# Rising Economic Powers and U.S. Trade Policy

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/crs%3AR42864

## Record

- **Collection:** Congressional research report
- **Document type:** CRS Report
- **Published:** December 3, 2012
- **Citation:** R42864

## Text

Rising Economic Powers and U.S. Trade
Policy
(name redacted)
Specialist in International Trade and Finance
December 3, 2012

Congressional Research Service
7-....
www.crs.gov
R42864

CRS Report for Congress
Prepared for Members and Committees of Congress

Rising Economic Powers and U.S. Trade Policy

Summary
A handful of developing countries are becoming major players in the global economy due, in part,
to their large populations, rising trade flows, and rapidly growing economies. These evolving
economies are likely to be of increasing interest to the 113th Congress. Led by China, these rising
economic powers (REPs) include Brazil, India, Indonesia, Mexico, Russia, and Turkey. Based on
purchasing power parity estimates, China, India, Brazil, and Russia are now among the 10 largest
economies in the world and Mexico (#11), Indonesia (#15), and Turkey (#16) are not far behind.
With large economies and rising shares of world trade flows, the REPs have greater involvement
in World Trade Organization (WTO) negotiations and dispute settlement cases, have protested
with greater frequency U.S. economic and trade policies, and are more able and willing to deflect
or reject U.S. trade and market access demands.
Although they have made great economic strides, any of these REPs could stumble if they do not
take steps to improve their business climates by undertaking a range of trade, regulatory, and
structural reforms. At the same time, other large developing countries that have enormous
economic potential, such as Egypt, Iran, Nigeria, and Vietnam, could rise if they successfully
address underlying political and economic challenges.
U.S. exports to the REPs and other developing countries have become an increasingly important
source of growth for the U.S. economy. If the United States is to maximize its export potential
and boost its living standards, U.S. exporters and investors may need to have better access to the
REP markets. Trade and investment barriers remain considerably higher in most of the REPs than
in the United States and other advanced countries. Efforts have stalled in these countries to reduce
their barriers further, and several REPs have reactivated industrial policies or found ways to take
advantage of gaps in the world trade rules to promote home companies at the expense of foreign
companies.
The United States’ ability to persuade these emerging economic powers to embrace the principles
of free and fair trade is constrained by growing differences over the role of the state in economic
activity. The more interventionist practices and philosophies of REP governments coincide with a
desire to maintain “policy space” to promote development of their economies via policies that
often appear to violate the letter or spirit of WTO rules and obligations. Persuading the REPs that
a strengthened multilateral trading system is squarely in their national economic interests and a
way to move their domestic economic reforms forward remains a challenge.
As global power and prosperity is reconfigured, U.S. trade policymakers face a number of
overlapping and complex issues relating to the role of future trade liberalizing negotiations, U.S.
leverage in influencing REP economic reforms, and the management of the global trading system.
Given the checkered history of the Doha Round, future progress on trade liberalization within the
WTO may require new approaches. Principles that have guided multilateral trade negotiations in
the past, such as unconditional most-favored-nation (MFN) and special and differential treatment
(S&D), may need to be reexamined. Similarly, if the United States wishes to negotiate free trade
agreements (FTAs) with large and more significant trading partners, it may need to consider
deviations from its standard FTA template. At the same time, ongoing Trans-Pacific Partnership
(TPP) negotiations and a potential comprehensive U.S. FTA with the European Union (EU) could
serve as incentives for the REPs to view multilateral or bilateral negotiations more favorably.

Congressional Research Service

Rising Economic Powers and U.S. Trade Policy

In an era in which global trade leadership is shifting and uncertain, the WTO’s dispute settlement
understanding (DSU) has become a key forum for managing trade relations. The DSU, despite
weaknesses, is a way to engage the REPs directly about their responsibilities for upholding a
system of multilateral trade rules.
The 113th Congress may review U.S. trade relations with the REPs, particularly if President
Obama should ask for a renewal of Trade Promotion Authority (TPA) in 2013. Some observers
maintain that U.S. trade leadership is bolstered when the President has TPA and a mandate from
Congress to negotiate new trade agreements. In trying to tie the REPs with their very different
state-led economic models into the more market-oriented WTO system, U.S. trade negotiators
may need considerable resources, incentives, flexibility, and leverage.

Congressional Research Service

Rising Economic Powers and U.S. Trade Policy

Contents
Introduction...................................................................................................................................... 1
Key Observations............................................................................................................................. 4
The Rising Economic Powers.................................................................................................... 4
U.S. Trade Interests and the REPs ............................................................................................. 6
U.S. Trade Policy Response ...................................................................................................... 7
Who Are the Rising Economic Powers? .......................................................................................... 9
Defining Characteristics ............................................................................................................ 9
Reform Challenges .................................................................................................................. 14
China ................................................................................................................................. 16
India................................................................................................................................... 16
Brazil ................................................................................................................................. 17
Mexico............................................................................................................................... 17
Turkey ............................................................................................................................... 18
Russia ................................................................................................................................ 18
Indonesia ........................................................................................................................... 19
U.S. Trade Interests and the REPs ................................................................................................. 19
REP Markets and U.S. Prosperity ........................................................................................... 20
REP Trade Barriers .................................................................................................................. 22
Tariffs ................................................................................................................................ 23
Services Barriers ............................................................................................................... 24
Government Procurement ................................................................................................. 25
Intellectual Property Protection ......................................................................................... 26
Foreign Investment Restrictions........................................................................................ 27
State-Owned or State-Controlled Enterprises (SOEs) ....................................................... 28
Export Restrictions on Raw Materials............................................................................... 29
REP Interventionist Practices .................................................................................................. 29
REPs as “Responsible Stakeholders” ...................................................................................... 32
China’s Key Role .............................................................................................................. 33
U.S. Trade Policy Response........................................................................................................... 34
Trade Policy Goals and the REPs ............................................................................................ 35
Trade Negotiating Initiatives ................................................................................................... 36
Multilateral Negotiations................................................................................................... 37
Plurilateral Agreements ..................................................................................................... 38
Strengthening the WTO Dispute Settlement Understanding ............................................. 39
Bilateral and Regional FTA Negotiations and Other Bilateral Initiatives ......................... 40
U.S. Unilateral Initiatives to Encourage REP Reforms ..................................................... 42
Congressional Role.................................................................................................................. 44

Figures
Figure 1. Rising Economic Powers.................................................................................................. 2
Figure 2. Shift in Shares of Global GDP ......................................................................................... 5
Figure 3. REP’s Shares of U.S. Trade .............................................................................................. 6

Congressional Research Service

Rising Economic Powers and U.S. Trade Policy

Figure 4. REP and U.S. GDP in 2010 and 2050 ............................................................................ 10
Figure 5. Total REP-7 Population and GDP, 2011 ......................................................................... 13
Figure 6. Trade as a Percentage of U.S. GDP ................................................................................ 20
Figure 7. Goods Tariffs and Services Tariff Equivalents ............................................................... 25
Figure 8. FDI Restrictiveness Index by Country, 2010.................................................................. 28

Tables
Table 1. Projections of the Largest Economies in the World, 2050 ............................................... 10
Table 2. Purchasing Power Parity GDP Estimates, 2011 and 2020 ............................................... 11
Table 3. REP Share of Global Exports........................................................................................... 12
Table 4. Economic Indicators of the REPs .................................................................................... 13
Table 5. REP Business Climates .................................................................................................... 15
Table 6. Tariff Profiles of the U.S. and the REPs .......................................................................... 23
Table 7. Tariff Equivalents of Service Barriers .............................................................................. 24
Table 8. Selective REP Procurement Policies................................................................................ 26
Table C-1. Economic Indicators of Selected “Long Shot” Countries ............................................ 50
Table C-2. Economic Indicators of Selected Emerging Markets ................................................... 52

Appendixes
Appendix A. Previous Efforts at Identifying a Group of Rising Developing Countries................ 46
Appendix B. Methodology for Economic Projections ................................................................... 48
Appendix C. Alternative REP Groupings ...................................................................................... 50

Contacts
Author Contact Information........................................................................................................... 53
Acknowledgments ......................................................................................................................... 53

Congressional Research Service

Rising Economic Powers and U.S. Trade Policy

Introduction
For much of the post-World War II era, developing countries were relatively minor players in the
world economy. Accounting for 80% of the world’s population but less than 20% of the world’s
output two decades ago, developing countries throughout Africa, Asia, Latin America, and the
Middle East were often dismissively referred to as the Third World. At the time, these countries
generally exported raw materials, and few ever expected them to be able to export sophisticated
manufactured goods to the industrialized world or to become significant world importers.1
Developing country economic prospects began to change in the 1980s with the spectacular
success of four Asian countries—Hong Kong, South Korea, Taiwan, and Singapore. Dubbed the
“Asian tigers,” these countries adopted export-led growth strategies that helped boost annual per
capita incomes by between 5% and 6% over the entire decade. This success, which also involved
the use of industrial policies to develop their manufacturing sectors, helped shift the focus of
other developing countries from production for domestic and regional markets to production for
world markets.
This reorientation in thinking accelerated dramatically in the early 1990s with the advance of
globalization. Bolstered by the fall of communism, the beginnings of the information technology
(IT) revolution, sharply declining transportation costs, the freer movement of capital and
technology from developed to developing countries, and economic reforms, economic growth in
developing countries began to take off, reaching practically every region of the world and
encompassing dozens of developing countries.2
China led the way with average annual real gross domestic product (GDP) growth increases of
nearly 10% from 1979 to 2011. Its share in global GDP increased from 1.5% in 1990 to 9.5% in
2010. Growth in a handful of developing countries with very large populations, such as India,
Brazil, Indonesia, Turkey, and Mexico, was also stronger than it had been in previous periods for
various reasons. These other developing countries increased their share of global GDP from 15%
to 22% over the same period, enabling developing countries as a group with now 83% of the
world’s population (5.1 billion people) to expand their share of global output to almost 33%
today.3 During this same period, the size of the global economy more than doubled, increasing
from $28 trillion in 1990 to $68 trillion in 2010.4
Projections abound that a handful of developing countries will continue to gain shares of global
output vis-à-vis the advanced countries, and in the process change the face of the global economy.
A World Bank study projects that by 2030, developing countries will contribute about 50% of

1

Ian M.D. Little, Economic Development: Theory, Policy, and International Relations, 1982.
CRS Report RL34091, Globalization, Worker Insecurity, and Policy Approaches, by (name redacted).
3
World Bank and Development Centre of the State Council, P.R.C., China 2030: Building a Modern, Harmonious, and
Creative High-Income Society, World Bank, Washington, D.C., 2012, p. 399 [hereafter cited as World Bank: China
2030].
4
A previous CRS report (CRS Report R41969, Rising Economic Powers and the Global Economy: Trends and Issues
for Congress, by (name redacted)) describes how a small group of fast-growing and highly populated developing
countries are gaining larger shares of global GDP, trade and investment, and posing varied challenges for U.S.
economic interests.
2

Congressional Research Service

1

Rising Economic Powers and U.S. Trade Policy

global output (with China contributing 20%) and two-thirds of global economic growth (with
China contributing 25%).5
Figure 1. Rising Economic Powers

Source: Analysis by CRS. Data from World Bank Development Indicators and U.S. International Trade
Commission.
5

World Bank: China 2030, p. 6.

Congressional Research Service

2

Rising Economic Powers and U.S. Trade Policy

Long-term projections, however, can be far off the mark. Some of these countries may falter as
aging populations, rising labor costs, corruption, environmental challenges, failure to innovate or
reform more deeply, or infrastructure deficiencies limit them from growing as rapidly as
predicted, while other developing countries currently not on anyone’s radar screen could turn
their economic and political fortunes around.
Nevertheless, there is widespread consensus that in addition to China, many of these other larger
populous developing countries will continue to experience faster economic growth than the
advanced economies, as they have over the past decade, thus continuing the shift of relative
economic wealth to a handful of developing countries. Reasons for this assessment include both a
continuing large potential for “catch-up” gains in output and productivity that these developing
countries possess, combined with continuing slow growth in advanced economies due to
deleveraging and the impact of high debt burdens.6
Despite likely gains in economic power, the living standards (as measured by per capita income
levels) of the rising powers are likely to remain well below the levels in advanced countries due
to their huge populations and still high poverty rates. But still “developing” countries are
becoming significant forces in the world economy for the first time in hundreds of years, creating
uncertainties regarding their role in the global economy.
These rising countries present the United States with both opportunities and challenges. On the
opportunity side, rising imports from these economies offer U.S. consumers an expanding choice
of products at lower prices, raising real incomes and contributing towards higher standards of
living. Many of the imports are also intermediate goods used in the production of U.S.-produced
goods, lowering costs and, thereby, helping to maintain the competitiveness of U.S. firms in the
global economy. As their economies grow, the REPs are also providing U.S. exporters and
investors with robust new markets—their successful growth strategies are expected to create
billions of new “middle-class” consumers and unleash billions of dollars in infrastructure
spending over the next few decades for which U.S. exporters of goods and services can compete.
At the same time, many U.S.-based firms and workers are competing now with an expanded pool
of lower-wage labor, much of it located in the REPs. Such competition can nudge U.S.-based
firms to reduce costs by adopting labor-saving technology, to move production overseas, or to
shut operations that may no longer be competitive. Even firms and workers in high-end service
sectors are feeling the pressure of competition from these countries.7
U.S. relations with the REPs, thus, are affecting U.S. economic welfare in fundamental ways.
From the perspective of U.S. trade policy, efforts to reduce the trade and investment barriers of
the REPs that are impeding U.S. producers and workers from maximizing the benefits of
participation in the global economy are likely to be a high priority. But the views and practices of
the REPs regarding the role of the state in economic activity, which may differ sharply from U.S.
perspectives and actions, make the elimination of trade barriers and the negotiation of new world
6
Assuming that workers in developed countries are already highly productive, for reasons ranging from more advanced
technology to better infrastructure and health care, workers in developing countries have a lot more scope for “catching
up” to them if they can fulfill their potential.
7
CRS Report R41145, The Future of U.S. Trade Policy: An Analysis of Issues and Options for the 112th Congress, by
(name redacted).

Congressional Research Service

3

Rising Economic Powers and U.S. Trade Policy

trade rules more difficult. For their part, the REPs are also protesting U.S. policies on trade
remedies, high tariffs on apparel and other import-sensitive items, pricing of medicines,
agricultural subsidies and quotas, the temporary entry of foreign workers, and monetary
expansion (so-called quantitative easing). In addition, they are making their concerns heard in
international institutions, particularly the WTO.
How the REPs evolve may also affect the nature and integrity of the world trading system. U.S.
trade policy officials have generally assumed that as the REPs gain weight in the international
trading system, they will become more responsible stakeholders by sharing not only the benefits
but the costs of system maintenance and by embracing the principles of free and fair trade with
limited government intervention. As China and other developing economies with heavy state
involvement in guiding economic activity evolve, it is not certain that they are going to accept
this place in the liberal international economic order that the United States and Britain jointly
constructed in the aftermath of World War II.
The rise of China and other developing countries has also coincided with a weakening of the
WTO-centered multilateral trade order. Bilateral and regional preferential trade agreements have
proliferated and WTO-sponsored multilateral trade liberalization negotiations have stalled. In this
environment, questions arise over how the world trade order will be kept and how new rules will
be established.8
These profound changes in the global economy raise a number of questions that the 113th
Congress may wish to consider in its oversight of U.S. trade policy. First, what kinds of trade
negotiations can best be utilized to open up REP markets in a way that provides for more
balanced and mutually beneficial relationships? Second, in what ways can the United States best
influence the REPs to adopt more market-oriented trade and economic policies or reduce barriers
to U.S. exports and investment? Third, how can the United States best influence China and the
other REPs to become responsible stakeholders in the world trading system?
This report is organized into four parts. Part one summarizes the key observations of the report.
Part two discusses the key characteristics of the REPs and their reform challenges. Part three
analyzes the relationship between U.S. trade interests and the REPs. Part four considers a range of
U.S. trade policy responses to challenges raised by the REPs, including the role of Congress.

Key Observations
The key observations of the report are summarized below. More detailed analysis and information
is provided in the main body of the report.

The Rising Economic Powers
•

Countries: A handful of developing countries with large populations and
growing economies are becoming major players in the global economy. These
rising economic powers (REPs) are led by China, but also include Brazil, India,

8

Robert Skidelsky, “The Future of Globalization in the Light of the Economic Collapse of 2008,” IISS Geo-Economic
and Strategy Seminar, March 25, 2012, p.3.

Congressional Research Service

4

Rising Economic Powers and U.S. Trade Policy

Indonesia, Mexico, Russia, and Turkey. There are also a number of populous
developing countries such as Egypt, Iran, Nigeria, and Vietnam that have
enormous economic potential, but must overcome fundamental political and
economic obstacles if they are to achieve their economic potential.
•

Characteristics: Comprising 48% of
Figure 2. Shift in Shares of Global GDP
the world’s population, these seven
countries have accounted for the bulk
of a shift in global GDP to developing
countries, going from 16% in 1990 to
33% in 2010 (see Figure 2). Based
on purchasing power parity estimates,
China, India, Russia, and Brazil are
now among the 10 largest economies
in the world and Mexico (#11),
Indonesia (#15), and Turkey (#16) are
not far behind. With large economies
and rising shares of world trade
flows, the REPs (particularly China,
Brazil, and India) have greater
Source: Analysis by CRS. Data from World Bank
involvement in WTO negotiations
World Development Indicators.
and dispute settlement cases, have
protested with greater frequency U.S. economic and trade policies, and are more
able and willing to deflect or reject U.S. trade and market access demands.

•

Reform Challenges: Continued high growth requires ongoing reforms to address
economic challenges, which constantly change as countries hit different income
levels. Any of the REPs could stumble if they do not take steps to improve their
business climates by undertaking a range of trade, regulatory, and structural
reforms. Government corruption, poor infrastructure, weak governance,
inadequate intellectual property protection, and inability to innovate are some of
the reform challenges these countries share. All these reforms tend to be
politically sensitive because they are opposed by vested interests.

Congressional Research Service

5

Rising Economic Powers and U.S. Trade Policy

U.S. Trade Interests and the REPs
•

U.S. Exports and Imports:
The REPs are becoming much
more important U.S. trading
partners (see Figure 3). They
accounted for 47% of U.S.
exports in 2011, up from 20% in
2000. Their share of U.S.
imports has risen from 23% in
2000 to 36% in 2011. If the
REPs continue to grow rapidly
and open their economies
further to trade, these trends
could accelerate in the future.

•

REP Trade Barriers: If the
United States is to maximize its
export potential and boost its
Source: Analysis by CRS. Data from U.S. International
living standards, exporters and
Trade Commission.
investors will need to have
better access to REP markets. REP trade and regulatory barriers on multiple
fronts—tariffs and non-tariff barriers, and restrictions on services and
investment—remain considerably higher than in the United States and most other
advanced countries. Many of these barriers are denying U.S. producers and
workers the extension of comparative advantage, particularly in the areas of
services, foreign investment, intellectual property, and government procurement,
not only in REP markets, but also in third country markets. A number of these
barriers are inadequately covered or difficult to enforce under current WTO rules.

•

REP Interventionist Policies: The ability of the United States to persuade the
REPs to embrace the principles of free and fair trade is constrained by growing
differences over the role that the state should play in economic activity. While the
rules-based GATT/WTO trading system favors commercial outcomes to be
determined by market forces, most REP governments play a much larger role in
their economies than does the U.S. government. As the 2008 global financial
crisis may have weakened the case for free market approaches, some of these
countries may now feel more willing to entertain market-distorting practices and
take advantage of gaps in the rules.

•

REPs as “Responsible Stakeholders”:9 As the REPs have benefitted greatly
from participation in the global economy, many observers hoped that over time
they would assume greater responsibility for the maintenance of the trading
system. But decisions by Brazil, China, and India not to make concessions that
could have facilitated the conclusion of the Doha Round of multilateral trade
negotiations reflected policy calculations driven primarily by national interests
and challenges. How to persuade these countries that a strengthened multilateral

Figure 3. REP’s Shares of U.S.Trade

9
Robert Zoellick introduced the notion of China as a “responsible stakeholder” in the international community in a
September 1, 2005 speech delivered before the National Committee on U.S.-China Relations. Zoellick at the time was
serving as Under Secretary of State.

Congressional Research Service

6

Rising Economic Powers and U.S. Trade Policy

trading system is squarely in their national economic interests and a way to move
domestic economic reforms forward remains a challenge. China, the largest
exporter of manufactured goods and the second-largest economy in the world, is
the REP looked to the most for providing leadership of the global trading system,
but India and Brazil are not far behind.

U.S. Trade Policy Response
•

Changing Context for U.S. Trade Policy: With the REPs accounting for a
rising share of global GDP and trade, U.S. trade policymakers face very different
conditions than those that prevailed in the second half of the last century. Support
for multilateralism is weaker, bilateral and regional preferential agreements have
proliferated, and priorities for trade liberalization and economic reforms are
evolving as complex, new policy issues come to the fore. In this environment,
questions arise over how the world trade order will be kept, how new rules will
be established, and how the United States can best respond to the opportunities
and challenges posed by the rise of the REPs.

•

Trade Policy Goals and the REPs: Trade expansion promotes higher U.S. living
standards, but all companies and workers do not gain equally. Today’s more open
global economy, which has intensified competition for low-skilled workers and
pressures for automation, may be responsible for a number of contemporary
economic concerns, such as job insecurity and income stagnation. These trends
feed into growing public pressures for greater reciprocity in U.S. trade relations
with the REPs, and raise questions concerning the role of trade negotiations and
export promotion in achieving U.S. trade policy goals.

•

Trade Policy Strategy towards the REPs. The REPs still depend on access to
advanced country markets and they may not easily ignore requests for reciprocal
negotiations. Nor are the REPs likely to ignore the potential discriminatory
effects of preferential trade agreements negotiated by the United States with other
large and significant trading partners. In negotiating with the REPs, U.S. trade
policymakers may wish to consider putting U.S. trade barriers on the table.

•

Multilateral Negotiations: Given that the REPs did not use their growing
influence to insure a successful conclusion of the Doha Round, further progress
on trade liberalization within the WTO may require alternatives to existing
multilateral processes and practices. Principles that have guided multilateral trade
negotiations in the past, such as unconditional most-favored-nation (MFN) and
special and differential (S&D) treatment, may need to be reexamined. Currently,
47 advanced and advanced developing countries are exploring a potential
plurilateral agreement on services under the WTO umbrella (where some but not
all WTO members are members), and other plurilaterals on foreign investment
and state-owned enterprises have been proposed. Such agreements could help
end simplistic distinctions between developed and developing countries which
many of the REPs have tried to perpetuate.

•

Strengthening WTO Dispute Settlement: In an era in which both global
economic power and trade leadership are in transition, the WTO’s dispute
settlement understanding (DSU) has become a linchpin for maintaining global
economic order. For the United States and other advanced countries, the DSU is a
way to engage the REPs directly about their responsibilities for upholding a

Congressional Research Service

7

Rising Economic Powers and U.S. Trade Policy

system of multilateral trade rules. For the REPs, the DSU provides a way to
challenge advanced countries’ market access barriers and measures that some
deem to be protectionist, such as extensive use of trade remedy laws. The DSU,
however, does have weaknesses (e.g., cases can take three years to complete and
remedies are not retrospective) which U.S. trade policymakers could try to
address.
•

Bilateral and Regional FTA Negotiations and Other Bilateral Initiatives:
Increasingly, U.S. trade policy (as well as the trade policies of the other major
trading countries) is becoming dominated by bilateral and regional negotiations
to establish free trade agreements (FTAs). These agreements offer opportunities
between pairs or groups of countries to reduce trade barriers and construct new
rules in an effort to forge more integrated economies. U.S. FTAs since NAFTA
went into effect in 1994 have been concluded with relatively small trading
partners (South Korea excluded). These have been comprehensive in scope and
have comprised high standards. For a number of reasons, the United States has
not concluded FTAs with large and more significant trade partners, such as
China, India, or Brazil, that could offer greater economic advantages. If the
United States wishes to move in this direction, deviations from its standard FTA
template may need to be considered. At the same time, ongoing Trans-Pacific
Partnership (TPP) negotiations and a potential comprehensive U.S. FTA with the
European Union (EU) could serve as incentives for the REPs to view higher
standard multilateral or bilateral negotiations more favorably. In addition, other
bilateral initiatives, such as cabinet-level working groups and trade and
investment framework agreements, are or could be additional approaches used to
elevate U.S. government attention and resources devoted to these key countries.

•

Unilateral Initiatives to Encourage REP Reforms: U.S. unilateral initiatives
traditionally took the form of threats to restrict a trading partner’s access to the
large U.S. market in order to influence trade barrier reductions. In today’s more
interdependent and rules-based world economy, unilateral initiatives take the
form more of “carrots” or incentives than “sticks” or sanctions. Possible
unilateral initiatives include measures that strengthen the U.S. economy so that it
sets an example for the rest of the world, as well as U.S. proposals that resonate
with the REPs’ evaluation of their own economic self-interest.

•

Congressional Role: Congress plays a large role in the development and
administration of U.S. trade policy. The 113th Congress may consider a number
of questions relating to the future direction of U.S. trade relations with the REPs,
particularly if President Obama should ask for a renewal of Trade Promotion
Authority (TPA) in 2013. Some observers maintain that U.S. trade leadership is
bolstered when the President has TPA and a mandate from Congress to negotiate
new agreements. In trying to induce the REPs with their very different state-led
economic models into strengthening the market-oriented WTO system, U.S. trade
negotiators may need considerable resources, flexibility, and leverage to engage
them more successfully.

Congressional Research Service

8

Rising Economic Powers and U.S. Trade Policy

Who Are the Rising Economic Powers?
Predictions abound that a small group of the over 140 countries now classified by the World Bank
as “developing” will be the growth engine of the global economy and will continue to gain global
output vis-à-vis the advanced countries. Outside of the largest developing countries, such as
China, India, and Brazil, there has been less consensus on which countries to flag for special
consideration.
Past attempts to identify the rising economic powers from the developing world have adopted
many different monikers—emerging markets, Big Emerging Markets, BRICs, Near-BRICs, Next11, and Pivotal Powers—often driven by different objectives, such as generating interest in new
investment opportunities. (See Appendix A for a summary of these past efforts.) This report
focuses on countries that are not only up and coming, located throughout the world, and
providing expanding markets, but are also playing an increasingly large role in determining the
shape of the global trading system.
Most predictions mapping out the rise of specific developing countries use a simple methodology
that incorporates data on labor force and capital stock growth combined with more subjective
evaluations on how individual governments will cope with a range of political and economic
challenges. To the extent that the underlying political and institutional dimensions are given more
weight, projections regarding the rise of any one country are probably going to be less firm than
the fact that the greatest potential for high rates of economic growth (and a continuing shift of
economic power) rests with a small group of developing countries (see Appendix B for more
detail on the methodology behind the economic projections).
There are large differences among the universe of rising developing countries, giving scope for
varied groupings and categories. The likely uneven rise of developing countries is an important
consideration for prioritizing U.S. trade interests and concerns. While this report focuses
primarily on seven large, populous rising economic powers—China, Brazil, India, Indonesia,
Mexico, Russia, and Turkey—some of these countries’ economic prospects could easily decline if
fundamental challenges are not addressed. Simultaneously, a number of large developing
countries, such as Egypt, Iran, Nigeria, and Vietnam, could emerge as global economic forces
over time if their geopolitical conditions are dramatically altered and economic deficiencies
addressed. These long-shot or turnaround economies have the size to exert influence if they break
out of their economic doldrums and political constraints. In addition, nearly a dozen or so fastgrowing developing countries, such as Colombia, Poland, and Malaysia, are providing rapidly
growing commercial opportunities for U.S. traders, consumers, and investors, although these
countries may not have the size to become forces in the global economy. (See Appendix C for a
discussion of these two alternative country groupings.)

Defining Characteristics
There are significant differences among the seven countries dubbed as rising economic powers
(REPs) in this report. These include political systems, per capita income levels, approaches to
economic development, and trade patterns. Perhaps most importantly, China and Russia tend to
be authoritarian states, while Brazil, India, Indonesia, Mexico, and Turkey are committed to
democratic institutions. Furthermore, of these latter five states, Mexico is a bit different given its
strong economic links with the United States through NAFTA and its close proximity to the
United States. But the one characteristic they all share is a large economy in absolute terms.

Congressional Research Service

9

Rising Economic Powers and U.S. Trade Policy

As shown in Table 1, all seven are currently ranked among the top 21 largest economies in the
world in 2010 based on GDP calculations in nominal dollars—with China #3, India #8, Brazil #9,
Mexico #13, Russia #17, Turkey #18, and Indonesia #21. Projecting out 40 years to 2050 (see
Figure 4), one recent study predicts that all the REPs will rise in the rankings with China
overtaking the United States as the largest economy in the world. Turkey is projected to gain the
most in rankings (6 spots), followed closely by India, Mexico, and Indonesia (5 spots each).
Figure 4. REP and U.S. GDP in 2010 and 2050
(in constant 2000 U.S. dollars)

Source: HSBC Global Research, “The World in 2050: Quantifying the Shift in the Global Economy,” January 2011.

Table 1. Projections of the Largest Economies in the World, 2050
2010 Rankings

2050 Projections

Rank Change 2010-2050

1. United States

1. China

+2

2. Japan

2. United States

-1

3. China

3. India

+5

4. Germany

4. Japan

-2

5. United Kingdom

5. Germany

-1

6. France

6. United Kingdom

-1

7. Italy

7. Brazil

+2

8. India

8. Mexico

+5

9. Brazil

9. France

-3

10. Canada

10. Canada

0

11. South Korea

11. Italy

-4

12. Spain

12. Turkey

+6

13. Mexico

13. South Korea

-2

14. Australia

14. Spain

-2

15. Netherlands

15. Russia

+2

16. Argentina

16. Indonesia

+5

Congressional Research Service

10

Rising Economic Powers and U.S. Trade Policy

2010 Rankings

2050 Projections

Rank Change 2010-2050

17. Russia

17. Australia

-3

18. Turkey

18. Argentina

-2

19. Sweden

19. Egypt

+10

20. Switzerland

20. Malaysia

+10

21. Indonesia

21. Saudi Arabia

+2

Source: HSBC Global Research, “The World in 2050: Quantifying the Shift in the Global Economy,” January
2011.
Notes: GDP calculations based on constant 2000 U.S. dollars. Unlike nominal GDP, real GDP can account for
changes in the price level. Also note that Egypt and Malaysia were not ranked in top 30 in 2010.

Comparisons of national wealth are also frequently made on the basis of purchasing power parity
(PPP).10 Measuring national wealth in PPP terms tends to increase the GDP of developing
countries by taking into account that many non-tradable goods such as haircuts, meals, medical
care, and housing tend to cost less in developing countries. One PPP GDP ranking (see Table 2),
estimates that China, India, Russia, and Brazil were among the 10 largest economies in the world
in 2011 and projects that by 2020, China will have the largest economy in the world and India the
second largest, with the Russian (#6), Brazilian, (#7), and Mexican economies (#8) also among
the top 10.11
Table 2. Purchasing Power Parity GDP Estimates, 2011 and 2020
($billions)
Rank-2011

Country

PPP GDP
(2011)

Rank-2020

1.

United States

15.10

1.

China

25.21

2.

China

11.45

2.

United States

22.22

3.

India

4.51

3.

India

9.87

4.

Japan

4.49

4.

Japan

5.74

5.

Germany

3.23

5.

Germany

4.32

6.

Russia

2.38

6.

Russia

3.97

7.

U.K.

2.32

7.

Brazil

3.83

8.

Brazil

2.30

8.

Mexico

3.15

9.

France

2.28

9.

U.K.

3.04

10.

Italy

1.96

10.

France

3.04

11.

Mexico

1.95

11.

South Korea

2.44

12

South Korea

1.50

12.

Italy

2.41

Country

PPP GDP
(2020)

10
PPP estimates take into account the amount of adjustment needed in an exchange rate between countries in order for
the exchange rate to be equal to each country’s purchasing power. In other words, the exchange rate adjusts so that
identical goods in two countries have the same price when expressed in the same currency.
11
The December 2012 U.S. National Intelligence Council (NIC) Global Trends: 2030 report projects that China’s GDP
will surpass the U.S. GDP by 2030.

Congressional Research Service

11

Rising Economic Powers and U.S. Trade Policy

Rank-2011

Country

PPP GDP
(2011)

Rank-2020

PPP GDP
(2020)

Country

13.

Spain

1.49

13.

Indonesia

2.28

14.

Canada

1.43

14.

Canada

2.10

15.

Indonesia

1.12

15.

Spain

1.89

16.

Turkey

1.07

16.

Turkey

1.87

17.

Iran

0.98

17.

Taiwan

1.51

18.

Taiwan

0.94

18.

Australia

1.48

19.

Australia

0.93

19.

Iran

1.32

Source: Economist Intelligence Unit estimates.

Aggregate GDP—the size of a country’s economy (whether measured in constant dollars or
calculated based on PPP)—captures the potential impact of a country on the international trading
system and its ability to resist unilateral pressure from another country. A country with a large
economy tends to have important trading relationships with more countries (i.e., global trading
relationships) and is increasingly part of global supply chains involving multinational companies.
As shown in Table 3, the seven REPs that are the primary focus of this report have gained
dramatic shares of world exports, rising from 7% in 1990 to 20.6% in 2011. By 2016, the REPs
are projected to account for nearly 25% of global exports.
Table 3. REP Share of Global Exports
(in percent)
Country

1990

1995

2000

2006

2011

2016 (est.)

Brazil

0.92

0.91

0.86

1.15

1.40

1.40

China

1.82

2.90

3.89

8.08

10.70

13.10

India

0.53

0.62

0.70

1.06

1.70

2.10

Indonesia

0.75

0.89

0.97

0.84

1.10

1.30

Mexico

1.20

1.50

2.60

2.09

2.00

2.20

Russia

1.43

1.62

1.61

2.52

2.90

2.60

Turkey

0.38

0.42

0.44

0.72

0.80

0.80

Total REP 7

7.04

8.91

11.06

16.46

20.60

23.50

Source: Economist Intelligence Unit trade data base.

With large economies and trade flows, these countries have greater involvement in WTO
negotiations and dispute settlement processes, as well as greater autonomy in applying the rules
and obligations of the WTO system domestically. The REPs have also protested with greater
frequency U.S. policies and practices that they deem are detrimental to their own national
economic interests. In the aftermath of the 2008 financial crisis, REP leaders have criticized U.S.
economic policies and reliance on free market orthodoxy more vociferously. While their protests

Congressional Research Service

12

Rising Economic Powers and U.S. Trade Policy

and criticisms have not been followed by changes in U.S. trade or economic policies, the REPs
arguably have become more able to deflect U.S. trade and market access demands.12
Large populations and growing economies are Figure 5.Total REP-7 Population and GDP,
the driving force in positioning the REPs
2011
higher in the global GDP rankings. As shown
in Figure 5, the seven REPs in 2011
accounted for 48% of the world’s population
(3.34 billion out of 6.97 billion people) and
23% of the world’s GDP ($16.4 trillion out of
$69.9 trillion). The fact that China has the
world’s largest population, India the second
largest, and Brazil the fifth largest has helped
make these three the second-, third-, and
Source: Analysis by CRS. Data from the World Bank
eighth-largest economies in the world
World Development Indicators.
(according to PPP calculations), respectively.
At the same time, per capita incomes of the REPs in 2011 (see Table 4) were approximately onefifth the per capita income levels in the high income countries of the Organization for Economic
Cooperation and Development (OECD) ($8,144 versus $38,667), indicating that reaching the
much higher OECD living standards with their large populations may be a stretch in the near
term.13
Table 4. Economic Indicators of the REPs
Population
GDP per
capita (current
US $ in 2011)

(millions)

Average Real
Annual GDP
Growth (20032008)

Average Real
Annual GDP
Growth (20092011)

Brazil

196.6

3.7

3.3

12,953

China

1,334.1

11.3

9.6

5,429

India

1,241.5

8.0

8.2

1,488

Indonesia

242.3

5.6

5.8

3,494

Mexico

114,.8

3.0

1.1

10,064

Russian
Federation

141.9

7.1

0.2

13,089

Turkey

73.6

5.9

4.3

10,498

REP total

3,345.1

6.4

4.6

8,144

World/High
Income OECD

6,973.7

2.1

0.2

38,667

2011
Country

12
Gregory Shaffer and Charles Sutton, “The Rise of Middle-Income Countries in the International Trading System,”
Legal Studies Research Paper Series No. 12-51, University of Minnesota Law School, pp. 5, 9.
13
The OECD is an international organization based in Paris designed to promote policies that will improve the
economic and social well-being of people around the world. Its 34 members include the world’s most advanced
countries, but also two REPs, Mexico and Turkey.

Congressional Research Service

13

Rising Economic Powers and U.S. Trade Policy

Population

(millions)

Average Real
Annual GDP
Growth (20032008)

Average Real
Annual GDP
Growth (20092011)

310.5

2.3

0.3

2011
Country
United States

GDP per
capita (current
US $ in 2011)

48,447

Source: World Bank data found at http://databank.worldbank.org/ddp/home.do?Step=12&id=4&CNO=2.
Notes: In the World/High Income OECD category, population and GDP data are for the World and average
growth rates and GDP per capita data are for High Income OECD countries.

With the exception of Mexico from 2003 to 2008 and Russia from 2008 to 2011, the REPs have
been growing faster than the advanced high income OECD countries by a considerable margin. In
the aggregate, they grew three times faster than the high income OECD countries from 2003 to
2008 (6.4% compared to 2.1%) and 23 times faster from 2009 to 2011 (4.6% compared to 0.2%).
If these growth rates persist, the REPs will continue to gain in the GDP rankings in the years
ahead.

Reform Challenges
Robust capital inflows and ballooning exports to the United States boosted REP growth rates
during the 2003-2008 period. Ruchir Sharma, author of Breakout Nations, argues that this was a
golden period that is unlikely to be repeated, while some other analysts are much more optimistic
that some developing countries, particularly China, India, and Brazil, can continue to grow at the
historically rapid rates of the last decade and remain growth engines of the global economy.14
The case for slower growth is based on two major factors. The first is that advanced countries,
hamstrung by high consumer and government debt, likely will be growing at much lower rates in
the foreseeable future. The International Monetary Fund (IMF), for example, projects that in 2013
advanced countries will grow at only one-third the rate of emerging markets and developing
countries (2% versus 6%).15 If growth slows in advanced countries, they could buy less from the
developing world, much of which is highly dependent on exports for its growth.
A second factor is that the richer a country becomes, the harder it is to grow rapidly. In the case of
middle-income countries, World Bank research determined that only 13 of the 101 countries
deemed middle income (currently defined as any country with a gross national income per capita
between $1,006 and $12,275) in 1960 had advanced to high income by 2011. To make this
transition up the value-chain, governments can no longer simply borrow technology or add more
capital and labor, but must find ways to foster private sector development and innovation.16
Economic history, thus, suggests that there is nothing inevitable in the continued rise of any of the
REPs or any other developing country. Every individual developing country may have great
economic potential, but there is no easy path for continued high growth. Continued high growth
14
World Bank, China 2030, pp. 16-17; and Jim O’Neil, The Growth Map: Economic Opportunity in the BRICs and
Beyond, Portfolio/Penguin, 2011.
15
IMF World Economic Outlook, April 2012.
16
World Bank, China 2030, p.13.

Congressional Research Service

14

Rising Economic Powers and U.S. Trade Policy

requires ongoing efforts and reforms to address economic challenges, which constantly change as
countries hit different income levels.17
The magnitude of the reform
challenges for the REPs is captured
by World Bank estimates of a
country’s openness or receptivity to
business operations. As shown in
Table 5, the REPs’ rates are quite
low, with the business climates of
Russia, Brazil, Indonesia, and India
comparable to countries such as
Bangladesh (#122), Uganda (#123),
and Swaziland (#124). The United
States’ business environment was
rated the fourth-best in the world.

Table 5. REP Business Climates
Economy

World
Ranking

Mexico

53

Turkey

71

China

91

Russia

120

Brazil

126

Indonesia

129

India

132

United States
4
To improve their business climates
and reinvigorate their economies, the
Source: World Bank, Ease of Doing Business Index, 2011. This
index ranks economies from 1 to 185. A high ranking (a low
REPs could undertake a range of
numerical rank) means that the regulatory environment is
trade, regulatory, and structural
conducive to the operation of a business.
reforms. By reducing tariffs, quotas,
and foreign investment restrictions, the REPs could open their economies at the border to more
international competition. Trade-related reforms encompassing services regulation, regulation of
food-safety and technical standards, intellectual property protection, public procurement, customs
administration, and competition rules could also increase competition. Structural reforms to
address corruption, labor and product market restrictions, and other regulatory barriers could also
help free the economies of the REPs from government intervention. Overall, the resulting
intensified competition could help improve worker productivity, economic growth, and living
standards.

All these reforms tend to be politically sensitive because they affect government-business
relations, as well as entrenched political and vested business interests. A political determination to
overcome special interests that stand to be disadvantaged by the reforms, thus, may be important
for most of these reforms to be initiated and implemented. A country’s economic future in this
sense depends substantially on its politics. In situations where there is growing political will to
initiate domestic reforms, the scope for international negotiations and solutions could increase
substantially.18
While the reforms are primarily a matter of unilateral action, some trade specialists believe that
action in one country can create a situation where REP governments would want to emulate
reforms of the others to stay competitive.19 Key reforms that each country may need to consider
vary and are highlighted below.
17

Japan’s rapid growth in the 1980s and continuing struggles since the 1990s illustrates that advanced countries are not
immune from reform challenges either. For the United States, getting a handle on federal debt and budget deficits is
considered by many economists a priority for bolstering long-term growth potential.
18
Razeen Salley, “Trade Policy in the BRICS,” p.16.
19
Razeen Sally, “The Crisis and the Global Economy: A Shifting World Order? ECIPE No. 3/2011, p.29.

Congressional Research Service

15

Rising Economic Powers and U.S. Trade Policy

China
Averaging a phenomenal 9% growth rate over the past three decades, China has been one of the
world’s fastest-growing economies. But today it faces formidable challenges in continuing on this
path. Its main reform challenge may be to make the economy more consumption and less
investment driven.20 To rebalance the economy, China will need to undertake various
competition-enhancing reforms, ranging from public sector and financial sector reforms to secure
private property rights, deregulation of internal trade, market pricing for internal inputs, and
better provision of health, education, pensions, and social security. A number of other measures
could be taken to bolster the private sector at the expense of China’s still large state-owned or
state-controlled companies. These could include limits on industrial policy activism, better
enforcement of intellectual property rights, and accelerated services liberalization.21 Rebalancing
will likely encounter resistance from powerful vested interests as they may challenge the heart of
the Communist party’s grip on power. Not only party members, but vested interests in the stateowned companies, military, banks, and family clans would likely resist the reforms in order to
preserve their positions of power and wealth.22 Other key risks to achieving stable long-term
economic growth include pervasive corruption, environmental degradation, and an aging
population.

India
A number of economists have projected that India will approach China’s rapid growth rates over a
sustained period of time and become the third-largest economy in the world in a few decades. But
these growth projections could easily be derailed by endemic obstacles associated with bloated
government, corruption, overregulation, grinding poverty, and poor infrastructure. By most
accounts, corruption and overregulation are rampant, stifling the environment for most
businesses. The Heritage Foundation’s 2011 Index of Economic Freedom ranks India 124th out of
179 countries based on its restrictive trade policies, heavy government involvement in the
banking and finance sectors, rigorous investment caps, demanding regulatory structures, and a
high level of corruption.23 A massive blackout that affected more than 650 million people in late
July 2012, the largest in world history, was a stark reminder that India’s inefficient and poorly
managed power sector could easily undermine its long-term economic ambitions.24 With the
economy slowing, to an estimated 5%-6% rate of growth in 2012, down from over 8% in 2011,
concerns are rising that a regime of heavy government regulation is responsible for economic
slowdown (a return to the “license Raj ” days between 1947 and 1990).25 It is still uncertain
whether Prime Minister Manmohan Singh, who championed the economic reforms of the 1990s,
will be able to overcome the opposition in his own party and among his coalition partners to a
strong reform agenda.26

20

Guy de Jonquieres, “China’s Challenge,” ECIPE Policy Brief, 01/2012, p.3.
Razeen Salley, “Trade Policy in the BRICS,” p. 7.
22
George Magnus, “Will Asia Shape or Shake the World Economy? ECIPE Policy Brief, No. 05/2012, p. 5.
23
CRS Report RL33529, India: Domestic Issues, Strategic Dynamics, and U.S. Relations , coordinated by (name re
dacted).
24
Simon Denyer and Rama Lakshmi, “Power Fails in Half of India,” Washington Post, August 1, 2012.
25
Tyler Cowen, “Never Mind Europe, Worry about India,” New York Times, May 6, 2012.
26
Pratap Bhanu Mehta, “How India Stumbled,” Foreign Affairs, July/August, 2012.
21

Congressional Research Service

16

Rising Economic Powers and U.S. Trade Policy

Brazil
Brazil’s solid performance during the 2008-2009 financial crisis and its early recovery, including
strong 7.5% growth in 2010, and a large cushion of foreign exchange reserves (approximately
$350 billion), has contributed to its growing global influence and role. But its economic growth
fell in 2011 to 2.7%, and growth in 2012 is projected to be 1.5%-2%. If Brazil is to become a
world economic power, the country may need to pursue reforms in areas including infrastructure
and taxes. Brazil’s housing, transportation, telecommunications, and power grids all need major
investments and improvement. The World Economic Forum ranks Brazil’s quality of
infrastructure 104th out of 142 countries surveyed, behind China (69th), India (86th), and Russia
(100th).27 Brazil’s tax burden has escalated from 22% in 1998 to 36% of GDP today.28 The heavy
burden increases the cost of doing business in a variety of ways, including very high electricity
prices for industrial users—which are almost doubled by some 28 different taxes.29 Burdensome
regulations in opening and closing businesses, archaic labor laws, corruption, and bureaucratic
red tape also contribute to Brazil’s business environment. Brazil’s President Dilma Rouseff has
acted to reduce taxes and bring private firms into upgrading roads and ports, but other reforms
may also be needed to help reignite growth.30

Mexico
Mexico’s per capita income is about $10,000, the third highest among the REPs, but its economy
grew on average by only 2% per year from 2000 to 2010. Once the richest country in Latin
America, in recent years Mexico has been surpassed by its largest regional rivals—Brazil and
Chile—due to persistently sluggish growth. More robust growth rates over the past few years
(4.5% in 2010, 3.9% in 2011, and a projected 4.0% in 2012) have reignited foreign investor
interest in Mexico. Nevertheless, a number of factors still could constrain Mexico from growing
at a faster pace in the years ahead. These include a continuing large state presence in some
economic sectors, an inadequate education system, a rigid labor market, high income inequality,
and mismanagement of its dwindling oil wealth. Competition is also weak in many sectors in
Mexico, hurting efficiency, productivity, and consumer well-being.31 The country’s top 10
business families control the majority of the concentrated sectors. With low growth and high
inequality, Mexico’s new President Enrique Pena Nieto could consider a number of structural
reforms to strengthen the economy’s growth potential and move the country out of its middleincome status. These include investing in infrastructure and education, breaking up monopolies,
re-writing labor laws to make it easier to hire and fire, and opening more sectors to foreign
investment—changes the Mexican Institute for Competitiveness has said could add 2.5
percentage points to Mexico’s growth rate.32

27

The Economist, “Investing in Brazil’s Infrastructure,” August 11, 2012.
The Economist, “The Brazil Backlash.”
29
The Economist, “Economic Policy in Brazil,” September 15, 2012.
30
Financial Times, “We Want a Middle-Class Brazil,” October 3, 2012.
31
According to a joint OECD-Mexican government study, the average Mexican household spends an estimated onethird of its budget on products that are produced in monopolistic or oligopolistic markets.
32
The Economist, “The Man to Beat: Mexico’s Presidential Election,” March 31, 2012.
28

Congressional Research Service

17

Rising Economic Powers and U.S. Trade Policy

Turkey
Turkey’s economy averaged 6% growth from 2003 to 2008—one of the highest sustained rates of
growth in the world. Growth dropped to 1.1% in 2008 and declined by 4.7% in 2009, but
rebounded to over 9% in 2010 and to over 8% in 2011. While GDP growth is projected to be only
around 2.9% for 2012, it will still be one of the strongest rates of growth throughout Europe.33
Steady economic growth requires the government to finance a large current account deficit. While
in the past Turkey’s trade deficit has been financed mostly by long-term loans and foreign direct
investment, short-term inflows have funded a rising proportion of the funding gap since 2010. An
important priority for Turkey, thus, is to attract more equity and foreign direct investment inflows,
which generally are accompanied by skill and technology transfers, and fewer short-term loans
and portfolio inflows, which are more prone to sudden reversal.34 To attract more investment,
Turkey may need to consider liberalizing its foreign investment regime. Stringent labor
regulations, a somewhat unpredictable regulatory environment, and intellectual property
violations may be additional concerns for foreign investors. The World Bank has urged sweeping
reforms to address high severance packages, limitations of temporary work, and high social
security costs.35

Russia
Before the 2009 financial crisis, Russia’s economy was growing at around 7% from 2003 to 2008.
The growth, which was fueled by rising demand for its oil, gas, and commodities, helped raise the
Russian standard of living substantially. With oil prices dropping by 75% from mid-2008 to early
2009, the economy grew by a meager two-tenths of one percent from 2009 to 2010.36 While the
economy has recovered and is projected to grow between 3.5% and 4% over the next few years, it
is unlikely to reach a potential estimated annual growth rate of 5.5%-6% in the years ahead.37 In
addition to its significant dependence on the production and export of oil and other natural
resources, Russia has other persistent flaws in the economy that are limiting its recovery and
long-term growth prospects. These include (1) a population, particularly working-age population,
that is declining (some project that it could drop to 80 million-90 million by 2050);38 (2) it has
few companies that make internationally competitive goods; (3) its economy is not very
diversified; (4) its business environment remains difficult and controlled by insider deals; and (5)
its economy has an increasing public welfare burden on its public finance.39 The economy has
also been plagued by low domestic and foreign investment, high rates of crime and corruption,
lack of independent judicial protection of property rights, and capital flight.40 While Russian
President Vladimir Putin began his third term in 2012 pledging to modernize the Russian
33

IHS Global Insight, “Turkey,” July 12, 2012.
OECD Economic Surveys: Turkey, July 2012.
35
IHS Global Insight, “Turkey,” July 11, 2012.
36
Russian Banks and Brokers Report, “Is Russia’s Economy Heading down a Cul-de-Sac,” November 30, 2011.
37
IHS Global Insight, “Russia,” August 30, 2012, and Sergey Aleksashenko, “Russia’s Economic Agenda to 2020,”
International Affairs 88: 2012, p. 33.
38
Over the next 20 years Russia may lose 15- 20% of its labor force, resulting in serious labor shortages and
considerable lost output [cited in Sergey Alekashenko, “Russia’s Economic Agenda to 2020, p. 39].
39
One estimate holds that over half of all Russians now depend on the state for a living, 40% as recipients of social
benefits and 12% as government employees. Cited in Ruchir Sharma, Breakout Nations, p. 88.
40
CRS Report RL33407, Russian Political, Economic, and Security Issues and U.S. Interests, coordinated by (nam
e redacted).
34

Congressional Research Service

18

Rising Economic Powers and U.S. Trade Policy

economy, proposed reforms to limit bureaucratic interference in the economy and a new wave of
privatizations were scaled back or deferred.41 However, Russia’s entry into the WTO in 2012 and
projections of the disappearance of its oil-fueled trade surpluses could pressure the government to
pursue fundamental reforms in order to attract foreign investment.42

Indonesia
Since Indonesia was transformed from a tightly controlled authoritarian state in the late 1990s to
an open, moderate, and multi-religious democracy, it has grown at an average of more than 5%
per year. This year it is expected to grow by over 6%, a full 1% faster than the rest of South East
Asia. With a current GDP at $900 billion, Indonesia’s economy could easily top $1 billion by
2013.43 If Indonesia is able to meet its target of 7%-8% GDP growth by 2014, it must address
numerous reform challenges.44 By most accounts Indonesia’s ports are overstretched, its electrical
grid is suboptimal, and its road networks are very poor. The World Economic Forum in 2011
ranked Indonesia 82 out of 142 economies in the quality of its infrastructure—just ahead of India
(86). These inadequacies add to manufacturing costs and widen regional disparities in prices for
basic commodities. Endemic and pervasive corruption also adds to Indonesia’s high cost
economy. High-quality education is lacking for training a young labor force in the skills it needs
for the country to move up the value chain. Even with skilled labor in short supply, Indonesia still
maintains rigid labor regulations that make starting a business, enforcing contracts, and hiring
labor quite difficult.45 Legislation has been introduced to address some of these shortcomings in
Indonesia’s business environment, but these measures face an uncertain future due to conflicting
views on reform within the governing coalition.46

U.S. Trade Interests and the REPs
The evolution of the economies of the REPs impacts U.S. exports, jobs, and economic growth in
important ways. If the United States is to maximize its export potential and boost its living
standards, exporters and investors will need to have fair and balanced access to the REP markets.
REP trade barriers, however, are extensive compared to market access and “ease of doing
business” obstacles found in most advanced countries. The ability of the United States to
persuade these countries to reduce their barriers arguably is constrained by growing differences
over the role that the state should play in economic activity—differences that were exacerbated
by the 2008 financial crisis. The more interventionist practices of the REP governments coincide
with a desire to maintain “policy space” to promote economic development via policies that often
appear to violate the letter or spirit of WTO rules and obligations.

41

IBS Global Insight, “Russia,” August 30, 2012.
The Economist, “Russia’s Economy and the World Trade Organization,” July 14, 2012; Charles Clover, “Russia
Faces End of Petrodollar Surplus,” and CRS Report R42085, Russia’s Accession to the WTO and Its Implications for
the United States, by (name redacted).
43
Karen Brooks, “Is Indonesia Bound for the BRICs?” Foreign Affairs, November-December 2011, v.90, issue 6, pp.
109-118.
44
U.S. Department of State, Background Note: Turkey, 2012.
45
Vikram Nehru, “Indonesian Manufacturing Needs a Shot in the Arm,” Carnegie Endowment, June 26, 2012.
46
The Economic Intelligence Unit, Country Report: Indonesia, August 2012.
42

Congressional Research Service

19

Rising Economic Powers and U.S. Trade Policy

With the imperative for the United States to export more, it may be a critical time to persuade
these rising countries to adhere more closely to the free market norms and obligations of the
WTO system, as well as to consider negotiations that could address many of the barriers not
currently covered by WTO disciplines. A major concern is that if this is not done soon, these
countries may use their growing economic power to maintain one-sided advantages over time.
Reaching robust agreements on the rules of the game between different centers of power which
do not share the same values, however, remains a formidable undertaking.

REP Markets and U.S. Prosperity
The United States is the world’s largest
Figure 6.Trade as a Percentage of U.S.
trading and investing country and depends
GDP
increasingly on the world economy to spur
economic growth and generate high-wage
jobs. Over the past four decades (see Figure
6), U.S. trade in goods and services has
accounted for an increasing share of the value
of GDP, rising from 13% in 1970 to 29% in
2010. Trade over the past 40 years has also
grown more rapidly than the U.S. economy,
rising at an average rate of 5.9% per year in
real terms compared to an average GDP real
Source: Analysis by CRS. Data from Bureau of
growth rate of 2.8%. Over a more recent
Economic Analysis.
period (3rd quarter of 2009 to the 3rd quarter of
2011), exports alone contributed 1.2 percentage points to the 2.4% annual increase in U.S. real
GDP growth.47
Many economists argue that exports will be increasingly important to U.S. economic growth in
the years ahead. One important reason is that 95% of the world’s population and 80% of the
world’s purchasing power is outside U.S. borders. Another important reason is the high levels of
U.S. public and private debt which will constrain government and consumer spending as the two
historically primary engines of U.S. economic growth.48 With ongoing pressures to reduce
government spending and consumer debt, exports could become an increasingly important source
of growth for the U.S. economy.49
Traditionally, manufactured goods and agricultural products have accounted for the bulk of U.S.
exports. Recent research indicates that there is much underutilized potential in the export of
business services.50 The fact that over the past two decades nearly all job growth in the U.S.
47

Office of the United States Trade Representative, 2012 Trade Policy Agenda and 2011 Annual Report, Annex 1
[hereafter cited as USTR, 2012 Trade Policy Agenda].
48
As GDP is a function of government spending (G), consumption (C), investment (I), and net export (exportsimports), constraints on rising levels of G and C will require increases in either I or net exports for GDP increases to
occur.
49
Tyler Cowen, “What Export-Oriented America Means,” The American Interest, May/June 2012. At the same time,
U.S. household debt, as measured by debt payments to disposable income, has declined from 14.05 in the 3rd quarter of
2007 to 10.69 in the 2nd quarter 2012. A continuing reduction of this ratio could position U.S. consumers for more
spending in the future.
50
J. Bradford Jensen, Global Trade in Services, Peterson Institute for International Economics, Washington, D.C.,
2011.

Congressional Research Service

20

Rising Economic Powers and U.S. Trade Policy

economy has been in non-tradable sectors, particularly in health care and public sector
employment, is a compelling reason why U.S. employment growth will require much stronger
performance in the tradable sectors, particularly services.51
For most of the post-World War II period, the bulk of U.S. trade ties have been with the advanced
countries of Western Europe (Germany, the United Kingdom, and France), Canada, and Japan.
Over the most recent decade, those ties, shifting increasingly to developing countries, grew twice
to three times faster than the United States and other advanced countries.52 Since 2000, U.S.
goods exports to developing countries grew almost three times as fast as U.S. goods exports to
industrial countries, 135% compared to 54%. Due to this long-term higher growth difference, the
share of U.S. goods exports to developing countries grew from 45% in 2000 to 55% in 2011.53
The seven REPs alone accounted for 47% of U.S. exports in 2011, up from 20% in 2000.54
Developing countries, led by the REPs, have also become a much more important supplier of
U.S. imports. Since 2000, the share of U.S. goods imports from developing countries has grown
almost four times faster (130% compared to 36%) than imports from advanced countries. As a
result, the U.S. share of imports from developing countries increased from 49% in 2000 to 61% in
2011.55 The REPs accounted for 36% of U.S. imports in 2011, up from 23% in 2000. Some
portion of this increase, however, is accounted for by U.S. multinationals, such as Apple and Dell,
which design their products in the United States and assemble them abroad.56
U.S. foreign investment ties with the REPs have not experienced the same shift. The stock of U.S.
foreign direct investments in Brazil, China, India, Indonesia, Mexico, and Turkey (Russia is not
included for lack of data) is low and declining slightly. These six REPs in 1995 accounted for
almost 8% of U.S. direct investment stocks abroad, but less than 6% in 2010. By contrast,
Europe’s share of total U.S. direct investment stocks abroad has increased from 49% in 1995 to
55% in 2010.57 Further liberalization of REP FDI restrictions, combined with weakening growth
prospects for Europe, could commence a gradual reversal of this trend.
The share of U.S. trade accounted for by the REPs, however, is likely to grow in the future if their
economies continue on their current trajectories. Their successful growth strategies are expected
to create billions of new “middle-class” consumers and unleash billions of dollars in
infrastructure spending that will be contested by exporters and investors across the world.

51
Michael Spence and Sandile Hlatshwayo, “The Evolving Structure of the American Economy and the Employment
Challenge, Council on Foreign Relations, 2011.
52
CRS calculations based on Bureau of Economic Analysis data on U.S. Direct Investment Position Abroad on a
Historical-Cost Basis.
53
USTR, Trade Policy Agenda, Annex 1.
54
CRS calculations based on World Trade Atlas data.
55
UTSTR, 2012 Trade Policy Agenda, Annex 1.
56
The proliferation of global supply chains has made it increasingly difficult to interpret the implications of U.S. trade
data. Such data may show where products are being imported from, but they often fail to reflect how the value-added is
distributed across countries. Chinese data indicate, for example, that over 50% of its exports are generated by foreigninvested firms in China. Thus, in many instances, U.S. imports from China are really imports from many countries. For
elaboration, see CRS Report RL33536, China-U.S. Trade Issues, by (name redacted).
57
CRS calculations based on Bureau of Economic Analysis data on U.S. Direct Investment Position Abroad on a
Historical Cost Basis.

Congressional Research Service

21

Rising Economic Powers and U.S. Trade Policy

Estimates of the Growing “Middle-Class” in the REPs
Many different estimates have been made on the number of people in developing countries whose incomes are rising
above a certain threshold, putting them in a position to demand and purchase non-essential goods or services such as
cars, computers, meals at restaurants, or education. The estimates typically have been based on a range of incomebased measures, per capita income thresholds, and household surveys. Based on a definition of the middle class as
falling between $10 a day to $100 a day per capita, a Brookings Institution study estimated the “middle-class” in
emerging markets will expand from less than 1.8 billion people today to about 5 billion in 2030. But based on the
number of cars in circulation as a proxy to estimate the number of people in developing countries who belong to the
“middle class,” a Carnegie Endowment study estimated that 530 million people now living in the REP countries can be
considered “middle-class.”

The Obama Administration’s National Export Initiative (NEI) is a response to many of these
trends. Launched in 2010, the NEI is an effort to double U.S. exports by 2014 and to create 2
million jobs. If the United States is to meet this objective, U.S. exporters, service providers, and
investors will need to have greater non-discriminatory market access to the big developing
country economies now and in the years ahead.58

REP Trade Barriers
Many of the REPs implemented significant trade and foreign direct investment liberalization in
the 1980s and 1990s. China, India, and Brazil, in particular, reduced their barriers to trade and
investment markedly. Applied tariffs and other “at the border” barriers were simplified and
reduced. Many non-tariff barriers affecting quotas, licensing, and foreign direct investment were
also liberalized. These fundamental reforms for the most part were undertaken unilaterally or
independently by national governments, but they were also reinforced and locked in by
commitments made in the multilateral trade negotiations of the 1980s (the Tokyo Round) and the
1990s (the Uruguay Round), as well as by the proliferation of free trade agreements such as
NAFTA. By helping to integrate the REPs into the global economy, the reforms were powerful
factors for producing growing shares of world trade and investment, which in turn promoted more
rapid growth and poverty reduction during the last decade of the 20th century.
Despite the reforms of the 1980s and 1990s, levels of protection on multiple fronts—tariffs, nontariff barriers, and restrictions on services and investment — remain considerably higher in the
REPs than in the United States and other advanced countries. The economic impact of REP
barriers on the U.S. economy is difficult to quantify, but it is clear that they limit U.S.
opportunities in many markets.
U.S. companies and workers face an array of obstacles in trying to do business in REP markets.
The list of barriers and selected country examples covers tariffs, services, government
procurement, foreign investment, intellectual property rights, operation of state-owned or statecontrolled companies, and export restrictions on raw materials. Technical regulations and
standards also affect market access by requiring the adjustment of products and production
facilities to comply with different requirements. Many of these barriers may deny U.S. producers
and workers the extension of comparative advantage, particularly in the areas of services, foreign
investment, intellectual property, and government procurement. Many of the measures are also
inadequately covered or difficult to enforce under current WTO rules. Moreover, some of the

58

CRS Report R41929, Boosting U.S. Exports: Selected Issues for Congress, by Shayerah Ilias et al.

Congressional Research Service

22

Rising Economic Powers and U.S. Trade Policy

barriers and practices interact to create formidable shields of REP home markets together with
supports for strengthening home or national companies.

Tariffs
Tariffs are taxes imposed on goods at the border and the easiest kinds of barriers to measure. The
average tariffs imposed by the REPs on goods entering the country are two to four times higher
than the U.S. average tariff of 3.5%. As shown in Table 6, Indonesia has the lowest simple
average applied tariff (6.8%) among the REPs, and Brazil the highest (13.7%). But the
differences are more stark in terms of bound tariffs, where the REPs’ rates range from
approximately three times higher (China at 10%) to 14 times higher (India at 48.7%). The
discrepancy between the applied and bound tariff rates of the REPs has been a long-standing
concern, particularly because at any time the REPs may raise their tariffs higher without violating
WTO obligations.59 Brazil, for example, recently did just that, increasing import duties to 25% on
some 100 products.60
Table 6. Tariff Profiles of the U.S. and the REPs
Simple
Average
Final
Bound
(Total)

Simple
Average
Final
Bound
(Ag)

Simple
Average
Final
Bound
(Non-ag)

Simple
Average
MFN
Applied
(Total)

Simple
Average
MFN
Applied
(Ag)

Simple
Average
MFN
Applied
(Non-ag)

United
States

3.5

4.8

3.3

3.5

4.9

3.3

Brazil

31.4

35.4

30.7

13.7

10.3

14.2

China

10.0

15.7

9.2

9.6

15.6

8.7

India

48.7

113.1

34.6

13.0

31.8

10.1

Indonesia

37.1

47.1

35.5

6.8

8.4

6.6

Mexico

36.1

44.2

34.9

9.0

21.5

7.1

Russian
Federation

n/a

n/a

n/a

9.5

13.5

8.9

Turkey

28.5

60.7

17.0

9.9

43.4

4.8

Country

Source: WTO Tariff Profiles databank.
Notes: Due to NAFTA, the United States faces zero tariffs in exporting to Mexico. Simple average MFN applied
rates are for 2010 and trade weighted averages calculated for 2009.

59

Binding is a form of concession under WTO rules in which a party agrees to bind its maximum tariff levels for a
product by placing that tariff level on record. These “bound” rates become part of a WTO member’s schedule of
concessions. In practice, many WTO members do not apply their bound rates, but apply much lower rates. These are
called “applied” tariffs. In theory, a WTO member that is not applying its bound tariff rates can cut bound rates without
providing any new real market access. Conversely, a WTO member can also at any time raise applied tariff rates to the
bound level without having to pay any compensation to its trading partners.
60
Jennifer Hillman, “Global Swing States and the Trade Order,” German Marshall Fund, Global Swing States
Working Paper 2012, p.5.

Congressional Research Service

23

Rising Economic Powers and U.S. Trade Policy

Services Barriers
Some economists believe that reducing
barriers to U.S. exports of services is
critical to the U.S. economy and should
receive priority attention.61 The United
States has a comparative advantage in
exporting business services
(information, banking, insurance, legal,
scientific, managerial, express delivery,
and e-commerce). Comprising 14% of
U.S. employment, jobs in business
services tend to be high-wage and highskilled. But the international sales
activities of business services lag
manufactured exports by an estimated
margin of 4:1. This export
underperformance is due substantially to
barriers to services trade which tend to
be quite high in REP markets.62

Table 7. Tariff Equivalents of Service Barriers
Country

Current Tariff
Equivalent

Brazil

55.54

China

67.93

India

68.06

Indonesia

67.93

Mexico

44.32

Russia

51.26

Turkey

43.89

United States

6.03

Source: Gary Clyde Hufbauer and J. Bradford Jensen,
Framework for the International Services Agreement, Policy
Brief 12-10, April 2012, p. 17.

REP services barriers include marketentry barriers (outright bans and quotas) that prevent entry into the market, national treatment
barriers that discriminate between domestic and foreign service providers (discriminatory
government procurement policies), and regulatory barriers that apply to all providers but create
additional hurdles for U.S. suppliers. According to Peterson Institute estimates, as shown in Table
7, the REP service barriers range from 7 (in the case of Mexico) to 11 times (in the case of India)
more onerous than U.S. service barriers. And as shown in Figure 7, services tariff equivalents of
the REPs tend to be much larger than their agricultural and non-agricultural tariffs.
The market access commitments of the WTO General Agreement on Trade in Services (GATS),
concluded in 1994, are modest, and the United States has attempted to expand on them in the
FTAs it has negotiated. In addition, the United States is pushing broader services provisions in the
ongoing Trans-Pacific Partnership negotiations, and trying to build support for a plurilateral
international services agreement among willing WTO partners.63

61

Michael Spence and Sandile Hlatshwayo, “The Evolving Structure of the American Economy and the Employment
Challenge,” Council on Foreign Relations, 2011.
62
J. Bradford Jensen, Global Trade in Services, pp. 137-153.
63
CRS Report R42344, Trans-Pacific Partnership (TPP) Countries: Comparative Trade and Economic Analysis, by
(name redacted).

Congressional Research Service

24

Rising Economic Powers and U.S. Trade Policy

Figure 7. Goods Tariffs and Services Tariff Equivalents

Source: WTO Tariff Profiles databank. Gary Clyde Hufbauer and J. Bradford Jensen, Framework for the
International Services Agreement, Policy Brief 12-10, April 2012, p. 17.

Government Procurement
Increases in REP spending on infrastructure projects over the next two decades are expected to be
worth trillions of dollars. This spending could lead to a substantial increase in demand for U.S.
capital goods, construction, engineering, and financial services if REP barriers, particularly
discriminatory government procurement policies, are modified. This is because much of the
spending on infrastructure is likely to be financed, controlled, and regulated by governments and
those governments are likely to face strong domestic pressures to favor domestic firms in granting
contracts.
Securing equal treatment in government procurement, thus, should be a major priority for the
United States. The Government Procurement Agreement (GPA) has provided the main legal
framework at the WTO level since 1996 for opening up government procurement markets of key
trading partners to international competition. The GPA does this by guaranteeing that some public
spending decisions are made on a non-discriminatory, transparent, and competitive basis for the
WTO members that have signed the agreement. But it is an agreement which comprises only a
handful of mostly advanced countries and offers limited coverage of services. None of the REPs
are signatories to the GPA, although China has been negotiating to join the GPA for many years.
Countries that want to join the GPA have to submit offers which must be agreed by all GPA
members.
REP procurement markets remain significantly closed, incomplete, and non-transparent. As
illustrated in Table 8, the bulk of purchases often is not determined by cost or technical factors,
but by domestic policy goals such as promoting domestic manufacturing, or the development of
home technologies (to say nothing of promoting non-economic interests.)

Congressional Research Service

25

Rising Economic Powers and U.S. Trade Policy

Table 8. Selective REP Procurement Policies
County

State Law/Policy

Details of Law/Policy

Rationale

China

2002 Government
Procurement Law

As re-drafted, regulations
require over 50% local
value added for bidding
purposes.

The Government
Procurement Law is seen
as a tool to help promote
local industry.

Brazil

Procurement Decree
12.349/2010

The Decree establishes a
25% margin of preference
for manufactured goods
and national services in
compliance with Brazilian
technical standards.

The procurement law is
part of an overall new
policy to promote
Brazilian industry.

India

Government Procurement
Guidelines

Guidelines issued in
February 2012 require a
percentage of all electronic
products be reserved for
domestic manufacturing.

The guidelines are
designed to preserve the
security of India’s
information technology
sector and promote Indian
manufacturing.

Indonesia

Presidential Decree
54/2010

Article 98 provides
preferences to goods and
services with a minimum
of 25% local content (even
where bid is 15% higher in
price).

The policy appears to
boost Indonesian
manufacturing by imposing
local content requirements
that discriminate against
foreign companies.

Mexico

Government Procurement
Rules

Public tenders covering a
range of goods and
services are restricted by a
minimum national content
of 65% for 2012.

Aim is to boost domestic
manufacturing through
procurement policies.

Source: Data from Information Technology and Industry Council.

Intellectual Property Protection
U.S. high tech companies and workers are among the most innovative in the world. According to
a U.S. Chamber of Commerce study, an estimated 19 million Americans are employed in
intellectual property-intensive industries such as information technologies, business software,
entertainment, pharmaceuticals, and video games. Intellectual property rights (IPR) protection
and enforcement of patents, copyrights, and trademarks are considered an essential facilitator of
innovation and creativity, which are vital to strengthen the U.S. economy through creation of
economic opportunities and high-paying jobs for Americans. Although difficult to quantify, it is
estimated that IPR infringement results in billions of dollars of losses to U.S. stakeholders.64
One example of these losses is provided by an annual survey of piracy rates of computer software
undertaken by the Business Software Alliance. According to this survey, the REPs have some of
the highest piracy rates of computer software in the world, while the United States and Europe
have some of the lowest rates. For 2011, the survey pegged Indonesia’s piracy rate at 86%,
China’s at 77%, Russia’s at 63%, India’s at 63%, Turkey’s at 62%, Mexico’s at 57%, and Brazil’s
64

USTR, 2012 Trade Policy Agenda, p.9.

Congressional Research Service

26

Rising Economic Powers and U.S. Trade Policy

at 53%. By contrast, the European Union’s piracy rate was estimated to be 33% and the U.S. rate
at 19%. A piracy rate of 86% means that for every $100 dollars of legitimate software sold, an
additional $86 worth of unlicensed software also made its way into the market.65 Significant
piracy also exists in the film, music, publishing, and Internet spheres.
The United States has sought increased IPR protection in its FTAs that go beyond the level of
protection provided in the WTO Trade Related Aspects of Intellectual Property (TRIPS)
Agreement. Some of these efforts to enhance intellectual property protection have made
considerable progress among U.S. free trade agreement (FTA) partners, but serious problems
remain among the REPs. A study done by the U.S. International Trade Commission estimates
those losses to U.S. industry from intellectual property infringements in China alone totaled
roughly $48 billion in 2009. To crack down on piracy and counterfeiting, the U.S. government
has brought two IPR-related cases against China in the WTO, and placed China, as well as India,
Indonesia, and Russia, on a USTR Priority Watch List in an effort to secure greater and fairer
access of intellectual property-intensive products exported to REP markets. Many of these
countries have made significant strides to improve their IPR laws, but enforcement remains a
significant concern.66

Foreign Investment Restrictions
Foreign direct investment (FDI), both inward and outward, is of substantial importance to the
U.S. economy.67 It is a force for spurring U.S. productivity, increasing investments in technology,
and raising living standards. Strong investment protections and other policies help support U.S.
foreign investment abroad and foreign investment in the United States.68
Overall, restrictions on FDI are low in most advanced economies, but high among developing
countries. According to an OECD study (see Figure 8), among the REPs, China, Russia,
Indonesia, Mexico, and India are among the most inhospitable countries in the world toward
FDI.69 Turkey and Brazil are much more open, with Brazil’s restrictions being comparable to the
level of U.S. restrictions and Turkey being much more open than either Brazil or the United
States. The OECD index is based on four measures: foreign equity restrictions, screening and
prior approval requirements, rules for key personnel, and other restrictions on the operations of
foreign enterprises.70

65

Business Software Alliance, 2011 Piracy Study, found at http://www.BSA.org.
CRS Report RL34292, Intellectual Property Rights and International Trade, by Shayerah Ilias and (name redacted).
67
Foreign direct investment is the acquisition of real assets such as real estate, a manufacturing plant, or a controlling
interest in an ongoing enterprise by a foreign national. More than 50% of U.S. outward foreign direct investment is in
advanced countries. Companies invest overseas for a variety of reasons, including new markets, higher returns and
lower production costs.
68
CRS Report RS21118, U.S. Direct Investment Abroad: Trends and Current Issues, by (name redacted).
69
Perhaps paradoxically, China was the second largest recipient of global FDI (after the United States) in 2011.
70
Blanka Kalinova, Angel Palerm and Stephen Thomson, “OECD’s FDI Restrictiveness Index: 2010 Update,” OECD
Working Papers on International Investment, No. 2010/3, OECD Investment Division,
http://www.oecd.org/daf/investment/workingpapers
66

Congressional Research Service

27

Rising Economic Powers and U.S. Trade Policy

Figure 8. FDI Restrictiveness Index by Country, 2010

Source: OECD Working Papers on International Investment, No. 2010/3, p.18.

There are no comprehensive multilateral investment rules and disciplines governing foreign
investment, despite past attempts in the WTO and OECD. Consequently, cross-border investment
rules can be freely negotiated in bilateral agreements between countries. The United States has
utilized FTAs and Bilateral Investment Treaties (BITs) to provide core protections that help
promote and protect U.S. investments.
The United States started BIT negotiations with China and India in 2008, and these negotiations
are ongoing. There is also interest in negotiating BITs with some of the other REPs, particularly
Russia, Brazil, and Indonesia. There may be more momentum for negotiating additional BITs in
light of the Obama Administration’s recently completed review of U.S. model BIT provisions.71

State-Owned or State-Controlled Enterprises (SOEs)
State-owned or state-controlled enterprises (SOEs) play an important role in most of the REPs.
Some 117 state-owned and public companies from Brazil, Russia, India, and China appear on
Forbes list of the world’s largest companies. The list includes national champions such as
Mexico’s Pemex, a state-owned oil company, and Brazil’s Vale, a huge mining company. In
addition, more than half of India’s 40 largest companies and most of China’s largest banks are
SOEs. Some 140 SOEs dominate key sectors of Indonesia’s economy, including oil,
telecommunications, and shipping.72
SOEs enjoy numerous competitive advantages over private companies, including direct subsidies
such as low interest-rate loans, and discounted land, electricity, and fuel. Indirect subsidies can
include bidding on state contracts which are often pre-disposed in their favor. As a result of these
subsidies and being able to sustain financial losses, SOEs are in a position to win market share
from private companies that operate largely in accordance with commercial and market
principles.73

71
CRS Report RL33978, The U.S. Bilateral Investment Treaty Program: An Overview, by (name redacted) and
Shayerah Ilias.
72
Oxford Analytica, “Reforms to Continue as SOE Divestment Slows,” March 24, 2011.
73
The Economist, “The Visible Hand,” Special Report on State Capitalism, January 21, 2012.

Congressional Research Service

28

Rising Economic Powers and U.S. Trade Policy

There are few international agreements or rules that might be used to discipline SOEs. The GATT
requires state enterprises to operate in a manner “solely in accordance with commercial
considerations.” Yet this provision has been interpreted loosely and SOEs continue to use any and
all special privileges granted to them by their governments.74
In light of weak international or multilateral obligations, the United States has addressed the
potential unfair competition element of SOEs, in part, through FTAs. U.S. FTAs with Australia,
Chile, Colombia, Peru, and South Korea, for example, contain national treatment, nondiscrimination, and transparency provisions, while upholding the prerogative of countries to
establish and maintain SOEs. Stronger disciplines are being proposed in the TPP negotiations to
ensure that the SOEs operate on a commercial basis. If stronger rules can be agreed to in these
negotiations with countries such as Vietnam and Malaysia, it is hoped that they could eventually
serve as a template for negotiations with the REPs, and perhaps more broadly for the WTO.75

Export Restrictions on Raw Materials
The growth in global demand and upward price pressure driven by the rapid industrialization of
the REPs has sparked concerns with regard to the sound functioning of global markets for raw
materials. For the production and export of many high-tech and “greener” products, many U.S
industries are dependent on imports of specific raw materials. Of the REPs, China, Brazil, Russia,
and India all impose restrictions on export of raw materials. The restrictions increase the prices
for U.S. industries that use raw material inputs, thus potentially jeopardizing the competitiveness
of selected U.S. industries, and ultimately consumers. At the same time, the restrictions hold
down prices for firms in the countries that impose the restrictions.
Country examples include China’s restrictions on rare earth metals, Brazil’s restrictions on raw
hides and skins, India’s restrictions on cotton exports, Indonesia’s restrictions on 14 key
minerals—including nickel, copper, and gold—and Russia’s high export duties on wood, ferrous,
and non-ferrous scrap. Tackling these kinds of restrictions is challenging because they are not
fully ruled out by WTO disciplines. While quantitative restrictions (notably export quotas and
export licenses) are subject to General Agreement on Tariffs and Trade (GATT) rules, export
taxes are generally not covered by multilateral disciplines (except when provisions were
specifically negotiated in WTO accession protocols as is the case for China and Russia for a
number of raw materials).76

REP Interventionist Practices
The United States played a large role in the creation of the open market, rules-based GATT/WTO
trading system. The system provides a set of non-discriminatory rules, a framework for
cooperation, and processes for negotiating trade agreements and resolving disputes. In addition,

74

Stephen S. Kho and Sean Heather, “Checkers or Chess? Facing State Capitalism – Part II, Law 360, Portfolio Media,
2011.
75
CRS Report R42344, Trans-Pacific Partnership (TPP) Countries: Comparative Trade and Economic Analysis, by
(name redacted).
76
For additional information on China’s rare earth controversy, see CRS Report R42510, China’s Rare Earth Industry
and Export Regime: Economic and Trade Implications for the United States, by (name redacted) and Rachel Tang.

Congressional Research Service

29

Rising Economic Powers and U.S. Trade Policy

the system seeks to limit the role of governments in economic activity by allowing commercial
outcomes to be determined by market forces and genuine competition.
While there are competing views within the United States today about the proper role that
governments or the state should play in promoting and regulating economic activity, many
analysts consider the United States to be one of the most open, market-oriented or capitalist
economies in the world.77 The REPs have considerably more state involvement in their
economies, as well as very different ideas about how government, business, and labor should
cooperate. Moreover, they pose clear-cut philosophical and practical challenges to the belief that
the market and the private sector, not the state, must be the primary engine of economic
expansion.78
These interventionist challenges may have gained traction as a result of the 2008 global financial
crisis, as some spokesmen from rising economic powers argued that the financial crisis was
caused by excesses in U.S. financial markets and inadequate regulation. In the process, some
governments questioned in stark terms the notion that free markets are always efficient and that
governments should get out of the way.79 Others reactivated industrial policies, granted industryspecific subsidies that distort trade, conditioned foreign investment approvals on the use of
domestically produced components, or otherwise imposed selective protectionist measures to
promote home companies at the expense of foreign companies.80
Most of the REPs tend to invite just enough market forces into their economies to create some
competition, while also retaining control over key industries. In seeking to promote investment,
the key factor in generating growth, REP governments have utilized variable arrangements of
state control and open markets. Characterized by Ian Bremmer as state capitalism, REP leaders
also use government ownership, intervention, and influence over the economy as a way to protect
and promote their own home companies at the expense of foreign firms.81 The contours of their
economic systems vary from country to country, but all share a proclivity for government
interventions that impact commercial outcomes.
•

China may be the most successful country practicing a version of state
capitalism. In 2008, just as the Western financial crisis was beginning, Chinese
Premier Wen Jiabao articulated his view of state capitalism: “The complete
formulation of our economic policy is to give full play to the basic role of market
forces in allocating resources under the macroeconomic guidance and regulation
of government. We have one important piece of experience of the past thirty
years, that is to ensure that both the visible hand and the invisible hand are given
full play in regulating market forces.” As a practical matter, this model defies
easy description. On the one hand, China is still nominally communist, with fiveyear plans and a sometimes heavy-handed involvement or control of a dozen or

77

According to the Heritage Foundation’s Index of Economic Freedom, which tracks one broad measure of market
openness, the United States ranked 10th in 2012.
78
German Marshall Fund, “The Case for Renewing Transatlantic Capitalism,” Edited by Pawlel Swieboda and Bruce
Stokes, 2012, p. 7.
79
David Rothkopf, Power, Inc.: The Epic Rivalry Between Big Business and Big Government and the Reckoning that
Lies Ahead, Farrar, Strauss, and Girous, 2012, p. 345.
80
USTR Trade Estimates Report, 2012.
81
Ian Bremmer, The End of the Free Market: Who Wins the War Between Corporations and Governments? Wiley,
201, p.23.

Congressional Research Service

30

Rising Economic Powers and U.S. Trade Policy

so of the most important and strategic sectors. On the other hand, the state sector
is shrinking and the conventional wisdom is that China will not keep growing at
sustainable levels unless it becomes less state-directed.82
•

Russia practices a highly interventionist form of state capitalism. The Kremlin
relies on both direct government control and intervention in key sectors and
control of politically connected businessmen to further both the interests of the
state and those who run it. The country’s vast oil and gas reserves are used as a
key tool to promote financial and political independence and promote Russia as a
great power abroad.83 At the same time, the Russian model also allows many
large segments of the domestic economy to remain relatively open for private
(including foreign) investment. Consumer driven sectors like retail, construction,
real estate, and wireless telecommunications are mostly free of direct political
interference. In some sectors, political officials have found that consumer
demand is best fueled by free markets.84

•

Brazil’s economy is market based, although significant state involvement
continues to shape economic activity through industrial policies and ownership of
major enterprises. The government is also the primary source of capital and longterm local currency financing and often attempts to influence some of the largest
private companies, known as national champions, to invest domestically in
strategic sectors such as natural resources and telecommunications. In Brazil it
can be said that there is very little controversy over the government playing a
large role as an investor, provider of social welfare, and driver of economic
growth.85

•

India combines a state-dominated economic model of an earlier era and one
driven by private enterprise. India still uses five-year economic plans that are
created, implemented, and monitored by a state planning commission. State
involvement in politically sensitive sectors such as food, fuel, fertilizer,
electricity, and water remains high. The Indian government continues to play an
active role in the management of business activities.86

The governments of Mexico, Indonesia, and Turkey also play a much larger role in their
economies than does the U.S. government, influencing market outcomes, promoting state
objectives, and advancing national power. In the process, these countries arguably may be more
willing to entertain market-distorting practices and take advantage of gaps in the rules.
WTO rules constrain many of the policy options pursued by the REPs to promote and favor the
development of home-grown technologically advanced industries. In resisting compliance with
the letter or spirit of their WTO obligations, many REP leaders argue that developing countries

82

Pieter Bottelier, “China’s Economy Is Slowly Becoming More Normal,” Carnegie International Economic Bulletin,
July 26, 2012.
83
David Rothkopf, Power, Inc., pp. 353-356.
84
Ibid. p.109.
85
Council on Foreign Relations, Independent Task Force No. 66, Global Brazil and U.S.-Brazil Relations, 2011, p. 9.
86
David Rothkopf, Power, Inc., p. 355.

Congressional Research Service

31

Rising Economic Powers and U.S. Trade Policy

should have the flexibility to use the same array of interventionist policy strategies that advanced
countries once employed to facilitate their own economic growth.87

REPs as “Responsible Stakeholders”
The changing configuration of global economic power has coincided with a shift in the leadership
of the global economy. Arguably, U.S. and European leadership, which was largely credited with
creating the architecture of the post-war trading system—including the GATT and its successor
organization, the WTO—has declined. Whether the decline is due to inclination or capability, the
WTO has struggled to adapt to new voices and centers of influence. In the process, there is
growing uncertainty about the future of the WTO and the direction of the world trading system. In
particular, there is concern that a leadership vacuum could lead to economic and political conflict
in the years ahead if the WTO system is not strengthened.88
Many observers assumed that because the REPs have benefitted enormously from participation in
the existing global trading system, they would over time become responsible stakeholders
(sharing not only the benefits of the global trading system but the responsibility of system
maintenance) as they gain weight and power in the global economy. Some assumed that as
responsible stakeholders the REPs would pursue a path of greater openness and actively promote
and embrace the principles of free and fair trade with limited government intervention. As
responsible stakeholders, it was also expected that they would work to break the stalemate in the
Doha Round and not to stand aside and let it fail.
These expectations have not yet been realized. Some observers believe that the REPs, led by
China, India, and Brazil, have preferred the status quo to co-leadership of the global trading
system, protection of their domestic markets to market openings, and manipulation of current
rules to designing new rules. Other REPs, such as Indonesia and Turkey, which could play a
constructive supporting role have also been either obstructionist or defensive in the Doha
Round.89
While many of the leaders of the REPs argue that they do show trade leadership by defending
what they perceive as their national interests, others disagree and point to factors that may be
inhibiting the REPs from exercising leadership. For example, while each of the REPs has a large
GDP, they are all relatively poor in terms of GDP per capita. This perhaps creates a gap between
the world’s expectations about their ability to shoulder important roles and responsibilities in
global governance and their perceptions of their own capabilities to do so.90 The REPs also face
formidable challenges at home, including weak national institutions and governance by elites
prone to corruption, which may curb any appetite for global leadership and keep their leaders
focused on domestic issues.91

87

Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, 2008; and Dani
Rodrick, The Globalization Paradox: Democracy and the Future of the Global Economy, 2011.
88
Robert Skidelsky, “The Future of Globalization in the Light of the Economic Collapse of 2008,” p.13.
89
Razeen Salley, The Crisis and the Global Economy,” pp. 28-29.
90
George Magnus, Will Asia Shape or Shake the World? ECIPE, 5/2012, p.2.
91
Razeen Salley, “The Crisis in the Global Economy,” p.28.

Congressional Research Service

32

Rising Economic Powers and U.S. Trade Policy

One hope for REP leadership rested in the rise of the G-20 as the primary forum for addressing
global economic issues. Created in 2008 in response to the global crisis, the G-20 was credited
with facilitating an effective response by the rising powers in keeping the world economy afloat.
China and India, in particular, both adopted large spending programs to keep their own economies
from declining, which, in turn, had some positive effects on the world economy. But the G-20 has
become less effective since the crisis, and cooperation remains elusive. Collective pledges, such
as on concluding the WTO Doha Round, have not been implemented. Soft cooperation may be
the best that can be hoped for as deep-seated differences among G-20 members on underlying
economic policies prevent hard coordination on rebalancing the global economy and
implementing policies to prevent a future crisis.92
As the REPs focus on dealing with internal challenges to economic growth, greater enthusiasm
and a stronger commitment to the principles of WTO membership could be helpful as they
attempt to overcome vested interests and protectionist pressures at home. A multilateral trading
system based on mutual obligations and concessions has historically helped governments deal
with their domestic political challenges to economic reforms.

China’s Key Role
With the largest population and the second-largest economy in the world, China is the REP
looked to the most for shouldering global responsibilities and in delivering global public goods.
Which direction China will take is uncertain, but it is sure to have a big impact on the other
REPs.93 A number of factors may push China either towards or away from accepting more
leadership responsibilities.
On the one hand, China has a huge stake and self-interest in maintaining an open multilateral
trading system. Its rise to prosperity has depended on an open world trading system to generate
growth and demand. Assuming it becomes the largest trading country (both goods and services)
and largest economy in the world in the decades ahead, its need for stable rules, open markets for
its exports, and access to raw materials and intermediate inputs that are not produced
domestically will only grow. China’s large state-owned companies also want opportunities to
invest abroad. These stakes in an open world trading system ought to provide an incentive for
China to provide more active leadership in strengthening the rules of the trading system,
especially if it is threatened by protectionism. Moreover, its regime’s claim to legitimacy hinges
on the country’s continuing welfare and prosperity.94
China’s movement toward responsible stakeholder status could also be bolstered by internal
forces pushing Chinese authorities to reduce control over the economy. The World Bank, for
instance, recently concluded that China will not keep growing at sustainable levels and will not
92

CRS Report R40977, The G-20 and International Economic Cooperation: Background and Implications for
Congress, by (name redacted).
93
It also can be argued that, with the possible exception of Russia, the approach the other REPs adopt on becoming
“responsible stakeholders” may be more fluid and open than China’s. If so, the other REPs, particularly Brazil, India,
Indonesia, and Turkey, may be as influential as China in affecting the future of the world trading system. For
elaboration of this view, see Daniel M. Kliman and Richard Fontaine: “Global Swing States: Brazil, India, Indonesia,
Turkey and the Future of International Order, German Marshall Fund of the United States and Center for New
American Security, November 2012, and Jennifer Hillman, “Global Swing States and the Trade Order,” German
Marshall Fund of the United States, Global Swing States Working Paper 2012.
94
Guy de Jonquiere, “China’s Challenges,” ECIPE Policy Brief, No. 01/2012, p. 8.

Congressional Research Service

33

Rising Economic Powers and U.S. Trade Policy

avoid the trap that most middle-income economies fall into unless its economy becomes less
state-directed. SOEs still account for a significant amount of Chinese industrial production and
put a heavy strain on China’s economy. Government support of unprofitable SOEs, half of which
reportedly lose money, diverts resources from potentially more efficient and profitable
enterprises. Accordingly, a less directed economy or an economy in which the private sector and
markets gain the upper hand would be consistent with movement towards responsible stakeholder
status—a China that is more integrated into the rules and norms of the global trading system.95
On the other hand, China’s leaders may believe that they can achieve the country’s international
economic objectives, particularly access to natural resources, through diplomacy, foreign aid, and
preferential trade agreements with other countries. Moreover, China’s leaders have for three
decades defied the predictions of critics that central planning cannot work efficiently. China’s
continued growth, despite a recent slowing, has led some in China to conclude that China’s state
dominance in key industrial and service sectors should and will continue. The challenge is that
genuine integration into the global economic order would demand significant modifications to the
Chinese political economy and how China is ruled. Such modifications could change the
dynamics of how the country is run or even weaken the relevance of the Communist Party. While
its leaders may recognize that they (via the state) misallocate capital on a massive scale, they may
do so in large part to keep a hold on power. Under this view, it is hard to see China taking on a
global trade leadership role given that most incentives will be in promoting the power interests of
the Party elites.96
While it is uncertain which path China will take, any change is likely to be incremental and
gradual. Reflecting Deng Xiaoping’s much quoted injunction “to stand firmly, hide our
capabilities, bide our time, never try to take the lead” in international affairs, China’s use of
power in the past has been cautious.

U.S. Trade Policy Response
Major shifts in the structure of the world economy have taken place. The REPs now account for
significant shares of global GDP and trade. As a result, they also have increased their economic
influence and bargaining leverage. This reconfigured global economy coincides with very
different conditions than those that prevailed in the second half of the last century.97 Most notably,
the traditional structure of postwar multilateralism has weakened; bilateral and regional
preferential trade agreements have proliferated; and priorities for trade liberalization and
economic reforms are in flux during a period of heightened economic uncertainty. In this
environment, questions arise over how the world trade order will be kept, how new rules can be
established to discipline foreign trade-distorting practices, and how the United States can best
respond to the challenges and opportunities posed by the REPs.98

95

World Bank, China 2030, pp.18, 61.
John Lee, “China’s Economy a Party Plan,” Australian Financial Review, January 5, 2012.
97
In 1948, when the General Agreement on Tariffs and Trade was created, U.S. GDP accounted for 65% of total GDP
of the 23 GATT members. By 2011, U.S. GDP accounted for about 22% of the total GDP of the now 157 members of
the WTO. CRS calculations based on IMF data in current dollars.
98
Robert Skidelsky, ”The Future of Globalisation in Light of the Economic Collapse of 2008,” p.3.
96

Congressional Research Service

34

Rising Economic Powers and U.S. Trade Policy

Any response could begin by reconsidering overall U.S. trade policy goals, as well as specific
objectives vis-a-vis the REPs. To promote those objectives, policymakers have a full range of
multilateral, regional, bilateral, and unilateral trade initiatives to consider. How the Obama
Administration and 113th Congress prioritize and shape these trade initiatives will fundamentally
determine the course of U.S. trade leadership in the years ahead.

Trade Policy Goals and the REPs
The overriding goal of post-World War II trade policy under successive administrations has been
to promote the highest possible standard of living for U.S. residents. To this end, there is a broad
consensus among policymakers and economists that by removing a country’s tariffs and non-tariff
barriers to allow greater specialization in production and trade, the ensuing expansion of trade
will have a favorable impact on overall economic well-being.99
Most economists, however, also agree that while a nation’s general welfare may increase, freer
trade does not necessarily distribute those production and consumption benefits equally. While
firms and industries that are competitive may gain by increasing exports or by expanding their
operations overseas, some segments of the economy that are unable to survive increased
competition could lose through worker layoffs and plant closures. In addition, there are growing
concerns that today’s more open global economy, which allows millions of low-wage workers
around the world to compete with American labor, and digital machines to replace many forms of
human labor, is responsible for a number of contemporary economic concerns. These concerns
include income stagnation for the majority of American workers and increased job insecurity,
particularly among lower-skilled workers.100
Given this dilemma, few economists call for halting trade liberalization efforts or technological
advances (i.e., globalization). But they do recognize that trade policy alone cannot address many
of the challenges U.S. companies and workers face in an increasingly global economy. These
experts generally argue that U.S. policy

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3AR42864. Public record. Not legal advice.