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On August 3, WITA and the Asia Society Policy Institute will hold an online event to discuss the future of Chinese automobile manufacturing and trade. Information can be found here and below.
Chinese electric cars are coming — and the U.S. and Europe are split dramatically on how to respond.
On both sides of the Atlantic, the push to move beyond the internal combustion engine is creating a giant strategic opportunity for China, whose carmakers already dominate global markets for batteries and clean-energy technology.
From there, the responses of policymakers diverge, as U.S. protectionism contrasts with the European Union’s low tariffs and generous national subsidies for battery-powered imports. But in both Washington and Brussels, the threat of China taking over yet another industry is becoming an issue governments cannot ignore — and it’s shaping debates about jobs, trade and the fight against climate change.
“The U.S. has not outright hung up a ‘Do Not Invest’ sign, but we have made it clear we are anxious about Chinese car companies,” said Scott Kennedy, an expert in Chinese economic policy at Washington’s Center for Strategic and International Studies. “Europe has been much less interventionist and more supportive.”
The U.S. imposes a stiff 27.5 percent tariff for Chinese-made cars — put in place during Donald Trump’s presidency — and has buttressed that with the protectionist tax credits of President Joe Biden’s Inflation Reduction Act, which put a premium on car and battery production in North America. In addition, hostility toward Beijing from leaders in both political parties would make it difficult for Chinese carmakers to penetrate the U.S. market, at least openly.
Meanwhile, Europe’s moves have, intentionally or not, provided a strategic opening for China’s start-up car brands. The bloc’s tariffs on imported cars are only 10 percent, and European national subsidies for electric vehicles apply to imports as well as domestically made cars and trucks.
The attraction of the European market for electric vehicle makers is magnified by the EU’s recent decision to ban the sale of new combustion engine cars starting in 2035 — a decision the U.K. has also followed.
That’s why it’s possible to see a BYD-branded car in Dusseldorf, but unlikely in Dallas. BYD, a maker of both clean cars and the battery cells that power them, sold nearly 2 million cars last year (way more than Tesla). It’s one of many Chinese brands moving into the European market.
“Europe’s [electric vehicle] market is comparatively far more open than those of China and the U.S., where national or regional assembly is a prerequisite to qualify for purchase subsidies and import duties on foreign vehicles are higher,” said a recent report by the Allianz insurance company on the threat Chinese carmakers pose to the EU.
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On July 27, the WITA Academy will host an online workshop on Artificial Intelligence and Trade Policy. Information can be found here and below.
Beyond merely providing an additional impetus to liberalize international trade, AI presents several policy gaps that current rules cannot address.
The rise of AI brings a familiar problem in the form of the goods–services distinction, which has proven difficult in the case of digital goods, for example. Although World Trade Organization (WTO) case law has shed some light on how to determine if a product is a good or a service, the WTO’s work program on electronic commerce—which was meant to settle the question more conclusively—is still being negotiated after 25 years. As AI is incorporated into more goods (think self-driving cars and AI robotics), it will become increasingly important to establish universal rules to determine whether General Agreement on Tariffs and Trade or General Agreement on Trade in Services (GATS) commitments dictate. The current patchwork that has emerged in the form of free trade agreements creates a fragmented landscape that is likely to boost the cost of trade.
Where AI can clearly be considered a service, other issues emerge. GATS market access commitments for certain professions including accounting, legal services, or medical services are often tied to certification requirements or legal personhood. This poses problems for AI systems such as legal tool Harvey or even Chat GPT (which recently passed the bar exam). Can such systems be said to have received education and training such that they are covered by GATS commitments? Similarly, where GATS commitments are based on legal personhood, does this exclude AI systems? Would this also be the case in a situation where a form of electronic or digital personhood is adopted for AI systems, as has been suggested in the European context?
Another GATS-related problem concerns the four modes of delivery: cross border, consumption abroad, commercial presence, and the presence of natural persons. These modes are ill-adapted to products that have AI embedded in them, like self-driving cars, smartphones, or medical devices. Such products create a market access issue for services trade, which, according to the GATS, is not supposed to be subject to tariffs. However, services that are embedded into goods are liable to tariffication because the value of the services is included in the cost of the final product for which a tariff is levied. Software bought online and delivered through mode 1 is not tariffed, for instance, yet the same software, when installed on an imported computer, will effectively be tariffed, given that the customs value of the computer includes the value of the software. This has led some to call for the addition of a 5th mode of services delivery, meant to capture the services content embodied in goods exports. In 2009, the European Union’s estimated mode 5 services exports amounted to EUR 300 billion. A 2017 study, meanwhile, suggested that multilateral liberalization of mode 5 trade could increase world trade by EUR 500 billion. Though some attempts have been made to include mode 5 facilitation in bilateral agreements, this has not been attempted at the WTO.
Lastly comes the issue of intellectual property. AI is producing graphics, poetry, and even music—all of which are the legal purview of intellectual property rights (IPR). In the context of international trade, it is the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) that sets minimum standards for the protection and enforcement of IPR. Unfortunately, the TRIPS agreement does not define how to deal with AI-generated works, and individual members have taken different approaches in their domestic legislation, ranging from full protection of AI-generated works to a requirement of human creativity that effectively leaves such works unprotected. This patchwork is likely to become increasingly unsatisfactory as the share of intellectual property—both copyright and patents—generated by AI and traded across borders continues to rise.
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