Most Favoured Nation: Weaponised Uncertainty
Revoking MFN, UK-New Zealand FTA, China and CPTPP.
Yesterday, in response to being invaded, Ukraine invoked the national security exception to suspend its obligations to Russia under the WTO agreements (GATT, GATS and TRIPS). It also called on other WTO members to “suspend the Russian Federation’s participation in the WTO for its violation of the purpose and principles of this Organization.”
Canada swiftly obliged, and suspended its most favoured nation treatment of Russia and Belarus [for clarity: Canada did not act to prevent Russia from subscribing to this newsletter, rather it suspended its obligation to treat imports from Russia and Belarus the same as imports from elsewhere] and applied a minimum tariff of 35 per cent on “virtually all” imports from the two countries.
The EU member-states are today discussing doing something similar, and the chair of the European Parliament’s International Trade Committee, Bernd Lange, has tweeted approvingly:
From a trade law perspective, the legal aspect of this discussion, and the question of what it means for the future of the rules-based trading system, is fascinating, and something this newsletter will return to in future.
But right now I want to think about the economic impact of suspending MFN and applying higher tariffs to Russian/Belarusian imports. Because in and of itself, I wonder if we have reached the point of diminishing marginal returns when it comes to additional economic sanctions.
I say this, because – what with half of Russia’s trade being denominated in either dollars or sterling – the financial sector sanctions which exclude Russia’s largest banks from US and UK financial markets, cut off access to the SWIFT messaging service, etc., already make trading with Russia an absolute nightmare.
Conceptually, the West has pre-emptively counter-sanctioned itself, by making it incredibly difficult to buy from, or sell to, Russia. Even if the product you are trading is exempt from existing sanctions, such as energy or medicines, you have to jump through legal and regulatory hoops to do so. The frictional cost is huge … and maybe just not worth it.
The news is already full of stories of firms decoupling from Russia, either because of sanctions or voluntarily (and also because of sanctions but saying it’s voluntary for brownie points).
So some extra tariffs? Sure, it will impact some of those firms still trading with Russia … but you can’t apply tariffs to trade that doesn’t exist.
What widespread MFN suspensions would do, however, is hammer home the overarching message: “Don’t trade with Russia unless you have no other choice.”
To repurpose an argument coined by Meredith Crowley and Dan Ciuriak: with its web of complementary-but-also-slightly-different-sanctions the West has successfully weaponised uncertainty. And this uncertainty is a collective sanction in and of itself, and arguably one that is greater than the sum of its component parts.
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Delicious Kiwi Fruit
Overshadowed by all the horribleness elsewhere, there was some good news this week: the UK and New Zealand put pen to paper on their long-awaited trade deal.
Due to this being well-trailed – the agreement in principal was reached last October – I’ve already written quite a lot about what’s in the deal.
Most interesting to just me (and probably George Riddell) is what New Zealand eventually agreed to on mobility provisions for contractual services suppliers.
To recap:
The movement of people invariably causes a couple of problems in trade negotiations. I’ve previously written about the fact that for a reason I don’t fully understand New Zealand doesn’t normally include commitments covering the temporary movement of contractual services suppliers (CSS; when a person working for a foreign company contracted to deliver a service comes in person to your country for like 12 months to deliver that service) in its trade deals. Well … it does now! In what can only be described as a UK negotiating success, CSS will be included. However these commitments will be subject to mysterious “safeguards”. Once I find out what these safeguards are, I will be sure to write about them.
And write about them I shall!
According to Annex 13A (C) the CSS provisions only apply to a person employed by a UK company that:
a) is not an agency for placement and supply services of personnel and is not acting through such an agency;
b) has not established in the territory of New Zealand; and
c) has concluded a bona fide contract to supply services to a final consumer in New Zealand, requiring the presence on a temporary basis of its employees in New Zealand in order fulfil the contract to supply services.
So basically if you work for a British firm that’s sole purpose is providing people to temporarily fill roles then this chapter doesn’t apply to you.
You also must have a tertiary-level degree of at least three years in duration and at least six years of experience. AND the provisions only apply to a select few services sub-sectors such as legal advisory services, and medical and dental services.
Anyway, assuming all of the above apply you will be able to deliver a contract in person in New Zealand, so long as you are not physically in New Zealand for more than 6 months in a 12-month period.
Or will you?
Because there are a load of other conditions too. The first, and biggest one being, that your ability to work temporarily in New Zealand is subject to an “economic needs test”. in practice this is a pretty big loophole that, in extremis, could mean you’re only able to come and deliver the contract if the contracting party in New Zealand can demonstrate there was no one else already in New Zealand able to do it.
Hmm.
Other conditions include requirements for the person delivering the contract to have been working for their UK firm for at least one year prior, receive pay that is equivalent to what a New Zealander would receive for the same work, and be employed on equivalent conditions to a New Zealander.
Hmm x2.
The TL;DR:
The UK should be commended for getting New Zealand to finally make commitments on CSS in a free trade agreement.
I’m pretty sure that next to no-one from the UK will ever use these CSS provisions.
China thinks it can join CPTPP
Perhaps more interesting than whether China will join the CPTPP, is the question of why China is convinced it can. Lots of people seem very certain that it will never happen because the Chinese regulatory approach is incompatible with the CPTPP rulebook.
But is it?
MFN fan-favourite, Henry Gao, has been running a one man campaign to get people to take China’s accession bid seriously. And he has been documenting the many areas where China is changing its rules, so as to become CPTPP-compliant.
See this twitter thread for more:
China might not ever join CPTPP. But it is deadly serious about doing so.
Further reading
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Best wishes,
Sam