. While there are many who remain skeptical about the benefits vs. costs flowing from the modified approach being pursued by the Trump Administration, there is little question that the change in approach has gotten attention of trading partners and at least some important modifications in agreements.

The USMCA has many novel elements, many of which are interconnected in terms of achieving stated objectives. Changes in rules of origin coupled with a high level of labor needing to make a minimum level of hourly wages and labor enforcement provisions are intended to address longstanding concerns of labor and is consistent with Amb. Lighthizer’s articulated objective of making trade work for workers. The willingness to work with the Democrats to achieve the labor and environment provisions contained in the revised agreement objectives permitted broad bipartisan support when implementing legislation was considered in the United States. Similarly, the USMCA provision of a sixteen year sunset of the agreement, extendable every six years should permit Canada, Mexico and the United States to update the agreement on a regular basis preventing the loss of relevance or coverage that normal FTAs have experienced with the passage of time.

On the importance of the U.S. relationship with China, the current Administration has come to the conclusion that China is not interested in converting to a market economy in fact. Reciprocity is unlikely under WTO Agreements since the WTO is premised on market economy Members, and the WTO agreements do not address many of the distortions flowing from the Chinese-style economy. Thus, the Administration has pursued a different approach to achieve a different outcome and greater reciprocity. The importance of the U.S.-China Phase 1 is best understood in that context. While the jury is out on how successful the Phase 1 Agreement will be, Amb. Lighthizer’s review of USTR information on growing orders from China in agriculture and China’s implementation of many of the specific commitments in the SPS area and other areas is encouraging.

On the WTO, the U.S. is looking for fundamental reform to achieve an organization that has rules for all and that reflects the changing capabilities of Members. With the differences in views of the purpose of the Appellate Body between the U.S. and the EU (and others), there is no likelihood of rapid restoration of the Appellate Body. With the EU moving towards taking unilateral action against Members who don’t engage in a second stage review of disputes with them, we are likely facing a period of heightened trade tensions between the U.S. and the EU.

Other U.S. proposals that have already been made at the WTO (notification requirements; eligibility for special and differential treatment; WTO being an organization for market economies ) or are working on jointly with others (e.g., EU and Japan on industrial subsidies and state-owned enterprises), have different challenges in terms of reaching consensus to adopt. The issue not yet formally raised on revisiting tariff bindings and/or how the system addresses changes in economic might over time with existing bindings would seem to require a further major shock to the operation of the WTO to have any chance of being considered.

As trading partners struggle to find new sources of revenue, particularly following the economic challenges flowing from the COVID-19 pandemic, many have looked to tax foreign companies in the digital services space. As the U.S. has many of the major players, there are looming major confrontations over EU and other country efforts to impose discriminatory taxes. The U.S. will defend its interests if an OECD agreed approach cannot be found. Based on yesterday’s withdrawal of the U.S. from the OECD process, major disputes are likely by the end of 2020.

The Trump Administration will continue to utilize all legal tools available to it under U.S. law and pursuant to various Agreements to achieve a rebalancing of the U.S. trade relationship with our major trading partners and with all nations. The Foreign Affairs article provides the Administration’s logic for the approach being pursued.

Qatar’s WTO dispute with Saudi Arabia — panel report released on June 16, 2020

A panel report in the dispute between Qatar and Saudi Arabia, Saudi Arabia – Measures Concerning the Protection of Intellectual Property Rights, WT/DS567/R, was released to the public today, June 16th.

Saudi Arabia and a number of other countries in the MENA (Middle East and North Africa) region had severed all relations with Qatar on June 5, 2017. Report, Section 2.2.2. “The June 2017 severance of relations and events leading up to it”. A Qatari company with exclusive rights of broadcasting in the MENA region (including Saudi Arabia) a range of sports for various leagues around the world found its materials used by a Saudi company without authorization. The Qatari company was unable to hire Saudi counsel to pursue enforcement actions in Saudi Arabia and criminal actions were not pursued by the Saudi government.

The dispute was one of several by Qatar against Members who cut off all relations for alleged violations of WTO Agreements. In the challenge of Saudi Arabia, various violations of the Trade-Related Aspects of Intellectual Property Rights Agreement were alleged by Qatar. While Saudi Arabia participated in the panel process, its main argument was that the matter was not properly the subject of dispute settlement or was justified by TRIPS Article 73.

Because the question of whether actions by countries pursuant to their national security concerns are properly the subject of WTO dispute settlement is important to many Members and in a number of ongoing disputes, there were many third parties (13 in total) to the dispute, including the United States, the European Union, China, Canada, Japan and others.

Panel findings

The panel did not find that the issues presented could not be decided by the panel. Based on the facts that were before the panel, the panel report had little trouble finding violations of various TRIPS Articles, with the key issue being whether security interests of the defending Member permitted an override of the other obligations. On this latter issue, the panel had different views on the two main violations, finding one (Art. 41.1 and 42) covered by the security exceptions and the other (Art. 61) not. More specifically, the panel found that the inability of the Qatari company to obtain local counsel in Saudi Arabia flowed directly from Saudi Arabia’s actions considered “necessary for the protection of its essential security interests” and which were “taken in time of war or other emergency in international relations.” TRIPS Art. 73(b) and (b)(iii). The panel did not find that the claim surrounding the non-application of criminal procedures and penalties to the Saudi company was factually related to the worsened relationship between Saudi Arabia and Qatar and hence did not find Art. 73 overrode the violation of TRIPS Art. 61.

The conclusion to the panel report is embedded below.

567r_conc_e

The earlier case that looked at security interests under the GATT, Russia – Measures Concerning Traffic in Transit, WT/DS512/R (adopted 26 April 2019; panel report was not appealed), was an object of interest for a number of the third parties who filed comments. While the U.S. supported the Saudi position that security interests are a matter of self-determination and are not subject to dispute settlement, that view was not supported by most other Members including Canada, China, the EU or Japan. WT/DS567/R/Add.1 at Annex C-4 (Canada), C-5 (China), C-6 (European Union), C-7 (Japan), C-13 (United States). With many countries (but not Japan) having challenges to the United States Section 232 national security action on steel and aluminum pending before panels, the third party positions mirror arguments being presented in those other disputes.

Next Steps

It is not clear that either Qatar or Saudi Arabia will pursue arbitration under DSU Art. 25 or some other approach to reach a final resolution of the dispute. While Saudi Arabia lost the overarching issue at the panel stage, having cut off all relations with Qatar, it is unclear why it would pursue next steps. For Qatar, having obtained a legal victory on some issues at the panel stage and with relations severed with Saudi Arabia, it is unclear what additional benefit they get from pursuing arbitration. They could decide to leave the issue for later appeal by agreeing with Saudi Arabia that they reserve the right to appeal at such time as the Appellate Body is functioning again. As neither Qatar nor Saudi Arabia are parties to the interim arbitration agreement that the EU and 20 other WTO Members are party to (JOB/DSB/1/Add.12, 13 and 14), any decision to pursue arbitration would have to be negotiated between the two countries including procedures, etc.

Conclusion

The panel report released today is important both in terms of providing some interpretation of TRIPS provisions but also for its interpretation of TRIPS Art. 73, which mirrors the language in GATT Art. XXI.

Bigger panel decisions are due out later this year in the large number of challenges to U.S. Section 232 of the Trade Expansion Act of 1962, as amended, and the actions taken on steel and aluminum products. The U.S. now has two panel reports that don’t agree with the U.S. basic premise that determination of national security interests and appropriate actions to take to defend are matters for Members to determine on their own without review by the dispute settlement system.

Assuming that the upcoming panel decisions go against the United States on that core principle, how the U.S. responds will depend on whether the panel report otherwise upholds the U.S. action as permissible in fact. If the U.S. loses the cases in toto, look for the U.S. to not accept the panel results, and to either negotiate with trading partners individually or take no action. The many countries who took unilateral retaliatory action without WTO disputes will likely continue to do so and may increase the level of retaliation based on the specifics of the decision.

At the same time, the United States has filed a series of challenges to the unilateral imposition of retaliation duties by many trading partners who treated Section 232 relief as being safeguard relief or without any WTO justification. Assuming that the U.S. wins all of these cases at the panel stage, the net outcome for the U.S. and each individual WTO member who has challenged Section 232 relief will depend on the combination of results and presumably bilateral consultations. It is unlikely that the United States will engage in arbitration with any of the disputants.

COVID-19 – continued global growth of cases; shift continues to Latin America, parts of Asia and the Middle East

Four months after COVID-19 peaked in China, where the virus started, the world continues to stagger under an expanding case load of confirmed COVID-19 cases. Indeed, in the last two weeks new cases around the world have increased by 1.567 million to reach a current global total since the end of December of 6.835 million as of June 7. These number compare to less than 55,000 global cases (nearly all in China) in early February. During the last two weeks, new confirmed cases increased 22.32% from the prior two weeks and continue a chain of unbroken increases since the beginning of March.

As much of the developed world has seen a peak in the number of cases, the continued growth in new cases reflects shifting centers or hot spots generally to developing countries. In looking at 25 countries that have accounted for more than 80% of all cases through June 7, ten of these countries have not yet reached a peak — Brazil, Chile, Egypt, India, Iran, Mexico, Nigeria, Pakistan, Peru, South Africa — while the other fifteen have peaked and seen declines from peak of between 10% and 99%. These fifteen countries are Canada, China, France, Germany, Italy, Japan, Russia, Saudi Arabia, Singapore, South Korea, Spain, Taiwan, Turkey, United Kingdom and the United States. Still these 25 countries saw a combined increase in total new cases of 18.7% in the last fourteen days. All other countries saw a much larger increase in new cases, 39.61% from 220,812 cases the previous 14 days to 308,293. Some countries of note in this “all other” grouping include Cameroon, Central African Republic, Democratic Republic of the Congo, Ethiopia, Kenya, Sudan, Argentina, Bolivia, Colombia, Guatemala, Haiti, Venezuela, Afghanistan, Bangladesh, Iraq, Nepal, Oman, Qatar, Armenia, and Azerbaijan. See https://www.ecdc.europa.eu/en/geographical-distribution-2019-ncov-cases. June 7th report embedded below.

COVID-19-situation-update-worldwide-as-of-7-June-2020

The shifting focus of cases to developing and least developed countries raises increased concerns about access to medical goods, including personal protective equipment, ventilators, and other goods. The WTO’s list of measures applied by Members dealing with COVID-19 either to restrict exports of medical goods or food products or to improve market access , shows dozens of countries applying export restraints on various medical goods (masks, gloves, etc.) including countries where new cases are well past peak (indeed where new cases may be 90% below peak). The WTO information is current as of May 29, 2020. There are also a large number of countries reducing tariffs or streamlining importation of medical goods. https://www.wto.org/english/tratop_e/covid19_e/trade_related_goods_measure_e.htm.

Moreover, health care infrastructure is often weaker in many of these countries facing growing COVID-19 cases, and the structure of their economies may complicate the ability of governments to address the pandemic even if medical goods are available. A recent article reviews the challenges in Latin America. See https://www.cnn.com/2020/06/06/americas/latin-america-coronavirus-intl/index.html.

Some major players like the United States, the European Union and its member states, and China are both investing large amounts in research and development and also securing early access to any vaccines developed through early commitments and other actions. https://www.biospace.com/article/eu-using-2-7-million-emergency-fund-to-buy-promising-covid-19-vaccines/. With the number of R&D projects ongoing around the world and the efforts of companies and governments to get manufacturing geared up early on promising products, the likelihood of earlier availability of large quantities of vaccines should there be breakthroughs has improved.

The question of equitable and affordable availability for all peoples is certainly there for a global pandemic where major players are funding research and have the resources to get early commitments for supplies. But greater manufacturing capacity earlier should improve global availability. So too the efforts of many countries, organizations and businesses to ensure both availability of vaccines and the distribution of such products to those in need is a major factor in ensuring greater access at affordable prices. As the news from the June 4 GAVI conference in London demonstrates, many are uniting to ensure that small children who have been unable to receive various immunizations against other diseases are able to do so yet this year as well as meet the needs of the pandemic for many developing and least developed countries. See https://www.gavi.org/news/media-room/world-leaders-make-historic-commitments-provide-equal-access-vaccines-all.

Conclusion

The pandemic is continuing to worsen on a global basis even as parts of Asia, Western Europe, Oceania, Canada and the United States are post-peak and starting a process of reopening. The tremendous growth in the number of cases is in developing and least developed countries, those least prepared to handle the health and economic fall out.

The trade news is mixed. Many countries are liberalizing imports of medical goods during the pandemic which is obviously a positive. However, dozens of countries have introduced export restrictions in an environment in which global supply has lagged global demand, and countries have scrambled to protect access to what supplies they can. Many of these restrictions should be removed at this point, at least by countries that are well past peak demand situations.

Ramp up in global production of many medical goods has occurred, though it is unclear if demand/supply balance has been achieved or how/if the world will build the necessary national and regional inventories to handle a second wave or future pandemics. Moreover, without knowing how much larger the number of new cases will become before there is a global peak, it is hard to know if expansion of production of medical goods will be adequate to meet demand in the coming months. Efforts by the G-20 in the trade and investment area are a start but limited in terms of likely actual effect.

Factually, there have substantial declines in global trade flowing from the lock down situation in large parts of the world over the last few months. Trade flows should increase in those parts of the world where reopening is occurring but will likely further decrease in countries where the pandemic is picking up its infection rate. The economic toll on many countries who have come through the worst of the pandemic has been unprecedented and will present challenges to their ability to rebound quickly and to their willingness to increase financial assistance to others.

While success in finding vaccines or therapeutics is never guaranteed (indeed no vaccine for HIV has been found despite efforts for 40 years), there has never been the global focus on R&D and the willingness to risk large amounts of capital to be ready to produce large volumes of doses for any products demonstrating effectiveness. While the global community is not unified in its support of the WHO or in cooperating to achieve equitable and affordable access for all, there has been important support for both which should improve achieving a global solution if vaccines are developed that are effective.

Finally, it is hard to imagine significant forward movement at the WTO on its current negotiations or on WTO reform (including of the dispute settlement system) while Members are struggling to address the fallout from the pandemic. And, of course, with the WTO turning its attention to the selection of a new Director-General in light of DG Azevedo’s departure at the end of August, achieving focus on the normal work of the WTO will be that much harder until a new DG has been selected.

Bottom line – a continued difficult 2020 in the second half of the year.

U.S.-China Phase I Deal is Failing Expanded U.S. Exports Even Before Recent Efforts by China to Limit Certain U.S. Agriculture Exports as Retaliation for U.S. Position on Hong Kong

The U.S.-China Phase I trade agreement went into effect in mid-February just as the COVID-19 pandemic was rapidly spreading globally.  In the United States, the U.S. Trade Representative and U.S. Secretary of Agriculture have released a series of statements indicating that China has been making a number of the substantive changes that were contained in the agreement, with the U.S. being pleased with the progress.  See, e.g. https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/usda-and-ustr-announce-continued-progress-implementation-us-china-phase-one-agreement

The COVID-19 pandemic has seriously reduced economic activity in the United States and in many other countries.  Despite such reduced economic activity in recent months, the U.S. Administration has remained optimistic about China’s meeting the agreement’s terms and the agreement being “a success,” including the significant increase in exports to China from the United States over two years (2020-2021).  https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/usda-and-ustr-announce-continued-progress-implementation-us-china-phase-one-agreement.  An important measure of the success will be the extent to which there are significant increases in U.S. exports.

As reviewed in a recent post, the United States has announced it will be terminating special status of Hong Kong in light of Chinese security actions taken vis-a-vis Hong Kong.  U.S. Withdrawal from the World Health Organization and Decision to Revoke Preferential Treatment for Hong Kong – Reduced Cooperation as COVID-19 Pandemic Rages On, https://currentthoughtsontrade.com/2020/05/30/u-s-withdrawal-from-the-world-health-organization-and-decision-to-revoke-preferential-treatment-for-hong-kong-reduced-cooperation-as-covid-19-pandemic-rages-on/.  U.S. action did not call for the termination of the US-China Phase I Agreement.  In recent days, the press have reported that China has ordered state-owned entities to stop purchasing from the United States various agriculture products, including soybeans, pork, corn and cotton.  https://thehill.com/policy/finance/trade/500464-china-halts-state-purchases-of-us-soybeans-pork-report.  There have been some statements in the U.S. press suggesting that China continues to buy U.S. agricultural products including soybeans despite the earlier reports to the contrary.  See, e.g.,   https://insidetrade.com/trade/grassley-confident-china-will-meet-phase-one-commitments.

With April 2020 U.S. export data now available, what is clear is that China is far behind in meeting the levels of purchases from the United States in a wide range of goods categories to meet the first year growth over 2017 on goods of $63.9 billion.  Total U.S. domestic exports to China in 2017 were $119.910 billion.  The $63.9 billion increase of U.S. exports of goods were on a subset of total U.S. goods exports, just $66.381 billion.  Thus, the rate of increase in the first twelve months under the agreement is expected to be 96.26% on the categories contained in Annex 6.1 to the Agreement.  There are specific commitments with regard to certain manufactured goods (increase of $32.9 billion over 2017 levels), agriculture (increase of $12.5 billion over 2017 levels) and energy (increase of $18.5 billion over 2017 levels).  While there are no specific commitments on other products the U.S. exports to China, the rate of increase as measured against all U.S. domestic exports to China in 2017 would be 53.29% if all other products were at the same level as in 2017.

Unfortunately, looking just at March and April 2020 (the first two full months after the agreement took effect for which U.S. export data are available), U.S. domestic exports of the products contained in Annex 6.1 to the agreement declined by 4.04% from the March-April 2017 period.  All other U.S. domestic exports of goods to China declined 39.35% in March-April 2020 compared to the same period in 2017.  In total U.S. domestic exports to China of all products declined by 20.24% in March-April 2020 compared to the same months in 2017.  Thus, the early months of the first year of the Phase I Agreement are moving in the wrong direction in terms of U.S. exports.  While challenges in China and in the United States from the pandemic have undoubtedly dampened both demand in China and ability to ship from the U.S. for some products, that situation has changed in May and will presumably improve moving forward.

The above figures do not account for increased U.S. services exports to China contained in Annex 6.1 to the agreement (increase of $18.5 billion over 2017 levels).  Data for U.S. services exports for 2020 are not available by country at this point for January-April.  But overall U.S. services exports have been hard hit in the first four months of 2020 and this will include U.S. exports to China.  U.S. exports of services to the world were $169.482 billion in the January-April 2020 time frame, down from $193.010 billion in 2019, with March and April 2020 being more sharply contracted, $72.117 billion vs. $97.103 billion in 2019.  See https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf (page 16).

The table below shows the 18 categories of goods for which there are growth commitments in Annex 6.1 of the Agreement.  All figures are in U.S.$ billions.

Product CategoryMarch-April 2017March-April 2020Change
Manufactured goods
1. Industrial machinery$1.845$2.091+$0.246
2. Electrical Equipment
and machinery
$0.694$0.867+$0.173
3. Pharmaceutical
products
$0.323$0.501+$0.178
4. Aircraft (orders and
deliveries
$0$0 $0
5. Vehicles$1.747$0.716-$1.031
6. Optical and medical
instruments
$0.522$0.566+$0.044
7. Iron and steel$0.232$0.081-$0.151
8. Other manufactured
goods
$1.737$2.224+$0.487
Subtotal — MFG goods$7.099$7.046-$0.053
Agriculture
9. Oilseeds$0.747$0.230-$0.517
10. Meat$0.106$0.582+$0.476
11. Cereals$0.224$0.194-$0.030
12. Cotton$0.229$0.200-$0.029
13. Other agricultural
commodities
$0.000$0.354+$0.354
14. Seafood$0.231$0.152-$0.079
Subtotal – Agriculture$1.536$1.712+$0.175
Energy
15. Liquefied natural
gas
$0.014$0.162+$0.148
16. Crude oil$0.658$0.210-$0.448
17. Refined products$0.334$0.193-$0.241
18. Coal$0.090$0.016-$0.074
Subtotal – Energy$1.096$0.581-$0.515
Total of 1.-18.$9.731$9.339-$0.392

Conclusion

The Trump Administration has had an aggressive program over the last several years to address perceived serious problems in our bilateral relationship with China. The Phase I Agreement was viewed as a down payment with the more challenging issues still on the table to be negotiated in a phase 2 agreement. There is no sign that Phase 2 negotiations have started. The history of U.S.-China consultations has been a great many promises of change by China and relatively little action by China to address U.S. concerns.

It is a positive that a number of the specific changes China has agreed to in the Phase I Agreement have been implemented to date. The U.S. has also made modifications it agreed to make in the Phase I Agreement. But the core issue for the Trump Administration is to see if its different approach to China can achieve meaningfully greater reciprocity in our trade relationship with China. That has been the justification for the large tariff increases on large parts of Chinese exports — getting long overdue changes to Chinese actions that harm American businesses and workers and obtain greater market access to the Chinese market.

Through April, U.S. trade data don’t show meaningful expansion of exports to China despite the commitments contained in Annex 6.1 to the Agreement. Indeed, U.S. exports are down sharply to China (U.S. imports from China are down sharply as well).

Despite the ongoing bilateral differences and actions causing a continuation of tensions between the two largest economies in the world, improving bilateral trade to a more reciprocal level would be in both countries’ interest. With China having recovered from COVID-19 constraints and with the U.S.having started its reopening process, the coming months will reveal whether the Agreement represents a further lost opportunity or a sea change in trade flows.

U.S. Withdrawal from the World Health Organization and Decision to Revoke Preferential Treatment for Hong Kong — Reduced Cooperation as COVID-19 Pandemic Rages on

On May 29, 2020, President Trump indicated that the United States was withdrawing from the World Health Organization (“WHO”) because of the WHO’s failure to adopt reforms the U.S. had demanded and the belief of a bias within the WHO towards China and China’s failure to provide timely information on the start of the virus and the likely nature of the problem. https://www.nytimes.com/2020/05/29/us/politics/trump-hong-kong-china-WHO.html. This followed the U.S.’s earlier temporary withholding of funds from the WHO while awaiting developments on reforms.

President Trump also indicated that in light of actions by China to assert security controls over Hong Kong, the U.S. viewed China as violating its commitment to maintain “one China, two systems” and would accordingly be taking actions to remove special treatment provided Hong Kong in a wide range of areas (extradition, export controls, etc.) and would be treating Hong Kong as part of China for tariffs, export controls, etc. https://www.wsj.com/articles/u-s-to-cancel-visas-for-some-chinese-graduate-students-11590744602.

Not surprisingly, China has reacted negatively to the statements of President Trump on Hong Kong and has threatened to take retaliatory actions if the U.S. takes actions contrary to China’s interests and indicated that any U.S. action was doomed to fail. https://www.bloomberg.com/news/articles/2020-05-30/china-says-us-action-on-hong-kong-doomed-to-fail; https://www.cnbc.com/2020/05/30/china-says-us-action-on-hong-kong-doomed-to-fail.html.

Concerns have also been raised that U.S. action would be a double-edged sword in light of the large trade surplus the U.S. has with Hong Kong and the enormous presence of U.S. businesses in Hong Kong. For example, based on U.S. Census data as compiled by the U.S. International Trade Commission, the United States had a trade surplus with Hong Kong (total exports – general imports) of $26.086 billion in 2019 [the trade surplus based on domestic exports – imports of consumption being lower at $11.845 billion]. While China has not identified actions it is considering, harming U.S. interests in Hong Kong would obviously be one avenue China might take.

The trade implications, in terms of U.S. imports from Hong Kong, are relatively minor. If imports from Hong Kong are treated as imports from China, imports of items subject to additional duties from the 301 investigation would be relatively minor. That is because U.S. imports for consumption from Hong Kong in 2019 were just $4.646 billion, with half of that being under HS 9810 for articles that have been imported after exportation, after repair, etc. If China were to impose additional duties on U.S. exports to Hong Kong, the effect would be larger. U.S. domestic exports to Hong Kong in 2019 were $16.491 billion.

Increased tensions; reduced cooperation

Whatever the merits of the actions being taken by the United States (and the reactions anticipated from China), the results are predictable — we are entering a period of reduced cooperation and coordination of actions to address the pandemic as well as increasing bilateral tensions between the U.S. and China at a time of global economic contraction. This despite the fact that cooperation has been less than robust even before the current increased tensions.

In the trade arena, the pandemic continues to grow in severity as confirmed cases continue to climb globally with the hot spots shifting. Cooperation at the WTO and G20 is critical in terms of keeping markets open, minimizing export restraints, addressing logistics needs in a manner that preserves the health needs of importing countries, avoiding inventory builds of agricultural products, the introduction of export restraints where there is no underlying agriculture production problem globally, taking actions to expand production of medical goods to meet the demand surge flowing from the pandemic, ensuring transparency, and promoting best practices. The world is struggling already to achieve the trade needs identified above. Reduced cooperation will make the challenges that much harder.

Similarly, the search for vaccines, therapeutics and diagnostics to effectively prevent, treat and identify medical needs requires global cooperation, information sharing and the work of a multilateral institution like the WHO and various NGOs to ensure all peoples who need these products have equitable and affordable access to them when developed. Trials on potential vaccines are at various stages in China, in the United States and in Europe and possibly other areas. Often the research is amongst companies working jointly from multiple jurisdictions. Which research project or projects will prove effective, if any, is obviously not known. Implications of a lack of cooperation between countries should effective vaccines, therapeutics and diagnostics be developed are for the possible hording of products, refusal to sell to other countries or delays in sharing and other actions that would make global escape from the pandemic harder, longer and more deadly.

And for many developing and least developed countries, the pandemic, whether significantly affecting individual countries directly, threatens most countries through contraction in global trade (estimated to be between 13 and 32% by the WTO in 2020), limited financial capabilities to address budget shortfalls and increased unemployment and challenges to existing health care infrastructure from the pandemic. Multilateral institutions like the World Bank and the IMF and others are critical here but are dependent on the cooperation of key members like the U.S., China, and others. While these organizations have been working effectively to date, the size of the challenge posed by the pandemic which is unprecedented will likely result in additional funding needs in the coming months or years which will require cooperation to meet.

Conclusion

The United States and China have very different economic and political systems. In the trade sphere, the United States has reached the conclusion that coexistence of such disparate systems doesn’t make sense under the World Trade Organization’s rules which are premised on market-based economic policies. The U.S. actions vis-a-vis China on trade have been an effort to achieve reciprocity with China, a situation not possible under the existing WTO rules. That the U.S. effort to obtain reciprocity in fact is proving contentious is hardly surprising and will not likely lessen in bilateral tensions in the near future.

In the political sphere, our two systems have resulted and will continue to result in periodic tensions, such as we are currently witnessing over the actions of China on security measures in Hong Kong.

Historically, major nations who view each other as adversaries have been able to cooperate effectively on issues of mutual interest. That was true during the cold war between the U.S. and the Soviet Union on certain issues. Whether the U.S. and China view each other as adversaries as well as competitors at the present time, the same ability to cooperate between them should be true when looking at issues such as addressing the pandemic effectively and efficiently.

Let us hope that regardless of the bilateral tensions and of the U.S. departure from the WHO, all WTO Members can step up their efforts to keep markets open and transparent and that governments will cooperate to ensure that medical developments are available to all on an equitable and affordable basis and that the financial resources are available to help those least able to weather the pandemic’s effects alone to survive and move forward.

The future of the WTO — restoring relevance

The World Trade Organization has 164 Members at present with 23 more countries or territories in the process of accession. Nearly all international trade in goods and services is handled by WTO Members and those seeking accession.

At the beginning of 2020, the WTO officially turned 25 years old. Despite some successes in the first 25 years in terms of negotiated improvements, the WTO set of agreements are largely reflective of the world in the 1980s. Advances in technology, manufacturing make-up and importance of certain service sectors (e.g., e-commerce) are not covered by the existing agreements.

The WTO’s negotiating function has been nearly moribund on a multilateral level for more than a decade, with most successes at the WTO keyed to actions by plurilateral groups of Members (action by the willing). A system built on consensus decision making has been the hallmark of activity during the GATT and now during the WTO years but has proven unworkable in moving many topics forward amongst an expanded membership.

Similarly, the dispute settlement function of the WTO, long referred to as the “jewel” of the WTO, has been in a state of crisis for the last several years and now has a nonfunctioning Appellate Body (“AB”) as longstanding systemic concerns of the United States about the Appellate Body’s operation and adherence to the Dispute Settlement Understanding (“DSU”) have led to the United States blocking appointments of Appellate Body members until the system is corrected consistent with the DSU. With only one of seven AB members still in place as of December 11, 2019, the AB is unable to hear appeals (as all appeals must be heard by three AB members).

At the same time, many WTO Members have not kept current with notification requirements contained in each Agreement and intended to help Members understand actions of trading partners and their likely compliance with WTO Agreement obligations. This lack of full transparency limits the ability of Members to address issues and seek compliance with underlying obligations.

With the increased importance of China and other countries with economic systems not consistent with the GATT’s and now WTO’s architecture, there have also grown concerns by some Members on the ability of the WTO to handle different economic systems under the existing rules with the U.S., EU and Japan seeking new rules addressing some of the major elements flowing from the different systems.

The WTO, unlike other multilateral institutions, has a process of self-selection of developing country status. Least developed countries do have a clear definition consistent with other organizations. As there has been substantial economic development of many countries describing themselves as “developing” during the first 25 years of the WTO’s existence, there is conflict on the need to change current classification and/or the need for special and differential treatment.

On top of all of these ongoing concerns, the COVID-19 pandemic has resulted in WTO Members acting first for their own domestic interests, particularly in light of huge shortfalls in global supplies and capacity for medical supplies versus the needs of countries facing spikes in the number of cases. The result has been dozens of export restraints (styled as temporary) and dozens of unilateral actions by countries to reduce duties, simplify or prioritize entry procedures for medical supplies. While the WTO has established a webpage for COVID-19 information and provides information on actions taken by Members (either export restraints or import liberalizing), the WTO Members have not agreed on a course of action for all Members to pursue.

The COVID-19 pandemic has also disrupted the functioning of the WTO as in-person meetings have been cancelled for the last several months, and many developing countries have insisted that virtual meetings not be used for decision making, essentially halting the negotiations on areas like fisheries subsidies.

The challenges reviewed above raise the question about the WTO’s continued relevance and as importantly what reforms are needed to restore the WTO’s relevance going forward. The short-term challenges for the WTO are compounded by the decision by Director-General Azevedo to step down at the end of August which will divert much energy at the WTO into the process for finding a replacement Director-General.

Deputy Director-General Alan Wolff’s virtual presentation at a webinar hosted by the Korean International Trade Association

Earlier today, the WTO’s Deputy Director-General Alan Wolff made a virtual presentation in a webinar that was hosted by the Korean International Trade Association. The title of the presentation was “COVID-19 and the Future of World Trade. A link to the presentation can be found here. https://www.wto.org/english/news_e/news20_e/ddgaw_27may20_e.htm.

Everyone interested in the future of the multilateral trading system should take the time to read DDG Wolff’s presentation. The presentation reviews actions needed by WTO Members to respond to COVID-19, measures WTO Members can take to assist with the economic recovery from the pandemic, and systemic reform that WTO Members should consider. It is the last of these that takes up the bulk of the presentation.

In talking about reform, DDG Wolff states that —

“It is necessary to understand what values the multilateral trading system is designed to promote before it can be reformed.

“A serious inquiry into this subject would serve three purposes:

“(1) to know the value of what we have in the current system,

“(2) to determine if the values of the current system enjoy the support of all WTO Members, and

“(3) to address the degree to which the WTO is of sufficient continuing relevance as it is at present or whether it needs fundamental change.

“My list of the underlying values of the WTO has 16 entries. They include a number of basic principles.

“The first two, not obvious to all of us today, are supporting peace and stability. This was the key concern of the founders of the multilateral trading system in 1948 and the central objective of conflict-affected and fragile acceding members today.

“Other values, such as nondiscrimination, transparency, reciprocity, international cooperation and the rule of law are more obvious. Still others are more nuanced, less obvious perhaps, and emerge only upon reflection. They include well-being, equality, sovereignty, universality, development, market forces, convergence and morality.

“A recent addition to the list is sustainability.

“A serious discussion of WTO reform is long overdue. The pandemic simply adds to the urgency of it taking place.”

Not surprising, DDG Wolff’s review of the sixteen entries is well done and presents a much broader understanding of the importance and value of a global trading system than trade negotiators, businesses, workers, and governments generally bring to the table.

I won’t review the presentation in detail as the value of the presentation in my view is in reviewing the entirety. While DDG Wolff presents the detailed analysis as a possible road to a better future, there are issues identified which similarly suggest the need for a new set of agreements. Consider his discussion of “convergence”:

“Convergence

“A corollary of the principle that market forces are to dictate competitive outcomes is that the rules of the WTO are based implicitly, but without doubt, on convergence and not coexistence. If the desire is to have systems where market forces are not allowed to operate and deliver results, an underlying unstated assumption of the multilateral trading system would not be valid.

“Coexistence would require a different WTO. Where there is no agreement on convergence, a new modus vivendi will inevitably be sought. The arrangement is likely to settle at a lower level of trade than the WTO rules would otherwise provide.”

The United States has in fact raised this exact issue with the WTO Membership in reviewing the market economy basis of the WTO and the incompatibility of state-directed/controlled economies like that of the People’s Republic of China (and others).

Will WTO Members be able to rise to the current needs to engage in reform that supports the 16 principles reviewed in DDG Wolff’s paper? The future relevance of the WTO and the future dynamism of the global trading system depend on it.

Continued Stress in U.S.-China relations — Reduced Cooperation in Multilateral Fora

The two largest economies in the world view each other as competitors and potential adversaries. With significantly different political and economic systems and ideologies, the United States and China have had different perspectives on commitments and obligations undertaken in the economic sphere.

U.S. concerns

Specifically, the United States has viewed its bilateral trade negotiations with China and the later conclusion of China’s accession to the World Trade Organization (“WTO”) as having created a commitment by China to continue on market-based reforms with the eventual conversion of the Chinese economy into a market-economy consistent with the basic rules of the WTO. There have been high level dialogues between the two countries for years with a feeling in the U.S. that repeated commitments by China to fulfill commitments have not been honored and that the bilateral relationship had growing serious problems.

China concerns

China has had a different view of the world and its obligations to other countries through its joining the WTO. Reforms continued for a while but were replaced with a growing focus on state direction, state investment and heavy subsidization of a widespread number of sectors. China has viewed the United States as attempting to prevent its economic growth and global role and as not respecting its “right” to view itself as a developing country within the WTO and hence to have fewer obligations than a developed country.

Trump Administration changes approach

Under the Trump Administration, the United States has taken a more aggressive approach to dealing with what it perceives as distortions in economic competition and lack of meaningful reciprocity in the bilateral trade relationship. The U.S. has also looked at bilateral and multilateral approaches to address the problems it perceives China has created and is creating with the functioning of the global trading system.

Bilaterally, the U.S. has conducted its 301 investigation on a host of longstanding concerns of the U.S. business community on Chinese policies and practices. The adverse findings from the USTR investigation has led to the U.S. imposing additional tariffs on Chinese goods when resolution of the underlying issues was not achieved followed by retaliation by China and a series of additional rounds of more tariffs and more retaliation. The U.S. and China did engage in negotiations to see if they could resolve the underlying concerns of the United States. A phase 1 agreement was signed in January 2020, with a phase 2 process supposed to have commenced by May.

At the same time, the United States has pursued reform at the WTO (1) to address longstanding and bipartisan concerns with the WTO dispute settlement system, (2) to address rule changes to address some of the distortions that flow from China’s nonmarket economy, (3) to modify the self-selection nature of which Members are “developing” and (4) to improve transparency.

On transparency, many countries are not current on the various notification requirements, but major concerns have existed with China and India in terms of the number and dollar value of subsidy programs that are not being reported in their notifications to the WTO.

Some of the reforms of interest to the United States are being pursued as well by others, such as the EU and Japan on state-invested companies and industrial subsidies and various other countries on transparency.

But the WTO has been struggling to achieve forward movement on many issues of importance to different Members in part due to lack of consensus on issues and a lack of leadership/coordination among major players.

COVID-19 Complicates the Bilateral Relationship

The COVID-19 pandemic has complicated the situation for the WTO and for U.S.-China relations both because of the global reach of the health problem resulting in reduced functionality of the Missions in Geneva and the current inability to hold face-to-face meetings and the widespread use of export restraints on medical goods (including personal protection equipment like masks, gloves, shields, gowns, etc.) as demand in nations with significant number of infections has grossly exceeded existing inventories and production capabilities both in country and globally.

In terms of U.S.-China relations, the lack of complete transparency by the Chinese in the early months of the COVID-19 outbreak, some slowness of action by the World Health Organization, and both missteps on testing and slowness of initial action within the United States (and resulting massive unemployment, costs to the economy and multiple trillion dollar government response) has added finger pointing on the pandemic to the already tense bilateral relations. It has also resulted in the U.S. distrusting the WHO and temporarily suspending U.S. funding for the organization.

With the collapse in global trade, the pandemic has also made it far less likely that China will honor its increased import commitments from the U.S. in 2020 as contained in the Phase 1 Agreement. See U.S.-China Phase I Agreement – some progress on structural changes; far behind on trade in goods and services, https://currentthoughtsontrade.com/2020/05/12/u-s-china-phase-i-agreement-some-progress-on-structural-changes-far-behind-on-trade-in-goods-and-services/. That said, the U.S. continues to identify important advances being made at least in agriculture with China. See https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/usda-and-ustr-announce-continued-progress-implementation-us-china-phase-one-agreement.

On trade, the pandemic has crippled the economies of many countries with the resulting declines in imports and exports in the March-April time frame and likely going forward for some period, though China as the first country through the outbreak and a major producer of medical goods actually saw increased overall exports to the world in April.

United States Strategic Approach to The People’s Republic of China

Earlier this week, the White House forwarded to Congress a document required by the 2019 National Defense Authorization Act, United States Strategic Approach to The People’s Republic of China. On the trade/economic front, the paper repeats the concerns that the Administration has laid out in other documents most of which are summarized above (not including the COVID-19 issues). The U.S. views challenges from China to three broad areas — (1) economic challenges (largely failure to continue reforms to become a market economy, failure to honor commitments made to the US, use of predatory practices, insistence on being a developing country, etc.); (2) challenges to U.S. values; and (3) security challenges. The link to the document is here and the text is embedded below. https://www.whitehouse.gov/wp-content/uploads/2020/05/U.S.-Strategic-Approach-to-The-Peoples-Republic-of-China-Report-5.20.20.pdf.

U.S.-Strategic-Approach-to-The-Peoples-Republic-of-China-Report-5.20.20

Challenges for the WTO

The WTO remains able to move forward where issues are limited to a subset (the “willing”) as progress on e-commerce talks would support. But in a consensus based system, distrust between major players will paralyze large parts of any agenda. Indeed, with the large number of WTO Members (164) at various stages of economic development, there will almost always be a wide divergence of views on any issue. In such a situation, leadership and cooperation among major economies become important to develop a consensus. So it is hard to see how the WTO advances a reform agenda without improved relations between the organization’s two largest Members.

With the recently added challenge for the WTO of selecting a new Director-General, the sour relationship the U.S. and China will likely make finding a candidate who would be supported by a consensus of the Membership that much harder, suggesting at a minimum a process that takes the full six-month time for selection (versus any hoped for expeditious resolution in light of DG Azevedo’s departure at the end of August) and perhaps extended time lines. If the selection process breaks down into highly polarized camps (the existing procedures were developed to try to prevent such an outcome), the ability to move forward the WTO’s reform and existing negotiating agenda will be delayed by certainly months and perhaps longer.

Conclusion

At a time when the world is struggling with a global pandemic which continues to cause huge health challenges to many countries in the world and has devastated the global economy at least temporarily, costing tens of millions of workers jobs, and likely closing hundreds of thousand of businesses around the world while requiring government financial support that will likely exceed ten trillion dollars, there is an unfortunate lack of global cooperation between the major economic players and distrust at least from the U.S. of multilateral institutions viewed as either ineffective to deal with China’s economic system or not operating in an unbiased manner.

A major part of the challenge flows from the distrust that exists between the world’s two largest economies that precedes the pandemic but that has been worsened by the pandemic’s development and handling. The two countries have different economic systems which are essentially non-compatible, have different political systems and different ideologies and view each other as competitors and potential adversaries.

In a change of approach, the United States has decided to take a more aggressive approach to achieve reciprocity in fact with China and not merely on paper or from spoken promises. The change in approach has resulted in the U.S. acting unilaterally in certain situations. China has appeared unable to understand or agree with the concerns raised by the U.S. (and others) and harbors a belief that the real motive behind U.S. actions is “to keep China down”. This mutual distrust has resulted in both hard feelings and an inability to achieve cooperation on a large number of trade, economic and other issues.

The current U.S.-China relationship increases the problems for many multilateral organizations, but certainly for the WTO both in terms of selecting a new Director-General and in developing WTO reforms and moving ongoing negotiations forward.

Look for a challenging second half of 2020.

G20 Trade and Investment Ministerial Meeting — Meaningful Help for COVID-19 Response and WTO Reform?

On May 14, 2020, the G20 trade and investment ministers held a virtual meeting to consider proposals for joint action pulled together by the Trade and Investment Working Group (“TIWG”) on the topic of “G20 Actions to Support World Trade and Investment Through the COVID-19 Pandemic”.

The Ministerial statement released on the 14th endorsed the TIWG proposals which were attached to the statement and contain both short-term actions designed to “alleviate the impact of COVID-19” and longer-term actions intended to “support the necessary reform of the WTO and the multilateral trading system, build resilience in global supply chains, and strengthen international investment.” https://g20.org/en/media/Documents/G20SS_Statement_G20%20Second%20Trade%20&%20Investment%20Ministerial%20Meeting_EN.pdf.

The WTO’s Director-General Roberto Azevêdo welcomed the Ministerial statement and provided the following characterization of its content:

“DG Azevêdo hails G20 pledges on trade cooperation in COVID-19 response

“WTO Director-General Roberto Azevêdo welcomed G20 ministers’ endorsement of collective action measures to mitigate the impact of the COVID-19 pandemic on trade and investment and help foster
global economic recovery. The initiatives were endorsed at a virtual meeting of the G20 trade and investment ministers on 14 May.

“The actions include short-term responses designed to prevent trade logjams and facilitate trade in products needed to contain COVID-19, as well as longer-term support to reform the multilateral trading system, build resilience in global supply chains, and strengthen international investment.

“The G20 ministers pledged to promote WTO reform and ‘support the role of the multilateral trading system in promoting stability and predictability of international trade flows’. They agreed to ‘explore COVID-19 related WTO initiatives’ to promote more open and resilient supply chains, and expand production capacity and trade in pharmaceuticals, medical and other health-related products

“’These commitments by G20 ministers represent an important collective response to the trade-related challenges raised by the COVID-19 pandemic,’ said DG Azevêdo. ‘Maintaining stability and predictability in trade relations is critical to ensuring that essential medical supplies are available to save lives, and that global food security and nutrition do not become a casualty of this pandemic.’

“Echoing language from their first crisis meeting in late March, G20 ministers said that any emergency restrictions on trade in vital medical supplies and services should be targeted, proportionate, transparent and temporary, and should not create unnecessary barriers to trade or disrupt global supply chains. They also agreed to strengthen transparency and notify the WTO of any trade-related measures taken. They urged governments to refrain from excessive food stockpiling and export restrictions on agricultural products.

“In addition, the G20 ministers endorsed trade facilitation initiatives, including accelerated implementation of provisions in the WTO’s Trade Facilitation Agreement, such as pre-arrival processing and expedited shipment, which could speed up access to essential goods during the pandemic. They also called for streamlining customs procedures and encouraging greater use of international standards to reduce sanitary and technical barriers to trade.

“Ministers also agreed to work together to identify key areas where investment is needed, in particular for critical medical supplies and sustainable agriculture production, and to encourage
investment in new production capacity for medical supplies.

“The extraordinary meeting of G20 trade and investment ministers was organized by the Kingdom of Saudi Arabia, which currently holds the group’s rotating presidency.”

https://www.wto.org/english/news_e/news20_e/igo_14may20_e.htm.

Because the G20 member countries have differing views on flexibilities needed, already taken, and potential space that may be needed in the future, much of the “actions” agreed to are more aspirational than commitments to avoid trade restrictive actions.

ANNEX to Ministerial Statement of May 14, 2020, G20 Actions to Support World Trade and Investment in Response to COVID-19

The Annex to the Ministerial Statement contains 19 “short-term collective actions” broken into five areas — “trade regulation”; “trade facilitation”; “transparency”; “operation of logistics networks”; and “support for micro, small, and medium-sized enterprises (MSMEs)”.

Trade regulation

On trade regulation, the three specific actions don’t ban export restraints for medical goods or agricultural products but rather provide avenues for such actions to be taken.

On medical goods, the action taken merely repeats the prior statement from the trade and investment ministers that any such actions are “targeted, proportionate, transparent, temporary” and “do not create unnecessary barriers to trade or disruption to global supply chains, and are consistent with WTO rules”. Para. 1.1.1.

Similarly, on agricultural restrictions, G20 countries agree to “refrain from introducing export restrictions” “avoid unnecessary food-stockpiling” but “without prejudice to domestic food security, consistent with national requirements.” Para. 1.1.2.

Finally, there is an aspirational action to “Consider exempting humanitarian aid related to COVID-19 from any export restrictions on exports of essential medical supples, medical equipment and personal protective equipment, consistent with national requirements.” Para. 1.1.3.

Considering the number of G20 countries who have had in place or continue to have in place export restraints on medical goods and the history of export restraints on agricultural goods and/or buildup of food stockpiling by some G20 countries, it is not surprising that more ambitious objectives have not been possible. For example, information compiled by the WTO Secretariat shows that nearly all G20 countries have had or continue to have export restraints on medical goods flowing from the COVID-19 pandemic. Indeed, the US, EU, Argentina, Australia, Brazil, India, Indonesia, Republic of Korea, Russia, Saudi Arabia, South Africa, Turkey and the United Kingdom are in the WTO data. While China is not included, their export restrictions on medical goods likely predated the data collection done by the WTO Secretariat. See https://www.wto.org/english/tratop_e/covid19_e/trade_related_goods_measure_e.htm. Similarly, Russia has agricultural export restraints in place and China, India and Indonesia have used them in the 2007-2008 food shortage challenge.

Trade facilitation

The Annex includes eight agreed “actions” under the heading of trade facilitation. Most of these actions are similarly not binding but are aspirational or encouraged. In fact five of the eight include the word “encourage”. Others include language like “to the extent possible” or “as appropriate and according with applicable national legislation”.

That said, many of the G20 countries and others have been taking actions to streamline the release of imported medical goods and other actions that are consistent with the objectives of the Trade Facilitation Agreement.

Two of the provisions under trade facilitation really go to the issue medical goods capacity, product availability and capacity expansions and are noteworthy as encouraging sharing of information on producers of product and also encouraging expansion of medical goods capacity. Paras. 1.2.4 and 1.2.5. As I have noted in prior posts, there has been and continues to be an imbalance between global capacity to produce the medical goods needed to fight COVID-19 and the demand for countries experiencing outbreaks. See, e.g., Shifting Trade Needs During the COVID-19 Pandemic, https://currentthoughtsontrade.com/2020/04/28/shifting-trade-needs-during-the-covid-19-pandemic/. If the world doesn’t address the supply/demand imbalance, it is highly improbable that most countries won’t enact export restraints to prevent the loss of needed goods that are in country during surging demand. While neither G20 agreed action is binding, both are helpful to improve knowledge of available supplies and hopefully to expand that supply.

The last trade facilitation action merely calls for G20 countries to “Support the efforts of international organizations (WTO, FAO, WFP, etc.) to analyze the impacts of COVID-19 on global agricultural supplies, distribution chains and agri-food production and trade.” Para. 1.2.8. Many of the G20 are signatories to statements indicating they will not impose export restraints on agricultural goods or urge restraint on the use of such restraints. There has not been a food shortage in 2020, and mechanisms put in place after the 2007-2008 food shortages to monitor food supplies have helped to provide governments with better information on likely problems. At the same time, the COVID-19 pandemic has created challenges in getting agricultural products harvested, processed and distributed. If these challenges are not properly handled, the world could find local or regional food shortages not because of lack of product but from an inability to get the product harvested, processed and distributed. With COVID-19 outbreaks in meat processing plants in various countries (United States, Canada, Germany to name just three) and with travel restrictions limiting movement of temporary farm workers, the challenges are real. Work of the international organizations is important for information gathering and dissemination.

Transparency

There are two action items under transparency — to share experiences and best practices; to notify trade-related measures to the WTO as required by obligations to the WTO.

The first should be helpful depending on openness of governments and willingness of governments to share experiences in fact. The latter action reflects the fact that countries (whether G20 or otherwise) have in some cases been slow to provide notifications or have taken limited views of their obligations to report certain trade related activities.

Operation of logistics networks

The four agreed actions under this title all involve trade ministers encouraging G20 Transport Ministers to take actions that will speed the movement of medical goods, increasing air cargo capacity, improve transparency on enforcement measures and “to abide by international practices and guidelines to ensure the movement of goods through maritime channels.” Paras. 1.4.1 – 1.4.4.

Support for micro, small, and medium-sized enterprises (MSMEs)

There are two action items for this topic — calling for reports from international organizations that would look at the “disruption of global value chains caused by the pandemic on MSMEs”; and encouraging enhancement of communication channels and networks for MSMEs, including through deepened collaboration with the private sector.” Paras. 1.5.1 and 1.5.2.

MSMEs are important engines of economic growth for all countries and are significantly adversely affected by the governmental actions needed to address the COVID-19 pandemic. For many countries, the bulk of the response for MSMEs will be through financial support legislation as can be seen by summaries of actions taken compiled by one or more of the international organizations. See, e.g., IMF, Policy Responses to COVID-19, https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19 Thus, the two actions contained in the G20 trade and investment ministers statement are helpful for considering future actions but don’t address the core immediate needs which are handled by other ministers.

Longer-term collective actions

The Annex also contains nineteen specific agreed actions for the longer term. The actions are broken into three topics — supporting the mutilateral trading system; building resilience in global supply chains; and strengthening international investment.

Like the short-term actions, the agreed list reflects the limitations on achieving G20 consensus because of different perspectives of G20 members. Some members like the EU have an interest in pursuing tariff eliminations on medical goods, an issue that the U.S. is not willing to explore until the pandemic has passed. Thus, there is no action item to achieve tariff elimination on such products in the longer-term actions.

Supporting the multilateral trading system

There are seven action items which include WTO reform (para 2.1.1), how the G20 can support work at the WTO (para 2.1.2), strengthening transparency and WTO notifications (para. 2.1.3), working “together to deliver a free, fair, inclusive, non-discriminatory, transparent, predictable and stable trade and investment environment and to keep our markets open” (para. 2.1.4), “work to ensure a level playing field” (para. 2.1.5), importance of interface between trade and digital economy and need for e-commerce agreement (para. 2.1.6), and exploring “COVID-19 related WTO initiative to promote open and more resilient supply chains, and expand production capacity and trade” in medical goods (para. 2.1.7).

These action items will have very different meanings depending on the G20 member who is interpreting them. Thus, the EU, Japan and the U.S. would have very different interpretations of ensuring a level playing field than would China and possibly others. India and South Africa have different views on e-commerce and making permanent no tariffs on digital trade than would the U.S., Japan and others

Still support for WTO reform, global rules on e-commerce, increased transparency and the other issues should help provide some focus in the ongoing efforts at the WTO for a future agenda and reform.

As noted in the short-term actions, greater focus by G20 countries on the supply/demand imbalance in medical goods is critical to avoid many of the same shortage issues in future pandemics or future waves of the COVID-19 pandemic. Thus, the support for para. 2.1.7 is potentially important.

Building resilience in global supply chains

There are five action items included under this topic which are positive. These include sharing best practices, strengthening cooperation on regulation of trade (including customs and electronic document management), ensuring transparency of trade-related information useful to MSMEs, encouraging cooperation between multinationals and MSMEs, and establishing voluntary guidelines that would permit essential cross-border travel during a health crisis. Paras. 2.2.1 – 2.2.5.

While these action items could be useful going forward, there is a major omission in this important category. Does building resilience in global supply chains necessitate building in increased redundancy or for onshoring some products or inputs? This is an important issue that has raised concerns among some G20 members that there is too great dependence on certain countries for input materials and that supply chains don’t have sufficient redundancy or are too “global” and not sufficiently regional or national. The United States, for example, has expressed concerns about over dependence on other countries and has been looking at encouraging domestic production of some key products/inputs. Such an approach is not supported by the EU or China. See statement of Ambassador Lighthizer at the virtual G20 Trade and Investment Ministers meeting of May 14 and the statements of the U.S., EU and Chinese Ambassadors to the WTO’s virtual General Council meeting on COVID-19 responses lays out the different perspective on this and some other issues. See https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/second-g20-extraordinary-trade-and-investment-ministers-meeting-remarks-ambassador-robert-e; https://geneva.usmission.gov/2020/05/15/statement-by-ambassador-dennis-shea-at-the-may-15-2020-general-council-meeting/; https://eeas.europa.eu/delegations/world-trade-organization-wto/79401/eu-statement-informal-general-council-meeting-15-may-2020_en; http://wto2.mofcom.gov.cn/article/chinaviewpoins/202005/20200502965217.shtml. While G20 countries generally all agree that it is not possible to be self-sufficient in the medical goods area, that view doesn’t answer the question of whether supply chains should be changed or whether there are certain products where a country or countries could decide self-sufficiency is sufficiently important to take different actions. From the very different views on this topic, it is not surprising that the G20 collective long-term actions were limited in the building resilience group of actions, and such differences also likely influenced the language used in the third section on strengthening international investment.

Strengthening international investment

The last seven long-term collective actions focus on the obvious need for improved investment in medical goods to reduce the stress on the global system that has flowed from the imbalance in supply versus demand and the lack of adequate national, regional and global inventories.

Collective actions include sharing best practices on promoting investments in sectors where there have been shortages (para. 2.3.2), working together to identify key areas where additional investment is needed in both medical goods and agriculture (para. 2.3.3), and four paragraphs (2.3.4 – 2.3.7) encouraging investment in new capacity, working with the private sector to identify opportunities, and other items. The last action item calls on G20 governments to “Encourage cooperation on technical assistance and capacity building provided to developing and least developed countries on investment promotion.” Para. 2.3.7.

Because many countries have been encouraging expanded production of medical goods since the outbreak of the pandemic, there is a great deal of investment that has been happening, including converting (at least short term) production lines to medical goods in short supply. Missing from the collective actions is any encouragement to the Finance Ministers to ensure the international organizations work with developing and least developed countries to ensure adequate regional inventories of medical goods to help such countries address outbreaks of COVID-19.

The G20 Trade and Investment Ministers Statement of May 14 is embedded below.

G20SS_Statement_G20-Second-Trade-Investment-Ministerial-Meeting_EN-1

Conclusion

The COVID-19 pandemic continues to infect millions of people around the world and has resulted in massive economic dislocations and the loss of tens of millions of jobs just in the United States. The G20 has been doing a reasonable job of providing leadership in how to address the pandemic and how to help the world recover as the pandemic recedes. The significant differences between G20 members on some issues have resulted in actions being taken that are either aspirational or simply encouraged, as stronger action was not possible absent consensus. But the May 14 Ministerial Statement is another positive step and provides ongoing recognition of needing to address the supply/demand imbalance to permit all countries to be able to obtain medical goods needed when the pandemic creates hot spots in their countries.

U.S.-China Phase I Agreement — Some Progress on Structural Changes; Far Behind on Trade in Goods and Services

In prior posts, I reviewed the U.S.-China Phase I Agreement and the commitments made by the parties. See https://currentthoughtsontrade.com/2020/01/19/u-s-china-phase-1-agreement-details-on-the-expanding-trade-chapter/; https://currentthoughtsontrade.com/2020/01/15/u-s-china-phase-1-trade-agreement-signed-on-january-15-an-impressive-agreement-if-enforced/. While for many the promised start of a Phase II was viewed as the more important in light of the issues not reached in the partial deal that was struck in January, the COVID-19 pandemic has absorbed much of the global energy for both countries, and no new talks have started.

Moreover, with both countries exchanging charges against the other in terms of the origin of the virus causing the pandemic and more recently concerns about transparency on the virus in China, there have been heightened tensions between the two countries. with some comments in the press calling for an end of the agreement by each country.

A recent telephone call between U.S. Treasury Secretary Mnuchin, USTR Ambassador Lighthizer and China’s Vice Premier Liu He seemed aimed at keeping the Phase I Agreement moving forward. The US press release on the call is reproduced below.

“USTR and Treasury Statement on Call With China

“05/07/2020

“Vice Premier Liu He, U.S. Treasury Secretary Steven T. Mnuchin, and Ambassador Robert Lighthizer participated in a conference call today. They discussed economic and trade issues, including the recently concluded Phase One agreement. The parties shared updates on COVID-19 and their assessments of its effects on economic growth as well as the measures their countries are taking to provide support to their economies.

“The parties discussed the ongoing process of implementing the Phase One agreement between the two countries that went into effect February 14. Both sides agreed that good progress is being made on creating the governmental infrastructures necessary to make the agreement a success. They also agreed that in spite of the current global health emergency, both countries fully expect to meet their obligations under the agreement in a timely manner. Meetings required by the agreement have been conducted via conference call and will continue on a regular basis.”

https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/ustr-and-treasury-statement-call-china.

Indeed, notices on Chinese Ministry websites as well as statements from U.S. government officials have made clear that China has been making progress on a number of the changes to laws and regulations where commitments were undertaken in the Phase I Agreement. For example on the large number of agricultural program changes that China agreed to make, USDA and USTR released a joint statement in late February, shortly after the Agreement took effect, reviewing the progress being made. See https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/february/usda-and-ustr-announce-progress-implementation-us-china-phase-one-agreement.

USDA-and-USTR-Announce-Progress-on-Implementation-of-U.S.-China-Phase-One-Agreement-_-United-States-Trade-Representative

Similarly, the United States has taken steps to address obligations that it undertook in the Agreement such as authorizing the importation of citrus products from China. See 85 FR 20975-20983 (April 15, 2020; https://www.aphis.usda.gov/aphis/newsroom/stakeholder-info/sa_by_date/sa-2020/sa-04/china-citrus.

“APHIS Authorizes Importation of Fresh Citrus Fruit from China

“Last Modified: Apr 14, 2020 Print

“The U.S. Department of Agriculture’s Animal and Plant Health Inspection Service (APHIS) is authorizing the importation of five types of commercially produced fresh citrus fruit from China into the continental United States. After thorough analysis, APHIS scientists determined that pummelo, Nanfeng honey mandarin, ponkan, sweet orange, and Satsuma mandarin fruit from China can be safely imported into the United States under a systems approach to protect against the introduction of plant pests. 

“A systems approach is a series of measures taken by growers, packers, and shippers that, in combination, minimize pest risks prior to importation into the United States. In this case, the systems approach includes importation in commercial consignments only, registration of places of production and packinghouses, certification that the fruit is free of quarantine pests, trapping program for fruit flies, periodic inspections of places of production, grove sanitation, and postharvest disinfection and treatment. This completes agreements on another Chinese commodity listed in Annex 11: Plant Health of the Economic and Trade Agreement between the United States of America and The People’s Republic of China, Phase One.

“This notice of authorization will go into effect on the date of publication in the Federal Register, April 15, 2020. The docket with information about this decision is available here upon publication on April 15, 2020: http://www.regulations.gov/#!docketDetail;D=APHIS-2014-0005.”

Expanding Trade -Growing Exports to China from the U.S. by $76.7 Billion in 2020

One of the important parts of the Phase I Agreement was the chapter on Expanding Trade and the commitments by China to increase imports from the United States by some $200 billion over 2020 and 2021 above the 2017 figures (i.e., U.S. exports to China ahead of the additional tariffs imposed by the U.S. and then China against goods from each other). The figures for 2020 were for increases of $76.7 billion, $64.9 billion in certain goods and $12.8 billion in certain service sectors.

The challenges to the Chinese economy in the first quarter because of COVID-19 and to the United States (and many other countries) for part of the 1st quarter and at least the second quarter of 2020 because of the pandemic makes the large increase in purchases seem unlikely. Certainly, first quarter figures for U.S. domestic goods exports paint a picture suggesting 2020 will not meet objectives. The goods categories that were included in Annex 6.1 and the Attachment thereto of the Phase I Agreement accounted for 59.1% of U.S. domestic exports to China in 2017 (the base year)– $70.9 billion of $119.9 billion total U.S. domestic exports to China. In the first quarter of 2020, the goods categories covered by the Annex showed U.S. domestic exports of $12.7 billion which would leave $122.1 billion to be exported in the last nine months of 2020 ($13.57 billion/month or greater each month than the U.S. exported in the first quarter of the year).

The remaining $49 billion of U.S. domestic exports don’t have particular export targets, but are running well below 2017 levels and indeed are more than 21% lower than the first quarter 2019 levels, suggesting 2020 levels of just $28.29 billion.

The table below shows the US exports for 2017-March 2020 and the objective for 2020 included in Annex 6.1. All figures are in $ Billions.

Product2017201820191st Qtr.
2019
1st Qtr.
2020
Manufactured goods
1. industrial machinery$10.949$12.288$11.062$2.318$2.500
2. electrical equip. &
machinery
$4.311$4.586$4.283$1.008$1.078
3. pharmaceutical
products
$2.089$2.126$2.362$0.483$0.665
4. aircraft* $0$0$0$0$0
5. vehicles$10.093$6.487$7.050$1.888$1.049
6. optical and medical
instruments
$3.135$3.398$3.527$0.763$$0.806
7. iron and steel$1.176$0.652$0.285$0.075$0.069
8. other manufactured
goods
$10.702$11.168$11.914$3.167$3.021
Total MFG goods$42.456$40.705$40.484$9.702$9.188
Agriculture
9. oilseeds$12.225$3.119$7.989$1.696$1.028
10. meat$0.559$0.440$1.193$0.110$0.727
11. cereals$1.358$0.696$0.313$0.015$0.119
12. cotton$0.973$0.921$0.707$0.197$0.290
13. other agricultural
commodities
$4.504$4.121$3.680$0.765$0.768
14. seafood$1.234$1.055$0.822$0.200$0.132
Total Agriculture$20.852$10.353$14.704$2.983$3.063
Energy
15. liquefied natural
gas
$0.424$0.464$0.063$0.036$0.059
15. crude oil$4.304$5.374$2.478$0.405$0.182
17. refined products$2.444$1.781$0.469$0.185$0.141
18. coal$0.403$0.311$0.127$0.047$0.048
Total Energy$7.575$7.930$3.138$0.674$0.429
Total Phase I Goods HS$70.882$58.987$58.326$13.360$12.680
Other domestic exports$49.028$50.593$36.005$9.435$6.798
Total domestic exports
to China
$119.911$109.580$94.331$22.795$19.478

Annex 6.1 has manufactured goods increasing $32.9 billion above 2017 levels for a total of $75.356 billion for 2020; leaving $66.168 billion for the last nine months of the year or $7,352 billion/month for the last three quarters.

Similarly, Annex 6.1 has agriculture imports by China from the U.S. increasing $12.5 billion over 2017 levels to $33.354 billion for 2020 which would leave $31.015 billion for the last nine months of 2020 ($3.446 billion/month).

Finally, Annex 6.1 shows energy increasing by $18.5 billion in 2020 over 2017 levels. That means 2020 has a target of $26.075 billion with $25.646 billion needing to be exported over the last nine months ($2.86 billion/month).

With the ongoing pandemic and Chinese industry operating below full capacity and U.S. industry and agriculture still coping with the market problems in the U.S. from efforts to cope with COVID-19, it is hard to see the goods commitments being met in 2020.

The challenges for the US service sector in exports to China are equally daunting. Total U.S. exports of services to China in 2017 were $56.009 billion of which $55.458 billion are in categories covered by Annex 6.1. Specifically, category 19, charges for use of intellectual property were $7.591 billion in 2017 for U.S. services exports to China. Business travel and tourism (category 20) showed U.S. exports to China of $32.705 billion in 2017. Financial services and insurance (category 21) had exports to China of $4.208 billion in 2017, while other services (category 22) showed exports of $10.030 billion to China. Finally, cloud and related services had exports to China in 2017 of $0.924 billion.

U.S. services export data for 2020 doesn’t show the breakdown by category by country. However, China has a much larger percent of U.S. services exports in the travel and tourism category (about 25% for all countries vs. 58.4% for China). U.S. data for the first quarter of 2020 show exports of travel and tourism services to the world down 19.5% with March being down more than 50%.

With the travel limitations in place in the U.S. and that have been in place in China and with the slow ability of the U.S. to reopen much of the travel and tourism related sectors (transportation, hotels, restaurants, entertainment venues, etc.), there seems to be no realistic scenario by which US service exports to China grow $12.5 billion in 2020.

Conclusion

The U.S.-China Phase I Agreement was an important step in trying to find a path forward for normalized trade relations between the world’s two largest economies. The path requires the start of a Phase 2 but importantly needs the building of confidence between the two countries based on achieving results in implementing the Phase I Agreement.

There have been extraordinary events clouding the global community as nations struggle to address the COVID-19 pandemic. Those events have complicated the ability of the U.S. and China to achieve in 2020 what the Phase I Agreement contemplates, at least in terms of expanded trade. That said, both China and the U.S. have implemented certain provisions of the Agreement, and there has been a recognition by the U.S. Administration of efforts by China to comply with modifications to laws, regulations, etc. agreed to in the Phase I Agreement.

The first two months that the Agreement has been in place have not resulted in significant movement on implementing the important chapter of expanding trade. For the United States, struggling to right its economy amidst the pandemic, a strong effort by China to honor its commitments to expand trade significantly in 2020, would be a welcome development and hopefully lead to the reengagement by the two countries to start and complete a phase 2 Agreement.

COVID-19 — US International Trade Commission report on U.S. imports and tariffs on COVID-19 related goods

In a post from April 6th, I reviewed a WTO document on medical goods relevant to COVID-19. https://currentthoughtsontrade.com/2020/04/06/covid-19-wto-report-on-medical-goods-fao-report-on-food-security/. As reviewed in that post, the data compiled by the WTO were useful but both over- and underinclusive. Because tariffs are harmonized for most countries at the 6-digit HS level, comparable data was only available at that level for the WTO’s analysis even though virtually every category included many products that are not relevant to treating COVID-19. The list also doesn’t include input materials as recognized by the WTO. I had suggested that it would be useful to have WTO Members supply information at their most disaggregated level of detail to see if a tighter fit of at least finished products could be identified in terms of trade.

The United States has now provided a report that provides its data at the 10-digit HTS level of detail for imports into the United States. It would be helpful if other major trading nations similarly provided their detail data to the WTO and for public release. Hopefully, the U.S. will provide similar data for its exports in the coming months.

Development of U.S. import data

USTR has been exploring possible elimination of duties on medical goods needed for the U.S. response to COVID-19 and is accepting comments through late June. The U.S. International Trade Commission (“USITC”) was asked by the Chairman of the U.S. House of Representatives Ways and Means Committee and the Chairman of U.S. Senate Committee on Finance to conduct “a factfinding investigation to identify imported goods related to the response to COVID-19, their source countries, tariff classifications, and applicable rates of duty.”. The report from the USITC’s Investigation 332-576 was completed in late April and is now available from the USITC webpage. USITC, COVID-19 Related Goods: U.S. Imports and Tariffs, Publication 5047 (April 2020). Updates to the report may be made through June 2020. See https://www.usitc.gov/press_room/news_release/2020/er0504ll1540.htm

In the report, the USITC compiled data on 112 10-digit HTS categories but noted that many of these categories which are generally more detailed than the 6-digit categories used in the WTO paper still contain large quantities of goods that are not relevant to the COVID-19 response. Thus, the U.S. data, while more refined that the 6-digit data used by the WTO are still overinclusive. To the extent major input data for products needed to address COVID-19 are not included in the USITC investigation, the results are underinclusive as well.

The USITC Executive Summary notes that of the 112 HTS categories:

6 cover COVID-19 test kits/testing instruments,

9 cover disinfectants ad sterilization products,

22 cover medical imagining, diagnostic, oxygen therapy, pulse oximeters, and other equipment,

20 cover medicines (pharmaceuticals),

19 cover non-PPE medical consumables and hospital supplies,

27 cover personal protective equipment, and

9 covered other products.

Looking at what tariffs were applied, the ITC looked both at ordinary customs duties (Column 1 rates) and also whether additional duties on products from China were owed because of the 301 investigation and subsequent actions by the Administration. The USITC indicated that 76 products (68%) were duty-free for ordinary customs purposes and that 36 products (32%) were subject to duties, though one or more countries’ goods entered duty free for each of the 36 products.

For goods from China, 59 categories were not subject to additional 301 duties, 55 products were subject to additional duties (39 products at 25% additional duties; 16 products at 7.5% additional duties) although 28 of the 55 categories were subject to exclusions (total exclusions for 13 product categories; partial exclusions for the remaining 15 categories).

The Commission pulled import data for 2017-2019 (including for several categories which expired before 2020 for completeness of the underlying data). The data show US imports by HTS category and then show the top 5 source countries by HTS and the all other country customs value.

The data from the investigation will be used by USTR and Congress to inform Administration decisions on which products should receive tariff reductions/eliminations.

Using the ITC’s list, the trade data can presently be updated through March 2020 as March 2020 data are now publicly available.. The total for the 112 categories for 2019 was U.S. imports for consumption of $105.3 billion up from $81.3 billion in 2017 and $93.7 billion in 2018. Imports in the first quarter of 2020 were $28.6 billion up from $24.6 billion in the first quarter of 2019.

The top 15 sources of imports into the U.S. in 2019 are the following. Data also show the percentage change in the first quarter of 2020 compared to the first quarter of 2019.

Top sources of imports Customs Value 2019 % change 2019-2020

Ireland $14.173 billion +12.77%

China $12.313 billion -14.13%

Germany $12.228 billion +20.35%

Mexico $ 8.791 billion + 4.44%

Canada $ 6.026 billion +19.57%

Belgium $ 5.952 billion +63.21%

Switzerland $ 5.082 billion +39.80%

Japan $ 4.144 billion +28.38%

United Kingdom $ 3.409 billion +11.42%

India $ 2.816 billion +16.71%

South Korea $ 2.694 billion -30.68%

Netherlands $ 2.545 billion +94.16%

Italy $ 2.177 billion +75.66%

Malaysia $ 2.163 billion + 7.65%

Costa Rica $ 1.693 billion +22.50%

All Other $16.574 billion +15.13%

Total $105.267 billion +16.16%

Different supplying countries focus on different parts of the medical goods needs of the United States. For example, the top four HTS categories imports from Ireland accounted for more than $10 billion of the $14.173 billion from the country in 2019 and all were medicines. In comparison, the top two HTS categories of imports into the U.S. from China were basket categories (other articles of plastic; other made up articles) which are presumably personal protective equipment (“PPE”) products and were $5 billion of the $12.313 billion. While ventilators were also a significant item, most other major items appear to fit within the PPE category.

Conclusion

The purpose of the USITC investigation and report are to provide information to the Congress and Administration to help identify which imported products relevant to the COVID-19 response by the United States are dutiable and which products from China are also subject to additional tariffs from the 301 investigation. The Administration and Congress will use the information as part of the Administration’s review of which imported products should face a reduction or elimination of tariffs at least during the pandemic.

However, the data also provide useful information for broader use in understanding the extent of trade in goods actually relevant to the global response to COVID-19. Hopefully, the U.S. will compile comparable data on the country’s exports and other major trading nations will supply comparable data to the WTO and to the public.

The collapse of tourism during the COVID-19 pandemic

As any of us knows all too well, the COVID-19 pandemic and resulting government efforts to control the spread of the virus has led to sharp reductions in the use of various services, including restaurants, hotels, entertainment venues and travel. This has been true domestically in many countries and has been even more obvious when one looks at international travel and tourism.

In a news release from the UN World Tourism Organization (“UNWTO”) on 28 April 2020, the toll on global tourism is reviewed, and the facts are shocking. See https://webunwto.s3.eu-west-1.amazonaws.com/s3fs-public/2020-04/200428%20-%20Travel%20Restrictions%20EN.pdf. The news release is copied below and is followed by the full report (embedded).

“100% OF GLOBAL DESTINATIONS NOW HAVE COVID-19 TRAVEL RESTRICTIONS, UNWTO REPORTS

Madrid, Spain, 28 April 2020 – The COVID-19 pandemic has prompted all destinations worldwide to introduce restrictions on travel, research by the World Tourism Organization (UNWTO) has found. This represents the most severe restriction on international travel in history and no country has so far lifted restrictions introduced in response to the crisis.

“Following up on previous research, the latest data from the United Nations specialized agency for tourism shows that 100% of destinations now have restrictions in place, of these, 83% have had COVID-19-related restrictions in place already for four or more weeks and, as of 20 April, so far no destination has lifted them.

“UNWTO Secretary-General Zurab Pololikashvili said: ‘Tourism has shown its commitment to putting people first. Our sector can also lead the way in driving recovery. This research on global travel restrictions will help support the timely and responsible implementation of exit strategies, allowing destinations to ease or lift travel restrictions when it is safe to do so. This way, the social and economic benefits that tourism offers can return, providing a path to sustainable recovery for both individuals and whole countries.’

Tracking Restrictions by Time and Severity

“As well as a general overview, the UNWTO research breaks down the type of travel restrictions that have been introduced by destinations in all of the global regions, while also plotting the evolution of these restrictions since 30 January – when the World Health Organization (WHO) declared COVID-19 a Public Health Emergency of International Concern. The latest analysis shows that, of 217 destinations worldwide:

“• 45% have totally or partially closed their borders for tourists – ‘Passengers are not allowed to enter’

“• 30% have suspended totally or partially international flights – ‘all flights are suspended’

“• 18% are banning the entry for passengers from specific countries of origin or passengers who have transited through specific destinations

“• 7% are applying different measures, such as quarantine or self-isolation for 14 days and visa measures.

“Against this backdrop, UNWTO has been leading calls for governments worldwide to commit to supporting tourism through this unprecedented challenge. According to Secretary-General Pololikashvili, the sudden and unexpected fall in tourism demand caused by COVID-19 places millions of jobs and livelihoods at risk while at the same time jeopardising the advances made in sustainable development and equality over recent years.” (emphasis and italics in the original)

TravelRestrictions-28-April

UNWTO data show roughly 1.5 billion arrivals of travelers around the world in 2019 following a long-term growth record in arrivals, accounting for 10% of global jobs and $1.5 trillion of international tourism receipts. See https://www.unwto.org/healing-solutions-tourism-challenge. The UNWTO in late March projected a decline in international tourism receipts for 2020 of 20-30% from 2019 (or $300-450 billion). See https://webunwto.s3.eu-west-1.amazonaws.com/s3fs-public/2020-03/200327%20-%20COVID-19%20Impact%20Assessment%20EN.pdf. The situation is likely more precarious as we enter May with the continued global economic harm flowing from government actions to address the continued strong expansion of number of confirmed cases worldwide and deaths. As noted, every government with international tourism has introduced and continues to maintain travel restrictions. Stay at home orders have closed restaurants (other than take out or delivery), hotels, entertainment venues and more.

While all countries and territories are adversely affected by the toll on international tourism from the pandemic, the harm is greater to island nations and poorer countries where tourism is a high percentage of total GDP. Even for advanced countries, the importance of tourism can be critical to a functioning economy. In the EU, a recent article indicates that 10% of GDP is from tourism with some countries (Greece and Malta) having much higher percentages (20-25%). See https://www.dw.com/en/when-and-how-post-coronavirus-travel-in-the-eu-is-up-in-the-air/a-53273416

Commitments for tourism and travel services under the World Trade Organization

Many World Trade Organization Members have undertaken tourism and travel-related service commitments. As noted on the WTO webpage on Tourism and travel-related services, https://www.wto.org/english/tratop_e/serv_e/tourism_e/tourism_e.htm, more than 125 WTO members have made services commitments in the tourism area (hotels, restaurants (including catering), travel agencies, tour operator services tourist guide services, etc.). A note from the WTO Secretariat in 2009 provides information on commitments undertaken by Member (at that time, more countries have joined the WTO in the decade since the note) as well as providing other information on travelers by country and receipts. See S/C/W/298 (8 June 2009) embedded below.

SCW298

But, as with trade in goods, trade in services has general exceptions which permit Members to adopt or enforce measures “necessary to protect human, animal or plant life or health” as long as such measures “are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services”. GATS Article XIV(b). Measures adopted in response to the COVID-19 pandemic restricting travel (and resulting effects on other services) have not been challenged at the WTO and would be likely found permissible even if challenged.

Many of the actions governments are taking to keep supplies of medical goods and food moving are only tangentially relevant to tourism in the broad sense, though of assistance to those needing to travel or moving goods. Removal of restrictions will likely occur over time and tourism’s return will also depend on confidence of consumers in the safety of travel, of dining out, of staying in hotels and of attending entertainment events. That confidence is likely going to flow primarily from the adequacy of testing, tracking and quarantining of those found to be infected, and ultimately with the development and widespread availability of a vaccine.

UNWTO recommendations for actions to address the pandemic and accelerate recovery

In a publication released on April 1, 2020, the UNWTO identifies 23 actions they seek governments to embrace broken into three topics:

1, “Managing the crisis and mitigating the impact” (1-7);

2. “Providing stimulus and accelerating recovery” (8-16)’

3. “Preparing for tomorrow” (17-23).

The 23 action recommendations are listed below. The full UNWTO document is embedded after that. As the list of action recommendations reveals, some of the action recommendations are included in actions already taken by major countries including China, the EU and its members, the United States and others. Actions reviewed in earlier posts by the IMF and others may permit some of these action recommendations to be implemented by some of the developing and least developed countries. Many of the recommendations will likely not be addressable in the near term but may encourage collective activity post pandemic.

“1. Incentivize job retention, sustain the self-employed and
protect the most vulnerable groups

“2. Support companies’ liquidity

“3. Review taxes, charges, levies and regulations impacting
transport and tourism

“4. Ensure consumer protection and confidence

“5. Promote skills development, especially digital skills

“6. Include tourism in national, regional and global economic
emergency packages

“7. Create crisis management mechanisms and strategies

“8. Provide financial stimulus for tourism investment and
operations

“9. Review taxes, charges and regulations impacting travel and
tourism

“10. Advance travel facilitation

“11. Promote new jobs and skills development, particularly
digital ones

“12. Mainstream environmental sustainability in stimulus and
recovery packages

“13. Understand the market and act quickly to restore
confidence and stimulate demand

“14. Boost marketing, events and meetings

“15. Invest in partnerships

“16. Mainstream tourism in national, regional and international
recovery programmes and in Development Assistance

“17. Diversify markets, products and services

“18. Invest in market intelligence systems and digital
transformation

“19. Reinforce tourism governance at all levels

“20. Prepare for crisis, build resilience and ensure tourism is
part of national emergency mechanism and systems

“21. Invest in human capital and talent development

“22. Place sustainable tourism firmly on the national agenda

“23. Transition to the circular economy and embrace the SDGs.” (Sustainable Development Goals).

COVID19_Recommendations_English_1

Conclusion

As the world is exploring ways to reopen individual economies as the worst of COVID-19 (at least phase 1) passes, governments will be under enormous pressure to reopen as quickly as is responsible to do. As data from the UNWTO demonstrate, travel and tourism is a labor intensive sector which has outgrown overall economic growth in the last decade and which can help facilitate recovery when economies are able to reopen.

There are huge challenges in the short- and medium-term for the sector including the depth of the decline, the fragility of many of the businesses financially and the challenges to restoration of consumer confidence. With the United States alone having recorded nearly 30 million people filing for unemployment over the last six weeks, the size of the economic challenge globally is obviously massive. The UNWTO recommended actions address an array of certain needs for many players. For those businesses that survive the pandemic, restoring consumer confidence and having governments withdraw restrictions safely will become the biggest challenges to forward movement. Government actions during the pandemic to provide safety nets for businesses and workers will influence how many businesses and jobs remain when markets do reopen.

Shifting Trade Needs During the COVID-19 Pandemic

As of April 28, the number of confirmed COVID-19 cases around the world is over three million. The EU/UK and U.S. have dominated the number of cases and number of deaths to the present time after the start of the pandemic in China. The EU and UK have more than one million cases and more than 120,000 deaths. The United States will likely surpass one million cases by the end of April 28th with deaths above 55,000. . Together they accounted for roughly 70% of cases through April 27 and 84% of deaths.

But the rate of growth is expanding in other parts of the world while number of new cases is shrinking in Europe and flatlining in the United States. The data below look at the number of cases on April 27 and the percent growth of new cases measuring a fourteen day period ending on April 27 compared to a fourteen day period ending on April 11. What the table makes clear is that Europe has been going through a period of declining numbers (percentage less than 100%), North America (based on the US) is close to zero growth (though Mexico’s 14 day numbers more than tripled) , while parts of Africa, Central and South America and some countries in Asia are experiencing rapid growth, albeit generally from low levels. China has largely gotten through the first wave and so numbers for both fourteen day periods are quite low even though the ratio is close to 100%.

Country/Area Number of cases April 27 ratio 14 day cases 4-27/4-11

EU27 908,316 59.65%

UK 152,840 123.03%

4 (Switz., Nrwy, Icel, Lich) 38,358 31.70%

United States 965,910 102.89%

Canada 46,884 128.99%

Mexico 14,677 320.31%

Japan 13,385 159.30%

South Korea 10,738 20.68%

Singapore 13,624 942.40%

China 84,199 93.57%

India 27,892 285.06%

Iran 90,481 52.41%

Turkey 110,130 128.65%

Russia 80,949 599.02%

21 African countries 29,479 185.71%

8 South & Central America 146,515 249.48%

World Total 2,914,507 104.44%

Source; European Centre for Disease Prevention and Control, situation update worldwide, as of 27 April 2020 and 11 April 2020.

As the growth in the number of new cases slows in many developed countries while ramping up in other countries, there will be increasing needs for medical supplies (medicines, equipment, personal protective equipment and other supplies) in countries or territories that heretofore have not had large supply needs.

At the same time, needs for some types of equipment may be reduced in countries that have gotten past the worst of the first wave. Ventilators would be a case in point. In the United States, as hard hit areas like New York see lower hospitalization rates, the state has been able to forward some ventilators to other states with growing case loads. Similarly, the United States has moved from a situation of buying ventilators abroad to being able to send ventilators abroad. That ability is presumably increasing as expanded U.S. production of ventilators kicks into higher gear as we get to the end of April.

Countries like China that have largely gotten through the first wave of COVID-19 have moved from being large importers of medical supplies to being able to export significant quantities of various supplies, including personal protective equipment. They have also ramped up production of some medical supplies and so should be able to both handle any internal needs and continue to expand exports to the world.

However, for countries that have gotten into a period of declining new cases or even flat growth, needs for personal protective equipment, disenfectant, testing equipment and supplies will continue to grow as these countries deal with both ongoing needs for hospital care and the significant increase in testing and tracing needed for a safe reopening of countries and the likely change in protective gear needed for citizens freed from stay at home orders.

Prior posts have reviewed efforts by the multilateral organizations like the WHO, IMF, World Bank, FAO, WCO and WTO to facilitate transparency, financial and other needs of the world during the pandemic as well as efforts at coordinated actions by the G20.

Faced with the worst pandemic in more than a century, the world was generally caught flat footed and without adequate supplies to address the needs of individual countries or the world as a whole.

Transparency and efforts to keep markets open are two of the trade focuses of governments and the WTO. However, a health crisis during a time of grossly inadequate medical supplies has resulted in many countries taking at least temporary actions to secure medical supplies needed for domestic demand. This has occurred through export restraints, commandeering domestic production, using laws aimed for national emergencies and other actions which favor the large and wealthy over other parties.

There appears to be little or no international efforts to coordinate expansion of critical supplies or to monitor demand vs. supply availability to maximize utilization of the scarce supplies that are available in areas hardest hit. If in fact, the pandemic is gaining steam in developing and least developed countries, there is an increasing need for coordinated action in supporting these countries in the weeks and months ahead.

In that regard, Deputy Director-General Alan Wolff provided virtual remarks on April 20th to an event hosted by the Center for China and Globalization in Beijing on the role of the WTO in assisting in the response to the COVID-19 pandemic. The link to the presentation is here and the materials off of the WTO webpage are embedded below. https://www.wto.org/english/news_e/news20_e/ddgaw_20apr20_e.htm.

WTO-_-2020-News-items-Speech-DDG-Alan-Wolff-DDG-Wolff_-Policy-coordina

While DDG Wolff recognizes that any action by the WTO is based upon initiatives from Members, he includes a series of “[a]genda items for a WTO COVID 19 Response”. Some of the agenda items have been pursued by individual WTO members as well as being part of an agreement between Singapore and New Zealand. These would include tariff suspensions on relevant medical supplies and enhanced trade facilitation for medical supplies. The WTO membership has already authorized transparency on actions taken, although Members have at best a spotty performance in providing the transparency agreed to.

The proposed agenda includes items that appear to be more aspirational in nature, at least during the current pandemic, including an agreement on codes of conduct on topics such as “guidelines on allocating scarcity”, “an accord on export controls and equivalent measures (including, e.g., pre-emptive purchasing in whatever form)”. Such issues will likely have greater likelihood of success after the pandemic has passed.

Of great interest to me is the last posting under “Codes of conduct, best practices and international understandings resulting in” which is “Coordinated efforts to enhance manufacturing of medical equipment and supplies”. It is possible that there are efforts within the WTO or the OECD or other groups to gather information on current capacities and planned expansions. Such an effort if not currently occurring should be made a priority during the pandemic and going forward. As China’s experience demonstrated (where demand in China for masks exceeded China production by ten-to-one during the peak increase in cases), supply is unlikely to meet demand in individual countries without better coordination amongst countries and without a greater global inventory buffer to address extraordinary demand surges.

The last agenda item proposed by DDG Wolff is the “Formation of a WTO Member Emergency Covid 19 Response Committee (ERC) or Task Force”. One would hope that an ERC could be quickly created within the WTO although many Members have shown reluctance during the pandemic (at least during the time where in-person meetings are not possible) to agree to any substantive decisions, although being open to collect information. It is also unclear how quickly an ERC, if created, would be able to advance proposals of interest to Members. But it could certainly be a group focused on gathering greater information relevant to supplies and demand as well as restrictions and liberalizations.

Finally, DDG Wolff in looking at planning for the future advances the idea of creating a WTO Committee for Policy Planning. “It is necessary to assure that there is dedicated policy planning capacity within the WTO Secretariat and networked with Members, including experts in capitals who would be able to participate remotely.” Such a Committee could hopefully, inter alia, help WTO Members come up with policies and rules that would better prepare the world for any future pandemics. While much of what is required to minimize the effects of future pandemics is not within the WTO’s jurisdiction, there are certainly areas that are. Many of those include the items DDG Wolff has included in his suggested agenda for the WTO in response to COVID-19. Hopefully, if not doable during the pandemic, such agenda items will be addressed aggressively after the pandemic, perhaps through a Committee for Policy Planning.

Conclusion

The current health pandemic is continuing at a high level but with growing infections starting to shift geographical areas of interest. As developing countries and least developed countries become areas of increased cases, the challenges of ensuring adequate medical supplies to those in need will become greater and be complicated by health infrastructure in many countries, financial resources, and continued supply/demand imbalances. The best hope for positive outcomes is greater coordination of activity and expanded financial resources available to those in need. The seemingly largest gap in coordinated activity is in the area of current supply abilities, growth in capacity and shifting demand needs. Hopefully international organizations like the WTO can help fill the gap.

Oil and gas sector suffers declining demand, collapsing prices, expanded state involvement — skewed economic results damage much of the global economy

The United States and many other countries view the World Trade Organization as the forum for global trade rules that support market economies. One of the challenges for the WTO going forward is what to do with the important Members whose economic systems are not anchored in market economic principles. While China is the most frequently mentioned WTO Member whose economic system is causing massive disruptions for market economies, there are other countries with important sectors that are state-owned, controlled and directed. The United States, European Union and Japan have been working on proposals for modifications of WTO rules to address distortions flowing from massive industrial subsidies and state controlled sectors that do not operate on market principles.

While WTO reform is not likely to see serious engagement by WTO Members before the COVID-19 pandemic is brought under control, the sharp contraction of economic activity in many countries is highlighting the importance for WTO Members actually addressing the role of the state in industry and rule changes needed to avoid the massive distortions that state involvement too often created.

Oil and Gas as an Example

Few industrial sectors have as much state ownership and control as the oil and gas sector. While there are countries with privately owned producers, much of the world operates with producers that are state owned or state controlled. Since the 1960s, a number of countries have engaged in cartel-like activity to collectively address production levels to achieve desired price levels. While many of these countries are part of the Organization of Petroleum Exporting Countries (“OPEC”), OPEC meets with other countries as well in an effort to achieve production and pricing levels. Current OPEC members include Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela.

The activity has resulted in artificial pricing levels in export markets as compared to prices in home markets of OPEC members and periodic price shocks based on collective action. Large price increases in the 1970s led to high levels of inflation and rapid changes to manufacturing operations in some countries.

  1. Economic contraction as countries struggle to limit spread of the coronavirus

There has been a sharp contraction in demand for petroleum products in 2020 as countries have shut down movement of people in an effort to control the spread of COVID-19. Air travel has been decimated in many parts of the world and there are significant reductions in automobile travel. Manufacturing has also seen significant reductions. The contractions have resulted not only in national reductions in use of petroleum products but also international reductions both directly (reduced air traffic and ship traffic) and because of disruptions to supply chains which have reduced downstream production.

The U.S.-China Economic and Security Review Commission released a staff research report on April 21, 2020 entitled “Cascading Economic Impacts of the COVID-19 Outbreak in China” which reviews information on the wide range of economic impacts from the COVID-19 pandemic as felt in the U.S. https://www.uscc.gov/sites/default/files/2020-04/Cascading_Economic_Impacts_of_the_Novel_Coronavirus_April_21_2020.pdf. The report includes a section entitled “Turmoil in Energy Markets” which states,

“The standstill in Chinese production and halt in flows of goods and people has drastically depressed Chinese demand for energy products such as crude oil and liquified natural gas (LNG), adding pressure to an oil supply glut that had materialized at the end of 2019.99 In December of 2019, Institute of International Finance economist Garbis Iradian had forecasted a supply glut, pointing to high output from Brazil, Canada, and the United States.100 The COVID-19 outbreak exacerbated this challenging outlook. As the Organization of the Petroleum Exporting Countries (OPEC) reported in April 2020: ‘The largest ever monthly decline in petroleum demand in China occurred in February 2020.’101 Chinese oil demand ‘shrank by a massive 3.2 million barrels per day’ over the prior year.102 Research by OPEC forecasted China’s 2020 demand for oil will decrease by 0.83 million barrels per day over 2019.103 As the largest oil importer,104 Chinese oil consumption has a significant impact on global demand. In 2019, China accounted for 14 percent of global oil demand and more than 80 percent of growth in oil demand.105 Following the outbreak in China, the OPEC Joint Technical Committee held a meeting on February 8 to recommend new and continued oil production adjustments in light of “the negative impact on oil demand” due to depressed economic activity, “particularly in the transportation, tourism, and industry sectors, particularly in China.”106 In LNG markets, on February 10, Caixin reported Chinese state-owned oil giant China National Offshore Oil Corp. (CNOOC) requested a reduction of an unknown quantity in LNG shipments, invoking a “force majeure” clause due to COVID-19.107 S&P Global Platts, an energy and commodities analysis group, stated China’s LNG imports in January and February fell more than 6 percent over the same period in 2019.108

Prices have also dropped in this period. OPEC’s reference price index fell from $66.48 per barrel in December 2019 to $55.49 per barrel in February 2020, a drop of 19.8 percent.109 These price cuts are causing financially strapped* U.S. energy producers to cut back investment in oil and gas projects as profits erode. The U.S. Energy Information Administration forecasts that the current drop in oil prices will lead to lower U.S. crude oil production beginning in the third quarter of 2020.110″

The complete report is embedded below (footnotes 99-110 can be found on page 22 of the report).

USCC-staff-research-Cascading_Economic_Impacts_of_the_Novel_Coronavirus_April_21_2020

2. State-owned or controlled oil companies create further crisis

With a sharp contraction in oil demand, one would expect falling oil prices and reductions in global production over time. OPEC efforts to achieve reductions in production amongst themselves and Russia didn’t work out with Russia walking out of talks to reduce production to prevent further price declines. Russia and Saudi Arabia then engaged in a price war which resulted in further sharp price reductions in March and early April, large surpluses of oil in the market, with dwindling storage capacity for surplus production. See, e.g., https://en.wikipedia.org/wiki/2020_Russia%E2%80%93Saudi_Arabia_oil_price_war (and sources cited therein). Below is a graph of crude oil prices from 2015 through April 2020.

3. April Agreement to Reduce Production Beginning in May and June 2020

The United States, concerned with the collapse of oil prices and the effects on U.S. producers and oil/gas field companies, engaged in outreach to both Saudi Arabia and Russia to seek a solution. OPEC members, Russia and many others (including the United States) agreed to global production reductions of close to 10 million barrels/day beginning in May and carrying through June, with smaller reductions for later periods, in an effort to bring about balance between supply and demand. See, e.g., April 12, 2020, AP article, “OPEC, oil nations agree to nearly 10M barrel cut amid virus,” https://apnews.com/e9b73ec833e9a5ad304a69e3b9b86914. The U.S. Department of Energy has a webpage that reviews statements by members of Congress and others on the OPEC+ deal.

Because the agreement kicks in at the beginning of May, the continued production and reductions in available storage for oil resulted in further declines in oil prices, with prices on April 20 going negative for the first time in history. Prices have recovered somewhat in the last several days. https://www.cnbc.com/2020/04/24/oil-prices-could-remain-under-pressure-according-to-satellite-imagery-analysis.html; https://oilprice.com/Latest-Energy-News/World-News/OPECs-No3-Already-Started-Cutting-Oil-Supply.html.

WTO Challenges

Joint action during the global COVID-19 pandemic may be understandable and in keeping with the resort to extraordinary measures by governments during the crisis to preserve health and economies. Nonetheless, the extraordinary distortions that flow to global commerce from joint government activity limiting production of oil and gas products or establishing minimum prices for export have been ignored within the GATT and now the WTO for decades. This is unfortunate as the distortions affect both competing producers of the products in question in other countries and also downstream users and consumers more broadly. The overall distortions over time are certainly in the trillions of dollars.

GATT Art. XX(g) permits governments to enforce measures “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.” While there have been some cases where Art. XX(g) has been examined, actions by OPEC or OPEC+ countries to limit production (and hence exports) have never been challenged.

While there are national antitrust laws in many countries, such laws (such as those in the United States) don’t make government interference in the economy or government restrictions on export actionable despite the harm to consumers and to downstream manufacturers.

In a consensus based system like the WTO, the likelihood of obtaining improved rules on state-owned or state-invested companies or to restrict governments’ ability to unilaterally or jointly restrict production and exports seems implausible. This is especially true on oil and gas with Saudi Arabia and Russia as WTO Members. The US-EU-Japan initiative hasn’t yet fleshed out possible rule changes for state entities, so one may see some efforts in the coming years that could be useful if accepted by the full membership. But if there is to be meaningful WTO reform, agreeing on rules for the actions of governments that affect production and trade in goods and services is clearly of great importance. Without such rules, the WTO will not actually support market economies in critical ways.

Modifying antitrust laws is the other option, but one which legislators have been unwilling to address over the last fifty years. It is not clear that there are current champions of such modifications in the United States or in other major countries.

Conclusion

There are many sectors of economies that are being seriously adversely affected by efforts to control the spread of COVID-19. Governments are taking extraordinary actions to try to prevent their economies from collapsing under the strains of social distancing.

The oil and gas sector is one where there has been significant negative volume and price effects. Unfortunately the extent of the negative volume and price effects is driven in large part by the actions of governments who are preventing the global market for these products from functioning correctly, just as government actions have interfered in the functioning of these markets for the last fifty-sixty years.

The recent agreement to slash global production by nearly 10 million barrels per day was needed in light of the extensive government interference that has characterized the market and the actions by Russia and Saudi Arabia in March and early April.

More importantly, the long-term government involvement and interference with the functioning of the sector should cause trade negotiators and legislators to be looking at how to reform the WTO and/or modify national laws to prevent government ownership, control or cartel-like actions from distorting trade flows and economies. The need is pressing, but don’t hold your breath for action in the coming years.

Food Security Complications from COVID-19 – Recent UN Information and G20 and WTO Member Statements

With the global health crisis flowing from the COVID-19 pandemic ongoing, the world is also facing the specter of mass starvation flowing from a combination of ongoing armed conflicts, weather events, export restraints on food and potential disruptions in food supply. Export restraints and disruptions in food supply are increasing based on actions to address the COVID-19 pandemic.

Governments of the world are understandably focused on the health pandemic where known deaths since December are approaching 200,000 with confirmed cases over 2.5 million and continuing to increase. To date Europe and the United States and a few other countries account for the vast majority of confirmed cases and deaths from COVID-19, though nearly all countries have some cases and many other countries could see rapidly growing cases in the weeks and months ahead.

In contrast, the number of people in the world facing acute hunger and possible starvation is staggering with death projections for 2020 in key months of likely shortage as high as 300,000/day or more without concerted efforts to prevent! On April 21, David Beasley, the UN World Food Programme Executive Director made a virtual presentation to the UN Security Council. https://www.wfp.org/news/wfp-chief-warns-hunger-pandemic-covid-19-spreads-statement-un-security-council. His statement is reproduced below.

Forgive me for speaking bluntly, but I’d like to lay out for you very clearly what the world is facing at this very moment. At the same time while dealing with a COVID-19 pandemic, we are also on the brink of a hunger
pandemic.

“In my conversations with world leaders over the past many months, before the Coronavirus even became an issue, I was saying that 2020 would be facing the worst humanitarian crisis since World War II for a number of reasons.

“Such as the wars in Syria and Yemen. The deepening crises in places like South Sudan and, as Jan Egeland will no doubt set out, Burkina Faso and the Central Sahel region. The desert locust swarms in Africa, as Director General Qu highlighted in his remarks. And more frequent natural disasters and changing weather patterns. The economic crisis in Lebanon affecting millions of Syrian refugees. DRC, Sudan, Ethiopia. And the list goes on. We’re already facing a perfect storm.

“So today, with COVID-19, I want to stress that we are not only facing a global health pandemic but also a global humanitarian catastrophe. Millions of civilians living in conflict-scarred nations, including many women and children, face being pushed to the brink of starvation, with the spectre of famine a very real and dangerous possibility.

“This sounds truly shocking but let me give you the numbers: 821 million people go to bed hungry every night all over the world, chronically hungry, and as the new Global Report on Food Crises published today shows, there are a further 135 million people facing crisis levels of hunger or worse. That means 135 million people on earth are marching towards the brink of starvation. But now the World Food Programme analysis shows that, due to the Coronavirus, an additional 130 million people could be pushed to the brink of starvation by the end of 2020. That’s a total of 265 million people.

“On any given day now, WFP offers a lifeline to nearly 100 million people, up from about 80 million just a few years ago. This includes about 30 million people who literally depend on us to stay alive. If we can’t reach these people with the life-saving assistance they need, our analysis shows that 300,000 people could starve to death every single day over a three-month period. This does not include the increase of starvation due to COVID-19.

“In a worst-case scenario, we could be looking at famine in about three dozen countries, and in fact, in 10 of these countries we already have more than one million people per country who are on the verge of starvation. In many places, this human suffering is the heavy price of conflict.

“At WFP, we are proud that this Council made the historic decision to pass Resolution 2417 in May 2018. It was amazing to see the council come together. Now we have to live up to our pledge to protect the most vulnerable and act immediately to save lives.

“But this is only in my opinion only the first part of the strategy needed to protect conflict-riven countries from a hunger pandemic caused by the Coronavirus. There is also a real danger that more people could potentially die from the economic impact of COVID-19 than from the virus itself.

“This is why I am talking about a hunger pandemic. It is critical we come together as one united global community to defeat this disease, and protect the most vulnerable nations and communities from its potentially devastating effects.”

Lockdowns and economic recession are expected to lead to a major loss of income among the working poor. Overseas remittances will also drop sharply – this will hurt countries such as Haiti, Nepal, and Somalia just a name a couple. The loss of tourism receipts will damage countries such as Ethiopia, where it accounts for 47% of total exports. The collapsing oil prices in lower-income countries like South Sudan will have an impact significantly, where oil accounts for 98.8% of total exports. And, of course, when donor countries’ revenues are down, how much impact will this have on life saving foreign aid.

The economic and health impacts of COVID-19 are most worrisome for communities in countries across Africa as well as the Middle East, because the virus threatens further damage to the lives and livelihoods of people already put at risk by conflict.

“WFP and our partners are going all-out to help them we’ll do everything we possibly can. For example, we know that children are particularly vulnerable to hunger and malnutrition, so we are prioritizing assistance to them.

“Right now, as you may now 1.6 billion children and young people are currently out of school due to lockdown closures. Nearly 370 million children are missing out on nutritious school meals – you can only imagine when children don’t get the nutrition they need their immunity goes down. Where nutritious school meals have been suspended by school closures, we are working to replace them with take-home rations, wherever possible.

“As you know, WFP is the logistics backbone for the humanitarian world and even more so now for the global effort to beat this pandemic. We have delivered millions upon millions of personal protective equipment, testing kits and face masks to 78 countries on behalf of the World Health Organization. We are also running humanitarian air services to get frontline health professionals doctors, nurses, and humanitarian staff into countries that need help, especially while passenger air industry is basically about shut down.

“But we need to do so much more, and I urge this Council to lead the way. First and foremost, we need peace. As the Secretary-General recently said very clearly, a global ceasefire is essential.

Second, we need all parties involved in conflicts to give us swift and unimpeded humanitarian access to all vulnerable communities, so they can get the assistance to them that they need, regardless of who they are or where they are. We also need in a very general sense humanitarian goods and commercial trade to continue flowing across borders, because they are the lifeline of global food systems as well as the global economy. Supply chains have to keep moving if we are going to overcome this pandemic and get food from where it is produced to where it is needed. It also means resisting the temptation to introduce export bans or import subsidies, which can lead to price hikes and almost always backfire.

“WFP is working hand in glove with governments to build and strengthen national safety nets. This is critical right now to ensure fair access to assistance and help maintain peace and prevent rising tensions among communities.

Third, we need coordinated action to support life-saving humanitarian assistance. For example, WFP is implementing plans to preposition three months’ worth of food and cash to serve country operations identified as priorities. We are asking donors to accelerate the (US) $1.9 billion in funding that has already been pledged, so we can build stockpiles and create these life-saving buffers, and protect the most vulnerable from the effects of supply chain disruptions, commodity shortages, economic damage and lockdowns. You understand exactly what I’m talking about.

“We are also requesting a further USD350 million to set up a network of logistics hubs and transport systems to keep humanitarian supply chains moving around the world. They will also provide field hospitals and medical evacuations to the frontline humanitarian and health workers, as needed and strategically.

“Excellencies, two years ago the Security Council took a landmark step when it recognized, and condemned, the devastating human toll of conflict paid in poverty and hunger. Resolution 2417 also highlighted the need for early warning systems, and today I am here to raise that alarm.

“There are no famines yet. But I must warn you that if we don’t prepare and act now – to secure access, avoid funding shortfalls and disruptions to trade – we could be facing multiple famines of biblical proportions within a short few months.

“The actions we take will determine our success, or failure, in building sustainable food systems as the basis of stable and peaceful societies. The truth is, we do not have time on our side, so let’s act wisely – and let’s act fast. I do believe that with our expertise and partnerships, we can bring together the teams and the programs necessary to make certain the COVID-19 pandemic does not become a humanitarian and food crisis catastrophe. So Mr. President, thank you, thank you very much.

Emphasis added. See also https://news.un.org/en/story/2020/04/1062272.

The 2020 Global Report on Food Crises mentioned in Mr. Beasley’s statement can be found here and is embedded below. https://docs.wfp.org/api/documents/WFP-0000114546/download/?_ga=2.200353390.1965067900.1587648297-1190105299.1587648297.

GRFC_2020_ONLINE_200420

Fifty-six countries or territories are listed as at various levels of concern for hunger in 2019 and potentially for 2020 and are summarized on pages 214-215 of the report. Eleven of the fifty-six countries or territories are categorized as at a phase 4 level (emergency) for the country as a whole or for particular parts. These include Afghanistan, Angola, the Central African Republic, the Democratic Republic of Congo, Haiti, Nigeria, South Sudan, Sudan, Yemen, Zambia, and Zimbabwe. Twenty-one others are categorized as phase 3 (crisis). These include Burkino Faso, Cameron, Chad, Eswatini, Ethiopia, Guatemala, Honduras, Lesotho, Madagascar, Malawi, Mali, Mauritania, Mozambique, Namibia, Niger, Pakistan, Senegal, Sierra Leone, Somalia, Uganada, and the United Republic of Tanzania. Eight countries or territories were ranked phase 2 (stressed). These included Cabo Verde, Cote d’Ivoire, El Salvador, Gambia, Guinea, Guinea-Bissau, Kenya and Nicaragua. Two countries or territories were listed as phase 1 (minimal)(Burundi and Rwanda). The remaining fourteen countries or territories had not been given a specific phase, some because the problem related to the presence of large numbers of refugees and what might happen during the year; for others the descriptions of the hunger challenges would suggest serious problems. These countries or territories include Bangladesh, Colombia, Djibouti, Ecuador, Iraq, Lebanon, Liberia, Libya, Myanmar, Palestine, Syrian Arab Republic, Turkey, Ukraine, and Venezuela.

While the bulk of the concerns raised in the report go to ongoing conflicts and weather problems, trade restrictions are potentially important contributors. As reviewed in an earlier post, a number of countries have imposed export restraints on certain agricultural goods. With the exception of Myanmar and Ukraine who are listed in the 2020 Global Report on Food Crises, the other countries reviewed in my earlier post are not included in the report. These countries include Russia, Kazakhstan, Vietnam, Malaysia, the Philippines, Thailand, Indonsia and Cambodia. The earlier post is linked below.

G20 Agriculture Ministers Communique

Following a virtual meeting on April 21, G20 Agriculture Ministers released a Ministerial Statement that reaffirmed “the importance of working to ensure the continued flow of food, products and inputs essential for agircultural and food production”. The Statement can be found here. https://g20.org/en/media/Documents/G20_Agriculture%20Ministers%20Meeting_Statement_EN.pdf. The statement covers a fair amount of ground but doesn’t prohibit export restraints per se in agriculture but rather repeats the limitations (reflecting existing WTO flexibilities) that trade ministers articulated for medical supplies – any restraints should be targeted, proportionate, transparent, and temporary. The full statement is reproduced below.

“We, the G20 Agriculture Ministers, are deeply saddened by the devastating human losses and suffering caused by the spread of COVID-19. We commit to cooperating closely and taking concrete actions to safeguard global food security and nutrition.

‘We reaffirm the importance of working to ensure the continued flow of food, products, and inputs essential for agricultural and food production across borders in line with our Leaders’ Statement on COVID-19 of March 26, 2020. We acknowledge the challenges of minimizing the risk of COVID-19 while keeping food supply chains functioning. We will continue to work to ensure the health, safety, welfare, and mobility of workers in agriculture and throughout the food supply chain.

We will guard against any unjustified restrictive measures that could lead to excessive food price volatility in international markets and threaten the food security and nutrition of large proportions of the world population, especially the most vulnerable living in environments of low food security. We agree that emergency measures in the context of the COVID-19 pandemic must be targeted, proportionate, transparent, and temporary, and that they do not create unnecessary barriers to trade or disruption to global food supply chains, and are consistent with World Trade Organization (WTO) rules. We recognise the importance of transparency and commend the Trade and Investment Ministers’ commitment to notify the WTO of any trade-related measures taken, including those related to agriculture and essential foodstuffs. We reaffirm our agreement not to impose export restrictions or extraordinary taxes on food and agricultural products purchased for non-commercial humanitarian purposes by the World Food Programme (WFP) and other humanitarian agencies.

“We emphasize the work of the G20 Agricultural Market Information System (AMIS) and take note of AMIS’ assessment that at present global food supplies are adequate and food markets remain well balanced. As members, we commit and call on other members to continue providing timely and reliable information on global food market fundamentals to help markets, countries, and consumers make informed choices. Where appropriate, we will coordinate policy responses, supported by the AMIS Global Food Market Information Group and the AMIS Rapid Response Forum. We call for continued support for AMIS, including through voluntary financial contributions.

“We will work together to help ensure that sufficient, safe, affordable, and nutritious food continues to be available and accessible to all people, including the poorest, the most vulnerable, and displaced people in a timely, safe, and organized manner, consistent with national requirements. Acknowledging the critical role of the private sector in food systems, we call for enhanced cooperation between the public and private sectors to help mobilize rapid and innovative responses to impacts of this pandemic on the agriculture and food sectors.

“Under the current challenging circumstances, we stress the importance of avoiding food losses and waste caused by disruptions throughout food supply chains, which could exacerbate food insecurity and nutrition risks and economic loss. We stress the need to strengthen the sustainability and resilience of food systems globally, including to future shocks from disease and pest outbreaks, and to the global challenges that drive these shocks. In line with the One Health approach, we call for strengthened mechanisms for monitoring, early warning, preparedness, prevention, detection, response, and control of zoonotic diseases, and developing science-based international guidelines on stricter safety and hygienic measures for zoonosis control.

“We deeply thank farmers and workers, and small, medium and large scale agri-food businesses for their continuous efforts to ensure our food supply. We will intensify our efforts, in line with WTO rules and the 2030 Agenda for Sustainable Development, to support them to sustain their activities and livelihoods during the crisis and to assist their recovery afterwards. Our efforts will support rural communities, especially small-scale farmers and family farms, to be more economically prosperous, resilient and sustainable, and to have improved food security and nutrition, giving special attention to the needs of developing and low-income countries.
We will continue our cooperation with relevant international organizations and within their mandates work to: reinforce international cooperation; identify additional actions to alleviate the impacts of COVID-19 on food security and nutrition; share best practices and lessons learned, such as addressing barriers to supply chains; promote evidence and science-based information and combat misinformation; provide capacity building and technical assistance; and promote research, responsible investments, innovations and reforms that will improve the sustainability and resilience of agriculture and food systems. This work could build on the Food and Agriculture Organization’s (FAO’s) evolving response to COVID-19, the International Fund for Agricultural Development’s (IFAD’s) evolving efforts to support a strong recovery from the effects of COVID-19, policy monitoring and analysis by the OECD, and other relevant initiatives, such as the preparation for the 2021 UN Food Systems Summit.

“We will continue our close cooperation and as necessary update our response to the COVID-19 pandemic and our broader G20 agriculture and food agenda. We stand ready to reconvene as required.” (Emphasis added)

The virtual meeting of G20 Agriculture Ministers included information received from the various UN organizations with expertise. See http://www.fao.org/news/story/en/item/1272058/icode/

The Ministerial Statement is helpful in encouraging nations to maintain open markets, to not tax humanitarian food aid and to provide transparency in actions taken. But the Ministerial Statement does not commit the G20 members to avoid trade restrictions where such restrictions are temporary, targeted, transparent and proportionate. Based on actions taken by China and India during the 2007-2008 food crisis, it is not surprising that the G20 could not get hard commitments to avoid agriculture export restrictions from all G20 members.

As international organizations are serving as transparency fora and are encouraging joint action, it is not surprising that the Ministerial Statement was warmly received by the WTO as the statement supports transparency and WTO consistency of any actions taken.. https://www.wto.org/english/news_e/news20_e/dgra_21apr20_e.htm.

Communique from Various WTO Members

On July 22, twenty-three WTO Members (including the EU) submitted a joint statement to the WTO entitled RESPONDING TO THE COVID-19 PANDEMIC WITH OPEN AND PREDICTABLE TRADE IN AGRICULTURAL AND FOOD PRODUCTS, WT/GC/208, G/AG/30. The statement is embedded below.

WTGC208

The statement cautions countries to avoid actions to address the COVID-19 pandemic that would adversely affect trade in agricultural goods. Absent from the joint statement are important Members who have in the past used or who at present are using export restraints on certain agricultural products including China and India (past export restraints) and Russia, Kazakhstan, Vietnam, Malaysia, the Philippines, Thailand, Indonesia, Myanmar and Cambodia (current export restraints).

The joint statement has strong language on keeping markets open (including the negative effects of export restrictions on agriculture and agri-food products), avoiding waste, maintaining effective transport and logistical services, the importance of transparency in actions taken as well as food production and stocks. Nonetheless, because of existing WTO flexibilities provided to Members, the commitments made by the 23 Members include one which maintains the right to emergency measures that are “targeted, proportionate, transparent and temporary, and not create unnecessary barriers to trade or disruption to global supply chains”.

The joint statement is certainly a positive step with eight specific commitments taken by WTO Members who account for 63% of global agricultural exports and 55% of global agricultural imports. Time will tell if the list of supporters of the commitments expands to other major Members.

Conclusion

Based on current and projected food supplies, there should be no crisis in food supplies to the world if there is collective efforts to keep markets open, provide food aid for populations experiencing severe shortages due to conflict, adverse weather events and any adverse effects from the COVID-19 pandemic. Much of what the UN and its World Food Programme seek (cease fires; access to people regardless of conflicts or sanctions) is not likely to happen based on actions by certain major countries. But keeping world markets open and food aid funded hopefully will occur. The consequences of failure in this regard would greatly exacerbate the health and economic costs already experienced from COVID-19.

WTO dispute settlement in 2020 – forward movement or further crisis?

As of April 20, 2020, there has been relatively limited new activity within the WTO on dispute settlement. Indeed just two requests for consultations were filed in the first quarter of 2020. While not the lowest number for the first quarter, it is one of the lowest over the first 25+ years of the WTO existence. The reason or reasons for the low number of disputes is not known. However, many WTO Members are focused on the COVID-19 pandemic at home reducing the focus on WTO activities. Moreover, the pandemic has disrupted the ability of the WTO to conduct business as usual, with no meetings in person having taken place over the last month and with many Members arguing against making substantive decisions during the pendency of the pandemic lockdown in many countries. See https://www.wto.org/english/news_e/news20_e/hod_17apr20_e.htm

There have been a few Appellate Body reports on disputes where Appellate Body hearings had occurred before December 10, 2019 and some panel reports issued in ongoing cases. The Appellate Body will not issue further reports after the plain packaging cases pending a resolution of the impasse on the functioning of the Appellate Body.

Arbitration under Art. 25 of the Dispute Settlement Understanding

The EU and fifteen other WTO Members have agreed to a Multi-Party Interim Arbitration Agreement to permit signatories to use arbitration along agreed lines as a substitute for an appeal within the WTO until the Appellate Body is back functioning. While the agreement has not been notified to the WTO as yet, pending signatories clearing domestic hurdles, the agreement is open to other WTO Members who wish to participate. See March 27 post, https://currentthoughtsontrade.com/2020/03/28/march-27-2020-agreement-on-interim-arbitration-process-by-eu-and-15-other-wto-members-to-handle-appeals-while-appellate-body-is-not-operational/

In an introductory statement by Commissioner Phil Hogan at an informal meeting of EU Trade Ministers on April 16, Commissioner Hogan stated that

“Working with like-minded WTO members since the effective collapse of the Appellate Body last December, we have developed the Multi Party Interim Arbitration Arrangement as a stop-gap to maintain an independent, two step dispute settlement function.

“There are 15 co-signatories alongside the EU, including some of the biggest users of the system, such as Brazil and China. I have also extended a broad invite to the entire membership to join, underlining the inclusive nature of the arrangement.

“There will be 10 arbitrators on the MPIA roster. The EU has the option of nominating a candidate. The nominee will need to be submitted by the end of May. We will notify the TPC of work on this in due course, respecting best practices used for the nomination of members of the Appellate Body heretofore.”

https://ec.europa.eu/commission/commissioners/2019-2024/hogan/announcements/introductory-statement-commissioner-phil-hogan-informal-meeting-eu-trade-ministers_en.

EU’s efforts to retaliate without WTO authorization where Appellate Body is not functioning and defending party does not agree to arbitration

The EU has also been working to develop regulatory authority to impose sanctions without WTO authorization on Members against whom the EU has brought disputes when such Members lose panel decisions at the WTO, don’t participate in arbitration and rather file an appeal when the Appellate Body is not functioning, preventing retaliation at the WTO. See https://www.europarl.europa.eu/meetdocs/2014_2019/plmrep/AUTRES_INSTITUTIONS/COMM/COM/2020/02-19/COM_COM20190623_EN.pdf.

COM_COM20190623_EN

The EU Council and Parliament need to meet to agree to a modified final text. It is assumed that a major target of the EU actions is the United States. There are two pending disputes that the EU has with the US where panels are underway, including the EU challenge to the US Section 232 actions on steel and aluminum and the EU challenge of a countervailing duty order on olives from Spain.

On the 232 dispute, the EU did not pursue a challenge prior to taking retaliation, claiming that the US use of the national security law (Section 232 of the Trade Expansion Act of 1962, as amended) on steel and aluminum was in effect a safeguard action. Thus, the EU claimed it was justified in retaliating to a certain extent immediately consistent with the Safeguard Agreement. The U.S. has filed a dispute challenging the EU’s retaliation as the U.S. action was not taken under U.S. safeguard (escape clause) law but pursuant to a national security law making the EU retaliation inappropriate. Both disputes are pending before panels at the WTO.

The interesting element of the EU’s pursuit of new regulatory authority is its willingness to act outside of the WTO while wrapping itself in the mantle of champion of the multilateral system.

China’s challenge of U.S. tariffs following Section 301 of Trade Act of 1974 investigation (and retaliations by China)

In August 2017, USTR commenced an investigation into whether certain actions of the Chinese government violated Section 301 of the Trade Act of 1974. Forced technology transfer, cybertheft of intellectual property and other issues were investigated by USTR and resulted in a determination in early 2018 of violations of U.S. law. The USTR fact sheet issued in 2018 is attached and embedded below. https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2018/march/section-301-fact-sheet.

Section-301-Fact-Sheet-_-United-States-Trade-Representative

Original tariffs imposed when the unfair practices were not addressed by China were $50 billion. Those amounts were increased as China retaliated against the U.S. without authorization from the WTO. Ultimately, the U.S. imposed tariffs on more than $360 billion and China imposed retaliatory tariffs on nearly all of U.S. exports to China.. https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2018/march/section-301-fact-sheet.

China filed a WTO dispute after the initial tariffs imposed by the United States. WT/DS543. It filed two additional requests for consultations as the U.S. expanded tariffs on other products, although both of these requests for consulation remain in the consultation phase. WT/DS565 and WT/DS587. The U.S. filed a challenge to China’s retaliation. WT/DS558.

While the panel proceedings have been underway in Geneva, the United States and China reached a Phase One Agreement in January 2020. See prior posts, https://currentthoughtsontrade.com/2020/01/15/u-s-china-phase-1-trade-agreement-signed-on-january-15-an-impressive-agreement-if-enforced/; https://currentthoughtsontrade.com/2020/01/19/u-s-china-phase-1-agreement-details-on-the-expanding-trade-chapter/.

The WTO dispute settlement panel provided a notice to the parties that the panel decision would be available to the parties by the end of June (a little more than two months from now). See WT/DS543/9 (15 April 2020). Because the dispute involves the largest amount of trade (at least when considering the additional actions by both the U.S. and China) of any trade dispute in the history of the WTO, the panel decision will not only be carefully watched by all members but could result in major rifts within the organization by one or both of the parties.

China’s briefs in disputes are typically not publicly available. The U.S. always releases public versions of its briefs. The below excerpt from the first U.S. submission in WT/DS543 gives a glimpse of the importance of the case from the United States perspective. The entire first brief is embedded.

“I. INTRODUCTION

“1. Technology, intellectual property, and innovation are the foundation of the competitiveness of the United States and many other Members in the world economy. China has chosen to adopt a range of policies and practices to obtain an unfair competitive edge over other Members by stealing or otherwise unfairly acquiring their technology and intellectual property. Where those policies or practices can be addressed through WTO rules, the United States is pursuing WTO dispute settlement. Most of China’s practices, however, are not covered by existing WTO disciplines.

“2. In these circumstances, the United States is pursuing its sovereign right to protect its fundamental economic competitiveness from China’s unfair, predatory, and harmful technology-transfer policies. The purpose of the U.S. tariff action is to obtain the elimination of China’s unfair practices, and thereby to promote a fair and sustainable trading system for the United States and all other Members that rely on technology and intellectual property for their competitiveness in world markets. Unfortunately, China has responded not by reforming its unfair technology-transfer policies, but instead by imposing retaliatory tariffs on most U.S. goods.

“3. In pursuing this course of action, China has demonstrated what the Panel should conclude in response to China’s pursuit of this dispute – namely, that this is a bilateral dispute between the United States and China concerning key economic issues not covered by existing WTO rules. In short, this dispute is fundamentally not about WTO rights and obligations.

“4. China’s decision to pursue this dispute represents a profound misuse and abuse of the WTO dispute settlement system. Having already adopted retaliation in response to the U.S. measures aimed at obtaining a fair world trading system, China knows full well that any WTO findings will not contribute to the resolution of the matter. Rather, China’s pursuit of this dispute is a cynical and hypocritical attempt to try to have the WTO side with China in the ongoing dispute involving China’s unfair technology transfer policies. To elaborate:

“5. In bringing this dispute, China seeks to abuse the WTO dispute settlement system by attempting to use it as a shield for a broad range of unfair and trade-distorting technology transfer policies and practices not covered by WTO rules. In doing so, it is China, and certainly not the United States, that – as China puts it – ‘is undermining’1 the viability of the multilateral trading system.

“6. China’s decision to launch this dispute is hypocritical. China is currently retaliating against the United States by imposing duties on most U.S. exports – over $100 billion of trade. China cannot legitimately challenge measures at issue for being “unilateral”2 and WTO-inconsistent, while at the same time openly adopting its own unilateral tariff measures in connection with the very same matter.

“7. The matters related to this dispute are currently subject to bilateral discussions between the Governments of China and the United States. The parties are holding these discussions at multiple levels, including between the leaders of the two disputing parties. It is those bilateral discussions, and not any possible findings to be adopted by the Dispute Settlement Body (“DSB”), that will resolve the important issues arising from China’s unfair and harmful technology transfer policies, from the U.S. response to those policies, and from China’s unilateral retaliation.

“8. Under these circumstances, the outcome of a dispute settlement proceeding would be pointless, and, worse – a misuse by China of the dispute settlement system by trying to have the WTO side with China in support of its fundamentally unfair technology transfer policies. As noted, China has already taken the unilateral decision that the U.S. measures cannot be justified under WTO rules, and on that basis, already imposed tariff measures on most U.S. goods. Accordingly, addressing China’s legal claims would not ‘secure a positive solution to [this] dispute,’3 as China has already adopted the response that China unilaterally has determined is appropriate.

“9. Fundamentally, both the United States and China have recognized that this matter is not a WTO issue: China has taken the unilateral decision to adopt aggressive industrial policy measures to steal or otherwise unfairly acquire the technology of its trading partners; the United States has adopted tariff measures to try to obtain the elimination of China’s unfair and distortive technology-transfer policies; and China has chosen to respond – not by addressing the legitimate concerns of the United States – but by adopting its own tariff measures in an attempt to pressure the United States to abandon its concerns, and thus in an effort to maintain its unfair policies indefinitely.

“10. By taking actions in their own sovereign interests, both parties have recognized that this matter does not involve the WTO and have settled the matter themselves. Accordingly, there in fact is no live dispute involving WTO rights and obligations. Therefore, in light of each party’s action settling the matter, the report of the Panel should “be confined” to a brief description reporting that the parties have reached their own resolution, as provided for in Article 12.7 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (‘DSU’).4

“11. Even aside from the fact that the parties have settled the matter through their actions, were the Panel to examine China’s contentions, the Panel would find that the U.S. measures at issue would be justified under WTO rules.

“12. The United States adopted the measures at issue in this dispute to combat China’s longstanding policy and practice of using government interventions, coercion, and subterfuge to steal or otherwise improperly acquire intellectual property, trade secrets, technology, and confidential business information from U.S. companies with the aim of advantaging Chinese companies and advancing China’s industrial policy goals. Although China’s conduct is not addressed by current WTO rules, it is unfair and contrary to basic moral standards. No WTO Member endorses forced technology transfer policies and practices such as those employed by China.

“13. Indeed, such fundamentally unfair policies and practices undermine support for an international trading system that permits such practices to escape discipline, undermine U.S. norms against theft and coercion, and undermine the belief in fair competition and respect for innovation, all of which are key aspects of U.S. culture (as well as that in a number of other Members). ). The United States does not undertake these activities against Chinese citizens or companies. China’s non-reciprocal and morally wrong behaviour further threatens to undermine U.S. society’s belief in the fairness and utility of the WTO trading system, if that system creates the conditions for, and fails to address, a fundamentally uneven playing field. Accordingly, the measures at issue in this dispute are legally justified because they are measures “necessary to protect public morals” within the meaning of Article XX(a) of the General Agreement on Tariffs and Trade 1994 (“GATT 1994”).

“14. Finally, the United States notes that one of the U.S. measures that China is challenging in this dispute is not within the Panel’s terms of reference because it was issued and took effect after China requested the establishment of a panel. Accordingly, for this additional reason, there is no legal basis for the Panel to examine or make any findings with respect to that measure.

“15. The United States emphasizes that a world trading system where one Member can adopt policies to steal or unfairly acquire technology and intellectual property from its trading partners, and where the organization responsible for overseeing world trade would entertain a request to issue findings in support of the Member adopting these unfair actions, is simply unsustainable. In order to maintain the viability and relevance of the WTO, this Panel must reject China’s request that the Panel make findings that China might use as support for maintaining its fundamentally unfair technology transfer policies and practices.

“1 See China’s First Written Submission, para. 5.

“2 See China’s First Written Submission, paras. 3, 4, 5, 24.

“3 See DSU Article 3.7 (Providing in part that “The aim of the dispute settlement mechanism is to secure a positive solution to a dispute.”).

“4 See DSU, Article 12.7 (‘Where the parties to the dispute have failed to develop a mutually satisfactory solution, the panel shall submit its findings in the form of a written report to the DSB. In such cases, the report of a panel shall set out the findings of fact, the applicability of relevant provisions and the basic rationale behind any findings and recommendations that it makes. Where a settlement of the matter among the parties to the dispute has been found, the report of the panel shall be confined to a brief description of the case and to reporting that a solution has been reached.’). (emphasis added).”

US.Sub1_.DS543.fin_.public

Canada’s dispute with the U.S. over Countervailing Duty Order on Supercalendered Paper from Canada

Canada pursued a challenge to a countervailing duty investigation and order on supercalendered paper from Canada conducted by the United States and received reports from the panel and Appellate Body that the U.S. actions were inconsistent with WTO obligations. Canada pursued the challenge despite the fact that the order had been revoked retroactively by the United States. In a submission posted today on the WTO website, Canada has given notice that it intends to seek retaliation at such time as the DSB is able to convene (recognizing the present inability to meet because of the COVID-19 lockdown in place). WT/DS505/11 (20 April 2020).

Because the United States has viewed the panel and Appellate Body as having erred in their decisions in the case and because of the importance to the United States of its countervailing duty law in addressing other countries subsidy practices, any such action by Canada is likely to worsen the dynamics in Geneva and in capitals in terms of reaching reform of the dispute settlement system.

Needed reforms of the dispute settlement system

While there has been activity to put in place for some Members an arbitration system, there is little indication of any effort to pursue resolution of the underlying reform needs to the dispute settlement system outlined by the United States over the last several years. See prior posts, https://currentthoughtsontrade.com/2020/03/07/impasse-on-the-wto-appellate-body-any-progress-likely-by-the-12th-ministerial/; https://currentthoughtsontrade.com/2020/02/14/ustrs-report-on-the-wto-appellate-body-an-impressive-critique-of-the-appellate-bodys-deviation-from-its-proper-role/; https://currentthoughtsontrade.com/2020/01/30/wto-appellate-body-impasse-how-and-why/.

The COVID-19 pandemic has made forward movement more difficult as attention of most countries, understandably, is focused on the immediate needs of their populations to address the global pandemic.

Conclusion

With the 12th WTO Ministerial Conference already postponed, with meetings at the WTO cancelled through at least April, there has been increasingly diminished hopes for what the WTO can achieve in 2020. While the dumbing down of expectations appears true across the board of the WTO’s reform program and pending negotiations, it is certainly true for reform of the dispute settlement system. The EU and China have engaged in unilateral action regardless of WTO rules (generally where the U.S. has taken actions that the others disagree with and don’t want to work through the WTO system or pursue reform). The U.S. has taken aggressive actions in a number of situations, though they have articulated WTO justifications for the actions which justifications are currently subject to WTO dispute settlement (but usually in situations where the Members challenging the U.S. have unilaterally retaliated without WTO authorization).

With important panel decisions due out yet this year and with EU actions to give itself retaliation rights regardless of WTO authorization while the Appellate Body is nonfunctioning, the likelihood of WTO Members focusing on dispute settlement reform are seemingly nonexistent for the foreseeable future. The ride is likely going to get a lot bumpier in the coming months.