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401. EU carbon border adjustment mechanism faces many challenges

Author:
Gary Clyde Hufbauer, Jeffrey J. Schott, Megan Hogan, and Jisun Kim
Publication Date:
10-2022
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
This Policy Brief assesses the evolving EU Emissions Trading System and EU carbon border adjustment mechanism (CBAM) and explains objections within Europe and from major trading countries likely to be affected by the proposed CBAM import levies. While EU officials have sought to ensure that the CBAM is consistent with obligations under the World Trade Organization (WTO), key aspects of the CBAM could violate WTO rules and are likely to be contested, taking years to play out. Meanwhile, several other countries will adopt new carbon-inspired border restrictions, adding to global trade frictions. Major carbon-emitting countries, therefore, need to act cooperatively instead of unilaterally to both advance the fight against climate change and update the rules-based global trading system. Two-thirds of greenhouse gas emissions result from nontraded activities, such as road transport, electricity generation, and home and office heating. Countries can curb emissions in these activities, while developing guidelines for carbon abatement in traded sectors.
Topic:
Climate Change, Economics, International Trade and Finance, World Trade Organization, European Union, and Carbon Emissions
Political Geography:
Europe

402. CHIPS Act will spur US production but not foreclose China

Author:
Gary Clyde Hufbauer and Megan Hogan
Publication Date:
10-2022
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
The CHIPS and Science Act, export controls, and agreements with allied countries will accomplish many of their multiple objectives. More US semiconductor fabrication plants will be built, US R&D will be accelerated, and advanced chips and chip-making machines will be denied to China, Russia, and other adversaries. However, the Act will not make a material difference to US chip supplies in the next two or three years. Slower economic growth has already tipped the chips market in favor of ample supplies. While collective measures have inflicted considerable short-term pain on China, causing a sharp drop in the fortunes of its high-tech firms, China will respond by redoubling its self-sufficiency programs. The United States, however, should not mimic China in pursuing self-sufficiency, as US self-sufficiency is an illusion. The United States currently exports high-value chips and imports low-value chips, so increasing self-sufficiency would require the United States to prioritize basic chip production at the same time it is supposed to be competing with China in advanced chip production. Continuing to prioritize advanced chip production—where the United States has a clear advantage—is the most efficient course of action.
Topic:
Economics, Legislation, Exports, Production, and Semiconductors
Political Geography:
China, Asia, and United States of America

403. Soaring demand is driving double-digit import price inflation in the United States

Author:
Caroline Freund
Publication Date:
10-2022
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
At a time of soaring price increases in the United States, inflation in the US import sector has been soaring the most. Import price inflation in the first half of 2022 was in the double digits, above US consumer price index and personal consumption expenditures inflation. Excess demand for certain imported goods is playing a big role, but so are supply shortages caused by temporary business closures overseas and shipping delays associated with the COVID-19 pandemic. Correctly identifying the culprit for misaligned demand and supply, and hence rising prices, is central to understanding the type and extent of policy intervention needed. Using movements in prices and quantities of specific goods, the analysis presented in this Policy Brief shows that the increase in import price inflation has been driven to the same or a greater extent by demand compared with supply constraints. The results have important implications for policies to help reduce the supply and demand imbalance and thus tame inflation.
Topic:
Economics, Inflation, COVID-19, Imports, and Supply and Demand
Political Geography:
North America and United States of America

404. Is South Korea vulnerable to EU and US carbon border restrictions?

Author:
Jeffrey J. Schott and Megan Hogan
Publication Date:
07-2022
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
South Korean exports, especially carbon-intensive products like steel, are increasingly vulnerable to both the European Union’s proposed carbon border adjustment mechanism (CBAM)—set to begin on January 1, 2023—and the proposed Clean Competition Act (CCA) before the US Congress. Schott and Hogan caution that Korean exporters should not count on Korea’s decade-old EU and US free trade agreements (FTAs), nor on the multilateral trading rules of the World Trade Organization (WTO), to protect them from new carbon-based import barriers in key foreign markets. The WTO and the FTAs have broad and loosely defined exemptions for environmental protection. Nor is Korea likely to be shielded by its own cap-and-trade emissions trading system (the K-ETS), because of extensive use of free allowances and large differences between EU and Korean carbon prices. While the threat the EU CBAM poses to Korean exports is imminent, passage of the CCA faces major legislative obstacles. But US imports of Korean steel and other carbon-intensive goods are still subject to climate-related duties at the US border under US unfair trade statutes. The US Department of Commerce has ruled that free allowances issued under the K-ETS (and EU ETS) are implicit subsidies that can be offset by countervailing duties. These charges are in addition to the harsh tariff-rate quotas on imported Korean steel applied under the “national security” authority of Section 232 of US trade law, which are more restrictive than measures imposed against European and other steel exporters. The authors suggest relaxing these US barriers, as they have been for shipments from Europe, in return for Korean participation in the nascent US-EU talks to establish a “Global Arrangement on Sustainable Steel and Aluminum.”
Topic:
Economics, International Trade and Finance, European Union, Exports, and Carbon Emissions
Political Geography:
Europe, Asia, South Korea, and United States of America

405. The online gig economy’s impact is not as big as many thought

Author:
Lee G. Branstetter
Publication Date:
07-2022
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
The explosive global growth of online ride-hailing platforms raised concern (and, in some quarters, optimism) that similar growth in other platforms could rapidly disrupt traditional labor arrangements on a large scale in advanced economies. But the evidence to date suggests no significant changes in the overall importance of “gig” work in the US labor market nor a significant decline in the importance of traditional employment relationships. Online platforms may play a growing role (relative to traditional “brick-and-mortar” intermediaries) in connecting gig workers to their customers, but that alone does not guarantee a large increase in the importance of gig work. Branstetter reviews this evidence, noting the gaps in labor market data series that make the measurement of this phenomenon so difficult. Even if traditional employment relationships are not likely to decline significantly in the near future, the rise of online gig work nevertheless highlights longstanding inadequacies of labor market regulations, which recognize employees and truly independent contractors but struggle with the intermediate kinds of worker-firm relationships the online platforms enable. Branstetter summarizes proposals for regulating gig economy work and the lessons policymakers in South Korea and other economies can learn from the literature he reviews in this Policy Brief.
Topic:
Economics, Employment, Labor Market, and Gig Economy
Political Geography:
Global Focus

406. South Korea should prepare for its exposure to US-China technology tensions

Author:
Mary Lovely and Abigail Dahlman
Publication Date:
07-2022
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
The stated goal of the US-led Indo-Pacific Economic Framework for Prosperity (IPEF) is to create standards that enhance and elevate regional trade and investment flows, but it is clearly aimed at reducing the role of China in global supply chains. As China is Korea’s largest trading partner, US policy discouraging Chinese participation in supply chains has immediate detrimental implications for Korean manufacturers. The United States is the second-most important destination for Korean exports. Given the values of these triangular trade flows, Lovely and Dahlman assess South Korea’s exposure to US demands to remove or reduce Chinese participation in the manufacture of exports destined for the US market. The reliance of the proposed framework on certain standards will likely reduce Chinese participation in IPEF trade networks. Korea may benefit from this trend, but IPEF could also increase production costs for Korean companies, especially in the electronics sector, a problem that would worsen if China retaliates against these companies. To reduce these risks, Korea might find it prudent to reduce its reliance on intermediate goods from China for products it produces for export to the United States. The Korean government should also seek to better understand its exposure to US–China trade tensions and diversify its trade relations. Korean firms should start preparing for supply chain disruptions, perhaps by making investments at home. Korea could also help other IPEF members reduce supply chain disruptions while addressing security concerns over China.
Topic:
Economics, Science and Technology, Supply Chains, and Competition
Political Geography:
China, Asia, South Korea, North America, and United States of America

407. China's CPTPP bid spurs South Korea to act on Asia-Pacific trade pacts

Author:
Jeffrey J. Schott
Publication Date:
06-2022
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
China’s sudden application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in September 2021 has broad implications for South Korea’s economic relations with China, Japan, and the United States. In the past, Korea frequently debated but invariably postponed deciding whether to participate in negotiations on the CPTPP, despite the substantial benefits to be gained from doing so. However, China’s application has prompted Korean officials to get off the fence and apply as well. As China moves to deepen its ties to regional partners, Korea needs to follow suit, complementing the ongoing implementation of the Regional Comprehensive Economic Partnership (RCEP) with expedited negotiations to join the CPTPP and participation in the US-led Indo-Pacific Economic Framework for Prosperity (IPEF). Korean participation in the RCEP, CPTPP, and IPEF is desirable and mutually reinforcing and should allow Korea to sustain its strong commercial interests in both the US and Chinese markets.
Topic:
Economics, International Trade and Finance, Treaties and Agreements, and Trade
Political Geography:
China, South Korea, and Asia-Pacific

408. Public responses to foreign protectionism: Evidence from the US-China trade war

Author:
David Steinberg and Yeling Tan
Publication Date:
06-2022
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
America's recent turn toward protectionism has raised concerns about the future viability of the liberal international trading system. This study examines how and why public attitudes toward international trade change when one's country is targeted by protectionist measures from abroad. To address this question, the authors fielded three original survey experiments in the country most affected by US protectionism: China. First, they find consistent evidence that US protectionism reduces Chinese citizens' support for trade. This finding is replicated in parallel experiments on technology cooperation, and further validated outside of the China context with a survey experiment in Argentina. Second, they show that responses to US protectionism reflect both a "direct reciprocity" logic—citizens want to retaliate against the United States specifically—and a "generalized reciprocity" logic that reduces support for trade on a broader, systemic basis.
Topic:
Economics, International Trade and Finance, Protectionism, and Competition
Political Geography:
China, Asia, North America, and United States of America

409. 25 years of excess unemployment in advanced economies: Lessons for monetary policy

Author:
Joseph E. Gagnon and Madi Sarsenbayev
Publication Date:
10-2022
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
For about 25 years before the COVID-19 pandemic, inflation was very low and stable in most advanced economies. A little noticed dark side of this impressive achievement is that unemployment rates were almost always higher than needed to keep inflation low. This widespread and persistent policy error arose because of a major flaw in standard macroeconomic models—the use of a linear Phillips curve. This flaw would have been far less costly if central banks had not chosen such a low target for inflation. This paper thus adds to the arguments in favor of a moderately higher inflation target. Even without a higher target, central banks need to use a broader range of economic models and should verify their estimates of the natural rate of unemployment by running the economy hot from time to time in order to see nascent inflationary pressure before throttling back.
Topic:
Economics, Monetary Policy, Unemployment, and COVID-19
Political Geography:
Global Focus

410. How carbon tariffs and climate clubs can slow global warming

Author:
Shantayanan Devarajan, Delfin S. Go, Sherman Robinson, and Karen Thierfelder
Publication Date:
09-2022
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
Slowing global warming requires countries to reduce carbon emissions, which imposes costs on their economies. To be effective, most countries must agree collectively to participate (e.g., the Paris Agreement, COP26). However, every country has an incentive not to comply and still reap the benefits of other countries’ actions—a classic free-rider problem. This paper evaluates recent recommendations to use trade policy to solve the free-rider problem associated with climate mitigation strategies. It shows that the European Union’s carbon border adjustment mechanism (CBAM tariffs) are effective at offsetting the unfair competitive advantage of noncompliant countries in the markets of compliant countries but have little effect on the trade of noncompliant countries, who can divert trade to other noncompliers. CBAM tariffs alone have little impact on global CO2 emissions. The paper also examines “climate clubs” (coalitions of countries that agree to impose carbon taxes or other equivalent policies and impose punitive tariffs on non-club members to induce them to join the club). It finds that punitive climate club tariffs can be effective in inflicting significant damage on the economies of nonmembers, providing a strong incentive for them to join the club. The paper identifies trade dependence between club and non-club members as an important consideration for the success of a climate club. Club members that are strongly linked to non-club members suffer losses when the club punishes non-club members, which would make them hesitant to impose punitive tariffs on a major nonmember trading partner.
Topic:
Climate Change, Economics, Tariffs, and Carbon Emissions
Political Geography:
Global Focus