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Tax-News Global Trade

By Editorial
July 30, 2012

Given that politicians, central bankers and economic commentators frequently tell us that we are in the grip of the worst economic and financial crisis since the 1930s, it is not surprising to see countries turning to protectionism in an attempt to insulate their industries from foreign competition.

It is now four years since the venerable Wall Street bank Lehman Brothers went bust after over-indulging in sub-prime mortgages, paralyzing the entire banking system and choking formerly prosperous economies. The reality of a much-feared double dip recession is now taking hold in many countries, especially in Europe where, Germany aside, growth has been almost non-existent. Things could be a lot worse however, and while a lurch towards trade protectionism is to be expected under such circumstances, the principles of free trade have not yet been fatally undermined.

According to a report by the World Trade Organization, governments are increasingly considering protectionist measures to achieve national economic objectives instead of the temporary measures to protect domestic industries more commonly reported at the start of the global crisis. Since mid-October 2011, a total of 182 new measures that restrict or can potentially restrict or distort trade have been recorded. The main measures are trade remedy actions, tariff increases, import licenses and customs controls. In addition to trade restrictions, many plans envisage the provision of tax concessions and the use of government subsidies, which can distort and inhibit competition between nations. However, it is important to note that such measures, while undesirable from a free trade standpoint, have impacted on less than 1% of world imports.

More worrying though, is that many of these restrictive measures have been concentrated in the G20 countries. The WTO says that since October 2008, protectionist measures implemented in G20 member states are estimated to be worth around 3% of world merchandise trade, and almost 4% of G20 trade. This is equivalent to some USD450bn, or close to the annual value of merchandise trade in Africa. Meanwhile only 18% of G20 restrictive measures have been repealed. In certain cases, the barriers seem to take the form of procedural or administrative actions to slow down the clearing of goods at borders rather than new laws or regulations, which, the WTO warns, can render trade conditions even more difficult since lack of transparency about conditions of entry into a market increases uncertainty for traders and raises the risks and costs of doing business.

The report goes on to note that the politics of trade in some countries seems to be turning inward-looking: "Of particular concern are statements by some leaders in favour of import substitution policies as the pillar of economic growth in their countries,” it says. “This is generating regional and global trade tensions which have largely been absent since the coordinated policy responses to the global financial crisis were launched.  Stronger global cooperation is needed to rebuild a robust architecture for trade in the 21st century. Greater international cooperation is also needed to make the case for open trade, escape the current economic crisis, and advance the multilateral trade agenda."

There are encouraging signs that the major trading nations are not abandoning their commitments to free trade yet however, as demonstrated by the accelerating pace of negotiations towards ambitious bilateral and multilateral free trade agreements (FTAs). One of them is America’s involvement in the Tran-Pacific Partnership (TPP) talks. After some worrying statements early in Barrack Obama’a presidency, in which he seemed to suggest that the benefits of free trade were somewhat over-rated, the USA is now taking a lead in the TPP negotiations, and the number of countries willing to step on board the TPP is rising.

Nine countries are currently negotiating the TPP including Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, the USA and Vietnam. These will soon be joined by Canada and Mexico, which were granted entry to the negotiations in June. Their addition will increase the market represented by the membership from 510m people and a gross domestic product (GDP) of USD17 trillion to 658m people and a USD20 trillion GDP. Japan has also expressed an interest in joining the TPP, although its reluctance to cut tariffs protecting its farmers and car makers could prove a tough nut for negotiators to crack, and its admission to the TPP club is far from clear cut. Nevertheless, the13th and most recent round of talks held in San Diego in July were said by the US Trade Representative to have made important headway with regard to a number of chapters, including customs, cross-border services, telecommunications, government procurement and competition policy, adding to progress on an ambitious tariff package that will provide access to each country’s industrial goods, agriculture and textiles markets. 

Indeed, Asia is the focus of several free trade initiatives. After having abandoned its attempt to conclude a free trade deal with the Association of South East Asian Nations (ASEAN), the European Union has redoubled its efforts to engage with key Asian trading partners, and is now pursuing individual agreements with Vietnam, Singapore and Malaysia, and, possibly, Thailand. At EUR160bn (USD213bn) per year, the EU accounts for over 10% of ASEAN's total trade in goods, with the percentage for services being even higher – at 13% of the total. However, according to EU Trade Commissioner Karel De Gucht, “these figures probably underestimate the total trade between our two regions as today's global supply chains mean that of ASEAN's exports to China often end up in products eventually shipped to Europe”. In addition, the current stock of bilateral investment stands at EUR260bn, and bilateral investment flows were over EUR31bn in 2010. European investment in ASEAN thereby accounts for a quarter of the annual total.

Figures quoted by De Gucht with regard to the EU/South Korea FTA, described by him as “the most advanced and ambitious free trade agreement that Europe has yet achieved” serve to highlight the economic benefits of removing barriers to trade. By measuring bilateral trade over the nine months to July 2011 to March 2012, and comparing these figures with average trade volumes over the same period of time in the previous four years, de Gucht said that trade is up, and up significantly, noting that overall, Europe's exports to Korea have already increased by 35%. Where liberalization has actually happened, the increase is even more impressive, the Commissioner explained, noting that duties were dropped on about a third of EU exports to Korea when the agreement entered into force last July and that sales of those goods have increased by 46%. For many other products – just under half of EU exports - tariffs were only partially reduced, De Gucht added, while pointing out that even for those products EU exports are up by 36%. Overall those increases translate into almost EUR2bn (USD2.5bn) in new trade and EUR350m saved in duties.

Building upon its FTA with the USA, which entered into force on March 15, South Korea is also keen to expand its network of trade treaties within Asia, aware that China, one of its main trading partners, has already concluded a trade-boosting deal with ASEAN. Following the commencement of negotiations on a trade treaty with Indonesia, the South Korean government has indicated that it will look to negotiate additional treaties with other countries within ASEAN, starting with Vietnam; and talks towards a trilateral FTA including China and Japan are set to start by the end of 2012. In addition, the respective Presidents of South Korea and Indonesia decided to commence negotiations towards a Comprehensive Economic Partnership Agreement at their summit meeting on March 28. South Korea is also looking further afield, in particular to the Americas, where it has an FTA with Colombia, signed in June, and has agreed to further trade talks with Mexico and Canada.

In fact, Canada is probably the only nation at the moment that is pursuing a free trade agenda with more zeal than South Korea. This year Ottawa’s trade negotiators have been kept busy progressing talks with the EU, Japan, Thailand, Morocco and the Mercosur group which includes Argentina, Brazil, Paraguay, Uruguay, and from July 31, 2012, Venezuela (although Paraguay’s membership was suspended this year). Talks are also being held to expand the scope of Canada’s existing FTAs with Costa Rica and Chile, while negotiations are ongoing with the Andean Community countries, the Caribbean Community, the Central America Four (Guatemala, Nicaragua, Honduras and El Salvador), the Dominican Republic, India, South Korea, Singapore and Ukraine. “Our government understands the importance of trade to our economy,” said Ed Fast, Canada’s trade minister, at the APEC Meeting of Ministers Responsible for Trade in Kazan, Russia. “It represents one out of every five jobs in Canada and accounts for over 60% of our country’s annual income. That is why we have embarked on the most ambitious pro-trade plan in the history of our country.  This is the time to double our efforts and provide meaningful leadership for the world."

Not all nations share Fast’s view, and one of the most serious offenders is Brazil. Facing a "predatory competitive world stage" and high currency appreciation, the Brazilian government introduced a series of tax breaks and incentives to protect domestic industry in the summer of 2011 after figures revealed a 1.6% drop in industrial production. Cheap imports from China are seen as largely to blame, so in response the government unveiled the "Bigger Brazil" plans on August 2, which include tax breaks worth BRL25bn (USD16bn). The incentives target specified industries hard hit by the continuing issues facing Brazil's economy, including the software, furniture, shoe and textile industries. The plan also throws up a series of new trade barriers in a bid to discourage imports of goods from competing nations. These include a four-fold increase in the number of anti-dumping investigators, swifter adoption of anti-dumping duties and tougher quality control measures on imported goods. There have also been serious rumblings of discontent among key WTO members over the Brazilian government’s decision little more than one month later to shield the domestic car manufacturing industry by hiking the industrial products tax on car makers by up to 30% on vehicles that are assembled mainly from foreign-manufactured components. Japan is said to be leading a chorus of protest at the measures, and it is believed that South Korea and other car-producing countries have also voiced their concerns. Brazil has also threatened to walk away from a long-standing agreement with Mexico that provides preferential tax treatment for bilateral automobile trade because of a widening trade deficit with that country.

A bigger blow for global trade, especially for developing countries, though is the protracted demise of the Doha Development Agenda (DDA), despite the repeated efforts of the WTO’s energetic Director General, Pascal Lamy, to revive the process. Launched in 2001, the DDA seeks to cut trade-distorting agriculture subsidies, phase out tariffs on industrial goods, open trade in services, facilitate customs operations, open trade in clean technology, adjust anti-dumping rules, and offer duty-free and quota-free access to the exports of the world's poorest countries. Although the agreement is thought to be about 80% complete, WTO members have reached an impasse on the last 20% and negotiations collapsed in 2008. As the former European Commissioner for Trade and a marathon runner, Lamy is perhaps perfectly suited to the arduous task of completing the DDA; but with his pleas to restart the process seemingly falling on deaf ears, even he must now be running out of puff, and it still remains to be seen whether anything will come of the negotiations.

A study from the European Commission reveals that the economic benefits arising from completion could amount to an increase in world exports of USD359bn on an annual basis from a deal that secures the liberalization of industrial goods, agriculture, services and from the removal of red tape.  This would mean 0.2% of additional economic growth at global level. The removal of red tape alone – otherwise known as ‘trade facilitation’ – which includes the simplification of customs procedures, transport and trade logistics would boost world exports by USD100bn, the figures suggest.

Governments are, however, often blind to the long-term benefits of free trade as they try to relieve short-term domestic political and economic pressures. On the other hand, despite an often inward-looking US administration, and some unashamedly protectionist policies on the part of some governments, fears that the use of ‘beggar thy neighbour’ trade policies would become seriously entrenched into the global trading system have largely been unfounded.


Tags: agreements | tax breaks | Chile | European Commission | Indonesia | tariffs | investment | anti-dumping | services | G20 | Malaysia | Thailand | Vietnam | Singapore | Mexico | Japan | China | Canada | Brazil | tax | trade



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