Most Favoured Nation: Trade Policy In The Metaverse
Yes, I'm a nerd.
As someone who grew up **very online**, and spent far too much time hanging out on internet relay chat forums with virtual friends I’d met pretending to be a Jedi [Jedi Knight 2, what a game], I kinda get the appeal of the Metaverse. A reality detached from your physical location, where a refined version of yourself can interact with people from all over the world. Habbo Hotel but with better graphics. Kinda cool.
But what if it were to really take off. Like, what if people started to exist primarily online in a virtual universe. Living, working, interacting and [we’re finally getting there] buying and selling things from each other. You’d need a whole new policy framework to first allow this to happen and then to manage it.
First, to make this alternate virtual reality a global reality, personal data would need to flow more freely than it does now. By which I mean, if the company running the global Metaverse has to store and process the personal data of users in their respective real world countries, the economies of scale aren’t great. You might also get bits of the global Metaverse entirely closed off to people from certain countries. It would be a bit like when a load of US news websites temporarily cut access to Europeans because they couldn’t be bothered to comply with GDPR. Digital borders.
You then have the question of regulatory jurisdictions. Even now, with the outbreak of Zoom, there are discrepancies between the existing trade rules and the realities of the modern world. For example, were I to be paid to go to Belgium to deliver a training course on rules of origin, I might need a work permit. But were I to deliver it over the internet, from the comfort of my living room, I would not.
Extrapolate this outwards, and in the global Metaverse I could be selling my training directly to people all over the world. Which might be fine, as it is now. Or it might not be because a government somewhere might have introduced new legislation requiring me to get a “virtual work permit” or the like to sell directly to their citizens.
But what if physical goods trade falls off a cliff as a result of everyone getting everything they need online? Some countries such as India still pull in quite a bit of tax revenue from import tariffs. Making up the shortfall could be difficult and it is only a matter of time before someone tries to apply tariff to the virtual products being sold in the Metaverse. But where do these sales even actually happen? Where the servers are located? Where the buyer and seller are located?
And what about qualifications? An architect qualified in the UK can’t automatically work in the US or vice-versa. But in the Metaverse I might approach an architect to draw up plans for my real world house with little idea where or when they were qualified. There’s then another question about whether you might need a digital architect to create your Metaverse home, with all the mod cons such as the latest cyber defence tools. Would they need a qualification? If so, who would grant it? And would it be recognised in all real world jurisdictions?
And what about cross-border banking? In the Metaverse you might just turn up at your virtual branch to make a payment or transfer some money. But where is that virtual branch actually based? Is it bound by the real world constraints on cross-border financial sales and local presence requirements, or does your entering their virtual branch count as reverse solicitation, leaving them free to operate from whereever?
None of these issues are at all new. And people such as Richard Baldwin have been writing about the impact of technological advancement on international trade for years, but it does make me think that the already dated trade policy and regulatory frameworks are not at all ready for what comes next.
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Trade barriers = less trade
That’s according to the UK Office for Budget Responsibility, at least.
Canada, again
On Thursday the UK and Canada launched the negotiations of a new UK-Canada free trade agreement. The aim is to improve upon the existing EU deal, that was rolled over after Brexit.
Something to know here is that the UK absolutely hates negotiating with Canada. The rollover deal nearly didn't happen after the Canadians walked out of the negotiations following the publication of the UK’s no-deal tariff schedule (The Canadians argued that the no-deal tariff schedule would have given the whole world what Canada wanted for free, so why bother giving UK exporters preferential access to the Canadian market in return). It was only concluded, very late in the day, once the UK changed its approach to general import tariffs and Liz Truss and Mary Ng managed to make nice. Even then, the Canadians gave the Brits less on cheese market access than they gave the EU, and the rollover deal includes an expiry date on the extended rules of origin cumulation provisions, which allow UK exporters to more easily qualify for tariff-free trade.
All of the above means that the UK negotiators are not looking forward to this one. The easy bit will be bolting on a digital and gender chapter. The hard bit will be convincing the Canadians to give more market access for cheese, and continue to accept the extending cumulation rules of origin provisions. And the Canadians will not be afraid to use the UK’s desire to accede to CPTPP (of which Canada is a member) as leverage.
It’ll get done, but it won’t be fun.
Round 2
The UK and India just concluded round 2 of their FTA negotiations. And it resulted in perhaps the least enthusiastic outcome statement I have ever seen:
On Thursday 17 March 2022, the Republic of India and the United Kingdom concluded the second round of talks for an India-UK Free Trade Agreement (FTA).
A delegation of Indian officials undertook technical talks in London. The negotiations were conducted in a hybrid fashion, with some negotiators in a dedicated UK negotiations facility, and others attending virtually.
For this round of negotiations, draft treaty text was shared and discussed across most chapters that will make up the agreement. Technical experts from both sides came together for discussions in 64 separate sessions covering 26 policy areas.
The third round of negotiations is due to be hosted by India in April 2022.
As MFN readers will know, I think this deal would be a good thing. But the politics have become much more difficult since Russian invaded Ukraine, and MPs have started to question the morality of doing a trade deal with a country that continues to cuddle up to Putin.
Which in practice means that the negotiations are probably going nowhere fast, and even if they were making progress the UK government probably wouldn’t choose now to draw any attention to the deal. Hence, the least enthusiastic outcomes statement of all time.
Other things
The UK finally convinced the US to scrap its trade war tariffs on UK steel and aluminium exports and replace them with a tariff-rate quota. The deal is broadly comparable to the one the US already did with the EU and Japan, but does have some interesting differences. The main being that Chinese owned British steel producers will need to submit to an audit to demonstrate they are not benefiting from Chinese subsidies in order to qualify for the TRQ.
The UK deal also makes next to no mention of climate – beyond a vague commitment to discuss discussing carbon pricing methodologies – which is significantly different from the US-EU deal, which aims to create a transatlantic climate change cartel.
It sounds like DG Trade has finally succumbed to peer pressure and accepted that future labour and sustainability commitments in EU free trade agreements will be enforceable, with breaches subject to sanction. Of course for this to actually happen there would need to be new EU free trade agreements, which very much don’t look like happening any time soon. So in the end perhaps no one wins.
One of the annoying things about FTA provisions on the mutual recognition of qualifications is that they tend not to do anything more than commit both parties to continue talking about the mutual recognition of qualifications and then in practice nothing happens. Until now. The EU and Canada have concluded negotiations on the mutual recognition of the qualification of each other’s architects. Congrats!
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Best,
Sam