Global Trade and Trade Governance During De-Globalization: Transforming Trade Policy for Not-So-United World (International Political Economy Series) 3031137566, 9783031137563

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Global Trade and Trade Governance During De-Globalization Transforming Trade Policy for Not-So-United World Edited by Anna Karhu · Eini Haaja

International Political Economy Series

Series Editor Timothy M. Shaw , Emeritus Professor, University of Massachusetts Boston and University of London, Boston, MA, USA

The global political economy is in flux as a series of cumulative crises impacts its organization and governance. The IPE series has tracked its development in both analysis and structure over the last three decades. It has always had a concentration on the global South. Now the South increasingly challenges the North as the centre of development, also reflected in a growing number of submissions and publications on indebted Eurozone economies in Southern Europe. An indispensable resource for scholars and researchers, the series examines a variety of capitalisms and connections by focusing on emerging economies, companies and sectors, debates and policies. It informs diverse policy communities as the established trans-Atlantic North declines and ‘the rest’, especially the BRICS, rise. NOW INDEXED ON SCOPUS!

Anna Karhu · Eini Haaja Editors

Global Trade and Trade Governance During De-Globalization Transforming Trade Policy for Not-So-United World

Editors Anna Karhu University of Turku Turku, Finland

Eini Haaja Rehtoripellonkatu 3 University of Turku Turku, Finland

ISSN 2662-2483 ISSN 2662-2491 (electronic) International Political Economy Series ISBN 978-3-031-13756-3 ISBN 978-3-031-13757-0 (eBook) https://doi.org/10.1007/978-3-031-13757-0 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: © Rob Friedman/iStockphoto.com This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Foreword

The world economy has experienced several major upheavals in this millennium. For example, the center for gravity of the global economy has shifted from the West to Asia, and China has become the world’s largest economy in terms of purchasing power parity. Although global trade and foreign direct investment have multiplied over the past two decades, the trade wars and the paralysis of the WTO Dispute Settlement Body suggest that the golden age of globalization seems to be over and the regionalization of global trade, that is, regional trade blocs, may lie ahead. The coronavirus pandemic and the ensuing concern about the functioning of logistical chains have strengthened a new world order with regional trade blocs. Similarly, the escalation of the war in Ukraine due to Russia’s invasion in February 2022 has not only shaken European security structures but has also raised the prices of energy, wheat, and other commodities, while slowing down the growth of the world economy by one percentage point in 2022. As the global economy and global business change, so will trade policy. Because of the above, this book is extremely timely. The book is divided into three main parts. The first part deals with the development of global trade and trade governance. At the beginning of the first part, research managers Anna Karhu and Eini Haaja from the Pan-European Institute at the University of Turku, Finland examine previous research on trade policy. Their article underlines the significance that international v

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business scholars may have in the creation of new knowledge related to policymaking. In the second article, Professor Juhana Aunesluoma discusses how economic crises and geopolitical conflicts have shaped global trade policy regimes. Aunesluoma analyses how the classical free trade system of the late nineteenth and early twentieth centuries disintegrated, how protectionism strengthened between the World Wars—especially during the Great Depression—and how free trade began to strengthen again with the introduction of the General Agreement on Tariffs and Trade (GATT) after World War II. He closes with an assessment of the impact of the global financial crisis and geopolitical tensions in the 2010s on the world trading system. The second part of the book discusses the disruptions to global trade. It begins with a description of the World Trade Organization (WTO) and its role in a changing geopolitical environment. American researcher Sandra Polaski’s study on the WTO is divided into five sections : (1) the birth of the WTO, (2) the contested WTO in developing countries, (3) China’s WTO accession and its consequences, (4) the impact of the strategic rivalry between the USA and China on the WTO, and (5) possible future paths for the WTO. Next, the book presents an essay by Russian Professor Vladimir Zuev on regional trade agreements. Professor Zuev starts with the concepts of regionalism and regional integration as they influence regional trade agreements. Zuev discusses the importance of regional trade agreements or even mega-regional trade agreements in a multilateral trading system. After Professor Zuev’s article on regional trade agreements, the book devolves to global value chains (GVCs). Professor Ari Van Assche explains in his article how traditional trade policies have been challenged by GVCs. He discusses how GVCs have raised the importance of the trifecta, namely tasks (value chain stages), linkages, and firms. Before his concluding observations, Van Assche moves on to analyse how the aforementioned trifecta has influenced four trade policy narratives: (1) the GVC participation narrative, (2) the GVC resilience narrative, (3) the value capture narrative, and (4) the sustainability narrative. The book then moves into an analysis of USA –China trade relations. Three professors, namely K. C. Fung, Nathalie Aminian, and Chris Y. Tung, examine the current USA–China trade war from the perspective of the earlier USA–Japan trade conflicts. This academic team focuses on three US complaints: (1) the bilateral trade

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deficit of the USA, (2) “unique” business entities in China, and (3) China’s exchange rate manipulation. The authors relay a sense of déjà vu when comparing the USA’s current trade policy towards China and earlier policy towards Japan. Moreover, these three scholars discuss whether the trade policy can be regarded as one element of larger technological competition between the USA and China for global economic and political dominance. After analysing USA–China trade relations, the book delves into an investigation of Britain’s post-Brexit trade policy and its impact on the British economy. This research subject is of the utmost importance politically and economically, as Great Britain is the first country to leave the European Union. In his article, Professor Pervez Ghauri investigates postBrexit UK trade relationships and their impact on the British economy. This British professor addresses the following three research questions: (1) What are the consequences of post-Brexit British trade policies on British businesses and consumers? (2) What are the most vulnerable sectors in a post-Brexit Britain, and how they are affected? and (3) How can UK negotiators influence the outcome of the UK’s trade negotiations with non-EU countries? The book then moves from the regional trade view to the perspective of small states, when Latvian researcher Sandis Šr¯aders deals with trade policy challenges from the perspective of small and open economies. Šr¯aders analyses how Iceland and Latvia have coped with the global financial crisis. His article describes how Iceland, with a population of just over 0.3 million people, and Latvia, with less than two million citizens, reacted to the global financial crisis in different ways. In the third part of the book, the focus shifts from the present to the future. At the beginning of the third part, Professor Jale Tosun and his colleague Christin Heinz-Fischer evaluate how the sustainable development goals of the European Union have been reflected in the EU’s trade agreements. The authors explore whether there are differences in the EU’s trade agreements with advanced economies and developing and transition countries. They investigate 12 trade agreements concluded between the EU and its trade partners, including Canada, Colombia, Ecuador, Georgia, Japan, Mexico, Moldova, Peru, Singapore, South Korea, Ukraine, and Vietnam. The EU aims to leverage trade policy in support of sustainable development objectives in response to the need to reassure EU citizens that

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imported goods and raw materials are not undermining EU standards and values or broader sustainable development objectives. In her article, Professor Louise Curran focuses on how concerns on the sustainability of trade are being integrated into trade policy at the EU level. Following this, Professor Toni Ahlqvist discusses how megatrends could be utilized in the context of trade policy. Ahlqvist analyses how the contextual notion of the megatrend is utilized in the European Commission’s efforts to characterize an open, sustainable, and assertive trade policy. At the end of the third part, the editors of this book, Eini Haaja, and Anna Karhu, summarize the main findings of the book. They observe that rising protectionism, disruptions, and non-unity between nations have challenged the achievements of globalization and the global institutions and have put them to a major test, whose results we may experience in the forthcoming years. Here, I would like to express my sincere gratitude to the Confederation of Finnish Industries EK and its special fund (TT-säätiö) for their financial support, since without a major grant the Pan-European Institute could not have executed this three-year project with the aim of strengthening trade policy knowledge in Finland. I would like to extend my gratitude to two individuals, Ambassador Matti Anttonen and the EU Commissioner Jutta Urpilainen’s Cabinet Head Taneli Lahti, who masterminded this project in 2019. Some earlier results of the project have already been published in our special issue on trade policy.1 Kari Liuhto Professor, Director of the Pan-European Institute University of Turku Turku, Finland

1 You may find the special issue of the Baltic Rim Economies (BRE) review at https:// sites.utu.fi/bre/wp-content/uploads/sites/227/2020/05/BRE_2_2020-vol7.pdf.

Contents

Part I Development of Global Trade and Trade Governance 1

Lessons from Trade Policy Research Anna Karhu and Eini Haaja

2

Global Trade Policy Regimes and Previous Crises Juhana Aunesluoma

3 19

Part II Disruptions of Global Trade 33

3

WTO in a Changing Geopolitical Environment Sandra Polaski

4

Regional Trade Agreements: A Hope or a Threat to the Global Trade? Vladimir Zuev

51

How Do Global Value Chains Challenge Traditional International Business Policy? Ari Van Assche

69

5

6

The US–China Relations and Trade Policy K. C. Fung, Nathalie Aminian, and Chris Y. Tung

85

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x

7

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CONTENTS

Post-brexit Trade Policy and Its Impact on United Kingdom’s Economy Pervez N. Ghauri and Ursula F. Ott Trade Policy Challenges from the Perspective of Small and Open Economy: The Cases of Latvia and Iceland During 2008/2009 Financial and Economic Crises Sandis Sraders

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Part III Trade Policy for Futures 9

10

11

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Sustainable Development in EU Trade Agreements: Different Trade Partners, Different Rules? Jale Tosun and Christin Heinz-Fischer

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Future Challenges to Trade Policy in Support of International Business Louise Curran

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Two Lenses to Megatrends in Trade Policy: Towards a Future-Oriented Contextual Approach Toni Ahlqvist

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Conclusions: The Future of Trade Policy in the Not So United World Eini Haaja and Anna Karhu

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Index

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Notes on Contributors

Ahlqvist Toni is Professor and Research Director of Futures Research at the Finland Futures Research Centre, University of Turku. He is an Adjunct Professor of Economic Geography and Technological Transformations at the University of Turku. His research focuses on futures studies, strategic foresight, spatial planning and policy, and spatial political economy. He has led numerous research projects that have covered, e.g., emerging technologies, construction, and uses of futures knowledge in organizations and regions, strategic development of industrial branches, such as forest industry in South Australia, and varied aspects of knowledge-based society. His most recent projects have dealt with politics of future generations in the context of law-making and potential societal antagonisms of radical emerging technologies. Ahlqvist’s research has been published in such journals as Technological Forecasting and Social Change, International Journal of Urban and Regional Research, New Political Economy, Antipode, Geopolitics, Geografiska Annaler A: Human Geography, Technology Analysis and Strategic Management, Futures, Foresight, Space and Polity, and Science and Public Policy. Aminian Nathalie is an Associate Professor of Economics (with Tenure) at the University of Rouen Normandie, France. She is the Co-Director of the Master Degree with a specialization in “Financial Risks Management” and “Banking”, department of Economics. She is currently engaged in research in several areas, including China, Japan, international trade and innovation policies, exchange rates, and the economics of the Asia-Pacific. xi

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She has contributed to the economics of production sharing and trade in parts and components, the political economic of exchange rates, and the formal model of digital firms. Aunesluoma Juhana is Professor of Political History at the University of Helsinki (UHEL), where he has held various positions since 2000. In 2010–2020 he was Director of the Centre for European Studies at UHEL. His research fields are Cold War history and Finnish political and economic history. He has written on East-West economic relations in the Cold War and the history of Finnish trade policy. Curran Louise is Senior Lecturer in International Business in TBS Education in Toulouse in France. She received her Ph.D. from Manchester Metropolitan University in 1995. Her research interests include the interactions between government policy and trade and investment flows, EU trade policy making, especially in relation to sustainability and EU– China trade relations. She has published widely on these issues including in the Review of International Political Economy, the Journal of Business Ethics, and Business and Politics. Fung K. C. is a full professor of economics at the University of California, Santa Cruz. He was previously a senior international economist at the White House Council of Economic Advisers (CEA) during the George H.W. Bush and Bill Clinton Administrations. He received a letter of commendation from the US President. From 2006 to 2010, he was an academic advisor and academic collaborator at the United States International Trade Commission (USITC). In 2004 and 2011, he provided invited testimonies to United States and investment. In 2011 and 2012, he was an outside academic expert for a project related to American Congressional Commissions related to Chinese trade economic interests in the Asia/Pacific, supported by the US Government. In 2015 and 2016, he was an academic partner working with the Office of the United States Trade Representative (USTR). Prof. Ghauri Pervez N. completed his Ph.D. at Uppsala University (Sweden) where he also taught for several years. Pervez has worked as Professor and Chair at Manchester Business School and King’s College London (UK). Currently Pervez is Chair and Professor of International Business at University of Birmingham (UK). Pervez has been the founding Editor-in-Chief of the International Business Review, has been Editor (Europe) for the Journal of World Business between 2007

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and 2014 and is Consulting Editor for Journal of International Business Studies. Pervez is a Fellow for both the European International Business Academy (EIBA) and the Academy of International Business (AIB), where he was also Vice President between 2008 and 2010. Pervez has published more than 30 books and 100+ articles in top level journals. Pervez also offers consulting and training programs for several corporations such as Airbus Industries, Ericsson, and BP. Haaja Eini (D.Sc. Econ.) is Research Manager at the Pan-European Institute (PEI) in Turku School of Economics, University of Turku. Haaja has specialized in International Business with an emphasis on the economic development of the Baltic Sea and Barents Sea regions. She has been involved in several research and development projects funded by the EU Interreg programs and various foundations, for instance. She has published articles and book chapters concerning collective business opportunities and business network dynamics, most recently focusing on internationalization, innovation, and digitalization in the maritime sector. Heinz-Fischer Christin is a Ph.D. candidate in Political Science at Heidelberg University. Her research focuses on global climate forums and public policy in Germany and the European Union. Karhu Anna is Research Manager at the Pan-European Institute (PEI) in Turku School of Economics, University of Turku. Her research focuses on the intersection of business and policy by examining how these two spheres of societies interact through business environment. She has studied this dynamics through institutional change perspective in context of pharmaceutical industry, international retailing, and trade policy systems. Prof. Ott Ursula F. is Professor of International Business and Director of the Centre for International Business Strategy and Decisions (CIBSD). She has a Ph.D. in Economics and Social Sciences; her research has been published in top journals (Journal of International Business Studies, Journal of Management Studies, Organization Studies, Journal of Business Research, International Business Review) and as research monographs. She is the recipient of Best Paper Awards at leading international conferences in International Business. Her research projects received funding from the British Academy, Leverhulme Trust, EPSRC, and Austrian Science Fund (FWF). Her research has an impact in industry and politics (Integration/Migration and Brexit).

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Polaski Sandra has been both a policy maker and a research expert on trade, labor, and income distribution in national and international contexts. She served as the Deputy Director-General for Policy of the International Labor Organization and was its Sherpa to the G20. Earlier she headed the US Department of Labor’s International Labor Affairs Bureau and before that directed the Trade, Equity, and Development Project at the Carnegie Endowment for International Peace, a global think-tank. She is currently affiliated with Boston University as a senior research scholar in the Global Economic Governance Initiative and is a member of the Independent Mexico Labor Expert Board, created by the US Congress to monitor and advise on Mexican labor policy in the context of the US Mexico Canada Agreement (USMCA). She has published widely on trade topics. Sraders Sandis is a Fellow and Lecturer in Russian Military and Strategic Studies at the Baltic Defence College (Tartu, Estonia). American foreign policy is his major concentration, whereas small states and international political economy are his minor focuses. Dr. Šr¯aders has assumed different roles. He has served as Secretary General of Latvian Transatlantic Organization (LATO) from 2007 until 2014 and assumed the role of a Board Member of LATO since 2014. He has been the project coordinator for the German Marshall Fund of the United States in the Baltic States (2013–2015). His responsibility was accumulating the intellectual capital for the Latvian Presidency at the EU Council in 2015. Dr. Šr¯aders was responsible for expert selection and meetings as well as final publication addressing the EU’s Eastern Partnership. One of his recent positions was Director of Strategic Projects, Sales, and Advertising at Latvijas Radio (2018–2019). He is the author of the recent (2021) book Small Baltic States and the Euro-Atlantic Security Community. Tosun Jale is professor of Political Science at the Institute of Political Science at Heidelberg University, Germany. Her main research interests comprise the comparative study of regulation in areas of environment, energy, and climate change, as well as distributive conflicts within the European Union and the influence of the EU on regulatory measures in third-party states. Tung Chris Y. is an associate professor at the Institute of Economics, National Sun Yat-sen University in Taiwan. He earned his Ph.D. in Economics from Georgetown University. His research interests cover

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industrial organization, political economy, and technology dissemination in the greater China region. His research articles have appeared in international peer-reviewed journals such as China Economic Review; Pacific Economic Review; Australian Economic Papers; Economic Change and Restructuring and Journal of Chinese Economic and Business Studies. He also contributed in the research regarding China’s Belt Road Initiative from a business and management perspective. Van Assche Ari is Professor of International Business at HEC Montréal and deputy editor of the Journal of International Business Policy. His research focuses on the organization of global value chains and their implications for international trade, sustainability, industrial clusters, and public policy. Zuev Vladimir has graduated from the Moscow State University of International Relations with excellency. V. Zuev undertook research and lecturing at many global Universities such as Sorbonne, Rennes, Maison des Sciences de l’Homme, CIFE, Laxemburg, Erasmus, Maastricht, ULB, Sevilla, Lucerne, Bern, Monasch, Cannon Institute, Stanford, Bordeaux. He defended two theses, the Doctoral in 2011. At the start of the Russian economy transition, he worked for the Russian Foreign Trade Ministry and as an advisor for the business community. He worked at IMEMO— the major think-tank providing advice for reforms and at the Eurasian Development Bank. He was part of a team to suggest the concept and to conclude the Russia–EU trade agreement. He worked as a WTO expert on regional trade and as a G20 expert on trade. In his current position as Professor at National Research University, Higher School of Economics in Moscow he undertakes research on Global economic governance, International Trade, and European integration. Russian government awarded him with a medal of “Excellency in Russian Higher Education”. His recent position—the Academic Director of the International Trade Policy joint Master program (Kiel-Bern-Moscow) extends his activities on to new horizons.

Abbreviations

AAs ASEAN CBAM CBD CFETS CIS CITES EAEU EBA ECU EEC EFTA ETS EU EUR FDI FLEGT FTA GATT GDP GDPR GSP GVC IB IMF

Association Agreements The Association of SouthEast Asian Nations The Carbon Border Adjustment Mechanism The Convention on Biological Diversity The Chinese Foreign Exchange Trading System The Commonwealth of Independent States The Convention on International Trade in Endangered Species of Wild Fauna and Flora The Eurasian Economic Union The Everything But Arms initiative The European Currency Unit The European Economic Community The European Free Trade Association Emissions Trading System The European Union Euro Foreign Direct Investment The Forest Law Enforcement, Governance, and Trade A Free Trade Area The General Agreement on Tariffs and Trade Gross-Domestic Product The General Data Protection Rules The Generalised System of Preferences Global Value Chain International Business International Monetary Fund xvii

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ABBREVIATIONS

IPR ITO IUU LDCs MEAs MERCOSUR MIC 2025 MMT MNE MOSS MRTAs NTB OECD OEEC ONS PBOC PCAs PMI R&D RMB RO RTA SDGs SDT SII SOEs TBT TIRM UNCTAD USD USMCA WTO WWII ZTE

Intellectual Property Rights The International Trade Organization The Regulation to Address Illegal Unreported, and Unregulated Least Developing Countries Multilateral Environmental Agreements The Common Market of the South, Mercado Común del Sur Made in China, 2025 The Association for Motor Manufacturers and Traders (UK) Multinational Enterprise The Market-Oriented Sector-Specific The Mega-Regional Trade Agreements The Non-Tariff Barriers Organisation for Economic Co-operation and Development The Organization for European Economic Cooperation Office of National Statistics (UK) The People’s Bank of China Partnership and Cooperation Agreements Composite Purchasing Managers’ Index Research & Development The Renminbi The Regional economic Organization The Regional Trade Agreement Sustainable Development Goals Special and Differential Treatment The Structural Impediment Initiative State-Owned Enterprise A Technical Barrier to Trade The Agreement on Trade Related Aspects of Investment Measures United Nations Conference on Trade and Development United States Dollar The United States-Mexico-Canada Agreement The World Trade Organization World War II Zhongxing Telecommunication Equipment

List of Figures

Fig. 1.1 Fig. 4.1

Fig. 7.1

Fig. 8.1 Fig. 9.1 Fig. 10.1 Fig. 11.1 Fig. 11.2

The emergence of trade policy research themes in IB studies Leading regional organizations by the share of inner trade in total trade, 2012–2020 (Sources done by the author on the basis of calculations from statistics on all five regional organizations. Obtained from: WITS [2021], UN Comtrade Database [2021], EAEU [2021], Eurostat [2020], Leitner et al. [2016]) International business negotiations analysis—an interdisciplinary and cross-cultural framework Currency challenges of the Lats and the Krona Degree of the integration of environmental concerns in trade agreements EU policy initiatives seeking to integrate sustainability concerns into trade policy Two lenses to approach the concept of “megatrend” Embedding trends and signals in a particular context

12

58

116 129 150 166 187 188

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List of Tables

Table 6.1 Table 6.2 Table 9.1 Table 9.2 Table 9.3 Table 10.1 Table 10.2 Table 11.1

U.S.–Japan Bilateral trade balance (US$billion), various years U.S.–China bilateral trade balance (US$billion), various years Environmental issues addressed in the trade agreements Subchapters in the sections/chapters on trade and sustainable development Overview of EU trade agreements Value and share of EU imports of products covered by CBAM Share of EU imports covered by Regulation in deforestation Some factors involved in trend identification (adapted from Slaughter, 1993: 842)

88 89 151 152 156 171 173 185

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PART I

Development of Global Trade and Trade Governance

CHAPTER 1

Lessons from Trade Policy Research Anna Karhu and Eini Haaja

Introduction Global challenges, from the climate crisis to digitalisation and the multiplicity of global powers, are faced by businesses as well as national governments, but also by international organisations such as the WTO, UNCTAD, the World Bank and the OECD. The increasing severity of weather conditions and natural catastrophes, the outbreak of the COVID19 pandemic and Russia’s invasion of Ukraine are examples of events that have shaken the prevailing governance structures of global trade. In addition to these trends, the global trade landscape has changed dramatically from the time when these organisations were established. For instance, the world trade volume in 2020 was approximately 40 times higher than the records in the 1950s, the early years of GATT. In the same time period, the world trade value has grown to 300 times that of the 1950s. In comparison with the levels at the time of the establishment of the WTO

A. Karhu (B) · E. Haaja University of Turku, Turku, Finland e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance During De-Globalization, International Political Economy Series, https://doi.org/10.1007/978-3-031-13757-0_1

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in 1995, world trade volume and value have grown by 4 and 5%, respectively, as of 2020 (WTO, 2022). Given the gradually evolving megatrends as well as the trade evolvement, the global economy has transformed from what it was when these trade organisations were created, and it is a valid question whether these institutions are still capable—let alone optimal—of pursuing their original goals. The global economy has seen two waves of globalisation, the first starting in the nineteenth century and ending at the beginning of the First World War, and the ongoing wave beginning after the Second World War and continuing since. Stemming from comparative advantages and the resulting national specialisation, international trade transactions include goods and services with increasingly complex global value chains. International business, meaning cross-border flows of trade and investment, has been widely welcomed by policymakers due to its contribution to any country’s economic growth and the creation of innovation and jobs; yet the cons may involve competitive challenges and displacements of activities to other, more optimal countries (Ortiz-Ospina & Beltekian, 2018). To optimise this balance, trade policy concerns the regulations and rules of international trade—who trades what with whom and who makes what kind of rules for these transactions. The conceptualisation of the term ‘trade policy’ has varied in different disciplines and at different times, evolving together with theoretical as well as world economy developments. Trade policy as a phenomenon does not fall clearly into any single academic discipline; as a result, it has been studied by multiple disciplines from economics and international relations to law, development studies, policy and international business (Velut, 2015). Today, trade policy is gaining increasing attention from various disciplines. Responding to global megatrends and to the changing international trade dynamics requires large-scale co-operation and common goals between multiple levels of decision-making agencies as well as between different actors from policy and business to society at large. It is crucial that the governing mechanisms of global trade are able to transform themselves as global trade itself and the driving values in our societies evolve. Prosperity and peace are built together, not in isolation. However, the recent international crises have also shown the down-side of interconnectedness, such as the difficulty in finding ways to decrease environmentally harmful emissions that do not obey man-made national borders, diseases that benefit from our ability to travel across continents quickly and the fragility of international relations and their influence on

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national autonomy. While these phenomena are directly addressed at the policy level, their impacts are instantly felt at the level of individual businesses—particularly the ones engaged in international operations, but also domestically operating ones due to implications to and even disruptions in global value chains. Thus, there is a need for an in-depth understanding of the international trade and investment landscape in a world where all actors are increasingly interconnected and interdependent, yet not as united as before. Indeed, unity is taking new forms through the rearrangement of previously mainly US-centred economic state power, and through the emergence of new powers, such as societal voices through uncontrolled social media movements and the emergence of gigantic corporations such as Amazon, Huawei and Meta, which provide and control increasingly crucial infrastructures. These changes require reactions from businesses as well as policymakers, and understanding the related dynamics at a larger scale calls upon us as researchers to explore the implications of global trends and the disruptions to the links between trade, international business and policy development. To expand the capabilities of all stakeholders to respond to our rapidly changing international trade and business environment, the respective actors, that is, policymakers, businesses and different kinds of societal institutions, as well as scholars in these fields, must be invited into the discussion on the dynamics shaping the future of the international environment. In fact, this potential and need for collective action has been the underlying inspiration for this book—the need to introduce the emerging dynamics of trade policy to all, not only politicians, and thereby, to also allow other actor groups to recognise their role and possibilities to contribute, collectively at least, to this development. To initiate this future-oriented trade policy exploration, we must set the stage for where we are coming from. To start with, this first chapter gives an overview of international business research related to trade and trade policy, with the aim of identifying what our current understanding is about the interconnectivity of trade policy and business, and what could be the paths towards the most impactful future research concerning trade policy dynamics and the future development of the international business environment.

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Development of Trade Policy as a Research Topic International Trade Explained by Economists At the beginning of twentieth century, before the two World Wars, global trade was vigorous as goods such as cotton, coffee and tea were transported between different countries all over the world (Rodrick, 1995). As international trade grew, economists were interested to understand first of all why nations engage in international trade (Rodrick, 1995; Van Assche, 2018). Thus, the economics discipline approached trade and trade policy from the point of view of national economies (Van Assche, 2018). The well-known models of Smith, Ricardo and Heckscher-Ohlin have advanced our understanding of these questions. Economics has developed a clear consensus of the superiority of free trade. However, international trade is rarely free. To understand this contradiction, a vast literature has developed at the intersection of economics and trade policy (Rodrick, 1995). Despite this, the focus in research has mainly been at the national level, studying international trade and its implications to, for example, costs and labour (e.g. Haberler, 1950; Samuelson, 1939; Williams, 1929). After WWII, two influential changes gradually took place influencing international trade and making way for international business (IB) as an independent field of study. First, new independent countries began to emerge, and the number of nations grew from fewer than 75 independent countries in the world (although half a dozen of them had multiple colonies) to nearly 200 independent countries today (Boddewyn & Goodnow, 2020). Therefore, due to the increasing number of nations, the opportunities for international trade and investment also grew. Second, as a consequence of the new business opportunities that emerged from growing international trade, a new type of large enterprise operating in multiple countries emerged: the multinational enterprise (MNE). The emergence of such companies became the focus of IB research and has a strong background in fields such as marketing, economics, finance and management (Boddewyn & Goodnow, 2020; Van Assche, 2018). Thus, in addition to looking at international trade and trade policy as a national level phenomenon, researchers began viewing its influences and interconnections from the perspective of firms and business environments.

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Trade Liberalisation and the New MNEs When IB studies related to the dynamics of trade, trade policy and business began to emerge in the early twentieth century, they focused on topics such as export and import activities of firms and the economic, political and regulatory factors affecting imports and exports (Boddewyn & Goodnow, 2020). As global trade grew and trade policy worked for more liberal trade rules, the emerged new organisation of an MNE also increased its influence. Thus, it presented a new part in the puzzle for governing international trade and understanding the influence of foreign firms on home and host countries. On a more general level, government and foreign enterprise relations became one of the key characteristics of IB research studying the influence that MNEs had on the national environments both at home and abroad (e.g. Behrman, 1969; Fayerweather, 1966; Fowler, 1965; Kapoor, 1970; Martyn, 1965; Mikesell, 1967; Vernon, 1969). For example, in the United States the labour unions and businesses had advocated free trade policies together. The rise and growth of MNEs, however, forced the labour associations to reconsider (Guisinger, 1973). MNEs were seen as taking jobs, technology and capital out of the United States, thus questioning the benefits of free trade for the home country (Guisinger, 1973). However, these rising new worries were considered to provide no ground for trade restrictions, since the primary objective of trade policy is not domestic employment generation. Nonetheless, it was conceded that MNEs have substantial power and should take into consideration their effects on the home country when planning their operations. In a host country context, especially in relation to developing countries, the discussion has focused on the ability of MNEs to boost the development of nations (Moore, 1972). This relationship is far from straightforward, however. For example, the aim of a developing country’s government might be to increase national independence, but at the same time to improve the qualitative and quantitative change in services and goods produced by their national economies. To produce these goods and services efficiently, it is necessary to organise, accumulate and co-ordinate the numerous resources necessary for producing the desired final output. In addition, a very high production volume is often required to effectively utilise these technical and organisational inputs to minimise the unit costs of final output. Therefore, this points in the direction of increased international interdependence rather than national independence. The research

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identified three general actor groups to organise this: government, the national private sector and the foreign private sector including MNEs. Thus, depending on the level of a nation’s development, these different actors have very different levels of capability to boost the desired development. The choice between these three alternatives incurs different types of costs and requires different degrees of support from policy. However, when organised via international firms to produce the desired goods and services, it generally implies a relatively higher level of international interdependence, which may conflict with the other developmental goal of increasing national independence. There have been some attempts to overcome the increase of interdependencies by separating the national market from the international market. However, this policy mostly leads to violation of one of the requisites for productivity: the necessity for high volume in order to reap the benefits of economies of scale. This reasoning brings forward the paradox that accepting a higher degree of policy interdependence with respect to individual sectors may ultimately increase the overall independence of the country, as only the country which uses its resources efficiently will be able to elevate the well-being of its citizens (Moore, 1972). In addition, Drucker (1974) brought forward our understanding of the role of MNEs as a catalyst for the development of national economies, that MNEs need political muscle to overcome strongly entrenched protectionist forces and that exporting is done most successfully, most easily and most cheaply if at least part of the production is to be sold in the world market. In addition, the MNE itself has developed from the ‘parent company’ with wholly owned ‘branches’ abroad towards a more globally structured business able to tap any capital market. For example, in Japan, the removing of restrictions on foreign investment was expected to bring a massive rush of take-over bids and 100 percent foreign-owned ventures. Instead, it was increasingly the Western investor—American as well as European—who presses for joint ventures in Japan and expects the Japanese partner to supply the capital while they supply technology and product knowledge (Drucker, 1974). Around the 1960s and 1970s, the political domain of trade also increasingly gained the interest of researchers as an outcome of the economic and political developments that took place after the two World Wars (Mansfield & Pevehouse, 2015). This specific subtheme of international political economy focuses on the different political aspects of international trade such as sanction and statecraft (e.g. Baldwin, 1971),

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domestic sources of trade policy (e.g. Katzenstein, 1977) and international trade institutions (e.g. Krasner, 1976). As the understanding of the trade policy mechanisms and policy making grew, also IB research developed. In addition to the perspective of studying the influences MNEs have on nations and how governments should manage that relationship, another stream of study has explored corporate political activity (Austen-Smith, 1987; Baysinger, 1984; Potters & Van Winden, 1992). The basic assumption is that the objectives of corporate political activity can be divided into three main themes (Baysinger, 1984). First, businesses may work to gain incentives (monetary or anticompetitive) from government through lobbying activities or trade unions. Second, they may aim to manage the turbulence created by governmental threats through lobbying, public relations or having a presence at certain important locations and third, companies may work to maintain a suitable business environment for their operations by lobbying or having presence at certain important locations. Thus, this stream of the research literature focuses on understanding business political activity and strategies (Hillman et al., 2004; Lawton et al., 2013). The approach in IB, therefore, has not only focused on trade policy and business relations but more widely on policy and international business interconnection. In relation to trade policy, for instance, Rugman and Verbeke (1991a, 1991b) focused on studying MNE–government relations and presented a concept of ‘shelter’ for an entry barrier that imposes artificial costs on rival firms. Rehbein and Schuler (1999), on the other hand, studied 1100 US manufacturing firms’ influence on trade policy. Both of these studies, as in the case more generally, focused on understanding the motives and processes of the firms rather than giving policy implications. Another perspective on the interaction of MNEs and policy is given by the socio-political network approach (Boddewyn, 1988; Hadjikhani & Ghauri, 2001; Ring et al., 1990). Here, the discussion of business networks is extended to also include societal and policy actors. This approach was more managerially oriented and aimed to understand how companies could manage their socio-political networks. Earlier studies also paid attention to the management of political actors by viewing management as a function of response to the political environment (Conner, 1991; Egelhoff, 1988; Kogut, 1991) and to the design of

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coping strategies as managerial risk, country risk ratings, corporate structure or industry structure (Cosset & Roy, 1991; Lenway & Murtha, 1994; Miller, 1992; Ring et al., 1990). Overall, due to the vast economic growth and integration during this period, MNEs and trade came to present globalisation both good and bad. MNEs and their internationalisation were the central theme in IB research, and the analysis of issues related to cross-border trade and investment focused on a private perspective rather than on a national or governmental perspective (Van Assche, 2018). The Globalisation of Free Trade and Rising New Markets Global economic growth has increasingly moved from developed countries to developing countries. In particular, some developed countries have grown rapidly and have drawn the attention of businesses by providing increasing business opportunities (e.g. the BRIC countries: Brazil, Russia, India and China). As these countries have grown to become bigger players in the global economy, they also constitute very different types of business contexts. Consequently, a new set of multinational corporations has appeared: emerging market multinationals (EMNEs). Due to these developments, the role of the political environment has become more critical in IB studies. From the outset, the institutional theory perspective has gained popularity. The policy sphere is seen as a part of the characteristics shaping firms’ international strategic behaviour (Peng et al., 2009). Through the institutional structures, policy is seen as a critical element alongside firm and industry characteristics, creating a strategy tripod (Peng et al., 2008). In this context, it is considered that institutions provide an order that regulates the external environment and, thus, governs firms’ internationalisation decisions (Ahuja & Yayavaram, 2011; Kostova et al., 2020). Studies have explored both the influence these institutional structures have on firms (e.g. Arregle et al., 2013; Marano & Kostova, 2016) and the dynamics between MNEs and institutions (e.g. Hillman & Wan, 2005). The need to understand the changes in the international business environment has become increasingly evident. Thus, in addition to understanding the direct interactions of business and policy through corporate political activity, or the influence that policies have through the institutional environment, an understanding of the co-evolutionary nature of

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change in the business environment as a result of the actions of business and policy actors has also emerged. This literature stems from the dynamics of innovation policies and MNEs (Cantwell, 2009; Giroud et al., 2012). Moreover, IB research has developed to understand the changes in the international business environment and its influence on firms as a multilevel phenomenon. This has been necessary to understand the emergence of e-commerce and its rapid growth from the level of global regulation development in the WTO and regional trade agreements to the national level policies to support innovation all the way to the strategies of firms (Agarwal & Wu, 2018). During the twenty-first century, the role of global value chains has also begun to intrigue both researchers and policy makers. The mechanisms through which GVCs influence policy making and doing business have been the primary focus of this line of research (Gereffi, 2019; Kano et al., 2020). The latest development in international political economy studies has been towards more firm-level analysis related to the politics of international supply chains (Mansfield & Pevehouse, 2015). Consequently, a review of IB research shows us how the perspectives towards the interaction between international business and trade policy have evolved, and how the published studies also contribute to understanding and managing these increasingly complex and rapidly evolving relationships.

Conclusions When policymakers look at the continuously changing international environment, their interests lie in the performance of countries or regions from a public or societal perspective. Internationally operating businesses, in turn, view the same changes with a strong focus on the performance of the firm from a private perspective. In the same vein, international business research has generated wide expertise in explaining how the international environment affects the behaviour and strategies of firms. The research on international trade in IB studies has developed from explaining international trade as a phenomenon to gaining understanding of the interrelationship of trade growth, free trade and multinational enterprises, thereby establishing a wider interest in understanding the interconnection of business and policy as a newly established focus area of international business policy. As our review shows, the evolving reality of international trade and business has been naturally reflected in the international business research

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over recent decades, whereby the multitude of themes covered in international business research has expanded from understanding international trade flows to how different political aspects are today promoted via international business, for example. It is also worth noting that, although new focus areas emerge, the older ones are not forgotten but continue to be pursued too in the new reality. This growth in the variety of themes under investigation today is illustrated in Fig. 1.1. While we have now entered times that drive nations towards multiple, alternative centres of power, international business is also facing a new turning point: de-globalisation. In the aftermath of the COVID-19 pandemic, the Russian invasion of Ukraine has been regarded as the end of three decades of globalisation, and a new reality is to emerge, requiring both scholarly and managerial expertise to manage in the new normal that is taking shape. In the midst of turbulent geopolitics, the essence of ‘international’ is re-gaining its true meaning. Firms doing business in global markets are now facing increasingly different political realities depending on where they operate and are even faced with pressures to ‘choose sides’ on different geopolitical issues or disputes that are prioritised or even viewed very differently in different power blocs. While the Human rights

Democracy

Sustainability

Global value chains and trade policy MNEs and globalisation

MNEs as institutional actors

Corporate political activity

Efficiency of trade rules and policies

International trade as imports and exports

MNE socio-political network Benefits of trade rules and policies

Free trade Why nations engage in international trade

Fig. 1.1 The emergence of trade policy research themes in IB studies

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Western world familiarised itself with increasingly open and free trade, the continuing decline in FDI in relation to GDP (The World Bank, 2022) and protectionist actions, for example, suddenly make it considerably more meaningful where a firm operates. This relatively rapid evolvement requires farsighted and open-minded scholarly exploration and even the questioning of some of our assumptions in international business research. However, wide expertise in explaining how the international environment affects the behaviour and strategies of firms should allow us to transform our explanations to reflect even considerable changes in the international environment. In fact, the inevitably changing international environment now calls upon international business research to deliver new managerial insight for the benefit of businesses. The need to step up to the next level in this research is urgent. Based on the lessons from trade policy research in the field of international business covered above, we find it important to highlight two avenues that scholars need to proceed down in exploring the changing dynamics of the international environment: the recognition of temporal underpinnings and the recognition of impact underpinnings. Regarding the first, businesses often find it hard to engage in truly future-oriented thinking about what the surrounding institutions might become; yet this visioning is the way in which they can themselves determine their course of action instead of adapting to change. Historical path dependence limits imagination, and the recognition of this is important for business managers in managing their way amidst breaking value chains and suddenly appearing political risks. Thus, amidst rapid and wide changes, it is important to study how foresight is employed in different international business areas and operations. Besides a perspective to be studied, we want to highlight that considering the employment of foresight is relevant also to business scholars themselves—considering and challenging our own stances in this respect can allow the disengagement from prior assumptions that were generated at the time of ever-increasing globalisation. We should not let the past limit our research. When it comes to the second dimension, impact underpinnings, businesses too often take the trade policy institutions and the related business environment as given, as something to adapt to. Our message is that international business research should increasingly support business managers in recognising their role—possibly small, yet existent—in the current transformation of old trade policy institutions and in the emergence of

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new ones. Firms of various sizes are not only influenced by existing institutions; through their reactions to the changing trade policy environment and complex chains of events they can also contribute to what those become in the future. In particular, worth investigation is the collective agency of firms in this evolutionary change. Moreover, in relation to the first dimension, the possibility to impact ongoing changes also concerns the researchers themselves. While following trade developments and trying to get a hold of them, international business studies sometimes suffer from focusing on retrospective reporting of what happened and how. While this understanding is still obviously of value and importance, we want to highlight the increasingly active role that international business scholars might take in the development of business in different fields and the related institutions. Engaging in increasing action research and dialogue with not only economic actors but also policy representatives that shape the international business arena at different levels might be eye-opening for today’s international business scholars as well as politicians. Indeed, while international business research is now in increasing demand to explain the impacts of the changing international environment via managerial recommendations, it should also take (or regain) an active role in generating future-oriented policy implications and delivering them further to the respective stakeholders. This is of particular importance given the fact that the changes in the business environment stem for a large part from policy-level changes. Recently, the strong business emphasis has hindered international business scholars from pursuing the policy implications of their research findings (Van Assche, 2018), whereas the complexity of the evolving environment calls for research with increasingly open approaches and aims for wider impact. Trade policy research is at the intersection of policy and business research and is a field requiring innovative and future-oriented insight from both sides to provide useful insight to support the transformation of trade-related international institutions as well as the strategies and operations of internationally operating businesses. This chapter has shown the agility of international business research in explaining the evolving business world. In the same vein, it suggests that international business scholarship can play a central role in the future development of new knowledge that is relevant to trade policy research and concrete policymaking. Nevertheless, to proceed in exploring the dynamics that shape the future of the international business environment

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and trade policy, we must first similarly look into the development of trade policy research. When we first understand the past trajectories of both international business and trade policy development, it is possible to recognise what kind of institutions, norms and practices we historically take for granted in terms of trade policy, and what we no longer should, requiring instead rapid transformation into something new. The following chapters in this book provide valuable food for thought in this respect.

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CHAPTER 2

Global Trade Policy Regimes and Previous Crises Juhana Aunesluoma

Crises as Drivers of Regime Change Economic crises and geopolitical conflicts have had a profound impact on the historical evolution of trade. Crises of various kinds have had a direct bearing on the fundamental features of the global trading system as it has over time alternated between classical, laissez-faire free trade and protectionism. The connection of economic and geopolitical crises and changes in trade policy regimes was particularly marked in the twentieth century, but similar patterns can be observed in earlier times as well as today. The First World War in 1914–1918 heralded the end of free trade as it had been practised since the mid-nineteenth century. While there were attempts after the war to re-establish a relatively liberal international trade policy regime, these foundered with a turn to full-scale protectionism in

J. Aunesluoma (B) University of Helsinki, Helsinki, Finland e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance During De-Globalization, International Political Economy Series, https://doi.org/10.1007/978-3-031-13757-0_2

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the Great Depression of the 1930s. The effects of higher tariffs and other protectionist measures were compounded with the adoption of further restrictions to cross-border trade in the Second World War in 1939–1945. The effects of the turn to protectionism were long lasting, and it took several decades after the Second World War to construct a relatively open global trade regime. Liberalization started first in the industrially advanced Western economies in the late 1940s and 1950s, from where it spread to the global south and Asian economies in the 1980s and 1990s. The creation of a more open international trade regime lead to a rapid expansion of world trade and its share of the global GDP. Even so, according to Findlay and O’Rourke (2007: 499–501), at the turn of the millennium, 44% of the world’s population still lived in countries, where the overall level of tariffs for foreign trade were higher than in 1913. This group included countries such as the United Kingdom, China and India. Crises that have the capacity to effect long-term changes in trade policy regimes come in many forms. Economic crises stem, for example, from systemic failures in the global financial sector, as happened in the financial crisis of 2008. Alternatively, they may be the result of other types of weaknesses in economic structures in individual economies, or disruptions in cross-border flows of goods and capital. International economic interdependence itself can increase the fragility of economies and their susceptibility to external shocks. In most cases, however, these shocks are themselves endogenous to economic activity, such as international conflicts and wars, social and political upheavals, revolutions, civil wars, natural disasters and their international consequences. Large crises or conflicts can bring about—and often are connected to—shifts in power relations in the international system and in its institutional arrangements. Trade is impacted in crises in a number of ways. First, crises have an immediate effect on the functioning of economies. Any disruption of economic activity in a country that is engaged in cross-border trade has repercussions to its trading partners. The larger and the more open these economies are, the more severe the consequences are. Second, crises play a role in the reorganization of the institutions and practices that govern international trade. These, in turn, reflect the way in which power is distributed among the actors in the system. A trade policy regime is formed usually in negotiations between the actors that make up the system. The actors’ capacity to realize their policy preferences depends on several factors, such as the relative weight of their economies, the composition of trade, their negotiation capacity or their ability to use

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other means, such as military force, to achieve political and economic goals. Large crises can therefore be seen as redistribution events, when not only economic and other resources are reallocated, but also the principles and institutions that underpin the trade policy regime itself are recast. While the effects in the first category may be severe in the short to medium term, economies have an ability to recover and adapt. A quick recovery may offset losses and limit a crisis’s social and political consequences. Nevertheless, when crises impact the fundamental features of the international trading system, such as its relative openness or the prevalence of protectionist measures, the effects can be long lasting. As a general observation, it can be said that crises change trade and trade policy regimes more quickly than it takes to reconstruct pre-crisis regimes and trade patterns. After particularly severe crises that may not be possible at all, as the underlying conditions and structures may have changed to make a return to a previous regime unfeasible. As has been shown by the economic historians Ronald Findlay and Kevin O’Rourke, global trade regimes have historically been closely connected to the ways in which political power has been distributed and exercised in the world. An open international trade system has required a political superstructure, where an actor or a group of actors has established the rules of the system, enforced their compliance and provided the system with the public goods—such as security backed up by military power or a legal framework within which to conduct trade—its stable operation requires (Findlay & O’Rourke, 2007; O’Rourke, 2009). Findlay’s and O’Rourke’s interpretation develop on views put forward in the so-called theory of hegemonic stability by the realist school of Global Political Economy (Gilpin, 1987; Krasner, 1976). Its proponents state that free trade is more likely to occur in an international economy dominated by a single political hegemon than in a more dispersed or multipolar system. While the theory of hegemonic stability has been criticized both theoretically and in historical case studies, Findlay and O’Rourke have convincingly shown that trade policy regimes are essentially political constructs that arise and decline together with the political powers that maintain them. Contrary to the theory of hegemonic stability, instead of a single hegemon, these orders can be maintained by a group of likeminded countries as well. What is required are the will and the mechanisms to share a set of rules and comply with them, as has been seen in forms

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of regional integration such as the European Union (Keohane, 1984; Moravcsik, 1998; Ruggie, 1983). Furthermore, not all historical hegemons have necessarily preferred free trade. In a long historical perspective, however, free or relatively free international trade has occurred only when there has been a political authority or authorities of some kind with the will and the means to support it. Also, trade policy regimes do not appear accidentally, as the establishment of a trade system—liberal or protectionist—is a painstaking process, albeit in the latter case more easily achieved than in the first. However, they may dissolve quickly together with the ideologies and material powers that justify and underwrite them. This chapter discusses the connection of state power in the international system with global trade policy regimes, and what effect various crises have had in their decline and transition from one order to another. In the first part we will look into the dissolution of the classical free trade system in the late 1800s and early 1900s and the final turn towards protectionism in the First World War and especially in the 1930s. The chapter then looks into the creation of the free trade system in industrial goods created under the leadership of the United States and other Western powers after the Second World War. It then discusses the expansion of Western-led free trade to a genuinely global trade policy regime from the 1980s onwards, and the effects of the end of the Cold War and the creation and the expansion of the World Trade Organization WTO in the 1990s. The chapter closes with an assessment of the effects of the 2008 financial crisis and geopolitical tensions in the 2010s and the 2020s on the world trading system.

From Free Trade to Protectionism in the Era of World Wars The pre-1914 global free trade regime was founded upon the British empire’s position as the world’s largest trader, and backed up by its financial and industrial strength. British naval supremacy guaranteed the openness of the main sea routes for trade around the world. Even more significant was the influence of successive British governments from the mid-nineteenth century onwards preferring free trade over protectionism, and suggesting or imposing this principle to its trading partners. After a landmark trade agreement with France in 1860, the so-called Cobden-Chevalier Treaty, liberalization of trade policy and the lowering

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of tariffs accelerated in the European and North American economies (Foreman-Peck, 1995: 45). The Anglo-French treaty of 1860 included the most-favoured-nation (MFN) principle in the relations of the two countries, from where it spread to agreements concluded by other partners, establishing for the first time a multilateral, global trade regime based on non-discrimination. In the monetary sphere, the gold standard provided the anchor for a multilateral payments system and the convertibility of currencies. In practice, the principle of free trade began eroding already in the last decades of the nineteenth century with the increasing weight of more protectionist economies, such as Germany and the United States. Intensification of geopolitical rivalry at the turn of the twentieth century was conjoined with increasing protectionism in the European continent and in the Americas (Irwin, 2017). However, as long as the British empire had the will and the means to maintain a liberal trade policy, the global trade regime retained its openness. All this ended when war came in 1914. The implementation of economic blockades by the leading European economies and other wartime restrictions to economic activity effectively put an end to free trade. The overall ideological aim in the post-war settlement in 1918– 1919 was, besides punishing Germany for its guilt for war, to restore the liberal international economic order that had preceded it. This included an effort to revive the principle of non-discrimination in trade agreements and the re-establishment of the gold standard as the anchor of the international monetary system. However, with an economically and politically weakened Britain, a sharp post-war recession in 1919–1921, and at best an ambivalent attitude towards liberal trade policy in other major countries, the reconstitution of free trade did not have an auspicious start. Other countries could no longer rely on the kind of leadership and stability the British empire had provided in the previous century. The new economic giant, the United States, was not yet ready to assume the position of systemic leadership it would later have. While liberal economic thought in principle permeated trade agreements concluded in the 1920s, protectionist measures adopted in the war years were difficult to remove in their entirety. Therefore, the post-war agreements did not go quite as far as to restore the old regime. In agricultural products, where a modern system of protectionism had for example in Germany and in France started already in the late nineteenth century,

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the shift from free trade to protectionism aiming at self-sufficiency in foodstuffs was in many countries paradigmatic. The financial crash in 1929 put an end to the liberalizing efforts of the 1920s. As the economic crisis spread from North America to Europe, governments resorted to higher tariffs and other restrictive measures to protect their domestic producers. The United States led the way towards all-out protectionism in the Smoot-Hawley Tariff Act in 1930, where steps taken at first to protect agricultural producers were extended to industrial goods. When sixty other countries reciprocated with similar protective measures, they soon found themselves in a vicious circle of measures and countermeasures. As prices fell and trade declined, tariffs lost their effectiveness. Governments resorted to quantitative quotas, which in some cases stifled trade altogether. Beggar-my-neighbour— policies exported economic difficulties from one country to another, leading to a further decline of economic output and trade. With countries suspending free convertibility of their currencies, multilateral trade was reduced to bilateral trading partnerships. The last country to give up on free trade was Great Britain, which in the Ottawa Conference of 1932 formed a protectionist bloc out of its empire and closest trade partners. In some countries, such as in Germany, where Adolf Hitler rose to power in 1933 amidst overall economic and political turmoil, protectionist trade policy was aimed at achieving autarky, i.e. a high degree of self-sufficiency in essential goods. With increasing isolation from anything but economic partnerships established on their own terms, the totalitarian countries’ economies were geared to war well before 1939. When the Great Depression gradually gave way to a recovery in the last years of the 1930s, trade policy liberalized somewhat in the economically advanced Western countries. The outbreak of war in 1939 put a swift end to this. The Second World War saw a total harnessing of economic resources in belligerent countries to support their war effort. A comprehensive regulation of economic activity was applied also to foreign trade, with exports and imports regulated in a government-controlled licensing system. Economic blockades were set up to inflict damage to the enemy’s war-making capacity, and to limit the neutral countries’ ability to trade with them. The joint effects of two world wars and the economic crisis of the 1930s was such that the era has been described as the first wave of deglobalization in the modern industrial era (O’Rourke, 2009). It is unlikely

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that the course of globalization that had begun in the previous century would have taken this turn without the wars, revolutions, the dissolution of empires, economic crises and social and political upheavals of the first half of the century. Absent these shocks, the course of globalization and global trade regimes would have looked very different. In an alternative historical scenario, governments might have adopted some protective measures to tackle social issues arising from accelerating globalization, such as rising inequalities and other effects of the economic dislocation resulting from the growing significance of foreign trade and nations’ exposure to the international economy. This is what they did after the Second World War. Regarding the first half of the twentieth century, however, it may be assumed that these measures would have created at most a moderately protectionist trade policy regime. They would have been exceptions to the overall liberal orientation of the world economic system, and they would not have challenged the basic course of globalization in the way the crises of the first half of the twentieth century eventually did.

Trade Liberalization in the West, 1947–1980 What had remained of a multilateral global trading system before the war laid in ruins in 1945. International trade was regulated with national import and export restrictions. Quantitative quotas, that were the main mechanism of regulating trade in the 1930s and 1940s, were settled in bilateral trade agreements. As most of the world’s currencies were not freely convertible, earnings from one country could not easily be used for purchases elsewhere. Earnings in US dollars, the only major convertible currency, were highly sought after, but a shortage of dollars remained a major bottleneck for Europe’s economic recovery. To ease the dollar gap, the US directed 13 billion US dollars to Western Europe in the European Recovery Program (ERP) in 1948– 1952, i.e. the so-called Marshall plan. This helped the participants to recover from post-war austerity and finance their essential consumption needs and capital investments. A significant dimension of the Marshall Plan was that it allowed for the return to multilateral trade within the auspices of the European Payments Union from 1950 onward, also funded by ERP dollars. Furthermore, within the Organization for European Economic Cooperation (OEEC, a precursor to the OECD) that

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administered the aid, the member states were committed to remove obstacles to trade they had erected in the war years and in the 1930s, most importantly quantitative quotas. Full convertibility of Western European currencies was restored by the end of the 1950s, which improved the conditions for liberalization of trade. In 1957, the liberalization programme that was begun at the OEEC, was continued in the European Economic Community (EEC). The Community achieved free trade in industrial goods among its members in the course of the 1960s. Another experiment of free trade integration, the European Free Trade Association (EFTA), did the same among its members by the end of the decade. With removal of tariffs and other trade restrictions between the EEC and EFTA countries, the West European economies had by the mid1980s achieved a level of free trade comparable to pre-First World War conditions, with the notable difference of agricultural goods that in a glaring contrast to the pre-crises trade regime, remained heavily protected. US sponsorship and leadership was crucial to set the West European regional trade liberalization in motion, and to maintain its momentum in the subsequent decades. In currency policy, the fixed exchange ratesystem established at Bretton Woods in 1944 provided the necessary stability until the turn of the 1970s. The advent of the General Agreement on Tariffs and Trade (GATT) under US leadership in 1947 heralded the beginning of liberalization on a global level (Zeiler, 1999). At first, however, the lowering of tariffs involved a limited group of commodities and compared to regional integration efforts in Western Europe, progress remained modest. The GATT-process gained speed in and after the so-called Kennedy round of negotiations in the early 1960s, followed by further progress in the 1970s. The GATT-process culminated in the Uruguay round in 1986–1994, that saw a significant increase of participating countries, the deepening of free trade between them and the broadening of liberalization to the trade of services and other areas. In 1995 the agreements concluded in GATT-negotiations were consolidated and codified in the World Trade Organization (WTO), together with its newly established dispute settlement system. Seen from a Western perspective, a process to repair the damage done in the crises of the early twentieth century was in many ways complete in the 1980s. Nonetheless, it had taken much longer to create a liberalized

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trade regime than it had taken to do away with the nineteenth century free trade system in the First World War and its long aftermath. This bore witness to the long-lasting significance of major crises to global trade policy regimes, and how important the dominant powers’ preferences and actions were in their deconstruction and reconstruction.

Globalizing Free Trade from 1980s to the Crises of the 2000s Perhaps the most remarkable feature of the recent historical evolution of the world trading system is the dramatic expansion of free trade— and of overall trade levels of GDP—from the year 1980 onwards. This period of liberalization and growth lasted until the financial crisis in 2008, when also the share of trade from the global GDP peaked. After an initial post-crisis recovery it remained on a relatively lower level in the 2010s (Hoekman, 2015). It is one of the most remarkable periods in the history of the world economy. It saw the expansion of the Western-led free trade regime into new areas: the opening of China, the gradual end of protectionism in post-colonial countries such as India, the rise of the East Asian economic ‘tigers’ and the transition of the old Soviet bloc from planned economies to free markets. Institutionally the process reached its peak with China’s accession to the WTO in 2001. Countries in Eastern Europe, which belonged to the Soviet Union’s sphere of influence in the Cold War, began to liberalize their foreign trade with their transition to democracy and market economy in the 1990s. The political preconditions for this were the easing of superpower tensions in the latter half of the 1980s, the dissolution of the Soviet Union’s empire in 1989–1991 and the geopolitical shift towards a unipolar world with preponderant US power in the post-Cold War world in the 1990s. While the factors and the causal mechanisms behind the post-1980s growth in global trade and the acceleration of globalization are a matter for ongoing debate, the role of the diminishing superpower competition in the last decades of the twentieth century and the spread of Western ideas of economic liberalism, should in any case be considered as a major factor (Milner, 1999). While it is true, that the relative power of the US in world politics and the world economy began to decline from the 1960s onwards, its significance behind the global shift in the 1980s should not be understated. The

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Vietnam war, the collapse of the Bretton Woods system and the rise of the economic significance of countries such as Japan and West Germany, all contributed to the US’ relative decline. America’s own, internal turmoil in the 1960s and 1970s contributed to the same direction. However, its position as a global superpower with an ability to implement its policy preferences regarding the institutional arrangements and organizing principles of world trade, was not effectively challenged by other actors at the time. From the 1980s to the 2000s, the US still enjoyed an unusually strong position in world affairs. This coincided not only with the global economic expansion experienced at the time, but also with systemic stability that lasted until the financial crisis of 2008. Despite a number of shocks, such as the financial crises in South Asia and Russia in the late 1990s or the September 11th terrorist attacks in 2001, the overall systemic stability of the world economy and the basic features of the global trade policy regime, were not seriously in doubt. The financial crisis of 2008 appears in retrospect a real turning point. This applies not only to the overall development of the world economy but also to the relative positions of the main power centres to each other. The US-led global trade policy regime and the relative economic and military power of the US culminated in the first decade of the 2000s. The 2010s saw the emergence of more diffuse and polycentric global economic and political order. During the latter half of the decade, we also saw the fracturing of the domestic consensus in the US regarding its role as the guarantor of global free trade. The role and weight of the European Union as a supplementary force favouring open markets could not fully compensate the loss of American leadership. US hegemony in the 1990s and early 2000s may have also hidden structural problems in the global trade policy regime centred on the WTO and the maintenance of its liberal, multilateral free trade orientation. The success in expanding the WTO’s membership in the early 2000s masked problems within the organization and in its governance and decisionmaking system. Steps for further liberalization stalled in the first years of the 2000s, and in the 2010s the one world approach popular in the 1990s had been replaced by network of regional or bilateral, in some cases plurilateral free trade agreements and economic partnerships. At the turn of the 2020s these numbered in the hundreds, creating a wide but complex network of trade and investment agreements.

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The global trade regime of the 2010s and early 2020s is a good example of a free trade system without a single hegemonic power that would guarantee its stability. At the turn of the 2020s a deeper politicization of trade, the prevalence of the use of economic sanctions as a geopolitical tool, and a tendency to use trade policy as a vehicle to achieve diverse non-trade goals, such as environmental goals, the strengthening of human rights or other geopolitical objectives, have born witness to an incremental regime change. Conflicts and crises were central to the dissolution and formation of global trade regimes in the twentieth century, and it appears that political developments and the state of affairs between the most important power centres in the world continue to play a similar role in the functioning of global trade today. What has not changed are the conditions that support a liberal, free trade global trade regime. What it requires is an international order that supports free trade and is backed by adequate political and materials resources either by a hegemonic power or by a group of like-minded nations. This needs to be supplemented with domestic policies and social conditions that allow governments to pursue further globalization, if they so wish.

References Findlay, R., & O’Rourke, K. (2007). Power and plenty. Trade, war, and the world economy in the second millennium. Princeton University Press. Foreman-Peck, J. (1995). A history of the world economy. International economic relations since 1850. Prentice Hall. Gilpin, R. (1987). The political economy of international relations. Princeton University Press. Hoekman, B. (Ed.). (2015). The global trade slowdown: A new normal? A VoxEU.org eBook. Centre for Economic Policy Research Press. Irwin, D. A. (2017). Clashing over commerce. A history of US trade policy. The University of Chicago Press. Keohane, R. (1984). After hegemony. Princeton University Press. Krasner, S. D. (1976). State power and the structure of international trade. World Politics, 28, 317–347. Milner, H. V. (1999). The political economy of international trade. Annual Review for Political Science, 2, 91–114. Moravcsik, A. (1998). The Choice for Europe. Social purpose & state power from Messina to Maastricht. Cornell University Press.

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O’Rourke, K. (2009). Politics and trade. Lessons from past globalisations. Bruegel essay and lecture series. Bruegel. Ruggie, J. (1983). International regimes, transactions and change’. In S. D. Krasner (Ed.), International regimes (pp. 196–232). Cornell University Press. Zeiler, T. W. (1999). Free trade, free world. The advent of GATT . The University of North Carolina Press.

PART II

Disruptions of Global Trade

CHAPTER 3

WTO in a Changing Geopolitical Environment Sandra Polaski

Introduction The World Trade Organization (WTO) came into existence in 1995, replacing the 50-year-old trade regime known as the General Agreement on Tariffs and Trade (GATT) that had governed trade among capitalist countries in the geopolitical context of the Cold War. The new organization grew out of what began as an eighth round of GATT negotiations in Uruguay in 1986. The negotiations dragged on for almost eight years, frequently stalling but eventually producing a greatly expanded body of trade law covering a much broader range of issues than the GATT. It also created a new, permanent organization (Marrakesh Agreement, 1994). The new regime was emblematic of a moment in time, when global economic integration was gaining rapid momentum based on technological change; the socialist bloc and its separate trading system had

S. Polaski (B) Global Economic Governance Initiative, Boston University, Boston, MA, USA e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance During De-Globalization, International Political Economy Series, https://doi.org/10.1007/978-3-031-13757-0_3

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collapsed; and China was still in the early stages of economic opening. The new WTO offered a single global trade regime that gradually grew to include 164 countries. The rules of the WTO were different in many respects from the GATT, which had focused on reducing tariffs and other border measures. The WTO by contrast aimed to facilitate deep integration through disciplines on domestic policies of member states. The new approach reflected a shift in the prevailing economic consensus in the west and the priorities of the US in particular, discussed in the next section. The new regime did not command universal support from the member states, especially developing countries who felt their needs were given inadequate consideration, discussed in the third section of the chapter. A fourth section addresses China’s accession to the WTO in 2001, its spectacular economic and trade growth, and the changing relative economic weights in the global economy. It explores the resulting distributional effects that eroded support for open trade and the WTO, even among the organization’s original proponents. A fifth section addresses the organization’s new challenges in an era marked by increasing strategic rivalry between the US and China, the global economic and trade disruption caused by the coronavirus pandemic, and the emergence of climate change and the digital economy as pressing new issues. A final section explores possible future paths for the WTO and the implications of each.

The Birth of the WTO---An Institution Emblematic of a Moment in Time The predecessor of the WTO, the GATT, was not an organization per se but the sum of a series of contractual agreements beginning in 1947 that gradually reduced tariffs among a group of countries known as the contracting parties. The original GATT was signed by 23 countries (World Trade Organization, 1996).1 The 1947 contractual tariff agreement was meant to be embedded in a broader institution, the International Trade Organization (ITO), which would administer it and 1 The twenty-three countries that negotiated and signed the original GATT in 1947 were Australia, Belgium, Brazil, Burma (Myanmar), Canada, Ceylon (Sri Lanka), Chile, China, Cuba, Czechoslovakia (Czech Republic and Slovakia), France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, South Africa, Southern Rhodesia (Zimbabwe), Syria, United Kingdom, and United States.

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oversee trade among the parties. However the ITO was never launched (Toye, 2012).2 Instead the GATT went forward without a formal institutional structure. Over the course of the next five decades and seven negotiating rounds the GATT membership expanded to 102 countries and tariffs were further reduced. By the 1980s the momentum of trade accelerated, enabled by breakthroughs in transport and information technology along with changing economic policies in many countries that facilitated greater global economic integration. The GATT was widely considered to lack the architecture needed to deal with the rapid increase in trade and the scope to deal with the increasing complexity of the issues involved (Jackson, 1997). The Uruguay Round of negotiations was a response to many governments’ desire to expand the rule book for transnational commerce and to create a supranational institution to set and enforce the rules. While the Uruguay Round negotiations were underway, the socialist bloc of countries began to disintegrate and in 1991 the Soviet Union collapsed. With the end of the Cold War—and with China’s spectacular growth still years away—the US emerged as the sole superpower (Lüthi, 2020; Nijman, 1992). This shift in the geopolitical environment had a profound effect on the ongoing negotiations. The western and particularly US model of capitalism was considered the sole surviving economic system and the victors were the ones to write the rules for the emerging global economy. Over the same period there had been a shift in the prevailing economic consensus in the west. In the early post-war decades, most western governments favored a Keynesian macroeconomic policy approach in which they assumed the responsibility for ensuring sufficient incomes and consumption demand when markets failed to provide them. By the 1980s, particularly in the US and UK, the consensus had shifted to a neoliberal

2 The International Trade Organization (ITO) was conceived as part of the multilateral governance architecture created after World War II to set rules for the international economy. The ITO was intended to foster economic recovery after the war and to rein in the type of punitive economic actions that contributed to the war. It was meant to complement the United Nations, the International Monetary Fund (IMF), and the World Bank (formally the International Bank for Reconstruction and Development, IBRD) as part of a system of international economic governance. However changing domestic political alignments and the advent of the Cold War led the US, one of the original architects of the ITO, to withdraw its support and the organization never came into being.

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view that markets were the most efficient way to allocate resources and that government intervention should be avoided (Irwin & Ward, 2021; Williamson, 2004). While this shift provoked significant dissent in many countries, the new ideology was widely embraced by the mainstream of governments, academia, opinion makers, and the media. With strong US influence, the WTO rules were written in the spirit of this new consensus, expanding the rights of private firms and investors while reining in numerous aspects of government intervention. For example, the Agreement on Trade Related Aspects of Investment Measures (TRIMs) restricts governments from requiring investors to use local content in production, an approach that a number of countries had used to encourage backward and forward linkages in their economies (Chang, 2002).

A Strong New Institution---But One Contested from the Beginning The new institution expanded trade rules into many more regulatory areas, such as protections for intellectual property and rules for provision of services that constrained member states’ practices in areas that had previously been excluded from the GATT trade rules. Perhaps most importantly, the WTO created a binding dispute settlement system to replace the weaker mechanisms of the GATT (World Trade Organization, 2021a). Under the GATT, disputes between parties could be referred to an independent panel for findings and recommendations. But the creation of the panel, the adoption of its findings and the authorization for the complaining country to take countermeasures all required a positive consensus of the organization’s governing Council. In other words, a single party, including the party named in the dispute, could block enforcement. By contrast, the new WTO dispute settlement system did not allow a party to block panel formation and a panel’s findings did not require unanimous consent. This was considered by some to reflect a movement from a power-based system to a rules-based system and in this light to represent a movement away from big power dominance to a fairer system (Pauwelyn, 2005). From the beginning, however, many developing countries considered that the rules themselves had been written to favor the interests of the already-developed countries (Ismail, 2020). A negotiating grouping then known as the Quadrilateral (or “Quad”), including the US, EU, Japan, and Canada, typically coordinated their bargaining positions during the

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Uruguay Round and early years of the WTO. Once they found common ground, they were in a strong position to achieve their key goals because of their economic and political heft. When they could not agree because of their internal conflicts of interest, they could and did block progress (United States Senate, 2000).3 Developing countries felt the need to be members of the WTO, since it set the rules for access to the largest and most lucrative markets. However many felt that the overall balance of rules in the WTO was not favorable to their own development interests, notably in textiles and agriculture. Perhaps the most widespread criticism by the developing countries related to the rules on agricultural trade, which they believed favored commercial agriculture in high-income countries that benefited from subsidies, export support, and other measures. Given that many developing countries depended heavily on agriculture both for exports and for domestic subsistence, they sought reform of the sector and formed their own negotiating alliances (Polaski, 2005; World Trade Organization, 2021b).4 The tension between the developed and developing blocs contributed to the breakdown of the attempt to launch a new round of WTO negotiations in Seattle, Washington in 1999. The new round was finally launched in Doha in 2001 by winning the support of the developing countries (the majority of WTO members) with a commitment to address their concerns (World Trade Organization, 2021c). Those negotiations stumbled repeatedly and eventually failed, due both to disagreement between developed and developing countries and within the bloc of developed countries. From the earliest days the WTO was also challenged from the outside by civil society. For example, the 1999 attempt to launch the new round 3 An example of the Quad’s blocking behavior can be found in the testimony of the U.S. Trade Representative at a March 2000 hearing of the Senate Finance Subcommittee on International Trade, in which she stated that some “base line understanding” among the Quad countries would have to be the “first step” toward reconvening negotiations after the WTO ministerial meeting ended in failure in Seattle in 1999. A number of differences between the United States and the EU had not been overcome there and she stated, “If the major trading partners cannot sort out their differences there will not be another round.”. 4 For example, the G33, also known as the “Friends of Special Products” in agriculture,

is a coalition of developing countries pressing for flexibility for developing countries to undertake limited market opening in agriculture to protect their small-scale farmers, while the G20 coalition of developing countries (not to be confused with the G-20 summit grouping formed in 2008) presses for ambitious reforms of agriculture in developed countries with some flexibility for developing countries.

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of negotiations in Seattle led to the famous “battle in Seattle” in which a large, diverse coalition of labor, environmental, peasant, social justice, and some anarchist groups brought negotiations to a halt (Edelman, 1999; Tizon, 1999).

China’s Accession to the WTO, Changing Geopolitical Weights, and Distributional Consequences The WTO continued to attract praise, criticism, and protest as well as new members throughout its early years. The most high-impact accession was that of China in 2001 (World Trade Organization, 2001a).5 This occurred after years of intense bilateral negotiations with other WTO members as a result of which China made significant commitments to lower tariffs and non-tariff barriers as a condition for its accession (World Trade Organization, 2001b). China’s accession was quantitatively and qualitatively different from that of other developing countries that had joined the GATT and then the WTO over the years. China was the most populous country in the world and at the time of its accession the large majority (63 percent) of its population was still rural, meaning that it had a huge body of labor available to be drawn from agriculture into manufacturing (World Bank, 2021). With its accession to the WTO and greater certainty that its products would be able to enter other members’ markets, China attracted foreign direct investment (FDI) at an accelerating pace. Before accession it already ranked first among developing countries in attracting FDI and in 2002 it surpassed the United States as the world’s top destination for FDI (Zhang & Corrie, 2018). Together with its available labor force and its own investments in infrastructure and connectivity, this led to a rapid expansion of manufacturing for export. This evolution of the economy allowed China to absorb several hundred million workers into employment in higher productivity manufacturing, with the result that China was able to eliminate extreme poverty (Li et al.,

5 As part of its economic reform and opening up process, China had requested to resume its pre-revolution status as a contracting party to the GATT and a working party on its status was established in 1987. That ongoing work was overtaken by the creation of the WTO in 1995 and China’s request to accede to it. The GATT working party was converted to a WTO working party.

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2021). Because of its size, the growth in employment and incomes led to a reduction of inequality at the global level (Lakner & Milanovic, 2013). China’s domestic success had a less favorable impact on employment and equity in some of its direct competitors, however. The rapid increase in manufacturing in China drew investors, manufacturers, and jobs away from some other countries, both developed and developing. In the US, the rapid scaling up of Chinese production in many competitive industries was described as the “China shock,” as many US firms shut production facilities in the US and relocated to China (Autor et al., 2016). Studies showed that regions and localities most exposed to the competition suffered declining employment and wages, with negative spillover effects to housing prices, local government revenues, public services, and health (Autor et al., 2016; Dean & Kimmel, 2019; Feler & Senses, 2016). Mexico, a developing country competitor to China in many industries, also experienced manufacturing losses (Hernández, 2012; Trachtenberg, 2019). It is telling that Mexico was the last country to agree to China’s WTO accession (World Trade Organization, 2001b).6 The impact of China’s accession on countries in the European Union was significantly different, due to a number of factors. First, the largest share of exports and imports of goods take place within the bloc, due to lack of tariffs, favorable border measures, and geographical proximity. Second, a relatively more important “shock” occurred in Europe around the time of China’s accession to the WTO, with the accession of Eastern European countries to the EU after the collapse of their socialist economies and opening to private foreign investment (Dauth et al., 2014). Many EU manufacturers, particularly those based in Germany and Austria, shifted production to the east, where wages were considerably lower (Marin, 2010).7 In this sense, the collapse of the socialist trading bloc and accession of those countries to the EU was Europe’s own shock from the geopolitical shifts discussed at the beginning of this chapter. Third, the relative concentration of many European firms in high technology or luxury products meant that the Chinese market represented

6 Mexico concluded bilateral negotiations on market access with China on 13 September 2001, days in advance of the final meeting of the WTO Working Party on China’s Accession on 17 September 2001. 7 It is interesting to note that the shifts in production by firms in these two countries shifted more high-skilled work rather than low-skilled work.

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important new demand and thus at least some offsetting job creation at home (Aubourg, 2017; Marin, 2017). Chinese policies shifted over the years following its WTO accession, including through a strong and steady increase in minimum and manufacturing wages after 2003 that gradually lifted its labor costs to exceed those of Mexico and approach those of some Eastern European countries (International Labour Organization, 2020). Sixty percent of Chinese workers were in the broadly-defined middle class by 2015 (Cuntao, 2016). This contributed both to increased domestic demand in China and to imports, which was reinforced by the policy shift to a “dual circulation strategy” in recent years (Sheng, 2021). China’s labor force stopped growing in 2017 and is now declining (World Bank, 2021). Chinese export growth slowed after 2007 and the “China shock” is considered to have plateaued in 2010 (Autor et al., 2021; Brandt & Kim, 2020). However, the sharp losses experienced by affected communities in the US proved to be long-lasting, persisting a decade or more after the initial shock (Autor et al., 2021). The experience gradually hardened into a narrative of unfair competition and anti-Chinese sentiment (Huang et al., 2021; Tan, 2011). In 2016 that narrative was weaponized in the presidential campaign of candidate Donald Trump, contributing to his electoral victory (Cerrato et al., 2016; Corasaniti et al., 2016). In historical perspective, the strong “China shock” to employment and welfare in the US and elsewhere represented a transitory period, much as the unipolar moment after the end of the Cold War proved fleeting. However in both cases the impacts of transitory phenomenon have endured in political and policy processes and have been consolidated in laws and legally binding trade agreements. The shift in US sentiment toward China became increasingly negative and much of the US discourse about the WTO is now framed as an effort to strengthen the institution in ways that constrain behavior of non-market economies in general and China in particular, discussed below.

The Creators Grow Disillusioned; New Challenges Arise The US came to resent the constraints that the binding WTO dispute settlement mechanism placed on its own behavior with regard both to China and competitors in the west and sought to weaken it (Hart & Murrill, 2021). Beginning in the Obama administration and accelerating

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in the Trump administration the US vetoed the appointment of appellate body members, finally incapacitating the body in 2019. As China grew into a major trading power, the EU, Japan and others also began to agitate for changes in WTO rules to constrain the Chinese model of state capitalism (European Commission, 2020a). The discontent of developing countries also continued, although the reforms they sought were often quite different from those sought by the high-income member states (Ismael, 2020). For example, some high-income countries seek to weaken provisions on special and differential treatment (SDT) for developing countries or to exclude some countries currently covered by the category altogether, while developing countries seek to strengthen policy space for development of their economies (Hegde & Wouters, 2021). Some countries have sought a path for further trade liberalization through plurilateral agreements within the framework of the WTO but involving only subgroups of members, but these have struggled to reach conclusion. The failure of the Doha round negotiations and the incapacitation of the binding dispute settlement mechanism mean that two of the WTO’s three structural functions have ground to a halt, with only the third function of reporting and monitoring left intact (World Trade Organization Documents, 2020a).8 The organization is now widely considered to be in crisis. It has been strained further by the economic and health effects of the global COVID-19 pandemic, when its rules were widely disregarded as member states sought to protect their own populations and stabilize their economies (Global Trade Alert database, 2021; Thrasher et al., 2021). In response to the pandemic and the very unequal accessibility of treatments and vaccines, India and South Africa proposed a waiver of the WTO’s intellectual property rules protecting patents for medicines and vaccines for the prevention, containment, and treatment of COVID-19. The proposal was eventually co-sponsored by an additional 87 mainly developing countries and endorsed by the US and China (Crossley, 2021; Schwegman & Woessner, 2021; USTR, 2021; WTO, 2021b), while the EU split on the proposal and Japan, Norway, Singapore, South Korea, Switzerland, Taiwan, and the UK expressed reservations about starting text-based negotiations (Titievskaia, 2021; 8 Member states are required to notify the WTO about various trade practices but the reports are often late. A group of countries seeks to strengthen these requirements and impose administrative and representational penalties on countries failing to meet notification requirements.

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Farge, 2021). A modest compromise was agreed by trade ministers at a WTO trade ministerial meeting in June 2022 that slightly expands the ability of developing countries to produce and share COVID-19 vaccines with other developing countries (WTO, 2022). The climate change crisis poses yet another challenge to the WTO going forward. Proposals by some countries for border measures such as carbon taxes could require new approaches to rules on nondiscrimination, while support for green transitions could potentially run afoul of current disciplines on state aid. The proper governance of digital issues in global trade is yet another area in which there is wide divergence of views and practices among member states. Finally, the rising geostrategic competition between the US and China and now the war in Ukraine threaten to cast a shadow over future efforts at reform across the broad spectrum of issues.

Possible Futures for the WTO as It Navigates These Complex Currents What are the prospects for the WTO, given the complex current conjuncture? Three very different paths seem possible. First, the organization may continue to muddle through without meeting the challenges described above and with no serious reform. The WTO still provides the basic rules of trade for most bilateral trading relationships and countries will be reluctant to let go of this fixed reference point, particularly in a global economy upended by the pandemic, with snarled supply chains and continuing trade uncertainties. As for disputes, the incapacitation of the appellate body by the US may leave some trade disputes suspended without the possibility of final resolution. As an interim measure, the EU and 22 other countries including China have set up a “multi-party interim appeal arrangement” (MPIA) to hear appeals of WTO panel reports as long as the appellate body is not functional (European Commission, 2020b). The arrangement was notified to the WTO, stating that it is intended to operate under the organization’s overall umbrella and is available to any members willing to join (World Trade Organization Documents, 2020b). It remains to be seen if it will function as intended and most WTO members have not yet joined (Starshinova, 2021). In a second plausible scenario, the organization may be buffeted more strongly by the growing strategic rivalry between the US and China in ways that undermine even the current suboptimal equilibrium and further

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destabilize the WTO. The Biden administration has been pressing allies to align with it against China’s state-led economic practices, including through plurilateral agreements that could amount to a de facto division into economic blocs even if it occurs within the shell of the WTO. On the other hand, the pandemic experience led to widespread adoption by many governments, including the US, of subsidies, state aid, government equity stakes in private businesses, and other industrial policy measures that could blunt the momentum for tightening rules on such policies. The recent discourse in Europe of building national champion firms and the announcement by many governments of efforts to build national capacity in semiconductors, electric vehicles, clean energy, and other sectors could lead to second thoughts on tightening rules on non-market practices. A third possible pathway for the WTO may be the least likely on the current geopolitics but arguably would be best for future global economic stability. This would involve an updating of the trade regime to allow greater flexibility for countries with different economic models and systems to trade with each other without sacrificing the other legitimate interests of their citizens and polities. The goal would be to continue a fundamentally open global economy while allowing governments greater scope for border actions and countermeasures to defend their own countries’ economic and social preferences (Shaffer, 2021; US-China Trade Policy Working Group Joint Statement, 20199 ). A durable reform of the global trading system will require greater space for domestic policies such as local procurement, carbon border taxes, or industrial strategies that aim at distributional justice, sustainability, or economic development. A pessimistic view would consider that the current geopolitical realities could make new negotiations even more difficult than the failed Doha round. A more optimistic view would see the active government economic

9 A group of 37 eminent U.S. and Chinese economists, including five winners of the Nobel Memorial Prize in Economic Sciences, formed a US-China Trade Policy Working Group in 2019 and issued a Joint Statement calling for an approach that: “(i) allows countries considerable latitude at home to design a wide variety of industrial policies, technological systems, and social standards, (ii) allows countries to use well-calibrated policies (including tariff and non-tariff trade policies) to protect their industrial, technological, and social policy choices domestically without imposing unnecessary and asymmetric burdens on foreign actors, and (iii) maintains a set of trade rules that prevent countries from deploying what economists call ‘beggar-thy-neighbor’ policies – policies that produce benefits to the home country only through the harm they impose on other countries.”.

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interventions necessitated by the pandemic and current supply chain failures as having the potential to lead toward gradual convergence of views on some of the policies that had polarized east and west, north and south. The rules of the WTO were written with the assumption that China would converge toward western models of capitalism, when in fact recent practice in the west converges toward a more interventionist state. The WTO was born at a time when neoliberal market capitalism was the dominant system and it set global rules to protect the then-prevailing preferences and advantages of the developed west. A quarter century later China is the largest exporter to most countries and a hub of many global supply chains. If western governments see China as a problem to be contained there will be no solution at the WTO and there will be increasing decoupling into separate trading blocs. This will produce slower growth, including for the west, as China’s huge economy and market will be out of reach. It will require the dismantling of global supply chains, producing further sharp supply shocks. And it will reinforce the tensions, suspicion, and rivalry that can lead to more dire conflicts. Finding a new path that prioritizes coexistence is an enormous challenge. But it is one that could achieve economic stability and peace.

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Boston University Global Policy Development Center, Boston. https://www. bu.edu/gdp/files/2021/11/GEGI-TAM-COVID-Report-FIN.pdf. Accessed 16 February 2022. Titievskaia, J. (2021). World Trade Organization TRIPS waiver to tackle coronavirus. European Parliamentary Research Service PE 690.649. https:// www.europarl.europa.eu/RegData/etudes/ATAG/2021/690649/EPRS_A TA(2021)690649_EN.pdf. Accessed 16 February 2022. Tizon, A. (1999). Monday, Nov. 29 – Saturday, Dec. 4: WTO Week. Seattle Times, 5 December 1999. https://archive.seattletimes.com/archive/?date= 19991205&slug=2999667. Accessed 8 February 2022. Toye, R. (2012). The International Trade Organization. In M. Daunton, A. Narlikar, & R. M. Stern (Eds.), The Oxford Handbook on The World Trade Organization. https://doi.org/10.1093/oxfordhb/9780199586103. 013.0005 Trachtenberg, D. (2019). Local labor-market effects of NAFTA in Mexico: evidence from Mexican Commuting Zones. Inter-American Development Bank, Washington. IDB Working Paper Series 1078. https://publicati ons.iadb.org/publications/english/document/Local_Labor-Market_Eff ects_of_NAFTA_in_Mexico_Evidence_from_Mexican_Commuting_Zones_ en.pdf. Accessed 8 February 2022. United States Senate Committee on Finance Subcommittee on International Trade. (2000). Hearing March 7, Second Session, page 22. https://babel. hathitrust.org/cgi/pt?id=pst.000046320957&view=1up&seq=26. Accessed 8 February 2022. United States Trade Representative. (2021). Statement from Ambassador Katherine Tai on the Covid-19 Trips Waiver. USTR Press Release, 5 May 2021. https://ustr.gov/about-us/policy-offices/press-office/press-rel eases/2021/may/statement-ambassador-katherine-tai-covid-19-trips-waiver. Accessed 8 February 2022. US-China Trade Policy Working Group. (2019). Joint Statement. 27 October. https://www.inet.econ.cam.ac.uk/files/us-china_trade_joint_statem ent_2019.pdf. Accessed 8 February 2022. Williamson, J. (2004). The Washington Consensus as Policy Prescription for Development. Lecture delivered at the World Bank; 13 January 2004, Washington. https://www.piie.com/commentary/speeches-papers/ washington-consensus-policy-prescription-development. Accessed 8 February 2022. World Bank. (2021). Labor force, total – China 1990–2020. https://data.wor ldbank.org/indicator/SL.TLF.TOTL.IN?locations=CN. Accessed 8 February 2022.

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CHAPTER 4

Regional Trade Agreements: A Hope or a Threat to the Global Trade? Vladimir Zuev

Regional Trade Agreements: Global Trading System Radical Re-Shaking In this section, we explore the growing role of the Regional Trade Agreements (RTAs) for the international trading system. The analysis reveals the fast-growing number of the regional agreements and a change in their nature. As a result of recent developments, regionalism and regional integration have reached new heights in their evolution. The fast spread of the RTAs does not lower down the necessity to reform the multilateral trading system. Moreover, it helps to demonstrate the main avenues of these reforms, increasing the chances to introduce them at the WTO level. The RTAs legal framework becomes all the more important as a policy decision determinant for the business community all around the

V. Zuev (B) Higher School of Economics, Moscow, Russia e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance During De-Globalization, International Political Economy Series, https://doi.org/10.1007/978-3-031-13757-0_4

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world, not alone in purely trade policy matters, but in many other trade related issues. Regionalisation—Regionalism—Regional Integration and Regional Trade Agreements (RTAs) The starting point of the analysis in this chapter is the concept of regionalism as it embraces, but not exclusively resides in, the process of the creation of the RTAs. Though quite recently, J. Bhagwati defined regionalism as ‘preferential trade agreements among the subset of nations’ (Bhagwati, 1993). Such definitions belong to history, as today regionalism is not only about trade. There is a big variety of thinking on regionalism and we have to identify where we depart from. The broad understanding of the term ‘region’ in international relations is not linked to a geographical identity or territorial proximity any longer. It used to be that way half a century ago. A well-known definition of the region was given by J. Nye: ‘a limited number of states linked together by a geographical relationship and by a degree of mutual interdependence’ (Nye, 1971). For modern regionalism, it does not matter whether the number of states is ‘limited’. As experience reveals, regional agreements could embrace states both in small and big numbers. ‘Geographical relationship’ could be a factor to facilitate a regional agreement, but not necessarily, as many regional agreements are formed by states from different geographical locations. ‘A degree of interdependence’ was never defined by scholars. Thus, it could be high or low and in case it was low, it never hampered reaching a regional agreement. However, the narrow understanding of the term ‘region’ is still widely used, e.g., in the World Trade Organization (WTO) RTAs database. We understand Regionalism as a policy, as a specific governance response to the challenges of regionalization and globalization. Concluding RTAs represent just the trade policy part of this response. The logic of the current trends would suggest regionalism as a process leading to globalization of regions, or even to a ‘regional world order’, or rather to several ‘regional Worlds’ (Acharya, 2014). The process of regionalization could be pushed forward by any kind of links, i.e., economic, political, and cultural between actors all over the globe, creating a new political and economic geography, building up new, economic and political regions, and arriving at a new level of interdependence. The number

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of extra-regional RTA connections is roughly four times bigger than intraregional ones (WTO | Regional Trade Agreements, 2021a, 2021b), which testifies that regionalism has become a global phenomenon. Sorting out the understanding of the interrelated definitions, we should bear in mind that most RTAs have been concluded in the form of a Free Trade Area (FTA). An FTA breeds the first form of regional economic integration, leading to another important definition, Regional integration. Regional integration embodies more intensive interactions compared to regionalization as the term integration has a deeper meaning i.e., ‘bringing separate parts together’. With this idea in mind, it will be appropriate to recall the study of B. Balassa published 60 (!) years ago (Balassa, 1961). Anniversary is always a good occasion to revise the major points of the theory. Can the validity of this theory be questioned today, as the contemporary concept of a ‘region’ is interpreted very differently half a century from its inception? The original concept of the Economic integration forms looked as follows, in accordance with the criteria of the level of discrimination in trade: (1) Free trade area, (2) Customs union, (3) Common market, (4) Economic union and (5) Full economic integration. It looks like a paradox, but despite the huge intensification of regional links, the theory on the forms of regional economic integration is almost identical to what it looked like 60 years ago, except for one thing. Balassa did not foresee the creation of the Monetary Union. It is definitely a form of integration, but it was not mentioned in his classification. As a solution to this inadequacy, the scholars started to refer to the Monetary Union jointly with the Economic Union, by describing this form of integration as ‘Economic and Monetary Union’. Some researchers perceived the Monetary union as a specific form of an Economic union: ‘The extreme case of an Economic Union could be a Monetary Union’ (Hosny, 2013). However, the meaning of these terms is absolutely different. The Economic Union refers to the coordination of macroeconomic policies, while the Monetary Union suggests merging them together. Coordination lies only at the starting point of unification. The unified monetary policy is miles away from a ‘mere’ coordination of policies. For me, it was a puzzle for a long time, why setting up any common economic policy apart from the trade and monetary policy was not treated as a form of economic integration. Let us remember that a common trade policy was considered by Balassa and his followers as an important element of the economic integration that made a difference between an FTA and

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a Customs Union. Hence, a common trade policy stepped forward in the classification of the forms of integration. If everybody accepts a common trade policy as a step to integration, then, why not consider a common agricultural or regional policy or any other common economic policy as a form of integration? Creating a common policy is no less important for the process of working out relationships between states than eliminating barriers to trade. If we can agree on that, the classification would look different. The evolution of the forms of Economic integration, according to the criteria of the level of discrimination in trade and the level of coordination of policies could be presented as follows: (1) Free trade area, (2) Customs union, (3) Common policy, (4) Common market, (5) Economic union, (6) Single policy, Monetary Union and (7) Full economic integration. In this renewed list of forms, apart from the added form of the common policy, the case of the Monetary Union does also have a special meaning. As we remember, before the Monetary Union was introduced, there was another form of economic integration in the European Union (EU)— the common monetary policy with the common monetary unit—The European Currency Unit (ECU). We come to an important methodological point that allows us to distinguish between regional cooperation (regionalism) and regional integration. Integration is not only about elimination of barriers. The maturity of cooperation matters. States agreeing to have their national policies coordinated to a certain extent does not imply integration. Coordination happens everywhere in the world, even between the states in a conflict. If states create something common, for instance a common policy or a common institution, that is the first step to integration. Out of something purely national, states manage to create something common. However, they still could preserve their national policies and institutions sovereign and intact. When states go further to substitute national policies with single elements, for instance the introduction of the Euro as a single European currency, only then a deep form of integration manifests itself. As a result, national structures and policies become merged, or integrated in a single whole, registering the peak of the economic integration process. Another important distinction that we have to take into account is the demarcation line between a regional economic organization (RO) and an RTA. An organization, whether regional or global, appears when its member-states or other actors come to agreement upon a statute with a set of rules, norms and procedures, fixed mechanism, and an institutional

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structure with common goals to be achieved. Different RTAs could be the building blocks within a regional organization. However, a regional organization is a more developed structure than an RTA. A RO aims at different levels of either formal cooperation like in the majority of international organizations, or setting up a more ambitious target, the one of integration. With these basic definitions and concepts in mind, we can move on forward to develop the topic of the role of the RTAs for the international trading system. The Growing Role of RTAs in International Trade According to the WTO, more than 700 RTAs have been notified by 2021. Around half of them (350) continue to be in force (WTO | Regional Trade Agreements, 2021a, 2021b). The RTAs dynamics over the past 20 years shows that the number of registered RTAs has almost tripled, and the number of RTAs in force—has doubled. The push for the multiplication of the RTAs can be explained in many ways. One factor—is the slow progress in trade liberalization at a global level, which is being compensated for at a regional level. Another explanation is that major economies are seeking reliable regional partners to support themselves against increasing global competition. Regional projects are also more feasible than global ones. It is more realistic to find a common denominator at a regional rather than at a global level between countries with different trade policies. Reliance on the RTA is growing worldwide. All countries, even the big ones conclude RTAs to support their trade activity (EU, United States of America (USA), Canada, China, Russia, Japan). European countries are the leaders in the RTAs creation. However, if we put North, South, and Central America together, the total for the notified RTAs—165, will be practically the same as for Europe—168. It is also of interest, if we bring together countries from East Asia, West Asia and the Middle East, we arrive to a figure—162 RTAs (WTO Secretariat/RTA Section 2021). Hence, we come to a rather balanced global redistribution of the RTAs between Europe, America, and Asia. However, if we take a single trading entity, the EU will be an absolute leader in the RTAs. In 2021, the EU participated in 49 such agreements. About 3/4 of the EU foreign trade is conducted with the FTA partner countries. Switzerland and Iceland signed 31 agreements. Other leaders in RTAs are Norway (30 agreements), Chile (29), Liechtenstein

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(29), Singapore (25), Mexico (22), Turkey (22), Peru (19), South Korea (18), Ukraine (18), and Japan (17) (WTO | Regional Trade Agreements, 2021a, 2021b). Numerous trade agreements between states from different continents have formed an interconnected global network of RTAs that are contributing to the creation of the new ‘global regionalism’ (Zuev, 2020). This trend outlines the importance of participation by any country in the process of the formation of FTAs networks. Goals and forms and methods of regional interactions of states differ to a great extent. Free trade area is the most widespread type of RTAs. About 80% of all agreements are concluded in the form of an FTA. Most frequently FTAs are covering trade in goods. However, since the start of this century agreements on services are also on a fast rise. This tendency reflects the growing role of services in international trade. It is not only the number of the RTAs that is constantly growing. The share of trade within and between RTAs is impressive and continues to be on an upward trend. The share of inner trade within the major regional organizations is not necessarily high. In most cases, it is not even higher than trade with third countries. Actually, only within the EU, inner trade is by far larger than trade with third countries. We could suggest that the deeper the level of integration within the organization, the higher the share of the inner trade between members of this entity should be. A well-integrated unions like the EU or the United States-Mexico-Canada Agreement (USMCA) do have higher levels of inner trade. While a lower profile ROs, like Common Market of the South, Mercado Común del Sur (MERCOSUR) and the Eurasian Economic Union (EAEU) do have much lower shares of inner trade. The Association of Southeast Asian Nations (ASEAN) is placed in between, with a relatively low share of inner trade. The national sovereignty remains much treasured for members of this RO. Hence, the level of economic integration remains relatively low. There seems to be a correlation between the degree of integration within the regional organization (the highest, clearly, is in the EU) and the share of trade within it (again, the largest share of inner trade is also within the EU). But this first-glance correlation should be further proven. The counterargument to this statement could be the level of complementarity of the economies of countries within the RO. Less complementary economies in the ASEAN or within MERCOSUR do continue to rely more on the extra-regional trade links.

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Another interesting feature is that trade within the RTAs occurred to be more resistant to economic crisis shocks than trade outside the RTAs, including the Pandemic shocks. Our recent study showed that external trade volumes for the EU, restored faster for those trade partners that had an FTA with the EU, rather than for those that did not have any trade agreement with the EU (Kalachyhin & Zuev, 2022). During COVID-19 crisis, some trade-restrictive measures have been adopted also within the RTAs. But they were phased out faster using the mechanisms of interaction within the RTA, and hence, the negative effect on trade was leveled down sooner. In July 2020, public and private trade experts deliberated on possible RTAs provisions that could complement national anti-crisis trade policies (Shirotori et al., 2021). The search for the increased role of the RTAs at a time of a crisis goes on, and RTAs may become a more important anti-crisis instrument, eventually. What is clear, is that the share of inner trade between members of all major regional organizations is growing (shown in darker color in Fig. 4.1). In the last decade, the largest increase in the share of inner trade was registered within the EU, followed by the USMCA. Same trend could be depicted for most RTAs partners. According to Eurostat, from 2015 to 2020, total EU trade growth with FTA partners was on average 2,5 times higher than with non-FTA partners (European Commission, 2021). A study for the EU RTAs, done in Sweden supports this thinking. According to the findings, trade effect of EU RTAs increases with the level of ambition in the agreement. EU custom unions (with Turkey, San Marino, and Andorra) and single-market agreements (the European Economic Area (EEA), EU-Switzerland) increased trade by 111% on average. By contrast, no impact was found for economic partnership agreements with countries in Africa, the Pacific, and the Caribbean. Earlier (1996–2010) EU free trade agreements (FTAs) increased trade by 20% on average, whereas post-2010 EU more ambitious FTAs increased trade by 37% (Altenberg et al., 2019). If on top of the inner trade within the leading ROs, we add the extraregional trade flows (between different countries having an FTA, between countries and ROs with an FTA, and within the mega-trade deals), the share of international trade that is channeled through different types of RTAs will be, according to different estimates, around an impressive 70%! It’s definitely appropriate to use the term ‘global’ in conjunction with RTAs, as all countries at all the continents do conclude regional trade agreements. RTAs and mega-RTAs connect America with Europe, Europe

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Share of inner trade in total trade, %

2020

2012

80 70 60 50 40 30 20 10 0 EU

USMCA

ASEAN

MERCOSUR

EAEU

Fig. 4.1 Leading regional organizations by the share of inner trade in total trade, 2012–2020 (Sources done by the author on the basis of calculations from statistics on all five regional organizations. Obtained from: WITS [2021], UN Comtrade Database [2021], EAEU [2021], Eurostat [2020], Leitner et al. [2016])

with Asia, Asia with America. Multiple RTAs between countries from different continents around the globe create an interconnected global RTA network and could be considered as a basis for the new Global regionalism. RTAs Growing Maturity: Meeting Global Challenges, Becoming Comprehensive and Sustainable The hope to fill in the gaps in global trade regulation depends more than ever before both on the expansion of the RTAs and especially on the changes occurring in their substance. Elimination of barriers creates common spaces by demolition of economic frontiers. Another way to a common structure—to construct it anew. A distinctive feature of modern RTAs is that they do contain this second way of building common spaces by introducing common instruments, standards, and norms. The old-time and well-established ROs, such as the EU, ASEAN, USMCA, MERCOSUR, African Union, and others, do also have common institutions and policies. This form of the regional integration is widely acknowledged. What can be regarded as a new trend, relates to the extra-regional RTAs that are mostly done in the form of the FTAs. They

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also provide for not alone elimination of different barriers to trade, but for creation of common mechanisms of interaction. The nature of the modern RTAs has become more extensive, embracing new areas and disciplines, not fully covered by the WTO. This trend manifests the growing role of the regional trade policy as a tool to meet the current economic challenges. The examples are numerous: it could be setting up a common legal framework for the protection of the Intellectual Property Rights (IPR), or for the protection of investors rights; introducing common technical and quality regulations, or labor and environment standards; adhering to the competition laws; building up common dispute settlement bodies or procedures. They also take care of e-trade, human rights, small enterprises, cybersecurity, they respond to the energy transition, they take into account climate agenda (Haas, 2016). Intra and extra-regional RTAs have become the strong driving power of modern regionalism not just because they continue to abolish barriers to economic interaction. Though it continues to be an important function of the RTAs, as barriers that were not sufficiently treated previously, like the Non-Tariff Barriers (NTB), started to be actively incorporated into the newly formed RTAs. A notable change in the RTAs function is that they turned out to be the drivers of the integration by building up common mechanisms, policies, spaces, etc. in a positive stream of integration activities. Analyzing the contents of the recent RTAs, we see that most frequently their chapters are devoted to such items as: services (in 64% of agreements signed since 2001), e-commerce and digitalization (33%), movement of people (50%), export restrictions (51%), environment (59%), competition (71%; including rules on monopolies), intellectual property rights (72%), transparency (80%), sanitary and phytosanitary measures (SPS—82%), technical barriers to trade (82%), and investments (85%). The coverage of trade related issues in the current RTAs is becoming more comprehensive, embracing many new chapters and provisions. Another change in the substance of the current RTAs is that they are becoming SDG-focused. Almost all recent RTAs include at least one reference to maintaining Sustainable Development Goals (SDGs). RTAs frequently refer to the multilateral environmental agreements; clean energy and waste management; policies which harm forests, water resources and downgrade biodiversity; aim sustainable management and rule-making procedures (WTO & UN Environment, 2018). Some trade blocks do more to advance the Sustainable Development (SD) agenda.

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For instance, the EU has included labor and environmental standards in its FTAs with third countries for about 10–15 years already. Since FTA with Korea in 2011, these have been included in a trade and sustainability separate chapter. The European Union has also included a chapter on Trade and Sustainable Development (TSD) in its latest trade agreements. The EU-MERCOSUR mega-deal provides for a separate chapter on the SDGs. According to the post-Brexit trade agreement with the United Kingdom (UK), signed in 2020, parties can impose trade sanctions in case levels of sustainability in trade are not sufficient. On February 18, 2021, the European Commission published a Trade policy review (European Commission, 2021). The Commission plans reinforcing the sustainability dimension of existing and future agreements, strengthening the enforcement of trade and sustainable development commitments. Hence, the sustainability is likely to become more enforceable through the EU trade policy, including through the RTAs as its main instrument. The sustainability provisions are also found in mega-trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. To assist SDGs implementation in RTAs, the United Nations (UN) Environment branch, has developed a Sustainability Toolkit for Trade Negotiators as advisory services (WTO and UN Environment, 2018). The methods of environmental provisions in RTAs continue to evolve. Bringing the environment and sustainable development into RTAs has become a typical element of regional trade policy. Digitization of the economy and trade has become another big issue dealt with in the current RTAs. For instance, the reshaped USMCA contains a set of digital rules and provisions, if compared with the former North American Free Trade Agreement (NAFTA). The digitization has been intensified since 2020 because of COVID-19. E-commerce was expanding at a time of pandemic isolation. In 2019, the first Digital Trade Agreement (DTA) was done by the United States (US) and Japan, aimed at building up and regulating common digital trade framework. E-commerce regulation is being provided for in many RTAs in the form of specific provisions. By 2021, in the Asia–Pacific region three DTAs were signed and one agreement was under negotiation. The first trade agreement with a dedicated chapter on e-commerce was the New Zealand-Singapore FTA signed in 2000. Within the last two years from 2019 to 2020, about half of all trade agreements (eight out of the 17) included specific e-commerce provisions. That is a clear demonstration of the growing role of the e-commerce regulation within the current RTAs.

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At the start of 2021, there were 65 regional trade agreements in place with e-commerce provisions (UN ESCAP, 2020). Some RTAs include a dedicated chapter on electronic commerce, or provisions on digital commerce in the chapter on IPR, or provisions related to digital rights management, or to data protection and localization. We can have an idea about the substance of the regulation in this area by looking at the list of provisions included in the chapters on e-commerce: electronic trade rules and market-access commitments, facilitating digital trade; prerequisites for telecommunications services provision; intellectual property rights protection; elimination of customs duties on electronic trade; de minimis thresholds for low-cost parcels; non-discrimination of digital imported products; the cross-border electronic transfer of information, data localization and cybersecurity; electronic authentication and e-signatures; paperless trading; e-invoicing; e-payments; consumer protection; personal information protection; open government data access; unified e-system the ‘single window’; usage of source code for software; digital identities; standards and conformity assessment for digital trade; rules for artificial intelligence in trade; dispute settlement. Hence, this part of the regulation in the RTAs has become virtually comprehensive. On the other hand, many RTAs just reproduce the moratorium reached within the WTO on customs duties for e-commerce transactions and provide for cooperation between regulatory authorities without going into any details. However, these arrangements within the RTAs may have a special meaning for the trading system as if the multilateral moratorium is not extended one day, there would be an RTA-level base for it. That could be considered as a limited scope substitute. With the growing role of digitalization, there are all the reasons to suggest that future RTAs will be further oriented to various forms of regulation on trade in digital goods and services, compared to traditional goods and services. The leading economies became leaders in forming the current RTAs agenda, bringing more items into it. It can be demonstrated by the example of the EU, pushing forward the green agenda, being the leader in environmental provisions incorporation into numerous RTAs. The USA emphasizes RTAs rules on the protection of the intellectual property rights that usually go beyond what is required by WTO. Many US FTAs contained provisions related to digital rights management. Digital provisions are frequently included into the RTAs upon the insistence of the developed economies. The illustration is in a number of RTAs

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between an advanced economy that insisted upon e-commerce provisions as a condition for the agreement with less developed countries such as with Cambodia, Georgia, Guatemala, India, Indonesia, and others. In general, RTAs between advanced economies have a broader coverage and a deeper penetration into the ways and means the topics are treated. The EU concluded several RTAs with a chapter on trade in services (telecommunications or financial services) and e-commerce (Wu, 2017). All in all, we can conclude that recent RTAs do have a broader and deeper coverage of different topics. In other words, their maturity is growing. The current economic challenges are increasingly met by the trade regulative response within the modern RTAs. The RTAs are more focused not alone on trade liberalization, they start responding to environmental, climate, digitalization, crisis management, and other important concerns of the current economic agenda. The RTAs and the Multilateral Trading System: Increased Fragmentation and Protectionism or Continued Globalization and Liberalization? One core principle of the WTO trading system is non-discrimination. However, RTAs are an exception to this rule. RTAs are somehow discriminatory as only their signatories enjoy favorable market-access conditions, put forward by these agreements. The partial solution to this problem is the WTO notification procedure. In order to be recognized by the WTO, a regional trade agreement has to be notified in a due way. It should aim facilitating trade between its parties and should not raise trade barriers vis-à-vis third-parties. From this perspective there is no formal conflict between the RTAs multiplication and the multilateral trading system. According to many scholars, regionalism is not opposed, but complementary to free trade. Especially after the concept of regionalism has been transformed into a ‘new regionalism’ often referred to as an ‘open regionalism’ (Laursen, 2003). However, with time, and at economic crisis times and during the Pandemic, some RTAs become restrictive toward third countries and it is not controlled in a due manner by any multilateral institution. The WTO authority lies more in the sphere of monitoring trade. It produces trade monitoring reports of its members and joint reports together with the Organization for Economic Co-operation and Development (OECD) and the United Nations Conference on Trade and Development (UNCTAD) on trade and investment measures for G-20

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economies. Trade policy reviews on individual countries and ROs are also done. But in case of restrictions revealed, there are no sanctions. The hope for the global trade regulation breakthrough lies and depends more than ever both on the expansion of the RTAs and especially on the changes occurring in the coverage of areas of cooperation. Modern RTAs are different from what they were only a decade ago. As we have showed, they deal not only with lowering down tariffs and quantitative restrictions on trade, but they go beyond that. This is what is called ‘WTO plus and WTO extra’ topics, which comprise non-tariff barriers, intellectual property rights protection, public procurement, investment regimes, ecology and environment protection and many others. These issues are not dealt with to the same extent at a multilateral WTO level, as it is difficult to reach a consensus between many members. However, the absence of solutions at a multilateral level looks less a tragedy for the global trade regulation as the number and the role of the RTAs is constantly growing and the quality of the regulation advanced within them is on a continuous upward trend. If we take digital trade, we find that the RTAs number dealing with digital trade is moving to a hundred. New international regulative frame originated and pushed forward by the RTAs could be considered as a compensation for the absence of a compromise at a multilateral level. The nature does not tolerate an empty space. There is always something to fill it in. This is exactly the case for the global and intra-regional trade regulation. Having said this, does not mean there is no need for a progress in trade regulation at the multilateral level. Even the global regionalism is not sufficiently global to fully substitute the WTO multilateral framework. Thus, countries will have to find a compromise for the reform of the WTO (already in progress) to restore its authority to the benefit of the re-shaken global trade regulation. According to OECD experts, services, investment, transparency, and e-commerce are the areas that show the most significant degree of similarity across different RTAs. Hence, these particular areas are the first ones to create a common ground for speeding up negotiations at the WTO level. A link RTA—WTO should operate this way too. Regionalism is working both ways. Regionalism and globalism could be both opposing and complementary, counterbalancing or complementing each other (Hettne, 2005). On the one hand, regionalism fills in the gaps of the multilateral system, becoming more comprehensive and global. Regions ‘are increasingly fundamental to the functioning of all aspects

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of world affairs from trade to conflict management, and can even be said to now constitute world order’ (Fawn, 2009). On the other hand, global multilateral system is becoming fragmented in certain areas of governance into more robust regional coalitions to deal with the current challenges in a more effective way. ‘.. regions and regionalism are taking a quasiautonomous role in shaping global policies and in addressing issues.. previously tackled in the framework of global multilateral institutions’ (Barbieri, 2019). International trade is definitely the case illustrating such a dual impact of regionalism by the fast spread of the RTAs. Mega-Regional Trade Agreements (MRTAs) represent a new level of RTAs’ development in terms both of the scope and the substance. They are done between large and important trading partners, or between the regional organizations (EU—MERCOSUR), or between a regional organization and a big economy (EU—Canada, EU—Japan). Mega-RTAs follow the RTAs path by regulating a wider and more complex range of issues. As R. Baldwin puts it, twentieth century RTAs were helping to ‘sell things’ by reducing barriers for goods to cross borders, twentyfirst century RTAs (including mega-RTAs) are there to help ‘make things’ by enabling factories … to insert themselves into global value chains … (Baldwin, 2014). Mega-RTAs represent another step forward in creating a large base for common regulatory standards for investment and business activities. They generate incentives for other states to become partners with actors in a MRTA. Economies of scale working. Third countries try to achieve compatibility with mega-RTAs rules, simplifying the access to the large markets. The trend to create MRTAs has all the chances to further intensify the process of multiplication of the standard RTAs. Hence, the most likely scenario in the coming years is a follow up trend of the new RTAs multiplication. Does the trend of the RTAs multiplication lead to a fragmentation in the international trading system? To a certain extent—yes. As benefits of the newly created RTAs are only available to members. The focus of scholars and the WTO was traditionally made upon the level of liberalization of trade. If no extra-barriers to trade were created by the newly formed RTA and some barriers were phased out within an RTA, that was considered in accordance with the WTO rules. The logic was understandable: the overall level of liberalization of international trade was due to be higher as a result of intensified liberalization within the regional parts of the trading system. However, taking into account the focus of the current RTAs—not so much on dismantling the barriers to trade but on building

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up common spaces (see “Regional Trade Agreements: Global Trading System Radical Re-Shaking” section of this chapter), the newly created mechanisms will be available only to members of the RTA. It does not formally confront the WTO rules. The more these common mechanisms become important, the more they would lead to another kind of fragmentation within the international trading system. This time fragmentation could be not identified upon the level of liberalization of trade within the global system, but it will emerge through a difference in the degree of coordination of policies within the trading blocks and RTAs. The trick is that the higher the level of coordination of policies, the more advantages the countries will mutually enjoy from the system that provides opportunities for such a coordination. And the WTO can’t do anything about it but to further continue to accept the notifications of the incoming new RTAs. Many scholars may be worried on the prospects for a new phase of fragmentation within the international trading system, the way they were worried about the existing fragmentation in the levels of trade liberalization. My guess is that contrary to these worries, the incoming ‘new’ fragmentation could bring about a hope for a progress at a multilateral level within the WTO. It looks as a controversial statement: how could yet another fragmentation in the global trading system bring back positive developments into the multilateral trade negotiations?! I suggest a following logic. ‘Defiant’ states could easily block multilateral negotiations using or rather abusing the consensus rule within the WTO. They can’t do that standing outside the RTAs, or belonging only to a small number of RTAs. And RTAs are becoming the dominant rulemakers within the international trading system. ‘Maverick’ states could continue blocking consensus decisions within the WTO, but they can’t do so within the multiple RTAs. And if these against-multilateral-tradesolutions’ states are becoming increasingly marginalized, they should normally loose motivation to continue blocking decisions within the WTO, as the dominant part of trade will be handled anyway by a set of rules within the growing RTAs network. Hence, there is a chance for the multilateral trading system to rebecome solid the way it used to be. The chances for the multilateral system renewal are strong with the RTAs on a rise. We demonstrated that RTAs have become a foundation for building up the new global trading system with many new distinctive features.

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This system was formed parallel to the existing multilateral framework. However, it remains strongly linked to it in many various ways. RTAs are guided by the WTO principles and apply its norms, being at the same time a best practice case for the WTO and fostering multilateral trade links in a particular way. Acknowledgements for the assistance of the Faculty of the World Economy and International Relations of the Higher School of Economics.

References Acharya, A. (2014). Global International Relations (IR) and regional worlds: A new agenda for international studies. International Studies Quarterly, 58(4), 647–659. Altenberg, P., Berglund, I., Jägerstedt, H., Prawitz, C., Stålenheim, P., & Tingvall, P. (2019). The Trade Effects of EU Regional Trade Agreements – Evidence and Strategic Choices. https://www.kommerskollegium.se/global assets/publikationer/rapporter/2019/publ-trade-effects-eu-rta.pdf. Accessed 15 November 2021. Balassa, B. (1961). The theory of economic integration. G Allen & Unwin Ltd. Baldwin, R. (2014). Multilateralising 21st century regionalism. OECD. Barbieri, G. (2019). Regionalism, globalism and complexity: A stimulus towards global IR? Third World Thematics: A TWQ Journal, 4(6), 424–441. https:// doi.org/10.1080/23802014.2019.1685406 Bhagwati, J. (1993). Regionalism and multilateralism: An overview. Trading blocs: Alternative approaches to analyzing preferential trade agreements. http://ctrc.sice.oas.org/trc/Articles/Regionalism/dm_ch2.pdf. Accessed 20 November 2021. EAEU. (2021). EAEU Legal Portal. https://docs.eaeunion.org/en-us. Accessed 12 December 2021. European Commission (2021) Communication: Trade Policy Review – An Open, Sustainable and Assertive Trade Policy. COM(2021) 66 final. Eurostat. (2020). Intra-EU trade in goods – Main features. https://ec.eur opa.eu/eurostat/statistics-explained/index.php?oldid=452727. Accessed 12 December 2021. Fawn, R. (Ed.). (2009). Globalizing the regional. Cambridge University Press, Cambridge. Haas, P. M. (2016). Regional environmental governance. In T. A. Börzel & T. Risse (Eds.), The Oxford handbook of comparative regionalism (1st ed., pp. 430–456). Oxford University Press.

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Hettne, B. (2005). Beyond the ‘New’ regionalism. New Political Economy, 10(4), 543–571. Hosny, A. (2013). Theories of economic integration: A survey of the economic and political literature. International Journal of Economy. Management and Social Sciences, 2(5), 133–155. Kalachyhin, H., & Zuev V. (2022). Role of EU RTA network and anti-crisis measures in overcoming the effects of the pandemic. Current Problems of Europe, 1, 126–150. https://doi.org/10.31249/ape/2022.01.05; https:// upe-journal.ru/article.php?id=695 Laursen, F. (2003). Comparative regional integration: Theoretical perspectives. Ashgate. Leitner, S.M., Marcias, M., Mirza, D., Pindyuk, O., Siedschlag, I., Stehrer, R., & Stöllinger, S. Z. (2016). The Evolving Composition of Intra-EU Trade (No. 414). WIIW Research Report. https://wiiw.ac.at/the-evolving-compositionof-intra-eu-trade-dlp-4059.pdf. Accessed 12 December 2021. Nye, J. S. (1971). Peace in parts: Integration and conflict in regional organization. Little, Brown. Shirotori, M., Ito, T., Duval, Y., Du, R., & Marceau, G. (2021). Readying regional trade agreements for future crises and pandemics. UNCTAD. https://unctad.org/news/readying-regional-trade-agreements-future-crisesand-pandemics. Accessed 15 November 2021. UN Comtrade Database. (2021). https://comtrade.un.org/. Accessed 12 December 2021. Under an FTA, member states cancel customs duties in mutual trade. In trade with third countries, each member can maintain its own policies and apply different customs tariffs. UN ESCAP. (2020). Asia-Pacific trade and investment agreement database – APTIAD. https://www.unescap.org/content/aptiad. Accessed 4 December 2020. WITS. (2021). World Integrated Trade Solution. https://wits.worldbank.org/. Accessed 12 December 2021. WTO | Regional Trade Agreements. (2021a). https://rtais.wto.org/UI/Public MaintainRTAHome.aspx. Accessed 2 December 2021. WTO | Regional Trade Agreements. (2021b). RTAs in force. http://rtais.wto. org/ui/PublicAllRTAList.aspx. Accessed 4 December 2021. WTO Secretariat/RTA Section. (2021). FACTS&FIGURES Regional Trade Agreements. https://www.wto.org/english/tratop_e/region_e/rtafactfig_e. pdf. Accessed 5 December 2021. WTO, UN Environment. (2018). Making Trade Work for the Environment, Prosperity and Resilience. https://www.wto.org/english/res_e/publications_ e/unereport2018_e.pdf. Accessed 02 December 2021.

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Wu, M. (2017), Digital Trade-Related Provisions in Regional Trade Agreements: Existing Models and Lessons for the Multilateral Trade System. RTA Exchange. International Centre for Trade and Sustainable Development (ICTSD) and the Inter-American Development Bank (IDB), Geneva. Zuev, V. (2020). International trade at a triple crossroads. In L. Grigoryev, A. Pabst (Eds.), Global governance in transformation. Springer. https://doi.org/ 10.1007/978-3-030-23092-0_12

CHAPTER 5

How Do Global Value Chains Challenge Traditional International Business Policy? Ari Van Assche

Introduction Global value chains (GVC) have taken the policy world by storm (Gereffi, 2019). In the past decade, virtually all leading international organizations including the International Labor Organization, the Organization of Economic Cooperation and Development, the United Nations Conference on Trade and Development, the World Bank, and the World Trade Organization (WTO) have dedicated at least one flagship publication to GVCs. The WTO has gone a step further by launching the “Made in the World” initiative ten years ago to deepen the understanding of the role of GVCs in international trade and their implications for the world economy. Yet, despite the huge enthusiasm about the topic of GVCs in policy circles, there remains substantial ambiguity how the adoption of GVC thinking alters trade policy recommendations. Is it old wine in new bottles

A. Van Assche (B) HEC Montréal, Montréal, Canada e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance During De-Globalization, International Political Economy Series, https://doi.org/10.1007/978-3-031-13757-0_5

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as some scholars have argued? Or does the reality of GVCs really lead to new policy thoughts? The goal of this chapter is to study these questions. In Sect. “Trifecta of Tasks, Linkages, and Firms”, we discuss which new elements the GVC framework brings to thinking about international trade by emphasizing the role of the trifecta of tasks, linkages, and firms. In Sect. “The Trifecta’s Influence on Trade Policy Narratives”, we then analyze how the enlarged focus on this trifecta has influenced policy thinking in four leading trade narratives in which GVCs play a central role. We use Sect. “Discussion and Concluding Comments” to make some concluding comments about the influence of GVCs on trade policy.

Trifecta of Tasks, Linkages, and Firms Global value chains (GVCs) have revolutionized the way that production processes are organized. Thanks to improvements in communication and transportation technologies, companies have abandoned the practice of producing goods or services entirely in a single country and within their own organizational boundaries. Through offshoring and outsourcing, they have sliced up their value chains and dispersed activities to locations and actors where production can be conducted most efficiently. In a recent article, Carlo Pietrobelli, Roberta Rabellotti, and I laid out a framework that evaluates the impact of GVCs on our thinking about international business policy (Pietrobelli et al., 2021). The main message of the paper was that GVCs alter our reasoning about trade by elevating the role of tasks, linkages, and firms. In this Sect., we briefly discuss how GVCs have raised the importance of this trifecta. In the next section, we then explain how the trifecta has influenced different narratives that relate GVCs to public policy. Tasks The first novelty of the GVC framework is its shift of attention from industries to tasks (or value chains stages). Traditionally, trade economists and practitioners treated comparative advantage as a phenomenon that drives countries to specialize in industries. This is because much of trade theory is built on the “national production paradigm” whereby final goods are considered tradable in world markets but production inputs are non-tradable (Van Assche, 2017). The emergence of GVCs has shattered

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this paradigm by demonstrating that production processes are nowadays globalized as well. This matters because it means that countries can participate in a finer-grained international division of labor than was previously considered. Countries no longer need to specialize in entire industries but can rather “hyperspecialize” in those value chain stages or “tasks” of an industry in which they have a comparative advantage (Grossman & RossiHansberg, 2008). Empirical evidence backs this up. Timmer et al. (2018), for example, combined value-added trade data with occupational employment data to show that, within industries, developed countries specialize in knowledge-intensive headquarter activities (e.g., R&D and marketing) while despecializing in labor-intensive fabrication activities. In contrast, developing countries predominantly specialize in fabrication activities. The focus on tasks has redirected the attention toward the type of tasks that generate most development opportunities. A highly influential concept in this respect is the “smile of value creation.” It suggests that the disproportionately high knowledge intensity of tasks at the two extremes of the value chain (R&D upstream and marketing downstream) implies that they capture a disproportionately high portion of the value added generated in GVCs. In contrast, the low knowledge intensity of assembly activities in the middle of the chain means that they generate little value added, putting them at the bottom of the smile curve. Recent studies have provided empirical support for this conceptualization (Van Assche, 2020). Dedrick and Kraemer (2017) used teardown reports to showcase the existence of “smile curves” in smartphone value chains. Lead firms such as Apple, Huawei, and Samsung, which are responsible for the R&D, product design and brand equity, captured around one-third of total value added. Assembly activities in developing countries only captured 3–4 percent of total value added. Rungi and Del Prete (2018) uncovered a similar story in their analysis of the financial data of two million European firms. After controlling for firm heterogeneity, they detected a U-shaped relationship between the value-added content of a firm and its distance from final consumption. The existence of the “smile of value creation” implies that countries nowadays vie to increase their competitiveness in higher value-added activities. Developed countries seek to develop policies that allow them to maintain their position at the extremes of the smile curve while developing countries look for the optimal policy mix to move up the smile curve.

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Linkages A second novelty that the GVC framework uncovers is the importance of international production and knowledge linkages for a country’s performance. In traditional trade thinking, international linkages were generally ignored since companies were believed to concentrate their entire production process within the same country (national production paradigm). For firms that participate in GVCs, however, international linkages become critical for performance. Collaborating with strong suppliers that can produce components cheaper at a higher quality can boost domestic firms’ productivity while working with weaker foreign value chain partners can stifle performance (Grossman & Rossi-Hansberg, 2008). Furthermore, international linkages to foreign partners can act as a powerful conduit for accessing foreign knowledge that can be leveraged to improve technological and operational capabilities (Ambos et al., 2021; Turkina & Van Assche, 2018). Countries therefore seek to develop an optimal policy mix that allows them to strengthen the benefits that international linkages provide without making them too vulnerable to foreign shocks through international linkages. Firms A third novelty of the GVC framework is that it highlights the importance of firms. GVC scholarship recognizes that the power in GVCs is unequally distributed in the favor of lead firms which can determine the terms and conditions of GVC participation for other firms (Dallas et al., 2019). Lead firms have the power to impose the product, social or environmental standards that GVC partners need to meet and can use various types of carrots (e.g., knowledge transfer) and sticks (e.g., supplier exclusion) to ensure that partners are in lockstep. An influential literature has built on these ideas to discuss the importance of GVC governance for economic and social upgrading (Barrientos et al., 2011; Gereffi et al., 2005). Other studies have built on this power asymmetry argument to call for lead firms to step up the plate and develop private governance to upgrade local suppliers, ensure fair treatment of workers, adopt environmentally sustainable business practices, and build resiliency (Van Assche & Brandl, 2021).

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The Trifecta’s Influence on Trade Policy Narratives How does the elevated role of tasks, linkages, and firms challenge traditional trade policy? In this section, we address this question by analyzing, comparing, and contrasting the policy recommendations that arise from four major policy narratives that have recently emerged related to GVCs: The GVC participation narrative which focuses on the importance of participating in GVCs to boost economic development; (2) the resilience narrative that concentrates on GVCs’ impact on a country’s economic resilience against global economic shocks; (3) the economic upgrading narrative that focuses on the fastest pathways for countries to increase their value capture in GVCs; and (4) the sustainability narrative that focuses on improving local social and environmental conditions in GVCs. GVC Participation Narrative The GVC participation narrative is a perspective that is most closely aligned to traditional trade thinking. As we will see, it enriches trade theory by embracing the concept of tasks and linkages in GVCs, but it also promotes neoliberal policies that are at the heart of conventional trade policies. Because of the widespread support that the narrative enjoys in many international organizations, it can also be called the establishment narrative. The starting point of the narrative is that countries increase their participation in GVCs for reasons that are similar to those evoked in traditional trade theory. According to this perspective, GVC participation primarily strengthens economic development by allowing countries to “hyperspecialize” in those tasks in which they have a comparative advantage, letting domestic resources flow to their most productive use (Grossman & RossiHansberg, 2008). This is beneficial for developing countries which can embark on a fast track to industrialization by allowing them to enter GVCs through the concentration on simpler production stages that suit their existing level of capabilities. It is also advantageous for developed countries which can specialize in high-value-added tasks such as R&D and marketing that generate more value capture. Due to the establishment narrative’s focus on the benefits of deeper international division of labor which is also at the heart of traditional

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trade policy thinking, it proposes many of the same neoliberal policies that international organizations have traditionally embraced (World Bank, 2019). Specifically, it emphasizes two policy pillars that aim to strengthen the functioning of the market in the global trading system: market-enabling policies and connectedness policies (Pietrobelli et al., 2021). Market-enabling policies address the market distortions that prevent the allocation of private resources toward comparative advantage sectors and value chain activities. Eliminating such market distortions is thus considered instrumental to facilitating GVC participation and promoting a country’s functional specialization in those GVC activities in which a country has a latent comparative advantage. Connectedness policies aim at improving GVC participation by reducing the cost for local firms to receive or transmit goods and information across borders, thus turning them into more attractive GVC partners. On the goods side, this includes trade liberalizing policies such as the elimination of tariff and non-tariff barriers as well as policies aimed at the introduction of competition in transport services and at the improvement of port structure and governance. On the information side, there are policies that strengthen companies’ ability to transfer data cheaply, freely, and safely across borders, such as those aimed at fostering competition in the telecommunications sector and at improving the quality of the wireless network infrastructure. The recognition of the sequential nature of linkages in GVCs has nonetheless led to new neoliberal policies that go beyond traditional policy. For example, the recognition that the same component may cross borders multiple times as it journeys along a GVC implies that the elimination of downstream trade restrictions in GVCs can substantially boost the participation of upstream producers in GVCs. This logic is at the basis of the “Global Value Chains for Least Developed Countries (LDCs)” initiative that I recently promoted with Gary Gereffi and Stephanie Barrientos in an open letter to the Director General of the World Trade Organization (WTO) (Van Assche et al., 2021). Under this Initiative, WTO members would complement existing preferential schemes based on “direct” LDC exports with a multilateral scheme that would extend a proportional duty-free treatment to the LDC value-added that is incorporated in exports across the globe. Hence, LDC value-added exports would remain duty-free throughout their journey along global

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and regional value chains, thus offering firms and workers in LDCs the needed additional support to participate in global trade. For instance, consider the case of mangos exported by LDCs. Currently, such products are offered duty and quota-free in certain preferential schemes for LDCs (e.g., the EU’s Everything but Arms program). But if the LDC mango is embedded in the destination country’s processed-food export (e.g., yogurt or ice cream) which faces a 15% most-favored-nation tariff, the LDC mangos are also indirectly subject to this tariff. Under the “GVCs for LDCs” initiative, the domestic value added of the LDC mango will be deducted from the dutiable value of the processed food items, leading to a boost to LDCs exports of mangos along the supply chain. A similar positive trade effect would arise for nonagricultural products (e.g., copper, aluminum, cotton) and manufacturing products (e.g., apparel and textiles). Antimiani and Cernat (2021) estimate that the “GVCs for LDCs” initiative will increase the value-added embodied in LDC exports by more than US$5 billion on an annual basis, with textiles, metal products, and other primary goods showing the biggest gains. On average, LDCs would see their domestic value-added content in exports increase by two percent and move away from excessive specialization in agri-food production toward the supply of intermediate manufacturing inputs. GVC Resilience Narrative A second narrative that has been front-and-center in recent policy discussions is the GVC resilience narrative. In the face of the Great Recession of 2008–2009 and the COVID-19 pandemic, many trade sceptics have clamored that hyperspecialization is endangering countries’ ability to ensure the supply of essential goods and to develop a resilient economic system. Proponents of the resilience narrative, then again, have pushed back against these views by countering that GVCs have in the past played a central role in building economic resilience and that they need to be further embraced to build a more robust economic system (Van Assche, 2021). In this section, we will briefly discuss these two contrasting viewpoints and identify what new policy recommendations the resilience narrative generates. In today’s globally interconnected economies where international linkages are prevalent, a disruption in one part of the global economic system

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can propagate to other countries through GVC linkages (Miroudot, 2020). Recent history provides us with numerous examples. During the Great Recession of 2008–2009, negative liquidity shocks in one country caused a chain reaction of financial difficulties throughout GVCs as firms relied on each other for credit (Bems et al., 2013). In the aftermath of the 2011 Tohoku earthquake and tsunami, the production of Japanese automotive and electronics components dried up, creating supply chain disruptions that affected the price and availability of cars and computers around the world (Escaith et al., 2011). In the early months of the COVID-19 pandemic, confinement efforts in China led to the closure of factories across the globe as companies could not access parts. These events—combined with recent shortages in essential goods and supply chain disruptions—have raised the concern among trade sceptics that hyperspecialization has overly heightened countries’ reliance on foreign suppliers and GVCs, thus endangering governments’ ability to deliver societal well-being. Assertions have been made that GVCs had become too complex and that they were not designed to operate in today’s turbulent geopolitical landscape. Calls have therefore become increasingly loud for GVC-curtailing policies that would make countries more resilient to global economic shocks through reshoring. Proponents of the resilience narrative have pushed back against these arguments by pointing out that the link between GVCs and resilience is more complicated than trade sceptics portray (Miroudot, 2020). While it is true that GVCs increase a country’s exposure to foreign shocks, it also reduces a country’s vulnerability to local disasters. Building a truly resilient economic system thus requires supply sources to be sufficiently diversified both between domestic and international suppliers and across countries, and GVCs play an important role in this (Miroudot, 2020). Policies that promote reshoring and “buy local” can in this respect be detrimental by both reducing resiliency and increasing procurement costs (OECD, 2021a). Advocates of the resilience narrative instead focus on policy instruments that can help countries strengthen the resilience of the supply of essential goods without curtailing GVCs (OECD, 2021b). First, they call for governments to build more slack in the system through domestic stockpiling so that unforeseen future shocks can be better managed. Second, they call for heightened government collaboration with the private sector to promote standards of risk management that reduce the perils of supply chain disruptions. This may include mandates for GVC

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lead firms in essential goods sectors to develop due diligence strategies that strengthen awareness, transparency, accountability, and agility. Third, they call for increased international regulatory co-operation with likeminded countries to ensure resilient GVCs by reinforcing predictable, rules-based trade and avoiding unilateral or retaliatory trade measures. Through cooperation with the private sector and other countries, it is believed that governments can incite companies to build GVCs that can ensure resilient supply chains in essential goods. It is important to point out that the focus on mandated due diligence strategies is a policy recommendation that builds squarely onto the GVC framework’s focus on firms. By imposing due diligence principles onto GVC lead firms in essential goods sectors, governments are imposing a heightened responsibility on lead firms to develop terms and conditions for GVC participation that will build resilience, thus ensuring that the private sector meets broader government expectations. Value Capture Narrative The value capture narrative pushes the trade policy discussion further away from the neoliberal trade policies of the past (Gereffi, 2019). While this narrative recognizes that GVC participation is an important ingredient for economic development, it cautions that market and coordination failures often prevent market forces from moving countries to activities that lead to higher value capture (Pietrobelli & Staritz, 2018). It therefore advocates that governments should adopt more interventionist trade policies to ensure a stronger nexus between GVC participation and industrialization through structural transformation (Pietrobelli et al., 2021). The starting argument of the economic upgrading narrative is that moving up the smile curve is key to economic development and that international linkages play a central role in doing so. Suppliers’ international linkages with global lead firms provide access to knowledge that helps them build the necessary capabilities to move into higher value-added activities (Gereffi et al., 2005; Morrison et al., 2008). This linkageinduced economic upgrading can take on different forms: product and process upgrading, which implies moving vertically along the value chain to better products or processes as well as the more challenging functional and interchain upgrading, entailing horizontal movement toward

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new functions or new markets (Humphrey & Schmitz, 2002). A range of empirical studies have used this upgrading typology to analyze how GVC participation may trigger economic development, including Bair and Gereffi’s (2001) study of the apparel cluster in Torreon, Mexico and Van Assche and Van Biesebroeck’s (2018) study of the export processing regime in China. A key talking point of the economic upgrading narrative is that a supplier’s ability to economically upgrade depends on both the governance structure of the lead firm (Schmitz & Knorringa, 2000) and the absorptive capacity of the supplier (Sako & Zylberberg, 2019). First, governance structure matters. Lead firms are generally willing to tolerate or even support innovation by their suppliers along the dimensions of quality, flexibility, and productivity if it helps strengthen the complementarities between the two value chain partners. In contrast, lead firms may discourage and even hinder the acquisition of technological capabilities by its suppliers if in the future this type of innovation risks to encroach on the lead firm’s core competence. In this respect, the GVC governance literature has focused on how different patterns of governance may enhance or hinder different types of economic upgrading, which are themselves often the result of learning and innovation activities (Schmitz & Knorringa, 2000). Second, absorptive capacity matters (Sako & Zylberberg, 2019). The quality of linkage-induced learning depends on local firms’ ability to absorb, master, and adapt the knowledge and capabilities that lead firms transfer to them (Morrison et al., 2008). These firm-level processes are often lacking in developing countries, where firms have low R&D and innovation capabilities. Building on these arguments, proponents of the value capture narrative advocate that governments should develop a more interventionist trade policy stance to boost economic upgrading, with vertical policies focusing on specific sectors and even firms that can lead to more rapid economic upgrading. Instead of advocating for market-enabling policies, they promote greater selectivity in building absorptive capacities and harnessing governance structures that can lead to stronger economic upgrading toward high value-added activities (Lee, 2013).

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Sustainability Narrative The sustainability narrative similarly promotes policies that are more interventionist and focus on leveraging the power of lead firms. A central argument in the sustainability narrative is that GVC participation, resiliency building, and economic upgrading do not automatically foster social and environmental upgrading along the GVC. Even if they create significant economic progress, the benefits often leave many behind (Lund-Thomsen & Lindgreen, 2014) and lead to environmental degradation (De Marchi et al., 2019). Barrientos et al. (2011) show that economic upgrading can, but does not necessarily, lead to social upgrading which implies accessing better work and enhancing working conditions, protection, and rights. Similarly, there could be tensions between economic and environmental upgrading, defined as any change in the value chain resulting in the reduction of firms’ ecological footprint, such as in their impact on greenhouse gas emissions, on biodiversity losses and on natural resources overexploitation (De Marchi et al., 2019). At the same time, there is a growing acknowledgment that lead firms— if properly harnessed—can be a powerful vector to promote social and environmental upgrading. As we have seen, lead firms have the corporate power to define the terms and conditions of GVC membership and can use their authority to promote social standards and environmental stewardship among their suppliers (Van Assche & Brandl, 2021). This compliance can cascade down to lower tier suppliers if GVC participation is made conditional on promoting sustainability standards further down the chain (Narula, 2019). Distelhorst and Locke (2018) find that firms reward suppliers for complying with social standards, supporting the notion that lead firms can play a key role in promoting social upgrading. The ability of lead firms to dictate the terms under which lower-level actors operate in a GVC has led to a vibrant academic debate about the role of private governance in filling gaps in global regulation. Many MNEs have implemented corporate social responsibility initiatives in their supply chains as a way of independently regulating labor issues, including the establishment of codes of conduct and the implementation of thirdparty monitoring of working and environmental conditions. While several scholars have pointed out the positive role that private governance can play in addressing market failures that public governance has difficulties

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tackling (Scherer & Palazzo, 2011), others have warned that it is relatively ineffective (Locke et al., 2009) and may weaken state regulation and create parallel regulatory systems (Rossi, 2019). For this reason, proponents of the GVC sustainability narrative have called for policies targeting lead firms that can more effectively incentivize them to promote sustainability along GVCs. One instrument that can be used in this regard is the use of social and environmental standards in public procurement practices. The 2014 EU Procurement Directives, for example, includes several far-reaching regulatory features that facilitate the monitoring of the respect for human rights and labor standards of contractors and subcontractors across borders. Another is the development of guidelines to which multinational firms need to abide in specific industries. The OECD Due Diligence Guidance, for example, provides detailed recommendations to help companies respect human rights and avoid contributing to conflict through their mineral purchasing decisions and practices.

Discussion and Concluding Comments GVCs are challenging traditional trade policies by putting the spotlight on the trifecta of tasks, linkages, and firms in trade policy development. Tasks matter because countries nowadays hyperspecialize in slivers of value chains—tasks—instead of entire industries. Proponents of the GVC participation narrative argue that a country should rely on neoliberal trade policies to benefit from hyperspecialization since it allows the country to functionally specialization in those tasks that are in line with the country’s latent comparative advantage, boosting economic development. Advocates of the value capture narrative suggest that more interventionist trade policies are needed to facilitate countries’ economic upgrading into higher value-added activities. International linkages matter because a country’s trade performance nowadays is heavily influenced by its firms’ linkages with foreign value chain partners. Proponents of the GVC participation narrative suggest that these international linkages can generate an additional productivity and knowledge boost to domestic firms and thus promote further hyperspecialization through neoliberal policies. Advocates of the GVC value capture narrative point towards the importance of linkage-induces knowledge spillovers for economic upgrading and call for interventionist policies that can help strengthen developing-country firms’ absorptive capacity

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and the amount of knowledge that lead firms transfer to these firms. Proponents of the GVC resilience narrative point toward the importance of diversified supply bases to ensure the resilience of GVCs in essential goods industries and call for international cooperation to achieve this. Firms matter because GVC lead firms have the power to set the terms and conditions of supplier participation in GVCs. Proponents of the GVC resilience narrative build on this argument to call for governments to mandate due diligence principles related to resilience so that lead firms can use their power to make their supply bases more resilient. Proponents of the GVC sustainability narrative make similar arguments to push governments to mandate due diligence principles that can promote social standards and environmental stewardship along GVCs. Taken together, these insights show that GVCs have created a new global trade reality that require a systemic redesign of trade policies. At the same time, the differential and sometimes opposing policy recommendations across the various narratives also highlights the need to develop a more integrative way of thinking about the complex phenomenon of GVCs and its interaction with public policy.

References Ambos, B., Brandl, K., Perri, A., Scalera, V. G., & Van Assche, A. (2021). The nature of innovation in global value chains. Journal of World Business, 56(4), 101221. Bair, J., & Gereffi, G. (2001). Local clusters in global chains: The causes and consequences of export dynamism in Torreon’s blue jeans industry. World Development, 29(11), 1885–1903. Barrientos, S., Gereffi, G., & Rossi, A. (2011). Economic and social upgrading in global production networks: A new paradigm for a changing world. International Labour Review, 150(3–4), 319–340. Bems, R., Johnson, R. C., & Yi, K. M. (2013). The great trade collapse. Annual Revue of Economics, 5(1), 375–400. Cernat, L., & Antimiani, A. (2021). Untapping the full development potential of trade along global supply chains: ‘GVCs for LDCs’ proposal. Journal of World Trade, 55(5), 697–714. Dallas, M. P., Ponte, S., & Sturgeon, T. J. (2019). Power in global value chains. Review of International Political Economy, 26(4), 666–694. Dedrick, J., & Kraemer, K. L. (2017). Intangible assets and value capture in global value chains: The smartphone industry (Vol. 41). WIPO.

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De Marchi, V., Di Maria, E., Krishnan, A., & Ponte, S. (2019). Environmental upgrading in global value chains. In G. Gereffi, S. Ponte, & G. Raj-Rechert (Eds.), Handbook on global value chains (pp. 310–323). Edward Elgar. Distelhorst, G., & Locke, R. M. (2018). Does compliance pay? Social standards and firm-level trade. American Journal of Political Science, 62(3), 695–711. Escaith, H., Keck, A., Nee, C., & Teh, R. (2011). Japan’s earthquake and tsunami: International trade and global supply chain impacts. VoxEU.org, April, 28. Gereffi, G. (2019). Global value chains and international development policy: Bringing firms, networks and policy-engaged scholarship back in. Journal of International Business Policy, 2(3), 195–210. Gereffi, G. (2020). What does the COVID-19 pandemic teach us about global value chains? The case of medical supplies. Journal of International Business Policy, 3(3), 287–301. Gereffi, G., Humphrey, J., & Sturgeon, T. (2005). The governance of global value chains. Review of International Political Economy, 12(1), 78–104. Grossman, G. M., & Rossi-Hansberg, E. (2008). Trading tasks: A simple theory of offshoring. American Economic Review, 98(5), 1978–1997. Humphrey, J., & Schmitz, H. (2002). How does insertion in global value chains affect upgrading in industrial clusters? Regional Studies, 36(9), 1017–1027. Lee, K. (2013). Capability failure and industrial policy to move beyond the middle- income trap: From trade-based to technology-based specialization. In J. E. Stiglitz and J. Y. Lin (Eds.), The industrial policy revolution I: The role of government beyond odeology (pp. 244–272). Palgrave Macmillan. Locke, R., Amengual, M., & Mangla, A. (2009). Virtue out of necessity? Compliance, commitment, and the improvement of labor conditions in global supply chains. Politics & Society, 37 (3), 319–351. Lund-Thomsen, P., & Lindgreen, A. (2014). Corporate social responsibility in global value chains: Where are we now and where are we going? Journal of Business Ethics, 123(1), 11–22. Miroudot, S. (2020). Reshaping the policy debate on the implications of COVID-19 for global supply chains. Journal of International Business Policy, 3(4), 430–442. Narula, R. (2019). Enforcing higher labor standards within developing country value chains: Consequences for MNEs and informal actors in a dual economy. Journal of International Business Studies, 50(9), 1622–1635. OECD. (2021a). Shocks, risks and global value chains: Insights from the OECD METRO Model. http://www.oecd.org/trade/documents/shocks-risks-gvcinsights-oecd-metro-model.pdf

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Van Assche, A., Gereffi, G., & Barrientos, S. (2021). Global value chains for least developed countries: A letter to WTO Ngozi OkonjoIweala. https://igs.duke.edu/news/global-value-chains-least-developed-cou ntries-letter-wto-ngozi-okonjo-iweala Van Assche, A., & Van Biesebroeck, J. (2018). Functional upgrading in China’s export processing sector. China Economic Review, 47 , 245–262. World Bank. (2019). Trading for development in the age of global value chains (World Development Report 2020) World Bank.

CHAPTER 6

The US–China Relations and Trade Policy K. C. Fung, Nathalie Aminian, and Chris Y. Tung

Introduction First Japan and more recently China have pursued export-oriented growth strategies. While other East Asian countries have done likewise, Japan and China are of particular interest because their economies are so large and the size of the associated bilateral trade imbalances with the United States so prominent. The purpose of this paper is to study the current U.S.–China trade wars from the perspective of the earlier U.S.–Japan

K. C. Fung University of California, Santa Cruz, California, USA N. Aminian (B) University of Rouen-Normandie, Mont-Saint-Aigna, France e-mail: [email protected] C. Y. Tung National Sun Yat-sen University, Kaohsiung, Taiwan

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance During De-Globalization, International Political Economy Series, https://doi.org/10.1007/978-3-031-13757-0_6

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trade conflicts. The comprehensive U.S.–China disputes and rivalry are clearly more complex and beyond the scope of this paper. Instead, we will focus only on one important aspect: the international trade conflicts. For researchers who have critically studied both the academic as well as the policy aspects of the earlier U.S.–Japan trade disputes (Baldwin, 1988, 1989a, 1989b, 1990; Bergsten & Cline, 1985; Bhagwati, 1989, 1991, 1992, 1993; Finger & Fung, 1994; Fung, 1989, 1991, 1992, 2002, 2019a, 2019b; Itoh, 1991; Krugman, 1991; McKinnon & Ohno, 1997; Petri, 1991; Saxonhouse, 1983a, 1983b, 1985, 1993), the current U.S.–China trade wars must seem like déjà vu. Many of the U.S. government allegations raised against Japan in the 1980s and 1990s are currently raised against China. In this paper, we will focus on three such complaints: the U.S. bilateral trade deficits, “unique” economic and business organizations or entities in Japan and in China that distorted international trade and Japanese Yen and Chinese Yuan exchange rate manipulations. Given how the allegations of the Trump White House against China look similar to the previous U.S. Government complaints against Japan, it seems logical and reasonable to provide a more detailed and critical look at the comparison of the current U.S.–China trade wars and the previous U.S.–Japan trade tensions. The paper is structured in the following manner. In the next section, we compare the issues of bilateral U.S. trade deficits during the U.S.– Japan trade conflicts and the U.S.–China trade wars. In Sect. ‘“Unique” Industry Organizations in Japan and “Unique” Chinese State-Led Capitalism’, we contrast the allegations and management of the “unique” industry structure and organization in both the U.S.–Japan and the U.S.– China trade frictions. In Sect. “Exchange Rate Manipulations”, we focus on the disputes of the allegations of exchange rate manipulations in both episodes. In Sect. “The Technological Competition”, we discuss the U.S.–China relations from the technological and strategic competition. We conclude in Sect. “Conclusion”.

U.S.–Japan and U.S.–China Bilateral Trade Balances One of the major complaints made by the U.S. Government against Japan during the 1980s and 1990s was the large and persistent Japanese trade surpluses. As an illustration, in 1988, the United States ran a trade deficit of over US$51.8 billion with Japan and in 1989, the deficit was US$49.1 billion (ACTPN, 1993, see Table 6.1). Similar complaints

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against China and its unfair practices and the trade imbalance has been heard from different U.S. administrations since the mid-2000s and particularly from the Trump administration.1 For the imbalances run by China, in 2017, using official U.S. data, the U.S. trade deficit was US$375.23, while in 2018, the deficit grew to US$419.16, its highest level (U.S. Congressional Research Service, 2019b, 2019c; see Table 6.2). Most economists noted that the U.S. trade and current account deficits were the result of macroeconomic factors such as low savings rates, high government budget deficits, and the high value of the U.S. dollar at that time (Feldstein, 1988; Fung, 1991; Krugman, 1991; Saxonhouse, 1983b). Some researchers have also blamed the Japanese government of deliberately adopting an undervalued Yen policy (Bergsten, 1983; The Economist, 1983). Following this line of thinking, one major policy initiative during the U.S.– Japan trade conflict was to realign the Yen-Dollar exchange rate. In 1985, five countries (the United States, West Germany, France, the United Kingdom, and Japan) signed the Plaza Accord, which effectively led to a sharp and abrupt large revaluation of the Japanese Yen against the U.S. dollar. The Yen shock (endaka) led to a deterioration of the performance of the Japanese exporting firms. Aminian et al. (2012) introduce a theoretical study of the political economy of the Japanese Yen. Some researchers further argued that the sharp appreciation of the Japanese Yen led to policy mistakes by the Bank of Japan (BOJ) which tried to slow the rapid rise of the Yen to help the exporting Japanese corporations, (Abegglen & Stalk, 1985) and in the language of the Japanese economics literature, the exporting J-firms (Aoki, 1990; Fung, 1992). But by continuing an excessively loose monetary policy for too long, the increased liquidity in the economy led to huge asset bubbles (Fukao, 1999; Fung, 2019a; McKinnon & Ohno, 1997, 2001). When the housing and stock market bubbles finally burst, deflationary expectations and stagnation induced by the Yen shock (Endaka Fukyo) became

1 From the mid-2000s, American politicians and economists were concerned about Chinese practices. Several bills have even been proposed in Congress to impose tariffs to discourage China to devaluate its currency (in May 2005 and September 2010) or for not complying with its intellectual property rights commitments. Even before Trump’s election and the trade war, the United States often sued China at the WTO: between 2001 and 2018, the United States lodged 23 complaints against China on issues such as dumping, illegal subsidies and intellectual property rights.

U.S.–Japan Bilateral trade balance (US$ billion), various years

−49.6

−59.4

−6.2

−10.4

−12.7

−18.3

1992

−22.8

1993

Source United States Census Bureau, “Trade in Goods with Japan,” various years, United States Census Bureau, “Trade in Goods with China,” various years, ACTPN (1993)

−43.4

1991

−41.1

1990

−49.1

1993

1989

1992

1990

1989

1991

U.S.–China (selected years for comparison)

U.S.–Japan (selected years during past intense trade conflicts)

Bilateral trade balance, selected years, during the countries’ respective intense trade tensions

Table 6.1

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−375.4

−419.5

−344.3

−283.6

−67.6

−69.1

−68.8

2016

−68.8

2017

−67.2

2018

−69

2019

−55.41

2020

Source United States Census Bureau, “Trade in Goods with Japan,” various years, United States Census Bureau, “Trade in Goods with China,” various years, ACTPN (1993), U.S. Congressional Research Service (2019c)

−346.8

2015

−367.3

2019

−344.8

2018

2014

2017

2015

2014

2016

U.S.–Japan (selected years for comparison)

U.S.–China (selected years during current intense trade conflicts) 2020

U.S.–China bilateral trade balance (US$ billion), various years

Bilateral trade balance, selected years, during the countries’ respective intense trade tensions

Table 6.2

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entrenched, creating conditions that at least partially led to Japan’s “Lost Decades” (McKinnon & Ohno, 1997). Another government policy inspired by the more systemic economywide macroeconomic approach to the U.S.–Japan trade tensions was to focus on the flip side of the current account deficits, namely, the savinginvestment imbalances. When policymakers established the Structural Impediment Initiative (SII) talks, experts within both governments and universities in the United States and Japan advised that one of the SII themes should be on such imbalances. The SII negotiations provided a binational government forum where both the Japanese and the U.S. governments could raise their dissatisfactions with each other’s economic and business practices and policies. One specific item under active discussion at that time indeed was how Japan could increase consumption and lower national savings, while for the U.S. side, how the United States could increase national savings and reduce consumption (ACTPN, 1993, SII, 1992). Overall, on the Japanese side, issues that needed to be addressed were Japanese Saving and Investment, Land Policy, Distribution System, Exclusionary Business Practices, Keiretsu Relationships, and Pricing Mechanisms. On the American side, policies that needed improvements included U.S. Saving and Investment Patterns, Corporate Investment Activities and Supply Capacity, Corporate Behavior, Government Regulation, Research and Development, Export Promotion as well as Workforce Education and Training (SII 1992). Both countries endeavored to address the concerns of each other and exert pressure to try to improve the fundamental economic factors. One important merit of the forum was that it involved both governments and were reciprocal. As for the current tensions and the Trump Administration’s trade wars with China, a “Phase One” trade agreement was signed and announced on January 15, 2020 (U.S. Trade Representative, 2020). Most experts expect that even with this interim “Phase One” truce, difficult disagreements between the two countries over the “unfair” bilateral trade deficits will continue in the future. President Trump’s preferred blunt policy was to try to reduce the U.S. deficits by imposing economy-wide tariffs and demanding large across-the-board increases in Chinese imports. Academic research has already been conducted on the issue of U.S.–Chinese trade imbalances (see e.g., Feenstra et al., 1999; Ferrantino & Wang, 2007; Fung, 1996; Fung & Lau, 1996, 1998; Fung et al., 2006; Schindler & Beckett, 2005; Tong, 2005; U.S.–China Joint Commission on Commerce

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and Trade, 2012). One major contribution of the research on the issue of U.S.–China trade deficits is to stress the fact that a large share of Chinese exports appears as reexports via Hong Kong (Fung & Lau, 1996, 2001; U.S. Congressional Research Service, 2019). Reexports and reexport markups will complicate the measurements of U.S.–China trade imbalances. Together with other factors such as transport costs, underinvoicing and over-invoicing, many researchers conclude that neither the U.S. government nor the Chinese government trade data are entirely accurate (Fung & Lau, 1996; Fung & Tong, 2014; U.S. Congressional Research Service, 2019). This is why the U.S.–China Joint Commission on Commerce and Trade established a working group to examine this issue in 2004. The working group produced two reports, one in 2009 and one in 2012, making attempts to reconcile the trade data of both governments. But even after appropriate adjustments, the U.S.–China bilateral trade imbalance is still very big, even though not as big as the U.S. government data would indicate. Furthermore, relevant research also shows that due to the deepening of the Asian and global supply chains, Chinese exports to the U.S. and to the world often contain various amount of imported intermediate goods. Estimating the domestic content or the vertical specialization share (the foreign content) is important for better policymaking (Dean et al., 2008). Thus, measuring the bilateral trade balance should not be based solely on gross values, but also on domestic value-added basis. Informed by such insights, the U.S. Government (U.S. Congressional Budget Office, 2008a, 2008b), international organizations such as the OECD, WTO, and the World Bank have also conducted research on the domestic and global value-added approach to measure imports, exports, and trade balances. However, the instincts of the Trump White House with respect to trade with China seemed to be more political than concentrating on U.S. business and economic benefits. Some potentially productive measures negotiated included requesting the Chinese government to purchase more U.S. goods and services, such as farm products and financial services. This type of policy tool is somewhat similar to the voluntary import expansion (VIE) measures employed during the period of the U.S.–Japan trade conflicts. VIEs during the Japan era were mainly industry-specific. They were likely market-distorting but for the case of both Japan and China, they can be useful tools to help defuse current and future U.S.–China trade tensions. One potential criticism of the

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current U.S.–China agreement to import more U.S. products is that these increased purchases do not seem to respond to particular complaints by U.S. companies and industries. These agreed increases in Chinese imports are so broad that they can almost be seen as the Chinese government buying political goodwill rather than reducing Chinese structural barriers to U.S. exports. In addition, even with the interim agreement, significant tariffs imposed by both countries are still in place. Overall, the across-theboard sharp tariff escalations initiated by the Trump Administration are incompatible with the established academic and policy research of professional economists and business researchers. Without altering the hardline approach toward China, the Biden Administration has decided to revisit the “Phase One” trade agreement. Comparing the episode of U.S.–Japan trade imbalance to the current U.S.–China trade imbalance situation, one can argue that at least at times, the U.S. government during earlier periods was able to use a productive bilateral, multi-agency platform, the Structural Impediments Initiative (SII), and utilize focused industry-specific VIE measures to try to mitigate the economic and political pressures. At the same time, trade tools employed against Japan in the form of the applications of 301, safeguards, antidumping and countervailing duties were mainly sectoral and often transitional. Compared with the economy-wide across-the-board tariffs imposed on China (which led to significant Chinese retaliations), the previous efforts in dealing with Japan seem to look steadier and more coherent. Urata (2019) points up an analysis that compares the merits of SII with the Framework Talks.

“Unique” Industry Organizations in Japan and “Unique” Chinese State-Led Capitalism During the U.S.–Japan trade conflicts, a second major complaint by the U.S. government was the “unique” Japanese organizations and entities that constitute “invisible” trade barriers. These industry structures, the Keiretsu are closely-linked industrial groups (Aoki, 1988). As described in detail in Fung (1991, 2002), Keiretsu can be classified into three types. The first type is the descendant of the prewar Zaibatsu. Mitsubishi, Matsui, and Sumitomo are of zaibatsu origin. The prewar zaibatsu were groups of companies partly owned and controlled by a family holding

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company. Each family zaibatsu included a bank, a trust company, an insurance company, and a trading company to buy and sell goods on behalf of the member firms. Until World War II, the Japanese economy was heavily influenced by ten major zaibatsu. After the war, all the major zaibatsu were dissolved, partly because they were seen to have contributed to the war efforts. However, gradually some splinter companies reestablished their former associations. They exchanged shares with other firms bearing the common zaibatsu name. They exchanged directors and set up clubs where company presidents could meet. In this way, some of the zaibatsu firms were transformed into Keiretsu. Mitsubishi Corporation is a prime example of such kind of post-war Keiretsu. The second type of Japanese industrial group is the bank group, also called financial Keiretsu or horizontal Keiretsu. This industrial group centers around a main bank. For much of post-war history of Japan (lasted until perhaps 1970s), capital and foreign exchange had been in short supply. The formation of financial Keiretsu during the 1950s and 1960s came in response to the need for banks to finance the operations and investment of J-firms. The various members of the bank groups typically borrow from the main bank and they tend to be in different industries. By law, the main bank is allowed to own five percent of each member firms. The member firms also hold shares of the main bank and they in addition hold shares of each other. The main bank also sends representatives to participate in meetings of the member firms. If the member firm is in financial distress, the main bank is expected to be the rescuer of last resort. The bank is supposed to organize a rescue package to save the member company in trouble (Fung, 2002, 2019a, 2019b). For instance, in 1975, Mazda, the automobile manufacturer, was on the verge of bankruptcy. Mazda’s main bank, the Sumitomo Bank, organized a rescue package. The third type of Japanese industrial group is vertical Keiretsu, which consists of prime manufacturers and their affiliated parts suppliers (Fung 2019a, 2019b). The main manufacturer is at the top of a pyramid of a large number of stratified smaller suppliers. For example, in 1977, a study on an unnamed Japanese automobile manufacturer (believed to be Toyota) showed that it had direct relations with 122 first-tier suppliers, indirect relations with 5437 s-tier suppliers, and 41,703 thirdtier subcontractors (Aoki, 1988; Fung, 1991; Japan Agency for Small and Medium-Sized Enterprises, 1977). The relationships among members of the vertical Keiretsu tended to be stable and long-term oriented.

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American firms often engaged in competition with members of the Japanese industrial groups. The U.S. exporters complain that these Keiretsu firms form an invisible trade barrier and they compete unfairly. The U.S. government accused these groups of being collusive and pressured the Japanese government to reform and better enforce its antimonopoly laws. Academic empirical studies conducted by Fung (1991), and Petri (1991) indicated that some forms of Keiretsu seemed to lead to lower Japanese imports.2 In recent years, Keiretsu as a distinctive Japanese business and economic organization has declined in importance, but some features remain important. For example, about one-fifth of the Tokyo equity market is still tied up in corporate cross-shareholding (Lewis, 2019). The policy management by the U.S. and Japanese governments of the complaints against Keiretsu firms took various forms. First, Keiretsu as invisible trade barrier as a trade issue was taken up in the reciprocal, binational forum SII. In addition to including discussions explicitly on Keiretsu relationships, other relevant and associated SII themes also included Distribution Systems and Exclusionary Business Practices. Second, the U.S. government employed its unilateral trade law, the “Super 301” in May 1989 to pressure Japan to deal with some of the potentially anticompetitive practices of these groups (Schweitzer, 1996). Even though Sect. 301 was and remains a unilateral trade tool, as practiced in the past, the use of 301 (both regular 301, Special 301, and Super 301) on balance, seemed to lead to export market openings (Bayard & Elliott, 1994; Finger & Fung, 1994). Previous U.S. Administrations’ use of Sect. 301 tends not to result in significantly higher tariffs or much more trade restrictions. Third, in September 1996, the U.S. government filed a case in the World Trade Organization (WTO) against Japan, alleging that the Japanese government implemented and maintained laws, regulations, and measures affecting the distribution of imported consumer photographic film and paper (WTO, 1996). Lastly, a much earlier 1985 initiative called the Market-Oriented Sector-Specific (MOSS) Talks targeted telecommunication, medicine and medical equipment, electronics, and forest products to reduce tariffs, lower entry barriers, and reform regulations. As its name suggested, the talks were meant to be market-based and market-expanding and they focused on

2 These results are further discussed in Feenstra and Rauch (1999) and Rauch (2001).

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specific industries that American exporters complained to have particular trade or regulation barriers (Finger & Fung, 1994; Tyson, 1992; Urata, 2019). For the current U.S.–China trade disputes, the U.S. government also accuses China of having a set of “unique” business and economic organizations and structures. The state-led economic system, as exemplified by the prevalence of state-owned enterprises (SOEs) is often singled out as a set of practices that are distinctively Chinese. These SOEs are alleged to have preferential access to credits. They face soft budget constraints and they are viewed to be implicitly or explicitly guaranteed by the local or central governments. Some act like “national champions” with various types of subsidies and tax preferences (White House Office of Trade & Manufacturing Policy, 2018). The SOEs are alleged to be favored by the Chinese government in exports as well as in domestic competition against the U.S. and other foreign multinationals. The U.S. government also highlights the fact that this state-led system is incompatible with the existing procedures and rules of the World Trade Organization (WTO) (U.S. Delegation to the World Trade Organization, 2018). To make progress in diffusing these trade conflicts, some of the measures and mechanisms from the previous U.S.–Japan disputes are worth studying and emulating. For example, the United States can request particular reforms of practices that they allege to be marketdistorting. But the requests should be mainly industry specific. The industries chosen should be those where the U.S. industries complain that they face the strongest barriers. They could also be sectors that are particularly sensitive to the United States. Demanding a systemic wholesale change to the entire economy is likely to be counterproductive. If negotiations fail, selected sectoral 301 tariffs can be used to pressure the Chinese industries to open up more, with the intention of increasing competition and widening market opportunities, not closing them. Across-the-board tariffs that invite retaliations hurt the exporters of both economies as well as consumers. Filing cases in the World Trade Organization and putting forward proposals to reform the global trading system will allow the United States to continue its strong leadership in fostering an open international, liberal trade regime.

Exchange Rate Manipulations The most common explanation for the accumulation of large external imbalances, specifically the large trade surplus of China with respect to the

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United States, is that they are due to currency manipulations. According to this argument, the Chinese government reduces the value of the Renminbi (RMB) through exchange rate interventions. This lowers the costs of China’s exports to the United States and raises the costs of U.S. imports to China, thereby artificially causing the large trade imbalance between the two countries. The same argument was used for the Japanese yen during the earlier U.S.–Japan trade conflicts and before the Plaza Accord. Some researchers argued that the Japanese Yen was undervalued, which helped promote its exports and widen its trade surplus (Islam, 1983; OECD, 1983; The Economist, 1983). Following the Plaza agreement, the Yen appreciated by twenty percent between the end of 1984 and the end of 1985 (Papa N’Diaye, 2010). Japanese interest rates had been stable before, but after the Plaza meeting, Japanese interest rates rose sharply, partly to facilitate the Yen appreciation (Islam, 1983; Papa N’Diaye, 2010). The international policy outcome of the allegations of an undervalued Japanese Yen was the Plaza Accord in September 1985. Many researchers argued that the subsequent sharp increase in the Yen exchange rate led to the Yen shock-induced recession (Endaka Fukyo) and over time led to Japan’s “Lost Decades” (McKinnon & Ohno, 1997). As for the current U.S.–Chinese trade dispute episode, on August 5, 2019, the U.S. Treasury Department officially labeled China as a currency manipulator (U.S. Treasury Department, 2019). The designation of China as a currency manipulator was taking part of the escalation of the trade war, at a time when many economists (Summers, 2019) showed that China is no longer manipulating the RMB and the IMF reported that China’s external position is in line with fundamentals (2019b, 28). As is well-known, the Chinese currency is managed by the People’s Bank of China (PBOC) (Fung et al., 2017). There are three major elements influencing the setting of the Yuan exchange rate (Fung, 2016a, 2016b; Lau, 2016a, 2016b). First, there is reference pricing. Each morning, the People’s Bank of China sets the opening price for trading on the Chinese Foreign Exchange Trading System (CFETS) for major currencies. Even though the exact calculations are not clear, the PBOC supposedly set the Yuan’s daily mid-point rate against the U.S. dollar based on both the previous day’s 4:30 p.m. closing price and changes in the Yuan’s daily trading in the past 24 h against its trade-weighted basket. But to curb intraday speculative trading, the CFETS changed the reference period of Yuan trading against the currency basket from 24

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to 15 h in February 2017 (Fung et al., 2017). Furthermore, starting December 29, 2016, the number of currencies included in the currency basket increased from 13 to 24. Second, there is the 2% bidirectional band against the U.S. dollar, with the band being wider against other major currencies. Thus, the Yuan can rise up or go down 2% from the daily reference rate against the U.S. dollar. The newer exchange rate band, at least technically eliminates the automatic one-sided bet that the Chinese currency used to have to face. Economically, of course, we can still have one-directional bet due to some determination of economic fundamentals or sentiment of momentum. Currently, the foreign reserves of China remain stable at around US$3.1 trillion. Compared to the fairly short duration before June 2014, when the PBOC lost quite suddenly almost US$1 trillion in foreign reserves. Various factors were highlighted to have led to this loss. Legal and illegal capital outflows have found their ways to destinations outside of China (China Daily, 2017). Some firms have found it useful to repay their U.S. dollar-denominated debt during this period. Lastly, the PBOC was thought to have used a fair amount of reserves to defend the depreciating Chinese currency. These factors may have contributed to the market expecting continued weakness of the Chinese currency (China Daily, 2016). Nonetheless, the trading band around the daily central parity rate determines the maximum amount of intra-day volatility. The third and last element of the Yuan setting is that it is a managed float. The PBOC does intervene, sometimes significantly, to prevent “excessive” exchange rate fluctuations. The mechanism of setting the reference rate also changed over time. Since January 2016, the Yuan’s closing rate one day and the reference rate next day is no longer strongly tied anymore. Most researchers now conclude that the process of Yuan setting is non-transparent and subject to change. With respect to the United States previously designating China to be a currency manipulator, one lesson that the Chinese government seems to have learnt from the previous experience of the U.S.–Japan trade conflicts is that sharp appreciation of the exchange rate can be destabilizing. Policy reactions to rapid, substantial increases in one’s currency can also lead to long-term stagnation. Many researchers in China had studied the earlier U.S.–Japan trade disputes and seem to have derived potential lessons for Beijing (Xinhua, 2018). If the U.S. use of across-the-board tariff increases is meant to put pressure on the Chinese government to revalue its exchange rate, this policy seems so far to have failed.

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In the current U.S.–China “Phase One” Agreement, Chapter 5 of the Agreement deals with macroeconomic policies and exchange rate matters (U.S. Trade Representative, 2020). The Agreement states that “Each Party confirms that it is bound under the International Monetary Fund (IMF) Articles of Agreement to avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage.” An addition, “Each Party should achieve and maintain a market-determined exchange rate regime.” Having a specific Chapter on exchange rates in a trade agreement is unusual and it reflects the U.S. policy conviction that “unfair” exchange rate changes do affect the business and economic competition between Chinese and American companies.

The Technological Competition The strategy employed and the scale of measures in the U.S.–China conflict, show that the outbreak of the trade war is not only related to the increasing US deficit, but also to structural changes in China observed with concern by the United States. The trade war is actually part of a substantial debate in the United States about China’s rising economic power. The United States seems to feel economically threatened by Chinese industry that has significantly moved up the value chain. With the ongoing fourth industrial revolution3 and the challenges accompanying the industrial restructuring, China launched in 2015 a new industrial policy, “Made in China 2025” (MIC, 2025), which ambitions to make China a global leader in key technologies by 2025 and a technological global force by 2049.4 3 The term of “fourth industrial revolution” was introduced recently (Schwab, 2016). The fourth industrial revolution is related to significant technological development through ICT, cyber-physical systems (CPS), and Internet of Things (IoT). 4 MIC 2025 stressed that “China’s manufacturing sector is large but not strong.” The plan prioritizes upgrading manufacturing through advances in technology innovation. The agenda is the following:

. by 2025. Boost manufacturing quality, innovation, and labor productivity; obtain an advanced level of technology integration; reduce energy and resource consumption; and develop globally competitive firms and industrial centers. . by 2035, Reach parity with global industry at intermediate levels, improve innovation, make major breakthroughs, lead innovation in specific industries, and set global standards.

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The theoretical background of MIC 2025 plan can be found in endogenous growth theories which examined why some developing countries catch up with developed countries, while others lagged behind. To show this divergence, Cowen and Tabarrok (2009) identified two types of economic growth; catch up growth and cutting-edge growth. Developing countries in the catch up growth period, such as China in the 2000s, are not required to create new ideas in their early stages of growth, however, to adopt less costly technology developed by advanced countries. However, cutting-edge growth relies on domestic innovation through which Japan developed and became an advanced economy in the past and China is trying to become an advanced economy. One difference with the Japanese cutting-edge growth is the speed of the transformation. According to Li (2018), MIC 2025 “signals China’s intention to launch an industrial transformation from labor intensive production to knowledge intensive manufacturing, and usher in a major breakthrough at a fast speed.” Another important distinction between the current U.S. rivalry with China and the previous U.S. trade disputes with Japan is the emergence and pervasiveness of digital and networked companies like Google, Facebook, YouTube, Amazon, Alibaba, Tencent, Baidu, TicTok, Line, Rakuten, etc. Most of these companies were founded after the U.S.–Japan trade tensions had already begun to subside. With a widespread use of the internet, cloud computing, and big data, U.S. and Chinese companies vie for technological leadership in this new, new economy. MIC 2025 strategy appoints some targets linked to the potency of China’s innovation activities. The ultimate objective is to enable Chinese industry to upscale, particularly certain key sectors such as new generation information technologies, high-end computerized machines and robots, aerospace, maritime equipment and high-tech ships, advanced railways transportation equipment, new energy energy-saving vehicles, energy equipment, agriculture machines, new materials, pharmaceuticals, and high-tech medical devices (State Council of People Republic of China, 2017), These are precisely the sectors targeted by the Trump Administration with the tariffs imposed in 2018.

. by 2049, Lead global manufacturing and innovation with a competitive position in advanced technology and industrial systems (US Congressional Research Service, 2020).

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It is noteworthy that Trump Administration tried to address MIC 2025 like other Chinese policies that it saw as unfairly advantaging Chinese firms, distorting global trade and investment patterns, by invoking Sect. 301 authorities and imposing tariffs on MIC 2025 products. Moreover, The United States has hardened technology transfer to China through inspection of academic exchanges and strengthened foreign investment review and export control authorities. Many Chinese tech companies have been sanctioned. The telecoms equipment manufacturer, Zhongxing Telecommunication Equipment (ZTE), is banned from using goods or services of American origin for seven years, and eight other Chinese tech companies (Hytera Communications, Hangzhou Hikvision Digital Technology, Dahua Technology, etc.) were blacklisted by the U.S. government, that prevents them from importing products from the United States. These preliminary designations were conducted to the sanctions later imposed on Chinese tech companies (such as Huawei in 20195 ) and Chinese apps (such as TikTok or WeChat in 2020). Since January 2020, new restrictions have been imposed on some Chinese tech companies (SMIC, but also ByteDance, owner of Tik Tok, and Tencent, which owns WeChat), and others that still seem to be in line of sight of the United States (Alibaba, Baidu, etc.). Given the importance of the current and future U.S.–China trade disputes surrounding these internet-based and apps-based companies, a formal economic model of monopolistic digital, networked firms had been provided in Fung, Aminian, Fu, and Tong (2020), proposing an analysis on how international and “Silicon trade policy” shocks such as being put on the U.S. Department of Commerce Entity List, Yen and Yuan exchange rate changes and being pushed out of the European digital market can affect the economic behavior of these internet and apps-based companies. More than improving the trade balance, the United States seems to want to limit Chinese access to U.S. technologies and markets, as these contribute to the growth of China’s economy. This is why, one can 5 In May 2019, the U.S. Department of Commerce placed Huawei—and 68 (and then 114 in August) of its non-U.S. affiliates—on an “Entity List” imposing some restrictions. This designation requires an export license to be granted for any export, reexport or transfer of items subject to the U.S. Export Administration Regulations (EAR) to Huawei. In others words, Huawei can no longer use electronic components and chips manufactured by American companies, hence cutting off the leader in 5G from access to U.S. technologies.

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expect that U.S.–China tensions on trade but also technological issues, will continue or even increase during Joe Biden’s presidency and beyond.

Conclusion In this paper, we examined and discussed the US trade war with China, using the experiences and perspectives from the U.S.–Japan trade conflicts from the 1980s and 1990s. We argue that bi-national government forums and platforms such as the Structural Impediment Initiative (SII) and the bilateral MarketOriented Sector-Specific (MOSS) Talks can provide useful lessons for managing future U.S.–China trade disputes. Filing cases with a reformed World Trade Organization (WTO) and even using market-opening U.S. 301 trade laws as leverages can also be productive. In general, across-the-board market-closing tariffs are less likely to yield fruitful results. Therefore, many of the American measures in this trade war obviously target Chinese companies in these sectors, imposing a partial and selective embargo on their access to the U.S. market and technologies. Discrepancies between the two episodes have been taken into consideration, particularly the emergence and prevalence of digital companies and the technological competition between China and the United States. We emphasized that the trade war is only part of a substantial debate in the United States about China’s rising economic power. The economic emergence of China is increasingly worrying the United States, as China is technological upscaling and is now a leader in key sectors.

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CHAPTER 7

Post-brexit Trade Policy and Its Impact on United Kingdom’s Economy Pervez N. Ghauri and Ursula F. Ott

Introduction Other than COVID-19, Brexit is a recent political and economic phenomenon that will have a long-lasting impact on the British economy. On March 29th, 2017, the UK government triggered Art 50 to leave the European Union which is called Brexit (Britain exits the EU). It has captured media and academic interest and its consequences are not yet fully understood. Brexit has triggered academic interest into its consequences and negotiation analysis (Ott & Ghauri, 2019), international business and entrepreneurship (Cumming & Zahra, 2016), private equity and UK’s trade relations (Wood & Budhwar, 2016; Wright et al., 2016). The British belief of cutting ties with EU and looking elsewhere for prosperity needs to be closely investigated from a neutral analytical perspective.

P. N. Ghauri (B) · U. F. Ott University of Birmingham, Birmingham, UK e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance During De-Globalization, International Political Economy Series, https://doi.org/10.1007/978-3-031-13757-0_7

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This chapter investigates the post-Brexit UK trade relationships, negotiation possibilities for trade and their impact on the British economy. The overall research question of this chapter is thus: What developments in post-Brexit British trade policies are plausible and what could be the consequences of these developments on British businesses and consumers? What are the sectors that are most vulnerable in a post-Brexit Britain and how are these affected? How will the behaviour and profile of UK negotiators influence the outcome of trade negotiations with non-EU countries? Let’s first look at what has been agreed so far. The new Brexit deal is essentially the same that was proposed by Prime Minister Theresa May and was rejected three times by the parliament, except that a new chapter has been added, so-called, protocol on Ireland/Norther Ireland that restates the commitment to all the elements of the Good Friday Agreement with free movement of people and products between Northern Ireland and Ireland. This means that Northern Ireland remains aligned to EU from the end of the transition period to at least four years in future. Resulting in the fact that there will be no checks and controls at the border between Northern Ireland and Ireland. This also means that Northern Ireland remains legally within UK but practically within EU. Tariffs and duties will be applied to goods entering Northern Ireland from UK, if these are further exported to the EU areas and vice versa. UK will be responsible to collect these tariffs and duties. As for level playing field, UK has agreed to remain with EU regulations on climate, environment and workers’ rights. It has been agreed to mutually respect some standards and benefits, such as, health care for visitors from each other’s areas, scientific cooperation, transportation, each other’s lorry drivers can operate freely on both sides, access to each other’s databases provided UK accepts EU’s regulations, such as General Data Protection Rules (GDPR) that have been accepted by all EU countries. A number of issues, however, have not been agreed such as, mutual recognition of professional qualifications (meaning that an architect or a lawyer from UK cannot work with EU clients), recognition of products’ safety conditions (for example, regarding genetically modified food and hormone and chlorine-treated poultry and meat), education exchange such as Erasmus programmes where University students and staff could spend up to a year in other EU countries that were financed by the EU, and rules on check for food and agricultural products at the borders. There is a rather complicated transition agreement on fisheries in each

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other’s waters that needs to be renegotiated after 2025. However, there have been no negotiations or agreement for the most important sector, at least for UK, services, that represent almost 80% of UK trade with the EU. The impact of Brexit is visible in many sectors. In addition to the shortage of lorry drivers and products on the shelves of most supermarkets that has caused a decline in 2.5% of retail sales in July 2021 alone, data collected by the Office of National Statistics (ONS) revealed decline of 20% in footfall in the week August 15–22, 2021, as compared to normal conditions. The association for Motor manufacturers and Traders (MMT) has reported that the industry that was on track to beat the preBrexit record of manufacturing 1.92 million cars as 12 months average, has slumped to 1.3 million cars even before the Pandemic struck (Smith, 2021). Another ONS survey revealed that four in ten firms trading in services reported that the end of transition period for Brexit, December 31, 2020, has hit their business badly (The Economist, 2021). In a twoyear period ending in July 2021, services exported to EU have decreased by 36.5%, while imports from EU have fallen by 37.9%. All the services, architects, lawyers, accountants, doctors, dentists, etc., can no longer do business in Europe or on behalf of European clients. For example, earlier an architect could work in his office in London for his client in France or Spain but now it is not possible. Moreover, business travel to EU and vice versa, now requires a Visa. As a whole, a combination of Brexit and COVID-19 have resulted in worse shortages and declines in manufacturing in UK, while the situation is not the same in the rest of Europe. This is mainly due to Brexit, although the government in UK wants to blame most of it on COVID-19 situation. Composite Purchasing Managers’ Index (PMI), which was at 60 before pre-Brexit referendum (in 2015) is now at 55.3, while the same index was at 51 for EU and is now above 60 (Smith, 2021). It is thus clear that the British economy is suffering more. Brexit and Services As services is an important sector for UK and is still to be negotiated, it is a good idea to have a closer look. It is surprising that Services, especially banking and financial services that contribute more than 10% to UK GDP, have not been agreed or even negotiated and have been left in limbo and will be dealt with in the future, although no time table for

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these negotiations have been put forward. This can be compared to the time and attention given to fisheries, which contribute 0.12% to UK GDP but contribute more to vote winning and political sovereignty slogans of the government. London has been the main rival to New York as the financial centre in the pre-Brexit era contributing to £76 billion of state tax to the annual budget. This status has already been lost. Over the past four years, most banks have set up their subsidiaries in France, Germany, and Netherlands. Although it has not happened at the speed predicted in 2016, the time of referendum, many financial institutions are moving their assets and staff to EU area. For example, HSBC is moving 1000 roles to Europe, Goldman Sachs 700, Deutsche Bank 500 JP Morgon and Socie’te General unspecified numbers. JP Morgan has recently moved e200 billion to Germany. The result is that it is expected/feared that Frankfurt or Paris is going to acquire the status that London once had, it is just a question of time and when. On another front, Amsterdam has already disposed London as Europe’s main centre for share trading as more than e80 billion a day of share trading has moved to EU. Amsterdam has also captured more than 20% of Euro swap market that is worth more than $160 billion in the market (Stafford, 2021). Amsterdam has been preparing itself since the referendum, the city is booming with construction of new houses and English-speaking international schools expecting an influx of Englishspeaking managers. Policymakers in the Netherlands feel a wind in their sails of the same magnitude as in the seventeenth century when the first joint stock company, the Dutch East India Company, was grounded and the Tulip craze of 1630s (Stafford, 2021). The Dutch authorities, however, need to look at the regulations, as it is now, the Dutch only allow financial companies to pay a maximum 20% of the salary as bonus to their managers in the financial sector, while the normal rate that is allowed in EU is 100%, this means that Frankfurt and Paris would have an edge in attracting talent in financial services. Other than the banks and share trading, British insurance companies have 16 million insurance policies with EU based providers, that are worth £76 trillion over the counter contracts, UK was thus quick in granting EU companies a further three years access to the British market, while after three years they could seek further extension. However, this has not been reciprocated by the EU (Economist, 2020). This means the UK companies will not be able to work with EU clients/companies. Moreover, some EU countries have already told UK banks that they

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would not be allowed to do retail banking to serve EU customers. EU has always been clear about what Brexit would mean, while it seems UK have not been able to realise what it would mean at the time of referendum and even now.

Britain and Post-Brexit Trade Considering the above discussion on negotiations and the evidence from the past four years of Britain–EU negotiations for BREXIT, the trade negotiations with non-EU countries might not be as straight forward as it seems. It took almost four years for Britain to negotiate an exit agreement, the divorce and even after four years most of the issues have not been finalised. So much so that there is still disagreement about the amount to be paid by the UK as the divorce settlement. According to EU the parties have agreed to settle for £40.8 billion that will be paid by the UK, however, recently, statements by the British government claim that they are only obliged to pay £37.3 billion, a difference of £3.5 billion. Britain has already paid the first monthly instalment in June 2021 according to their own calculation of £37.3 billion. To which EU has objected and reminded the UK that any further negotiations to settle the remaining issues and to renegotiate the issues as per agreement of December 2020, can only take place after the divorce bill has been paid in full. UK claims that the difference is merely due to different methods of calculation by us and by the EU. Reaching an agreement in trade deals is thus a difficult and long process. In this case, even after four years of negotiations, there are inescapable differences in objectives, negotiation strategies and even the interim agreements between the two sides. The main issue, however, is that both parties seem to have different priorities. While the EU is more concerned about the economics and trade implications in future, the UK is primarily concerned about sovereignty and independence and has been and still is very emotional in negotiations. All parties involved, however, know that UK has more to lose from Brexit. the European Union was the UK’s biggest trading partner, both in terms of value and volume. It’s much bigger than the trade with the US and all Commonwealth countries put together. For a realistic analysis, it is therefore hard to see how new post-Brexit deals can entirely replace what has been lost. Moreover, other countries, with whom UK wants to arrange trade deals, have their own priorities about what they want to achieve through

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trading with the UK. The US, for example, wants access to food and pharmaceutical markets for American firms. UK citizens, meanwhile, are not enthusiastic about chlorine-washed chicken, hormone-filled beef, genetically modified food products and highly inflated branded medicines. Nor would there be shortages of these products domestically with trade being disturbed with EU, both economies, the US and the UK, have similar economies and products to trade. Both have surplus in dairy products, meat and some manufactured products such as automobiles. In the UK, some sectors have already been hit hard due to Brexit, including energy, financial services and manufacturing that requires components from the EU. At this point, there are big problems in logistics and there are shortages of lorry drivers so much so that during January 2022, Nando and Kentucky Fried Chicken had to close 50 of their restaurants each, due to shortage in chicken supplies. McDonalds and Burger King are planning to do the same, to close some of their branches. The shortages are more due to glitches in logistic services than the availability of chicken or beef. Almost all supermarkets are shouting about shortage of goods partly due to the shortage of lorry drivers and partly due to the delays and checks at the borders due to Brexit. Waitrose, one of the supermarkets, is offering £53,780 as annual salary to lorry drivers. In addition, it is offering £1000 as joining bonus. TESCO and M&S are offering similar salaries. This means that with bonuses and some overtime, lorry drivers are now earning more than £60,000, which is at the same level or even higher than solicitors, doctors, professors, and accountants. It is higher than teachers, veterinary doctors, architects, nurses and economists (Eccles, 2021). Although many of these shortages and problems are now blamed on COVID-19, Britain has suffered 15% and 17% drop in imports and exports more than its neighbours in European Union (The Economist, January 1, 2022). Imports of British goods in Germany alone fell by 8.5% in 2021 while total imports into Germany surged by 17.1%, it also fell out of the top five trade partners with Germany. Total imports of German goods to UK also fell in the same period but only by 2.6%. Only in the month of July 2021, UK export to EU fell by £1.7 billion, as compared to the same month in 2018 (O’Carroll, 2021).

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Negotiating with Non-Eu-Partners The US has started dictating terms for post-Brexit trade with UK. The new government in the US has shown their irritation about the UK’s proposal to go back on the Northern Ireland border deal. Even on other fronts, the relationship between Biden government and Johnson government is not very cordial. This means that three to five years of very tough times for the UK and its citizens. It is highly probable that UK will not get a trade deal with the US, at least in the first four years of Biden administration. As for the deal with the EU beyond the extension of transition period (end of September 2021), considering the conflicts already emerging on Northern Ireland, fisheries, divorce bill and previous experience, it will take some time before the UK can settle the issues with the EU. The process, however, seems to be going very slow, as real negotiations have not even started yet. UK negotiators also need to be more rational and now that they are not negotiating with the EU about the exit, they cannot be as emotional as in earlier negotiations, trying to achieve sovereignty over rational outcome. As for trade deals with other non-EU countries, the UK is already outside the EU, and therefore does not have a strong bargaining position as other countries know that the UK needs them more than they need UK. The COVID-19 crisis has further reduced the bargaining power of the UK, while other countries already have trade relations with EU and would not like to jeopardise their relations with the EU, a market of more than 450 million, for UK, a market of 65 million. Moreover, they already have their relationship with other regional and bilateral trade agreements with third countries and in the aftermath of COVID-19, they would not like to rock the boat and risk the stability of their economies further. In other words, they are not desperately looking for another trade partner, unless they are offered something extraordinary in return. Moreover, both parties will need to comply to WTO rules for trade between countries, that means that they cannot be overly generous with each other or just dump their existing partner agreements with other countries, to accommodate this new relationship. An analysis of British negotiation behaviour and skills is therefore necessary to envisage UK’s future trade relationships. Experimental studies (Chuah et al., 2007; Ott et al., 2016) provide insights into the cross-cultural profile of the negotiators, their negotiation behaviour and style. It follows a clear procedural order and an analytical path leading

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to an outcome which is the result of a combination of rational and behavioural approaches. An actor-specific, strategy-specific and resultspecific analysis provides a comprehensive understanding of British trade negotiations behaviour (Ott et al., 2016). The negotiators’ specific profiles as an antecedent construct determines how the strategies are played in the phase of the negotiation process with their interactive decision-making as illustrated by Fig. 7.1. The variety of outcomes is a consequence of the psychological and bargaining theoretical developments throughout a negotiation process which explains the outcome. Since culture plays an important part in international business negotiations (Ghauri & Fang, 2001), different levels of culture serve as antecedents influencing the negotiators (Cavusgil & Ghauri, 1990; Ott, 2011). The negotiation process contains interdisciplinary perspective and leads to an outcome. The advantage of this approach is that we can look forward while reasoning backwards to analyse different outcomes. International trade negotiations are as much dependent on individual decision making as on joint decision making. Raiffa et al. (2002) emphasise that behavioural decision-making deals with how and why individuals think and act, it is therefore, important to understand their cultural background. The process deals with the negotiators’ communication styles and nature of their negotiation behaviour. International Business Negotiation Negotiation

Negotiation

Negotiation

Determinants

Process

Outcome

Actor-specific

Strategy/Style-specific

Result-specific

Background

Negotiation Behaviour

Agreement, Break-up

Culture

Clash of Negotiation Styles

Deadlock

Interactive Decision-making

Negotiation Analysis

Objectives

Behavioural Decision-making

Fig. 7.1 International business negotiations analysis—an interdisciplinary and cross-cultural framework

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frameworks (Ghauri, 2003a, 2003b; Weiss & Stripp, 1998) consider the negotiators as two separate entities which have different strategies due to their cultures and objectives. Negotiators from a five-country study, a nine-country study and a two-country experiment (Chuah et al., 2007, 2009) revealed differences in terms of time orientation, height of offers, information sharing and communication patterns. For example, a multicountry study (Brazil, Chile, UK, India, Mexico, Netherlands, Norway, Spain and the USA) found that participants from the US perceive themselves less likely to misrepresent information and to bluff than Brazilians. It also revealed that exaggerating an offer, hiding one’s bottom line, pretending to be not in a hurry and asking others for information were normal behaviours in multiple country studies. These country combinations are those relevant for a post-Brexit trade agreement. All these countries will be potential trading partners and therefore an understanding of their behaviour for UK negotiators is important. One of the conclusions of the above studies is that British negotiators often use linear-active negotiation style, that the negotiators use a shortterm approach. Compared to the reactive cultural counterpart, Chinese or Japanese (Ott et al., 2016). If a linear-active negotiator is facing a counterpart from a multi-active background (Middle Eastern, some Asian, African, Latin American countries), the negotiator needs to first develop a trustworthy relationship with the counterpart before making offers or counter offers. In Brexit negotiations, the UK had chosen to use a tough negotiating strategy despite its weaker position, that it was UK who wanted to leave, and that EU did not want to push them out. In our ongoing research with experienced negotiators in international trade negotiation experiments, we are seeing that British negotiators often start very high with their demands but are unable to adapt their offers and concessions at the proper time to reach an agreement. As they often try to use delaying tactics and make a decision at the eleventh hour. In normal negotiations, tough negotiators quickly consider concessions, whereas British negotiators get stuck on a higher level and are too conflict-averse to adapt to the demands from the other side, to reach an agreement. That often leads to a deadlock or breakdown of negotiations. Even an inexperienced business manager knows that negotiations are a process of give and take, you can never get what you wish and have to compromise. In other words, to get something, you need to give something. This is the essence of negotiations also for trade negotiations between countries.

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British negotiators need to consider this while preparing for trade negotiation with non-EU countries, whether it is US, Common-wealth countries or any other country such as Turkey, Brazil or Indonesia.

Conclusion In the absence of UK–EU agreement on services and the importance of services for the British economy, UK needs, first of all, to negotiate an agreement on services with the EU. It seems Britain has still not grasped what is at stake, as otherwise, it should give more importance to an agreement on services before anything else. As for trade negotiations with non-EU countries, the rules on trade in services are available in joint initiative of the World Trade Organisation (WTO) and the World Bank. A lot of information is available on rules and regulations and what is being traded between countries in The Services Trade Policy Data Base that covers 77 countries and 31 service sectors. It shows what is possible for bilateral agreements (BITs) and covers, legal services, telecommunication, distribution, retailing, wholesale trade, finance, tourism, transport, and health services. WTO rules clearly state that to provide services or trading in another country, the host country rules and regulations need to be followed. For any country to negotiate trade in services, this is a prerequisite, British negotiators need to evaluate whether they are willing to accept that or not, before even entering into negotiations with a particular country. The best option for UK is therefore, to first agree on an agreement on services with the EU. Not only it will help to avoid any WTO rules, as they have been trade partners already, but would also save time and several rounds of negotiations with non-EU countries. There is also no guarantee that after several rounds of negotiations and couple of years spent, the deal agreed will be a better deal than the one that is possible with the EU. In any case, negotiations with EU or non-EU partners need to be conducted in a cooperative atmosphere, with meaningful offers and quick concessions, calculated considering conflict resolution mechanisms. Experience from the Brexit negotiations, earlier studies (Ott & Ghauri, 2019) and experiments (Ott et al., 2016) revealed that British negotiators normally play tough and are conflict-averse which often leads to break-ups and deadlocks. Considering behavioural and rational approaches, based on cultural and strategic perspective, helps negotiators to understand and predict the behaviour of the other party and helps in making appropriate

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and effective counter offers and results in positive agreement for both parties. Britain has a long way to go before a clear picture emerges that how post-Brexit Britain is going to handle international trade. It first needs to finalise the Brexit trade negotiations beyond extended transition period, renegotiate the agreement on fisheries and negotiate an agreement on services. Another issue that has not been fully agreed with the EU is related to collaborations for security matters. This is important to both sides as they have complementary resources and capabilities. Moreover, it needs to revive its relationship with America that seems difficult during the present administrations on both sides. In addition, it needs to negotiate bilateral or multi-lateral agreements for trade with Commonwealth and other countries. Striking a deal with Australia (with a population of 25 million) who has similar product portfolio (dairy, lamb and other agricultural products), other than mining, is not very helpful for trade, as Britain already has a surplus in these products. Britain is very keen to strike a deal with India but is not sure what it will have to give in return. India normally demands that anything to be sold in India should be manufactured in India which would mean more manufacturing jobs moving out of UK. Moreover, India often demands millions of work visas for its people. Whether UK is willing to give that or not considering that the starting point and overwhelming support for Brexit came from people who wanted to get rid of all the immigrants from Eastern Europe. The British people are however getting worried and majority of people, even those who voted for Brexit, are now worried and dissatisfied. The prices of all products including energy, groceries and transportation have increased by 7.5–25%. People are thus very unhappy, so much so that in January 2022, the Prime Minister has created and appointed a new Minister called, ‘Minister for Brexit Opportunities’. His main job is to bring out the positive news about Brexit to convince the people that it has not been as bad as it looks. Britain’s relationships with the United States, especially President Biden and Macron of France are at record low. Some Ministers are saying that French are always grumpy, not only because of the fishing rights or tensions due to AstraZeneca vaccine deliveries but due to historical facts. The northern Ireland question is very sensitive, as the US has openly announced that it will not allow a deviation from the good Friday agreement, that there will not be a border between Ireland and Norther Ireland while UK Prime Minister has several time announced that UK will not allow a borderless united Ireland. In 2021, Intel, the US

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chipmaker, announced that it will not be building multibillion-dollar chip plant in UK. Instead, it will be built a $20 billion facility in a couple of countries in the EU (Colvile, 2021). All this means that UK is going to have tougher times in the coming future and standard of living in UK is going to drop considerably. Whether Brexit is good or bad for the people of UK is therefore an open question.

References Cavusgil, S. T., & Ghauri, P. N. (1990). Doing business in developing countries: Entry and negotiation strategies. Routledge. Chuah, S.-H., Hoffmann, R., Jones, M., & Williams, G. (2007). Do cultures clash? Evidence from cross-national ultimatum game experiments. Journal of Economic Behavior & Organization, 64, 35–48. Chuah, S.-H., Hoffmann, R., Jones, M., & Williams, G. (2009). An economic anatomy of culture: Attitudes and behavior in inter-and intra-national ultimatum game experiments. Journal of Economic Psychology, 30, 732–744. Colvile, R. (2021). Finally we see the real price of Brxit: We can’t afford to baxh the French anymore. The Sunday Times, November7, p. 38. Cumming, D. J., & Zahra, S. (2016). International Business and Entrepreneurship Implications for Brexit. British Journal of Management, 27 , 687–692. Eccles, L. (2021). Soaring pay helps lorry drivers earn as much as lawyers. The Sunday Times, August 29, p. 12. Ghauri, P. N. (2003a). A framework for international business negotiations. In P. N. Ghauri and Jean-Claude Usunier (Eds.), International business negotiations, 2nd edn (pp. 3–22). Pergamon. Ghauri, P. N. (2003b). The role of atmosphere in negotiations. In P. N. Ghauri and Jean-Claude Usunier (Eds.), International business negotiations, 2nd edn (pp. 205–219). Pergamon. Ghauri, P. N., & Fang, T. (2001). Negotiating with the Chinese: A socio-cultural analysis. Journal of World Business, 36(3), 303–325. Inman, P. (2022). Brexit takes toll on trade as imports from UK to Germany fall. The Guardian, February 10, p. 35. O’Carroll. (2021). UK’s trade with EU slumps as Brexit and pandemic hit imports and exports. The Sunday Times, November 7, p. 39. Ott, U. F. (2011). The influence of cultural activity types on buyer-seller negotiations: A game theoretical framework for intercultural negotiations. International Negotiation, 16(3), 427–450. Ott, U. F., Gates, M., Lei, L., & Lewis, R. (2016). A configurational and experimental approach to compare British and Chinese cultural profiles of generation Y. Journal of Business Research, 69, 5500–5506.

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Ott, U. F., & Ghauri, P. N. (2019). Brexit Negotiations: From negotiation space to agreement zone. Journal of International Business Studies, 50(1), 137–149. Raiffa, H., Richardson, J., & Metcalfe, D. (2002). Negotiation analysis: The science and art of collaborative decision making. European Journal of Operational Research, 168(2), 655–656. Shah, O. (2021). Banks are on guard for no-deal Brexit. That’s not necessarily good for the City. The Sunday Times/Business, October 18, 2020, p. 9. Shenkar, O. (1991). Organizations and management in China: 1979–1990. M.E.Sharpe. Smith, D. (2021). A Brexit headwind the UK recovery could do without. The Sunday Times/Business, August 29, 2021, p. 9. Stafford, P. (2021). Amsterdam springs early Brexit surprise. Financial Times/FT Big Read: Financial Services, March 12, p. 21. The Economist. (2020). Brexit and the City: London as a financial centre. The Economist, October 24, p. 23. The Economist. (2021). Doing a disservice: How Brexit is hitting trade. The Economist, July 31, p. 19. The Economist. (2022). Happy Now? The Economist, January 1, 2022, p. 19. Weiss, S. E., & Stripp, W. G. (1998). Negotiating with foreign businesspersons: An introduction for Americans with propositions on six cultures. In S. Niemeier, C. P. Campbell, & R. Dirven (Eds.), The cultural context in business communication (pp. 51–118). John Benjamin Publishing Company. Wood, G., & Budhwar, P. (2016). Brexit and beyond: BJM and unforeseen events. British Journal of Management, 27 , 680–681. Wright, M., Wilson, N., Gilligan, J., Bacon, N., & Amess, K. (2016). Brexit, private equity and management. British Journal of Management, 27 , 682–686.

CHAPTER 8

Trade Policy Challenges from the Perspective of Small and Open Economy: The Cases of Latvia and Iceland During 2008/2009 Financial and Economic Crises Sandis Sraders

Introduction By the time the global financial and economic crises affected Latvia and Iceland in 2008 and 2009, the former was an EU member-state, whereas the latter was not a member of the European Union. Initially, both countries viewed EU membership as a vehicle that offered them sanctuary and security from global economic and financial challenges. Latvia applied

S. Sraders (B) Baltic Defence College, Tartu, Estonia e-mail: [email protected] Center for Security and Strategic Research, Riga, Latvia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance During De-Globalization, International Political Economy Series, https://doi.org/10.1007/978-3-031-13757-0_8

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for EU membership in October 1995, began formal accession negotiations in 2000, and became a member of the European Union in 2004 (Relations with Latvia: European Commission’s Enlargement Archives, 2021). Because of the financial and economic crises, Iceland applied for the EU membership in 2009, but the Icelandic government requested that “Iceland should not be regarded as a candidate country for the EU membership” in 2015 (Iceland: Membership Status, 2021). These are just a few of the decisions made by Latvia and Iceland to address their financial and economic vulnerabilities and sensitivities in order to protect their security and economic interests through international institutions. Despite the fact that both countries were confronted with a crisis that was comparable internationally but differed in terms of size and scope on the domestic level, their responses, particularly on a domestic level, were clearly different. Iceland’s domestic decision to maintain merely closer ties with the EU is one example, while Latvia’s domestic securitydriven approach to deepening integration in the EU while overcoming the economic crisis is another. The presence of small states in international institutions, in theory, can compensate for their inherent sensitivities and vulnerabilities. Practically, it is always preferable to belong to a larger trading regime or institution in order to better adapt to potentially upcoming economic challenges. The European Union, as the larger actor, could potentially guide trade policies of smaller countries, such as Latvia or Iceland, in order to offset or capitalize on external economic challenges or opportunities (Handel, 2006: 82). Short of outright military conflict, trade-induced sensitivities, and vulnerabilities are the weakest link in the small power’s armor (Vital, 1967: 205). To best protect domestic interests, the logic of sectoral dependence suggests that certain groups or classes structure the options available to actors (Ingebritson, 1998: 33). Furthermore, smaller states must exercise caution in order to avoid becoming victims of larger countries. More powerful actors could use their influence in international structures in addition to abusing access to their economically rewarding markets as an advantage, as well as other options such as withdrawing preferential trade agreements, economic pressure on officials, and unilateral removal of negotiators from influential positions, and obstructing of economic dialogue. As a result, small and non-aligned states are more sensitive to changes in international markets on an internal level (Sraders, 2017: 74). Instead of assessing international challenges and patterns that small states in international affairs must consider, the author will focus on how

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the particular countries of Iceland and Latvia domestically responded to the 2008 and 2009 financial and economic crises. Small states that are economically open to trade should be more resilient and better adapted to external challenges if they can achieve democratic consensus or democratic corporatism—a mixture of ideological consensus, centralized politics, and complex bargains among politicians, interest groups, and bureaucrats. This democratic consensus or corporatism allows offsetting negative external conditions by adapting domestic institutions and interest groups to respond to changes in international markets (Katzenstein, 1985). The main argument of this paper posits is that the ways in which Latvia and Iceland politically responded to the 2008 and 2009 financial and economic crises strengthened their democratic consensus. To support this claim, the author will explain the financial consequences of the economic crises in Latvia and Iceland. Every small state is interested in forging strong democratic corporatism where in the event of any crisis wherein actors such as Latvia or Iceland can achieve the best result through complex bargains. While shaping the consequences of the international crisis and its domestic consequences in Latvia and Iceland, both governments had to face the challenge, avoid acting like a roving bandit. In such a polity, short-term interests, extraction of benefits in the name of a narrow elite or particular group prevails over longterm prospect of a stationary bandit—the polity that reciprocates public and elite interests, prospects for democratic succession, and public goods (Olson, 1993). Conversely, Iceland and Latvia faced the challenge to fall into the trap of the developing states mostly through predatory practices and rent seeking (Evans, 1993). As a result, losing the prospect for democratic corporatism is averse to long-term development. To assess these aspects, the author explains how Iceland and Latvia politically responded to the financial and economic crises. Finally, it will be possible to explain and conclude whether the Latvian or Icelandic political responses favored broader societal interests or, conversely, specific interest groups such as banks and other vested interest groups.

The Way to the 2008/2009 Financial Crisis in Latvia and Iceland Latvia and Iceland experienced rapid economic growth, which caused their economies to expand too rapidly. Icelanders proudly referred to themselves as “Geyser Tigers,” while Latvians referred to themselves as

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“Baltic Tigers” during this growth period. Icelanders and Latvians were attempting to emulate Asian Tigers while ignoring the painful lessons that Thailand, Hong Kong, South Korea, and Singapore had learned during the 1997 Asian financial crisis. For example, in Latvia, public expenditures increased on a yearly basis due to rising government revenues prior to the financial and economic crisis. The state budget deficit was planned to be 23% of GDP in both 2006 and 2007, but dazzling annual economic growth indicators of more than 10% GDP increases in multiple precrisis years allowed for the increased public spending (Åslund, 2009: 1). As a result, both public spending and tax revenues were on an upward trajectory. Any tightening would be politically unpopular and impossible based solely on risk assessment. As a result, by 2008, Latvia was facing severe financial and then economic crises. Parex, the second largest bank in Latvia, was privately owned and went bankrupt in December 2008. As of December 2008, it was the second largest bank in Latvia with total assets of 3.4 billion Lats (4.9 billion euro). Before the crisis, the bank had the largest share (18%) of the country’s deposits market and the third largest share (12%) of its lending market at the end of 2007.1 It is worth noting that, from 2000 to 2012, Latvian private banking thrived on non-resident deposits that made up an approximate share of 40–50% of total deposits. Furthermore, this paradigm is the result of non-resident banking enjoying a supportive administrative environment (including an extension of temporary residence permits to investors from the Commonwealth of Independent States (CIS) in exchange for investments, especially after the 2008 and 2009 financial crisis to attract even more investment from CIS), a network of double-taxation agreements with Russia and other CIS countries, and a favorable corporate tax regime in addition to intensive advertising and sound banking traditions (Eglitis et al., 2014: 1–2). Owing to these favorable conditions, Parex had grown, and the significance of nonresident presence in the Latvian banking sector was largely regarded of

1 According to the Association of Latvian Commercial Banks (ranking based on YE 2009 data), the top banks in Latvia in terms of market shares are the following: 1. Swedbank 23.0%; 2. SEB banka 13.7%; 3. Parex banka n/a; 4. Nordea Bank Finland Latvia branch 10.7%; 5. DnB NORD Banka 8.7%; 6. Latvian Mortgage and Land Bank 4.8%; 7. Rietumu Banka 4.6%; 8. Aizkraukles banka 4.5%; 9. UniCredit Bank 3.7%; 10. Latvijas Kr¯ajbanka 2.4%. (According to the Latvian Banking Association, Parex bank did not submit any data. Its ranking is based on YE 2009 data).

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systemic importance for the financial system by the Latvian authorities (Commission Decision, 2021). As a result, the Latvian government took over the bank and invested approximately 1 billion Lats to ensure the solvency of the bank (approximately 1.4 billion EUR) (Rulle, 2021b). In order to ensure the financial liquidity and public services, Latvian government was forced to seek financial assistance from the International Monetary Fund (IMF) and the European Commission (Rulle, 2021a). On December 23, 2008, the IMF approved 2.35 billion USD worth of stand-by financial assistance for “maintaining Latvia’s exchange rate peg while recognizing that this calls for exceptionally strong domestic policies and substantial international financial assistance.” The program’s aim for Latvia was to meet the Maastricht deficit criteria to facilitate the adoption of the Euro (IMF Executive Board, 2021). Aside from IMF assistance, Latvia has received financial assistance from the European Union (4.31 billion USD), Nordic countries (2.64 billion USD), the World Bank (0.56 billion USD), the Czech Republic (0.42 billion USD), the European Regional Bank of Reconstruction (0.14 billion USD), and neighboring countries (Latvia’s International Donors & Amounts, 2021). Iceland, too, faced a severe financial crisis by 2008. By 2003, the banking sector had been fully privatized. In only five years, Icelandic banks’ assets grew from slightly more than 100% of Iceland’s GDP to more than 1000%. Furthermore, due to multiyear running account deficits Iceland’s external debt had surpassed 500% of the GDP (Andersen, 2008; Ray, 2021). Because of additional external shocks in 2008, the fragile financial system collapsed. Forthwith, financial disputes turned into political ones with the largest debtors. The so-called Icesave dispute devolved into a diplomatic brawl between Iceland on one side and the United Kingdom and the Netherlands on the other. The dispute arose as a result of the bankruptcy of Iceland’s privately owned bank, Landsbanki, on October 7, 2008. The bankruptcy resulted in the inability of the Icelandic banking sector to guarantee repayments of capital deposits to foreign nationals (non-residents) from the Landsbanki’s Icesave branch. The Icelandic national Depositors and Investors Guarantee Fund lacked the financial reserves or resources needed to bailout the bank. The Icelandic government refused to guarantee financial liabilities to the foreign investors because it had lost access to international funding as a result of the country’s long-term financial crisis. As a result, the British

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government used its antiterrorist laws (placing Iceland into the same category as North Korea and Al-Qaeda) to seize assets from two Icelandic banks in Britain, causing one of the banks to collapse instantly and significantly worsening the crisis in Iceland (Thorhallsson, 2013: 123). Three big banks went bankrupt—Landsbanki, Kaupthing and Glitnir. They had amassed assets 14 times the size of the annual output of the entire Icelandic economy (Iceland’s Capital-Controls Saga, 2015). To avoid Icelandic default, the IMF approved 2.1 billion USD worth of stand-by financial assistance on December 2, 2008. Neighboring countries—Sweden, Norway, Denmark, and Finland—offered an additional 2.5 billion USD to stabilize the Krona, which had dropped by 70% within a week, and halt the freefall of the Icelandic economy (World Finance, 2021). The first challenge posed by the 2008 and 2009 financial crises was to Latvian and Icelandic national currencies, the Lats and the Krona, respectively (See Fig. 8.1 Lats exchange rate with USD and EUR, 100 Krona exchange rate with USD and EUR). Both currencies faced devaluation challenges, but Latvia was adamant about adhering to the Maastricht criteria in order to adopt Euro in the future (which Latvia did in 2014). Conversely, Iceland did not stabilize its national currency. The global financial challenges—the collapse of the Lehman Brothers and global financial meltdown in the United States—had had immediate ramifications in Latvia and Iceland. Private borrowing in Latvia resulted in a foreign debt of 137% of GDP at the end of 2008 (Åslund, 2009: 2). The suspension of lending and refinancing had an immediate impact on domestic consumption, most notably the burst of a real estate mortgage bubble. In Iceland, the global financial meltdown caused the freefall of the Krona’s exchange rate. As a result, Icelandic banking assets depreciated, capital inflows and outflows ceased, and the mortgage bubble burst. Both countries entered the domestic economic crisis due to the global financial crises. Governments were facing default challenges, but private banks were facing solvency challenges.

The Political Exit from Crises in Latvia and Iceland from 2008 Until 2011 Following the financial crisis’s impact on Iceland and Latvia, attempts were made to find political solutions to the financial sector challenges, as well as to the economic ramifications in both countries more broadly. In

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Fig. 8.1 Currency challenges of the Lats and the Krona

both cases, international actors and local decisions shaped the outcome of the 2008 and 2009 financial and economic crises, leading them to steady growth by 2011. Before the financial crisis, experts advised Iceland to “join the EU and the Eurozone to get a credible lender of last resort and suggested some ways of acquiring foreign reserves to solve their problems already in a short term” (Zoega, 2011: 21). Iceland was experiencing a massive running current account deficit (more than 20% of the GDP just in the 2007 fiscal year) (Zilber, 2011: 9). Furthermore, private banks had grown at a rate that was multiples of the annual GDP and were borrowing money to invest in bad assets. With the creditor’s money, they made all the worst possible foreign direct investments with the creditors’ money— “they bought foreign companies, they bought foreign real estate, they even bought foreign soccer teams” (O’Brien, 2021). When the international financial crisis erupted, Iceland experienced a run on the banks not only from domestic creditors, but also most importantly from the non-resident private creditors in the Netherlands and the United Kingdom. The run affected not only the bank, but also the Icelandic government. It caused bank solvency issues, and there was no financial institution, other than the IMF or some Nordic friends of

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then “Geyser Tiger,” was capable of providing adequate financial assistance. The market’s realization that Iceland might not be able to prevent a banking crisis was what brought market participants’ expectations of a bad outcome together. Iceland requested and received IMF support to ensure immediate standby financial assistance. This assistance is well-known for some orthodox austerity strategies; the first step is always to increase government revenue through tax increases. Second, to balance the budget, public spending must be reduced. In addition to these demands, the IMF requested that interest rates be raised (even if inflation was high and the economy was contracting). Iceland’s central bank was forced to raise interest rates to 18%, and only in 2010 did the IMF allowed for a decrease that was over double-digits, but only in 2011 did they reached a “low” of 4.25% (Ibid.). Furthermore, because British and Dutch citizens had heavily invested in the Landesbanki Icesave program, guarantees for deposit repayment to the British and Dutch creditors were made a condition for IMF assistance. Due to pressure from Amsterdam and London, the IMF was hesitant to commit to timely financial assistance prior receiving such guarantees. Iceland claimed that “the IMF had come under pressure from the British and the Dutch to halt payments amid a dispute over repayments of savings lost in Icelandic bank accounts” (Ward & Parker, 2009). By 2011, Iceland had resumed economic growth. The IMF announced its mission in Iceland had been completed and was a success. The public finances were on a sustainable path, the exchange rate had stabilized, and the financial sector had been restructured, but the need to fulfill some of the IMF demands remained (Danielsson, 2011). Iceland had already undergone austere belt-tightening and adjustment measures. “We raised almost every tax there was—and introduced new ones,” recalled then finance minister, Steingrimur Sigfusson, adding that there were considerable cuts in public spending too as government debt ballooned to unprecedented proportions (Bowers, 2013). After a period of financial and economic austerity, Iceland eventually experienced political change. The incumbent left-green coalition had made political guarantees to governments of the United Kingdom and the Netherlands. The formerly opposition reformist-nationalist government to the ruling left-green coalition, led by Sigmundur Dav Gunnlaugsson, was elected in 2013. Then political course changed and the new prime minister departed on a more confrontational course as Iceland’s

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economy recovered and IMF support was no longer necessary. By 2013, Gunnlaugsson still opposed repaying the non-resident creditors, but the United Kingdom and the Netherlands had already been forced to use their own taxpayer funds to compensate ordinary savers (Ibid.). In one of his first speeches as prime minister on Iceland’s Independence Day, he said, “Icelanders, as descendants of the Vikings, are highly individualistic and have difficulty putting up with foreign authorities, let alone oppression” (Ibid.). Gunnlaugsson declined to guarantee repayments to British and Dutch citizens and governments. As a result, this dispute was brought to the attention of international court where the Icelandic position triumphed over British and Dutch interests. After having helped in the famous Icesave victory from outside the government, Gunnlaugsson promised to maintain that uncompromising stance against the wave of attacks in the face of the interests of foreign creditors on Iceland’s three failed banks, Kaupthing, Glitnir, and Landsbanki (Ibid.). Moreover, in response to the corruption within these banks and crony capitalism within one of the Scandinavian states, Icelandic courts have held more than two dozen of bankers and financiers accountable for the 2008 and 2009 financial crisis (Robinson & Valdimarsson, 2016). This is something that courts in London or New York were unable or unwilling to do to punish those responsible for the effects of the financial system collapse on ordinary citizens. In Latvia, the start of the financial crisis was similar. Latvia, too, had experienced a degree of conventional tightening as a result of IMF lending conditions (public spending cuts and increase of taxes). In the first year of crisis, 2009, total fiscal tightening was estimated to be 7% of GDP. The public expenditure cuts were draconian: reducing the number of public employees by 15%, public nominal wages by 15 percent, and state procurement of goods and services by 25% (Åslund & Dombrovskis, 2012: 41–43). The immediate fiscal consolidation also included the VAT increase by 3% and additional taxes on fuel, alcohol, coffee, and other beverages. Aside from the IMF mission, other donors to Latvia had different demands for recovery through restructuring. The European Union, the European Regional Bank of Reconstruction (which purchased a portion of the Parex bank assets), the Nordic countries, the Czech Republic, Poland, and Estonia, together negotiated and adjusted the Latvian reform process. As Latvia had pegged Lats to the Euro, currency depreciation became a non-starter for Latvia and the European Union before talks with the IMF had even began. A change in

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the peg was strongly opposed by the Latvian authorities and EU institutions, undermining the IMF assistance program’s ability to also meet the Maastricht Criteria (to facilitate the adoption of euro). The IMF led the negotiations, with staff from the European Commission, the European Central Bank (ECB), the World Bank, the European Bank for Reconstruction and Development (EBRD), the Swedish Ministry of Finance, the Riksbank, and other Nordic governments participating (Zakulis, 2021) (Ibid.: 42). To counterbalance the IMF, the European Union acted as a political force at the negotiating table with Latvia. The European Commission accepted and supported Latvian economic trajectory projections, whereas the IMF was always far more skeptical (Ibid.: 85). As a result, the European Commission assumed command of the negotiations (which was previously assumed by the IMF). At times when IMF was hesitant to commit financial installments to Latvia, which were crucial especially in the first months of the crisis, the European Union went ahead on its own. It overruled the IMF, awarding Latvia a massive second tranche of 1.2 billion USD, effectively ending the acute financial crisis in Latvia. Only after donor pressure did the IMF release the second payment, arriving one month after the expected date. Nordic countries and the regional partners had lobbied from within the European Union for the European Commission to maintain a more vigorous stance. The dominance of the European Commission and the Nordic countries in financing reduced the traditional role of the IMF, which offered Latvian officials unusually open negotiations (Ibid.: 86, 117). Politically, due to the Latvian financial crisis, the devaluation of Lats would have made things worse for households, as 87% of all loans in Latvia were issued in Euros. Thus, fiscal consolidation was the only option, and when the GDP forecast turned out to be lower than expected at the start of crisis, the Latvian government took drastic measures (for example, cutting the public spending, increasing taxes, and laying off public sector employees), reaching 11% of the annual GDP (Ibid.: 72, 84). Due to this robust tightening, international donors found it difficult to justify additional reforms, as the country performed marginally better by 2011. When the European Commission and IMF visited Latvia in December 2011, they demanded “additional high-quality structural measures” totaling around 0.4% of the GDP. By that time, the Latvian government did not see the need to tighten the belt on the country’s already corrected

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structural course. The joint team of international donors urged the Latvian government to keep “the 2012 general government deficit significantly below 3% of the GDP.” In addition, the European Commission requested that the Latvian government prepare a list of public enterprises for privatization, but the government preferred to wait until international markets guaranteed a higher profit from the sales of public companies before opposing the suggestion (Ibid.: 100–101). To avoid further consolidation, Latvia abandoned such policies and aimed at repaying and eliminating financial assistance from the international donors. In terms of Latvia’s domestic adjustments, there are reasons for ambiguity and concerns relating to the lack of transparency and the presence of vested interest groups. At the beginning of its financial operations, the Parex bank for new customers from especially CIS overtly labeled itself as a Western financial center but with additional benefits: “We are closer than Switzerland!” (Russian: “My blime, qem XveucapiЯ!”). Since 2004, private banks could boast of the benefits of EU membership, geographic location, rule of law, cheaper financial services, and the possibility to receive services in the Russian language. As a result, they could deliver services and attract financial resources from former Soviet countries in the CIS. According to the Financial and Capital Market Commission, even a few years after the harsh financial and economic repercussions of 2008 and 2009, Latvia was not a destination for long-term deposits, but rather a hub for short-term financial transactions of financial logistics (Zakulis, 2021). Latvian financial regulators admitted that their financial structures were best for transactions from the CIS to safer financial markets. Only the imposition of anti-money laundering initiatives by the European Union in June 2018 adjusted this affluent, but risky, business practice in Latvia. The instances of sensitivity and vulnerability from the 2008 and 2009 financial crisis remain vivid. The Parex bank crumbled due to serious fraud after it was looted by its former owners, Valerijs Kargins and Viktors Krasovickis. There is now evidence that the bank was acting as a front for the mafia and former Soviet intelligence; a more attentive look by research journalists unveiled, for example, illicit transactions, funneling bribes, and laundering of money by the Uzbek elite through Parex (Uzbeki Latvij¯a, 2016). Even after the immediate review after the collapse and government takeover, Latvia’s Financial and Intelligence Unit did not unveil the results of inquiry

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even though the unit admitted the “presence of suspicious transactions” (Komarnyckyj, 2019). Furthermore, WikiLeaks documents about the takeover of the Parex bank revealed a completely different picture. The Ivars Godmanis government did everything possible to assist the then finance minister Atis Slakeris in buying time and allowing the owners of the bank, Kargins and Krasovickis, the time to settle financial liabilities with non-resident clients (Ostrovskis, 2011). The infamous neglect, downplaying of impending financial difficulties, inability to assess the situation in terms of international assistance or structural reforms, and overt incompetence by then finance minister Slakteris were best portrayed in front of a Bloomberg journalist. At the start of the crisis and the tasks ahead in Latvia, Atis Slakteris exposed his incompetence and neglect by melting down the conditions in the infamous phrase “Nothing Special” when describing the financial trouble (Slakteris Short Version, 2021). The international partners and donors never asked to save Parex. After non-resident clients withdrew their funds from Parex, the Latvian government, not the IMF or the European Union, insisted on a takeover of the second largest bank, citing systemic risk. Before the Latvian government or financial controllers halted financial transactions, large amounts of non-resident money had left the bank because of corrupt politicians and government. The Latvian government paid one symbolic Lats (1.4 EUR) to each majority shareholder (2 Lats for the takeover) of approximately 85% of the Parex shares to write off the bad assets for the main Parex shareholders, Kargins and Krasovickis (On Taking Full Control Over the JSC, 2021). Latvian government in a few days with less than five Euro did the same as major Icelandic banks in a few years buying bad assets. Almost a decade after the takeover, the Latvian Supreme Court ruled Kargins and Krasovickis liable for nearly 4.3 million Euro in damages. The prosecutor’s initial claim was slightly more than 81 million Euro, but the Latvian government (taxpayers) had invested 1.4 billion EUR (Former Parex Owners Ordered to Pay Back Millions, 2016). The relative share of the financial responsibility the society and ordinary taxpayers undertook to save the banking sector in Latvia, in comparison to the bankers or politicians, is incomparable and the reason for protracted distrust between society and public sector.

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Conclusion According to Henry Kissinger, the beginning of the Cold War supported the statement that international relations are the subject of the noble man and “referred to the small states, with obvious contempt, as the tyranny of the weak” (Neumann & Gestöhl, 2006). This statement is more than relevant in the case of the Icelandic crisis for Dutch and British citizens (non-resident investors in Icelandic financial programs). The ability and willingness of the Icelandic government to stand by their intrinsic inherent, rather than local bankers or foreign nationals, is the loadstar and the best measurement on how governments should uphold the social democratic consensus in small states ruptured by international financial markets. This instance strongly supports the argument that Iceland acted as developmental polity where bureaucracy, political elites responsible for shaping the consequences of the 2008/2009 economic crisis were supporting the public interest. To serve a slightly larger than 300,000 strong local population, the Icelandic government even prevailed in international courts against larger European powers, those being the financial interests of the United Kingdom and the Netherlands. Furthermore, Reykjavik saw international donors such as the IMF acting on behalf of non-resident financial interests in Iceland when assistance was conditional on guarantees from foreign nationals in Icelandic banks to repay lost money (similar analogy was applied to the potential membership in the EU). Besides that, to alleviate the already harsh conditions on the local population, the Icelandic government used international law and courts to defend their citizens and the local legal system to sentence those responsible for the irresponsible and corrupt financial management of the Icelandic financial sector. The outcome of the financial crisis of 2008 and 2009 is increased trust in local government and fading credibility of international institutions as defenders of large power interests rather than small states like Iceland. This example runs contrary to the statement “that there was general agreement that small states would seek out multilateral organizations and alliances to ensure their security and achieve foreign policy goals” (Hey, 2003: 4). With the 2008 and 2009 financial and economic crisis, Iceland even acted as a norm setter, earning admiration and applause from international economic experts. Paul Krugman lauded Iceland’s flexible currency rate model: “Iceland’s lesson is relevant to countries that experienced big

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capital inflows followed by a sudden stop” (Krugman, no date). Joseph Stiglitz commented on the Icesave accounts holders: “It would have been wrong to burn future generations with the mistakes of the financial system” (Stiglitz, no date). Martin Wolf blamed the banking sector for creating the crisis in Iceland: “Since the banks had turned Iceland into a hedge fund, with massive short-term foreign currency liabilities used to finance risky long-term assets, the economy was doomed” (Wolf, 2010). Latvia was not like Iceland. While Iceland let its entire banking sector, which was worth more than ten times the country’s GDP, fail, the Parex bank represented only about 20% (the aggregate share of deposits and loans) of the Latvian banking sector. Nonetheless, the Latvian government chose the term “systemic.” This deliberate decision to save the private bank necessitated international financial assistance as well as domestic austerity and restructuring. Known arguments and evidence about the scope and character of interests and individuals saved by the Latvian government by rescuing Parex run counter to any argument that the political establishment was acting in the name of public interests. Such evidence as presented in this article strongly supports the argument where Latvia was acting instead of European but rather as the Third World states supporting predatory policies and practices in the name of interests of narrow political and corporate elites. For Latvia, the presence of international donors, regional interests, and states acting in Latvia’s best interests supports the argument that international institutions can protect the security and foreign policy interests of smaller states. Despite disagreements among Latvia’s major financial supporters on how to restructure the Latvian economic and financial system, the presence of multiple international actors allowed Latvia to strengthen compromises and navigate its national interests through the 2008 and 2009 financial crises. To summarize, Latvia’s embrace of EU integration (in order to break with Soviet-era ties) was a beneficial substitute for IMF orthodox requirements. Furthermore, regional partners like neighboring states lobbied for and supported Latvia’s position and interests within the European Union. Iceland, on the other hand, has been under pressure from the IMF to respect the interests of Dutch and British nationals as a condition for financial assistance. In the case of Latvia, participation in multilateral structures was advantageous, whereas for Iceland, participation in multilateral structures became detrimental to national interests.

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With the local restructuring, Iceland not only eliminated the financial risk to the local population by sentencing corrupt bankers and utilizing international courts, but also acted as the most just actor, particularly in relation to domestic constituents. Such enhancement of democratic corporatism proved possible through the management of short-term crisis favoring long-term developmental practices and public interests. Following the resolution of financial and economic difficulties, the Icelandic population strongly aligns with the government and the state, with prospects for strong social democratic consensus (corporatism), and enjoys better prospects for shaping emerging challenges. Latvia, on the other hand, was defending the interests of corrupt bankers and their clients by assuming responsibility for the bad Parex assets after the government and Latvian institutions and financial controllers allowed the bankers to prioritize their interests and those of non-residents over the interests of the Latvian public. In the end, the credibility of Latvian government institutions suffers, as does the prospect of short or long-term social and democratic consensus, corporatism. Following the resolution of financial and economic difficulties, the Latvian public has all reasons for distrust due to their government favoring the resolution of the 2008/2009 economic crisis in the name of the banker of non-residents rather than the broader public good. As a result, the case of Latvia suggests undermining the prospects for strong social democratic consensus (corporatism) with long-term consequences for development.

References Andersen, C. (2008). Iceland Gets help to recover from historic crisis. https:// www.imf.org/external/pubs/ft/survey/so/2008/int111908a.htm Åslund, A. (2009). How can Latvia escape from financial crisis: Annual Conference of the Bank of Latvia, Riga, 1 October. Peterson Institute for International Economics. Åslund, A., & Dombrovskis, V. (2012). How Latvia came through the economic crisis. The Peterson Institute for International Politics. Bowers, S. (2013) Iceland rises from the ashes of banking collapse. The Guardian, 6 October. http://www.theguardian.com/world/2013/oct/06/ iceland-financial-recovery-banking-collapse Commission Decision. (2021). Commission Decision of 15 September 2010 on the State aid C 26/09 (ex N 289/09). European Comission. https://eur-lex.eur opa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32011D0364&from= EN#ntr6-L_2011163EN.01002801-E0006

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Danielsson, J. (2011). Was the IMF programme in Iceland successful? VOX CEPR’s Policy Portal, 26 October. http://www.voxeu.org/article/icelandwas-imf-programme-successful Eglitis, G., et al. (2014). Assessing business practices in Latvia’s financial sector. Economic Analysis from European Commissions Directorate General for Economic and Financial Affairs, 11(6), 1–2. Evans, P. B. (1993). Predatory, developmental, and other apparatuses. Sociological Forum, 4(4), 567–576. Former Parex Owners Ordered to Pay Back Millions. (2016). Latvian Public Broadcasting, 14 October. https://eng.lsm.lv/article/economy/economy/ former-parex-owners-ordered-to-pay-back-millions.a205425/ Handel, M. (2006). Weak states in the international system. In I. Neumann and S. Gestöhl (Eds.), Small states in international relations. University of Washington Press. Hey, J. A. K. (2003). Introducing small state foreign policy. In Small states in world politics: Explaining foreign policy behavior. Lynne Rienner Publishers. Iceland: Membership Status. (2021). European neighborhood policy and enlargement negotiations. European Commission. http://ec.europa.eu/enlarg ement/countries/detailed-country-information/iceland/index_en.htm Iceland’s Capital-Controls Saga. (2015). The Economist, 10 June. http://www. economist.com/blogs/economist-explains/2015/06/economist-explains-8 IMF Executive Board. (2021). Approves e1.68 Billion (US$2.35 Billion) stand-by arrangement for Latvia. IMF Press Release, 11 November. https://www.imf. org/external/np/sec/pr/2008/pr08345.htm Ingebritson, C. (1998). The Nordic States and the European Integration. Cornell University Press. Katzenstein, P. (1985). Small states in world markets: Industrial policy in Europe. Cornell University Press. Komarnyckyj, S. (2019) Was a British shell company used to funnel funds for the trump campaign? Byline Times, 9 August. https://bylinetimes.com/ 2019/08/09/was-a-british-shell-company-used-to-funnel-funds-for-russianmanipulation-of-the-trump-campaign/ Krugman, P. (no date). The times does Iceland. New York Times http://kru gman.blogs.nytimes.com/?s=iceland&_r=0 Latvia’s International Donors and Amounts. (2021). 1EUR = 1,39 USD exchange rate on 10/20/2010. Bank of Latvia, The Ministry of Finance of the Republic of Latvia, 11 November. http://www.fm.gov.lv/lv/sadalas/starpt autiska_finansu_sadarbiba/starptautiska_aizdevuma_programma/jautajumi_ un_atbildes/#1 Neumann, I. B., & Gestöhl, S. (2006). Small states in international relations. University of Washington Press.

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O’Brien, M. (2021). The miraculous story of Iceland. The Washington Post, 11 November. https://www.washingtonpost.com/news/wonk/wp/2015/ 06/17/the-miraculous-story-of-iceland/ Olson, M. (1993). Dictatorship, democracy, and development. American Political Science Review, 87 (3), 567–576. On Taking Full Control Over the JSC (2021). “Parex banka” by the Government of Latvia. FKTK, 15 November. https://www.fktk.lv/en/mediaroom/other-publications/on-taking-full-control-over-the-jsc-parex-banka-bythe-government-of-latvia/ Ostrovskis, T. (2011). Godmanis un Šlesers atz¯ıstas: Parex p¯arnemšana ¸ notika Kargina interes¯es. TVnet, 5 September. https://www.tvnet.lv/5319972/god manis-un-slesers-atzistas-parex-parnemsana-notika-kargina-intereses Ray, M. (2021). Euro-zone debt crisis. Enclopedia Britannica, 12 November. http://www.britannica.com/topic/euro-zone-debt-crisis Relations with Latvia: European Commission’s Enlargement Archives. (2021). European Parliament, 17 November. https://www.europarl.europa.eu/enl argement/briefings/10a3_en.htm Robinson, E., & Valdimarsson, O. (2016). This is where bad bankers go to prison. Bloomberg Markets, 31 March. https://www.bloomberg.com/news/ features/2016-03-31/welcome-to-iceland-where-bad-bankers-go-to-prison Rulle, B. (2021a) Parex crisis. IR, 11 November. http://www.ir.lv:889/2012/ 2/23/parex-bankas-krahs Rulle, B. (2021b). Parex crisis or the 2K Service. Providus, 17 November. http://providus.lv/article/parex-krahs-jeb-pakalpojums-2k Slakteris Short Version. (2021). Bloomberg. https://www.youtube.com/watch? v=VcTaaBeuEnY Sraders, S. (2017). The little lady that could: Small Latvia Rejoins the EuroAtlantic Community. ProQuest. https://digitalcommons.odu.edu/cgi/viewco ntent.cgi?article=1013&context=gpis_etds Stiglitz, J. (no date) Lessons from Iceland’s economic crisis: International Monetary Fund. https://www.youtube.com/watch?v=HaZQSmsWj1g Thorhallsson, B. (2013). Can small state choose their own size? The case of Nordic State-Iceland. In The Diplomacies of small states: Between vulnerability and resilience. Palgrave Macmillan. Uzbeki Latvij¯a. (2016) Re:Baltica, 16 May. https://www.youtube.com/watch? v=BgmwBPULYVE Vital, D. (1967). The inequality of states: A study of the small power in international relations. Greenwood Publishing Group. Ward, A., & Parker, G. (2009). IMF plays down Iceland loan rift. Financial Times, 1 August. http://www.ft.com/cms/s/0/88de1206-7dfa-11de-8f8d00144feabdc0.html#axzz40RCXUtbz

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Wolf, M. (2010). How the Icelandic saga should end. Financial Times, 14 January. http://www.ft.com/cms/s/0/ca8f222e-0141-11df-8c54-001 44feabdc0.html#axzz3tgsuU2q4 World Finance. (2021). Failing Banks, winning economy: The truth about Iceland’s recovery. World Finance, 17 November. http://www.worldfinance. com/infrastructure-investment/government-policy/failing-banks-winningeconomy-the-truth-about-icelands-recovery Zakulis, K. (2021). Banku nerezidentu bizness Latvij¯a: ieguvumi un riski. FKTK, 12 November. Zilber, R. A. (2011). Monetary turbulance and Icelandic economy. In G. Zoega and R. A. Zilber (Eds.), Preludes to the Icelandic financial crisis. Palgrave Macmillan. Zoega, G. (2011). In G. Zoega and R. A. Zilber (Eds.), Preludes to the Icelandic financial crisis. Palgrave Macmillan.

PART III

Trade Policy for Futures

CHAPTER 9

Sustainable Development in EU Trade Agreements: Different Trade Partners, Different Rules? Jale Tosun and Christin Heinz-Fischer

Introduction Sustainable development has been on the agenda of international organisations for at least three decades. The United Nations Conference on Environment and Development held in 1992 contributed significantly to the international diffusion of this concept. The Sustainable Development Goals adopted in 2015 build on these three pillars but exceed them in both scope and precision, for they define what exactly sustainable development means (Tosun & Leininger, 2017). The European Union (EU) has adopted the definitions of sustainable development as provided by the United Nations and tried to deliver on them. Since sustainable development is a complex concept, this chapter concentrates on the alignment

J. Tosun (B) · C. Heinz-Fischer Institute of Political Science, Heidelberg University, Heidelberg, Germany e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance During De-Globalization, International Political Economy Series, https://doi.org/10.1007/978-3-031-13757-0_9

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of the economic dimension with the environmental one. This means that we do not analyse labour standards, even though they are included in the sections of the trade agreements that refer to sustainable development. For decades, the EU has been regarded as an international leader in environmental policy. It has relied on different mechanisms to influence international environmental agreements and the environmental policies of arrangements of non-EU states. The first of a total of four mechanisms of EU influence, as identified by Zito (2005), concerns the EU’s role as an active player in shaping international negotiations, followed by its provision of policy innovations for solving complex problems. Another mechanism refers to the EU’s ‘leadership by example’. The fourth mechanism concerns the EU’s attractive common market: the governments of third countries adopt EU-style environmental regulations to reduce the risk of their companies being excluded from this market. The EU can use environmental standards as so-called non-tariff barriers. The literature speaks here of a ‘California effect’ (Vogel, 1997), which postulates that countries with lower environmental standards originally adopt the higher ones of their trade partners to avoid being denied market access. Evidently, such an upward ratcheting of regulatory standards is not only brought about by California, as the eponymous effect suggests, but also by the EU (Perkins & Neumayer, 2012). The prospect of exporting goods to the EU market has been shown to be a motivational factor for countries aiming to join EU-led international environmental agreements (Bastiaens & Postnikov, 2017; Schulze & Tosun, 2013), as well as for the adoption of environmental policies that correspond to those of the EU (e.g. Tosun & Schulze, 2015). This mechanism is characterised by third countries adopting EU environmental law or signing/ratifying EU-led environmental agreements unilaterally and on a voluntary basis. A complementary market-related mechanism concerns the exertion of influence by means of trade agreements the EU signs with individual countries or regional blocs, such as the Southern Common Market (Mercosur) (e.g. Poletti et al., 2021). The first time the EU included sustainability in a trade agreement was in 1999, in the one concluded with the Mercosur members. The European Green Deal enshrined the goal of the EU to promote sustainability globally by means of trade policy (European Commission, 2021a). Considering the recent reiteration of the EU’s commitment to promote

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sustainability through trade agreements, it appears worthwhile to take stock of how exactly the EU has approached this. In particular, we are interested in assessing whether the sustainability-related content of the trade agreements varies across the types of trade partners. The EU has concluded trade agreements with both advanced and emerging economies as well as low-income, developing countries. Usually, the latter two are associated with weaker environmental policies (Tosun, 2013), which is why the EU has been able to push for more detailed sustainability-related content in their trade agreements with these countries. Considering this, we assess the following research question in this chapter: Are the trade agreements between the EU and its trade partners that are developing or transition countries more detailed concerning sustainable development than those with advanced economies? Empirically, we offer a comparative, in-depth analysis of the trade agreements the EU has concluded with Canada, Central America, Georgia, Japan, Mercosur, Mexico, Moldova, Singapore, South Korea, Ukraine and Vietnam, as well as the agreement between the EU and Colombia, Ecuador, and Peru.

Background Information on EU Trade Agreements The EU has negotiated several bilateral trade agreements: at the time of writing, it has 46 trade agreements with 78 partners, which the European Commission (2021b) regards not only as an opportunity for providing EU-based companies with access to an ever-growing number of foreign markets, but also to promote the EU’s values and regulatory standards. Concerning the promotion of environmental standards, the EU committed itself with the Single European Act to integrating environmental concerns into all policies and activities as soon as possible. This is known as Environmental Policy Integration (Jordan & Lenschow, 2010), and the Single European Act became more binding with subsequent revisions of the European Treaties (Jinnah & Morgera, 2013). The reasons behind the EU’s approach of attempting to export its regulatory standards are manifold. One of them is that by defining EU regulation as the level-playing field, EU-based companies will be protected from competitive pressure since their counterparts in the tradepartner countries will not benefit from lower regulatory standards (Knill

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et al., 2008). Another reason is that the European public and nongovernmental organisations (NGOs) have demanded that trade agreements define regulatory standards of a high level, to prevent them from being watered down through trade agreements (Vogel, 1997). While both mechanisms are most likely to apply to a context when the EU negotiates a trade agreement with countries with lower regulatory standards, the Comprehensive Economic and Trade Agreement (CETA) with Canada and the Transatlantic Trade and Investment Partnership (TTIP) with the United States have demonstrated how closely the public and NGOs watch the EU’s trade policy and criticise the negotiation process (in terms of transparency) and its outcomes (in terms of rules and institutions) (Leblond & Viju-Miljusevic, 2019: 1837). The EU negotiates and concludes four types of trade agreements. The first are Economic Partnership Agreements (EPAs), which are trade and development agreements between the EU and African, Caribbean, and Pacific partners. The second type are Free Trade Agreements (FTAs), which entail a reciprocal opening of markets that also grants preferential access to markets. Association Agreements (AAs), the third type, correspond to FTAs but are bolstered by broader political agreements. Fourth, the EU can negotiate non-preferential trade agreements as a part of broader cooperative arrangements, such as Partnership and Cooperation Agreements (PCAs) (European Council, 2021). In this analysis, we include 12 trade agreements and only those that refer explicitly to sustainability issues. The first time a trade agreement did this was with the one concluded with the Mercosur member states (Argentina, Brazil, Paraguay and Uruguay). This agreement entered into force in 1999, making the EU the bloc’s major trade and investment partner. Just one year later, in 2000, the Economic Partnership, Political Coordination and Cooperation Agreement between the EU and Mexico came into force. Previously, Mexico depended heavily on the United States as its major trade and investment partner (Knill et al., 2008). The United States continues to play a particularly important role in the Mexican economy, but the trade agreement with the EU helped to diversify both the export and import markets of the country. A revised version of this agreement has been fully negotiated but is not yet ratified at the time of writing. The updated agreement will include a pledge on environmental protection (European Commission, 2020). The EU has strengthened its trade relationship with additional countries in Latin America by concluding an FTA with the Andean countries of

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Colombia and Peru that went into effect in 2013, with Ecuador joining in 2017. In parallel, the EU negotiated an agreement establishing an association with the states of Central America. The agreement with Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama went provisionally into force in 2013. The FTA between the EU and South Korea entered into force in 2015, four years before it was signed by the partners. During these four years, it was implemented provisionally with mixed results. Only after it was fully enacted it did yield positive synergies for the trade partners. The FTA poses one of the pillars of the EU-South Korea Strategic Partnership that puts forth a more comprehensive shared policy agenda (Chung & Lee, 2019). The next three trade agreements that went into effect were the ones concluded with Moldova and Georgia (2016) and with Ukraine (2017). With Moldova, the EU signed an Association Agreement, which includes a Deep and Comprehensive Free Trade Area that aligns with the principles of the World Trade Organisation. With Georgia and Ukraine, the EU has the same type of trade relations in place. Georgia used to have strong trade ties with Russia, but the country shifted towards the EU after the conflict between Georgia and Russia over South Ossetia in 2008 (Kemoklidze & Wolff, 2020). Ukraine cooperated with Russia closely in the frame of the Eurasian Customs Union, which it joined in 2010. However, after Russia’s annexation of the Crimea Peninsula (Zahorka & Sargsyan, 2014), Ukraine has been seeking to cooperate as closely as possible with the EU, which now represents its largest single trading partner. The RussiaUkraine war breaking out in February 2022 cemented the close political and economic relationship between Ukraine and the EU. The contentious CETA project between the EU and Canada went into effect in 2017, but only provisionally since not all EU member states have ratified the agreement (Hübner et al., 2017). The negotiation of TTIP attracted even more criticism, though it ultimately failed due to an attitudinal shift towards anti-globalisation. Such attitudes also materialised in the Brexit vote and the electoral success of Donald Trump in the United States (De Ville, 2019). Since TTIP was not realised, it is excluded from this analysis.

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Less controversial were the Economic Partnership Agreement between the European Union and Japan and the FTA between the EU and Singapore, which both entered into force in 2019. The same applies to the FTA the EU concluded with Vietnam, which went into effect in 2020. When inspecting these trade agreements negotiated by the EU, three observations are noteworthy. First, in geographical terms, the agreements spread widely, including countries in North, Central and South America as well as Eastern Europe and East and South-East Asia. Second, the agreements were concluded with both advanced and emerging market economies. Third, the trade agreements were subject to differing degrees of politicisation, in the sense that some of them received high levels of attention from the public and NGOs (Leblond & Viju-Miljusevic, 2019). The ‘California Effect’ only takes place when the public in a higher-regulating state suspects a potential lowering of regulatory standards in their home country because of trade. To prevent such a ‘race to the bottom’, they demand that trade agreements include shared rules on the regulatory standards concerned (Vogel, 1997). Thus, the causal mechanism underlying a ‘race to the top’, which the ‘California Effect’ expects, does not stem from the fact that countries of different levels of economic development and supposedly different levels of regulatory standards negotiate trade agreements, but from public scrutiny of the trade agreement as it undergoes negotiation. Therefore, we can expect CETA to cover more environmental aspects than one would anticipate, since Canada is an advanced economy. In summation, from a theoretical perspective, we expect environmentrelated specifications in the EU’s trade agreements to be more comprehensive when they are concluded with low-regulating countries and/or when the trade agreement concerned was subject to politicisation.

Integration of Environmental Concerns in EU Trade Agreements In this section, we proceed in two steps. First, we assess quantitatively how prominently environmental concerns feature in the EU’s trade agreements with differing (groups of) countries. This analysis will give us an indication of the degree to which the trade agreements integrate trade

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with environmental concerns. Second, we will assess in-depth the content of the chapters concerned in order to develop a more nuanced understanding of the type of standards defined. The analysis is based on the 12 trade agreements briefly discussed above.

Degree of the Integration of Environmental Concerns in Trade Agreements Figure 9.1 presents the quantitative analysis, which is based on two dimensions. The first is the length of a chapter or section that integrates sustainable development into a trade agreement. The second dimension refers to the number of mentions of sustainable development. These two dimensions are correlated but not perfectly: the longer a chapter on trade and sustainable development or an equivalent section is, the more often the term ‘sustainable development’ is used. An exception to this rule are the EU agreements with Singapore and Japan since they have a high word count. In them, the term sustainable development is mentioned relatively infrequently. What is worth noting is that the trade agreements which the EU concluded with Mexico and Mercosur did not include a distinct chapter on trade and sustainable development. This feature is reflected in the data presented in Fig. 9.1, as Mexico and Mercosur score low on the two coding dimensions. The most comprehensive agreement in terms of stipulations on sustainable development is CETA with Canada. When comparing the EU trade agreements on the basis of these two dimensions, we can observe differences between the various economic groupings. In general, the term ‘sustainable development’ is more often used in EU trade agreements with developing countries. In contrast, agreements with trade partners classified as emerging or advanced economies show a medium to low scope in terms of word count and the times ‘sustainable development’ is mentioned. However, as already noted, CETA represents an exception to this rule.

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Fig. 9.1 Degree of the integration of environmental concerns in trade agreements

Depth of the Integration of Environmental Concerns in Trade Agreements The existence of a dedicated section/chapter and the content of such sections/chapters provide insights into the importance ascribed to environmental issues (see Tables 9.1 and 9.2). Our analysis of the trade agreements revealed climate change, biological diversity, and the conservation and sustainable management of natural resources (mostly forests and fisheries) as the most pressing issues addressed in the EU trade agreements. Climate change: While the trade agreements concluded with the Andean Community, Central America, Georgia, Moldova and Vietnam dedicate a whole (sub)chapter to climate change governance, those concluded with Canada, Japan, Singapore, South Korea and Ukraine refer to it in a few sentences only. The trade agreements with Mercosur and Mexico do not mention climate change governance at all.

✓ ✓ ✕ ✕ ✓ ✕ ✓ ✓ ✓

✓ ✓ ✕ ✕ ✓ ✓ ✓ ✓ ✓

Notes Own elaboration

✓ ✓

✓ ✓ ✓ ✓ ✓ ✕ ✓ ✓ ✕ ✓ ✓

✓ ✓

✓

✓

✓

Andean Community Canada Central America Georgia Japan Mercosur Mexico Moldova Singapore South Korea Ukraine Vietnam ✓ ✓ ✓ ✓ ✓ ✓ ✕ ✓ ✓

✓ ✓

✓

✓ ✓ ✕ ✕ ✓ ✓ ✕ ✓ ✓

✓ ✓

✓

Air pollution and carbon accounting

Forest comservation

Climate Biological change diversity

Trade Partner

Fisheries

Environmental issues addressed in the trade agreements

Table 9.1

✓ ✓ ✕ ✓ ✓ ✓ ✓ ✓ ✓

✓ ✓

✓

Energy efficiency and renewable energy

✓ ✕ ✕ ✓ ✓ ✕ ✕ ✓ ✕

✓ ✓

✓

Recycling and waste reduction

✕ ✓ ✕ ✕ ✕ ✕ ✓ ✓ ✓

✓ ✓

✓

Genetic resource (incl. GMOs)

✕ ✕ ✕ ✕ ✕ ✕ ✓ ✓ ✕

✕ ✓

✓

✕ ✕ ✕ ✕ ✓ ✕ ✕ ✓ ✕

✓ ✓

✕

Traditional Chemicals knowledge

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✓ ✓ ✓ ✓ ✓ ✕ ✕ ✓ ✕ ✓ ✓ ✕

✓

✓ ✓

✓ ✓ ✕ ✕ ✓ ✓ ✓ ✓ ✓

Andean Community Canada Central America Georgia Japan Mercosur Mexico Moldova Singapore South Korea Ukraine Vietnam

Notes Own elaboration

Trade (and Investment) Favouring Sustainable Development

Multilateral Environmental Standards and Agreements

✓ ✓ ✕ ✕ ✓ ✕ ✕ ✕ ✓

✕ ✕

✓

Biological diversity

✓ ✓ ✕ ✕ ✓ ✓ ✕ ✓ ✓

✓ ✓

✓

Trade in Forest Products

✓ ✓ ✕ ✓ ✓ ✓ ✕ ✓ ✕

✓ ✓

✓

Trade in Fish Products

✕ ✕ ✕ ✕ ✕ ✕ ✕ ✕ ✓

✕ ✕

✓

Climate Change

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

✓ ✓

✓

Cooperation on Trade and Sustainable Development

Subchapters in the sections/chapters on trade and sustainable development

Trade Partner

Table 9.2

✓ ✓ ✕ ✕ ✓ ✓ ✓ ✓ ✓

✓ ✓

✓

Sustainability Review

✓ ✓ ✕ ✕ ✓ ✕ ✓ ✓ ✕

✓ ✓

✓

Civil Society Dialogue

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All agreements dealing with climate change emphasise the need for international cooperation and refer to the current and future international climate change regime. The differences across trade agreements refer to the goals and concrete measures. The most far-reaching climate change rules are introduced in the association agreements the EU concluded with Georgia, Moldova, and Ukraine. A possible explanation for this might be that these three countries are part of the Eastern Partnership, which aims to strengthen political and economic relations between the EU and its Eastern European neighbour countries (Shyrokykh, 2021). The association agreements require the approximation of domestic legislation to EU law and international standards. As stated in the EU Moldova Trade Agreement, the country will align its policies with the EU’s regarding the protection of the ozone layer and provide rules for the establishment of institutional monitoring, reporting, and enforcement mechanisms. Similarly, Ukraine has committed itself to adopting EU climate policy as well as to complying with international agreements on climate change governance as stated, for example, in the Kyoto Protocol. Georgia will adjust national legislation to EU guidelines regarding water quality and flood risk management. While the climate-related contents of the previous three trade agreements focused mostly, albeit not exclusively, on climate change mitigation, those concluded with developing countries or emerging economies, such as the EU Andean Community Trade Agreement, give priority to issues related to climate change adaptation. In contrast, trade agreements with advanced economies focus almost exclusively on climate change mitigation. The measures agreed on include investment in and trade of clean energy technology, such as in the agreements concluded with Japan and Singapore, or the establishment of global carbon markets, such as in the case of the EU South Korea Trade Agreement. The trade agreements do not only differ in respect of their contents about climate change but also regarding the level of detail of the corresponding sections/chapters. The agreements concluded with developing countries include the most detailed rules. On average, the treaties with developing countries and emerging economies dedicate one page to the stipulations on climate change, whereas those concluded with advanced economies tend to cover this issue in a mere two to five sentences.

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Biodiversity: We can observe a similar empirical picture for the inclusion of biodiversity issues in the trade agreements as for climate change: the corresponding sections/chapters are longer for developing countries and emerging economies than for advanced economies. The stipulations on biodiversity are, on average, about one page long when the agreement is concluded with developing countries, while they cover only one to two sentences in agreements with advanced economies. Similar to climate change, the agreements with Mercosur and Mexico do not include any content related to the protection of biodiversity. Another case worth mentioning is the trade agreement concluded with Singapore, which is also silent on biodiversity. Most trade agreements aim at promoting the trade of products that can contribute to the conservation of biodiversity. All trade agreements acknowledge the need to cooperate at the regional and global levels through the exchange of information or multilateral conventions, such as the Convention on Biological Diversity (CBD) and/or the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES). Some agreements, such as those concluded with Japan and Vietnam, approve of the implementation of monitoring and enforcement measures to combat illegal trade in endangered species of wild fauna and flora. The EU Andean Community Trade Agreement differs from the other trade agreements since it recognises that protected areas are important for the welfare of indigenous people. In contrast to the agreements with developing countries and emerging economies, the agreements with advanced economies generally do not state specific measures. For example, CETA refers generally to the importance of cooperation for conserving biodiversity. The EU Japan Trade Agreement is an exception since it contains detailed action plans on labelling schemes, for example. The conservation and sustainable management of natural resources: Apart from climate change and biodiversity, natural resources, including forestry and fisheries, represent key environmental issues for trade. Therefore, they are part of almost all trade agreements (except for the one the EU concluded with South Korea). Usually, an entire chapter is devoted to this topic. It is difficult to identify differences between the agreements concerning natural resources because the corresponding sections are very similar in length and content across the individual trade

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agreements. All trade partners of the EU recognise the importance of the conservation and sustainable management of forests. Furthermore, there is no disagreement among them over promoting timber products from sustainably managed forests and combating illegal logging. The EU Andean Community Trade Agreement supports mechanisms for controlling timber production and tracing the origin of timber products throughout the marketing chain. The EU Singapore Trade Agreement stresses global forest law and governance. The sections on fisheries resemble the paragraphs on forest in the sense that all trade partners recognise the importance of conserving living marine resources and marine ecosystems as well as agree to apply best practices in fisheries management and fighting illegal fishing. To enforce monitoring and controlling mechanisms, the trade partners agree to cooperate with regional organisations for fisheries management and to comply with international conventions. An important exception is Japan, which agreed with the EU on the voluntary sharing of information on illegal, unreported and unregulated fishing. Another deviation from the rule is that the EU agreed with Canada on the promotion of the aquaculture industry. Linkage to Multilateral Environmental Agreements: As indicated in Table 9.3, the EU refers to Multilateral Environmental Agreements (MEAs) in the trade agreements. The MEAs to which the EU refers most often are United Nations Agenda 21 (signed 1992), the United Nations Framework Convention on Climate Change (signed 1992), the Kyoto Protocol (signed 1997), the United Nations Johannesburg Declaration (signed 2002), CITES (signed 1973), and CBD (signed 1992). In this way, the EU calls on its trade partners to comply with the stipulations of a certain MEA. The trade agreements with the Andean Community, Central America, Georgia, and Vietnam refer to more MEAs than those concluded with the advanced economies, in particular Canada and South Korea. As the oldest analysed agreements in this chapter, the trade agreements with Mexico and Mercosur refer to only a few MEAs.

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Table 9.3 Overview of EU trade agreements Trade Partner

Economy Groupings

Date entry into force

Type of trade agreement

Depth of environmental provisions

Number of MEAs mentioned

Andean Community

emerging market economies advanced economy

01.03.2013; 01.08.2013; 01.01.2017 21.09.2017

free trade agreement

high: climate change chapter

high: 10

free trade agreement

emerging market economy and low-income developing countries emerging market economy

01.08.2013; 01.10.2013; 01.12.2013

association agreement

low: almost all low: 2 ecological issues addressed, but very short explanation high: all high: 10 environmental issues addressed, climate change chapter

01.07.2016

association agreement

Japan

advanced economy

01.02.2019

economic partnership agreement

Mercosur

emerging market economies emerging market economy

01.07.1999

association agreement

01.10.2000

economic partnership agreement

Canada

Central America

Georgia

Mexico

high: high: 7 approximation of domestic legislation to EU law, climate change chapter medium: most medium: 6 environmental issues addressed, concrete measurements low: many issues low: 1 not addressed low: many issues low: 1 not addressed

(continued)

Conclusion An important source of the EU’s power is its attractive market (Damro, 2012), which is, however, also characterised by a commitment to sustainable development in general and high environmental protection standards in particular. Consequently, when the EU negotiates trade agreements, it strives and usually also succeeds in including rules that aim to

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Table 9.3 (continued) Trade Partner

Economy Groupings

Date entry into force

Type of trade agreement

Depth of environmental provisions

Number of MEAs mentioned

Moldova

low-income developing country

01.07.2016

association agreement

medium: 6

Singapore

advanced economy

21.11.2019

free trade agreement

South Korea

advanced economy

13.12.2015

free trade agreement

Ukraine

emerging market economy

01.09.2017

association agreement

Vietnam

low-income developing country

01.08.2020

free trade agreement

high: approximation of domestic legislation to EU law, climate change chapter low: biological diversity and other ecological issues not addressed low: climate change and biodiversity very briefly addressed, natural resources not mentioned high: approximation of domestic legislation to EU law, high: climate change chapter, most environmental issues addressed thoroughly

medium: 5

low: 4

low: 4

high: 8

Notes Own elaboration. MEAs = multilateral environmental agreements

create a level-playing field that corresponds to its own regulatory standards. Against this background, we investigated in this chapter whether the environment-related contents of the EU’s trade agreements vary depending on whether they are concluded with high- or low-regulating countries, which we assumed to be set equal to developing countries and emerging market economies, on the one hand, and advanced economies, on the other. Our findings revealed that the length and level of detail of the environment-related contents of the trade agreements vary. As expected,

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the stipulations are fewer and less concrete when the EU negotiates a trade agreement with an advanced economy, whereas the opposite holds for developing countries and emerging economies. To some degree CETA deviates from this rule since at least in terms of the length of the environment-related content, it stood out as exceptionally comprehensive. We anticipated this, for the negotiation of CETA was strongly politicised and therefore the EU negotiators had to make sure that they elaborated in detail on how the trade partners would collaborate to attain sustainable development. The trade agreement concluded with Mexico and Mercosur also deviated from our theoretical reasoning, but most likely because they were negotiated and concluded much earlier than the other agreements, at a time when in the EU (albeit not in the United States, for example), the salience of integrating sustainable development into trade agreement was low. We expect that future trade agreements will dedicate even more space to issues of sustainable development and formulate more explicit rules for ensuring that intensified trade does not threaten environmental protection.

References Bastiaens, I., & Postnikov, E. (2017). Greening up: The effects of environmental standards in EU and US trade agreements. Environmental Politics, 26(5), 847–869. https://doi.org/10.1080/09644016.2017.1338213 Chung, S. W., & Lee, J.-S. (2019). Building the pillars of the EU-South Korea strategic partnership. Asia Europe Journal, 17 (3), 327–340. https://doi.org/ 10.1007/s10308-019-00557-z Damro, C. (2012). Market power Europe. Journal of European Public Policy, 19(5), 682–699. https://doi.org/10.1080/13501763.2011.646779 De Ville, F. (2019). Understanding EU trade politics after TTIP, Trump and Brexit. Comparative European Politics, 17 (3), 447–459. https://doi.org/10. 1057/s41295-018-0128-z European Commission. (2020). EU-Mexico trade agreement. https://ec. europa.eu/trade/policy/in-focus/eu-mexico-trade-agreement/. Accessed 01 December 2021. European Commission. (2021a). Commission sets course for an open, sustainable and assertive EU trade policy. https://ec.europa.eu/commission/pressc orner/detail/en/ip_21_644. Accessed 01 December 2021a. European Commission. (2021b). Enforcement and protection. https://ec.eur opa.eu/trade/policy/policy-making/enforcement-and-protection/. Accessed 01 December 2021b.

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European Council. (2021). EU trade agreements. https://www.consilium.eur opa.eu/en/policies/trade-policy/trade-agreements/. Accessed 01 December 2021. Hübner, K., Deman, A.-S., & Balik, T. (2017). EU and trade policy-making: The contentious case of CETA. Journal of European Integration, 39(7), 843–857. https://doi.org/10.1080/07036337.2017.1371708 Jinnah, S., & Morgera, E. (2013). Environmental provisions in American and EU free trade agreements: A preliminary comparison and research Agenda. Review of European, Comparative & International Environmental Law, 22(3), 324–339. https://doi.org/10.1111/reel.12042 Jordan, A., & Lenschow, A. (2010). Environmental policy integration: A state of the art review. Environmental Policy and Governance, 20(3), 147–158. https://doi.org/10.1002/eet.539 Kemoklidze, N., & Wolff, S. (2020). Trade as a confidence-building measure in protracted conflicts: The cases of Georgia and Moldova compared. Eurasian Geography and Economics, 61(3), 305–332. https://doi.org/10.1080/153 87216.2019.1702567 Knill, C., Tosun, J., & Heichel, S. (2008). Balancing competitiveness and conditionality: Environmental policy-making in low-regulating countries. Journal of European Public Policy, 15(7), 1019–1040. https://doi.org/10.1080/135 01760802310512 Leblond, P., & Viju-Miljusevic, C. (2019). EU trade policy in the twenty-first century: Change, continuity and challenges. Journal of European Public Policy, 26(12), 1836–1846. https://doi.org/10.1080/13501763.2019.1678059 Perkins, R., & Neumayer, E. (2012). Does the ‘California effect’ operate across borders? Trading-and investing-up in automobile emission standards. Journal of European Public Policy, 19(2), 217–237. https://doi.org/10.1080/135 01763.2011.609725 Poletti, A., Sicurelli, D., & Yildirim, A. B. (2021). Promoting sustainable development through trade? EU trade agreements and global value chains. Italian Political Science Review/Rivista Italiana Di Scienza Politica, 51(3), 339–354. https://doi.org/10.1017/ipo.2020.33 Schulze, K., & Tosun, J. (2013). External dimensions of European environmental policy: An analysis of environmental treaty ratification by third states. European Journal of Political Research, 52(5), 581–607. https://doi.org/10. 1111/1475-6765.12011 Shyrokykh, K. (2021). Why climate? The drivers of the European Union’s climate governance in its Post-Soviet East European neighbors. Problems of Post-Communism, 1–11. https://doi.org/10.1080/10758216.2021.197 4888 Tosun, J. (2013). Environmental policy change in emerging market democracies: Eastern Europe and Latin America compared. University of Toronto Press.

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Tosun, J., & Leininger, J. (2017). Governing the interlinkages between the sustainable development goals: Approaches to attain policy integration. Global Challenges (Hoboken, NJ), 1(9), 1700036. https://doi.org/10.1002/gch2. 201700036 Tosun, J., & Schulze, K. (2015). Compliance with EU biofuel targets in SouthEastern and Eastern Europe: Do interest groups matter? Environment and Planning C: Government and Policy, 33(5), 950–968. https://doi.org/10. 1177/0263774X15605923 Vogel, D. (1997). Trading up and governing across: Transnational governance and environmental protection. Journal of European Public Policy, 4(4), 556– 571. https://doi.org/10.1080/135017697344064 Zahorka, H.-J., & Sargsyan, O. (2014). The Eurasian customs union: An alternative to the EU’s association agreements? European View, 13(1), 89–96. https://doi.org/10.1007/s12290-014-0309-3 Zito, A. R. (2005). The European Union as an environmental leader in a global environment. Globalizations, 2(3), 363–375. https://doi.org/10.1080/147 47730500377156

CHAPTER 10

Future Challenges to Trade Policy in Support of International Business Louise Curran

Introduction This chapter will explore some of the key evolutions of trade policy in reaction to increasing concerns about the impacts of globalisation and the likely effects of such shifts on International Business. The new more skeptical context around global integration and the impact of the COVID-19 pandemic have several implications for trade policy’s likely evolution (Eckhardt & Curran, 2019; Jean et al., 2018). In this short chapter, it would be impossible to do justice to all of them. The pandemic in particular has raised new questions about overreliance on complex and dispersed global value chains (GVCs), with many observers and some governments calling for reduction of global interdependencies

L. Curran (B) TBS Business School, Toulouse, France e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance During De-Globalization, International Political Economy Series, https://doi.org/10.1007/978-3-031-13757-0_10

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and ‘reshoring’ of critical goods (see Curran & Eckhardt, 2021 for a review). These concerns are added to long-standing calls to better integrate sustainability concerns into trade policy in order to ensure that trade does not undermine broader environmental and social objectives. This chapter will focus in particular on how these concerns on the sustainability of trade are being integrated into trade policy at EU level. It will also explore the likely impact on business, as well as note shifts in how business itself interacts with public policy in a more interconnected world (Curran & Eckhardt, 2018; Eckhardt & Bièvre, 2015; Madeira, 2016). To put things into context, it is important to briefly highlight the broader international trade rules as they apply to sustainable development concerns. These impact what policy measures can be mobilised by the EU (and all other WTO members) and how they are fashioned.

WTO Flexibilities in a Time of Contestation As discussed in Chapter 3, the WTO is facing a difficult context, where the failure to appoint judges to the Appellate Body has undermined faith in the institution and its capacity to police global trade rules. In addition, the COVID-19 pandemic resulted in extensive trade policy interventions to restrict exports and/or imports. Although many of these were linked to securing crisis supplies of medical goods, other products were also targeted and many of the interventions are likely to be WTO incompatible (Curran et al., 2020). These widespread interventions further undermined faith in the WTO’s capacity to enforce its rules. Nevertheless, they continue to exist and members of the WTO continue to refer to WTO principles when fashioning their trade policies. It is important, therefore, to take stock of this context and the flexibilities which global trade rules afford to member countries. The first thing to highlight is that, under the principle of nondiscrimination enshrined in Article I of the GATT, members of WTO accept to treat ‘like products’ of all members the same. Although, since the Enabling Clause was agreed in 1979,1 developing countries and Least Developing Countries (LDCs) can be treated differently. What is important is that such special access is provided in a non-discriminatory manner. There is some jurisprudence on this issue in WTO. Not least following

1 See https://www.wto.org/english/docs_e/legal_e/enabling1979_e.htm.

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India’s challenge to a previous EU preferential market access system for countries supporting the fight against the drugs trade.2 The panel ruled that that system discriminated between different developing countries and needed to be reformed (Shaffer & Apea, 2005). So special access for developing countries needs to be structured in such a way as to treat similar countries the same. Similar products also need to be treated equitably. This question of ‘like products’ has also been subject to quite some jurisprudence going back many years (Quick & Lau, 2003). Any efforts by WTO members to privilege more ‘virtuous’ products over those made in certain less sustainable locations or in less sustainable ways, could fall foul of WTO law, unless they are covered by the intrinsic flexibilities built into WTO, mainly through Article XX. It is these flexibilities which are the key to what can and cannot be done to favour sustainable trade. Article XX contains the ‘General Exceptions’ to WTO rules. These include the right to ban or restrict goods made by prison labour or which offend public morals, as well as the right to incorporate restrictions which are ‘necessary’ to protect the environment or human health. The latter two exceptions, in particular, are subject to a lot of jurisprudence including tobacco control legislation (US-Indonesia on banning Clove Cigarettes,3 Australia versus several countries on Plain packaged Tobacco4 ) and restricting imports of tuna and shrimp because of concerns on by-catch (the US cases: Tuna-Dolphin5 and Shrimp-Turtle6 ). The key outcomes of these cases are that members can ban or restrict imports of certain products if there is a clear public interest and the measure is ‘necessary’ according to objective scientific evidence (e.g. Plain Packaged Tobacco). In addition, the means by which the objective is achieved cannot be arbitrarily imposed by the importing country (TunaDolphin and Shrimp-Turtle), which also cannot discriminate between 2 See details.

https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds246_e.htm

for

3 See details.

https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds406_e.htm

for

4 See details.

https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds435_e.htm

for

5 See details.

https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds381_e.htm

for

6 See https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds58_e.htm for details.

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products which are essentially the same (clove and menthol cigarettes) (see Howse & Levy, 2013, for a legal analysis of several key cases). Finally, national security threats also constitute a basis for contravening WTO rules in certain limited contexts defined in Article XXI, although this exception had been very rarely used (Lee, 2018). However, in the current context, where trade has become increasingly controversial in many developed countries (Bauer, 2016; Eckhardt & Curran, 2019; Rashish, 2017), unilateral trade policy actions have taken on new forms, especially in the United States, posing questions about the limits of WTO exceptions. In particular, the Trump Administration leveraged a little-used regulation on threats to national security under Section 2327 (Lamp, 2018; Rashish, 2017) and Chinese IPR abuses under Section 3018 (Morrison, 2019) to increase the costs of exporters from a range of countries, most notably, but not exclusively, China. As noted by Jean et al. (2018) and many other observers, the use of the WTO national security exception to impose additional tariffs on imports from countries which are long-standing allies, like those in the EU, undermines these global trade rules. This, together with the very natural tendency for targeted countries to retaliate with their own tariffs against US exports and even against third country exports,9 heralds a new period of uncertainty on the limits of unilateral trade defence actions. In this context, the EU is proposing a series of innovative measures to address a key concern about trade—its potential negative impacts on sustainability—specifically environmental degradation and abuse of fundamental labour and human rights. Although the objectives are certainly morally defensible, these proposed measures raise new questions about the limits of flexibilities within WTO law at a time when the institution is already fragilised. A swathe of challenges to novel EU measures

7 The administration initiated, in particular, two Section 232 investigations into Steel and Aluminium imports, thereby resuscitating an instrument which, although widely used in the 70s and 80s, had fallen into disuse, with the last investigation dating from 2001. 8 As noted in Morrison (2019), under previous administrations, this process would have led to a WTO complaint, not unilateral tariffs. 9 For example, in the EU, the threat of import surges in steel products which were deflected from the US market by the 232 tariffs, was the basis for Safeguard measures against steel imports. This action was strongly opposed by up-stream steel users like the car industry.

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will certainly not strengthen the trading system, at least not in the short term (although an argument can certainly be made that clarifying these flexibilities will be useful to both the WTO and the planet).

Sustainable Development and EU Trade Policy Shifts In recent years, the EU has sought to increasingly leverage trade policy in support of sustainable development objectives, in response to the need to reassure European consumers that imported goods are not undermining EU standards and values or broader sustainable development. The key means to achieve these objectives is the use of ‘market power Europe’ to encourage positive policy change in partner nations, for example through the Trade and Sustainable Development (TSD) chapters in its FTAs. The manner in which this process plays out in FTAs is discussed in Chapter 3. Here I will focus on the so-called ‘autonomous measures’ of EU trade policy, i.e. those that are not negotiated with partners, but decided unilaterally by the EU. Sector-specific EU measures to address sustainability concerns have existed for some time. Key among them are: the Regulation to address illegal, unreported and unregulated (IUU) fishing, which came into force in 2010 (Jaremba, 2020); the Forest Law Enforcement, Governance and Trade (FLEGT) initiative, applied in 2013 and aimed at combatting illegal timber trade (Zeitlin & Overdevest, 2021); and most recently, the Conflict Minerals Regulation, which entered into force in 2021 and seeks to ensure that conflict minerals don’t enter the EU’s supply chains (Jaremba, 2020). Through different mechanisms of bilateral and global cooperation and coercion, these measures seek to address sustainability concerns in particular sectors. As such they have been relatively uncontroversial. However, the measures discussed here, which are either in development or being revised, seek to address more generic sustainability concerns. They affect a wider swathe of companies and have been subject to more intense debate. The key measures I will focus on are conditionality in the Generalised System of Preferences (GSP), the Carbon Border Adjustment mechanism (CBAM), the Regulation on limiting trade in goods associated with deforestation (CEC, 2021a) and the Regulation on Due Diligence (DD) in supply chains. The first is a long-standing policy

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instrument, although it is being strengthened, while the latter three have not, so far, been implemented. Their likely inclusion in the EU’s policy mix in the near future reflects long-standing concerns about the sustainability of EU-facing supply chains which the pandemic has only served to intensify. As highlighted above, they pose questions for the flexibility of WTO rules. They also have important implications for international business, not least because they signal a shift towards ‘harder’ regulation on this issue. Figure 10.1 provides a visual representation of the EU’s different unilateral trade policy tools in relation to environmental and social (labour and human rights) concerns, with measures not yet implemented indicated in italics. These measures differ, not just in their product coverage, but in the manner in which they seek to achieve their objectives. Some focus on partner countries’ domestic policies while others focus on behaviour within companies and their GVCs. This is an important distinction, because, from a business perspective, the former type of policy seeks to affect decision-making on the geography of their GVCs, whereas the latter seeks to impact on internal company operations, especially on how (and to what extent) they undertake due diligence across their suppliers. Environmental Objectives

Labour/Human Rights objectives

IUU fishing FLEGT CBAM Deforestation

DD regulation

GSP Removal Conflict Minerals

Fig. 10.1 EU policy initiatives seeking to integrate sustainability concerns into trade policy

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GSP—Differentiating Between Countries The GSP is a long-standing trade regime which provides preferential access to developing countries. Such special access is validated in the WTO through the ‘Enabling Clause’ referred to above, such that the EU can provide preferential market access to developing countries, as long as they treat similar countries in the same way. Least Developed Countries (LDCs) have been given completely free access under the Everything But Arms (EBA) initiative for over 20 years. As mentioned above, early EU efforts to differentiate between other developing countries by providing special access to those who were actively involved in the fight against illegal drugs fell foul of a challenge in WTO brought by India.10 As a result of this judgement, the EU revised its special access arrangements, increasing preferences for countries which respect certain minimum labour, environmental and human rights commitments. The result was the ‘Special Incentive Arrangement for Sustainable Development and Good Governance’ (the GSP+ regime), which provides very generous market access provided that countries ratify and comply with a list of international conventions. The most recent evaluation of the GSP indicated that this scheme had positive impacts on both exports and the ratification of conventions, although it recommended that monitoring be improved (Development Solutions, 2018). Access to the standard GSP programme is also subject to ratification of a shorter list of labour and human rights conventions, such that access can be removed from countries where there are clear abuses of human or labour rights (e.g. Belarus) (Zhou & Cuyvers, 2011). The EU’s ‘carrot and stick’ approach seeks to encourage ratification of international standards in developing countries on the one hand, while securing minimum standards of human and labour rights across the board on the other, through the threat of loss of access. The effect of such conditionality on sustainable development on the ground in developing countries has been subject to a lot of debate. While the evaluation noted that GSP+ has improved the uptake of international conventions, labour and human rights abuses have continued in EBA countries, especially Bangladesh, Cambodia and Myanmar (Development Solutions, 2018).

10 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds246_e.htm.

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Indeed, the EU has been criticized for uneven application of human rights commitments across GSP beneficiaries (Velluti, 2016). The European Parliament (EP) has been very active in monitoring the situation and calling for action in cases where commitments were not seen to be respected. In an analysis of the 2014–2018 period, Pakistan was the country where the most concerns were expressed (EPRS, 2018). More recently, the EU have withdrawn some market access preferences from Cambodia11 following pressure from several actors including the European Parliament about human rights abuses (EP, 2017). Although some have questioned the impact of such withdrawals on trade (Zhou & Cuyvers, 2011), most studies find that greater market access increases exports (Curran & Nadvi, 2015; Development Solutions, 2018) and thus constitutes a lever to impact on government policy. The European Commission recently proposed a revised GSP Regulation for the ten-year period from 2024 (CEC, 2021b) which strengthens both the carrots and the sticks. It would increase the requirements for GSP+, by adding the need to adopt further international conventions, including the Paris Agreement. In addition, it is proposed to enable more rapid removal of market access in cases of grave violations of commitments. This latter provision is certainly a reaction to criticisms by the EP and civil society more broadly of the long delays between negative shifts in local governance and removal of preferential access, most recently seen in the case of Myanmar.12 EU business obviously has an interest in the debate on the conditions for market access. Many GSP beneficiary countries are important sources of goods, especially labour-intensive goods like clothing, where GSP+ and EBA benefits reduce the cost of imports, often substantially (the import tariff for clothing is 12%). Whereas in the past, there was little tendency for business to contribute to the discussion on sustainable development and market access, more recently we have seen them take public positions in favour of action. One of the most notable was the statement by amfori—the European trade association which represents large importers—in support of action against Cambodia (Amfori, 2019). They stated that, although many of their members sourced in Cambodia

11 https://trade.ec.europa.eu/doclib/press/index.cfm?id=2113. 12 https://cleanclothes.org/news/2021/call-for-the-eu-to-suspend-preferential-eba-

trade-tariffs-from-myanmar.

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and benefited from the reduction in tariffs accorded, if removal of preferences was considered necessary ‘…amfori would support any such decision, as a last resort, to lend credibility to the GSP system and show that penalties, as well as advantages, can occur’. (op.cit: 2). For an association that generally lobbies for greater openness this was quite a surprising ‘volte face’ and underlines the pressure that civil society has been putting on retailers and other importers to address abuses, particularly of human and labour rights in supply chains. For business, the country-based approach of the GSP/EBA has the advantage of assuring a level playing field for all EU companies sourcing from a given country. It also, to a certain extent, reduces the need for companies to exercise due diligence in that, the EU to some extent validates the eligible countries as ‘sustainable’ supply sources, especially in the case of GSP+. Balancing Market Access and Climate Change Imperatives—the Carbon Border Adjustment Mechanism (CBAM) The CBAM is a proposed mechanism to address the competitiveness impacts of EU efforts to address climate change, especially by increasing the cost of carbon in the block. The argument for such a mechanism is straightforward. If the EU abides by its Paris commitments to seek carbon neutrality by 2050, it is inevitable that carbon costs will increase. If trade partners don’t make equivalent efforts, EU carbon-intensive industry will be at a competitive disadvantage, with the risk that some businesses will import goods from countries without such regulation—so-called ‘carbon leakage’ (CEC, 2021c). This is not a new argument (Curran, 2010) and the Commission has proposed ideas for action before, but they have never been implemented. As Mehling et al. (2019) observe in a recent article, the intensification of the debate on trade, as well as the increased efforts to reduce carbon emissions post-Paris, mean that the time may be ripe for action. In any case, one of the first commitments of the current Commission was to take action to address carbon leakage, with the proposal integrated into its ‘Green Deal’ (CEC, 2019). The practical and methodological challenges of calculating the embedded carbon in imported goods are substantial. Rather than seek to cover all goods from the outset, the Commission has chosen to focus on a small number of goods which are particularly carbon-intensive and, importantly, are covered by the EU’s internal Emissions Trading System

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(ETS). This system caps carbon emissions from key producers annually and allows them, if needs be, to meet their obligations by trading among themselves (so-called Cap and Trade). The industries covered are cement, electricity, certain fertilisers and most iron, steel and aluminum products (CEC, 2021c). In order to explore the likely impact of these proposals Table 10.1 presents figures from the International Trade Center (ITC) on EU imports in recent years in goods covered by the CBAM. As 2020 was quite an atypical year for trade in these products, averages for the last 5 years are also presented. Several insights emerge from these figures. Firstly, the majority of imports are intra-EU. The post-Brexit EU27 has consistently made up over 70% of the EU imports, with the figure standing at 72% in 2020. Secondly, the non-EU country that will be most effected by the CBAM is not China, as might seem intuitive, but Russia, whose share of these EU imports was 3.4% in 2020 (against 4.4% on average over the 5 years to 2020), although clearly sanctions against Russia following the war in Ukraine will have substantially reduced these figures. Equivalent figures for China’s share of the EU market were 2.3 and 2.9%. These figures may have been kept artificially low as a result of the extensive trade defense measures applied to these exports.13 With the exception of India, most of the other key sources are relatively developed countries with robust carbon reduction strategies. Overall, these figures suggest that carbon leakage through trade has not, historically, been hugely important in the goods where CBAM will initially be applied. This does not mean that there will be no impacts on trade partners. Although the US represents less than 1% of the EU’s exports, it is still a substantial figure—$1.5bn in 2020 and concerns have been expressed about the potential negative effects of CBAM. Several countries are concerned about the potential impact of CBAM on their exports and there is a high likelihood that it will face a challenge in WTO. Although the Commission has been at pains to underline that they consider action to be WTO compatible, some observers consider that it could not be justified under Article XX (Bacchus, 2021). In addition, the effectiveness (and WTO compatibility) of the CBAM in terms of carbon reductions depends in part on the EU simultaneously phasing out 13 At the end of 2020, China faced 4 antidumping duties on aluminium products and 17 on various iron and steel products. Russia faced duties on 7 iron and steel products (CEC, 2021a, 2021b, 2021c).

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Table 10.1 Value and share of EU imports of products covered by CBAM

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EU27 Russia Turkey China UK Norway Switzerland Korea India Ukraine US

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Value ($m)

Share in 2020

Average 2016–2020

152,140 6906 5093 4935 3971 3431 3308 2759 2688 1928 1523

71.7 3.3 2.4 2.3 1.9 1.6 1.6 1.3 1.3 0.9 0.7

70.9 4.4 2.1 2.9 2.4 2.0 1.6 1.3 1.4 1.3 0.9

Source—Author’s calculations based on ITC TradeMap

free ETS allowances (National Board of Trade, 2020) and EU industry is lobbying hard to avoid this eventuality (AEGIS, 2021). The EU is not proposing to apply the new measures until 2026, although from 2023 importers would already need to detail the carbon content of their goods. In addition, the proposal needs to wind its way through the EU’s legislative machinery, which could result in some important changes to its implementation. This leaves time for negotiation and even the replacement with a more global approach, such as the ‘Climate clubs’ proposed by Nordhaus (2015) or a minimum carbon price, an idea supported by the IMF (Parry et al., 2021). In any case, it certainly puts the issues on the WTO agenda (Hufbauer et al., 2021). In terms of its operation, although the basis of the regulation will be to differentiate between countries on the basis of whether (and how) they regulate carbon emissions, it leaves open the possibility for individual companies which produce in a more carbon-efficient manner to apply for carbon credits. It thus combines a country-based approach with some company-specific flexibilities. Balancing Market Access and Impacts of Increased Demand on Land Use—The Regulation on Products Linked to Deforestation The proposed regulation on products linked to deforestation aims to reduce the negative impacts of EU consumption on forests by seeking

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to assure that products which have been produced on deforested land are not sold in the Community. Unlike CBAM, the regulation doesn’t increase the costs of imports, rather it requires importers of relevant products to submit a due diligence statement and makes them subject to legal liability in case of non-respect or fraudulent declarations. It amounts to a Technical Barrier to Trade (TBT) measure, in some ways similar to other standards that the EU requires for market access. As such it could also be challenged in WTO. Although environmental NGOs have argued that there are sufficient flexibilities within Article XX to enable such differentiation between ‘like products’ (FERN, 2015), it is by no means certain. Indeed, the EU Farming lobby has raised concerns about the discrimination between producer countries intrinsic in the operation (Copa—Cogeca, 2021). As in the case of the CBAM, the initial regulation has been made more manageable by limiting its scope to five commodities which are particularly implicated in deforestation—cattle, cocoa, coffee, oil palm, soya and wood—and their direct derivative products (CEC, 2021a). The key figures presented in Table 10.2 identify the most likely trade partners effected by the proposal. 2020 was a representative year in these products, thus the average in the past five years is substantially the same. As in Table 10.1, most imports are from within the EU. Among the key trade partners which will be affected by this measure, several (UK, Switzerland, Norway…) are unlikely to have difficulty fulfilling the due diligence requirements. However, the key non-EU supplier, Brazil, is likely to face considerably greater barriers to assuring that their exports comply. Indeed, concerns about deforestation in Brazil have been a key element of NGO criticisms of EU trade relations with the country in recent years and the European Parliament is following the situation closely.14 In view of Biden’s shift in policy on environmental protection and reintegration into the Paris Agreement, the challenge may be lesser for the US, but discussions will nevertheless be intense.

14 https://www.europarl.europa.eu/thinktank/en/document/EPRS_ATA(202 0)659311.

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Table 10.2 Share of EU imports covered by Regulation in deforestation

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EU27 Brazil US UK China Russia Argentina Switzerland Indonesia Ivory Coast Norway

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Import share

Value $m

71.3 5.4 3.9 2.5 2.2 1.6 1.5 1.3 1.2 1.0 0.7

91,671 6892 5032 3226 2813 2067 1917 1662 1511 1276 945

Source—Author’s calculations based on ITC TradeMap

Due Diligence in Supply Chains—Differentiating Between Companies Deforestation is only one of the risks along a company’s supply chain. There are also concerns about responsibility for other potential environmental damage, as well as non-respect of human and labour rights. These are not new, but have gained increasing traction in recent years, especially since the collapse of Rana Plaza in Bangladesh in 2013 resulted in over a thousand deaths. It seems likely that negative publicity during the pandemic around widespread worker layoffs in highly vulnerable social contexts due to cancelled orders by Western retailers (Kim & Woo, 2021) only served to increase concerns about the lack of responsible business conduct in GVCs. Calls have intensified for a shift from ‘soft’ approaches, like codes of conduct and voluntary inspections, to ‘hard’ regulation where companies are held legally responsible for malpractice along their supply chains. Several national initiatives have been launched across Europe, the most far-reaching of which is the French ‘Droit de Vigilence’ passed in 2017. This requires large companies (vaguely defined) operating in France to undertake due diligence along their supply chains and report annually on both the risks identified and their action to address them. Whether this law results in criminal responsibility for firms which fail to properly exercise due diligence is still a subject of legal debate and several cases (including two against the oil giant Total) are winding their way through the French legal system. However, the approach marks a shift away from

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voluntary initiatives managed by companies, or their trade associations, towards government-imposed minimum standards. Rather unsurprisingly, the existence of this law in one of the EU’s key consumer markets has led to calls from civil society for an EU-wide equivalent (ECCJ, 2019). However, there is also support in some sectors of business, not least because of the need to ensure a level playing field between companies operating in France and the rest of the EU. In a report for the German EU presidency, Ericsson and H&M, as well as amfori, came out in favour of legislation (BHRRC, 2020). The European Parliament has long supported regulation in this area and in March 2021 it adopted a legislative ‘own initiative’ resolution asking the Commission to draft a legislative proposal and providing detailed guidance for its content (EP, 2021). As the Commission drafted proposals, a YouGov survey put support for such an initiative at 80% (Glover, 2021). Depending on how the final regulation is structured, it will create new requirements for EU businesses and likely change the way in which they approach risk management, not only within their enterprise, but also across partners in their supply chains. Value chain choices will likely become less focused on financial cost-based analyses and incorporate nonfinancial risks like reputation and even criminal liability for actions (or non-actions) by business partners.

Innovations in Trade Policy---The Challenges for Business For trade-dependent companies, these policy innovations create new and, in many ways, unpredictable threats to their business models. As with any policy change, they also present opportunities. In any case, the rapidity and extent of changes in the EU trade policy environment will require business to pay increasing attention to the policymaking process. Political risks have increased, not just in those emerging and developing markets where they have long been a pressing issue, but in Western democracies. The key question for companies going forward, will be how to effectively mobilise to impact on trade policy choices. Company mobilisation is complicated by two factors. Firstly, antiglobalisation sentiment is quite high in many EU countries, so individual companies have been loathed to come out publicly in favour of international trade and GVCs (Curran & Eckhardt, forthcoming). Secondly, GVCs integration varies extensively across countries within similar

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industrial sectors, making it more difficult to build coalitions within sectors (Curran & Eckhardt, 2018; Madeira, 2016). This complexity is evidenced, for example, in the reaction of the EU farming lobby to the proposed deforestation regulation. At first glance they could be expected to support the regulation, as increasing barriers to trade in beef will reduce competition on the EU market and benefit some livestock farmers. However, increasing the cost of soy, an important foodstuff for many other livestock, is not in the interests of a larger group of farmers. Indeed, the peak farming lobby group has expressed skepticism about the legality and effectiveness of regulation (Copa—Cogeca, 2021). This variation in policy positions within sectoral trade associations because of the differential interests of their members, especially their varied reliance on imports and exports, has led to several ad-hoc temporary coalitions of companies across sectors and borders focused on specific policy objectives (Curran & Eckhardt, 2018; Eckhardt & de Bievre, 2015). The proposed trade policy changes discussed above are likely to be no different. In addition to some partner countries being disproportionately affected by shifts in the policy environment as outlined above, some companies will have strong incentives to lobby for and against change. It would not be surprising to see transnational coalitions on both sides of the political debate.

Conclusion This chapter has explored how the evolving long-term public debate on trade, together with the short-term shocks linked to the pandemic, have fostered several innovative new policy proposals, as well as moves to strengthen the conditionality of existing regimes of market access. Through analysis of four key policy shifts and their likely impacts it seeks to highlight, both the intensification of ‘hard’ requirements within the EU’s GVCs and the likely effects on business. Given the diversity of vulnerability to these proposed changes across sectors and EU members, it seems likely that novel ad-hoc alliances will emerge to argue for and against different aspects of the proposed regulations. Nevertheless, the trajectory of EU trade policy is clear. Regardless of how the proposals of the current Commission finally emerge from the legislative process, the move towards greater conditionality for market access and binding requirements on companies selling into the EU market seems likely to be an enduring characteristic of the post-pandemic New Normal.

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CHAPTER 11

Two Lenses to Megatrends in Trade Policy: Towards a Future-Oriented Contextual Approach Toni Ahlqvist

Introduction Megatrends are among the most utilised concepts in futures studies. In the last twenty years or so, the use of megatrends, and its neighbouring concepts, has increasingly become a prevailing practice in policy processes across varied spatial scales, be they local, regional, state-level or international. However, megatrends have still not become the bread and butter in the context of trade policy and they are somewhat rarely discussed in this setting. Assessing fundamental reasons for this is outside the scope of this paper, but I will nonetheless present a surface speculation: in my view, the probable reason for this is because trade policy is commonly perceived

T. Ahlqvist (B) Turku School of Economics, Finland Futures Research Centre, University of Turku, Turku, Finland e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance During De-Globalization, International Political Economy Series, https://doi.org/10.1007/978-3-031-13757-0_11

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as an actor-driven policy aimed at forming a workable operational environment for organising a geoeconomic and geopolitical “game of trade”, be it bilateral or multilateral, and outlining actionable and binding rules and practices that entwine the actors to this game. In this kind of thinking, the roles of megatrends or other transformation elements are seen as the business of the actors themselves, and trade policy is perceived as a rulebased framework instead of a policy practice inherently connected with wider socio-economic transformations. Obviously, there are also other reasons why megatrends are peripheral in the trade policy theorisation than my speculation. Aisleitner and Puehringer (2020) have analysed trade policy discourse in leading economic journals. Their analysis gives evidence-based clues for this situation. Based on the analysis, they argue that the academic discussion on trade policy has four main characteristics: firstly, the discussion reflects the hierarchical structure of economics as an academic discipline; secondly, the discussion is primarily based on theoretical assumptions than on empirical evidence; thirdly, the discussion has normative bias towards trade liberalisation; and, fourthly, the discussion is not aligned with other types of policy discussions, such as social, cultural or environmental policies. Thus, Aisleitner’s and Puehringer’s (2020) analysis substantiates a conservative tradition in the field that does not favour empirical perspectives or perspectives based on trends or other kinds of transformation signals. However, this kind of conservative economism has been increasingly challenged by the wide range of evidence and studies on the socioeconomic and spatial changes induced, for example, by climate change (e.g. Coultera et al., 2019; Wainwright & Mann, 2015), digitalisation (e.g. Ash et al., 2019; Iansiti & Lakhani, 2014), and urbanisation (e.g. Leszczynski, 2014; Ruddick et al., 2015). It has been widely acknowledged by the actors in multiple scales that majority of these megatrends, grand challenges and wicked problems are related to the structures and practices of the global economic system. This system is based on the idea of the global market that generates the most efficient use of resource and production. The operation of the global market is based on trade between the states and regions. The trade is dependent on the efficient movement of the goods, in a way that makes the entire system interconnected and interrelated. Further, the system is built on uneven spatial division of labour, where certain parts of the system are the core production sites and core markets, and certain parts of the system act as resource

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and labour peripheries (see Massey, 1978/2007). Thus, it is evident that in this kind of systemic setting there are processes and practices that could be affected by the feedback loops and wider socio-economic transitions in the system. Thus, the tools of trade policy could increasingly be utilised not just in its traditional roles to guarantee the balance of the market behaviour or securing the competitive advantages of the strong states in the global economy, but also increasingly to drive normative and value-based changes in the system. Thus, this article discusses how megatrends could be conceptualised and utilised in the context of trade policy, and provides a brief empirical analysis of the recent European Commission’s initiative to drive “assertive trade policy” that mingles value-based ideas about transformation and uses megatrends as levers towards more normative trade policy orientation. A key question here is how to think about megatrends in the context of trade policy? In the article, I provide partial answers to these questions and pave way towards what I call contextual future-oriented approach. Thus, the article advances through the following sections. In the first section following this introduction, I present key paths of discussion about megatrends. In the second section, I outline a future-oriented contextual approach for contemplating the impacts of megatrends in specific settings. In the third section of the article, I provide a stylised empirical analysis of the European Commission’s recent efforts to build an “open, sustainable and assertive trade policy”. In the fourth concluding section, I tie some open strings and provide insight into the futures of megatrends in the context of trade policy.

Megatrend: A Contested, but Widely Utilised Concept The concept of a “megatrend” was coined by John Naisbitt in 1982 in his business best-seller Megatrends (Naisbitt, 1982). In the book, Naisbitt characterised multiple transformation directions, or “megatrends”, that would condition the development of the business in the future. The directions were on “mega-level”, as the notion explicitly states, with examples such as: “industrial society to information society”, “national economy to global economy”, “short term to long term”, “centralization to decentralization”, “representative democracy to participatory democracy” and “hierarchies to networking”. For compiling these megatrends, Naisbitt and his research associates collected materials from US newspapers and

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other US sources and then subjected it to content analysis that was finally interpreted by Naisbitt. By the start of the 1990s, the notion of megatrend had became, with the active consultative lecturing work by Naisbitt, a sort of classic concept in the field of business consultancy. Since then it has also become a classic futures concept that is widely used in plethora of futures exercises, projects and workshops. However, it must be noted that in many of the futures exercises the naval chord to the Naisbitt’s original treatise is rather thin, or has even been cut off entirely. The notion of “megatrend” has become a sort of pragmatic keyword in futures research that is used to signify any wide-ranging transformation lineage that can be assessed to combine multiple events, practices, elements and trends all pointing to a more or less uniformly definable direction. In my view, what is thus useful about this notion is that tries to grasp and conceptualise wide-ranging and meta-level transformation trajectories that could have multiple, even contradictory, effects for different societies and locales. For the purposes of this manuscript, I define “megatrend” as a particular phenomenon, or a group of phenomena and trends, that can be assessed to define and constitute the direction and general quality of future. It denotes a long-term development trajectory of a phenomenon that is expected to continue in the future. It is a sort of “general direction of things” that is connected with a specific context and time of perception. This notion depicts a large wave of future development that can be defined relatively concisely and can be analysed also with a historical perspective. Thus, megatrend consists of multiple subunits, trends. However, the original notion could and should be constructively criticised. Adapting Slaughter (1993: 841) there are two important criticisms towards the original version. Firstly, there is no common framework or approach to combine the trend methodologies. Secondly, the trend listings are over-optimistic about the possibilities of new technologies to provide solutions for problems. I would assess that these two points are still valid today when glancing through various trend lists used in different business consultancy and futures exercises. The trend lists are usually realised by varied consultant companies and think tanks which all seem to be having their own methods for scouting and analysing the trends, or some individual tool that is “black-boxed” and concealed from critical scrutiny in the name of competitive advantage. Also, I would say that even if the multiple impacts of technologies are more widely understood, there is still a much technology optimism in the air, because current society

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is so deeply dependent on technological solutions for its basic operations. Slaughter (1993: 831) further criticises Naisbitt’s original treatise for flawed, “methodologically and intellectually unsustainable” analysis and for being too US-centric. Slaughter (1993) identifies various biases in Naisbitt’s definitions, both in the 1982 original book and the updated version Megatrends 2000 (Naisbitt & Aburdene, 1990). He (1993: 832) argues that success of the notion of “megatrend” is mainly based on two things: firstly, how the notion simplifies the world and, secondly, how it creates “a largely false sense of security” and thus evades deeper critical analysis. As Slaughter (1993) notes, trends and megatrends are not selfevident or self-explanatory phenomena, but they are always mediated by personal and contextual factors, and linked with particular ways to interpret and view the external environment. Slaughter (1993: 842) provides a highly valid compilation of factors that affect the “reading” of a trend (Table 11.1). Megatrends, if the notion is used as a concept referring to a wideranging transformation trajectory, have increasingly become a common currency also in policy-making and related processes. In this setting, megatrends share a conceptual field with multiple neighbouring concepts that have become pivotal in the present policymaking and related theorisation, such as “grand challenges” (e.g. Keenan et al., 2012; Rhisiart, 2013), “wicked problems” (e.g. Head, 2014) or even varied societal Table 11.1 Some factors involved in trend identification (adapted from Slaughter, 1993: 842) Personal Institutional Professional Methodological Cultural Ideological Level in global system Level of analysis

Interests, background, values, cognitive style, favoured metaphors Position, orientation (market, non-profit, interest group, activist, etc.) Training, constituency, disciplinary paradigm Approach, methods, nature of significant data Race, religion, region, history Marxist, socialist, capitalist, communitarian, radical, post-modernist Institution, area, state, region, globe Events, practices, ideas, worldview commitments

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transition concepts, such “sustainability transitions” (e.g. Markard et al., 2012; Smith et al., 2012) or “socio-technical transitions” (e.g. Geels, 2012; Smith et al., 2005). I argue that these concepts share a somewhat parallel conceptual field: all the concepts refer, more or less, to systemic transformations, that is, transformations that are realised at the systemic level of multiple spatial scales, multiple institutional arrangements, multiple organisations that combine varied practices and relationships. These concepts, albeit they do not refer exactly to the same types of phenomena or processes, are thus connected by the idea of metalevel, and “mega-level”, transformation which is outside the scope of any particular actor. Providing solutions to these transformations require manifold concerted policy activities in several fronts, and a multitude of coordinated actions by varied actors, such as policy-makers, public organisations, companies and citizens. Thus, affecting systemic transformation requires target-setting, orchestration and alignment. Megatrends can thus be utilised also in the academic research, but in order to use them, one needs to breakdown and ground the trends for understanding the effects in the specific context.

Two Lenses to Megatrends: Towards a Contextual Approach In order to evaluate the impacts of megatrends in specific spatial and policy contexts, I propose that megatrends could be understood via two conceptual lenses (Fig. 11.1). Firstly, the concept can be approach as a monolithic concept, which is the traditional way to define, identify and imagine megatrends. “Monolithic megatrend” refers to thinking that focuses on the role of megatrend as an imaginary centre of discourse, as a speculative crystallisation of a set of phenomena and events that are perceived in the environment. In an intriguing treatise on the meanings of trend concepts in foresight, von Groddeck and Schwarz (2013) argue that megatrends are specific socially constructed semantic forms that are commonly treated as “empty signifiers”. They (2013: 32) utilise Laclau and Mouffe’s discourse theory and suggest that in the context of megatrends, “empty signifier” refers to “a signifier without a signified, making it therefore applicable to a semantic form without a specific meaning”. Thus, empty signifiers are “meaningless as such”, but just because their meaning is non-specific the notion can be utilised as a centre of a discourse, as a nodal point for focusing the perspective: “megatrends

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Megatrend: idea and thinking ‘Megatrend’ as a monolithic concept

‘Megatrend’ as a contextualised concept

Dynamics of the external environment

Fig. 11.1 Two lenses to approach the concept of “megatrend”

can be perceived as empty signifiers because they hold together a number of heterogeneous discursive elements as equal contributions to a certain discourse” (Von Groddeck & Schwarz, 2013: 32). This is exactly how the usual understanding of the megatrend operates: as an overarching centre of a discourse that holds so heterogeneous elements that the exact meaning of the megatrend is almost impossible to define. Secondly, instead of this monolithic notion, I argue that the concept of a megatrends should be approached contextually, that is, by assuming that the notion is constructed from multiple parallel and contradicting trajectories that result in different kinds of impacts in different contexts. Albeit this multiplicity, one can argue that there is a core to these trajectories that make them “clusterable” by this specific notion. Here, “megatrend” is perceived like an aggregate outcome of different lineages than a notion that monolithically defines a singular transformation trajectory. Hence, the important task when interpreting megatrends is to ground the concept in a specific setting and then to deconstruct its main “filaments” that are viewed as effective in this specific context. The contextual approach thus starts from the context and ends in the context. Meanwhile, the notion of megatrend is still a specific semantic form and a metaphor, but now the concept is not that empty anymore, but more of a package that contains multiple filaments for catalysing actions and reactions in the context. For advancing with the contextualisation process, I present a framework to embed trends and signals in a context (Fig. 11.2). Basically,

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Embedding futures knowledge in a context Megatrends Selected trends What is relevant in the trends? How do they affect the context? Understanding the contextual focus How do they affect the context? What is relevant in the signals? Ahlqvist 2019

Selected signals Weak signals

Fig. 11.2 Embedding trends and signals in a particular context

the process is similar for different types of futures signals, be they megatrends or weak signals. Firstly, the process starts from the “red dot” in the centre of the figure, that is, understanding the contextual focus. The first step is about sense-making where organisations write out and assess its basic assumptions (e.g. Brown et al., 2008; Weber & Glynn, 2006). This step sharpens the focus when it comes to reading of trends and signals (Schoemaker & Day, 2009). Here, one defines the cores and limits of the strategic perception and thinking of an organisation, company, or even a state. The idea is that trend-seeking exercise would be grounded in a contextual understanding where the limits of the perception are not just identified, but also thought out and acted upon (see Ahlqvist & Uotila, 2020). The second step in the process is to utilise various trend-seeking materials, such as databases, analytical tools, web searches, literature, trend lists and so on, to make a contextualised map of key trends and signals that have a strategic fit in the defined context. By strategic fit I refer to two kinds of topics: first, the trends or signals that fit the core emphases of the context, that is, they have a high probability to be relevant in this context. Second type of strategic fit is located near the periphery of the contextual focus, that is, either close to the strategic boundary or just

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beyond it. These kinds of trends and signals have a possibility to be critical emerging themes. This process should be repeated as many times as required in order to have some 5–8 trend and signal candidates. The third step is to expose the selected trends and signals to indepth analysis in order to answer the question: what is relevant in the chosen trends or signals? The relevance could be defined on the basis of different criteria. The first criterion could be the research evidence on the topic, e.g. refereed journal articles and research reports. The second criterion could be varied media articles and public policy reports on the topic. Third criterion is based on benchmarking related organisation or companies. Benchmarking could be realised by scrutinising the “median knowledge” in the industry, that is, the most common thinking about the trends and signals. When this has been done, it is possible to identify particular cases of trends and signals that are unique when reflected against this “median knowledge”. The fourth criterion could be constructed through an analysis of counter-trends or counter signals to the identified topics (see e.g. Ahlqvist & Rhisiart, 2015). Are there signs or events that display oppositional or antagonistic currents? If there are these kinds of trends or signals, one should take these into account when assessing the relevance. The fourth step is to evaluate multiple ways the now “verified” trends and signals could affect the context. It is important to note that, as forcefully argued by von Groddeck and Schwarz (2013), the trends are “empty signifiers” as long as their impacts are not contextualised and elaborated on. In the same vein, it is important to recognise that in a specific organisational context, there are no necessary nor “objective” impacts that inexorably follow from the presentation of a certain trends or signals, but the majority of the impacts are realised as societal and strategic actions based on the trend or signal. This conclusion has the following implication for the trend theorisation: there are no definite, causally compelling societal effects that invariably follow when a trend or signal impacts in a context. Quite the opposite is the case: the effects and impacts are highly dependent on the contextual reactions the societal actors make on the basis of the analysis and interpretation. Thus, megatrends are socially constructed down to the bases (see Fuller & Loogma, 2009). This means that the interpretations of megatrends will vary across space, time and interpretive context, and the interpretations reflect assumptions, values and biases of the perceiving agents (Ahlqvist & Uotila, 2020). In the next section, I will analyse the European Commission’s trade policy framework by using this contextual trend approach depicted above.

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Enacting the Contextual Approach: The Case of European Union’s Novel Trade Policy Framework In 2021, the European Commission produced a trade policy report to emphasise its new “open, sustainable and assertive” approach (EC, 2021). The report provides an interesting novel perspective to the trade policy by utilising megatrends as levers for constructing more normative and value-based framing for European trade policy. Thus, the report can be interpreted as a contribution to not just changing rules of trade policy, but also as a commentary towards a multilateral geopolitical order based around three major “thought islands” in the topic, that is, USA, China and Europe. Here, I provide a brief analytical reading of the report in order to showcase the contextual framework depicted above. The document is intriguing because it can be read as an exemplary case of how an embedded future-oriented approach to megatrends can be enacted. The report starts with a depiction of the context: the European trade policy in 2030 (EC, 2021: 1). The first section of the report is thus about formulating the “red dot”, the contextual focus (see Fig. 11.2). Key motivation of this contextual focus is the following statement: With new internal and external challenges and more particularly a new, more sustainable growth model as defined by the European Green Deal and the European Digital Strategy, the EU needs a new trade policy strategy – one that will support achieving its domestic and external policy objectives and promote greater sustainability in line with its commitment of fully implementing the UN Sustainable Development Goals. Trade policy must play its full role in the recovery from the COVID-19 pandemic and in the green and digital transformations of the economy and towards building a more resilient Europe in the world. (EC, 2021: 1)

The “megatrend driven” approach of the document is motivated by the “right policy choices” in the future that results from identifying the “political, economic technological, environmental and social shifts and the global trends emerging from them” (EC, 2021: 1). Thus, the report argues for a transition of a trade policy from an economistic and theoretical orientation towards an outward-looking, pragmatic and value-based orientation. The background motivators of this trade policy transition follow from the selection of megatrends mentioned

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in the report: globalisation; technological evolutions and global value chains; rise of China; climate change; and digital transformation (EC, 2021: 1–2). Supposedly, a further transition is going on in the field of “trade itself”: It [trade] will become more innovation-driven, supported by intellectual property (IP) protection, with an increasing role of services trade compared to goods. Services not only contribute directly to the value chain (financial services, telecommunication, IT, transport and logistics) but - often even more importantly – they contribute by being incorporated in manufacturing products. The servicification of the economy and the rise of digital technologies have created well-paid and high quality jobs and have fuelled economic growth. (EC, 2021: 3)

On these bases, the document provides a mission statement and target for the European trade policy: “The EU will remain a global economic power and a leader on sustainable growth” (EC, 2021: 3). These statements, and other alike statements, are examples of the reasoning behind the selected megatrends and arguments for the supposed trade policy transition. A key point in the document is to enunciate a new type of trade policy orientation that is simultaneously “open”, “sustainable” and “assertive”. The openness refers to a multilateralism of “peer economies”, that is, states, organisations and companies that are willing to adhere to the common rule-based trade policy envisioned in the report. The sustainability signals adherence to the premises of green growth and resilience in the face of the critical megatrend of climate change. In the document, climate change is perceived as a catalyst of openness and multilateralism (EC, 2021: 6). The assertiveness of the policy creates a strong normative element to the new European trade policy: adhering to the rules of the trade is about connecting with a specific normative worldview. The normative orientation is further defined through the notion of “assertive enforcement” that focuses on “market access” and “sustainable development commitments”. In the report, the assertion task is finally concretised through an official professional mandate, as a position of “Chief Trade Enforcement Officer” (EC, 2021: 19). After selecting and arguing for the specific megatrends, the report provides answers to the third step in the framework I presented above, namely what are the relevant issues in the chosen trends (see Fig. 11.2). In the report, these trends are embedded in the specific context of Europe

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as a particular space of trade that differs from its geopolitical counterparts, e.g. the USA and China. As an example, I present an argument that combines the assertive approach, the selected trend of digitalisation, data flows and European territorial governance: The question of data will be essential for the EU’s future. With regard to cross-border data transfers and the prohibition of data localisation requirements, the Commission will follow an open but assertive approach, based on European values and interests. The Commission will work towards ensuring that its businesses can benefit from the international free flow of data in full compliance with EU data protection rules and other public policy objectives, including public security and public order. In particular, the EU will continue to address unjustified obstacles to data flows while preserving its regulatory autonomy in the area of data protection and privacy. To better assess the size and value of cross-border data flows the Commission will create a European analytical framework for measuring data flows. (EC, 2021: 15)

The quote above illustrates how the notion of digitalisation is tied with wider geopolitical and security-related questions, such as “cross-border transfers”, “localisation”, removing “unjustified obstacles” and ensuring “free data flows”. These notions, coupled with the idea to measure crossborder data flows, shows how wider trend of digitalisation is embedded to solve the key European question of territorial cohesion. The report also constructs new strategic ideas to endorse the assertiveness of the trade policy. One exemplary is the notion of “open strategic autonomy”. It is depicted as follows: A stronger and more resilient EU requires joined up internal and external action, across multiple policy areas, aligning and using all trade tools in support of EU interests and policy objectives. It requires leveraging our strengths while engaging with partners. “Open strategic autonomy” responds to this need. Open strategic autonomy emphasises the EU’s ability to make its own choices and shape the world around it through leadership and engagement, reflecting its strategic interests and values. (EC, 2021: 4)

It is also depicted that this principle is both “a policy choice” and “a mind-set for decision makers” (EC, 2021: 4). Key aspects of this choice are the following: “resilience and competitiveness” “sustainability and

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fairness” and especially “assertiveness and rules-based cooperation” (EC, 2021: 4–5). In the report, resilience is raised as a key factor of “open strategic autonomy”: Trade policy can contribute to resilience by providing a stable, rules-based trading framework, opening up new markets to diversify sources of supply, and developing cooperative frameworks for fair and equitable access to critical supplies. (EC, 2021: 8)

Thus, the report aspires to create a more decisive, engaged and valuebased Europe that is willing and capable to lead this normative trade policy also in the global scale.

Concluding Remarks In the chapter, I analysed relations of megatrends and trade policy. The notion of “megatrend” has become a keyword in futures research that refers to a wide-ranging transformation lineage that can be assessed to integrate multiple events, practices, elements and trends pointing to a more or less uniformly definable direction. However, there are also problems with this notion, as argued by von Groddeck and Schwarz (2013), that spring from the notion’s “emptiness” as a signifier. Thus, I suggested that there could be two lenses to conceptualise the notion of “megatrend”. Firstly, the notion can be conceptualised as a monolithic concept, as a centre of a discourse. This is how megatrends are commonly understood in policy processes and futures exercises. However, I also proposed a second way to conceptualise them as contextual entities that are constructed out of parallel and contradicting trajectories resulting in varying impacts in particular contexts. Based on these definitions, I presented a framework to embed the trends or signals in a particular context of the state, organisation or company. In order to provide empirical evidence and to show how this method could work in practice, I made a stylish analysis of how the contextual notion of megatrend is utilised in the context of the European Commission’s effort to characterise an “open, sustainable and assertive trade policy”. The analysis shows that the new trade policy is built on selected megatrends that are then analysed and utilised to endorse a normative orientation in the policy. The megatrends, such as climate change and digitalisation, are also utilised to construct new policy practices, such as

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“assertive enforcement”, and new administrative and territorial ideas, such as “open strategic autonomy”. These practices and ideas then have direct effects on how Europe will manage its trade and govern its territorial cohesion. Thus, I can conclude that the “test run” for the contextual framework operated quite fluently in the context of the new European trade policy. However, more empirical studies are required to further develop the framework. To conclude, I assert that scholars interested in how futures are evoked and built via different concepts would benefit from various contextualising and deconstructing exercises like the one I engaged here.

References Ahlqvist, T., & Uotila, T. (2020). Contextualising weak signals: Towards a relational theory of futures knowledge. Futures, 119, 102543. Ahlqvist, T., & Rhisiart, M. (2015). Emerging pathways for critical futures research: Changing contexts and impacts of social theory. Futures, 71, 91–104. Aistleitner, M., & Puehringer, S. (2020). The trade (policy) discourse in top economics journals. New Political Economy. https://doi.org/10.1080/135 63467.2020.1841145 Ash, J., Kitchin, R., & Leszczynski, A. (2019). Digital turn, digital geographies? Progress in Human Geography, 42(1), 25–43. Brown, A. D., Stacey, P., & Nandhakumar, J. (2008). Making sense of sensemaking narratives. Human Relations, 61(8), 1035–1062. Coultera, L., Serrao-Neumanna, S., & Coiacettoa, E. (2019). Climate change adaptation narratives: Linking climate knowledge and future thinking. Futures, 111, 57–70. EC 2021 = European Commission. (2021). Trade Policy Review—An Open, Sustainable and Assertive Trade Policy. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM(2021) 66 final. Fuller, T., & Loogma, K. (2009). Constructing futures: A social constructionist perspective on foresight methodology. Futures, 41, 71–79. Geels, F. W. (2012). Ontologies, socio-technical transitions (to sustainability), and the multi-level perspective. Research Policy, 39, 495–510. Head, B. W. (2014). Evidence, uncertainty, and wicked problems in climate change decision making in Australia. Environment and Planning c: Government and Policy, 32, 663–679. Iansiti, M., & Lakhani, K. R. (2014, November). Digital ubiquity. How connections, sensors, and data are revolutionizing business. Harvard Business Review, 91–99.

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Keenan, M., Cutler, P., Marks, J., Meylan, R., Smith, C., & Koivisto, E. (2012). Orienting international science cooperation to meet global ‘grand challenges.’ Science and Public Policy, 39, 166–177. Leszczynski, A. (2014). Speculative futures: Cities, data, and governance beyond smart urbanism. Environment and Planning A, 48(9), 1691–1708. Markard, J., Raven, R., & Truffer, B. (2012). Sustainability transitions: An emerging field of research and its prospects. Research Policy, 41, 955–967. Massey, D. (2007). In what sense a regional problem? (Vol. 13, Number 2, 1978). Regional Studies, 41(1), S49–S59. Naisbitt, J. (1982). Megatrends. Warner Books. Naisbitt, J., & Aburdene, P. (1990). Megatrends 2000. Sidgwick and Jackson. Rhisiart, M. (2013). Foresight and “grand challenges” within research and innovation policies. Foresight, 15, 29–39. Ruddick, S., Peake, L., Gökbörü, S. T., & Patrick, D. (2015). Planetary urbanization: An urban theory for our time? Environment and Planning D: Society and Space, 36(3), 387–404. Schoemaker, P. J. H., & Day, G. S. (2009). How to make sense of weak signals. MIT Sloan Management Review, 50(3), 81–89. Slaughter, R. (1993, October). Looking for the real ‘megatrends’. Futures, 827– 849. Smith, A., Stirling, A., & Berkhout, F. (2005). The governance of sustainable socio-technical transitions. Research Policy, 34, 1491–1510. Smith, A., Voß, J.-P., & Grinc, J. (2012). Innovation studies and sustainability transitions: The allure of the multi-level perspective and its challenges. Research Policy, 39, 435–448. von Groddeck, V., & Schwarz, J. O. (2013). Perceiving megatrends as empty signifiers: A discourse-theoretical interpretation of trend management. Futures, 47 , 28–37. Wainwright, J., & Mann, J. (2015). Climate change and the adaptation of the political. Annals of the Association of American Geographers, 105(2), 313–321. Weber, K., & Glynn, M. A. (2006). Making sense with institutions: Context, thought and action in Karl Weick’s theory. Organization Studies, 27 (11), 1639–1660.

CHAPTER 12

Conclusions: The Future of Trade Policy in the Not So United World Eini Haaja and Anna Karhu

Trade Policy and International Business Amidst De-Globalisation---How Did We Get Here, What Is Going On, and Where Are We Going? The discussions presented in the chapters of this book illustrate the winds of change in global trade policy. The objectives of increasingly free trade and broad trade agreements are not easily maintained amidst rising protectionism and megatrends such as increasing digitalisation and multipolarity of economic power. Moreover, the recent disruptions in international business and global value chains, particularly due to COVID-19 pandemic and the Russian invasion in Ukraine, put the achievements of globalisation to test and bring into surface new voices questioning even the liberal world view, both of which have been favored

E. Haaja (B) · A. Karhu University of Turku, Turku, Finland e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance During De-Globalization, International Political Economy Series, https://doi.org/10.1007/978-3-031-13757-0_12

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and taken almost for granted in western economies. Some of us might receive these eye-opening times with disappointment, yet they should be seen as a stepping-stone to something new. The first part of the book provides the basis for this investigation by describing the trade policy development from the perspective of international business and by opening the prerequisites of open trade and multilateral agreements, allowing us to understand how those objectives were originally pursued and how the conditions gradually changed to support the emergence of protectionism. Karhu and Haaja present the widening scope of research in the intersection of trade policy and international business. This change is based on the development of values driving trade policy in our societies from enhancing free trade to defending human rights, sustainability change and democracy. Aunesluoma provides a description of the development of trade and trade policy. His chapter highlights that protectionist policies and free trade supporting policies emerge in different circumstances. The lack of clear hegemonic power in global economic development brings up the challenges in our prevailing global trade policy structures. Thus, this part shows the complexity of changing or developing global governance structures and their interconnection to the developments of ways of doing business. The second part of the book focuses on more current challenges. The first three chapters of this part give a big picture of ongoing trade policy transformations. Polaski focuses on the development of WTO amidst all the challenges faced at global level, and introduces three scenarios for the organisation’s future. WTO’s abilty to reform itself to meet the needs of the new world of numerous, increasingly multidimensional RTAs is being widely questioned, yet it would be favourable for global economic stability. Indeed, Zuev then presents a view by which the WTO could be built anew bottom-up through RTAs, which would decrease current lockin situations as everything would not have to be widely and unanimously agreed. In particular, as explained by Van Assche, trade policy and the related institutions require systemic redesign to meet the new global trade reality, which is driven by GVCs and the trifecta of tasks, linkages and firms. The next three chapters of Part II present challenges faced at more regional and national levels. One of the key aspects in the weakening of trade policy structures is the increased tensions and economic power competition between the USA and China. As described in the chapter by

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Fung, Aminian and Tung, the current trade war measures are not unforeseen, yet rise an unexpected question of whether we can anymore expect the enlargement of western mentality and structures in doing international business. In the same vein, but at a narrower scale, the divergence of aims as well as negotiation styles in Great Britains’s divorce from the EU brings to light similar tensions within Europe, as illustrated by Ghauri and Ott. Common goals are fragmenting at different levels, and the resulting changes disrupt the traditional structures of trade. While larger economies are actors in these changes, smaller ones, in turn, are increasingly forced to take sides and find their ways through crises in different ways. Indeed, the challenges that open and small economies face, and the options that there are in responding to them, are well described in Sraders’ analysis of the experiences of Iceland and Latvia in 2008 and 2009 financial and economic crises. The third part of our book explores the emerging new future of trade policy. While values and trade policy objectives may be increasingly diverging, one of the converting topics at global scale as well as regionally, is environmental protection, which is among the key issues the EU unitedly wants to push forward also at the global scale. For example, Tosun and Heinz-Fischer illustrate the California effect, by which countries with lower environmental standards agree to adopt higher ones of their trade partners in order to gain an access to an attractive market. This has been visible in the EU policies. However, while the EU increasingly targets to include sustainable development issues in trade agreements, the multipolarity of economic power brings up the question how far and how long such western values and objectives can be promoted through trade in the future. In fact, from the perspective of international business and individual companies, these future policy uncertainties increase political risks of operating also in western economies, like Curran describes in her chapter. Policymakers are challenged with finding ways to promote economic growth together with other values, and this complexity and uncertainty call businesses to seek new measures for having an impact on trade policies in the future. To add to the complexity, megatrends drive policymakers and businesses to change their operations in different ways in different contexts, as Ahlqvist proposes. Hence, it depends on the value lenses through which actors in different contexts view, prioritise and respond to megatrends. This multipolarity and multivoicedness make global trade policy development, let alone anticipation, highly challenging.

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All in all, the chapters of this book comprehensively illustrate and explain the global trade policy evolvement and its implications to international business. Given the increasing number of values and priorities involved in policy-making, and the unknown impact that the COVID19 pandemic and the war in Ukraine may have on the progress of different megatrends, we see that trade policy formation is becoming increasingly challenging, complicating also the predictability of international business environment. While trade policy has been considered a rather distant issue to businesses focusing on their daily operations, particularly in the western, open economies, the policy impact on business is increasing, requiring new, strategic preparation and farsighted orientation from companies at various sizes.

The Future Dynamics of Trade Policy and International Business---Improving the Old or Creating Anew? How, then, do we expect the general dynamics of trade policy and international business to evolve in the future? Besides providing the extremely insightful chapters to this book, we asked all the authors to speculate the future in this respect. Aunesluoma predicts that the rise of protectionism, the use of economic sanctions as a foreign policy tool, and the growing weight of China will create additional hurdles for cross-border trade and investments. However, he views that as the benefits of free trade continue to be widely apparent around the world, the liberal trade policy regime will not be replaced by a global protectionist regime but to its fracturing into multiple regimes, some of which may be motivated by strategic or security concerns. Aunesluoma further assumes that their competition will reflect the power relations of the main economic and geopolitical centres in the world, notably the US, EU and their allies on one side, and China and other growing economies on the other. Accordingly, Polaski foresees that the intense geopolitical rivalry between the US and China, with Russia now playing a role as well, will break the world economy into rival blocs, resulting in slower growth, dismantling of global supply chains, and increased risk of conflicts. In particular, the pandemic has shown how state power is considerable still also in liberal countries, and the dramatic shift towards state economic intervention during the crisis is likely to persist in some countries and sectors, having implications for trade and investment.

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While these views were provided right before the Russian invasion to Ukraine, we may already say that the prediction of increased state power is a reality and likely to continue, despite the western ambitions to promote open trade as widely as possible. While security suddenly became a priority issue also in Europe, and countries globally were more or less forced to take sides, the whole atmosphere of international trade changed, showing also how naïve thoughts Europeans had had regarding the global favourability of western democratic values and trade-driven political trust. Indeed, Van Assche expects that the use of trade policies for non-economic goals will only increase, including mechanisms to tackle climate change and human rights. He also notes the enlarged scrutiny of multinational firms and their global value chains in policy discussions, as policymakers are increasingly interested in harnessing the power of multinational firms within global value chains to pursue their political objectives. In similar vein, Sraders states that in the reign of the liberal world order the tables have turned. He views that national states have been retreating in the face of large corporations and their substantial resources. Thus, he argues that the dominance of multinational corporations demonstrates not only the weakness of states, but also the weakness of international structures. This change has created a paradox where small and unconventional short-term strategies outperforming long-term rigid trade policies that frequently mislead or misguide actors in the international economy. Moreover, Fung, Aminian and Tung emphasise the rapid and ongoing transformation of global value chains due to digitalisation, artificial intelligence and automation. Digitalisation boosts efficiency gains and provides opportunities for economically viable business models in industrialised as well as emerging countries, for example, but at the same time heats trade conflict and technological competition between the US–China and the emergence of two rival blocs in trade, investment, technology and business environment. At the same time, Zuev foresees that trade policy will become increasingly more sophisticated, aiming to safeguard the interests of companies in the challenging global environment disrupted by the pandemic, global problems, nationalism, conflicts and sanctions. He sees that while the multilateral legal framework remains largely inadequate and international organisations are not able to push forward global arrangements, regionalism fills in gaps of the global governance, and the role of RTAs is expected to increase. However, Zuev notes that the growing popularity of the RTAs does not undermine the necessity to reform the

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multilateral trading system, but possibly shows the way for a bottom-up reform of WTO and other international institutions. Curran also highlights the need for a new type of regulation on a global level. She sees there are increasing pressures that justify the sustainability of international trade links, as well as their resilience, boosted by the global COVID-19 pandemic and most recently the war in Ukraine. Both of these crises have put new pressures on firms: COVID-19 pressured firms to relocalise or at least shorten their supply chains and the war has heightened concerns about food and energy security. These developments together with the preexisting sustainability concerns make relying on international value chains more complicated for businesses. Thus, firms will continue to have recourse to international production networks, but many will reduce their scope, relocate some functions and increase oversight. The costs involved will vary substantially across sectors. Therefore, Curran views that the era of dispersed and unregulated GVCs is over. Thus, much attention will be paid in future to regulatory and political risks when designing these chains and there will undoubtedly be winners and losers in this process. Consequently, the world today is not so united in terms of values, agreements and governance frameworks, but inevitably it will continue to be united in some ways and in some constellations, and with new kinds of institutions and agreements, the emergence of which is currently in process. On this basis, we suggest that businesses at all sizes should (1) pay increasing attention to trade policy development at regional and global level, (2) build agile response capability in this respect (e.g. possible diversification of value chains and widening the incoming information flows), and (3) take agency in the future development of trade agreements as well as trade policy institutions. At the same time, there is an increasing interest and need for policymakers to understand the role of businesses in forwarding non-economic goals. This calls for innovative, two-way communication channels, whereby shared goals between business and policy actors could be optimally progressed via modern institutions that fit the new reality. To support all this, also international business research must increasingly internalise insight from international politics in order to develop theories and managerial recommendations that correspond with the increasingly complex reality of international trade and business. The various dynamics and aspects of trade policy covered in this book should provide a fruitful starting point.

Index

A anti-globalisation, 147, 174

B banking sector, 126, 127, 134, 136 behavioural decision-making, 116 bilateral, 24, 25, 28, 38, 39, 42, 85, 86, 90–92, 101, 115, 119, 145, 165, 182 biodiversity, 59, 79, 154 Brexit, 109–111, 113, 114, 117–120, 147 Britain–EU negotiations, 113

C California Effect, 144, 148, 199 Carbon Border Adjustment Mechanism (CBAM), 165, 169–172 China, 10, 20, 27, 34, 35, 38–44, 55, 76, 78, 85–87, 90–92, 95–101,

164, 170, 171, 173, 190–192, 198, 200 China’s accession, 27, 34, 38, 39 climate change, 34, 42, 150, 153–157, 169, 182, 191, 193, 201 climate crisis, 3 Cold War, 22, 27, 33, 35, 40, 135 comparative advantage, 4, 70, 71, 73, 74, 80 contextual approach, 183, 187 corporate political activity, 9, 10 COVID-19, 3, 12, 41, 57, 60, 75, 76, 115, 197, 200 Customs union, 53, 54

D Deforestation, 165, 171–173, 175 de-globalization, 24 democratic corporatism, 125, 137 developed countries, 10, 37, 62, 71, 73, 99, 164, 170

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance During De-Globalization, International Political Economy Series, https://doi.org/10.1007/978-3-031-13757-0

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INDEX

developing countries, 7, 10, 34, 36–38, 41, 71, 73, 78, 99, 145, 149, 153, 154, 156–158, 162, 163, 167 digitalization, 59, 61, 62 Doha round, 41, 43

E economic integration, 33, 35, 53, 54, 56 economics, 4, 6, 87, 113, 182 environmental concerns, 145, 148, 149 EU measures, 164, 165 European Union (EU), 22, 28, 36, 39, 41, 42, 54–58, 60–62, 75, 80, 109–115, 117–120, 123, 124, 127, 131–136, 143–150, 153–158, 162–175, 192, 199, 200 exchange rates, 26, 86, 87, 96–98, 100, 128, 130

F financial crisis, 20, 22, 27, 28, 126–129, 131–133, 135, 136 free trade, 6, 7, 11, 13, 19, 21–24, 26–29, 62, 197, 198, 200 Free Trade Area (FTA), 53–58, 60, 61, 146–148, 165 future-oriented, 5, 13, 14, 183, 190

G General Agreement on Tariffs and Trade (GATT), 3, 26, 33–36, 38, 162 Generalised System of Preferences (GSP), 165, 167–169 geopolitical crises, 19 globalization, 25, 27, 29, 52, 161

Global regionalism, 56, 58, 63 global trade, 3, 4, 6, 7, 20–23, 25, 27–29, 34, 42, 58, 63, 75, 81, 100, 162, 164, 197–200 Global Value Chain (GVCs), 4, 5, 11, 64, 69–77, 80, 81, 161, 166, 173–175, 191, 197, 198, 201, 202 Great Depression, 20, 24

H hegemonic stability, 21 human rights, 29, 59, 80, 164, 166–168, 198, 201

I Iceland, 55, 123–125, 127–131, 135–137, 199 India, 10, 20, 27, 34, 41, 62, 117, 119, 163, 167, 171 inner trade, 56–58 innovations in trade policy, 174 institutional theory, 10 interactive decision-making, 116 international environmental agreements, 144 International Monetary Fund (IMF), 35, 96, 98, 127–132, 134–136, 171 international trading system, 21, 51, 55, 64, 65

J Japan, 8, 28, 36, 41, 55, 56, 60, 64, 85–87, 90–94, 96, 99, 145, 148–156

K Keiretsu, 90, 92–94

INDEX

L Latvia, 123–128, 131–134, 136, 137, 199 M Maastricht criteria, 128, 132 Made in China (MIC), 98–100 megatrends, 4, 181–191, 193, 197, 199, 200 MNE–government relations, 9 Multilateral, 23–25, 28, 35, 51, 61–65, 74, 136, 154, 182, 190, 198, 201, 202 multilateral environmental agreements (MEAs), 59, 155, 157 multinational enterprise (MNE), 6–11, 79 N negotiation analysis, 109 negotiation behaviour, 115, 116 negotiations, 20, 26, 33, 35, 37, 38, 41, 43, 60, 63, 65, 90, 95, 110–113, 115–119, 124, 132, 144, 146–148, 158, 171, 199 non-EU countries, 113, 115, 118 non-resident investors, 135 non-tariff barriers (NTB), 38, 59, 63, 74, 144 Northern Ireland, 110, 115, 119 P participation narrative, 73, 80 plurilateral, 28, 41, 43 privatized, 127 protectionism, 19, 20, 22–24, 27, 197, 198, 200 R regionalism, 51–54, 59, 62–64, 201

205

Regional Trade Agreement (RTAs), 11, 51–65, 198, 201 Research & Development (R&D), 71, 73, 78, 90 resilience, 73, 75–77, 81, 191, 193, 202 resilience narrative, 75, 76, 81 Russia, 3, 10, 28, 55, 126, 147, 170, 171, 173, 200

S socio-political network, 9 state-owned enterprises (SOEs), 95 sustainability narrative, 73, 79–81 sustainability of trade, 162 Sustainable Development Goals (SGDs), 59, 60, 143 Sustainable development (SD), 59, 60, 143–145, 149, 156, 158, 162, 165, 167, 168, 199 sustainable management, 59, 150, 155

T technological competition, 101, 201 trade agreements, 22, 23, 25, 40, 57, 60, 90, 92, 98, 115, 117, 124, 144–150, 153–158, 197, 199, 202 trade imbalance, 85, 87, 90–92, 96 trade policy, 4–7, 9, 11, 13–15, 22–24, 29, 52–54, 59, 60, 63, 69, 70, 73, 74, 77, 78, 80, 144, 146, 161, 162, 164–166, 174, 175, 181–183, 189–194, 198–202 trade policy regimes, 19–22, 25, 200 trade policy shifts, 165 trifecta, 70, 80, 198

206

INDEX

U Ukraine, 3, 12, 56, 145, 147, 150–153, 157, 171, 197, 200–202 unilateral, 77, 94, 124, 164, 166 United Kingdom (UK), 20, 34, 35, 41, 60, 87, 109–115, 117–120, 127, 129–131, 135, 171–173 United States (US), 7, 9, 22–28, 34–36, 38–43, 55, 60, 61, 85–87, 90, 91, 94–96, 98, 100, 101, 113–115, 117, 119, 128, 146, 147, 158, 163, 164, 170–173, 183, 184, 200 Uruguay Round, 26, 35, 37 U.S.-China disputes, 86 U.S.-Japan trade conflict, 86, 87, 91, 92, 96, 97, 101

V value capture narrative, 77, 78, 80

W weak signals, 188 World Trade Organization (WTO), 3, 4, 11, 22, 26–28, 33, 34, 36–44, 51–53, 55, 56, 59–65, 69, 74, 91, 94, 95, 101, 118, 162–165, 167, 170–172, 198, 202 WTO dispute settlement, 36, 40 WTO rules, 34, 36, 41, 44, 64, 65, 115, 118, 163, 164, 166

Z Zaibatsu, 92, 93