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The International Economics program aims to explain developments in the international economy, and influence policy. It does so by undertaking independent analytical research.

The International Economics program contributes to the Lowy Institute’s core publications: policy briefs and policy analyses. For example, the program contributed the Lowy Institute Paper, John Edwards’ Beyond the Boom, which argued that Australia’s transition away from the commodities boom will be quite smooth.


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Intellectual property: the big risk in US–China ties

It may be chaotic and confused, but the Trump administration is not entirely nuts. Expected to slam China with heavy penalties for appropriating the intellectual property of US businesses, the administration instead appears to be stopping short of a fundamental injury to the world’s biggest bilateral trading relationship.

Even so, the developing dispute over intellectual property is now a big risk to US–China economic ties, one that if mishandled has the capacity to hurt the growth of world trade.

According to background briefings given by administration officials to the media last week, President Donald Trump will soon announce a US $30-billion penalty on China’s exports to the US in reprisal for what the administration will claim is the cost of Chinese appropriation of US businesses’ intellectual property.

In most contexts, $30 billion is a very large amount; however, it is less than 6% of China’s annual exports to the US. Depending on the time frame and method of application, the actual cost may be mitigated. Imposed as, say, a 20% tariff on $30 billion of China’s US exports, the cost could come down to something closer to $6 billion, shared between Chinese exporters and US consumers.

The action will be proposed in response to an adverse finding in an investigation under Section 301 of the US Trade Act, initiated in August by the US Special Trade Representative Robert Lighthizer. Much depends on the plausibility of the 301 report, which is delivered as an outcome of the investigation.

The official brief for the USTR investigation was to examine:

any of China’s laws, policies, practices, or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology development.

It was, to say the least, a very wide brief. The further the report goes beyond actual offences to World Trade Organization rules, the less support the US will receive from the rest of the world.

The 301 report will likely argue that China has engaged in deliberate, large-scale appropriation of intellectual property from the US. It will allege that Chinese Government authorities, private businesses, and state-owned enterprises have participated in co-option of intellectual property. It will claim that there has been a systematic campaign to target technologies, including robotics, artificial intelligence, and advanced communications. And it will assert that some of these technologies have defence applications, so their importance is not only commercial but also strategic.

The 301 report will probably claim that Chinese corporations and government authorities have used standard commercial means to transfer technology, including commercial licensing agreements, but also less legitimate and less obvious means to which US and other advanced economies should be more alert. These include direct offshore investment in early-stage Western technology businesses; direct offshore investment in mature Western technology businesses; and “involuntary” knowledge transfers required by Chinese authorities as part of the price of access to China’s vast and rapidly growing consumption and investment market.

The 301 document may also accuse Chinese authorities of engaging in cybertheft of intellectual secrets and actual commercial espionage, citing cases that arose during previous administrations.

Most of this is old stuff. With varying levels of annoyance and plausibility, the US has been complaining of theft of intellectual property by China for three decades. It was once an argument over DVDs and fake designer handbags, watches, and jeans. Under successive administrations the argument moved on as China moved up the technology curve.

Nor is the US complaint unique to China. Further back, the US was accustomed to similar disputes with Japan and South Korea. Even today, US officials sometimes portray France as a close second to China in intellectual property wickedness. As recently as May 2014, former US Secretary of Defense Robert Gates said:  

[there] are probably a dozen or 15 countries that steal our technology ... in terms of the most capable, next to the Chinese, are the French – and they’ve been doing it a long time.

Rhetorically enlivened by the Trump administration, the US stance on intellectual property will meet very little dissent in Washington. It will be backed by Republicans and Democrats alike, free-traders and protectionists. Once upon a time, US corporations would have lobbied against strong action on China. Perhaps disappointed by their experience in China, perhaps cowed by greater anti-China sentiment as that country has asserted itself in the world, US business is now on the side of sterner action – particularly regarding intellectual property transfers.

China will certainly respond with sanctions on US exports to China, which over the last decade have grown twice as fast as China’s exports to the US. But China, like Europe, will be wary of escalating the dispute with the US. It will continue to look to the long game.

Tangled in this coming dispute are much bigger issues for the US, China, and the rest of the world. One is the extent to which the US may wish to obstruct China’s declared intention of becoming a leading competitor in high-technology industries. Another is the extent to which the US wishes to frame trade disputes with China as those between a “liberal international order” created and sustained by the US and a state-directed transactional and opportunistic challenge by China.

In its disputes over intellectual property and China’s adherence to WTO undertakings in 2001, the US will be seeking allies. These include Australia, but the major ally the US needs is Europe. The administration appears prepared to refer some aspects of the intellectual property case to the WTO, long portrayed by Trump as the centre of anti-US iniquity in global trade disputes.

To find allies, the administration is evidently now prepared to do what was previously unthinkable. But European support will not be forthcoming unless the US gives ground on its steel and aluminium tariffs due to become effective on Friday. 

The sky is not falling on Asia’s central banks

The nature of financial-markets commentary is that every tiny blip and ephemeral piece of news is presented as a narrative of impending doom: who wants to read a story about how everything is jogging along normally?

Headlines such as “Asian central banks face white-knuckle steering as Fed tightens” are hardly surprising; others describe the minor correction to equity markets last month as a “global rout”.

But it’s a stretch to say that “you can almost hear the echoes of the Asian financial crisis which battered emerging economies twenty years ago”. The facts are more boring – and reassuring.

The US Federal Reserve will do what it has been talking about doing for some years: gradually lifting interest rates from the historically low levels of the past decade and (equally gradually) unwinding quantitative easing (QE). In doing so, it will assess the impact of every small policy move, raising rates to counterbalance the now-sustained expansion.

Unwinding the Fed’s QE bond holdings will not be achieved by dumping bonds on the open market, but by letting them mature on the Fed’s balance sheet. Former Fed chair Janet Yellen promised that unwinding QE would be “the policy equivalent of watching paint dry”.

All this has been so well signalled by the Fed that investors should have fully adjusted their portfolios in advance. Any investor who is uncomfortable with the uncertainty of emerging markets should have retreated already.

Minor portfolio tweaks might be necessary as investors respond to the precise profile of the unfolding Fed “normalisation”, but no single policy change will be important enough to significantly change the outlook. Why should this cause any drama?

Rather than a wholesale global retreat of capital from emerging economies, what seems more likely is that individual countries might come under pressure because of idiosyncratic vulnerabilities: governments or companies that have borrowed too much in foreign currency in a world of shifting exchange rates; a country that is running big account deficits, or is mired in sluggish growth and big budget debt (for example, Brazil), for which even modestly higher interest rates raise issues of sustainability.

The interesting issue is not the prospect of global panic, but which among the emerging economies might get into trouble.

Our region looks pretty secure. India and Indonesia, members of the 2013 “Fragile Five”, are both in better shape than five years ago (and even then, the so-called “taper tantrum” was only a short-lived scare).

Taking Indonesia as an example, the Nervous Nellies among foreign holders of government rupiah–denominated bonds have already pulled back (foreigners’ share of these bonds has fallen from 41% to 38%). The current account deficit (around 3% of GDP in 2013) was less than 2% in 2017 and won’t be much more than 2% this year. The budget has been straightened out, and inflation is low. Foreign exchange reserves are $US130 billion. The exchange rate has already depreciated a few per cent this year, ensuring that it won’t be seen as grossly overvalued.

Elsewhere in the region, China has its congenital doomsayers. The Bank for International Settlements is promoting a crisis early-warning measure, comparing the credit/GDP ratio with its trend. On this measure, China’s credit/GDP is way over trend. But it’s much less above-trend than it was a year or two ago (now 13%  compared with 29%  in 2016), so there seems a good chance China will sneak through, gradually bringing financial excesses under control through case-by-case restructuring of over-leveraged entities.

Neither the doom-laden headlines nor the Bank for International Settlements’s one-size-fits-all early-warning indicators are subtle enough to help in foretelling the next crisis. Market analysts should keep calm and carry on with the tedious task of analysing the detailed national data, recalling that “unhappy countries are all unhappy in their own way”.

CPTPP wobbles over foreign investor rights

With the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP) now signed and awaiting ratification by the member states, the issue of investor-state dispute settlement (ISDS) is again being debated. The high-profile opinion-catalysing group GetUp is encouraging opposition to ISDS, and the Labor Party has long-standing concerns about the system which will likely be rehearsed during the ratification process.

Should this esoteric issue be a deal-breaker for Australia’s membership of the CPTPP?

Defenders of ISDS can argue that the current clauses (redrafted as the TPP morphed into the CPTPP) embody protection against misuse: ISDS could not be used for a repeat of Philip Morris’s egregious attempt to overturn Australia’s cigarette plain-packaging laws. The CPTPP clauses are doubtless an improvement over the ISDS clauses in many bilateral investment treaties that remain in force. And, of course, there are many other international agreements which constrain or override national sovereignty.

Opponents of ISDS argue that countries should be entitled to decide how they treat foreign investors in their own country. History, circumstances, and domestic public opinion differ from country to country, and there is no good reason why foreigners should be given the advantage, over domestic investors, of appealing to foreign arbitration less cognisant of domestic factors than the local judicial system. Foreigners who don’t like the laws or the judicial system should simply stay away.

There is a more rarely articulated foreign-policy argument for moving away from ISDS in international agreements. In the past, foreign investors have used ISDS to strengthen their position in sensitive investment areas, such as mining, which often involve vexed issues of land ownership, environment, and perceived exploitation. Australian company Newcrest has used ISDS to oppose public-policy changes in Indonesian law, as has Newmont (American, but often thought of as Australian).

Do we want our diplomatic relationship, including public opinion of Australia in the host country, burdened by disputes in which the foreigner has the advantage of being supported by ISDS clauses in international treaties? When Australians get themselves into trouble in foreign countries, the usual consular response is that domestic laws and procedures apply, no matter how much these might differ from Australian norms. Why isn’t the same for companies? Retaining ISDS provisions in CPTTP makes it less likely that countries such as Indonesia will join the group later.

The inclusion of ISDS in the CPTTP does raise an interesting, if peripheral, issue. Who among the 11 members of the CPTTP wanted to keep ISDS provisions in the agreement? Both Japan and Canada have had recent experience of the groundswell against ISDS provisions in their trade negotiations with the EU. Why not put the issue into suspension, as happened to some other American-inspired clauses?

Whatever the doubts about ISDS, this text is now agreed and signed, with no opportunity for revision. We either sign up, or don’t join the CPTPP. After years of negotiation and the drama of America’s withdrawal from the TPP, followed by Canada’s doubts-at-the-altar, a last-ditch effort has succeeded in reviving an agreement which on balance is probably advantageous for global trade, even if it offends some multilateral desiderata.

For Australia, the CPTPP, with its less far-reaching intellectual property protection, it is probably better than the TPP. We retain the benefits of our bilateral trade agreement with America while obtaining some new trade advantages (for example, beef to Japan, where American competition is disadvantaged).

Let’s hope the CPTPP gets the stamp of approval from the Australian Parliament without too much political posturing.

Trump’s tariff antics as the TPP-11 is signed

The symbolism of last Thursday for the future of the global trading system was hard to miss. In Washington, Donald Trump authorised new tariffs on steel and aluminium imports of 25% and 10% respectively in one of the clearest signs yet that he plans on following through on his protectionist agenda. In Santiago, eleven countries, including Australia, gathered to sign the Comprehensive and Progressive Partnership for Trans Pacific Partnership (CPTPP or TPP-11), voicing their support for the opposite – a desire to open markets further and work constructively to modernise the rules of international commerce.

Trump’s new tariffs were always poorly conceived (by one estimate it will destroy 146,000 American jobs on net). Ostensibly, the policy is aimed at protecting national security and curbing Chinese imports in particular. In practice, it serves neither purpose well and will instead primarily hit US allies. Canada and Mexico got exemptions and the door was left open for others with a US “security relationship” to also seek exemptions, with Australia already securing this after intense government lobbying.

Yet sighs of relief should still be tempered for now. Although we are still some way from an actual “trade war”, the risks of escalating tit-for-tat protectionism remains high.  

After Canada, the EU is the second most important source of US steel and aluminium imports, at about US$7.3 billion a year. The EU is yet to get an exemption and has already drawn up a “hit list” of some US$3.5 billion in US exports for retaliatory measures. Trump said he would retaliate to their retaliation with tariffs of 25% on EU car exports. If this actually happened, it would be a big escalation – these exports are worth some US$40 billion a year.

The EU is of course hoping its status as a close ally will eventually earn it an exemption, though America’s trade deficit with the EU could be a sticking point (the US, by contrast, runs a trade surplus with Australia).

Meanwhile China will be little affected by the latest tariffs, so is likely to be more restrained in response. But the real risk emanates from the ongoing US investigation into technology theft by China. This will soon be completed and could lead to wide-ranging protectionist measures. Risks of a more damaging protectionist cycle following such a move are much higher, especially as China is unlikely to give in easily to US demands. Compromise will need to be found on both sides.

Trump’s antics also risk undermining the ability of the World Trade Organisation to play its role in keeping a lid on protectionism. The claimed national security foundations were always flimsy and risked setting a damaging precedent. But by linking exemptions for Canada and Mexico to a favourable outcome in ongoing North America Free Trade Agreement negotiations (favourable, that is, according to the flawed logic that trade deficits are inherently bad) it is now even more obvious that national security was never anything other than a convenient loophole.

The WTO itself would also be put in a precarious position should the case be referred to it. If it finds in favour of the US, it risks opening the protectionist flood gates on similar flimsy grounds. If it finds against, the WTO risks further aggravating the US, which is already putting significant pressure on its dispute settlement body by blocking the appointment of new appellate judges. Making matters worse, the planned retaliation by the EU may also violate WTO rules.

In this context, what should we make of the signing of the TPP-11 last week?

While the TPP-11 clearly lost the battle for the headlines, it is by far the bigger deal on the pure economics (that is, as long as a full-blown trade war is avoided). Lost exports amongst those affected by Trump’s new tariffs might amount to about US$10 billion a year, compared to around US$300 billion in estimated additional annual exports by 2030 for the TPP-11. Even this comparison overstates the relative importance of Trump’s tariffs, as a large share of lost exports to the US will likely be diverted to other markets.

More important, however, will be what impact the TPP-11 can have in keeping the agenda of open markets, international cooperation and a rules-based system alive, even as Trump’s America pulls back.

At the margins, fear of losing out through trade diversion may give others an incentive to join the pact and/or catalyse “competitive liberalisation”, in particular ongoing negotiations for the Regional Comprehensive Economic Partnership. However, the latter continues to move at a snail’s pace. Meanwhile, a number of countries at various points have said they are interested to join the TPP. But the agreement has also become far less attractive now that better access to the US is not on offer, while the political cost in terms of the deep and wide-ranging reforms required to join remain largely the same.

Without expanding membership and eventually bringing the US back into the fold, it will be difficult for the TPP to fulfil its other strategic objectives. Hopes of using the TPP to write the rules of international commerce for the region and using this to influence broader negotiations at the WTO are, for now, significantly diminished.

There is also little the TPP-11 can do to anchor US economic engagement in Asia and reassure Asian partners of American reliability, key overarching objectives of the original TPP. For that, Washington would need to rethink its protectionist and unilateralist agenda.

No urgency in cutting Australian corporate tax

Prime Minister Malcolm Turnbull returned from Washington last month even more convinced of the need for deep cuts in Australia’s 30% corporate tax rate, which is well above that in the US. Given the numbers in the Australian Senate, however, it is unlikely the proposed tax cut will pass.

How serious an issue is this for the future of the Australian economy? How long can any middle-sized economy hold out against a trend to lower corporate rates among its competitors?

As my Lowy Institute colleague Steven Grenville recently reminded us, because of the imputation system, corporate taxation functions very differently in Australia than in all other countries, except New Zealand.

The relevant issue is the impact company tax cuts will have on foreign investment in Australia. This is readily conceded in Treasury modelling, and has been pointed out several times by the Reserve Bank.

Somewhat surprisingly, given the rhetoric of the Australian Government and the Business Council of Australia (BCA), the numbers show that the relatively high nominal tax rate appears to have had no discernible impact on foreign direct investment in Australia. In the 12 months to the September quarter of 2017, the most recent quarter for which we have data, the flow of foreign direct investment into Australia was higher than it had ever been, and by a considerable margin.

At $79 billion, the inward flow was more than a tenth higher than the next highest 12-month rolling total, back in 2012. This is transactions data and comes closest to measuring the inward flow.

The stock of foreign direct investment in Australia has been similarly firm. At just short of $900 billion, in the September quarter 2017 the stock of foreign direct investment was 50% higher than it had been five years earlier, at a time widely regarded as the peak of the mining investment boom.

Throughout the period in which Australia has been discussing cuts to the corporate tax rate, and the government and the BCA have been warning of a sharp loss of international competitiveness, foreign direct investment in Australia has boomed.

If the corporate tax rate was such a disincentive to investment, one might expect Australian businesses to be eagerly putting their money into other economies with lower tax rates. Attracting foreign investment is, after all, said to be the motive for lowering corporate tax rates. But recently, outward direct investment has been unusually feeble.

The stock of Australian direct investment abroad in the September quarter 2017 was much the same as it had been two years earlier, and would have been markedly less were it not for the valuation effect of the cheaper Australian dollar. The flow of outward direct investment in the same period was $5 billion, or one sixteenth of the inward flow of direct investment.

It may be that Australia’s corporate tax rate is not as uncompetitive for foreign investors as the headline rate suggests. What really matters are the provisions for capital depreciation and other deductions. These account for a large part of the difference between the nominal tax rate and the effective rate, which is the actual rate paid.

In his Interpreter article, Grenville used Congressional Budget Office estimates of comparative rates to show that Australia’s effective rate is more competitive than the nominal rate suggests. Finance Minister Mathias Cormann prefers the corporate tax database of the Oxford University Centre for Business Taxation. In this database, Australia’s effective average corporate tax rate was 26.6% in 2017.

Of advanced economies, Japan, Germany, Spain, Belgium, and a number of others have somewhat higher corporate tax rates than Australia. New Zealand’s was a little more than one percentage point lower, and Canada three percentage points lower. The US effective rate was an enormous seven percentage points higher, but is now lower. The UK effective tax rate was far lower, at 18.5%.

On these numbers, the effective rate facing a foreign investor in Australia is a little higher than in New Zealand, Canada, and the UK, and a little lower than in a number of other countries.

But it is quite difficult to link the corporate tax rate with investment – either foreign or domestic. On World Bank data for the year 2016, Australia’s investment as a share of GDP was 25.5%, compared to 17% for the UK. Investment in Canada and New Zealand as a share of GDP was also below Australia’s, though both countries have somewhat lower effective corporate tax rates. The US, with a stellar effective corporate tax rate of 34%, nearly twice the UK’s effective rate, also had higher investment as a share of GDP than the UK in 2016.

It is true that tax rates are one of the issues affecting the level of foreign investment, and if corporate tax rates in competing economies continue to erode, Australia may someday have to cut its rates as well. But foreign direct investment, as well as overall investment, in Australia is actually very strong compared to economies with lower corporate tax rates. And we are yet to see the long-term consequences of financing corporate tax cuts by adding to fiscal deficits, which is what the US is doing.

At the very least, the strength of inward flows suggests there is no urgency in cutting Australian corporate tax. We could well wait and see, and in the meantime repair the Federal Government budget faster than we could otherwise. This might also give Australian policymakers time to think up cleverer and more discriminating ways to attract mobile foreign capital in its most useful forms.

Multilateral trade versus self-interest

How should countries respond to President Donald Trump’s tariffs on steel and aluminium? One response would be to retaliate. Another would be to emphasise the damage done to the global multilateral trade framework. Yet another would be to negotiate a side deal to avoid, and perhaps even benefit from, the distortion.

All three approaches have been evident since Trump’s announcement.

The European Union has taken the first course, with EU president Jean-Claude Juncker threatening to put tariffs on Harley-Davidson motorcycles and American bourbon imported into Europe. Of course, Trump fired back with a swift tweet threatening further measures (“we will simply apply a tax on their cars which freely pour into the US”). This tit for tat can escalate into a trade war, which Trump says is “easy to win”.

Germany, the UK, and Japan have taken the second course – reacting critically, but more in sorrow than in anger. They register disappointment but seek to calm matters, sometimes with an explicit renunciation of retaliation. The tariffs “raise deep concerns”, but “there is too much at stake”. A “proportional” response is needed. Playing for time by “seeking clarification” may allow the situation to calm.

China (the long-time target of Trump’s trade wrath) falls into this second group. Vice–foreign minister Zhang Yesui said that “China will not sit idly by”, but added explicitly that “China does not want a trade war with the US”.

Canada and Australia fall into the third group: critical of the tariffs’ multilateral harm, but mainly concerned about domestic damage and focused on obtaining a bilateral exemption. Canada has the most to lose, being the top exporter of both steel and aluminium to the US (the two economies are so closely integrated that America exports almost as much steel to Canada). Prime Minister of Canada Justin Trudeau said the tariffs “are absolutely unacceptable” and “make no sense”. As a close neighbour and security partner of the US, Canada is seeking an exemption.  

It’s said that all politics is local. Sticking to the second script is hard for politicians when there’s pressure to protect local industry by doing a special deal which would bring personal kudos and perhaps large advantages to the domestic industry. Australian Minister for Trade Steve Ciobo’s mention of multilateral trade was lost among the special pleadings for exception (here and here), based on earlier promises made by Trump. But it looks as though exemptions will be scarce.

To be torn between principle and practice is a familiar dilemma for Australia. In principle we are in favour of multilateral free trade, but in practice we eagerly pursue so-called Free Trade Agreements (FTAs), with their preferential arrangements.

Harvard economist Dani Rodrik’s recent paper, “What Do Trade Agreements Really Do?”, sets out what is wrong with FTAs. Why, then, do we put so much effort into these agreements? The answer is simple: when others are distorting the multilateral system with FTAs, a country can minimise the distortion (and perhaps even benefit) by climbing aboard the distorting FTA bandwagon.

Australia might have chosen a different balance of principle and practice here, making a strong public pro-multilaterist argument against the Trump tariffs while keeping our self-interested lobbying on a private track. That would avoid any suggestion of unseemly kowtowing to seek special favours. It would also minimise the political damage if the approach fails to obtain an exemption.

The long road back for the US to rejoin the Trans-Pacific Partnership

Tentative signs the US may have been adopting a more sensible view on trade have been dashed by President Donald Trump’s recent decision to impose tariffs of 25% on steel imports and 10% on aluminium imports.

Hopes that Trump’s protectionist views were mellowing were kindled at Davos in January when he hinted that the US might consider rejoining the Trans-Pacific Partnership (TPP) trade agreement. In February, US Treasury Secretary Steve Mnuchin said the US had held talks with TPP members about what it would take for the US to rejoin the deal. This statement followed a letter to the President, signed by 25 Republican senators, urging the US to rejoin the trade agreement.

Another positive sign that the US may have been moving away from protectionist rhetoric was the annual Economic Report to the President, prepared by the Council of Economic Advisers. Released on 21 February, the report stated, “trade and economic growth are strongly and positively correlated”. Notwithstanding Trump’s scepticism about the World Trade Organization (WTO), the report also stated:

The United States gets better outcomes via formal WTO adjudication than negotiation, increasing the probability that the complaint will be resolved and decreasing the time it takes to remove the barrier in question.

Even on the North America Free Trade Agreement (NAFTA), which Trump described as “the worst trade deal ever made”, the Council of Economic Advisers said, “Studies suggest the existence of net positive gains from NAFTA for US GDP and employment”. As Matthew Goodman from the CSIS observed, there was hope that views on trade in the White House were evolving in a positive direction.

Yet Trump’s decision to place levies on steel and aluminium imports has squashed such expectations. In contrast to the pro-trade comments in the report from his Council of Economic Advisers, after imposing the tariff on steel and aluminium imports Trump tweeted:

When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.

As one commentator later rightly observed:

There’s a lot to unpack in Trump’s tweet, but the overall message is pretty clear: The president doesn’t seem to have a full grasp of what’s going on here.

When Mnuchin said the US had begun talks with other countries about rejoining the TPP, Australia’s Trade Minister Steve Ciobo cautiously welcomed the news. His caution was wise because, even before Trump’s imposition of tariffs on steel and aluminium, it would have been a hard slog for the US to rejoin the TPP.  After Trump’s announcement, the prospect is very unlikely under this administration.

As the largest market economy in the world, the US was the driving force behind the original TPP agreement. But following Trump’s decision to withdraw from it, and efforts of the remaining members to continue as “TPP-11”, the US is no longer in the driving seat in any negotiations. The remaining 11 members will have to agree to the US rejoining.

The qualification in Trump’s comments at Davos was that the TPP would have to be renegotiated, and the US achieve a “significantly better deal”. The irony is that the US drove the original TPP negotiations, pushing for provisions only reluctantly agreed to by many other members who would say the original TPP was a “good deal” for the US.

Following the US withdrawal from the TPP, the immediate reaction was that the agreement was dead. However, the eleven members remaining, led by Japan and with strong support by Australia, were able to keep most of the TPP agreement in place under a new name, the Progressive Comprehensive Trans-Pacific Partnership (PCTPP), and with a number of provisions suspended. The suspended provisions were mainly those driven by the US, including rules governing copyright, patents, and pharmaceuticals – issues very close to the heart of US business, but controversial for many other TPP members. The PCTPP was described as the “Trans-Pacific Partnership with fewer bad bits”.

While the suspended provisions can be unsuspended if the PCTPP members agree by consensus, this would not be sufficient to entice the US to rejoin. Trump said the original TPP, which included the suspended provisions in the PCTPP, was a “potential disaster”, clearly suggesting he wants to renegotiate the whole agreement.

After a decade of difficult negotiations, it is unlikely the PCTPP members would be willing to accommodate a better deal for the US. The Chilean President, Michelle Bachelet, said the TPP cannot be redone to please the US; and Japan’s chief negotiator on the TPP, Kazuyoshi Umemoto, said renegotiating the agreement would be difficult given that it took months of intensive talks to revise the pact after Trump pulled out.

But it is very unlikely that Trump has any idea of what a significantly better TPP outcome for the US would look like. As we have seen on numerous occasions, Trump’s musings on policy issues are not the outcome of well-considered deliberations. The immediate issue facing the PCTPP members is not what it would take to entice the US back into the TPP, but how to avoid a disastrous trade war.

Trump’s tariffs: not a trade war, yet

Although widely portrayed as the opening shots in a trade war between the US and China, new US tariffs on steel and aluminium imports confirmed by President Donald Trump on Thursday clearly are not.

China’s steel exports to the US account for barely more than 2% of total US steel imports, and barely one eighth of Canada’s steel exports to the US. All up, China accounts for around 0.5% of the US steel market.

Nor is China a big exporter of basic aluminium products to the US. It has taken a one-fifth share of the US aluminium foil market, but the US Commerce Department is already taking action under anti-dumping rules quite separate from, and far more draconian than, the 10% aluminium tariff announced by the President.

China is moving to cut back on aluminium production, which is often inefficient, expensive, and polluting. As pointed out in an earlier article, China exports were also little affected by US actions against solar panels and washing machines announced in January.

It is not the trade war, yet. But the threat of one has been sufficiently real for China to this week send its top economic negotiator, Liu He, to the White House. On Wednesday, the Office of the US Trade Representative sent its annual report to Congress, and reminded us the Commerce Department has for many months been putting together a case against China’s treatment of corporate intellectual property. Whatever form the result takes, be it a proposal for sanctions against China or a US law making intellectual property transfers by US businesses to Chinese businesses difficult, the intent will be to slow down China’s race up the production chain into market-leading technologies.

That will not be easy. If the US hinders technology transfers, competitors such as Japan, Germany, the UK, and France will seize what opportunities they can to profit from US reluctance. After all, China these days is not only a big exporter of manufactures but also a vast and increasingly wealthy market. China is itself an increasingly successful innovator and is building the domestic capacity to become a technological leader.

As interesting and complicated as a discussion of intellectual property protections may be, it will not begin to address what Trump says is the big trade issue between China and the US: the size of the bilateral trade deficit. If the US wants to approach that through tariffs, it would be recklessly damaging to the US as well as China.

Unlike steel tariffs, which will only gradually find a way into higher US steel prices and higher product prices, punitive tariffs on China’s manufacturing exports would be immediately evident in every Walmart and Home Depot store in the US. This would be very unwelcome to the people who put Trump into office. China would respond in ways that hurt the US farming sector, another important Republican constituency.

Liu He’s assignment in White House discussions this week is to draw the US back into the bilateral economic consultations suspended by the Trump administration late last year. Australia is not the only country hoping he succeeds.


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