Kal Raustiala 0:06
Good morning, everyone. I'm Kal Raustiala, director of the UCLA Burkle Center for International Relations. And it's my pleasure to welcome you to our first event of 2021 with Jennifer Hillman, who I will introduce properly in a moment. So first a couple of things, I want to apologize right off the bat, there is construction outside of my home, which I cannot control. And so there may be jackhammering in the background, hopefully not too disturbing. Second, our event today is co sponsored with the UCLA Law School's International and Comparative Law program. So we appreciate their support. And let me just introduce a little bit of what we're going to do, and the format is familiar if you've been to these before. I will introduce our speaker, she will come on and speak for maybe 15 minutes, she and I will then have a joint conversation about her remarks and general issues around global trade policy. And then we will open it up to questions from all of you. But in the meantime, you can be sending your questions in through the q&a feature. So that is open or will be open shortly. And you can send them in, I encourage you to do so as we're talking. And then also ask questions to pose to Ms. Hillman.So with that in mind, let me begin just by noting, of course, a lot is going on in Washington right now. In fact, at the very moment that we're here together, the impeachment proceedings are beginning. But the world has not stopped turning in the meantime. And so outside of the United States, many things are happening. And one of the most important areas, of course, is what's happening in the global economy, both to address trade and investment and other issues that have always been with us, as well as what happens in light of the COVID pandemic that is still wreaking so much havoc, here and elsewhere. So I'm really pleased to have someone who's a real expert on global trade policy with us today. Jennifer Hillman is a senior fellow for trade and international political economy at the Council on Foreign Relations. She has previously taught at Georgetown University Law School, she was a judge on the WTO (the World Trade Organization's) appellate body, essentially its Supreme Court, and so has extensive experience in trade disputes, and has practiced law in various ways over the years as well. She's a graduate of Harvard Law School and Duke University. So with that in mind, I'm going to invite Jennifer Hillman on to present a few remarks. And we'll take it from there. Thank you, Jennifer.
Jennifer HIllman 2:49
Well, thank you so much. It is a pleasure for me to be here. So greetings from Washington, DC to all of you that are lucky enough to be out in California these days. It's an honor to be here. I thought I would just take a little minute to kind of take us back to the rollercoaster ride that we've been on in the last four years over over trade to review a little bit about sort of what's happened, and maybe more importantly, why has it happened and then where we might be headed. So I think if you think back to what the Trump administration has done in the trade space, it's pretty clear that it's been quite a significant departure from where we've been in the past. It is very much that America first kind of an approach. It's also been very much a function of the fact that, as President Trump has liked to describe himself, he's the tariff man. So we've seen an awful lot of tariffs. And I would say it's also been added to a bit of a disdain, if you will, for multilateral rules and multilateral institutions, particularly the WTO. So if I just kind of step back and review the bidding in terms of what's happened, I think it's important to remember that on his second day in office, President Trump withdrew the United States from what was then known as the Trans Pacific Partnership, which had it come into being, would have been, you know, a very significant, major agreement, creating free trade in goods and services among, you know, 13 countries representing 40% of the world's GDP, 36% of the United States' two way trade would have been involved in this major agreement, which was in many ways the Obama administration's ideas for how to both modernize the North American Free Trade Agreement, the NAFTA, and how to how to create a high standards, high rules kind of an agreement as a contrast, if you will, to China. But that didn't happen. The Trump administration pulled out. Secondly, the Trump administration then fairly immediately imposed tariffs, 25% on steel and 10% on aluminum, in the name of national security They kind of dusted off a really old 1962 statute that even those of us that, you know, practice trade law and teach trade law had to kind of dust off our rule books to figure out what is this 232. And they immediately imposed these tariffs, which created a huge pushback from our trading partners, I would say, particularly Canada, Mexico, and the European Union and Japan saying, "What do you mean, we are a threat to the national security of the United States? How is that possible that you're saying that our trade and our relationship with you threatens the national security of the United States," but nonetheless, the Trump administration went ahead with it. And again, I think, important to note is that the rest of the world didn't just sit still; they responded by retaliating and putting lots of tariffs on American goods that were going into those markets, particularly agricultural goods. So we then have seen, you know, again, huge difficulties in our farm sector. Then a month later came the announcement that the Trump administration was going to impose tariffs on China under a separate, you know, set of rules under Section 301, based on a finding, and I think a very well documented, well accepted set of findings, that China had been engaged in a lot of theft of intellectual property, a lot of forcing of the transfer of technology to China, and a lot of unfair practices that have resulted in a burden on the United States. And therefore, the United States was putting on these tariffs. And the theory of Section 301 is the point of the tariffs is to create leverage. I mean, it's supposed to create some willingness on the part of China to try to negotiate an agreement in order to get out from under those tariffs. So we then had a huge escalation, it started out with $50 billion worth of tariffs, and over a series of actions, China put on retaliatory tariffs, then the United States put on more tariffs, then China retaliated with more tariffs of its own, then the United States retaliated some more... we've ended up at a place where we have tariffs on about $370 billion worth of imports from China, over three quarters of everything China ships to us now has to pay these additional tariffs. And about $170 billion worth of American goods going to China are also paying higher tariffs. And at the end of a long series of discussions, we ended up with a so called phase one trade agreement with China that basically did a number of things in terms of asking China to make some changes in its intellectual property rules, and its agricultural rules. But at the heart and soul of it was this notion of China, you should buy $200 billion more of US goods. And the problem with that is, you know, all of this has sort of begged the question that, you know, has been out there now, throughout this entire debate of what is the United States really want out of this agreement with China? Is this really just a ruse to put a big tariff wall around the United States so that we're protecting American companies from competing with Chinese goods? Is it really because what we're trying to push is a complete decoupling of the relationship between the United States and China and basically forcing American companies that are doing business in China to effectively pull out?Is it that we really actually just want China to figure out better rules on intellectual property or technology transfer? What exactly is the goal? And I think that remained unclear at the end of the phase one agreement, particularly because the agreement did not touch on a lot of what is at the core of most complaints about trade with China, which is the degree of state intervention in their economy, the degree of state owned enterprises, the size and scope of the state owned enterprises, and the degree to which the Communist Party is sort of controlling everything in a way that works only to China's advantage and to the active disadvantage of the United States. So we get all of these things brewing. And then you add on top of it, that to some degree, the Trump administration either started or certainly was not able to work out an ability to fix the problems that we have with our trade with the European Union. So again, outside of the NAFTA, our single largest trading partner would be the European Union. And yet we're in skirmish after skirmish with the European Union, against subsidies on Airbus and subsidies on Boeing and both countries have retaliated by putting tariffs on and then we're having a big fight now with the European Union over the fact that France has imposed taxes on digital services. So this would be big taxes on Facebook and Amazon and Google and Apple. And, and again, so the United States has said "No, France, you cannot do that." France has said, "Oh, yes we can." We're in a slight bit of a truce right now. But again, lots of concerns about where this is headed. And then the last thing that is very clear that the Trump administration has done on is actions on the multilateral front. So on the one hand, the good news is that they were able to successfully renegotiate the North American Free Trade Agreement. And again, it was basically just take the NAFTA and what they did was in essence, add in a lot of the newer chapters out of that TPP agreement that Trump pulled out of at the beginning, a lot of those chapters in those texts were just pulled into this new revised USMCA. But they also added clearly at the behest of the Democrats in the House, they added a lot more provisions with respect to how are we going to enforce labor rights under this agreement, they increased rules of origin and a number of other things. To me, what was really significant about the USMCA is that for relatively modest changes to the underlying NAFTA, the agreement went from one that was very much condemned by a lot of people, particularly President Trump, to an agreement that passed with 89 to 10, as the votes in the Senate, 385 to 41 in the House of Representatives, so it got overwhelming bipartisan support, which is something that has not happened in decades. It also got the support of the AFLCIO, the first time a major labor union has supported, you know, any kind of a trade agreement since the US-Jordan little tiny agreement, and certainly not a major agreement again in decades. So again, maybe a new paradigm in how we think about trade agreements that can get through the Congress on bipartisan support. Not sure yet. But again, I would argue a positive development. The other thing, though, on the multilateral front that the Trump administration has done is to basically push back very, very hard on the WTO and been very critical and and in many ways, working to kind of tear down the WTO, starting with tearing down its Dispute Settlement system. The dispute settlement system requires there to be an appellate body (that's the that's the body that I sat on for a while) that is this kind of Supreme Court, if you will, the final adjudicators of disputes. Obviously, it requires that there be judges sitting on that body and the United States has blocked all of the appointments to the appellate body such that it no longer has anyone sitting there. So there is no appellate body. And the problem with that is, if you end up... the appellate body is an appellate review. So again, it is taking an original panel decision and reviewing it to make sure it's consistent with the law... so what happens now is if you get that original panel decision, and you don't like it because you lost, you can appeal the case to this non-existent appellate body. And under the rules of the WTO, as long as an appeal is pending, nobody can do anything with that case. So you can just, in essence, send your dispute into kind of limbo, because it will never be, it will pend forever, if you will, because there isn't any appellate body to decide it. The other thing that the United States did, you know, just very recently is the WTO needs a new Director General, a new head, and there been a long process to try to figure out who that should be. And consensus had been reached that it should be a woman, Dr. Ngozi from Nigeria, was the selection of everybody, in essence. And the United States at the very last minute said no, not us. We don't want Dr. Ngozi so we are now still without a leader at the WTO. So why is all of this happening? I mean, I think it is worth sort of stepping back and saying how did we get to this point with all of this kind of unilateral activity, all of these tariffs etc.? And from my perspective, I would say it's both a bit of a failure on the communications, I mean, that we haven't done a good enough job in terms of how we talk about and do research and conduct ourselves around trade. But it's also to some degree, a failure of the substance. You know, on the communication side, it's pretty clear to me that the President was able to basically say to all you know, to a lot of Americans, whatever it is that you really think is ailing you, that you haven't gotten a good wage increase, that the road in front of your house is crumbling, that your schools are not as good as they used to be, blame it on foreign. Blame it on foreign people, which is why we need to build the wall and keep out all immigrants, blame it on foreign goods, which is why we need all of these tariffs to try to keep foreign goods out of the US market. Increasingly you're seeing blame it on foreign money because we're going to start making sure that investments are much more heavily screen and we're not going to allow a lot of investments to come in. But in general it's this notion of whatever you think is wrong, blame it on foreign. And therefore, anything and everything that I do, as President Trump is saying to sort of stop the foreign, is considered you know, sort of a good thing that helps Americans and helps again with this whole America first message. You know the problem has been that that's not how it's actually worked out. I mean, the tariffs were supposed to help the steel industry. And we haven't seen that. I mean, what we've seen, you know, is yes, temporarily, there was some increase in the amount of steel production and steel employment. But over the long haul, it's been the opposite. We've seen, you know, price declines, production declines, employment declines. So even these industries that are highly protected are actually not doing as well, and everybody else is suffering, because all of the other prices, particularly the prices for downstream products that have to be made out of steel, are very much suffering. But there's also to me been a failure on the substance side, I mean, part of it is that the rules, the trading rules, have not done a good job at disciplining subsidies, state owned enterprises, and a lot of the non marketing practices, non market economy practices coming out of China. So I mean, there's been a huge failure of the system to be able to rein in the unfair practices from China that are causing, you know, a huge amount of troubles. But it's not just there. It's also a failure within the United States where we have seen, you know, our corporations become uniquely focused on shareholder value, and not so much on caring about their workers or their communities. We've seen a huge increase in the wealth gap in the United States, were you seem to get big, big divides, and you've seen a huge failure to invest in in people in long term worker training, in portable pensions, in good healthcare. So we've seen a big decline in all of the things that would keep America competitive. And I'm gonna pivot there and say while all of these things have been happening in the United States, while, we've been turning very internal and we've been erecting these tariff walls around our borders and staying out of most of the international agreements, the rest of the world has gone in the complete opposite direction. Just since November 15 alone, we have seen three major trade agreements be entered into elsewhere in the world. The first and the biggest would be the Regional Comprehensive Economic Partnership in Asia. So again, this is a huge agreement joined by China, Japan, Korea, and then the countries of the Association of Southeast Nations, again, signing this major, major agreement that covers basically a third of all of the people in the world and a third of all of the goods and services that are traded in the world are covered under this big, big new agreement, which is going to you know, clearly and forcefully stimulate a lot of intra-East Asian integration around China, and to a lesser degree, I think around Japan and Korea, but heavily around China. So major new agreement moving ahead without the United States. Second sort of huge agreement reached a you know, again, on December 31, effectively, was an agreement between the United Kingdom and the European Union. Again, this is in response to Brexit. So when the UK decided to leave the European Union, then the question comes, what's going to happen to all of the trade and again, the European Union is the UK is biggest trading partner. For the EU and many of its member states, the UK is a major trading partner. So the question came, what's going to happen if there is no agreement between the UK and the EU? What happens to all that trade? You know, and the answer to the question is all of that trade would have had to take place under the WTO rules, which has huge implications for both sides. I mean, and again, huge implications for even the United States. I mean, let's let's just take a look at for example, automobiles. The US has a lot of auto production facilities in the United Kingdom, particularly in Northern Ireland. Right now, all of those cars, and we ship a lot of car parts into Northern Ireland, they're made into cars in Northern Ireland, they then ship into the European Union to be sold in the EU. Worked just fine, no problems at all. Along comes Brexit. And without an agreement, what would have happened is the parts would have shipped into the UK, and then once they're made into a car, they would have to then pay a 10% tariff in order to ship it into the the EU. And more importantly, they would have had to be inspected and go through a whole regulatory process that cost somewhere between $3,000 and $5,000 a car. And when you add those two things up, the 10% tariff and the regulatory barrier, now all of a sudden that car is not competitive to be sold in the European Union. So again, huge implications across every kind of area. Finally, at the 9th hour, 10th hour, or 20th hour really, there was an agreement between the UK and the EU to continue to allow duty free trade. So now the car will move without paying the 10% tariff, but there will be regulatory barriers. So you're going to have to have everything be inspected and checked when it goes from the UK into the EU and huge other issues that we could talk about with respect to everything connected to Brexit. But again, nonetheless a very significant agreement. And then the last one was reached just recently, again, on the 30th of December, an agreement between the European Union and China over investment flows. And again, this is a huge amount of investment, 140 billion euros of foreign direct investment going from Europe into China, 120 billion euros coming back from China into the European Union. And again, very significant for China and the EU to reach this kind of comprehensive agreement. Part of the reason it's so significant is because the Biden administration's Jake Sullivan, the incoming National Security Adviser, effectively said, "Don't you do this, European Union, we want to work with you so that the United States and the EU can get together and have a common approach to China. And neither one of us is going to solve our difficulties with China alone. So let's get together." And effectively the EU, by moving ahead without the United States, is basically saying, "No, thanks, we're gonna do this ourselves. We're not waiting for you." So I think significant, both political and economic issues connected to it. So I'm going to just close with a few things on where are we headed? I mean, where is this going to all end up? And here, I will say, the first thing that I think is happening is already happening, but it's going to get much, much more significant is the growth of regionalism. I think we are going to see some serious cutbacks in the amount of truly global trade, and much, much more trade is going to take place at the regional level. So I think you are going to see, if anything, a real tightening of the amount of trade between Mexico, the United States and Canada. And maybe we're going to add in a little bit more trade in the Central American region, maybe even into some of the Latin American countries. But I think that means we will also see a diminution in the amount of our trade with China. And I would say the same thing is going to happen, Asia is going to concentrate on trade with Asia, the European Union is going to concentrate on trade within the EU and to some degree, North Africa and the Middle East. But we are all going to get a lot more regional. Secondly, I would say the WTO is on a knife's edge. I mean, it is really in a state of crisis. And so it's possible the Biden administration has clearly indicated that they're interested in reforming the WTO. They're interested in multilateralism and multilateral rules. And if the United States, I think, can take a real leadership role and help the WTO improve, and we can talk about if you're interested what that would take, maybe the WTO can survive. I think in the absence of it, I see it kind of sliding into sort of an irrelevant or not certainly very useful institution. The third thing that's coming is a huge denouement, if you will, with China. I just finished last night writing a huge taskforce report coming soon in March, just as a little plug from the Council on Foreign Relations, on China's Belt and Road Initiative, and the kind of risks that that Belt Road Initiative presents to the United States. And those risks are huge, because the Belt Road Initiative is causing a huge increase in the amount of debt that countries cannot afford. So you're gonna see more and more countries have huge issues with debt sustainability. Part of the BRI, from China's perspective, has been exporting 274 coal fired power plants. So you're going to see a huge issues with respect to whether or not anybody can meet their climate change goals if they're starting to have more and more power being generated through coal fired plants coming out of China. You're starting to see huge issues with respect to the degree to which the BRI is allowing China to get much more sort of political both hard and soft power in a lot of these countries where it's building so much of their infrastructure. You're starting to see everything from environmental damage on down. So again, a big concern over where BRI is taking us and where overall, the China relationship. And last but not least is what COVID is doing to trade and to trade agreements and to the trading rules. Because there is no question that the outbreak of COVID caused everybody to take a look at where exactly am I getting my protective equipment from? Where am I getting my pharmaceuticals from? Who is producing and making all of the drugs, all of the vaccines? How are we going to get the vaccines distributed? And it has caused, you know, a lot of countries to turn inward, to say, as you saw many, many members of Congress say, we're no longer going to be so reliant on China for any of this. I want the United States to be completely self sufficient in PPE, in certain pharmaceuticals, and in all of the things that it will take to fight COVID. Problem is we don't have a lot of that production here in the United States. So again, it's unclear how fast we can move to being more self sufficient in any of these things and how fast we can unwind all of the major, major supply chains that are involved in producing all of the drugs and the PPE and the medical equipment and everything that is involved in this. So it's caused everybody to start re examining the value of global supply chains and whether or not we're going to continue in this world in which, you know, everything is made everywhere and nothing is made in any one location, and what are the costs and the risks and the benefits of doing that, and a lot of attention on how do we make our supply chains both more resilient and how do we build in some redundancies, so that if we have another crisis of any kind, whether that's brought on by climate change, or whether that's brought on by another pandemic, or anything else... How do we have more resilience and more redundancy in our supply chains in a way that is good and yet is consistent with with the trading system? So I will just end by saying there is lots to study, lots to think about, lots to write about. So I'm going to encourage any and all questions and hope that this is the beginning of a conversation because it's clear that our trading systems, our trading rules, and our trading partnerships all need a lot of creative thought, a lot of time, a lot of attention, and clearly need some significant reform. So I will stop there and look forward to your questions.
Kal Raustiala 26:26
Great, thank you, Jennifer. That was a fantastic overview of so many interesting issues, which I imagine we'll address only some of them in our discussion and in the questions coming in, which are, which are really interesting. So let me just start with kind of a little bit of a puzzle or something I just, I guess, don't really understand. And I'm curious what you think. So on the one hand, I've heard over the years, the last few years, many instances in which the nature of US trade politics seems to be changing, and what used to be a pretty strong bipartisan consensus around free trade. Maybe more Republican leaning in the past, there was so much more resistance for many of the reasons you just gave to the idea of an open economy, open global economy. And yet on the other hand, you pointed out how the USMCA passed overwhelmingly. And so I'm just curious at a kind of political level in this country, and then we'll turn outward a little more... Do you think that there is really a consensus of any kind around future free trade agreements, or just a more open approach to the global economy? You pointed out at the end the issues of COVID, which I think will really play out in in ways that are kind of hard to predict, but I totally agree, it's going to generally make people more hesitant. So where do you see this going in terms of our ,you know, our politics?
Jennifer HIllman 27:50
Well, it's a great question. And it's very interesting to me, if you look over time. So again, when when the NAFTA was first going through in the mid in the, you know, 1993, the Uruguay Round that created the WTO went through in 1994. At that point, it went through on heavily Republican votes with a small cadre of, if you will, center Democrats. So it used to be the center, the center that clearly supported it, more skewed towards the Republicans. If you look now, and particularly look at the polling data, you have seen a huge shift. And again, if you look at the data now trade actually in trade agreements, and the idea of being engaged in the world is actually much more popular than it was even in the 1990s. And what's interesting is in the look at the breakdown of who is in favor of more trade and more openness. And again, it clearly skews towards younger people. So again, anybody that is younger and more well educated, is going to be in favor of a more open economy. And that's true, not just in the United States, again, if you looked at, you know, the votes around Brexit, and sort of who is for and who is against, again, young people tend to say "I want a more open economy, I want to be able to buy stuff from all over the world, I want to be able to travel all over the world, I want to be able to study all over the world, I want to be able to work all over the world. And I'd like to work in a company that is interesting, and is doing things in all these different hubs. And maybe I want to end up in, you know, a year in Bogota doing something really cool." So you have a huge, huge shift now. And the problem is I don't think the politicians have kept up as much with where their constituents are, because a lot of the politicians are still hearing the kind of older line messages, and the older line message was always unions oppose trade agreements. And therefore, to the extent that Democrats are perceived as close to unions, they were anti trade agreements, Republicans were close to, you know, corporate america and therefore they were for trade agreements, because that's where corporate America has come. And all of that is changing. And part of it again is this is this youth shift. And part of it is also a big shift in what we trade. You know, again, a huge change to much more digital trade. I mean, what are we trading now? We're trading data that's going up into the cloud, we're not trading as much, or certainly, as a percentage of all trade... digital and services are way higher up in the lexicon of what we're trading. And that, again, changes the politics because you know, sort of who is involved in that digital trade, who is much more involved in services trade, is a different mix than old line manufacturing that has that union component to it. So I actually think we're not really headed for a complete close- down. Because, again, as trade gets more digital, you're not going to stop it. I mean, you you aren't going to just shut off data coming from the cloud up there that doesn't belong in any particular country. You know, again, China, and others may be trying to say we're not going to allow foreign data in, but it's very, very hard to do that.
Kal Raustiala 31:03
I'm really glad you raised the issue of digital economy and services. And so as you know, and maybe some of the viewers do as well, our economy is about two thirds services. And when you think about it, the media narratives around trade often do depict this very 1950s view of you know, some Ohio factory making some widget that's going to go to some other country. And that's not really a big part of trade anymore, as you just pointed out. So maybe two things to address: one, just make clear to, to all of us what it means to have digital trade. So when you talk about that data, what does that actually mean, make that a little more concrete. And then where is that going? Do you see that just continuing to grow or do you see other forms of pushback on the digital economy, and I'm particularly thinking of the pushback in many parts of the world against American technology companies, which are are dominant?
Jennifer HIllman 31:58
So again, digital is one of the ones that's really hard, because it doesn't fall into any of the traditional buckets. So again, when we think of trading goods, you know, that's a physical object, and it's going to cross a border. And we know when it crossed the border that it has to pay a tariff of whatever is in the tariff schedule. And that's all pretty clear, you know that when it when it crossed that border, then it's been traded and it has to pay this tariff. And we have then also rules about how do we know where was that good made? Was it made in the United States or not, and we have all these rules of origin. So on the goods side, you know, we pretty much know what the story is. When you flip over to services, which is what most of the digital things are, it's much harder, because a service can trade in so many different ways. I mean, a service can trade in the sense that I am sitting in the United States, but I downloaded software that was written, you know, in India, and I've now pulled that software onto my computer and downloaded it, or I've put that app on my phone, I've now traded in the service. If the app or the whatever or the software was created somewhere else, you know, that is a trade in a service, and it can be anything from, you know, an insurance policy, a banking product, a financial services product. You have all of these now, services that are traded digitally, but you still also have a lot of services that are traded (if you know back in the olden days, when you get on a plane and fly somewhere else, or a student that is studying abroad) that is again, a trade in the service of education, a trade in the service of tourism, but it didn't occur in the same way that a goods thing is traded. You add digital on top of it, and it's even more complicated. Because, again, what's the origin of something that's up there in the cloud? And you have a lot of the issues about, okay, even if you were going to try to charge a customs duty, which some countries are wanting to do on that trade, when actually did it cross the border? Which border did it actually cross? How do we know any of that, you know, gets to be very complicated in terms of how you think about it. And it gets very complicated because so much of what is about digital is about data. And that then gets into this issue of can you even stop data from crossing the border? I mean, is that even possible, technically or any other way? Secondly, should you/could you put rules on where data has to be stored? And that's one of the big fights of should we say that all all American financial bank records have to be stored only in the United States and they can't leave the United States for privacy reasons? Again, that would have a huge implication for whether or not you can have back office operations somewhere else. Can I actually have somebody in India read my X-ray, can I actually have a call center somewhere else? So all of that gets affected by whether or not we do or do not have trade in digital services. You see this for example, coming up very clearly in this fight over whether or not you can tax the digital service. One of the issues that gets raised by all this digital trade is this issue of where do we tax corporations? Because there's a sense, you know, the corporations ought to be paying their fair share of taxes. And and the issue has always been, you know, the logic had always been that international companies should be taxed where their headquarters are and where their physical headquarters are, where they're primarily doing business. And then there were all these transfer pricing issues about companies that were doing business in multiple places. Now all of a sudden comes all this digital trade: everything Google does, Facebook does, most of what Apple does, you know, Amazon. These are heavily heavily digital companies. And so the other countries around the world are saying, "Now, wait a minute here," you know, France is basically saying, "Look, Apple and Facebook and Amazon, you're making a lot of money off of French consumers. French consumers are clicking, clicking, clicking, and that's giving you a lot of revenue. And that's giving you a lot of ad revenue, it's giving you a lot of data about what French consumers like and what they don't like. And it's allowing you to tailor your ads. You should be taxed on the activity that's occurring in France. So we are wanting to put a tax on your digital revenues that come from effectively French consumers." And immediately, the United States says, "No, you can't do that. I mean, those are American companies, we tax those companies, not you." And so again, you're seeing these digital issues, raise all of these complicated questions, that the rules that were written in the 1990s have nothing to say about because there wasn't any digital anything in the 1990s. So there aren't any rules. And the whole world is struggling to try to figure out how do we bring those rules into some kind of order so that there isn't every country doing their own thing and everybody having to comply with, you know, 170 different rules around the world, which would arguably destroy digital trade.
Kal Raustiala 37:00
That's fantastic as an overview, and I hope there are law students watching and listening and realizing how many interesting questions are raised by that. Let me ask one final one, before I turn to the audience, just related to what you just said. So a digital economy is one that, as you pointed out, isn't necessarily clearly geographic. So where is the cloud? Now there are data storage centers, and there's actually a lot of litigation around questions about where, you know, data stored, and so forth. So it's not, it's not as if there's no geography, but the geography is a bit different. You earlier in your remarks pointed out how we seem to be moving from a global approach to trade to a more regional one. And I'm just curious how you see those two trends intersecting. So can we have a more regional global economy or a more regional economy that's also a more digital one? And what does that even mean?
Jennifer HIllman 37:50
Yeah, and let me just start by saying the fact that I think we're going to end up more regional is probably more goods-oriented, and traditional services-oriented than digital. So I think probably some of the digital is the exception to the rule. But part of it is, again, if you think about what to some degree, the pushback against globalization writ large has been, it has been this issue of whether or not it's costing jobs. And those are both manufacturing jobs and services and digital jobs. But if you look at it, there is, and I think part of the reason why the USMCA agreement went through, is because when President Trump initially said, "I'm getting rid of the NAFTA", you immediately heard all of a sudden this human cry, "You can't do that, you know, we rely on the NAFTA." And all of a sudden, it became very clear that, yes, we rely on the NAFTA, and we have a tremendous amount of trade between Mexico and Canada that just cannot be uprooted. And so when you look at , for example, the average import from Mexico already has in it 40% American content. So again, already, there's a lot of American jobs and American, again, tax revenues, American everything connected to everything that we're importing from Mexico. With Canada, it's in the 20s. With China, 4%. You know, so again, when we're trading regionally, we still are keeping a lot of the jobs and a lot of the economic activity and a lot of the tax revenues local. When you go global, not so much. And and so I think that's part of what's going to drive this much more regional integration. The big exception is going to be digital. Because I don't see, you know, a significant reason why digital trade would necessarily become more regional. I think it will remain, you know, highly global unless countries start creating new rules. And obviously, the concern is very heavily in China, where you are seeing, you know, where there are significant censorship bans that act clearly as a barrier to trade. I mean, if any of you have been to China recently, and try to get anything out of Google or Gmail or any of the Google Apps... Nope. It's completely and totally banned. And you can try to do, you know, various workarounds, but fundamentally China is basically saying... a whole lot of what we think of as just, you know, Google it and figure it out, not in China. So to the extent that you have those markets like that, that are trying to create either a separate space or to wall off, there you may see even some regionalization in the digital space. And here's where I do think that there is the prospect, at least, of having two lanes, if you will: the US or Western lane, maybe we call it and a a China-centered lane. Because there's no question that China is, you know, again, they're installing 5G everywhere in the world, they are taking over at the standard setting organizations. So if you look at the leadership of all of the organizations that set standards for telecommunications, you know, it's heavily dominated by the Chinese, the vast majority of the proposals that are going in for technical standards on how things operate, connecting to each other, are being written and driven by China. And we may end up at the point where their systems and our systems are not interoperable, and can't talk to each other. And we may end up in this very sort of two-lane approach to digital trade, in which case again, you would see even digital trade become more regional.
Kal Raustiala 41:27
Great, thank you so much. So let me go to the audience questions, which we have quite a few good ones. So the first one is, what is your perspective on what Joe Biden's expected trade priorities will be? So what do you see?
Jennifer HIllman 41:41
Okay, I mean, I, I'll just start with what President-elect Biden said, I mean, I think it's very clear that first and foremost, he said that they don't expect to engage in new trade agreements until and unless we've made some significant investments at home. In other words, until we have a more competitive workforce, until we've invested in our American workers, in our infrastructure, in our innovative economy, we're not going to keep opening up the US market to more trade until we've gotten our own house in order. So on the new trade agreement front, I don't expect much. As a general matter, I expect a big change in attitude, because I think the Biden administration is going to say we believe in multilateralism, we believe in rules based trading system. So I think you will see a greatly significantly increased role at the WTO, or at least initially to try to see if we can get a multilateral rules approach going. I think, thirdly, you will see the Biden administration start to partner with others on an approach to China, instead of our go it alone, our tarrifs by ourselves, our fight by ourselves with China, I think you will see the Biden administration try to immediately reach out to the European Union and Japan and Korea and Australia and Canada and others to say, "Okay, we've all got a problem with certain of China's unfair trade practices, can we all get together and come up with a solution that would have a lot more chance of having an actual effect on China than the go it alone in front." So those things I think you will definitely see. What they're going to do with the steel and the aluminum tariffs, I think, remains to be seen. Again, I think there still is a sense that you're going to have to work with trading partners to figure out the right answer. But in general, I would say much more multilateral work with allies, get everybody together, see if there is a like minded group of countries that can agree on some of these things, including new rules for digital trade. But again, get a get a group of like minded countries together to agree on the path forward.
Kal Raustiala 43:43
Okay, second question. What types of reforms do you feel are most important in restoring the central role of the WTO?
Jennifer HIllman 43:51
So again, the WTO, to me, is just really badly out of balance. If you think about the WTO, it has kind of three legs on the stool. One is the sort of rule-making part of the organization, which is the negotiating function, and it is just as close to dead as it could be. Only one new agreement since 1995 on trade facilitation, it's had pending before it an incredibly important agreement to limit the amount of subsidies that we're giving to fisheries, because we are overfishing our oceans, and we've got to cut it back. And again, their hope was that there would be an agreement in December, didn't reach it. So again, the negotiating arm of the WTO is simply not working, so you've got to fix that. The second leg of the stool is the executive branch, if you will, that's the Secretariat of the WTO. And again, its major function is a transparency one, where it's supposed to be collecting all of the rules and all the notifications so that you can go to one place and find out everybody's trading rules. And the problem there has been that a lot of countries are way behind on their notifications, so it doesn't serve the transparency function that it really needs to. And the staff who was excellent, I mean really, really high quality staff (for any of you out there who have any interest, I would strongly recommend the WTO as a great place to work), they a lot of expertise, but they don't have a lot of power. In other words, all of the proposals are supposed to come from the members of the WTO, the individual countries, not from the staff or the Secretariat. So they have a limited role. And again, countries are not complying with all the notification rules. And then you shift over to the third branch, the judiciary, if you will, which until the United States killed, the appellate body was extremely strong. More cases in front of the WTO Dispute Settlement system than any other international court with the sole exception of the European Union Human Rights Court. But again, huge numbers of cases, major decisions, really important work being done by that Dispute Settlement system, but now the United States has effectively killed it. So you have that this system is really, really out of balance. And again, my own view had been, you know, the judicial system was way up here and everything else was kind of down here. My own sense was we would have been better lifting up the other arms. Obviously, the United States' approach is to push all of them down to the same sort of low level. I personally think that you're going to have to start with fixing the appellate body. Because I think it's really hard to tell country's "Well, you should commit to all these new things", if there's no way to enforce them, how willing are they going to be? And then secondly, I think you've got to get the negotiating arm going again. And to me, you do that by agreeing that you can have agreements that don't include everybody, that you have what they call plurilateral, in WTO terms, Annex 4 agreements, where the coalition of the willing gets together and agrees to these rules that apply to them and among trade with them. And if you're not in, you're not in. So I think they're going to have to do more, you know, so called Annex 4 plurilateral agreements to get that negotiating function going.
Kal Raustiala 46:53
There were a couple of questions that addressed the issue of the appellate body and the fact that this very strange strategy of just sort of killing it off and allowing cases to to simply pend forever seem to really take the teeth out of it. So I'm curious, do you see this (as something that was raised in one of the questions) do you see any prospect to change that rule, so in other words, to take away the advantage of indefinite pending?
Jennifer HIllman 47:20
I think more likely what I see is either the restoration of the appellate body, or what's happening right now is led by the Europeans and some of the other countries (you know, Canada and others) there's been created a multiparty interim arrangement to do effectively the appeals through an arbitration process. So it may be that that arbitration process gets going and in essence shows the United States and the rest of the world that you can do this process in a way that doesn't create the problems that were created by the appellate body. So that's one thought, is that you let this multiparty interim arbitration arrangement get up and running, prove to the world that it can be done, and then you adopt those best practices and bring it back into a formal appellate body. Option two is just to reform the appellate body. And there's been a huge number of proposals and effort. I've contributed a lot to that debate as well. I think there that either one of those, there is fixes to the appellate body that would address the United States' concerns, some of which are clearly legitimate concerns, some of which may be not quite as legitimate. But certainly, you know, you need a serious reform effort.
Kal Raustiala 48:33
Can you articulate a little more what those concerns are?
Jennifer HIllman 48:36
So again, I would say the number one concern that the United States has had is in the area that is referred to as trade remedies. This is decisions that are made that if an import comes into the United States that is dumped, (meaning it's sold at less in the United States than it's sold at at home, or it's gotten a subsidy at home that puts a countervailing duty on it, or it's subject to what's called a safeguard action across all three of those where the United States was taking a lot of actions because of these, these imports) a whole series of rulings by the WTO appellate body effectively made it harder for the United States to use those trade remedies. And so all of the industries that were heavily reliant on using those trade remedies, and that's heavily the steel industry, the aluminum industry, the chemicals industry, to some lesser, much lesser degree, the agriculture folks, they were used to using these rules, and all of a sudden, the WTO rulings have made it harder and harder to do that. So clearly, one of the things that's going to have to change is the way in which the appellate body interprets the rules around trade remedies. So I mean, I think that's unequivocal that that has to happen. So in essence, the United States' argument here is that what the appellate body has effectively done is to take away a right that the United States used to have. We used to have the right to impose, you know, countervailing duties without having to show that China had created a public body. And now you have to show this public body, we used to have the right to engage in a practice called zeroing, which is one of the ways that you calculate the amount of dumping. Now we can't do that anymore because the appellate body took away that right. And so the argument in the United States is, "Wait a minute, we would never have agreed to these things in a negotiation. And yet, you're getting that in a litigation process. And that's not the way the rules were supposed to be done." So that's clearly, you know, one of the ones that's got to be addressed. I mean, secondly, the United States has some legitimate complaints that, you know, the cases started to take too long. They're supposed to be 90 days, and they started to be taking way much longer than that, because there were so many cases and because the cases were so complicated, that the appellate body was sort of going on and on and issuing effectively advisory opinions. And they're not supposed to do that. They're just supposed to decide the case in front of them. So again, there's a lot of these kind of things where I think the United States has made some very good points and very well documented points. But the problem for most of the people in Geneva is okay, fine, United States, you've laid out all the problems, where's the solution? And that I think, is where maybe the Biden ministration would be different and coming along and saying, "You know, yes, there are all these problems. But now let's fix them instead of just killing the system."
Kal Raustiala 51:19
Great, fantastic. So next question. Three major trade decisions in the last month two involving China, none with the US. Does this lend more credence to China's continued rise as the new global arbiter in the absence of US leadership? And how do we combat that?
Jennifer HIllman 51:36
I would say the answer is yes. This clearly means the rise of China. I mean, I think there is no doubt in my mind that you do the combination of RCEP, this agreement with the European Union, and everything China is doing under the Belt and Road initiative. And again, to be really clear, you know, the Belt and Road Initiative, you know, again, initially started out as a promise of $1 trillion in infrastructure, you know, and a huge amount of railroads, highways, ports, etc, have already been built under the Belt and Road Initiative. All of the combination of all of those is suggesting China is becoming the center hub for trade. And increasingly, even the Belt and Road Initiative is going digital. It used to be about ports, roads, highways, railroads, it is now about 5G and artificial intelligence and smart cities and running the electricity grids in smart grids that are controlled out of China and using Chinese technology to control everything from transmissions grids, smart cities, on and on. So as the Belt and Road has gone digital, and as China has engaged in all of these agreements, what I think you're going to see is China becoming the hub, the absolute center, of trade in the world, and certainly in Asia. I mean, absolutely In Asia, and that's coming. And with respect to, you know, again, try to becoming the hub in in Asia, I don't think there is anything that the United States can do. With respect to you know, China basically becoming the center for the entire worl, the answer is yes, there's a lot that the United States can do and needs to do, in my view. It starts though, with, you know, again, as my boss at the Council on Foreign Relations, Richard Haass, always says, you know, "foreign policy begins at home". It's gonna have to start with the United States getting more competitive. I mean, we simply got to put a lot more money and effort into being a more innovative economy, to putting a lot more money back into research and development, a lot more money back into education, a lot more money into bringing in more immigrants and having more graduate students in STEM, in AI and everything else, and having those graduate students stay here and contribute their talent and their skills to the process. So it's got to start with the US getting more and more competitive on its own and also having the United States be much more engaged in the World Bank and in, you know, sort of lending itself. I mean, there are some things the US is doing, but again, not enough. So it's going to take a lot more of that effort and a lot more working with allies again, and in tiny, little ways. It's going to take the United States actually getting reengaged in the standard setting process. Instead of letting China write all of the standards for all of the telecommunications in the world, the United States has got to get in there and say "Now wait a minute, there's a different way that you could do this particular technology protocol, and we don't want it written in a way that only benefits China." So you know, huge amounts of things that the United States is going to need to do, you know, again at home and then out in the world in order to respond.
Kal Raustiala 54:40
Along the way you've mentioned, you just now mentioned 5G, Huawei. One of the interesting things about high technology is the intersection between that and international security concerns, national security concerns. And those seem to be growing, and we see those examples with Huawei and 5G especially but there'll be other examples as well. So how does that fit into either the WTO or any of these other trade settings? How can that be made...?
Jennifer HIllman 55:08
It's a great question. Because if I think back, you know, over, you know... So way back when the original trade rules were written, the General Agreement on Tariffs and Trade in 1947, there was this clause, Article 21, that said that you could break all of your trade rules, you could discriminate, you can put on tariffs, you can do all these things, if you were doing so for a national security purpose, that you said it was essential to your national security. But it had these clear clauses in there that it had to relate to trade in nuclear materials or trade in arms, ammunition, implements of war, or measures taken at a time of war or other international emergency. The problem now has become that the steel and aluminum tariffs that the United States has put on, most countries are saying that does not fit within that Article 21. And so you have this kind of bad fit between where the exceptions to the rules are and where the United States has been. And yet others would say that with respect to things like cybersecurity and the national security risks that Huawei presents in terms of, you know, everything from spying to taking down somebody's electric grid and turning off the power or, you know, shutting down the port, that that is genuinely a national security measure. And so the problem has been the Trump administration has sort of blurred the line in a way that's not very helpful. But I think there's no question that the trading system is going to have to figure out exactly where is the line between national security and economic security? Where is that line? And what do we do about all of the things that fall in the middle of that line between that have an economic security component to them, and a national security component to them? And who gets to judge? And under what criteria do you get to judge whether or not you can do that? And there's no question that fight is coming. We've seen for the first time cases at the WTO arguing over this interpretation of Article 21, and so I think that is only going to continue.
Kal Raustiala 57:12
Great. Well, Jennifer, thank you so much, and with apologies to all the questioners whose questions I didn't get to. We're unfortunately at the end of our hour. I really want to thank you, Jennifer, for coming on. I hope we can have you back. And for all of you viewing, have a great rest of your day. Thank you, everyone.
Jennifer HIllman 57:29
Thank you so much. It's been an honor to be here.