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Welcome to the first week of Trade Secrets, a new newsletter about the twists and turns in global trade. We’ve created this in response to your growing interest in the story — to help you better understand the rapidly changing face of international trade and globalisation. Throughout the week, the FT’s leading experts on trade — including Brussels-based Alan Beattie and Washington DC-based James Politi — will offer you insights and analysis you can’t find anywhere else. Your Trade Secrets editor, based in London, is Alice Ross. You’ll be hearing from all of them in the coming weeks.

On the menu today, you’ll discover a new weekly Tall Tales of Trade section that will debunk something that someone — often a politician — has said about trade. This week it’s UK politician Greg Hands with his thoughts on customs unions. Today’s chart of the day delves into trade between Japan and South Korea. Every day, we’ll also curate the best trade stories from our sister publication, the Nikkei Asian Review, in Tokyo Talk, and other must-reads. All of that follows the main story today, an interview with World Trade Organization director-general Roberto Azevêdo.

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WTO chafes against fetters from America

Roberto Azevedo, director general of the World Trade Organization (WTO), gestures as he speaks during a panel session on day three of the World Economic Forum (WEF) in Davos, Switzerland, on Thursday, Jan. 24, 2019. World leaders, influential executives, bankers and policy makers attend the 49th annual meeting of the World Economic Forum in Davos from Jan. 22 - 25. Photographer: Jason Alden/Bloomberg
Roberto Azevêdo believes there is no political appetite to allow the WTO’s dispute settlement system to ‘crash completely’ © Bloomberg

For a man whose organisation is about to lose the use of a limb, Roberto Azevêdo is remarkably chipper, writes Alan Beattie. Trade Secrets chatted with the World Trade Organization director-general on the phone just as he headed off to last week’s IMF/World Bank meetings in Washington.

Almost everyone around the WTO thinks the US is serious about letting the organisation’s dispute settlement system seize up in December by refusing to appoint a replacement when a judge retires from the appellate body (AB), depriving it of a quorum. Azevêdo reckons, though, that American complaints about the judicial over-reach of the AB do not equal mindless destructiveness.

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“Somehow the system will continue, either in a normal way or an imperfect manner,” Azevêdo told us. “There is no political appetite to let it crash completely.” The EU and Canada have come up with an ad hoc appellate body workaround — now joined by Norway — which Azevêdo’s WTO secretariat has helped set up. There can’t be definitive new Airbus-Boeing litigation until the US comes around, but disputes over salmon will find a happy home.

It is premature to regard the temporary fix as the beginning of a permanent alternative system. Officials from some big economies who use dispute settlement have told Trade Secrets there seems little point in antagonising Washington through bypassing the US blockage unless they have to.

“I don’t know how much appetite there is immediately for following the EU and Canada down their route,” Azevêdo said. “I think some members are waiting to see first whether Plan A of keeping the current system functioning works.”

In the meantime, he points out that the WTO’s negotiating function is still operating, with talks under way on digital trade and reducing fishing subsidies. “Members are engaged, including the US. There are lots of proposals on the table. It’s exciting to see.” Japan, the EU and the US are also working on a proposal to overhaul the WTO’s subsidy rules for industrial goods. “There is an opportunity for reform of subsidy disciplines but it requires members to be flexible and imaginative,” Azevêdo said.

In practice, though, progress depends on the US. And others say American engagement has taken such a hardline that its engagement seems to be more for show than a genuine attempt to reach deals.

The Tokyo-Brussels-Washington industrial goods subsidy proposal, for example, should be ready in a couple of months, but it is well behind schedule. Some participants say the US held up progress by taking a stringent and unrealistic legalistic position that would prohibit whole swaths of government intervention, including in the US itself. EU officials are concerned Washington will use the final report for China-bashing rather than constructive reform of WTO subsidy disciplines.

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In the digital talks, the US has pushed for tough provisions protecting cross-border data flow, identical to those it agreed with Canada and Mexico in the US-Mexico-Canada Agreement. Admirable though the principle is, this is a non-starter even with the EU, let alone with China, which strictly limits data leaving the country.

MEVAGISSEY, ENGLAND - OCTOBER 09: Fishing boats are seen in the harbour in the village of Mevagissey which has submitted plans to limit the number of second homes on October 9, 2017 in Cornwall, England. The picturesque Cornish coastal fishing village has submitted plans to Cornwall Council to block outsiders buying new-builds to use as holiday homes in an attempt to give local first-time buyers better chances of getting on the property ladder rather than being outbid by wealthy second home owners. The village's Neighbourhood Development Plan has highlighted that currently twenty six per cent of the homes in Mevagissey are holiday homes with average prices, according to Rightmove, of £299,587, nearly £50,000 more than the Cornish average of £250,000, and 20 times the local average wage of £15,458. It also noted that although since 1930 the buildings in the village have more than doubled, the permanent population of Mevagissey has actually fallen over the last 200 years. If the plans are approved they will be returned to the village to be voted on in a referendum and will follow attempts by other communities in Cornwall which have introduced new-build bans including most notably St Ives. (Photo by Matt Cardy/Getty Images)
The US looks like a country keener on scoring points than preserving fish stocks © Getty

In the fisheries talks, the US seems keen on progress but has helped to sidetrack the talks via a petty bureaucratic dispute. A group of developing countries, including India, vetoed the Brazilian WTO ambassador chairing the talks: they say Brazil doesn’t respect developing countries receiving “special and differential” treatment, giving them more leeway to keep subsidising. The US, miffed, blocked the next candidate as chair, the Jamaican ambassador, apparently as tit-for-tat. This looks like a country keener on scoring points than preserving fish stocks.

A US official told Trade Secrets that America is exhibiting high ambition rather than obstreperousness and is actively engaged in all of the fisheries, ecommerce and subsidy talks. To be fair, Washington may indeed be acting in good faith: the US’s negotiating strategy has traditionally been to ask for the stars and settle for the moon. Still, other WTO member governments remain suspicious about US intentions.

Azevêdo makes a lucid case for optimism. But his confidence in the resilience of the WTO to American criticism is about to get a severe stress test.

Charted waters

Trade between South Korea and Japan was already looking weak before a dispute blew up about the treatment of Korean forced labourers during Japan’s occupation more than half a century ago, showing the potential for old sores to create new wounds:

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Tall tales of trade

FKDC8K Greg Hands,Chief Secretary to the Treasury,arrives at Downing street for a cabinet meeting,He is MP for Chelsea and Fulham
Conservative MP Greg Hands wrongly believes that a customs union would mean Britain having to accept everything signed in any EU trade deal with a third country © Alamy

Another Brexit delay in the UK this week means that the politicians are now going to attempt the novel feat of reading the hugely complex Brexit withdrawal bill before voting on it. There will also probably be attempts to keep the UK in a customs union with the EU. Stand by for a blizzard of wrong-headed notions about what that means. Conservative MP Greg Hands — incredibly a former UK trade minister — has made a strong early bid.

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What’s the tall tale?

On Twitter, Hands endorsed the contention that a UK-EU customs union would mean Britain having to accept everything signed in any EU trade deal with a third country, including rules affecting the NHS (presumably drug procurement and health provider liberalisation).

Why is it wrong?

Customs unions are about tariffs, not services and not regulations. So while the UK would be affected by the tariff parts of EU trade deals, it wouldn’t affect procurement or services. Watch out for this tall tale popping up again in the weeks ahead.

Don’t miss

  • The White House is getting worried that the USMCA, the revision of Nafta signed by US president Donald Trump with Canada and Mexico, could fail to gain congressional approval amid rising tensions on Capitol Hill. Read more
  • Trump officials are battling over a plan to keep technology out of Chinese hands, the New York Times writes, with some worrying that imposing too many constraints could undermine American industry.
    Read more
  • Governments are curbing new trade policies, research shows, in the latest evidence that rising geopolitical tensions are weighing on economic globalisation.Read more

Tokyo talk

  • Signs of a thaw? Japan’s Shinzo Abe and South Korean PM Lee Nak-yon have met for the first time in a year, with tensions high over second world war disputes and Japan’s tighter controls on exports to South Korea.
    Read more
  • Check out this longer read on how China is building influence with former Communist countries on the periphery of the EU: in a Dubrovnik hotel, for example, the TV stations offered are Chinese so come with a Beijing spin on the Hong Kong protests.
    Read more