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    HomeBusinessIPEF — rebooting the world trading system

    IPEF — rebooting the world trading system

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    The international economic system that emerged after the collapse of the Berlin wall in 1989 was dying slowly for close to a decade now. There were two main drivers behind the increasing irrelevance of existing institutional frameworks — China and technological change.

    Admitting a non-market economy like China into a rule based global trading system that is based on presumptions of transparency was bound to be a disaster. It is now an established fact that China got away with violating every rule in the book in its pursuit of economic advantage and market dominance. These include anti-competitive practices included providing huge state subsidies, dumping, predatory pricing, and labour practices bordering on human rights violations.

    Unlike most other WTO members, the Chinese state directly or indirectly controls all factors of production, and WTO rules are inadequate and ineffective in providing checks and balances since they were designed largely with market economies in mind. Initially, the Chinese economy was not large enough to represent a threat to the industrialised countries, neither were they competing in the high-tech sectors of interest to these advanced large economies.

    Thus, the fact China was slowly starting to dominate supply-chains across product lines were largely ignored. Western companies and consumers gained from lower prices, and did not care if manufacturing sector development got stifled due to unfair competition in other developing countries like India. This has changed now. The pandemic drove the realisation of China’s sheer dominance on manufacturing supply-chains, and how vulnerable this makes everyone across the world.

    Tech transformation

    There has also been a paradigm shift in technology. The so called ‘industry 4.0’ represents a production system where information, data, and returns to intellectual property represent the core of the value in manufacturing. With further fragmentation of production, robotics, and rise of 3D printing the old rules governing trade mostly focusing on tariffs are becoming irrelevant.

    Governing current trade in goods and services requires comprehensive rules on cross-border transfer and storage of data, robust rules on technology transfer and IPR protection that leads to effective enforcement going much beyond the existing WTO rules on intellectual property rights (IR).

    The next generation of production networks would have to be underlined by trust and transparency. Product developers in Korea would have to trust their engineering colleagues in India not stealing their designs, banks in Europe would have to trust the database managers in Malaysia with their financial information, computer aided manufacturing program files will need to be shared across factory floors globally to enable local 3D printed production of electronic components without concerns about such files being compromised. Singaporean users of a Finnish owned livestreaming app would need be able to hold that firm accountable for data breach of its servers located in Panama.

    Existing rules and institutional frameworks are incapable of handling this level of complexity. The fact that the WTO has consistently failed to provide meaningful solutions to technical barriers to trade — i.e., regulations on product health and safety standards, which are often used to protect local markets, underlines the inability of the WTO to handle complex regulatory issues of trade policy.

    Countries have instead been engaging in bilateral and regional trade negotiations where appropriate disciplines and frameworks to handle such complex issues can be developed and negotiated. The more advanced disciplines on product standards, cross-border data and cross border delivery of professional services in Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is just one example of this.

    China factor

    There is an underlying ‘China factor’ even within this concern for new disciplines on trade on issues like cross-border data transfer, digital trade, regulatory barriers. and protection of technical know-how and practices. And it all boils down to fairness, transparency, and accountability. Firms globally have been victims of predatory practices with respect to their designs and ideas stolen or backdoor attempts to steal data. Market access has been unfairly denied using arbitrary interpretation of regulations, or technology transfer has been forced upon foreign firms.

    While China is not the only country that has indulged in such practices, a vast majority of such instances are from China. More importantly, the Chinese system offers little confidence in terms of fair resolution or accountability when such illegal or unfair practices occur. Indeed, there is a general feeling that such practices are even encouraged by the state as a part of its larger strategy to dominate global markets.

    There was a crying need for an alternative approach for global economic engagement, a new framework of rule-based trade that prioritised transparency and fairness, and is able to handle the new complexities of production, digitalisation and exchange of data. The four fundamentals of the Indo-Pacific Economic Framework for Prosperity (IPEF) related to trade, supply-chains, clean energy, and anti-corruption are an attempt to address these gaps in the current system.

    On trade the IPEF prioritises inclusive, free, and fair-trade commitments and develop new and creative approaches in trade and technology policy, including cooperation in the digital economy.

    On supply-chains IPEF focuses on improving transparency, diversity, security of supply chains, and on cooperation to better prepare for and mitigate the effects of disruptions to business continuity. Especially critical is the emphasis on ensuring access to key raw and processed materials, semiconductors, critical minerals, and clean energy technology, indirectly referencing the challenges of over-dependence on any one country for key raw materials (such as rare earths metals used in lithium-ion batteries) or key components such as semi-conductors.

    India learned the hard way about supply-chain dependence during the pandemic when its pharmaceutical sector was held hostage due to shortages of critical bulk drugs from China. Disproportionate pricing or denial of critical raw materials or industrial inputs can be strategically used to weaken certain industrial sectors and is a lethal anti-competitive measure.

    The IPEF principles on climate change appear as a broad initial attempt to develop rules for technology transfer for key technologies that would attempt to balance the interests of both the technology owner and the recipient user. Very importantly, the official IPEF statement clearly mentions that it intends to address a more expansive set of areas in the future.

    IPEF therefore clearly represents the beginnings of developing an alternative set of rules and frameworks to address the needs of the new trading system and production networks that have emerged in the last decade or so, and right the wrongs of the existing institutional framework that failed to enforce the principles of fairness and transparency where it was most needed.

    This is the great rebooting. It is not intended to be a closed system to exclude any country, but participation would require a commitment to openness, transparency and market principles that certain large economies would find difficult to comply with.

    The writer is an independent trade and logistics specialist

    Published on June 06, 2022

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