Award for my Master’s thesis on export controls

AscendentesAquila-logo

 

I recently received an ‘Aquila ascendens’ award for young academics working on security policy for my Master’s thesis on export controls for cyber-surveillance technologies. This prize is awarded on an annual basis by the DialogForum Sicherheitspolitik and the Working Group on Security Policy of the Bundeswehr University Munich. 

My thesis at the Hertie School of Governance evaluated existing export controls for surveillance technologies at the German, European and multilateral level and assessed the potential to introduce additional control measures and other mitigation strategies to protect human rights and promote international security. Professor Dr. Wolfgang Ischinger, Chairman of the Munich Security Conference and Professor at the Hertie School of Governance, acted as my thesis supervisor.

A research article on recent developments in the discussion on exports controls on cyber-surveillance technologies, which is partly based on my Master’s thesis, will appear soon in the next issue of the peer-reviewed Strategic Trade Review journal. 

Here is the abstract to the upcoming article: 

The global trade in cyber-surveillance technologies has largely evaded public scrutiny and remains poorly understood and regulated. European companies play a central role in the proliferation of a broad spectrum of advanced surveillance systems that have legitimate uses, but have also been repurposed for nefarious ends. Export controls have developed into an important instrument to restrict sales of cyber-surveillance equipment and software to repressive regimes; however, these technologies pose significant challenges to traditional frameworks for the control of dual-use exports. This article provides an overview of current developments on the European level and within the multilateral Wassenaar Arrangement and presents the current state of export controls on cyber-surveillance technology. Most importantly, it discusses the outcome of the EU export control policy review, focusing on the regulation proposed by the European Commission in September 2016, and provides an initial assessment of the key innovations and limitations of the draft text. In addition, the article presents an analysis of the current debate regarding the problematic definition of ‘intrusion software’ in the Wassenaar Arrangement and offers insights into some alternative proposals.

Award for my Master’s thesis on export controls

An Example of the Successful Use of Export Taxes and Its Value for North-South Trade Negotiations

A recurring problem in the discussion on North-South trade relations is identifying good examples that show how controversial – trade-distorting – policy instruments are successfully used to promote economic development. The search is not a purely academic exercise as the case studies can be used to legitimise and defend policy tools in trade negotiations aimed at outlawing or restricting their domestic application. Export duties, i.e., taxes imposed upon the export of raw materials, are one of these instruments and the Economic Partnership Agreements (EPAs) between the European Union and developing countries are one attempt at circumscribing their use.

Because export taxes can be used to ensure a price advantage to domestic industries and therefore skew international competition – a good example are Chinese duties on the export of rare earth minerals – or enrich a small authoritarian elite, their use is actively discouraged by many industrialised countries. However, export taxes can also incentivise producers/exporters to process raw materials domestically into higher-value goods or components (that can be exported without additional charges). If used correctly, export taxes can thus promote the economic development and industrialisation of developing countries. Existing WTO rules do not discipline Members’ application of export taxes and only few countries have agreed to binding constraints on the use of export taxes during their WTO accession.

The EPAs between the EU and regional groups made up of African, Carribean and Pacific countries would limit the ability of governments to use export taxes considerably. For example, Article 13.1 of the EPA between the EU and the Economic Community of West African States (ECOWAS) declares: “No new duties or taxes on exports or charges with equivalent effect shall be introduced, nor shall those currently applied in trade between the Parties be increased from the date of entry into force of this Agreement.” According to Article 13.3, African members can impose export charges only “in exceptional circumstances, on a temporary basis and after consulting the European Union Party […] and with equivalent effect” of existing export charges.

But can export taxes be effective in promoting economic development? And if so, are there good examples that should discourage us from restricting their use? A brief look at the development of the Ethiopian leather industry suggests some benefits from the use of export taxes:

In February 2008, Ethiopia introduced a 150 percent tax on the export of raw and semi-processed animal hides and skins. This was meant as an instrument to encourage industries engaged in the preparation of raw hides and skins for export to shift to more advanced processing stages. Consequently, exports in raw hides and skins dropped significantly in 2009 and remained low, but exports in processed goods (“tanned or crust hides and skins”) almost doubled until 2011. In 2012, the Ethiopian government added a further 150 percent tax on the export of crust leather, i.e., leather that has been tanned, dyed and dried, but not finished. Again, this resulted in a signficant drop in exports of the affected products and the transformation of the leather industry to perform more advanced tasks in country.

The figure below summarises this development. It is based on data collected by the International Trade Centre for product group 41 (raw & semi-raw leather) and product group 42 (manufactured leather products). In Figure 1, I aggregate the different product types into four categories: (i) “raw hides” describes the most basic products, i.e., raw hides and skins (HS 4-digit: 4101-4103); (ii) “tanned hides” constitutes tanned or crust hides and skins” (HS 4-digit: 4104-4106); (iii) “prepared leather” represents more advanced leather processing (HS 4-digit: 4107-4113); and (iv) “manufactured leather products” are all finished leather products in product group 42.

Figure 1 – Ethiopian leather exports to all trade partners

EthiopiaExportsToWorld

Source: own calculation based on ITC data

Overall, the most drastic changes in the distribution of exports seem to occur in close temporal connection with the introduction of export taxes, as indicated by the two dashed vertical lines. The quick second transformation of exports in tanned hides to prepared leather from 2011 to 2012 suggests that the creation of this tax was better communicated and affected industries anticipated the costs. In addition, the adoption of this final processing step might have been much less demanding than the initial transformation. In parallel, exports in manufactured (finished) leather products started to increase from 2011. The same effects are visible in the trade relationship with the EU, see Figure 2.

These findings suggest that export taxes were used effectively to transform the Ethiopian leather sector from an industry focused on the preparation of raw skins to more advanced processing stages, while increasing the overall value of exports and encouraging the production of finished products. Of course, it is likely that other factors such as the growth in external demand, foreign investment and other policy interventions affected the transformation. The magnitude of the effects and temporal connection nevertheless suggest a considerable (positive) effect of the exports taxes on the economic development of the Ethiopian leather industry.

Trade agreements that are too restrictive of this and similar policy instruments might thus undermine national development strategies in the long run. Thus, it will be crucial for all members to the EPAs, the EU and its partners, to actively use review clauses such as Article 13.4 of the ECOWAS-EPA, which allow for regular reality-checks and revisions to the agreements “taking full account of their impact on the development and diversification of the economy of the West Africa Party” or other developing partners.

Figure 2 – Ethiopian leather exports to the European Union

EthiopiaExportsToEU

Source: own calculation based on ITC data

A brief addition:

Below I complement my assessment of the impact of export taxes on Ethiopian leather exports by also including exports of shoes with a leather component. These products are included in product category 64 (footwear), so I select all shoes with some leather content based on the HS 6-digit level. (This equals all product lines in category 6403, as well as line 640420 and 640510.)

I find that exports of leather shoes broadly mirror the growth rate in exports of other more advanced leather products. Ethiopian exports in shoes with leather content consequently increased specifically between 2011 and 2013, i.e., the time period where the government introduced export taxes on processed leather. This correlation, which also can be observed for the exports of other finished leather products, suggests that export taxes may have encouraged the domestic production of more advanced leather products.

Figure 3 – Ethiopian leather exports to all trade partners (incl. leather shoes)

EthiopiaExportsToWorldwithShoes

Source: own calculation based on ITC data

Ethiopia also recovered from the slight decrease in the exports of leather shoes after 2013 in 2016, when exports more than doubled to about $39 million.

An Example of the Successful Use of Export Taxes and Its Value for North-South Trade Negotiations

The UK-EU Trade Relationship: Part II

Looking again at UK trade data, I discuss what tariff costs UK exporters would face in the unlikely scenario that no Brexit deal (or interim trade agreement) can be reached and commercial relations would have to continue on a ‘most favoured nation’ (MFN) basis. The analysis is based on product groups established in the Harmonized System (HS) on the two-digit level, which allows to calculate some broad estimates of potential costs, but does not constitute a detailed assessment for each traded product.

1. An Update on UK Exports in 2016

Using data provided by the International Trade Centre (based on Eurostat data), I complement my previous analysis in Part I with information on UK exports in 2016. Interestingly, the data shows that UK exports to the EU increased again relative to 2015 while trade with other regions decreased. The difference between both trade flows narrowed from nearly £38,000 million in 2015 to about £17,000 million in 2016. See below for a brief overview:

UK_exports_2014-2016

Source: own compilation based on ITC & Eurostat data

2. UK Exports to EU Members by Product Group

As I have already shown in my first post, new markets for UK goods emerged rapidly over the last decade and British companies have increasingly found new customers in East Asia and other regions. Yet, a significant amount of UK exports are still directed towards Europe. For three-quarters of all HS-2 product groups, a majority of exports were traded with the EU in 2016 – see below for the quantiles:

0% 25% 50% 75% 100%
2.91 49.95 60.91 70.84 92.62

The following figure summarises these findings for each product category: the x-axis depicts the UK trade volume with Europe in percent; the y-axis shows the number of HS-2 product groups for each segment. The dashed line depicts the average UK trade across product categories with the EU, which equals 58.94 percent.

UK_Export_By_Product

Source: own compilation based on Eurostat data

3. EU MFN Tariffs 

The big question for the immediate future is whether the EU and the UK will be able to spell out an agreement that preserves most aspects of current relations concerning trade in goods. A free trade agreement (FTAs) would, at a minimum, consist of abolishing tariffs on most or all goods traded between the parties, thus leaving both sides free to conclude FTAs with other countries – which is an explicit goal of the UK government.

Preserving the mutual access to national markets that EU member states currently enjoy certainly constitutes a priority for both sides in the Brexit negotiations. The diversity of interests within both parties and diverging priorities – as well as any conditionality on other parts of the package Brexit deal – could, however, render the negotiations on trade in goods laborious and time-consuming. (Of course, the negotiations on trade will also be affected by many more issues, such as product standards, rules of origin, rules on the services trade, taxation, dumping, …)

In case no (interim) agreement is reached in time, the UK would revert back to WTO rules, i.e., UK exports to the EU would be subject to the EU’s MFN tariffs. The figures below describe the current EU MFN tariff structure. They both show that EU MFN tariffs are actually relatively low, with an average (dashed lines) between 4.7 (figure on the left) and 6.6 percent (on the right), and only few extreme values for individual HS-2 product groups.

EU_MFN_Tariffs

Source: own compilation based on Eurostat data 

Of course, there is a technical detail that makes both figures important for different reasons: in the one on the left, the average tariff for each product group is calculated by dividing the sum of tariffs through the number of all products in the group (including those without a tariff). This reduces the average tariff and introduces groups with an average tariff of practically zero. On the right, the sum of tariffs in a particular HS-2 product group is only divided by the number of dutiable items in the same group, thereby creating a potentially more accurate representation of the true impact of the EU tariff on traded goods, but reducing the utility of the figure for an assessment which does not distinguish between specific products and, instead, merely looks at the product groups as a whole.

4. Potential MFN Tariff Impact on UK Exports 

What would be the immediate costs for UK exports to the EU if MFN-tariffs would apply and which sectors could be affected most?

In 2016, the UK exported goods with a total value of £142,244 million to the EU. Multiplying the value of UK exports in each product category with the respective EU MFN tariff yields tariff costs of approximately £5,140 million, i.e., an effective tariff rate of 3.61 percent. Caveat: Because I calculate the potential tariff costs for whole HS two-digit product groups and tariffs vary widely for individual products, my results can only present a very rough estimate of potential costs.

Overall, there seems to be a linear positive relationship between the trade volume and tariff costs, with only a few outliers. Interestingly, product category 87 “Vehicles and parts thereof” would incur particularly high tariff costs (about £1,126 million) – a finding that is consistent with the present debate about the future of the UK automotive industry after Brexit. The 15 product groups with the largest trade volumes to the EU could potentially face the following tariffs:

HS Product Group HS Group Name UK Exports to EU 2016 in £ million Potential Tariff Cost in £ million
22 Beverages, spirits and vinegar 2742.44 32.18
27 Mineral fuels/oils 13111.46 190.47
29 Organic chemicals 3963.96 166.42
33 Essential oils; perfumery, cosmetic or toilet products 2643.90 62.71
38 Miscellaneous chemical products 2631.10 137.02
39 Plastics and articles thereof 5603.66 310.11
61 Apparel and clothing, knitted or crocheted 2036.47 236.30
62 Apparel and clothing, not knitted or crocheted 2469.59 285.57
71 Pearls, precious stones, precious metals 2686.91 15.59
72 Iron and steel 2065.63 4.83
84 Machinery and parts thereof 16241.82 311.27
85 Electrical machinery and equipment 10058.70 304.49
87 Vehicles other than railway and parts 17884.69 1125.57
88 Aircraft, spacecraft, and parts thereof 7246.19 222.56
90 Precision Instruments 5083.13 102.23

The figure below briefly summarizes the statistics for all product categories. The UK exports to the EU for each HS-2 product category are plotted on the y-axis; the potential tariff costs on the y-axis.

UK_ExportstoEU_UKTariffCosts

Source: own compilation based on ITC & Eurostat data 

5. Tariff Cost vs. Export Dependency on Europe

Finally, are UK exports highly dependent on the EU as a market and does this affect some product categories with high potential tariffs?

To answer this question, I subdivide the product categories into four groups based on the percentage of goods in each category that are exported to the EU. (See the table describing quantiles above.) I find that the first quantile – the product groups for which the trade dependence on the EU market is relatively low, i.e., below 50 percent of goods go to EU members – account for about £2,092 million of potential tariffs. This, includes several product categories with large trade volumes, for example, 87 for motor vehicles and 84 for machinery.

The product categories in quantiles two and three represent £779 million and £1,104 million respectively. The HS-2 product groups with the highest dependence on the EU as an export market, which describes categories in which more than 70 percent of exports go to EU member states, would incur approximately £1,164 million in tariff costs.

The figure below provides a rough overview of potential costs by plotting the EU’s MFN-tariffs on the x-axis and the UK exports to the EU for each HS-2 product category on the y-axis. All observations are labelled with the two-digit number of the respective HS product group. In addition, the colour of the individual observations indicates the amount of UK exports in the respective product group that is traded with EU member states.

UK_Exports_By_EU_Tariff.png

Source: own compilation; note that one observation with an extreme tariff value of 45 percent (product group 24 for tobacco products) was omitted in the figure.

 

The UK-EU Trade Relationship: Part II

A Conflicts-Law Response to the Precarious Legitimacy of Transnational Trade Governance

I am currently working on the revision of a research article on the tensions between new deep and comprehensive trade agreements – read as: CETA, TTIP – and democratic politics. It includes some important findings of a joint research project with Professor Christian Joerges of the Hertie School of Governance, Berlin. We already made the first draft available via SSRN in November 2016 in the Dickson Poon Transnational Law Institute, King’s College London Research Paper Series. The final version will be published in the forthcoming Research Handbook on the Sociology of International Law edited by Moshe Hirsch and Andrew Lang. 

The new title (above) and new abstract: 

“This paper discusses the fundamental tensions between economic globalisation and democratic politics in the field of international trade. New bilateral and regional trade agreements increasingly incorporate other “trade-related” policy areas and threaten to constrain state action and democratic politics. The move towards deeper and more comprehensive trade deals has greatly accentuated grievances and is of exemplary importance in the realms of transnational governance. This article examines the decoupling of these agreements from national and democratic control and the resulting legitimacy impasses of transnational governance based upon the theoretical frameworks of Karl Polanyi and Dani Rodrik. Arguing that politics is not a mistake that gets in the way of markets, we submit our own conceptualisation of transnational legitimacy. In doing so, we suggest a new type of conflicts law which does not seek to overcome socio-economic and political diversity by some substantive transnational regime, but responds to diversity with procedural safeguards, thus ensuring space for co-operative problem-solving and the search for fair compromises.”

A Conflicts-Law Response to the Precarious Legitimacy of Transnational Trade Governance

The UK-EU Trade Relationship: Part I

In light of the lively discussion over the UK’s future trade agenda, I take a brief look at the UK’s existing economic ties with Europe and beyond. Given the intricacies of these relations, more posts on this topic will follow.

1. The Development of the UK Trade Balance with Europe

The UK trade deficit with Europe has grown significantly over the last years, but the trade balance with other parts of the world has improved over the same time period. In fact, there is a relatively clear trend: exports to EU member states have declined by on average 0.7 annually since 2008 and exports to 17 of the 27 other EU member states are lower today than they were in 2008.

According to data collected by HM Revenue and Customs, the UK’s total exports to Europe have actually decreased over the years from £141,068 million in 2008 to £133,365 million and imports have at the same time increased from £178,858 to £218,667 million. This leaves the UK with an average annual growth rate of -0.7 percent for exports to the EU and 2.54 percent for imports between 2008 and 2015. Consequently, the UK’s negative trade balance increased from £37,790 to £85,302 million between 2008 and 2015; this represents an annual growth rate of 10.71 percent. The figure below shows the change in the UK trade balance since 2008.

UK-EU_trade

Source: own compilation based on HM Revenue and Customs data

2. UK Trade with non-EU Partners 

While UK exports to the EU declined, commercial ties with other regions intensified and especially exports to Asia grew significantly. The average annual growth for exports to China between 2008 and 2015 was 17.8 percent, to South Korea 8.8 percent, to Hong Kong 6.5 percent, and to Singapore 3.9 percent. Saudi Arabia and the UAE have become other important destinations for UK commerce with annual average growth of 11.5 and 4.4 percent respectively.

Exports to non-EU trade partners rose from £115,792 million in 2008 to £171,544 million in 2015 – an annual growth rate of about five percent. While the EU thus remains the largest export market for the UK,  a majority of British exports are now directed to other trade partners. Not least because of the European financial and sovereign debt crisis, UK exports to the rest of the world were larger than exports to the EU for the first time in 2011 and the disparity grew to nearly £40,000 million in 2015.

However, trade with Commonwealth members such as India or Australia has stagnated or declined over the same time period: exports to India decreased by on average 0.8 percent annually while exports to Australia fell by around 1.5 percent annually. The figure below sums up UK ties with non-EU trade partners. Given the high volume of transatlantic trade, with an average annual increase of 3.3 percent the US has also been a major contributor to UK export growth and, interestingly, exports to Switzerland grew on average 14.8 percent annually.

UK-ROW_trade

Source: own calculation based on HM Revenue and Customs data

3. The UK Trade Balance in Intra-EU Comparison 

Can we observe a similar shift in exports from Europe towards other trade partners for other EU member states? And how does the UK trade balance compare to the exports and imports of other EU member states?

Based on Eurostat data on trade in goods (excluding services, which remain an importing correction factor for the UK!), the UK’s balance stands out: the UK imported around €150,000 million more in goods in 2015 than it exported in the same year. But although the UK’s negative balance in goods increased over the last decade, this happened much slower relative to some other European member states, notably France. While the French negative balance increased from a negative of around €15,000 million in 2004 to around €60,000 million in 2015, the UK’s balance – which in 2004 already stood at a negative of €103,223 million – only rose by about the same amount.

The figure below provides an overview of Member States’ trade balance in goods (!) for the year 2015:

EU_MS_trade_balance_2015

Source: own calculation based on Eurostat data

The UK’s negative trade balance in goods manifests itself in an asymmetric trade relationship with most EU member states. The figure below sums up the relationship between UK imports and exports in goods with EU member states in 2015. Note that logarithmic scales on both axes are necessary to represent the whole of Europe in one graph. Every point left of the 45-degree line suggests a trade relationship in which the UK imports more goods than it exports to a specific member state. The figure shows that the UK’s 2015 trade relationship in goods is positive for only a few smaller EU member states, while most other members export considerably more to the UK than they import from the UK.

UK_Import_Export_EU

Source: own calculation based on Eurostat data

The UK-EU Trade Relationship: Part I

Visualizing Trade Agreements: An Interactive R Shiny App

PTALinks

I recently created an interactive tool for visualizing existing trade agreements based on the Design of Trade Agreements (DESTA) Database. The dataset includes customs unions, free trade agreements or partial free trade agreements of various types that have been signed between 1945 and mid-2016.

My ‘app’ PTA Links creates a network of lines representing these treaties between up to five countries, which can be selected in the field on the left. In addition, it creates a table which lists all agreements, including their name, the year they entered into force and the total number of member states. It also allows to exclude the most common asymmetric trade relationships, i.e., the Global System of Trade Preferences and the EU-ACP trade relationships.

The tool isn’t perfect and there is much room for improvement with regard to both performance and presentation – and to be fair, the data might also not be ideally suited for this kind of visualization.

Visualizing Trade Agreements: An Interactive R Shiny App

International trade after the US election

The result of the US presidential election in mind, Prof. Dr. Christian Joerges and I take a look at the future of US trade policy and its consequences for the European Union and the global trade regime. This article was originally posted on the Hertie School research blog and the UCL Brexit Blog.

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Donald Trump’s astonishing election victory Tuesday night shows the appeal of populists who give voice to the anger of the real and self-perceived losers of globalisation. Rejecting the standard view that countries benefit from free trade, he argued that elites either blundered or conspired to send jobs out of the United States, while leaving “millions of our workers with nothing but poverty and heartache.”[1] Electoral convenience or not, no candidate for either main US party since the Great Depression has campaigned as fervently to roll back free trade. The election of Donald Trump amounts to a revolt against economic globalisation in a nation that has long been its leading advocate. This adds to deep uncertainty about the future of global trade, which had already suffered a blow with Brexit.

Growing anti-trade sentiments in the US and Europe increasingly reflect public concerns that modern trade policy has undermined democracy. Agreements like the EU-US Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP), the Obama administration’s flagship trade deal, acted as a catalyst for a debate on broader societal concerns surrounding the role of the state in creating and overseeing globalising markets, redistributing the gains from international trade and holding the precarious balance between different interest groups. In Europe, these conflicts recently culminated in strong resistance from Belgium’s Wallonian region to the EU-Canada trade agreement – a political disaster set to haunt future negotiations with Europe.

The failure of Western governments in managing globalisation’s domestic disruptions has led to frustration and uncertainty among the losers of an open economy and, in turn, created spaces for populist demands. Trump’s trade policy largely remains a mystery, save for his threats to tear up existing legal arrangements by the score, but his rumblings about the real and imagined ills of international trade will now have a lasting impact. Obsessed with the nation’s trade deficit, he announced to abandon the TPP and to demand the renegotiation of existing trade pacts, including the North American Free Trade Agreement (NAFTA), which he described as “the worst trade deal in history”. He also vowed to impose tariffs on imports from countries that enjoy “unfair advantages” and bring trade cases against China, in particular.[2]

Are we thus witnessing a drastic revision of the US commitment to free trade and its leading role in the move towards mega-regional trade agreements? This depends on whether cooler heads will prevail in the new administration. The candidate himself described his priorities in only the most hyperbolic terms; the crucial question is who will agree to come on board to sort out a clear policy. Trump faces a public that is increasingly wary about US participation in the global economy[3], which makes it more difficult to backtrack on his remarks. Given his unrealistic stances on other issues, it seems likely that Trump ditches agreements with high symbolic value such as TPP.

What will succeed the contested TPP and lingering TTIP and what will be the effect on global trade governance? Trump expressed a preference for bilateral “deals” instead of holding complex negotiations with country groups, which would constitute a break with the current trend towards both more elaborate agreements and more signatories. Overall, the uncertainty will incentivize US partners to look for alternative markets and could lead to new bilateral and regional agreements that exclude the US. Despite the EU’s campaign to keep TTIP alive[4], it will be low on the new administration’s agenda. While US citizens see the agreement as less problematic than TPP, slow progress in the negotiations and European grievances seem to have dispelled expectations.

Trump’s triumph should teach us about the importance to reconcile free trade with domestic policies that protect citizens from its disruptions and ensure that costs and benefits are fairly shared. It is certainly tempting to make trade the scapegoat for all our economic ills, but this narrative puts the blame for stagnant wages and rising inequality on only one piece of a larger picture. Harvard economist Dani Rodrik got it right: “Instead of decrying people’s stupidity and ignorance in rejecting trade deals, we should try to understand why such deals lost legitimacy in the first place. I’d put a large part of the blame on mainstream elites and trade technocrats who pooh-poohed ordinary people’s concerns with earlier trade agreements.”[5]

If large sections of society start to associate trade with inequality, insecurity and diminished aspirations, the social consensus in favour of open markets will crumble rapidly. To preserve the legitimacy of international trade, its link to democratic policy-making and commitment to the protection of domestic social norms and social cohesion must be strengthened. Reconciliation has to entail reforming the way in which societal preferences are articulated and how the goals of trade policy are defined. Most importantly, free trade has to be complemented by fair domestic distributional policies that limit its disruptive potential and thus mitigate the populist backlash to globalisation.

This article is based on one of our recent research articles; a draft version is available here.

International trade after the US election