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  • Author: Gary Clyde Hufbauer
  • Publication Date: 03-2021
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: Open Sub-navigation BackOpen Sub-navigation Publications Back Policy Briefs Working Papers Books PIIE Briefings Open Sub-navigation Commentary Back Op-Eds Testimonies Speeches and Papers Topics & Regions PIIE Charts What Is Globalization? Educational Resources Open Sub-navigation Back Senior Research Staff Research Analysts Trade Talks Open Sub-navigation Back RealTime Economic Issues Watch Trade & Investment Policy Watch China Economic Watch North Korea: Witness to Transformation 中文 Open Sub-navigation Back All Events Financial Statements Global Connections Global Economic Prospects Stavros Niarchos Foundation Lectures Trade Winds Open Sub-navigation Back News Releases Multimedia Media Center Open Sub-navigation Back Board of Directors Staff Employment Contact Annual Report Transparency Policy POLICY BRIEF VIEW SHARING OPTIONS Will industrial and agricultural subsidies ever be reformed? Gary Clyde Hufbauer (PIIE) Policy Brief21-5 March 2021 Photo Credit: REUTERS/Denis Balibouse One economic argument for government subsidies is that they are necessary to compensate firms and industries for benefits they provide to society at large but cannot capture in the prices they charge for goods or services. For example, subsidies to renewable energy are defended because renewable energy limits carbon emissions. When a major economy subsidizes extensively, however, its trading partners are drawn into the game, with losses all around. As the prisoner’s dilemma suggests, a better outcome would entail mutual restraint. But the goal of mutual restraint is no less difficult in international trade than it is in international arms control. Both the European Union and the US federal system try, in different ways, to regulate industrial subsidies. Hufbauer examines efforts to contain unjustifiable subsidies and proposes modest improvements, bearing in mind that as countries struggle to overcome the global economic downturn resulting from the COVID-19 pandemic, there is little appetite for restoring a free market economy—one in which firms compete with minimum government assistance or regulation. Selective upgrading of the rulebook may nevertheless be possible.
  • Topic: Agriculture, Government, Reform, European Union, Regulation, Manufacturing, Industry, COVID-19, Subsidies
  • Political Geography: Europe, North America, United States of America
  • Author: Lior Lehrs, Moien Odeh, Nimrod Goren, Huda Abu Arqoub
  • Publication Date: 02-2021
  • Content Type: Policy Brief
  • Institution: Mitvim: The Israeli Institute for Regional Foreign Policies
  • Abstract: peace processes and have the potential to contribute to the advancement of Israeli-Palestinian conflict resolution. A team of Israeli and Palestinian policy experts developed a joint proposal for an international package of incentives for peace. The proposal defines the central needs of the parties that the incentives package must address, focusing on security, recognition and legitimacy, religious rights, economic prosperity and domestic needs. It examines which international actors can be relevant in addressing those needs and should be part of an international incentives package, elaborating on the potential role of the US, the EU, and the Arab and the Muslim world. The proposal also discusses when and how a package of incentives should be introduced and delivered, and what should be the international mechanism required to promote it.
  • Topic: Conflict Resolution, Security, European Union, Peace, Incentives
  • Political Geography: Middle East, Israel, Palestine, United States of America
  • Author: Maria Demertzis, Marta Dominguez-Jimenez, Lionel Guetta-Jeanrenaud
  • Publication Date: 06-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: The European Union’s capital markets remain very underdeveloped compared to the United States. The market for equity, as measured as the size of the total market capitalisation of listed domestic firms relative to GDP, is much larger in the US and in Japan than in Europe.
  • Topic: European Union, GDP, Capital Flows
  • Political Geography: Japan, Europe, United States of America
  • Author: Monika Grzegorczyk, Mario Mariniello, Laura Nurski, Tom Schraepen
  • Publication Date: 06-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: The pandemic has shown that many workers can efficiently work remotely, with benefits for wellbeing and even productivity. The European Union should develop a framework to facilitate hybrid work.
  • Topic: European Union, Work Culture, Innovation, Strategic Competition, Pandemic, COVID-19
  • Political Geography: Europe, Global Focus
  • Author: Gregory Claeys, Zsolt Darvas, Maria Demertzis, Guntram B. Wolff
  • Publication Date: 05-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: The COVID-19 pandemic has led to the biggest global recession since the Second World War. Forecasts show the European Union underperforming economically relative to the United States and China during 2019-2023. Southern European countries have been particularly strongly affected. While the ICT sector has benefitted from the COVID-19 crisis, tourism, travel and services have suffered. Business insolvencies have, paradoxically, fallen. While total employment has almost recovered, the young and those with low-level qualifications have suffered employment losses. Inequality could rise. The pandemic may lead to medium to long-term changes in the economy, with more teleworking, possibly higher productivity growth and changed consumer behaviour. Policymakers must act to prevent lasting divergence within the EU and to prevent scarring from the fallout from the pandemic. The first priority is tackling the global health emergency. Second, we warn against premature fiscal tightening and recommend instead additional short-term support from national budgets. Over the medium term, fiscal policymakers will need to gradually move away from supporting companies through subsidies, towards tax incentives for corporate investment. A review of the European fiscal framework is needed to achieve the EU’s green goals more rapidly. The quality of public finances, how policymakers spend resources and the associated reforms are of central importance to prevent scarring. Improving the efficiency of insolvency procedures will be crucial for speedy and effective recovery. Targeted labour market policies for the young and less-qualified are needed. As teleworking becomes a more permanent feature of the EU’s labour markets, it will be crucial to adapt social security and taxation systems in the context of the single market for labour. The EU should resist protectionist calls in the wake of the pandemic. Rigorous competition policy enforcement and an integrated EU market have been beneficial for European convergence and growth. Capital markets have an important role to play in a speedy recovery.
  • Topic: Governance, European Union, Inequality, COVID-19
  • Political Geography: Europe
  • Author: Uri Dadush, Pauline Weil
  • Publication Date: 05-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: Despite tensions over China’s discriminatory business practices, China’s trade continues to thrive, and the country has taken over from the United States as the first destination for foreign investment. American and European businesses continue to be engaged in China’s large and growing market, even amid a trade war between China and the United States. Drawing on surveys of companies and international comparisons, we show that – contrary to the prevailing narrative – China’s business practices have improved significantly in recent years. China’s business environment is today generally more favourable than that in other large countries at similar levels of development and, in some though certainly not all aspects, is in line with the Organisation for Economic Co-operation and Development average. Differences over geopolitics and human rights must be addressed, but it is clear that trade and investment agreements conditioned on accelerated reforms in China would yield substantial dividends. The benefits of such deals would accrue not only to foreign investors in China and exporters to China, but also to consumers and importers in the European Union and, especially, in the US, where punitive tariffs on China remain in effect. Critical aspects in the negotiations would include better access for American and European investors to China’s market for services and improved enforcement of rules and regulations in China. As in many middle-income countries, uneven enforcement of the law (rather than the law itself) remains a critical problem in China.
  • Topic: Development, Bilateral Relations, European Union, Business , Investment
  • Political Geography: China, Europe, Asia, North America, United States of America
  • Author: Marta Dominguez-Jimenez, Alexander Lehmann
  • Publication Date: 05-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: International debt investors increasingly demand assets that are aligned with environmental, social and governance objectives. Sovereign debt is being belatedly swept up in this change. This huge asset class represents a uniquely long-term claim and funds a wide range of public expenditure, both brown and green. Public capital expenditures will be a central part of the roughly €3 trillion investment budget needed to pay for the European Green Deal. European Union countries have so far met investor appetite for climate-aligned assets through sovereign green bonds, the issuance of which has rapidly grown since 2017. The EU itself will also issue green bonds in large volumes. However, because of some inherent flaws in such instruments and as their still-weak frameworks, these bonds are unlikely to meet the environmental criteria demanded by investors, and will complicate established principles in sovereign debt management. Much more comprehensive information is needed on the climate related aspects of the public budgets of EU countries. Greater transparency in this respect would support stability and improve the functioning of capital markets, given that sovereign debt plays a pivotal role in all investor portfolios and also in regulatory and monetary policy. Adoption by sovereign issuers of green budgeting principles, based on a common taxonomy of sustainable activities, would enhance transparency. It could also be driven by investors who, under new EU rules, must disclose the climate-related aspects of all financial instruments offered in the capital market.
  • Topic: Climate Change, Debt, Markets, Sovereignty, European Union, Finance, Sustainability
  • Political Geography: Europe
  • Author: Ben McWilliams, Georg Zachmann
  • Publication Date: 04-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: Hydrogen is seen as a means to decarbonise sectors with greenhouse gas emissions that are hard to reduce, as a medium for energy storage, and as a fallback in case halted fossil-fuel imports lead to energy shortages. Hydrogen is likely to play at least some role in the European Union’s achievement by 2050 of a net-zero greenhouse gas emissions target. However, production of hydrogen in the EU is currently emissions intensive. Hydrogen supply could be decarbonised if produced via electrolysis based on electricity from renewable sources, or produced from natural gas with carbon, capture, and storage. The theoretical production potential of low-carbon hydrogen is virtually unlimited and production volumes will thus depend only on demand and supply cost. Estimates of final hydrogen demand in 2050 range from levels similar to today’s in a low-demand scenario, to ten times today’s level in a high-demand scenario. Hydrogen is used as either a chemical feedstock or an energy source. A base level of 2050 demand can be derived from looking at sectors that already consume hydrogen and others that are likely to adopt hydrogen. The use of hydrogen in many sectors has been demonstrated. Whether use will increase depends on the complex interplay between competing energy supplies, public policy, technological and systems innovation, and consumer preferences. Policymakers must address the need to displace carbon-intensive hydrogen with low-carbon hydrogen, and incentivise the uptake of hydrogen as a means to decarbonise sectors with hard-to-reduce emissions. Certain key principles can be followed without regret: driving down supply costs of low-carbon hydrogen production; accelerating initial deployment with public support to test the economic viability and enable learning; and continued strengthening of climate policies such as the EU emissions trading system to stimulate the growth of hydrogen-based solutions in the areas for which hydrogen is most suitable.
  • Topic: Climate Change, Energy Policy, European Union, Carbon Emissions, Decarbonization, Hydrogen
  • Political Geography: Europe, Global Focus
  • Author: Uri Dadush, André Sapir
  • Publication Date: 04-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: The European Union is very open to foreign direct investment. By comparison, despite considerable liberalisation in the past two decades, foreign investors in China’s markets still face significant restrictions, especially in services sectors. Given this imbalance, the EU has long sought to improve the situation for its companies operating or wanting to operate in China. After eight years of negotiations, the EU and China concluded in December 2020 a bilateral Comprehensive Agreement on Investment (CAI). The text awaiting ratification aims to give foreign investors greater market access, enforceable via state-to-state dispute settlement. It does not yet, however, cover investor protection (such as against expropriation). Meanwhile, investor protection is covered by bilateral investment treaties between EU countries and China, which remain in force. The CAI has been met in some quarters with scepticism on economic and geopolitical grounds. The main criticism is that it provides little new market access in China, and that this small economic gain for the EU comes at the price of breaking ranks with its main political ally, the United States. Our assessment, which focuses on the economic implications, is different. It is true the CAI provides only modest new market access in China, but this is because China has already made progress in recent years in liberalising its foreign investment regulations unilaterally. The CAI binds this progress under an international treaty, marking an improvement for EU firms insofar as their market access rights can be effectively enforced. Most important, the CAI includes new rules on subsidies, state-owned enterprises, technology transfer and transparency, which will improve effective market access for EU firms operating in China. These bilateral new rules could also pave the way for reform of the multilateral rules under the World Trade Organisation, with the aim of better integrating China into the international trading and investment system – a goal shared by the EU, the United States and other like-minded countries. From an economic viewpoint therefore, the CAI is an important agreement, and one worth having. However, its ratification by the European Parliament is unlikely while China continues to apply sanctions against some members of the European Parliament and other critics of China’s human rights record.
  • Topic: Science and Technology, Bilateral Relations, European Union, Investment, Liberalization
  • Political Geography: China, Europe
  • Author: Ottmar Edenhofer, Mirjam Kosch, Michael Pahle, Georg Zachmann
  • Publication Date: 03-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: Putting carbon pricing at the centre of the EU climate policy architecture would provide major benefits. Obtaining these benefits requires a uniform, credible and durable carbon price – the economic first-best solution, however, several preconditions required to attain this solution are not yet met. This paper proposes a sequenced approach to ensure convergence of the policy mix on the first-best in the long run.
  • Topic: Climate Change, Energy Policy, European Union, Carbon Tax, Carbon Emissions
  • Political Geography: Europe