Most Favoured Nation: The Mystery of the Missing Protocol
CBAM and Northern Ireland, how to pronounce CBAM, GVCs for LDCs and a detailed update on the fisheries subsidies negotiations.
Hello! Welcome to my newsletter, Most Favoured Nation.
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I’ll be joining Dmitry Grozoubinski and Anna Isaac to discuss trade shenanigans over at Dmitry’s twitch feed on Monday at 19:30 UK time – tune in here.
And if you missed the last episode on CPTPP, you can catch up here
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Now you see it, now you don’t
After much leaking, the EU finally published its proposal for a carbon-border adjustment mechanism (CBAM, see later in the newsletter for the correct pronunciation). The proposal will inevitably evolve and change over the coming months as the European parliament and member-states get their grubby mitts into it, but regardless it’s a pretty significant moment: after decades of academic discussions about border carbon taxes and the like, we are one step closer to seeing such an instrument in the wild.
I’ll certainly be returning to CBAM, but for now I’m going to focus on something that is a slightly niche preoccupation: CBAM’s interaction with the Northern Ireland protocol. This is an issue I’ve written about a fair bit, most recently with my CER colleague Elisabetta Cornago:
“The first question is whether the CBAM regulation falls within the scope of the Northern Ireland protocol. It probably should, in order to prevent carbon-intensive imports dodging the new levy by entering the EU market via Northern Ireland. However, it is not clear how this would function in practice. The EU’s ETS applies only to electricity generation in Northern Ireland, while the UK’s ETS applies to everything else. So the legal basis for any additional charges on CBAM goods entering Northern Ireland would be shaky, due to there being no link to a domestic EU pricing mechanism (other than for electricity). Alternatively, (non-electricity) exports from Northern Ireland to the EU could be subject to the CBAM (requiring EU buyers to register and make declarations), but this would undermine the purpose of the protocol, and create a new regulatory trade border between Northern Ireland and Ireland.
Another alternative would be to extend the ‘not at risk’ procedure, which currently allows some goods to dodge EU tariffs when entering Northern Ireland, to CBAM goods. This would allow CBAM goods to be exempted from CBAM-related bureaucracy when imported into Northern Ireland from Great Britain so long as the importer can prove they will not be moved into the EU. However, this does not resolve the issue for CBAM goods produced in Northern Ireland, which could continue to be freely sold into the EU.”
A bit of a nightmare, I’m sure you’d agree. But the Commission seems to have ducked the issue, for now.
Despite acknowledging that CBAM falls within the scope of the Northern Ireland protocol in an earlier [leaked] draft, there is no mention of Northern Ireland in the final, official, proposal.
See:
There’s a part of me that thinks the omission makes sense. Despite CBAM obviously being in the scope of the Northern Ireland Protocol, neither the EU or the UK wants to open up a new front in their ongoing dispute over the implementation of the Northern Ireland protocol right now, so better to hope no one notices, and deal with it later. But I’m also a bit worried … because short of the UK plugging in its ETS to the EU’s, and implementing its own CBAM in parallel, there isn’t an obvious solution that will keep everyone happy.
DEPA and DEPA
Bloomberg is reporting that the US is considering a digital trade agreement with a number of Indo-Pacific countries.
Paid subscribers will recall last week’s focus [MFN 12 …. C’mon subscribe, you know you want to!] on Stephanie Honey’s piece, where she argues that the nascent Digital Economic Partnership Agreement (DEPA), which currently involves CPTPP members New Zealand, Chile and Singapore, could be *the* building block for future discussions on digital trade. And with CPTPP out of the question, perhaps DEPA could be US’s route back into the region? That’d be nifty.
TL;DR on the fisheries subsidies negotiations
The meme is probably a little unfair, but it pretty much sums up why the WTO negotiations on fisheries subsidies aren’t going very well. More from Blomberg here.
GVCs for LDCs
Some of you might know former DG Trade chief economist, and now head of EU global regulatory cooperation and international procurement negotiations, Lucian Cernat as the creator of the concept of mode 5 services. For those of you who don’t know, in trade discussions trade in services is usually divvied up into four modes of supply …
• Mode 1- cross-border services trade (e.g. online transactions)
• Mode 2 - customers purchase services while abroad (e.g. tourism)
• Mode 3 - a services company sets up a commercial presence abroad
• Mode 4 - a worker crosses the border temporarily to provide a service
… but Lucian has been trying to introduce a 5th mode to the discussion: services incorporated and traded internationally as part of a manufactured good. For example, the inherent value created by R&D, engineering, and design services that gets incorporated into the final value of an exported car. Mode 5.
His core argument (although this is missed by most policymakers who have picked up on mode 5) is that because tariffs are not supposed to be levied on services, countries need to overhaul their approach to customs valuations so as to strip out the services value-add of imported goods when calculating their value for tariff purposes.
In practice, stripping services value-add out of the customs valuation of imported goods would amount to a not-insignificant de-facto global tariff liberalisation. It’s all quite clever, if a bit sneaky.
Anyhow, the reason I mention this is that Lucian has identified another area where tariffs are being levied where they shouldn’t be: imports from least developed countries (LDCs). Or, more specifically, imports of goods from non-LDCs that incorporate inputs sourced from LDCs. The context here is that direct imports from LDCs into the EU (and also some other OECD countries) are not subject to tariffs due to unilateral preference schemes. However, despite this preferential access to developed world markets, exporters in LDCs are still struggling to plug into global value chains, and have low export diversification.
Along with his DG Trade colleague Alessandro Antimiani, Lucian suggests that the solution to this is a new ‘GVCs for LDCs’ initiative, which “would offer duty-free access to LDC value-added that ‘travels’ inside finished products exported worldwide by any other WTO member”.
Much like his mode 5 proposals, in practice this would see LDC-originating value-added stripped from the customs valuation of an imported good, when determining how much duty due to levy.
They estimate that such an initiative would see global trade “increase by $23 billion, and the share of LDC in world trade would increase by roughly an extra tenth of their current share of world trade”. The following sectors would benefit:
As well as this proposal being incredibly on brand, it is fascinating, in that it is one of the few trade proposals I have seen that genuinely wrestles with the challenges posed by global value chains. I suppose my main question (ignoring whether such an initiative has much chance of being adopted by the WTO membership) is whether the potential cost-savings for importers would be large enough to justify the additional expense of discovering and evidencing the LDC value-add so as to benefit from a reduced customs valuation.
And it would, of course, just be easier if rich countries unilaterally scrapped their import tariffs … but that really is wishful thinking.
How to pronounce CBAM
See-BAM. (Pay no attention to that Alan Beattie fellow and his KUH-BAM nonsense.)
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As ever, do let me know if you have any questions or comments. And do join me, Dmitry and Anna on Monday at 19:30 UK time.
Best,
Sam
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