The Paradigm Shift in Trade: Business is NOT as Usual Anymore

The Paradigm Shift in Trade:  Business is NOT as Usual Anymore

The new paradigm has not been established yet.  Kuhn describes a protracted battle that takes place during times of shift as the crisis plays out over what ought to replace the discredited old model.  Trump has fired the starting gun on the battle for the future of the global trading system.  In his world, the US will draw up the gates and manage with only those favored few bilateral partners that share similar perspectives.  The European Union just presented a plan to save the current WTO.  But because they have not yet recognized the extent to which we are standing on the precipice of the shift, the plan has already been derided as weak.  It tweaks around the edges of the existing system. Canada is holding a conference of “middle powers” next month to brainstorm new ideas.  They will need to be bold.  In designing a way forward, officials need to recognize that whatever comes in the future will—of necessity—be radically different that the system that we have been comfortable with for more than seven decades.

The Challenge of Reforming the Global Trading System

Having negotiations just over rules will require flexibility by members because it will be much harder for members to return home and clearly point to “gains” from WTO changes.  In many places, adjustments to specific provisions could even lead to short term challenges. But without any way to address legitimate demands by many members to more accurately reflect the situation in the global trade regime in 2018 and beyond, the system itself is under increasing threat. We have forgotten how important the WTO has become to the business world.  It operates like air.  It is only when it is missing that it becomes obvious how much it was needed. Without creativity and flexibility by all members, the WTO is at risk of evaporating.  The focus ought to be on updating the global rule book, rather than increasingly carving up and out smaller and smaller bits of the economy to be tailored for various member interests. 

Cybersecurity: A Key Building Block for Digital Trade in Asia

Companies need effective information flows to manage and grow their business operations.  But as part of our ongoing work with the 16 governments in the Regional Comprehensive Economic Partnership (RCEP) trade talks, we know that officials often argue that data cannot flow without critical building blocks in place first.  Three important elements include cybersecurity, data privacy and consumer protection. We have taken on the task of working with companies in the region to develop what we think are sensible regulatory frameworks for each of these areas.  These frameworks will be accompanied by indexes to track Asian government progress towards meeting specific elements.  The first framework, on cybersecurity, is presented here and reprinted below.  We had planned to present the cybersecurity framework to trade ministers in Singapore this weekend at the ASEAN Economic Ministers meeting.  After all, the first element of the framework argues that trade and economic officials must be involved in the process of setting cybersecurity policy and not default to defense or home affairs alone.  Unfortunately, ASEAN places cybersecurity matters under the political and security architecture and not in the economic pillar.  It did not fit anywhere on the AEM agenda. This rather proves the point--cybersecurity cannot simply be placed in the remit of security agencies, but must include a broader set of stakeholders including trade and economic officials. 

Wrecking the Promise of the “Micro-Multinational”

Amazon’s move was in response to a decision by the Australian government to both impose a 10 percent tax on all imported goods into Australia and lower the de minimus threshold (DMT) for entry into the country from AU$1000 all the way to $0. The DMT is a government-imposed limit under which imports are exempted from taxes, import charges and most customs duties, and have a limited clearance processes and data requirements.  A higher de minimus, in particular, can make it much easier for smaller firms to ship goods globally since most are not sending 40 foot containers anywhere, but small size packages.  Under the new law, businesses located anywhere in the world that experience an Australian annual turnover of AU$75,000 or more are now required to register with the Australian Taxation Office. The combination of the removal of the DMT and the imposition of tax is very problematic.  It creates a triple burden for firms shipping smaller value packages into the country: they must now deal with duties or tariffs, they must handle often complex customs forms and paperwork; and they must be prepared to pay tax in Australia whether or not they are based in Australia. 

Second and Third-Order Tariff Impacts: Shutting the Gate Damages Us All

The implications, as the Singaporean trade minister noted, can be hard to calculate.  For instance, American importing companies will need to increase the amount of the continuous bond they hold with US Customs.  In some cases, bond levels may be 20-100 times higher than prior to Trump’s tariff wars began. Shipping volumes have fallen off dramatically.  This has left firms paying more for transportation as well. So it is not just 25% tariff rate increases that affect firms.  The second- and third-order implications are just starting to appear. In the short run, exporting firms have several options to limit risk and exposure to higher tariffs.  They can do nothing and bear higher costs, hoping to ride out a short conflict.  They can work with their importing partners to effectively “share” the costs of higher tariffs. Firms should be reexamining their options to ensure that they understand their current supply chains, tariff classifications and possible sourcing alternatives.  It may be prudent to tweak existing processes to move products into new tariff classifications by, for example, adding or subtracting manufacturing steps in the supply chain from one location to another.