Tag Archive for: WTO

Collective consistency is the answer to Beijing’s trade coercion

Prime Minister Anthony Albanese’s empowerment of his foreign and defence ministers, and the balancing of constructive diplomacy with military deterrence policy, have helped the government deliver a highly effective first year in international security and foreign affairs.

Another critical element in the success has been the effort towards consistency, which is a vital aspect of the way any country projects itself into the world. Consistency means allies and partners can rely on us, while adversaries know they can’t bully us into rolling over.

And while Australia and other nations further work to stabilise relations with China, maintaining consistency on key issues of principle and national interest will only become more important as Beijing senses the West’s desire for re-engagement as an opportunity to test the limits of our patience and resolve.

The consistency of rhetoric to date has been commendable. For instance, Albanese said at the G7 summit in Japan last month that Beijing had to rescind all of its coercive trade measures against Australia—a clear signal that Beijing should not expect anything in return.

As he told reporters, it was ‘important that any of the impediments to trade between China and Australia be lifted’. This mirrored remarks he made a year earlier, also in Japan, just after becoming prime minister: ‘It is China that has placed sanctions on Australia. There is no justification for doing that. And that’s why they should be removed.’

The one divergence in the approach has been Australia’s suspension of its World Trade Organization case against Beijing over its anti-dumping and countervailing duty measures on barley. This was a clear concession to Beijing, compounded by the leaked reporting that the WTO had told the two countries Australia was poised to win the case.

In this case, Australia gave up a significant card without a proportionate return. Neither Australia nor any other country will be able to point to the ruling as a demonstration of where Beijing has breached trading rules, which could have set vital limits and markers on its future behaviour.

Pulling out of the case was a judgement by those who considered it more important to smooth the improvement of the relationship by allowing Beijing to avoid a public defeat and save face.

The balancing act of trying to counter Beijing’s aggression without disrupting domestic economies has produced plenty of inconsistency globally, from Southeast Asia to Europe.

Yet even former Philippines leader Rodrigo Duterte, who was as inconsistent as leaders come, allowed the 2016 South China Sea arbitration tribunal hearing to finish and ensure future Philippine governments and regional nations had a ruling to which they could point.

Just this week, US Defense Secretary Lloyd Austin noted its significance as ‘legally binding and … final’.

That ruling, a watershed moment that remains of benefit to the region and to future generations, followed Japan’s successful WTO case that held Beijing accountable in 2014 for economic coercion over rare earths.

Without those rulings, Beijing could further claim it had not fallen foul of global institutions and international rules.

Australia’s failure to proceed with its barley case in the WTO is the trade equivalent of allowing Beijing to avoid public reputational damage on the UN Convention of the Law of the Sea.

Indeed, the Chinese Communist Party has already made hay with Australia’s decision through its mouthpiece, the Global Times, which wrote recently that the coercive measures had been ‘in line with WTO rules’. The paper said Beijing’s removal of such measures would be an ‘act of goodwill’ that should yield ‘a positive response from the Australian side’.

So where does this leave Australia? It leaves us with an opportunity to declare that the concession on barley is all we’re prepared to give and send a clear signal that we will stand our ground on issues of national interest and principle.

The fact that there is continuing speculation in Australia about what Beijing might ask for in return for lifting its coercive trade measures—whether that is a loosening of our foreign investment regime or giving our support for negotiations for China to enter the Comprehensive and Progressive Trans-Pacific Partnership—shows we have a problem.

We cannot become complacent just because of the lifting of bans on timber or some other trade restriction in isolation. Trade is an inescapable component of national and international strategy.

There is positive momentum in a collective consistency that is emerging in response to coercion. It could be seen in the joint declaration issued last week by the Five Eyes partners and Japan condemning the use of economic coercion and committing to ‘address trade-related economic coercion and non-market policies and practices, including through multilateral institutions, such as the WTO’.

This followed the OECD ministerial statement that referenced the need for ‘deterring and countering economic coercion’ and praised Japan’s G7 focus on economic security. The opportune Quad meeting on the sidelines of the G7 should also have given Albanese the sense that there is genuine solidarity among countries that want to improve collective resilience against coercion.

Australia must continue to be a part of this new wave of open societies cooperating to both call out and deter the use of economic power for coercive purposes.

If a country and economy like Australia can remain steady in the face of Beijing’s attempts to weaponise trade, and can stand alongside partners who are doing the same, Beijing will have a shrinking strategic space in which to play its coercive trade games.

Australia’s asymmetric advantages in global trade

Australia’s phenomenal resource endowment has once again seen it through a difficult period in the global economy, with supercharged commodity markets siphoning some of the stimulus spending by the world’s major economies into Australian pockets.

It was the same during the global financial crisis 12 years ago, when Australia was almost the only advanced nation to escape a recession, thanks mainly to the demand from China for Australian minerals generated by its massive budget stimulus spending.

There was a time when the global smart money considered Australia a hopeless case, dependent on digging up rocks when the future belonged to nations with their own microchip fabrication plants. During the technology boom of the late 1990s, Treasurer Peter Costello had to resist pressure to subsidise the building of one.

The key economic measure is the terms of trade, which is an index that compares the prices of exports with the prices of imports. Ever since the end of the Korean War, it had held pretty constant—rising by 15% or 20% during booms and falling by about the same amount in slumps, but always returning to a long-term average level.

In the late 1990s, it was believed that Australia faced a long-term and irreversible slide in its terms of trade as the world shifted from a material economy of things to a digital economy of information.

But for the past 16 years—since around 2005—the world has been paying ever higher prices for Australia’s resources, while the manufactured goods Australia buys from abroad have been getting cheaper. During that period, the terms of trade have been 60% above their long-term average, and right now they are about double that average. Every shipload of exports is buying about twice as many shiploads of imports as it did before 2005.

Few Australians understand the transformation of the economy that has flowed from the minerals boom. Australia’s earnings from resources and energy are now only slightly below Saudi Arabia’s earnings from oil. Australia has become the pre-eminent supplier of mineral resources to the world. It is the largest exporter of iron ore, liquefied natural gas, coal, bauxite (and alumina) and mined gold. It is the third biggest exporter of copper.

The increases in the volume of shipments have been extraordinary. Since 2004, iron ore exports have gone from 200 million tonnes to 900 million tonnes, coal exports from 220 million tonnes to 400 million tonnes, and LNG from 8 million tonnes to 80 million tonnes.

Australia’s coal industry is challenged by concerted global action on climate change, while LNG’s status as an ‘intermediate step’ along the path to greenhouse neutrality is increasingly questioned. However, industrialisation, and hence resource use, has a long way to go in a world where nearly half the population still lives on less than US$6 a day.

Australia may have a small population (ranking 55th, just below North Korea and above Taiwan), but its resources give it a disproportionate value, particularly to the major economies of Asia.

Australia has other strengths. It possesses one of the largest agricultural estates, with 62 million hectares of planted pasture, cropping and horticulture and another 290 million hectares of scrub pasture. France, by way of comparison, has 18 million hectares of arable land. About three-quarters of Australia’s agricultural production is exported.

Both Australia’s farmers and its miners operate with some of the world’s best economies of scale, deploying the latest technologies and benefiting from the strong educated workforce and institutional infrastructure that is lacking in so many otherwise resource rich nations.

Perhaps most importantly, both its mineral and agricultural commodity exports are supported by the institution of free global markets, with prices struck at arm’s length between buyers and sellers, ensuring a balance of supply and demand. With allowance for quality variations and shipping costs, all suppliers of a commodity are paid the same, which is the price needed to ensure demand is met.

It is an institution so woven into the fabric of the global economy that it is taken for granted, but the contrast is the monopolisation of commodities by either consumer or producer interests.

Oil was controlled by a cartel of Western oil companies, known as the ‘seven sisters’, which held 85% of global oil reserves and paid derisory returns to the countries where they were located until the OPEC exercised its muscle, nationalising reserves in the 1970s.

The United Fruit Company similarly supressed the returns to the host nations of its banana plantations, as did the British East India Company the returns to India and China from their tea in the 19th century.

A concerted, though ultimately unsuccessful, attempt by the Chinese state-owned company Chinalco to take over Rio Tinto in 2008–09 was motivated by the belief that if the consuming country controlled the iron ore mines, it would be able to lower the price.

Free trade is underwritten by the global trade rules of the World Trade Organization. Those rules are calculated to ensure that small countries have the same access to a fair return for their goods and services in the global trading system as large countries.

US President Donald Trump and his administration rejected the disciplines of the WTO and sought to use America’s power as the world’s largest economy to impose its will on trading partners. Its effort was aimed at China in particular, but also attacked allies in the European Union, Japan, South Korea and elsewhere. ‘The future does not belong to globalists. The future belongs to patriots,’ Trump told the United Nations in 2019.

Australia’s Prime Minister Scott Morrison echoed these sentiments a few weeks later in a speech denouncing the ‘negative globalism’ of multilateral institutions imposing their mandates through an ‘unaccountable internationalist bureaucracy’. He ordered the Department of Foreign Affairs and Trade to undertake an audit of the global institutions and rule-making processes that Australia was party to.

Although the audit report was kept secret, it defended the network of global institutions. Foreign Minister Marise Payne said the audit had ‘affirmed that multilateral organisations, especially international standard-setting bodies, create rules that are vital to Australia’s security, interests, values and prosperity’.

While a superpower like the United States can dictate its own terms to others, the presence of globally agreed frameworks provides vital insurance for smaller nations. This message has been absorbed by the Morrison government, in the wake of both the unilateralism of the Trump administration and the coercion Australia has faced from China.

Heading to the G7 meeting in the United Kingdom earlier this month, Morrison said he would be pressing for reform of the WTO’s dispute-settlement mechanism, which he sees as fundamental to resisting economic coercion from China. ‘The most practical way to address economic coercion is the restoration of the global trading body’s binding dispute settlement system. Where there are no consequences for coercive behaviour, there is little incentive for restraint,’ he said.

The WTO’s ability to deliver binding rulings in trade disputes was undermined by the Trump administration, which brought its dispute settlement to a halt by refusing to approve new appellate judges. The Biden administration is yet to shift policy or articulate what it wants, while divisions remain between the US and Europe. China’s assent will be needed for any reform.

The risk for Australia is that the global institutional infrastructure on which it relies for fair prices for its goods and services and fair access to foreign markets might fall victim to superpower rivalry and governments more focused on the short-term interests of their domestic constituencies than the global good.

Who will save the WTO?

The World Trade Organization is heading towards an end-of-year train wreck. Next weekend’s G20 leaders’ summit is now one of the last opportunities to switch the points to a safer track.

The United States appears determined to shut down the ultimate WTO body for settling trade disputes, which would jeopardise the organisation’s ability to set law for the conduct of global trade.

In the absence of globally accepted rules, the terms of international commerce would be set by the exercise of power. It would be a much harsher world for mid-sized nations like Australia and would raise the risks of global conflict.

The long-time US secretary of state during the late 1930s and 1940s, Cordell Hull, pressed the case for a post-war, rules-based global trading order, arguing that ‘unhampered trade dovetail[s] with peace; high tariffs, trade barriers, and unfair competition, with war’.

The 1947 General Agreement on Tariffs and Trade laid the foundations that the WTO, established in 1995, built upon to provide a more formal institutional framework for negotiating trade agreements, establishing consistent and transparent rules and adjudicating disputes. Trade rose from 40% of global GDP to a peak of 60% in the 20 years after the WTO’s formation.

Six months from now, the WTO has a date with destiny. On 10 December, the terms of two of the three remaining judges on the WTO’s appellate body expire. The WTO treaty requires a minimum of three judges, so unless something happens before then, it will no longer be able to hear disputes.

The US has been blocking the appointment of replacement judges since the beginning of last year. This has already led to four unfilled vacancies on what the treaty sets as a seven-member panel.

The US believes the appellate body, which has churned out a large volume of jurisprudence governing global trade, has over-reached in a number of its decisions. The US is concerned that the WTO contains no legislative mechanism for over-riding appellate decisions.

Although the US has won more cases than it has lost, the appellate body has consistently rejected the US method for calculating punitive tariffs on steel and aluminium imports. Some see the hand of the US steel and aluminium industry behind the Trump administration’s aggressive approach on trade; both commerce secretary Wilbur Ross and trade representative Robert Lighthizer had strong links with these industries before gaining office.

To restrict steel and aluminium imports from Europe, Japan and Korea, Washington controversially deployed a rarely used provision in the WTO treaty that allows countries to raise trade barriers if they believe their national security is threatened. The US has threatened to do the same on motor vehicles.

While the US has been the aggressor in the assault on global trade rules, it has been far from alone. The WTO was in trouble long before the election of Donald Trump. Repeated efforts to renegotiate the treaty have failed because the consensus required for WTO decisions is no longer attainable.

When the global financial crisis struck in 2008, there was a clear risk that countries would resort to protectionism to defend their domestic businesses. With the knowledge of how destructive this response was following the Great Depression in the 1930s, the G20 nations made a commitment to foreswear raising trade barriers.

However, G20 nations have, since 2009, imposed around 20,000 policy measures affecting the relative competitiveness of their domestic industries with imports, according to analysis by the Global Trade Alert, which is produced by the Centre for Economic Policy Research.

The report estimates that more than 70% of world exports now compete in markets with trade distortions that were not present when the global financial crisis began.

The G20 formally abandoned its pledge to eschew protectionism at the Buenos Aires summit last December after the US refused to sign any communiqué that included it. Since then, G20 nations have imposed 288 protectionist measures affecting about US$1.2 trillion of trade, of which the US–Chinese trade war accounts for only about a sixth.

The Global Trade Alert argues the WTO’s dispute settlement mechanism was falling into disuse before the Trump administration brought things to a head. The number of cases brought for adjudication annually has hovered between 10 and 20 for most of the past decade, despite growth in trade volumes and the rising resort to protectionism.

The US appears uninterested in proposals to reform the WTO and has made no proposals of its own. The appeals body is only one of its complaints about the organisation. It is also strongly opposed to countries having the ability to designate themselves as ‘developing countries’, entitling them to higher tariffs and greater use of subsidies than otherwise. It believes the WTO rules don’t capture the full range of subsidies offered by nations like China. There’s also concern that the WTO has failed to grapple with the challenges posed by digital trade.

The US rejected a reform proposal from the European Union, which also had the support of Australia, Canada, China, Iceland, India, Korea, Mexico, New Zealand, Norway, Singapore and Switzerland.

A meeting of G20 trade ministers in Japan earlier this month made no headway. Developed countries opposed proposals for a formal and graduated method for designating developing country status. And the US blocked any mention in the communiqué of protectionism, unilateral measures or the crisis in the WTO appellate body, while China vetoed any mention of unfair subsidies.

Another effort will be made at the G20 summit in Osaka. Indonesia has flagged it will present a fresh proposal at the weekend meeting which would include a path forward, with or without the support of the US. People who have seen the Indonesian proposal consider it has the potential to achieve a breakthrough, which would be a triumph for a nation that has long preferred the sidelines to the centre of the world stage.

The Indonesian proposal reflects its concern that the US and China will do a bilateral deal that ignores WTO rules and damages the trade interests of everyone else. All but the super powers have much to fear from a trade world in which it is each for themselves, and the devil take the hindmost.

Can trade agreements be a friend to labour?

Labour advocates have long complained that international trade agreements are driven by corporate agendas and pay little attention to the interests of working people. The preamble of the World Trade Organization agreement mentions the objective of ‘full employment’, but otherwise labour standards remain outside the scope of the multilateral trade regime. The only exception is a clause, left over from the 1947 General Agreement on Tariffs and Trade (the precursor to the WTO), which permits governments to restrict imports that are produced with prison labour.

Regional trade agreements, by contrast, have long taken labour standards aboard. The linkage in these agreements between preferential market access and adherence to core labour rights has become increasingly explicit. In the original North American Free Trade Agreement, signed in 1992, labour standards were shunted to a side agreement. Since then, US trade agreements have typically included a labour chapter.

According to its proponents, the Trans-Pacific Partnership would have required Vietnam, Malaysia and Brunei to improve their labour practices significantly—and Vietnam to recognise independent trade unions. And US President Donald Trump’s administration claims that its revamped agreement with Mexico contains the strongest labour provisions of any trade agreement.

Developing countries have generally resisted inclusion of labour standards in trade agreements for fear that advanced countries will abuse such provisions for protectionist purposes. This fear can be justified when the requirements go beyond core labour rights and make specific wage and other material demands. For example, the new US–Mexico agreement requires that 40–45% of a car be made by workers earning at least US$16 per hour.

Auto companies can certainly afford to pay higher wages and this provision on its own may not undermine employment prospects in Mexico. But it is not an altogether salutary precedent either, insofar as it sets an unrealistic wage floor—many multiples higher than the average for the Mexican manufacturing sector as a whole.

On the other hand, developing countries have little reason to reject labour standards that address bargaining asymmetries in the workplace and fundamental human rights. Core labour standards such as freedom of association, collective bargaining rights and prohibition of compulsory labour are not costly to economic development; in fact, they are essential to it.

In practice, the problem with trade agreements’ labour provisions is not that they are too restrictive for developing countries; it is that they may remain largely cosmetic, with little practical effect. A key concern is enforcement. For one thing, charges of labour-rights violations can be brought only by governments, not by trade unions or human rights organisations. By contrast, investment disputes can be launched by corporations themselves.

Critics rightly worry that governments that are not particularly friendly to labour causes will not be keen to follow through. To date, there has been only a single instance of labour rights being pursued under a trade agreement’s dispute settlement procedures, and the outcome is hardly encouraging.

Following two years of complaints by US and Guatemalan trade unions, the US government formally launched a case against Guatemala in 2010. When a final decision was announced in 2017, nearly a decade after the initial grievances were aired, the arbitration panel decided against the US, but not because Guatemala lived up to its labour rights obligations under its own laws. The panel did find violations of Guatemalan labour laws. For example, court orders against employers who had dismissed workers for engaging in union activities were not enforced. But it ruled that such violations did not have an effect on Guatemala’s competitive advantage and exports, and therefore were not covered by the trade agreement.

There are two reasons to care about labour standards. First, we may have a humanitarian desire to improve working conditions everywhere. In this case, we should have equal regard for workers in the domestic economy and those employed in export industries. Focusing on the latter may even backfire, by deepening dualistic labour-market structures.

In principle, we could expand enforceable labour clauses in trade agreements to cover working conditions in the entire economy. But it seems odd to have the linkage in the first place: why should labour rights be left to trade negotiators and the commercial interests sitting around the table, and remain hostage to negotiations couched in terms of market access?

If we are serious about improving working conditions everywhere, we should resort to experts on human rights, labour markets and development, and raise the profile of the International Labour Organization instead. The objectives of both domestic labour unions and international human rights advocates are served better through other means.

One argument for linkage with trade is that it gives countries a real incentive to reform labour-market practices. But foreign aid agencies have long experience with conditionality, and they know that it is effective only under special conditions. The desire for change must come from within the country and be demonstrated by prior actions. Achieving reform by threatening to suspend material benefits—aid or market access—is unlikely to work.

Alternatively, the concern about labour standards may be narrower: upholding working conditions at home and preventing a race to the bottom. In this case, we should seek domestic remedies, as with safeguards against import surges. What is required is a mechanism against ‘social dumping’ that prevents poor labour practices in exporting countries from spilling over to the importing country.

Such a scheme, if poorly designed, might deliver excessive protectionism. Yet even the overtly protectionist anti-dumping measures allowed under existing trade rules have not been overly damaging to trade, while providing a release valve for political pressure. A well-designed safeguard against social dumping should do no worse.

Labour rights are too important to leave to trade negotiators alone. To date, labour clauses in trade agreements have remained a fig leaf, neither raising labour standards abroad nor protecting them at home. Real change would require a significantly different approach. We can start by treating labour rights as being on a par with commercial interests, rather than being an adjunct to them.