ATC Admin

June 30, 2015

Talking Trade Blog Recap

ATC Admin

June 30, 2015

After six months, the Talking Trade blog has attracted a growing list of global readers. We thought this would be a good time to recap the set of materials posted during this time, in case you missed them. We very much appreciate your support and, as always, enjoy receiving feedback from you.

Deborah Elms

June 19, 2015

Doing the Right Thing When All Else Has Been Tried: Congress Tries TPA Once More

Deborah Elms

June 19, 2015

WASHINGTON, DC: This week in Washington, more people than I can count have repeated a quotation attributed to Winston Churchill, “America will do the right thing only when it has tried everything else first.” We are testing this theory right now on the trade front, as Congress grapples with how to undo the various “procedural snafus” that have bedeviled the votes on Trade Promotion Authority (TPA) and Trade Adjustment Assistance (TAA).

Yesterday, I wrote two different blog posts and had to toss them out and start over again this morning as events have been moving swiftly on the ground here in Washington.

After the shock defeat of TPA/TAA in the House of Representatives on Friday, many of the folks in the city that care about trade spent the early part of this week trying to figure out a possible solution.

Congressional leaders have opted for a risky strategy. The House just passed a “clean” TPA resolution by 218-208. This bill splits apart TPA from TAA.

The hope now is that the Senate will re-vote next week on the new House-approved version of TPA. Assuming the two bills match, TPA can quickly be passed along to the President for signature.

But this is a risky strategy because it requires Democrats in both parts of Congress to vote for TPA without TAA. They must count on promises that Trade Adjustment will be up for another vote prior to its expiry in September. Given the low levels of trust in Washington these days and the growing polarization of both parties, this is an interesting gamble.

The goal is to complete the entire process prior to the July 4th recess in Congress.

Most likely, the chief negotiators for the TPP have shifted existing plans to meet until just after July 4. They are likely to need two weeks to complete negotiations. The ministers are likely to be penciled in for mid-July in the hope that they can sign the completed agreement by then (after some furious late nights of bargaining).

If this near-death experience has had any upside, it may be that it has concentrated minds. Partner countries and American negotiators will have to think carefully about any further delays in getting the agreement finished. I believe that officials will be more ready to wrap this deal up than ever before.

Once the agreement is finished, under TPA rules, officials will have 30 days to finish legal scrubbing and any other associated technical details. Fortunately, English is the official language of the TPP, which will reduce the amount of time needed for translations and the legal work on each translated version.

The document will then be published for 60 days before the President and other leaders can sign the agreement. Hence, if all the deadlines line up, it is just barely possible to imagine the TPP finished and signed off in or around the next APEC Leader’s Meeting in Manila in mid-November.

Given the issues around getting trade agreements through Congress, officials across government will be feverishly working to get any necessary implementing legislation worked out during the TPA review window period. This ought to allow a Congressional vote on the TPP—just barely—by the end of this year.

Hence, the TPP can still be completed in 2015. (But note that entry into force will still be some distance away, likely in 2017, as countries will require some time to bring domestic rules and regulations into compliance with TPP rules.)

But what if the agreement is not done this year? I have heard two opposite and distinct arguments about 2017.

First, lots of people here have suggested that approval of TPP should just be postponed until after the next president is in office in January 2017.

I believe this is deeply problematic. For starters, the lineup of participating countries in the TPP could be radically different by January 2017. Canada faces a tough election in October. The Prime Minister of Australia has already narrowly survived one no confidence vote from his Parliament. The Prime Minister of Malaysia is struggling to maintain his office in the wake of a growing scandal over government funds as well as a softening economy.

The Prime Minister of Japan has staked his entire reputation and government policy around radical shifts in the economic space. If TPP does not succeed, he might well not survive either. It is highly unlikely that any successor will be inclined to take the politically difficult steps needed to bring TPP into force in Japan.

The list could go on—Brunei might implement sharia law in a way that is deeply problematic. Malaysia could find additional mass graves. Between now and 19 months from now, all manner of issues could easily derail any agreement and any TPP government.

The assumption by many here seems to be that whoever wins office in Washington at the end of next year will be more enthusiastic about trade and the TPP and will be more able or willing to cajole, arm twist, charm, threaten opponents or reward supporters than the current occupant of the White House. And that the next Congress will be equally keen to take on a big, fraught policy decision right after being seated in the Capitol building. Even if the rest of the world somehow stood still, the picture in Washington is unlikely to be so rosy.

Deciding now to wait until 2017 to get the TPP approved is a poor idea. Wishful thinking is not going to solve the problems of getting a high stakes trade agreement past 535 members of Congress and into the hands of the President for signature.

But this does conflict with a second argument I have heard in Washington regarding timing. If the agreement cannot be ratified by late 2015 or very early in 2016 given the presidential election dynamics, the world will not end if domestic approval inside the U.S. slips slightly.

We have precedent for this as the free trade agreements with Columbia, Panama and South Korea all sat for years waiting to be approved in Washington. All three countries even had to go back to the negotiating table.

It should not be a surprise that I am not at all in favor of this idea. Most of the TPP member countries have put a great deal on the line domestically to get this far. After more than 5 years of negotiations, any further delay can be quite problematic. Businesses are already waiting for implementation and have started making investments and shifting production to account for TPP rules.

The best strategy—by far—is to approve TPA by the end of next week. TPA really ought to have been relatively uncontroversial, although past votes on the topic have also been fraught with challenges. In any case, once TPA is finished, officials can quickly wrap up the TPP and prepare for the final battle over this agreement. Hopefully, voting on TPP will be less nail-biting than the votes over TPA.

***Talking Trade is a blog written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Deborah Elms

June 13, 2015

Defeated Again: Understanding The American Congress Votes on Trade

Deborah Elms

June 13, 2015

When the U.S. Senate first rejected the bills on Trade Promotion Authority (TPA), I wrote that it may have marked the day the Americans quit leading on trade. Although the Senate subsequently managed to squeak through the necessary authorizations, the votes from the House of Representatives today suggests I was right. Getting the United States to show leadership on trade is somewhere between a tough and an impossible task.

To recap where we are: although the United States has been negotiating multiple trade agreements for years, the U.S. Trade Representative (USTR or basically the trade minister) does not formally have trade authority as delegated from Congress. Under what used to be called fast track and is now known as Trade Promotion Authority (TPA), Congress lets the White House lead on trade. Congress sets up the parameters for negotiations and expedited procedures for final approvals.

USTR went ahead with talks in the Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Promotion (TTIP) “as if” the provisions of TPA were in effect. The White House had opted not to try for renewal sooner (the last version expired in 2007) because they were not convinced that Congress would view the request favorably in the absence of information about what sorts of agreements were under negotiation. Therefore, the executive branch decided to negotiate first and seek permission at a later date, when it would be more clear to the legislative branch what sorts of benefits and costs might be on offer.

With the TPP waiting for TPA to close the agreement, it was no longer possible to pretend that authorization was in place. The other TPP member countries have refused to discuss the most sensitive aspects of the negotiation in the absence of clear authority from Congress to pass the final deal without amendment.

Hence the push to get TPA, starting with the Senate. The original bill was defeated, only to be resurrected days later.

The Senate votes set up the challenge for the House now. If the House version of TPA does not exactly match the Senate’s bill, members from both sides would have to sit down and reconcile the inconsistencies. The final, combined, bill would have to be voted on again by both bodies.

Given the difficulties in getting TPA, no one wants a situation where members of Congress are forced to vote twice. Hence, the House version had to match the Senate version exactly.

Which leads us, depressingly, to today’s House votes. The Senate bill had done two things—it renewed authorization of Trade Adjustment Assistance (TAA) and granted TPA. (An earlier post discussed TAA in more detail.)

The House was reluctant to vote on a similar combined bill. Thus, they split the bill into two halves—first a vote on TAA and then a vote on TPA.

The TAA bill went down to defeat. Even Democratic members of the House that are in favor of the idea of assistance for displaced workers voted against TAA renewal. This bill, many argued, was insufficient for one reason or another. Republicans that are not fans of TAA at all had to step up and try to push it over the finish line. But it was not enough as 86 Republican and 40 Democrat yes votes lost to 303 no votes.

Once TAA was defeated, it also spelled the end to TPA. This is because the House and Senate versions of the bill have to match. The Senate authorized both TAA and TPA. Therefore, the House must also have matching legislation in place.

In a grim attempt to snatch victory from the jaws of defeat, House members then proceeded to vote—narrowly—in favor of TPA (219-212). This looked, to people not familiar with the intricacies of Congress, like a success.

But it is not. Hence, for the second time in weeks, Congress refused to show leadership on trade.

What comes next is unclear. It is possible that the House will figure out a solution to what is again being called a “procedural snafu.” Maybe sufficient members on both sides of the aisle will reconsider their votes on TAA. Perhaps the Senate will revote on TPA without TAA or with a different version of TAA that might be acceptable to the House.

Even if this can be fixed, it means that the TPP may not close as planned. Chief negotiators were expecting to meet on June 22. This—at best—now looks optimistic. The deadlines have always been perilously short.

Once the immediate crisis is resolved one way or another, it is certainly worth thinking hard about why Congress has twice voted against trade. (And against the President in spite of a full-court press the likes of which Washington has rarely seen in recent memory.)

I am on my way to Washington DC and will write another blog post once I’ve had the chance to discuss issues with trade and business experts from the ground. Perhaps only inside-the-Beltway naval gazers can make sense of what has been happening. Because much of Asia (at least) has been watching in amazement as American legislators reject what most in this region see as common sense. Cutting off your nose to spite your face does not seem a sensible policy.

***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Deborah Elms

June 8, 2015

Drawing Up Guidelines for Business in RCEP

Deborah Elms

June 8, 2015

KYOTO--The 16 countries involved in the Regional Comprehensive Economic Partnership (RCEP) are currently gathered in Kyoto. The 8th round runs all week long, as officials try to meet an announced deadline at the end of this year.

RCEP is an unusual animal in the free trade agreement (FTA) zoo. Under RCEP, the 10 countries of ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) are trying to knit together their existing FTAs into one comprehensive agreement.

This requires getting ASEAN to work together with the six dialogue partners that have existing FTAs with ASEAN (Australia, China, India, Japan, New Zealand, and South Korea). In RCEP, the ASEAN members often meet to caucus first, followed by the remaining six (in RCEP lingo—the AFPs or ASEAN Foreign Partners). Once both groups have held caucus sessions, they gather together as 16 parties for negotiations.

Like in most FTAs, the RCEP party negotiators are split into specific chapters. RCEP negotiations are under way for goods; rules of origin; customs procedures and trade facilitation; sanitary and phytosanitary (SPS) rules for agricultural products; services; investment; intellectual property rights; competition policy; economic and technical cooperation; and legal issues.

The original intention of RCEP was to sort out the problems created by having five different agreements (called ASEAN+) with sometimes differing commitments between them. The issues that need addressing can be seen clearly by businesses trying to ship goods between ASEAN and the AFPs.

For example, many goods have tariff reductions that are different across the five existing agreements. In some, tariffs may have fallen all the way to zero allowing a firm’s products to enter duty free. In other deals, the tariffs that matter to the firm have not been touched at all.

Equally (or even more) problematic for businesses, the rules of origin (ROOs) used across the five existing deals are different. Depending the product, firms may be forced to have entirely different sourcing patterns for different markets with raw materials or components from alternate suppliers to get final products to qualify for benefits under the ASEAN+ FTAs.

For some products, the ROO might be 40 percent regional value content (RVC). Put crudely, this means that a firm needs to sufficient transformation of the raw materials and components to take place inside the ASEAN member states and the dialogue partner to count for at least 40 percent of the final the value of the good.

But other ASEAN+ agreements may require a change in tariff heading instead, where the creation of a final product results in a different classification for the product relative to the raw materials or components used. Worse still, some agreements require some products to use multiple ROOs simultaneously to qualify for preferences.

In short, these sorts of rules make it difficult for firms to actually take advantage of the benefits on offer from some of the existing agreements.

RCEP could try to sort out most of these challenges that firms face in operating across the 16 member countries. However, because RCEP is not a voluntary organization, participating countries are approaching the tasks of harmonizing across agreements with different degrees of enthusiasm. In RCEP, unlike some FTAs, the parties are essentially drafted to participate by dint of having an existing deal.

Having an agreement with ASEAN, however, does not automatically mean that members are eager to extend their existing trade arrangements to other members. This is true both for ASEAN countries as well as many of the AFPs. Hence, around the table in RCEP, some members are downright hostile to further market opening while others remain relatively enthusiastic.

One area of potential scope for new efforts can be found in e-commerce. Previous FTAs did not cover this topic, which means that the members do not have to worry overly much about existing commitments. In addition, all 16 parties in RCEP have some level of interest in creating new rules to govern this space.

This is particularly true if RCEP countries approach e-commerce from the perspective of smaller firms. Small and medium sized enterprises are very active and constitute the largest share of the economy in all member states.

More important, seizing the opportunity means letting smaller firms join a larger marketplace for their goods and services. They can attach themselves to some of the biggest global enterprises in ways that were previously not possible. The e-commerce marketplace includes buying and selling to other businesses as well as consumers.

But this is an unfamiliar place for government officials in charge of trade negotiations. In many economies, the domestic rules and regulations for managing e-commerce are either undeveloped or underdeveloped. This makes it more challenging to create appropriate rules for governing e-commerce at the RCEP level.

In some of the fastest evolving sectors of the global economy, it is important that officials aim for light touch regulations. Many of the goods and services that will be provided in 5 or 10 years time cannot even be imagined now. Hemming in these types of developments could easily prove problematic for companies. Restraining the growth and participation of smaller companies could leave the markets open for further dominance of the largest global players.

Hence, officials need to think carefully about what sort of rules they want to create for the e-commerce space in RCEP. Most businesses would prefer a harmonized set of regulations, rather than a patchwork quilt of rules across 16 different countries. This is certainly better for smaller firms who will struggle to handle different requirements and rules in different RCEP marketplaces.

These rules should put in place specific policy objectives, rather than specify specific types of rules. The objectives can be met by different governments and businesses in an evolving fashion, rather than be set down in a difficult-to-amend trade agreement.

For instance, government officials are likely to be concerned about the spread of online gambling or pornography. RCEP rules could allow governments to regulate these types of activities directly. Restrictions could also be handled through the use of exceptions clauses allowed elsewhere in all trade agreements that grant governments the right to regulate in the interest of public health, morality, security and so forth. Or governments could create a policy framework that would highlight types of activities that should be constrained.

Because policymakers do not know enough, most likely, about e-commerce and its current and future potential, trying to create specific rules about what can and cannot be opened is likely to be deeply problematic. Instead, government might best support smaller firms in e-commerce by thinking broadly about their needs and crafting the RCEP agreement to better meet the issues of concern to small companies.

This requires a holistic view of e-commerce and a vision of helping smaller firms buy and sell smaller value goods or supply services of all sorts across the internet. It means ensuring that information can flow freely and that companies have access to some of the best, safest, and most secure platforms and technologies for managing their e-commerce activities. Finally, it means helping smaller firms manage cash flow issues by helping open trade financing and e-payments systems so firms can successfully get paid for their goods and services.

Creating an agreement where few have existed before is never going to be easy. But the benefits of a true regional platform could perhaps be best expressed in RCEP through bold steps in e-commerce. This would help unleash the economic potential of the small companies that make up the backbone of the economy in all RCEP members. It could be the most concrete example of where RCEP negotiations can make a difference to the Asian regional landscape. ***

On a different note, before closing, I would like to give a shout out to APEC for the APEC Business Travel Card and to the American government for finally allowing U.S. passport holders to participate. The card saved me at least 2 hours getting into Beijing and a further two hours clearing immigration in Japan. Thanks!

***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Deborah Elms

June 3, 2015

Battle #2: Getting Trade Promotion Authority (TPA) Through the House

Deborah Elms

June 3, 2015

In the ongoing saga of American efforts to show leadership on trade, the battle has moved to the House of Representatives. The House now needs to give its approval for Trade Promotion Authority (TPA).

As previous posts have noted, TPA is necessary to conclude any major trade agreement. TPA delegates authority to the White House to negotiate trade deals on behalf of Congress and subject to ongoing consultations. At the end, Congress will either pass or reject a trade agreement negotiated under its terms without amendments and with no procedural maneuvering to stop or delay the vote like filibusters or allowing the bill to die in committees.

TPA is needed most urgently for the Trans-Pacific Partnership (TPP) that is stuck on hold waiting for the Americans to sort out their domestic issues. It will also be used for ongoing trade talks with the Europeans and with different groups in global trade under the general auspices of the World Trade Organization (WTO).

TPA narrowly passed the Senate (62-37) on May 22. [Note that the Senate needed 60 votes in favor to avoid a filibuster that could have blocked consideration of the bill at all.] The Senate is considered to be the “easier” body for trade agreements, because each Senator represents an entire state with generally more diversified interests.

Dealing with the House of Representatives

The House is more problematic. Instead of two members per state like the Senate, representation in the House is based on population. This means the House is much larger (435 members) and most officials represent narrower slices of the overall electorate. While seven House members represent entire states (Alaska, Delaware, Montana, North Dakota, South Dakota, Vermont and Wyoming), California is split into 53 different districts. Population of districts varies quite a bit—from Montana with nearly a million voters to Rhode Island’s 1st district with about half as many.

In general, the House tends to be more partisan on both sides with more Republicans that lean further right and more Democrats that lean further left than the Senate. An electoral system that often pushes Senate candidates towards the center does not do the same in narrower House districts.

In the Senate, TPA largely passed with Republican support and a small number of Democrats. The House, by contrast, has a set of Republican members that have already said they will not support TPA (either because they dislike TPA or because they do not want to hand any victory to this president). The number of House Democrats that have come out in support of TPA is quite small.

The next week will involve furious lobbying by both sides with some extremely unlikely bedfellows developing.

The bill also faces some stiff procedural complications. If the House does not vote on the same bill that was approved by the Senate, the final versions of both bills have to go to a conference committee. Afterwards, members of both the Senate and the House will need to vote on the final, combined bill one more time. Given the fraught nature of trade deals, no one is particularly keen to vote twice on a trade bill at this time.

Contentious Issues

Many of the same issues are being raised in the House that nearly derailed TPA in the Senate, including issues over currency and concerns over a possible rise in drug prices post-TPP. The last concern seems particularly strange coming from the United States. After the TPP is implemented, it is very likely that the United States will have to make no changes at all (or quite modest increases) in the length of protection provided to pharmaceutical products.

In spite of strenuous negotiations, the Americans are unlikely to succeed in getting the other 11 member states to reach the farthest timelines under discussion. Hence, the differences inside the United States around patent length and the timeline needed for generic medicines to appear in the market is likely to be modest. The impact on domestic drug pricing is likely to be minimal and could, potentially, be positive as manufacturers have access to new markets overseas. [Concerns over new, longer protections could be more pressing for other members who currently have shorter timelines for intellectual property protections.]

Just like the battle in the Senate, in the House opponents are bringing in additional issues and trying to tie them to the passage of TPA legislation. Two key issues are extension of Trade Adjustment Assistance (TAA) for displaced workers and the renewal of the Ex-Im Bank.

Trade-Adjustment Assistance (TAA)

In any trade agreement, there are likely to be winners and losers. TAA is intended to help retrain workers that experience job losses directly tied to trade. Unfortunately, it is difficult to sort out whether a worker lost a job due to a trade deal or to globalization more broadly or to shifting technology or to some completely unrelated factor. Only the first type of job loss is eligible for worker training assistance under TAA funding.

In the new economy characterized by global value chains and shifting patterns of production and consumption worldwide, individuals are likely to hold many different jobs over the course of a career. These jobs may or may not even be in the same sector. As a result, to stay competitive, workers are likely to need a lifetime of training and retraining options. Training can provide people with new skills necessary for success in the future.

This type of training is likely to be necessary with or without any new trade agreements. After all, even if the United States never signs another trade deal, workers will still be faced with competition from overseas and still need upgraded skills to work with different types of technology. Jobs of the future are likely to be quite different from many today and no person—white or blue collar, well educated or not—is likely to succeed without a lifetime of increasing investment in new skills and knowledge.

Thus a battle over the appropriate levels of support for working training is one worth having, although it need not be tied to a trade agreement. Connecting the two unnecessarily burdens the latter while not giving sufficient scope to the former.

Ex-Im Bank Renewal

The other area of interest in both the House and the Senate is also tangentially connected to a trade agreement. The fight has shifted to discussions of conditions needed for renewal of the Export-Import Bank. The Bank has to be reauthorized every five years and the deadline is approaching at the end of June.

The purpose of the Bank is to provide money to firms that want to export more by either giving trade financing (especially to smaller firms) or providing a government loan guarantee (key for larger firms). It also provides insurance for overseas firms that want to buy American products. Commercial banks are often more expensive or loath to take on what they view as excessive risks (particularly in emerging or frontier markets).

The U.S. taxpayer is on the hook only when the loan recipient defaults. The record of Ex-Im since the 1930s shows that its loans contain very low risk and, in fact, the program overall puts money back into the U.S. government coffers.

A focus on shutting down the Export-Import Bank looks extremely strange viewed from Asia. The total U.S. funding for Ex-Im amounts to roughly $20 billion or 0.6 percent of the total U.S. budget. What is so odd is that the scale of this assistance is, frankly, close to microscopic. Governments in this region grasp the need for exports. Without fetishizing exports at the expense of imports, it is clear that exports create jobs at home. Exports have contributed strongly to the economic miracles in Asia that have lead to rapidly rising incomes and living standards across the region.

To continue to foster this kind of growth, Asian governments promote exports considerably more than America. In fact, it could be fairly easily argued that American companies are at a strong competitive disadvantage given the lack of trade financing and loan guarantees available relative to their competitors. Even the relatively small scale program in Ex-Im is meaningful for participating firms.

Just to take one example, Singapore has three different agencies tasked with building up and encouraging economic growth and development by getting smaller firms to scale up, helping firms find a niche in overseas markets and encouraging inward investment by some of the largest and most competitive global firms. The government gives grants, loans and tax credits to companies large and small, foreign and domestic.

Canada, Japan and China all have substantially larger entities that do many of the same things. Each dwarfs the size of the American programs. In fact, every country in the OECD (a collection of rich countries) has at least one export credit agency.

Like the fight over TAA, it might be worthwhile to engage in a sustained discussion about supporting industry—the ideal level of support, the effectiveness of programs, the best methods for doing so, etc. But the TPA ought not be torpedoed over Ex-Im Bank reauthorization.

***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***