The national security loophole you could sail a trade yacht through

Hello from Brussels. We try to steer clear of Brexit and the EU-UK permatalks here at Trade Secrets. One, we have colleagues who do it far better (sign up here if that’s your thing to our revamped Brexit Briefing, now titled Britain after Brexit). Two, it’s got a repetitive quality with slight variations, which can be soothing in certain classic works of art and music, but less so in talks over chilled meat sales to Northern Ireland. However, we will pause momentarily to note that, being about regulations and trade facilitation, the EU-UK tussle over Northern Ireland is a thoroughly modern trade issue quite removed from the ra-ra-Ricardo tariff-related rhetoric of the free-trade Brexiters. Someone should totally have warned about this years ago.

Speaking of trade facilitation, President Joe Biden has managed to chivvy the big beasts of the US supply chain — Walmart, UPS and FedEx — and the Port of Los Angeles, including its recalcitrant labour unions, to move towards a 24/7 operation to ease supply chain backlogs. More on this issue in future newsletters. Today’s main piece initially stays with the UK with an entertaining vignette from Brexit Britain before painting the underlying issue of trade and national security on a broader canvas.

There’s more on supply chain snafus in Charted waters, where we look at delays affecting the world’s biggest port, Shanghai.

The buccaneers who cower behind trade barriers

Remember all that nautically themed rhetoric about post-Brexit Global Britain being buccaneering and swashbuckling while various people, probably including us, pointed out that far from being agents of free trade, the original buccaneers actually operated under state licence and protection? (Also, were essentially pirates.)

Well, here we are on the Brexit high seas, and my Financial Times colleagues brilliantly discover that the UK is proposing to build an export-promoting yacht without putting the contract out to international tender. It’s planning to circumvent Britain’s commitments under the World Trade Organization’s government procurement agreement (GPA) by using the national security exclusion (Article III here). This involves treading a thin line of pretending the ship has some security role without actually being a naval intelligence vessel. Let’s face it, Britain might have a hard time persuading China to let the Royal Navy moor a spy ship off Shanghai under the pretence of holding a trade fair. To be frank, that sounds like a James Bond screenplay where the writers are just phoning it in.

Given how well UK civil servants have done in establishing the UK as an independent trading country — negotiating continued UK membership of the GPA after Brexit was not a trivial achievement — the use of flimsy national security rationales by ministers isn’t a trend we ought to welcome.

As it happens there’s a flotilla of national security test cases bearing down on us right now in the form of several linked WTO actions where rulings are in theory due later this year. They are brought by different members, including the EU, India and China, but all targeting the same policy, the US’s Section 232 national security tariffs on steel and aluminium first introduced by former president Donald Trump and kept in place by Biden. There are also several cases where the US is contesting the legality of countries’ retaliation against the 232s, including one targeting the EU.
Washington and Brussels are now trying to negotiate a compromise on steel and aluminium, which would put their litigation against each other into abeyance. The other cases remain open.

Naturally the 232s induce from people like us mockery of the idea that trading powers such as the EU (and even more so Norway and Switzerland, two of the other complainants), aren’t exactly a clear and present danger to US national security. Biden’s people retort that the relevant legislation says it’s not the source but the product and its economic importance that’s the issue. US Trade Representative Katherine Tai told a gaggle of sceptical journalists in Brussels earlier this year: “The key to the national security threat is that steel and aluminium as basic industrial inputs are critical to a country’s national security.”

To our mind that’s equally silly in a different way. You could make that argument for dozens of products, and no one seriously thinks the steel and aluminium tariffs are based on a rational security risk assessment rather than wanting to please the relevant labour unions. Senator Rob Portman of Ohio, former USTR under George W Bush, has put forward a bill to tighten up the use of the Section 232s, but we’re not there yet.

Meanwhile, punting the issue to the WTO is exceedingly risky. Asking a WTO dispute settlement panel to judge the legitimacy of claiming national security exemptions from trade rules means handing it a political hot potato packed with legal gelignite and dunked in a chalice of boiling jurisdictional poison. A WTO ruling telling the US it can’t assess its own security needs is not exactly the way to get Washington to re-engage with the organisation and unfreeze its appellate body.

Roberto Azevêdo, the highly risk-averse former WTO director-general, used to say that the dispute settlement system wasn’t the place for national security issues to be decided. The Section 232 rulings have already been postponed from earlier in 2021 and are now due by year-end. We’d forgive the dispute settlement panel if it were to claim it had printed out the judgments but dropped them into Lake Geneva, and then said: “Oh, no, look, they’re too soggy to read, those are the only hard copies and the server’s been corrupted, we’d better start again.”

The understanding used to be that the WTO system would defer to countries’ own judgments on national security provided governments didn’t abuse it. In examples such as the Section 232s and this silly yacht it’s increasingly hard to conclude that this informal truce works any more, and WTO panels are asserting their strength. In a WTO dispute settlement case involving Russia and Ukraine, a panel ruled in 2019 that it had the right to judge whether security measures were justified or not, while concluding in that particular case that they were.

The best way to fix this is for governments to stop the proliferation of national security exceptions and to find ways of boosting their domestic industries’ competitiveness rather than coddling them through trade restrictions. Otherwise, it’s a choice between either letting governments gradually punch more holes in the net of trade law or risking a massive political backlash against the WTO dispute settlement system, whose very legitimacy and continued existence are already under threat. Neither option strikes us as pleasant.

Charted waters

If Biden thinks that opening up the Port of Los Angeles 24/7 will fully resolve supply chain issues, then he’s likely to be disappointed.

Here’s one reason why.

According to figures from supply chain data specialists project44, as of October 7 there were about 386 ships (anchored and moored) off Shanghai and Ningbo — two of China’s busiest ports, of which, 228 were cargo and 45 container vessels.

To get a sense of the knock-on impact that’s having on deliveries to US consumers here’s a chart that compares the lead times, that is the total transit time from the port of load to the port of discharge, from Shanghai to ports on the US West Coast. It shows that it now, on average, takes more than 50 per cent longer to get cargoes across the Pacific than it did pre-pandemic.

Containerised trade through Chinese ports accounts for 40 per cent of global container trade and Shanghai is the world’s busiest port. Running US ports night and day might ease the strain on supply chains, but it will by no means solve the logjams overnight. Claire Jones

Trade links

The FT has a great in-depth analysis of the supply crunch at US ports and the value chain. Tim Harford, meanwhile, looks at why Britain is braced for a grim Christmas beset by shortages.

The energy crunch has pushed Chinese factory gate prices higher, with producer costs soaring at the fastest rate since 1995.

Nippon Steel has filed a suit (Nikkei, $) in Tokyo against Toyota Motor and a subsidiary of China’s state-run Baosteel Group for patent infringement of steel sheets used in electric vehicle motors.

The Peterson Institute’s Chad Bown and Thomas Bollyky of the Council on Foreign Relations) explain how the WTO could facilitate a vaccine investment and trade agreement. Alan Beattie and Francesca Regalado

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