Global Trade March 2018 issue

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Trade Talks

To be, or not to be

While US’s trade battle with the East continues to brew, focus has now shifted to its neighbours. The bone of contention – contents of the new and improved North American Free Trade Agreement (NAFTA). The three signatories, US, Canada and Mexico, have officially begun talks to update the 23-yearold trade agreement. And with US President Trump following through on his pre-election vows to withdraw from TPP and Paris Climate Accord, the future of NAFTA hangs in balance.

During the first round of negotiations, Robert Lighthizer, US Trade Representative (USTR), minced no words and toeing Trumps stance on NAFTA has demanded major changes in areas such as rules of origin, labour provisions and provisions for preventing currency manipulation. Regarding the rules of origin, US has been stressing on increasing the requirement for the percentage of NAFTA country components in products for availing benefits. Mexico and Canada both count US as one of their largest trading partners and any changes to the deal may work against them. Trump has repeatedly warned that he wants a major overhaul of the treaty and that US may consider withdrawing from the deal if it is not to their liking.

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The two important rules for Canada are Chapter 11 and Chapter 19 – while Chapter 11 provides for protection of cross-border investments, Chapter 19 refers to a dispute settlement mechanism. The US government, which has often been at the losing end of Chapter 19 cases, has pushed for its removal. The Justin Trudeau-led government has recently threatened to pull out of the agreement if US continues to push for its removal. While there is no definitive timeline for the negotiations to end, an early 2018 date is reported to be on the USTR agenda.

With US’s focus on protecting domestic industry and Mexico and Canada pushing for more cross-border trade, the negotiations are expected to be protracted. The big question is will US manage to arm twist its way or will Canada and Mexico manage to withstand the Trump storm?




Leading by example

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At a time when questions are being raised on the feasibility of the OPEC deal, Saudi Arabia has followed through on its commitment and is expected to cut exports by 10% to North Asian refiners in September 2017. While the cut is expected to remove some excess oil from the market and stabilise prices, it may also push India and China to source more oil from US and other non-OPEC countries, resulting in Saudi Arabia losing some of its traditional markets.

In November 2016, OPEC nations had pledged to reduce crude oil production by at least 1.8 million barrels per day from January 2017 to March 2018, which is likely to get extended by another three months. Many OPEC economies like Saudi Arabia are highly dependent on oil and are hoping that this time, with the production and export cuts, they will be able to stem the decline in oil prices.




Opening doors

While the developed world continues to spar on the pros and cons of free trade, emerging markets have vowed to tackle protectionism front and center. During the recently held BRICS meeting in Shanghai, Brazil, Russia, India, China and South Africa vowed to fight the barriers to international trade and the growth in protectionism. This announcement was made at the end of a two-day meeting held in Shanghai between the trade ministers of the BRICS nations. The member nations have also vowed to strengthen investment ties and strengthen bilateral trade links amongst themselves.

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This meeting was a part of a series of meetings being hosted by China (which currently has the BRICS presidency) before the main 2017 summit to be held in Xiamen, Fujian Province between August 31 and September 4. The event hopes to discuss developing a strong framework for economic cooperation between the members. This recent meeting also saw ministerial approval on IPR guidelines amongst the five nations.

This is not the first time that the BRICS nations have spoken up against protectionism. Just about a month ago in July, at the G20 Summit, it was the BRICS nations that had spoken up and requested the G20 nations to work towards and continue to strengthen a free and open trading system across the world.



Dropping anchor

China, under its ambitious OBOR initiative, has made yet another strategic move by finalising a deal to buy 70% controlling stake in Sri Lanka’s Hambantota Port. The port will now be run by the state-run China Merchant Port Holdings (CMPort). Under the 99-year lease, CMPort will invest $1.1 billion for “marine and port-based developments.”

The trade unions in Sri Lanka have pilloried the deal as a sale of its ‘national asset to China’. However, Sri Lanka’s mounting debts to China (estimated to be around $6 billion) became a major factor in sealing the deal. The port itself had accumulated losses to the tune of $300 million and the offer from the Chinese made perfect financial sense.

The deal has also raised security concerns in India with India anticipating the presence of the Chinese navy near its territorial waters. Sri Lanka has however clarified that while the port will be maintained by CMPort, the Sri Lankan Navy will continue to hold control over the port’s security to prevent the port from becoming a Chinese navy base.

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In recovery mode

While the big news in the world of trade has been the turmoil in the west, the African economy has been quietly making steady progress. Studies have revealed that the intra-Africa trade volume has the potential to grow at a rapid clip if the nations can address the issue of market information. To add to this, presently 54 African nations are working to create a single market under the Continental Free Trade Agreement (CFTA) and the first round of talks on the framework of the CFTA is expected to conclude by the end of 2017. The accord is expected to boost intra-Africa trade multifold. On the India-Africa trade front, GoI estimates that by 2021 trade between India and Africa will reach $117 billion. Meanwhile, Africa-China trade too witnessed a 19% y-o-y increase in the first half of CY2017.

Not all is good news though and disappointment came in the form of the failed Africa-US talks on review of the African Growth and Opportunity Act (AGOA) free-trade deal that allows tariff-free access for 38 African countries to the US market. The deal, which is stuck in a quagmire, will expire in 2025.

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