Institute for International Trade

A message from the director

Dear reader,

How the world has changed. Geo-economic trends that we have been tracking at the IIT have gone into overdrive via Russia’s unconscionable invasion and destruction of Ukraine. Others are analysing the associated issues in real-time; for us, the unprecedented western sanctions campaign and associated ‘freezing out’ of Russia from international cooperation forums is particularly resonant. In the WTO’s various committee meetings, for example, I am told that EU officials leave the room if Russian officials are present. There are also – in my view, optimistic - moves afoot to expel Russia from the WTO. Furthermore, the longer the war drags on the more likely it is that China’s tacit support of the invasion will be caught up in the same decoupling impulse. Looking over the horizon, this leads me to conclude that for Western countries the main international cooperation games will increasingly be played in the G7 and OECD. I cannot see Indonesia’s G20 delivering anything of substantive value, nor do I hold out hope for the India-led G20 since India too may become a target of Western ire. Still, as Harold McMillan famously remarked in 1964, ‘a week is a long time in politics’, and, to mix metaphors, today’s verities can be turned on a dime. I, like many others, hope that the slide towards global fracturing can still be arrested, but we are running out of time.

In that light, this edition again emphasises geo-economic issues.

Dr Naoise McDonagh kicks off with a review of the effectiveness of Australian sanctions on Russia – in essence, not much. As he notes, the same is not true of those imposed by the US and to a lesser extent the UK and various EU countries. The longer the war drags on, the more damaged the Russian economy will be, and we are just at the beginning of these impacts. I am South African and observed Zimbabwe’s economic meltdown over the last 15 years; at some point, we stopped asking how much worse things could get. For Russia, things will get worse – much worse I suspect – before they get better. As happened in Robert Mugabe’s Zimbabwe, Putin’s support base will shrink to a smaller and smaller kleptocratic ‘siloviki’, resorting to increasingly repressive means to stay in power. Unless or until he is ejected, most likely by force and from within the siloviki, it is hard to see how this ends well for the Russian people, let alone the Ukrainians on whom Putin’s war is being perpetrated.

Translating this into a broader geopolitical frame, how China plays its cards will be crucial, such as not censuring Russia in international forums. In their competition with the West over regional and global dominance, both China and Russia have emphasised the acquisition of key ‘dual use’ technologies, within which semiconductors feature prominently. Such dual-use technologies are high on the list of Western sanctions applied to Russia, but China has also been subjected to a barrage of export controls and investment restrictions vis-à-vis the US market in particular; while the EU has implemented its own investment screening regime that requires Member States to cooperate more extensively to prevent exploitative investment. On the flip side, both the US and EU are increasingly resorting to industrial policies for ‘strategic sectors’, notably for semiconductors. In our second piece, Professor Andreas Freytag critiques the EU’s pronouncements on its planned semiconductors production support package and finds them wanting.

This highlights the inescapable fact that to compete with China, the West is becoming more Chinese, at least in its industrial policy orientations. Veterans of the international trading system, like me, would draw on the epochal Michael J Fox movie to observe that we are going ‘back to the future’. The last time the US stared down an emerging Asian competitor – Japan – it resorted to the same playbook. At that time it saw itself as the custodian of the liberal international economic order which required a largely liberal trade policy orientation. Things are very different now, not least owing to the scale and nature of the Chinese challenge and the US turning its back on international trade leadership. In his second recent publication, Dr Naoise McDonagh challenges the ‘China engagement strategy’ on which China’s entry into the WTO was predicated. He argues that the Chinese system is institutionally so different to Western economies that it cannot readily be accommodated in a WTO system built on the presumption that member states practice market economics – more or less – at home. As I observed in my first paragraph, this debate is set to grow and sharpen in the weeks and months ahead, and the West is likely to increasingly withdraw into its institutional safe zones in the OECD and G7, and potential extension of the latter into some kind of ‘League of Democracies’.

Just in case this write up isn’t gloomy enough, don’t forget planetary warming and the pressing need to deal with it. In our final feature piece, Tim Ryan dissects the EU’s forthcoming carbon border adjustment mechanism (CBAM). He advocates a cautious approach to the expansion of unilateral CBAMs to agricultural products, drawing on the beef industry as an example, arguing that the expansion of a CBAM should be incremental, based on multilaterally agreed rules and standards, and be incorporated into a global institutional framework. I wholeheartedly agree, but wonder how this will be possible given the rapidly deteriorating outlook for international economic cooperation.

Professor Peter Draper

POLICY & ENGAGEMENT 

All told, Australian sanctions will have almost zero consequences for Russia.

Will Australia’s sanctions hurt Russia? This article outlines why #Australian sanctions are symbolic only, by discussing the conditions under which sanctions can be effective and explaining why such conditions do not exist in the Australia-Russia economic relationship. Other countries, such as the US, UK and EU, who do have conditions for effective sanctioning power against Russia, must make complex calculations to maximise deterrent power while minimizing as far as possible costs for them.

Naoise McDonagh is Lecturer in Political Economy at the Institute for International Trade.

POLICY & ENGAGEMENT 

The EU’s ‘Chips Act’: A Rent-Seekers Paradise or a Feasible Industrial Policy?

Microchip shortages are high on the agenda of governments and businesses feeling the pinch of ongoing supply shortages. Not least for this reason, there is a broad political consensus in Europe that strong support is needed for the European chip industry in order to be independent of Asian manufacturers in the future.

Andreas Freytag, Professor and Chair of Economic Policy, Friedrich Schiller University, Jena and Visiting Professor with IIT

WORKING PAPER 

How China challenges the liberal trade order: Coercion, contestation and the socialist market economy.

The original China ‘engagement strategy’ was grounded in the assumption that WTO membership would turn China into a liberal market economy. Today the engagement strategy is viewed as having failed, with China’s largest trading partners viewing Beijing as a systemic rival. 

Yet, a significant strand of international economics still views the engagement strategy as a viable approach for driving liberal reforms within China, indicating a growing gap between political thinking and international economics. This paper addresses that gap, drawing on theoretical and empirical considerations. Theoretically, a comparative capitalism framework explains why nations evolve different varieties of market economy, and why they then seek to externalize their preferences in a multilateral context. 

Naoise McDonagh, Lecturer in Political Economy at the Institute for International Trade, School of Economics and Public Policy

POLICY BRIEF

Carbon Tax Creep Beyond Industrial Goods: Challenges and Risks for Extending Coverage to Agriculture

Governments around the world are implementing emissions reduction policies to mitigate the impact of global warming, however the application of climate policies will occur at different speeds and depth due to varying levels of development and degrees of ambition. Absent intervention this will result in emissions arbitrage, as production (and the inherent emissions) shifts to where the regulatory burden is lower.

Tim Ryan is completing a Masters in International Trade and Development at the University of Adelaide, and is Manager of Global Trade Development at Meat & Livestock Australia.

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