Negotiating new trade deals may not be the first order of business for the Biden administration, but it has set out how it will use trade to pursue its other goals.
The recently released “President’s Trade Policy Agenda” spells out the Administration’s plans to enlist trade in promoting a sustainable environment and addressing greenhouse gas emissions, enforcing labor standards, and countering China’s unfair trade practices, including its forced labour programs exploiting ethnic and religious minorities.
Other major trading partners share these objectives to varying degrees. But differences among countries’ standards and commitments to such objectives are recognised as potentially significant trade-distortions. Some countries exploit these differences to gain competitive advantage.
Behind the border measures and other market distortions are also being employed in lieu of tariffs to protect domestic interests in many countries. This, of course, is a major source of market economies’ frustration with China. Its extensive subsidies to aspiring national champions, discriminatory regulatory regimes, financial support for inefficient state enterprises, and predatory technology transfer requirements all lie beyond the reach of current WTO disciplines.
At present, multilateral trade rules do not address adequately these potential anti-competitive market distortions. Effective global disciplines will take several years to negotiate. So what can be done in the meantime?
Actually, the UK and the EU are already dealing with these issues in real time as they negotiate their post-Brexit living arrangements. While they share ambitions such as addressing climate change, workers’ rights and marine conservation, they remain wary of being disadvantaged by differing standards for meeting such goals. As Biden and his team refine their objectives for negotiating new trade agreements or updating FTA/s, there’s one idea percolating through the Brexit discussions that they should consider closely.
The approach being discussed has been published by the UK’s Trade and Agriculture Commission report which was released on March 2. The report suggests that the parties incorporate into their trade agreements internationally agreed standards such as their Paris Climate Accord commitments, certain ILO Conventions, and animal welfare rules. This already occurs in various US and multilateral agreements (for example, worker rights, illegal logging, wildlife trafficking, sustainable fisheries management). A derogation from the agreed standard by one party would enable the other party to impose a remedial tariff on those products benefitting from the derogation which would be treated as an anti-competitive market distortion. The tariff would be proportional to the damage done by the market distortion. For example, if the FTA specified a standard for carbon emissions and one party deviated from the standard, putting the other party’s producers at a disadvantage, the affected party could apply a rebalancing tariff on the relevant products.
In the absence of such an approach, countries are likely to impose ex-ante border measures unilaterally on trading partners who don’t share the same production methods or standards for dealing with such issues. We are already seeing proposals for unilateral carbon border adjustments and digital tax levies. Those clearly are second-best approaches to counter market distortions. They’re arbitrary and less effective as correctives.
Ultimately, this approach of targeted remedial tariffs could serve as an international template for dealing with a broad range of anti-competitive market distortions. It might even serve as a mechanism for disciplining anti-competitive practices under updated WTO rules, while facilitating free trade and fostering socially responsible objectives.
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