2016 Year in Review: International Economic Law and Policy

By Marcus Gustafsson


International Trade, Investment and Dispute Settlement
Global trade saw a tumultuous 2016. For the first time in fifteen years, global goods trade is expected to have increased more slowly than global GDP, at a mere 1.7%. Major regional trade agreements were twice rejected, in the Brexit vote and then through President Trump’s withdrawal from the Trans-Pacific Partnership (TPP) in early 2017. Perhaps as significant was the fact that both Democrat presidential contenders, Hillary Clinton and Bernie Sanders, similarly rejected the TPP, alongside the whole of the traditionally trade-friendly GOP elite. Trump has announced he will renegotiate NAFTA, and another mega-regional agreement, the US-EU Trans-Atlantic Trade and Investment Partnership, is looking moribund. The retreat of regionalism may strengthen the multilateral WTO regime, at least in the short run, and some British commentators are urging the UK to become a global free trade haven. However, Prime Minister May is no standard-bearer for increased globalization, and the US is poised to pursue bilateral trade deals and  to circumvent WTO rules. The benefits of multilateralism are no longer viewed as self-evident in major developed countries.
In an interesting reversal of roles, Xi Jinping defended global free trade as the first ever Chinese president to attend the World Economic Forum in Davos. Taking advantage of Trump’s withdrawal from the TPP, China pushed ahead with negotiations of the Regional Comprehensive Economic Partnership slated for conclusion in 2017 (together with India, South Korea, Japan, Australia, New Zealand, and ASEAN), as well as its One Belt, One Road policy seeking to improve trade links throughout Central Asia. Despite rising anti-globalization sentiments in the US and parts of Europe, trade liberalization efforts are thus far from abandoned. Indeed, the EU managed to sign a long awaited free-trade deal with Canada, overcoming a veto threat wielded by the Wallonian regional government in Belgium. The EU also launched consultations over its proposal to establish an Investment Court System to replace controversial investor-state dispute settlement procedures. In this regard, the TTP’s innovative chapters on labor, the environment, competition and state enterprises may also be retained and revived in future deals.
Turning to the WTO, the Trade Facilitation Agreement, the WTO’s first multilaterally negotiated agreement since the organization’s creation 22 years ago, came into force in early 2017. It is expected to slash members’ trade costs by 14.3 per cent when fully implemented. An amendment to the TRIPS agreement on the availability of generic drugs also entered into force after being provisionally applied since 2003. Yet even disregarding potential pressure from an unpredictable Trump administration, the WTO dispute settlement body (DSB) faces mounting pressure. Firstly, the US blocked the reappointment of Appellate Body member Seung Wha Chang, which some commentators believe may undermine the body’s judicial independence. Secondly, China has taken a complaint to the WTO over what it considered was a promise by the EU and US to no longer label it a “non-market economy” (NME) by 2016, which otherwise allow the US and EU to impose higher anti-dumping duties on Chinese products. Any ruling will be highly contentious. Finally, experts have indicated that newly proposed reforms of the US tax code may be inconsistent with The United States’ WTO obligations.

International Finance
In international finance, multilateral cooperation has been fraying for some time. The European Commission imposed a €14 billion fine on Apple for preferential treatment by Ireland, while the Obama administration halted an attempted tax inversion by Pfizer (again, in Ireland). Tax evasion was also high on the agenda in 2016 thanks to the Panama Papers, which highlighted the use of vast, opaque structures of off-shore shell companies to hide wealth by prominent individuals. Coincidentally, Britain hosted a global anti-corruption summit soon after the leak, generally considered a step in the right direction to foster increased transparency on tax and government procurement. 

EU-US frictions again surfaced after the US finalized rules requiring foreign banks to capitalize US subsidiaries, against which the EU quickly retaliated. Similarly, final agreement on how to calculate international capital requirements for banks under the Basel III rules was delayed over a proposal that would minimize banks’ ability to use internal models to evaluate risk, and thereby increase funding pressures on European banks. Moreover, the Financial Stability Board indicated in its second annual report that new capital rules had been implemented without stymying the supply of credit in most jurisdictions, but that this might have been due to lax monetary policies, and it highlighted increased concern over the effect of regulations on economic growth.
Monetary Policy
On the monetary front, the reversal of such lax monetary policies became ever more likely with the Federal Reserve’s second interest rate hike since the Great Recession. The US election further boosted the dollar’s appreciation, prompting hot money to flow out of emerging markets, and pressuring dollar-denominated sovereign debt. Meanwhile, China continued to profess its commitment to internationalizing therenminbi (RMB) as a rival to the US dollar’s global dominance, and its efforts were recognized in the official inclusion of the RMB in the IMF’s basket of reserve currencies in October. Yet despite what looked like an emerging market recovery in the first half of 2016, the RMB saw a record annual depreciation against the dollar  and Chinese foreign reserves hit a symbolic US$ 3 tn low in January this year, prompting China to curb the excesses of its corporate dealmaking and undermine the yuan’s availability. China’s attempts to prop up the RMB also seem to have stayed the Trump administration’s hand in labeling China a currency manipulator, despite campaign rhetoric.
Many have looked at 2016 as heralding significant change, and while the lasting effects are still too early to ascertain, they will doubtless be felt for decades. Yet as the above review shows, even if countries increasingly asserted their national interests, in an ever more globalized, integrated world, cooperation and multilateralization continues to be the only viable game in town. However, if this is true, and the tide of history slowly but inevitably flows in the direction of progress, then much energy is currently being wasted trying to wade in the opposite direction.