The China tightrope — and other trade developments that will define 2022
The second year of the Biden presidency opens with a widening realization that a Democrat-run White House is keeping Donald Trump’s protectionist trade policies: tariffs on steel, aluminum and Chinese imports; domestic content requirements; and dim prospects for trade talks.
Three trends are emerging for the new year. First, countries are increasingly flouting the longstanding international trade regime. Second, trade professional services are being unleashed by the pandemic’s remote-work revolution. Third, multinational corporations are walking an increasingly unsteady tightrope with China.
First, watch for more countries going rogue on trade. Recent U.S. tariffs, India’s sugar program and the European Union’s (EU) carbon border adjustment mechanism are good candidates for a World Trade Organization (WTO) challenge. But with that threat defanged by a crippled WTO appellate body, governments are pursuing domestic agendas without enforcement worries.
A functioning WTO dispute settlement mechanism means deterrence. WTO members agree to pursue domestic policy goals in the least trade-restrictive way. With some exceptions, that means treating domestic goods as you treat imported goods, and that the market access you give to one country must extend to all WTO members. For instance, want to make your cars more energy efficient? Sure, as long as it applies to domestic and imported autos. The mere threat of WTO litigation has required countries to think carefully on policy design to honor these requirements.
Second, cross-border trade in professional services could soon be booming in the wake of the pandemic’s remote-work breakthrough. Thanks to technology and a growing share of the workforce being forced to innovate and adapt, we have expanded the frontiers of what can be done remotely. Today, workers can do more from home, and some even do it better than before.
In a recent interview about his research, Stanford economist Nicholas Bloom said hybrid work is here to stay, and firms see some jobs that can be done completely away from the office. Bloom characterizes these as non-managerial, medium-skill jobs like graphic design, payroll, HR, IT support and editing. If a job does not involve managing a team or immersion in a collaborative process, some firms question if the employee ever needs to come back to the office, or even be in the country at all.
This is not, however, the same as moving a factory to Mexico or China, where wages are a fraction of what they are here. This kind of trade may only happen on the margins, in countries with reliable internet connectivity and the right workforces. Cost savings will be modest. Still, given the tight labor market and 10.6 million job openings, this could help U.S. businesses that desperately need to hire in order to compete and expand. The good news is that this kind of trade is resistant to government protectionism.
Policymakers appear aware of the potential. In her recent visit to the United States in an effort to strengthen cross-border commerce, UK Minister of State for Trade Penny Mordaunt highlighted the “talent, creativity and entrepreneurial spirit” and a shared ambition to level up.
Third, multinationals will continue to walk a tightrope with China. Corporate social responsibility is not just about saving the planet anymore. It also includes U.S.-China culture wars over freedom of speech and forced labor. Social media today puts every CEO in the spotlight on these issues, with corporate sponsors of next month’s Beijing Olympics as the latest example. A company press release meant to appease concerned U.S. citizens and politicians can end up inflaming China (or vice versa).
Multinationals must thread the needle. Nike recently came under fire for using a factory that was forcing hundreds of young Chinese Uyghur women to produce sneakers. Nike conducted an audit through a third party, and decided it was fine to continue with the supplier. But Amelia Pang, the investigative journalist and author of “Made in China,” questions the authenticity of that audit, describing the ease with which Chinese auditors can create fake accounting books and irregular attendance records.
These reports suggest it may be impossible to conduct a meaningful audit in China. If that is the case, then all imports from China arrive at our ports with a big question mark. That should make every CEO squirm as we head into the new year.
The international economy continues to change quickly. There will be a lot to unpack in 2022.
Christine McDaniel is a senior research fellow with the Mercatus Center at George Mason University.
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