B7 Trade and Investment Policy Recommendations

B7 POLICY RECOMMENDATIONS TRADE AND INVESTMENT POLICY

17. Juni 2022

Bundesverband der Deutschen Industrie e. V. (BDI) BDI – Federation of German Industries www.bdi.eu

Preamble The B7 remains dismayed and incredibly disheartened by the Russian invasion of Ukraine and by the humanitarian crisis that has followed as a result. Without a doubt, this delineates a clear violation of international law, humanitarian rights and the principles of sovereignty.

While the first concern remains the humanitarian and migration crisis, as well as swiftly concluding peaceful negotiations, this crisis will nevertheless result in key disruptions to the entire global economy, international trade flows and global value chains. According to preliminary estimations by the WTO, merchandise trade volume growth in 2022 has already been downgraded from 4.7% to 3%. Services trade will also be affected, particularly in the transport sector.

Commodity prices are expected to increase sharply. It will have profound ramifications for the multilateral rules-based system and for international organizations and institutions as a whole. The G7 remains the most prominent forum for global partners with shared values to stand together, and the B7 stands behind the G7 governments in their efforts to act collectively to hold Russia accountable through financial sanctions and restrictive measures cracking down on evasion and disinformation.

Level Playing Field and the World Trade Organization Context The B7 remains committed to an open, free and fair trade agenda. Thus, business welcomes the progress at the multilateral level delineated by the Geneva Package at MC12, including on e-commerce, the response to emergencies, WTO reform, and fisheries subsidies. Events in Ukraine and the wider supply chain disruptions have shown more than ever the importance of a fully functioning global trading system – a system which delivers growth and prosperity for all.

The role of the WTO will increase in importance as the world seeks to ensure greater supply chain resilience. We need to maintain a level playing field, ensure any imposed trade barriers are WTO-compliant and reduce friction in the global trading system wherever possible. Particularly in the wake of the Covid-19 pandemic and the new risks to the regional and global economy introduced by Russia’s invasion of Ukraine, the G7 must strategically counteract the international trend toward protectionism and continue supporting and promoting the market access agenda.

The multilateral rules-based system provides deep benefit to businesses of all sizes. However, the WTO remains currently under threat with its dispute settlement system paralyzed and its rulemaking function outdated and in deep need of modernization and concretization. Moreover, the Russian invasion of Ukraine threatens the multilateral system at its very core. The B7 supports the G7 action to deny Russia MFN status and urges the G7 to monitor the situation closely to assure that this action does not derail the important progress that must be made at the multilateral level. The basic function of the institution to set and enforce a common set of global rules should not be thwarted.

The G7 must put its political weight behind urgent action in the rulemaking and dispute settlement functions in advance of the 13th Ministerial Conference and take a leadership role in the larger reform and process with a focus on further market-based and sustainable trade liberalization to ensure a level playing field, devoting special attention to the increasingly complex relations between market and non-market economies. Next to myriad proposals for WTO reform, which the B7 also supports, there needs to be a comprehensive discussion on how the WTO – as it currently functions – can remain the best forum to ensure a global level playing field and to best facilitate exchange and

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dispute settlement between market and non-market economies. Accordingly, the G7 must reach consensus on what the best approach is.

Policy Recommendations World Trade Organization: In advance of the 13th Ministerial Conference and in light of multilateral progress at MC12, concrete outcomes at the plurilateral level is key. The Joint Statement Initiatives (JSI) on e-commerce, investment facilitation for development and MSMEs should be prioritized. The success of the JSI on services domestic regulation shows the effectiveness of the plurilateral approach in progressing trade policy at the WTO and should serve as an example to conclude the JSI on e-commerce. With regard to the importance of digitalization as underscored by the pandemic, the G7 should aim at the highest level to address free cross-border data flow (with trust) and a clear commitment against unjustified forced data localization requirements. The moratorium on customs duties on electronic transmissions should be made permanent.

It is imperative for plurilateral initiatives at the WTO to be as inclusive as possible, particularly those that address issues highlighted during the pandemic such as e-commerce, investment facilitation for development, plastics and distortive fossil fuel subsidies, trade and climate, trade and gender, and MSMEs. The G7 should encourage other Members, particularly those from emerging economies to join, and play an active role in the JSIs, as well as other plurilateral agreements such as the Government Procurement Agreement and the Information Technology Agreement. A clear framework is also needed next to Article X:9 to integrate plurilateral agreements into the larger WTO negotiations structure.

Finally, the G7 must urgently work towards a solution on the WTO Appellate Body crisis. The B7 does welcome the commitment of WTO members in the Geneva Package to a fully functioning dispute settlement system by 2024, which would guarantee members’ compliance with the commitments they have undertaken in WTO agreements.

More members have recognized the need to address the identified concerns with the Appellate Body, but the priority now should be substantive engagement to agree and execute reforms – and do so expeditiously, ideally before MC13. The absence of an effective Appellate Body does not disincentivize protectionism and the increase of unjust trade barriers that cause retaliatory actions. This not only endangers economic growth and resilience but will increase already tense geopolitical challenges.

Guided by the principles of the Trilateral Initiative, the G7 should put considerable weight behind reforming and retooling the Agreement on Subsidies and Countervailing Measures (SCM). The G7 should set forth a work plan addressing special and differential treatment and industrial subsidies. Here, it is key that the G7 emphasizes that members should undertake commitments in the WTO according to their economic weight, capacities, and competitiveness. Objective criteria are imperative in the designation of developing country status, including membership in the OECD and shares of global exports and imports.

Level Playing Field: In order to combat distortive trade practices and address the changing conditions in international trade, more effective enforcement of international trade rules and assertive trade policy instruments are imperative.

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Together with a reform of all three WTO pillars, notification rules must be enforced more efficiently and strictly.

The role of the WTO secretariat can be strengthened here to address shortcomings by members via notification and transparency requirements.

The G7 must reiterate its commitment against protectionism and support the immediate roll back of all protectionist measures taken in the wake of the COVID-19 pandemic while fostering international cooperation and rules-based free trade and investment with its economic partners.

International trade and global competition have fostered innovation and economic growth for decades. Therefore, multilateral rules-based global trade must remain the guiding principle to achieve a level playing field. In accordance with the OECD recommendations on Fostering Resilience in a World of Open and Integrated Markets, the G7 governments must lead collective action to level the global playing field and to enhance the WTO reform process, while committing to setting specific criteria in their state interventions during the remainder of the COVID19 pandemic. This state action must be temporary in nature, transparently notified to the WTO, and directly in line with longer-term goals.

Resilient Supply Chains Context The current war in Ukraine and the resulting sanctions are causing significant supply chain disruptions, including in energy, raw materials, logistics and transportation. New bottlenecks have been formed and with maritime transport not being available anymore and road and rail networks being used at full capacity, queues are long, risking delays in the delivery of commodities and other goods. The war also threatens massive disruptions to food supply, particularly in wheat, sunflower oils, barley and components of cereals, which will lead to substantial price increases. The impact will be felt globally but will be particularly severe in developing nations, potentially resulting in instability. The World Bank estimates that 10 million people enter extreme poverty for each increase of one percent in food prices. It has moreover brought about important discussions regarding significant dependence of Europe in particular and the G7 as a whole on agricultural products and gas and oil from Russia and Ukraine.

These disruptions only threaten to exacerbate unprecedented shocks in both supply and demand along global supply chains brought on by the Covid-19 crisis. Value-added losses brought on by bottlenecks amounted to more than €50 billion in the industrial sector in 2021. Here, losses were concentrated particularly in the automobile, electrical, construction, mechanical engineering and plastic sectors. The pandemic and lockdowns severely reduced supply of human capital which led to a temporary reduction in production and transport capacities and this in turn disturbed global supply chains. There have also been significant downturns in the supply of key raw materials, as well as semiconductors and chips, over the past year, resulting in massive price increases. The pandemic prompted additional dramatic surges in demand for goods in the medical and ICT sectors, as well as drops in demand – most notably for services. Nationalistic export controls did not contribute positively, exacerbating supply shortages. For many nations with reduced vaccine uptake and for those with differing political approaches, knock-on impacts for supply chains will continue as lockdowns are imposed, which will in turn hamper recovery.

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OECD empirical analysis suggests that reshoring and localization of supply chains is associated with high efficiency costs and is not typically feasible. Diversified, global supply allows production to be more efficient, cost-effective and promotes security of supply.

The G7 have a key role to play in sending a strong signal against forced reshoring and in favor of diversified, resilient supply chains bolstered by open markets. Here, collaboration with the private sector in several areas can be incredibly beneficial. They can also facilitate regulatory cooperation amongst themselves and other key allies.

Furthermore, the digitization of trade will be critical to building resilience, particularly amongst SMEs. A harmonization of digital trade processes across the G7 is needed and business also wants to see as many countries as possible creating compatible systems to reduce frictions and risk.

The B7 would therefore welcom e

commitments from the G7 to fund capacity building for developing economies in this area. Moreover, G7 governments should promote the uptake of digital tools in customs procedures , including documentation and controls.

Policy Recommendations The B7 advocates for diversifying sourcing within supply chains to build resilience and to ensure that the G7 are less strategically dependent on single nations or suppliers. Diversification should especially be pursued among countries that do uphold their core values of democracy, freedom, equality, the rule of law, and respect for human rights, or those that do not violate international law. Business is willing and prepared to stand with government and to support them in this endeavor. Coalitions of like-minded nations and G7 nations working together to develop supply chain resilience alongside the Build Back Better plan will also be vital.

In order to combat global food insecurity, to tackle the sharp rise in commodity prices and to avoid further humanitarian disasters, coordinated action is required by G7 governments in avoiding export restrictions on agricultural products, including wheat, barley and sunflower oil, and resist food protectionism in the aggregate.

Food production and supply chains should be facilitated by G7 governments and trade corridors for agriculture should remain open. B7 acknowledges the importance of reaching consensus on the WTO ministerial declaration on food insecurity. Transparency and information exchange on shortages and trade restrictions, if applicable, is also imperative here, with fora such as the Agriculture Market Information System encouraged. As called for by the heads of the World Bank, IMF, WFP and WTO as well as the German G7 alliance for food security, the G7 can also pledge deeper support for developing countries hit hard by food insecurity, including financing for immediate supply of food and for farmers confronted by higher prices.

In accordance with the WTO report on the impact of the war in Ukraine on global trade, the B7 advocates for resilience based on deeper and more diverse international markets, anchored in open and predictable trade rules.

G7-specific cooperation on supply chains goes hand-in-hand with greater reforms at the WTO, including taking the lead in rebuilding trust in the multilateral rules-based system, which reduces uncertainty, and strengthening enforcement of notification rules to ensure that all measures taken by governments that lead to supply chain disruption are transparent. Additionally, concluding the JSI on e-commerce can contribute positively to resilience, as well as to allow enterprises and consumers to stay connected to markets.

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Based on analysis by Deloitte, the B7 encourages supply chain resilience within the G7 based on transparency, in particular through visibility of demand and supply forecasts to enable faster risk identification and better risk mitigation, as well as trust. A resilient supply chain should be based on the key elements of network resilience, trust, collaboration, responsiveness, infrastructure and tools capabilities, visibility, data accuracy and timeliness,

and the coverage of the delivery network. Other strategic tools that can come in handy in building resilient supply chains include global scenario planning, risk management frameworks and updated planning parameters that focus on supply and inflationary pressures on key commodities, cybersecurity risk monitoring, and increased flexibility in logistics in the case of disruptions in supply routes.

In accordance with the OECD recommendations on Fostering Resilience in a World of Open and Integrated Markets, the G7 countries must give each other binding assurances that they will keep borders open for deliveries and investments, especially in times of crisis. Open borders and free trade are the best guarantee for the supply of necessary goods, stable supply chains, and smooth production processes. The G7 must affirm itself as a community of strong market-oriented economies.

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The G7 should work more closely with the private sector in order to achieve resilience, and to undertake a more accurate analysis of the consequences of different potential policies, including reshoring of supply chains and to promote their resilience and diversification. Trade policy coupled with digital solutions must play a key role in lessening strategic risks. Supply chain resilience is contingent on public policy choices, which should be geared towards the proper functioning of globally integrated market actors. Specific measures are necessary to safeguard the supply of essential goods. Here, calculated stockpiling, and supply stress tests are relevant tools. The G7 should closely coordinate initiatives and on export restrictions and controls, especially in strategic stockpiling to avoid price surges and shortages, and to create room for sustainable responses in future crises.

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The G7 can work collectively to strengthen international regulatory cooperation with a focus on developing common approaches, including simplifying, harmonizing and digitizing customs procedures and collaboration on standards to ensure the flow of critical goods. Where possible, harmonization and coordination in standard-setting should be sought through mutual recognition agreements.

Logistical bottlenecks may be further eased by allowing trading hubs such as ports to be better equipped to support distortions. This may include warehousing facilities, addressing shortages in port workers, ensuring sufficient customs officials in border control posts, and investing in infrastructure and communications.

The G7 should follow through with the welcome commitments in the 2021 Framework for G7 Collaboration on Electronic Transferrable Records. Digitalizing trade will be an enabler for growth and reduce costs and friction and will help manage future supply chain risks.

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Securitization of Trade Policy Context Advocates of tighter state investment screening warn that security and public order could be endangered when foreign investors gain stakes, for example, in arms companies or in critical infrastructure such as power grids or even pharmaceutical companies. In addition, they see the competitiveness of the business location to be at risk if foreign investors acquire “future-oriented technologies” through their acquisitions. Furthermore, by strengthening their own rights of intervention, other states should be encouraged to open their own markets (“reciprocity”). In response to the debate, a lot of states expanded their options to screen and ban foreign investments. While there may be benefits to inbound screening mechanisms, some in the private sector have major concerns with the construct and implementation of outbound screening frameworks and urge caution when such tools are under consideration. Moreover, the war in Ukraine has demonstrated the need to ensure greater resilience in the economy as part of a broader strategic approach to security, competition, and global collaboration.

While business understands that in certain cases, the screening of investments is necessary for security policy concerns, we consider that its misuse or abuse encompasses economic risks. G7 countries benefit substantially from open markets for goods, services, and investment. In order to maintain the foundation of their competitiveness, G7 countries must remain open and attractive to foreign investors and must push other partners also to do so.

Since the middle of the 2010s, the bulk of annual investment flows have been directed towards emerging and developing countries. The era of major liberalization and market opening seems to be coming to an end; a global spiral of investment protectionism threatens to accelerate. UNCTAD has reported repeatedly that more and more global investment policy measures recently restricted investment. Both UNCTAD and the OECD have indicated a trend in the G20 countries towards broadening the framework for government foreign direct investment (FDI) screenings. This comes with increased rhetoric on deglobalization.

The OECD has drawn up guidelines for

government investment screenings. These are a safeguard against the protectionist exploitation of investment controls and should be respected by all OECD members.

In the wake of the COVID-19 pandemic, this trend has become even more pronounced as many states sought to ensure control over the production of health-related goods. G7 countries should not participate in accelerating a spiral of investment protectionism. Legislation in this area must be constantly adapted to changing scenarios, such as in the course of the COVID-19 pandemic. This requires a continuous dialogue between industrial, security and foreign trade policy.

B7 rejects industrially motivated encroachments on private property and freedom of contract that go beyond the protection of public security. The overall competitiveness and innovative strength of G7 industry is mainly based on the protection of private property and freedom of contract – not on state protection of certain technologies. It is additionally important to adapt the legal framework of the G7 countries to become more resistant within an intensifying systemic competition with non-liberal systems. Such adjustments must be made across all areas of law and must not be limited to investment screenings for foreign investors.

We live in an age when security concerns, trade, and technology are increasingly intertwined, and governments around the world are turning to export controls more often. It is the shared responsibility of G7 members to work

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together in a plurilateral fashion to craft export control approaches that avoid unnecessary disruptions to trade and protectionism among allies while addressing national security concerns.

Each G7 country should increase coordination with allies and partners to adopt the least trade res trictive and narrowly targeted export controls for the most sensitive technologies. We welcome an export control policy in the sense of balanced and targeted protection measures and caution countries against export control policies that veer beyond national security concerns. Applying export controls to too broad a set of commodity items and technologies will undermine private sector innovation and competitiveness – the very pillars from which national security can be improved.

We urge G7 countries to adopt an approach to export controls that emphasizes the role of allies and like -minded countries and appropriately controls the transfer of technologies sensitive to national security to prevent nefarious uses. Additionally, a clear rationale for each set of controls should be promptly developed and communicated, with robust stakeholder consultation.

Whether controls restrict access to surveillance capabilities or limit access to propulsion technology, export controls can only keep competitors at a distance for a limited time. Countries also need incentives to help their industries run faster so that a given technological distance can be maintained – or even expanded. It is, therefore, of the utmost importance that G7 leaders focus their discussions on the ‘running faster’ side of the export control formula.

A positive trade agenda and a commitment to increased and intensified collaboration among allies is a strategically vital precondition in bolstering the very economic and international security trade controls are meant to ensure.

Policy Recommendations Foreign Direct Investment (FDI) Screening: the B7 calls for resolute political action in the further opening of foreign markets and asks the G7 countries to set a good example by limiting the use of restrictions. The conclusion of free trade and investment agreements, a strong WTO, and development of better global governance are more effective than establishing new hurdles for investors.

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Inward investment screening should not be motivated by considerations of industrial policy and should remain a limited instrument to protect national security and public order of the G7 countries.

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The G7 should commit to work on a more transparent and precise definition of “national security and order” in the context of foreign direct investment to increase legal certainty for global investment, cognizant of variance in national security concerns across the G7 countries.

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Investment protection and promotion treaties remain the most suitable way to protect economies whilst ensuring FDI, a key driver of economic growth, can flow. Greater openness must be promoted within the G7, with emphasis on increasing market access.

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Exchanges of best practices and cooperation among the G7 should be further promoted to ensure not only more effective FDI screening processes, but also that unintentional harm to industry is avoided.

Export Controls: the B7 calls on the G7 leaders to commit to greater cooperation in the development of sensitive technologies. Aside from sustainable energy technology or the digitization of everyday life, an elaborate set of

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incentives will be a crucial precondition to boost investment in research and development by companies and research institutions alike.

G7 leaders should do their utmost to streamline existing national export control policies to limit the burden that businesses carry when active in several G7 jurisdictions while also protecting national security. The B7 calls for the establishment and implementation of a mutual recognition scheme that helps these companies avoid going through lengthy licensing procedures repeatedly.

It is important that G7 leaders acknowledge the vital role an open and competitive economy plays, not only in providing prosperity but also in actually staying technologically ahead beyond mere export controls. Meanwhile, the challenge to the liberal, rules-based order requires policy answers that interfere with the openness within which a globalized economy would ideally work. The B7 anticipates a well-balanced approach to this issue by G7 leaders.

Imprint Bundesverband der Deutschen Industrie e. V. (BDI) BDI – Federation of German Industries Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu Business 7 www.b7germany.de German Lobby Register Number R000534

BDI Document number: D 1588

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