” New Economic Pattern, New Multilateralism” – This is the topic addressed by IMF Managing Director christine lagarde at the joint annual meeting of IMF and World Bank ( WBG ) on October 11, 2018. She sighs with emotion: in the past 70 years, global economic and trade cooperation has promoted unprecedented economic growth and prosperity, but now the principles and systems on which it is based have been strongly resisted and face major challenges. She estimated that the current escalation of trade tensions could cut global GDP by nearly 1% in the next two years. Lagarde called for easing these disputes, and for this reason must reform and work together to repair rather than destroy the global trading system.
At the same meeting, the IMF released a new issue of the Global Economic Outlook report, reducing the global growth rate from 2018 to 2019 by 0.2 percentage points to 3.7% from the previous 3.9%. The report believes that increased trade tensions and the possible weakening of the rules-based multilateral trading system are major threats to the global economy, which will lead to financial market turmoil and eventually slow down investment and trade. The global supply chain will be destroyed by the increase of trade barriers, which will hinder the spread of new technologies and eventually lead to a decline in global productivity and welfare. The latest data provided by IMF show that global trade, manufacturing and investment have shown signs of weakening.
The rule-based global governance structure is facing unprecedented threats and challenges. It is no exaggeration to say that the global trading system is in danger of entering the ” Warring States Period”. In order to safeguard and expand the benefits of trade integration in the past few decades, all countries must cooperate and resolve their differences as far as possible without increasing distorting trade barriers. Otherwise, the bitter fruits of the decline in global productivity and welfare will be tasted by all.
U.S. Trade Policy Changed
The United States has launched a rare trade war by imposing import duties and launching the ” 301 investigation”. China’s Passive Response. However, the trade war launched by the United States is not only aimed at China, but also includes Europe and Japan. It reflects the fundamental change in the global trade policy of the United States, that is, reflecting on globalization, questioning free trade and emphasizing fair trade. After Trump came to power, he first withdrew from the TPP ( Trans – Pacific Partnership Agreement ) and instead focused on bilateral negotiations. He even threatened Canada and Mexico to withdraw from the North American Free Trade Agreement ( NAFTA ), regardless of their long-term special relationship, which reflects this policy change.
In order to discuss the root causes and effects of this policy change, we must first clarify two basic facts:
Fact 1: Trade Is Not the Main Cause of Job Decline in U.S. Manufacturing Industry.
The decline in manufacturing jobs in the United States is not a recent occurrence. It has started since the 1960s ( when international trade was not yet well developed ) and continues to this day. In particular, the decline in manufacturing jobs is not unique to the United States, which is the case in most developed industrial countries. Even Germany, Italy and Japan, which are major surplus countries in manufacturing, are no exception. This fully shows that the decline in manufacturing jobs in the United States has a limited relationship with trade. Otherwise, why do manufacturing jobs decline in surplus countries?
Then, why have manufacturing jobs declined in major industrial countries? Two major factors: First, due to scientific and technological progress, labor productivity has increased significantly; Second, the demand for manufacturing products is relatively insufficient. Robert Lawrence, a famous American trade expert and Harvard professor, has fully demonstrated this point.
Therefore, even if the United States has no trade deficit, even if the United States is a surplus country like Germany, its manufacturing jobs will also decline. At present, in the United States has reached the state of full employment in fact, trying to improve employment through trade policies is an impossible task.
Fact 2: The root of the US trade deficit lies in the US.
Economic theories show that, in the long run, a country’s trade balance is related to its savings gap ( the difference between savings and investment ): if savings are greater than investment, a trade surplus will occur, otherwise, there will be a trade deficit. Since the mid – 1970s, US savings have been consistently lower than investment, resulting in a long-term trade deficit.
Japan – US trade is a prominent case. Due to Japan’s large trade surplus with the United States, the United States forced a sharp appreciation of the yen through the Plaza Accord in 1985, which failed to solve the problem. Volcker wrote in his book ” Changes in Times” ( translated by Yu Jie and published by CITIC Publishing House in October 2016 ) with Xing Tianfeng: ” One of the ironies I have experienced recorded in this book is that since the repeated depreciation of the US dollar in 1971, the US trade and current account deficit has been much higher than imagined in the 1960s when it fell 60% against Japan and 53% against the German mark. On the contrary, among some major industrialized countries, those with strong exchange rate appreciation have higher savings, stronger productivity, more competitive industries and, finally, the strongest trade balance. ”
The author predicts that during trump’s administration, the U.S. trade deficit will continue ( it is difficult to change because savings are less than investment ) and may increase further ( tax cuts and increased infrastructure investment will increase the fiscal deficit, with the result of widening the savings gap and leading to a larger trade deficit ); At the same time, the share of manufacturing employment in the United States may decline further ( due to the constant trend of technological progress and declining demand for manufacturing products ). Based on the above forecast, the possibility of long-term trade disputes cannot be ruled out.
Globalization and free trade, once seen as a manifestation of U.S. leadership, have suddenly turned into objects strongly opposed and challenged by the Trump administration, indicating that major changes are taking place in the global economic and political landscape. This is an economic and trade relationship and a political game. In this regard, we should have a clear understanding and formulate long-term strategies.
Impact on Asset Prices
Since the beginning of 2018, the United States has imposed tariffs on solar panels, washing machines, steel, aluminum and 250 billion U.S. dollars of Chinese products imported from many countries, and the other side has retaliated accordingly. Apart from China, the trade friction between the United States and its allies is also quite sharp, involving Canada, Mexico, the European Union, Japan and South Korea. Although the United States, Mexico and Canada completed the renegotiation of NAFTA at the end of September and the US – South Korea FTA was signed in early October, the negotiations between the United States and the European Union, Japan, Britain and India have just started, and there is still considerable uncertainty in the negotiations with China.
Affected by trade tensions, global trade volume and industrial production both began to slow down after experiencing rapid growth in 2017. The IMF recently lowered its global GDP growth forecast to 3.7% from 3.9% for 2018 – 2019. Among them, the GDP growth rate of the United States and China in 2019 is 0.4 percentage points lower than that of 2018. However, due to the influence of the base number, the United States is 13.8% lower than that of 2.9% in 2018, while China is 6.1%.
With the escalation of the trade war, the volatility of various asset prices has increased significantly, with obvious differentiation, no matter whether it is stocks, bonds, currencies or commodities.
In the stock market, the United States performed better, while Europe and Asia generally fell. In the bond market, with the exception of China, almost all bond markets are falling, while emerging markets and long-term U.S. treasury bonds are leading the decline. In the exchange rate market, only a handful of currencies rose against the US dollar, with Argentina peso ( – 53.4% ) and Turkish lira ( – 38.5% ) falling the most. The general decline in commodities shows that the market is more worried about the uncertainty of the future global economic trend.
What is striking is that gold has lost its function as a hedge tool in the face of increasing uncertainties. Gold prices have dropped 4.9% this year, mainly due to the rise in US interest rates and the appreciation of the US dollar. Perhaps a small part of this is also related to the decline in demand in China and India. Gold does not have interest, the Federal Reserve raises interest rates to reduce the attractiveness of gold. The appreciation of the US dollar and the pricing of gold in US dollars have made it more expensive to buy gold in currencies of other countries.
U.S. Consumer Price Index ( CPI ) rose 2.7% and 2.3% year-on-year in August and September respectively. Core CPI excluding food and energy rose 2.2% year-on-year and exceeded the target of 2%. In addition to the strong job market, the minutes of the Federal Reserve meeting on October 18 have released the expectation of continuing to raise interest rates in December. The US dollar may remain strong for some time.
Perspective of NAFTA Negotiations
The renegotiation of NAFTA made significant progress on the night of September 30, 2018 Eastern Time. The United States and Canada reached an agreement at the last minute before the deadline, thus ending a nearly 14 – month deadlock.
The renegotiation of NAFTA was initiated at the earliest, and the focus and conflict are also very obvious. From this, we can see Trump’s negotiation strategy and focus. After the agreement was reached, the United States also claimed that NAFTA renegotiation would be regarded as a ” model” for other trade negotiations in the future. Therefore, a careful study of the process and content of NAFTA renegotiation may provide reference for Sino – US trade negotiations and possible future WTO reforms or renegotiations.
Trump’s withdrawal from TPP soon facilitated the renegotiation of NAFTA on August 16, 2017. The drama of this round of negotiations lies in the fact that until a few days before the agreement was reached, there was no unanimous expectation. The author observes that three factors may have played an important role: first, Mexico has made considerable concessions before August, which is undoubtedly very attractive to Canada; The second is Trump’s emphasis on the mid-term elections and his worries about the parliamentary vote after the election, and his determination to reach an agreement by the deadline of the end of September. Third, Canada’s dependence on U.S. trade exports is quite large and it is difficult to bear the negative impact of the breakdown of negotiations. Both sides made relatively big concessions at the last moment. Key concessions include: in Canada, opening up the dairy market; In the United States, it is a special court that retains the original NAFTA, allowing one member to challenge trade barriers imposed by other members.
The core of the negotiations involves several important aspects, including improving working conditions, rules of origin, dispute settlement mechanism, sunset clause, agricultural product opening and tariff exemption. The automobile industry is the focus, as it concerns all the original 25 sections of NAFTA.
First, look at the working conditions. Labor conditions are rarely included in a trade agreement. There is no such thing as NAFTA in the WTO, because it is usually regarded as having nothing to do with trade. However, the United States insists that its aim is to return jobs and to win Democratic votes.
To this end, the United States requires 40% of a car to be produced by workers with an average minimum wage of $ 16 an hour. We should also strengthen labor protection. If wages are raised and labor protection is strengthened, the cost of Mexico’s automobile industry will be greatly increased. At present, the hourly wage of Mexican auto assembly workers is US $ 8, while some parts manufacturers only have US $ 4. In these areas, the United States has an advantage. Mexico thinks that the 40% ratio is too high, and has suggested reducing it to 20% to allow enterprises more time to adapt and adjust.
Look at the rules of origin. In the original NAFTA agreement, 62.5% of a car was required to be manufactured in North America. U.S. proposal to increase to 75%, and core parts including engines, gearboxes and batteries must come from North America. This is good for the United States. But Mexico thinks it should not be higher than 70%.
Dispute settlement and arbitration mechanism. Under the existing mechanism ( i.e. ISDS, Investor – State Dispute Settlement ), enterprises can sue a government and an international arbitration panel will decide. The United States tried to cancel it in order to restrict Canadian and Mexican enterprises’ access to U.S. government procurement, while Canada and Mexico preferred to retain the clause. The final result is that the mechanism has been retained, but its binding force has been greatly reduced. In addition, the special court under the original NAFTA agreement was retained to allow members to challenge tariff or non-tariff trade barriers imposed by other members – the result of Canada’s continued efforts under U.S. pressure until the final stage.
Sunset clause. The sunset clause has been added, but the renewal period has been extended from the original motion. The clause was added at the request of the United States, meaning that it will expire naturally in a few years unless renewed at that time. The United States is trying to increase its influence through this move, while Canada and Mexico are both strongly opposed due to concerns about future uncertainty. The United States initially proposed that the expiration date should be 5 years if not renewed, and the final agreement should be increased to 16 years. At the same time, the three countries should hold talks every 6 years to decide whether to renew the agreement.
The agricultural market is open. Data from the US Department of Agriculture show that in 2017, US exports of milk, cheese and other dairy products to Canada were worth 637 million US dollars, with a surplus of 418 million US dollars. At least since 2010, there has been a surplus every year. Even so, the United States still accuses Canada of unfair trade because Canada’s dairy market has a complicated ” supply management” system. The government sets the price and output of products, has a ceiling on the quantity of imported products, and imposes a tariff of more than 200% on the excess.
Treatment of tariffs already imposed and likely to be imposed in the future. The tariffs imposed by the United States on steel and aluminum imported from Canada in June were not immediately cancelled due to successful negotiations and will be dealt with separately in the future. The United States has claimed to impose tariffs on motor vehicles and their parts imported from other countries. One of the conditions of this negotiation is that Canada and Mexico will be exempted.
The main purpose of the US renegotiation of NAFTA is to bring manufacturing back to the US. Both the rules of origin and the improvement of working conditions have this effect. Even if it is possible to raise costs and reduce the overall competitiveness of the North American automobile industry, it will not hesitate. In addition, there is a strong tendency to limit foreign companies’ access to U.S. government procurement by weakening the provisions for companies to sue the government, and to add sunset provisions to maintain ” deterrence.”
In the NAFTA negotiations, trump adopted the strategy of ” divide and rule, divide and conquer”, i.e. negotiating separately with Canada and Mexico to make them compete with each other in order to obtain the most favorable result for himself.
The U.S. negotiation strategy seems to be gradually clear: first, talk with Mexico and Canada; Talk with Japan and Europe again; India and Britain followed. Finally, China. The abacus is: once we talk about Mexico, we will have a good talk with Canada. When we talk about other economies, we can talk with China. It is more difficult for China to deal with, and it will be discussed at the end.
So, what strategy should China take? First, strengthen interaction with economies other than the United States. On the one hand, we should speed up the existing trade negotiation process, and at the same time we should start new negotiations in due course. Second, there is always talk with the United States. We need to be prepared, when to talk, under what conditions, what to talk about, where the bottom line is, what concessions can be made, what requirements to ask the other side, and think clearly ahead of time. Third, the WTO reform and the trend of the global trading system are related to China’s future and need to be planned as soon as possible and take the initiative.
In this round of trade friction, the United States was accused of openly violating WTO rules and provoking a trade war. The United States, on the other hand, claimed that EU, China, Canada, Turkey and Mexico’s tariff retaliation was an infringement of WTO principles. While vowing to defend the WTO as a multilateral trading system, China, EU, Canada, etc. have also recognized the need for fundamental reform of the WTO to adapt to changes in the situation.
The role of WTO is both important and embarrassing. Importantly, WTO has 164 contracting members, and the rules are binding on all members. Its trade dispute settlement mechanism is very effective although it takes a long time. Since the establishment of WTO, more than 500 cases have been accepted, of which more than 200 have been adjudicated, covering almost all WTO agreements, with far-reaching implications.
However, in the face of the escalating trade war, the WTO can only sit on the sidelines and do nothing, highlighting the embarrassment of this most important multilateral organization. The main body of the WTO is the contracting members, and the members negotiate with each other. The WTO only provides a negotiation platform and does not comment on and actively restrict the behavior of the contracting members unless the members appeal. In terms of rule – making, since the Doha negotiations were launched in 2001, no significant progress has been made, which is disappointing. As a result, the WTO itself has been weakened ( see Table 1 ).
WTO Doha negotiations have been going on for many years. Why is it so difficult to make progress? One of the reasons is that WTO follows the principle of ” Single Undertaking”, that is, there will be no agreement unless all members agree. The initial goals of Doha negotiations are ambitious: to reduce agricultural barriers and subsidies, to reduce tax rates in developed countries, and to promote trade facilitation. The 164 members are very different from each other. It is extremely difficult to reach full agreement.
Second, the situation has changed greatly since the Doha negotiations were launched. When the negotiations started in 2001, one of the original intentions was to help developing countries to cut tariffs and barriers in developed economies more, because at that time, developing countries experienced 20 years of low growth and were in difficult circumstances. However, with the passage of time, developing countries experienced unprecedented high growth, while developed economies slowed down their growth and then fell into crisis in 2008.
Third, the Doha negotiations also attempted to make progress in the transparency of competition policy, investment and government procurement, but were soon abandoned at Cancun in 2003 due to lack of consensus. Some countries, such as India, strongly oppose the inclusion of new topics before the Doha negotiations are completed, further leading to deadlock.
In my opinion, the WTO Doha negotiations are dead. It is very important not to expect to continue as planned and to change or add new topics to the negotiations. New topics may include investment, making e-commerce transaction rules and trade facilitation.
The way of negotiation must be changed. 164 WTO members have very different demands and it is difficult to reach a consensus. Partial negotiations can be held on certain topics, limited to interested members, to increase the probability of success. Other members may apply for membership at any time after the negotiation is completed.
The function of WTO should be strengthened. In addition to organizing negotiations and providing dispute settlement mechanisms, WTO, as an organization, should give it the power to maintain order. If only members are allowed to argue with each other, or even resort to the tariff baton directly without going through WTO procedures, it is very likely to get out of control.
How to improve the efficiency of the dispute settlement mechanism is also a big problem. A case often takes three years or even more before it is decided. After the decision is made, it may not even be complied with by the members. Some cases have been delayed for more than ten years and still have not been finally settled, which is a headache. It is also an international economic organization, but compared with the International Monetary Fund and the World Bank, the shortage of staff and funds in WTO is a big problem, which affects the efficiency.
Attaches great importance to the appointment of judges of the WTO Appellate Body and maintains the WTO dispute settlement mechanism. As more and more members of the Appellate Body leave office, the appointment process for new members must be adopted as soon as possible, otherwise the dispute settlement mechanism may be paralyzed. Due to the Trump administration’s obstruction of the appointment of the current candidate, the WTO dispute settlement mechanism will be destroyed by December 2019 at the latest. At that time, the number of members of the appellate body will be less than the minimum number of 3 to hear the lawsuit.
Canada and the European Union have put forward specific proposals on how to reform and strengthen the WTO. China should put forward its own ideas on this issue as soon as possible and actively participate in it.
WTO is a multilateral trading system, in addition to regional and bilateral trade arrangements. Free trade zones, customs unions, common markets and bilateral investment agreements are all important elements. A country’s trade status in the world depends more and more on the signing of regional or bilateral trade agreements ( RTAs ). As of October 2018, China has signed 16 FTAs with 24 countries and regions. A preferential trade arrangement ( Asia Pacific Trade Agreement ) has been established. Negotiations on 13 free trade zones are under way; At the same time, 10 free trade zones have been brought into the research field of vision. We should speed up the negotiation of the Regional Comprehensive Economic Partnership Agreement ( RCEP ). Actively contact and join the comprehensive and progressive trans-pacific partnership agreement ( CPTPP ) when conditions are ripe. Start trade negotiations with EU and UK in due course ( see Table 1 ).
We will continue to push forward reform and opening up, strengthen the protection of intellectual property rights, relax market access, improve the investment environment, and reduce state subsidies and government intervention. This is the need of our own development and also helps to enhance our authority and voice in the world. In addition, China’s accession to the WTO will have reached 15 years in 2016, but so far it has not gained market economy status. China has filed a lawsuit with WTO. Strengthening credibility through the above measures will increase the probability of winning. Leading globalization and free trade through reform and opening up will also help China to realize trade and economic transformation. Recent and upcoming policies in these areas reflect this direction.