Friday, 12 September 2014

#ECIPEdebates: Are EU sanctions on Russia working?

Following the agreement reached at the special European Council held on 30th August, the EU has announced the implementation – effective from today - of new sanctions against Russia. 

These will expand to three state-controlled oil companies the restriction to raise new money in EU capital markets. According to The Wall Street Journal, three oil companies (Gazpromneft, the oil-production and refining subsidiary of Gazprom, Transneft and Rosneft) as well as three Russian defence companies (United Aircraft Corporation, Uralvagonzavod and Oboronprom) will be forbidden from raising funds of longer than 30 days' maturity. The same will apply to five Russian state-owned banks already targeted in the July measures. 

Brussels is also broadening its ban on sales of so-called dual-use technologies to Russian customers and imposing new restrictions on the provision of services for deep-water oil exploration, arctic oil exploration or production and production and shale oil projects in Russia - quite unpleasant given Russian dependency on these technologies to exploit new drilling sites situated offshore and above the Arctic Circle. A further 24 people - including people linked to the rebels in eastern Ukraine and Russian officials and oligarchs – have also been added to the list of those barred from entry to the bloc and whose assets in the EU are frozen.

This is the second wave of sanctions following those announced by Brussels in July and to which Moscow has responded imposing a one year-long ban on imports of meat, fruits and vegetables, fish and dairy products from Australia, Canada, the European  Union, Norway, and United States. And while Moscow denies the allegations, it has started reducing its gas supplies to some EU countries in the attempt to prevent them from re-exporting Russian gas to Ukraine. 

Is this tit-for-tat working?

We have asked this question to several experts in the field which seem to agree more with Hungarian Prime Minister Viktor Orban – who, criticizing the sanctions, remarked that “in politics, this is called shooting oneself in the foot” – rather than with Lithuanian Foreign Minister Linas Linkevicius – who considers that it is “better to shoot yourself in the foot, than let yourself be shot in the head”.

In his blog entry in reply to our question, Philip Levy speculates on the objective that US and EU are trying to achieve. He presents four alternatives:

1. Compel Russian withdrawal from Crimea and the Eastern Ukraine. 
2. Ensure that international accords, such as the 1994 Budapest Memorandums on Security Assurance, are credible. [This was the one in which Russia, the United States and the UK promised to defend Ukraine’s territorial integrity if Ukraine gave up nuclear weapons]. 
3. Make sure Russia goes no further, e.g. by threatening NATO Article V allies such as Estonia (where the President just visited). 
4. Signal displeasure.

He argues that so far only the fourth objective has been achieved and that a stronger action is required to send a clear signal to Russia. An action which would include new defense capabilities within NATO, supply of advanced weapons to Ukrainian military and full-scale economic sanctions, as suggested by Chicago Council President Ivo Daalder.

The trade war is already causing significant unrest on both sides given the strong economic dependencies of the two economies, and various estimations of the impact of EU sanctions on Russia as well as of Russian counter-sanctions forecast substantial possible costs.

The reply to #ECIPEdebates question received by CATO Institute stresses the costs that Russian-imposed sanctions might bring to the Russian economy. The high import penetration in the food sector - around 60% of food sold in Moscow and other major cities is imported – is likely to bring new pressure to the rising food prices. The latest quarterly food inflation figures show a two percentage points increase compared with the first quarter of the year (see figure).


While CATO Institute suggests that Russian consumer discontent could play a role in the eventual end of this wave of restrictions, Russia is preparing to announce new trade sanctions, perhaps targeting European automotive and textile industries.

Any chance for a mutual removal of sanctions?

ECIPE Director Hosuk Lee-Makiyama, in a recent interview by The Moscow Times, considers that both sides cannot afford to uphold the sanctions more than six to eight months. The rapid tightening of the sanctions and the upcoming winter might force the two parts to find a solution even quicker.

Wednesday, 10 September 2014

India, the WTO Bali Package, and global value chains

India’s economy has become much more liberal over the last 20 years. Its applied tariff rate has gone down from a high 113% in 1990-91 to a low 13.7 by taking a simple average although some tariff peaks still remain, particularly in agriculture. At the same time India has started to deregulate some of its services sectors such as retail and telecom services, even though this is mainly for cross-border services trade. Besides, India has proved very successful in exporting Business Processing Outsourcing services. Probably thanks to this, India’s trade profile has resulted in the fact that its participation in world exports for services is higher than for goods, namely 3.32% compared to 1.61%.

India has also been an active user of Preferential Trade Agreements (PTA) as a way to liberalize trade. It has concluded agreements with, amongst others, Chile, Mercosur and ASEAN. India’s most important preferential agreements at the moment are probably with Japan and Korea seen each of their market sizes. This has benefited firms on both sides: trade costs are lowered whiles companies are able to reach economies of scale because of larger common markets. Other PTAs are under negotiation. Some of them could have significant economic importance such as the EU-India Strategic Partnership, but negotiations are on hold. India’s reach to the US does not go any further than a ‘commercial dialogue’ or a ‘trade policy forum joint statement’. Probably not much will come out of these preferential intentions as both the EU and the US are occupied with other priorities.

In part, the regional search for trade agreements reflects the current state of play within the World Trade Organisation (WTO). To date no ‘big deal’ could be concluded as part of the Doha Development Round as we have seen in 1994 when the Uruguay Round was finalised. It seems more and more likely that the Doha Round will go down as an attempt that was one step too far. On the one hand, this is the result of the fact that in the meantime the world has changed with rising emerging powers. On the other hand, in 2008 a Doha deal was nearly concluded if not precisely some emerging countries, notably India, had been on the defensive side. They demanded more support for their agricultural sectors, something the developed world was unable to accept.

Meanwhile, however, some progress seemed to have been reached. In December 2013 the so-called ‘Bali-package’ was born providing reassurance that multilateral trade negotiations are successful, albeit slightly. No major advancements were made but to down-pay the package is neither appropriate. On the contrary, next to provisions on lowering import tariffs and subsidies in agriculture it includes important issues such as trade facilitation which aims to reduce trade costs regarding red-tape and to simplify customs procedures. This is of major significance to especially emerging countries such as India provided they seize the opportunity to participate in today’s global trade patterns. Yet again, however, India now appears to come back on the deal by showing a defensive attitude towards the package by demanding better conditions on food stock piling and subsidizing. If pressing ahead, this will mean would mean missed chance for India.

Typically trade is thought of as a final product travelling from one country to another where the good is consumed. Although this still holds true for some products, in many sectors this is not the case anymore: input goods cross borders many times before they become a final good. This is the world of global supply chains or, as more recently called, global value chains. Each time an input is being exported after processing, some “net” added value is created, which in turn contributes to the national economy. Some sectors, of course, carry higher value added than others depending in which the country is specialising. For instance, in general services hold higher value added than some goods inputs such as textiles or food industry. At first sight, India appears to do relatively well in this regard.

However, although India is specialising in services it turns out that it actually concentrates too much on lower-end activities of the services value chain, such as Customs Relationship Management or Enterprise Resource Management. What’s more, India’s value in services is created for end-users, not as inputs for other manufacturers – a reflection of its poor participation of global value chains. India would do well to, first, upgrade its current business services sector to higher-value added activities such as software R&D services, business consulting services or business analytics; and second, to diversify its services input-set by deregulating some of its domestic services sectors such as professional services, retail and transport sectors for foreign investors.

More important, as the pattern of trade is changing the concept of trade costs is altering too. In essence, the concept of trade policy has been redefined. “Old” trade policy is still important: even low applied MFN tariffs have a considerable effect in a world organized around global supply chains as tiny mark-ups can have tremendous effects on the costs of goods crossing numerous amounts of borders every day. Seen from this perspective, India’s tariffs in goods are still pretty high. Still, what is of greater importance for India’s global competitiveness is the cost of managing the international segmentation of production, linking its own internal productions processes to global markets. Here India’s score is rather modest. Its ranks 54 on the World Bank’s Logistics Performance Index which measures the ease of input transhipments in the global supply chain. Particularly logistics competences, customs procedures and the general state of India’s infrastructure could be much improved. 

Wednesday, 3 September 2014

Europe's fear of progress

In these days when the whole of Europe files less patents than Japan; when precautionary principle rules over science, and turns into one of the biggest stumbling blocks of a transatlantic trade deal; or when Germany propose a ban on the Uber car sharing service while its largest telecom operator suggests a Chinese-style blocking of data flows from outside the EU (so-called Schengen routing); or when ECJ ruled for the controversial right to be forgotten – my colleagues and I are reminded of an observation by our friend Takayuki Sumita a couple of years ago –

"When Europeans use their knowledge to resist any change to status quo, they should not expect a brighter future, or that the next generation will be able to lead the enjoyable life of the current one. The problem is not only attributed to business, governments or regulations – it is also a matter of whether the people can change their mentality.

Given the fact that Europe has been the frontrunner of economic development for more than one and a half millennium, they have rarely experienced the pressure to catch up with others. In other words, this is also a question of social evolution, which may take a longer to address than the time it takes to make an investment decision or introduce a new piece of EU regulation."

Read his essay, "Can Europe overcome its conservatism?", here.

Thursday, 10 July 2014

Outsider's perspective on TTIP

The Transatlantic Trade and Investment Agreement (TTIP) has been a focal point of much discussion in recent months. Of course, much of this debate centers on the economic and political pros and cons for both the European Union and the United States. But concluding an agreement that would represent nearly half of the world’s economic output is not expected to have no impact on the outside world. Quite the contrary, outsiders such as China, Brazil and India are most likely to scrutinize the TTIP negotiation process. Apart from geopolitics, in an economic sense their views on these developments are determined by the following factors. 

First, the extent of trade diversion. The more TTIP is diverting trade, the greater the likelihood that outsiders will react to such an agreement. Two notable studies have analyzed the potential trade effects of TTIP with differing results on third-party countries. The CEPR report, commissioned by the European Commission, states that outsiders will not experience any adverse consequences. This a result of the direct and indirect spill-over effects from a TTIP agreement. Direct spill-over effects are greater exports of goods and inputs by third-partner countries to a bigger Transatlantic market; indirect effects are potentially the additional trade effects in the event outsiders are adhering to TTIP standards. These spill-over effects are contested by the Ifo study which concluded that some outside countries would actually experience trade diversion. A more recent study by the Central Bank of Turkey assessed that China could suffer severely from a TTIP deal. As such the issue of trade diversion has not been settled yet.

Second, the “depth” of an agreement. A deeper Transatlantic agreement will have a more pronounced outcome on outsiders’ trade patterns. This is because a deeper trade policy agenda generates greater trade between partners, creating a higher wedge between insiders and outsiders in terms of trade costs. Some recent regional trade agreements have already included so-called “beyond-the-border” or deeper measures which are, for some at least, typically lying outside the realm of the WTO. Examples include competition policy, investment protection and data regulation, but also government procurement and services restrictions; two policy areas which are actually dealt with multilaterally. The gains from tackling these issues are great, much greater than the benefits from tariffs. Yet, all these issues touch upon regulatory and institutional sovereignty within each of the party countries. Negotiating a successful agreement will therefore inevitably lead to the erosion of regulatory rents. In this sense TTIP will be a real test-case whether ambitious goals can really be realized politically.

Third, whether standards are going global. An often-read argument in favor of TTIP is that the EU and the US could set a precedent for high-quality standards which will eventually be taken over by other countries around the world. Of course, this is an assumption as there is no guarantee that all firms in countries outside the agreement will truly apply these new standards. However, China’s accession to the WTO is a good example that an emerging country did want to adhere to global rules which were previously set by other countries bringing down trade costs. Nonetheless, a recent Bruegel study assessed that TTIP could also lead to a dual regulatory regime in emerging countries. This means that some firms in these countries that export will take over Transatlantic standards whereas other ones which are left behind only serving the domestic market will be unable to do so. This is a serious threat for emerging countries since a dual regulatory track system would increase costs for firms and eventually for domestic consumers. 

Last, the extent of “multilateralization”. It is often said that more and deeper trade agreements bring along a greater degree of discrimination. Higher levels of discrimination could make it harder to multilateralize these agreements for outsiders. In fact, the world could be even in danger of more deep bilateral agreements as a result of TTIP. Various arguments go against such analysis. Bigger trade deals could also incentivise countries to go for a multilateral deal if enough compensation is given to outsiders by the deal makers. An example is the revival of the Uruguay Round after NAFTA had been created. In addition, recent research shows the dynamic effects of PTAs in Latin-America which has lead the participating countries to lower their multilateral tariffs over time. The logic behind this result is that eventually domestic import-competing firms will become dominated by the foreign exporting firms, which reduces their domestic political weight. Aside tariffs, the regulatory policies that TTIP and other big deals are supposed to tackle are alleged to be largely non-discriminatory in nature for reasons of practicality. In other words, it’s very hard for a regulatory policy to distinguish between different partner countries. This could lower third-party trade diversion and hence make it easier to multilateralize existing PTAs.

Wednesday, 2 July 2014

The Costs of Data Localisation: Country Reports

Last month, we published a paper that aimed to quantify the losses that result from data localisation requirements and stringent data privacy and security laws. The study looks at the effects of recently proposed or enacted legislation in seven jurisdictions, namely Brazil, China, the European Union (EU), India, Indonesia, South Korea and Vietnam.

Below, we are presenting our findings in country-specific reports for easier reference:


Wednesday, 28 May 2014

E-health solutions: is the EU moving in the right direction?

by Martina F. Ferracane

Technology-based innovations are often seen as a luxury and the healthcare sector is not an exception. However, recent technological innovations, coupled with increasing broadband coverage and quality, widespread use of smartphones and enhanced storage thanks to cloud-based solutions, can provide the European healthcare system with more efficient and effective treatments. Several studies, in fact, confirm the positive impact of mobile devices, electronic health records, personal digital assistants and other e-health solutions on data management, error prevention, time and cost savings, patient compliance and remote patient monitoring.

An example of how mobile devices are revolutionizing healthcare.

Although the first Commission plan on e-health was adopted 10 years ago and since then the Commission has implemented (at least on paper) several other initiatives including the most recent launch of eHealth Action Plan 2012-2020, the European Union lags behind other countries in implementation of IT solutions in the healthcare sector.  The shift towards e-health solutions is moving extraordinarily slowly while costs in healthcare keep rising fast.

The recent European Commission proposal to reform existing regulations for market authorization of medical devices might be a good opportunity to reduce the delays in patient access to medical devices that EU citizens encounter compared with our counterparts on the other side of the Atlantic. However, it seems that the EU intentions are moving in the opposite direction. In another important area of e-health such as telemedicine, the EU has adopted the Directive 2011/24/EU which calls for the right of patients to be reimbursed for the provision of cross-border health services, including telemedicine. However, the Directive came into force last October and yet the majority of member states are lagging behind in its implementation.

We would like to shed some light on this complex framework and encourage you to send your comments, information on successful initiatives, proposals or analyses to or to share your view commenting this post!

Here some questions on which we would like to hear your point of view:

Are EU initiatives on e-health moving in the right direction? How will the reform of the approval processes for medical devices affect use and trade of medical devices? Is the Directive 2011/24/EU being actually enforced in the area of telemedicine? Which barriers are preventing IT solutions to be applied in healthcare sector?

What European industrial champions and US tech firms actually pay in corporate taxes

Today, an EU Expert Group on Taxation of the Digital Economy will present its conclusion in the presence of Commissioner President Barroso. The expert group is set up to correspond with the OECD, who at the request of the G20, has designed an action plan to address what it calls base erosion and profit shifting (BEPS) – namely that the corporate tax base is eroding due to the internet.
Following media reports on the low tax rates paid by some of the world’s largest multinationals, international tax reform has moved to the top of policy-makers’ agendas across the world. However OECD itself admits there is no evidence of base erosion in reality. Nonetheless, some OECD and EU Member States are targeting the digital economy as the main culprit for alleged erosion of corporate tax income.

Our new report raises doubts on some of the assumptions surrounding the OECD/EU work. Here's our first example – as we can see, internet companies in fact pay effective tax rates similar to European multinationals:

The options currently considered in the OECD BEPS process is to require online businesses to have a local presence in every country they operate in, and thereby forcing them to pay taxes in these countries. This would not only contradict the OECD’s own technology neutrality principle in taxation, but also reverse the free movement of services on the EU’s single market. In essence, it would create a separate tax regime for the digital economy, despite intentions to the contrary.

Furthermore, the idea that digital services/online exporters should be seen as always having a commercial presence in the countries in which they operate would mean that music, e-banking, e-commerce web based delivery services, etc. would be barred from international trade. The EU is negotiating more cross-border trade commitments (so-called mode 1) with efforts to ensure that they are not linked to  requirements on local presence – but apparently, this should apply everywhere except in Europe itself.

Good luck explaining that double standard to the US and Chinese trade negotiators.

A new ECIPE report, OECD BEPS: Reconciling global trade, taxation principles and the digital economy, released today