I’ve been on the lookout for more reaction to last week’s WTO appellate decision on the raw materials case, which China lost (for the most part). I mentioned a few days ago with respect to rare earths that while some foreign enterprises may benefit from this WTO precedent, in the long term it may not matter since China is ultimately in control of production.

I expected to find the usual parsing of the ruling by academics sympathetic to China’s arguments. There were also the usual formal statements issued by the affected government agencies. And although I was not surprised to see an editorial in the Global Times (often dismissed by some Western commentators as a bit too close to the government) expressing outrage at the ruling, the broad-based attack on the WTO in that Op/Ed went much further than I expected. If the position laid out in the editorial reflects even a significant minority opinion within the government, it worries me.

Countries always complain about multilateral organizations, particularly when they are on the losing end of a dispute. Ordinarily, therefore, I’d disregard this kind of thing. But let’s have a look at some of the arguments here so I can explain why I think this is quite different:

A WTO appeals panel has upheld a ruling against China restricting exports of nine types of raw materials. The ruling, completely unreasonable to Chinese, will threaten China’s resource preservation and environmental protection efforts.

As an aside, I find the use of “Chinese” instead of “China” odd, although this might be, for all I know, standard usage at GT or is a product of writing by a non-native speaker of English. Of course, the government here would like nothing more than to represent the interests of ethnic Chinese everywhere, but that’s a bit of a stretch, and the specific WTO ruling at issue only applied to a policy of the PRC. Anyway, minor point.

As I wrote about last week, the environmental and preservation issues, which China used as a main argument in its defense, are certainly legitimate issues. However, since China can control production, it can also therefore contain both environmental effects and conservation. In other words, the WTO ruling does not stop China from doing those things, it just says that in doing so, the country may not discriminate in violation of WTO rules.

I’m not surprised that the author of this opinion piece doesn’t mention this reality (it basically neutralizes the entire Op/Ed), but I thought I should say so at the outset.

But let’s move on from this case to the main issue: the WTO itself and China’s relationship with that body. This area of criticism is the main subject of the article.

China has generally been following WTO regulations and rulings. But it should find the best balance between applying WTO rules and protecting its national interests. Getting approval from the West is not our top concern.

Some may beg to differ, but I agree with that first sentence. China has indeed, with some notable exceptions, been following most of the rules. However, things take a turn for the weird, and the nationalistic, after that sentence.

It sounds quite reasonable to assert that nations must balance the application of WTO rules and national interests. But wait. Isn’t that just another way of saying that a nation should only follow the rules it promised to abide by when it joined the organization when it suits them? That’s a serious problem. If everyone did that, the organization would be a joke. (Although I disagree, some critics believe the WTO is indeed a joke because of its enforcement system.)

The balance between giving up a bit of national sovereignty and obtaining trade benefits was a calculation that China made when it joined WTO. Such a discussion has no place with subsequent policy making, except perhaps in extremely rare instances (and WTO law usually provides sufficient exceptions for those eventualities).

Even more troubling is the final sentence of that paragraph, suggesting that WTO compliance is tantamount to seeking approval from the West. Yikes. This is a scary frame of mind.

On one level, complaints about WTO and accession promises are common with both China and other WTO member states. Protectionists in the U.S., for example, constantly rail against the WTO (and other multilateral agreements, like NAFTA) and globalization as a bad deal for the nation, for workers, etc. So some of this is par for the course, simple sour grapes in the wake of an unfavorable decision:

Admittedly, joining the WTO has boosted China’s rise. However, entry was granted at the cost of China accepting some unfair terms, from which the aftereffects have gradually emerged, including this ruling.

Many would say that China has benefited more from WTO/GATT in recent years than anyone. But nothing’s perfect, and the basic complaints are understandable, just not reasonable. Of course China had to negotiate and accept certain unfavorable terms to get into WTO. That’s what a negotiation is all about. And if China’s economy had been limping along for the past decade along with a trade deficit, then this entire argument might make some sense. But really, it doesn’t help, after a decade of annual double-digit growth, to whine about the process.

But back to the scary part. Is the WTO a binding contract or isn’t it? Here’s more language suggesting the latter:

Due to unfamiliarity with the WTO system, and worries of Western media censure, China has often opted to follow WTO rules.

Wow. Are you seeing what I’m reading? The suggestion here is that China wasn’t following the rules because it had promised to do so, but because of unfamiliarity with the system and fear of a backlash!

Unfortunately, you can see where this argument leads. If those two things were the only things holding China back from WTO violations, then an increasing familiarity with the system, which China no doubt now has after a decade, should lead to more and more trade violations, which the author(s) apparently believes is perfectly acceptable.

And make no mistake, this is exactly what the Op/Ed is calling for:

China can consider putting up market barriers in response to the ruling. The intention is certainly not to disrupt the WTO system, but at the same time, there is no need for China to be a model member. Conflict and compromise are part and parcel of the global trade mechanism. Every country seeks to maximize its benefits, and self-imposed sacrifices will not bring any gratitude.

It’s simply bizarre that anyone would call for even more illegal behavior (i.e. putting up market barriers) in the face of a negative WTO ruling. But the rest of the paragraph is much more troubling. China doesn’t need to be a “model member”? As every nation is the world breaks trade laws now and again, I’m not sure who qualifies as a model member. Flouting the rules should be a rare exception, though, and not something to be proud of.

(By the way, since when is the international trading system all about disputes? That bit about “conflict and compromise” sounds vaguely Marxist. Was the author’s educational training unconsciously bleeding through there?)

Look, there certainly are self-imposed sacrifices in the world trading system. China agreed to certain things when it joined WTO, deciding at the time that the advantages outweighed those drawbacks. That decision was a huge success no matter how one looks at the math.

If China no longer thinks that WTO membership is worth the sacrifices, it can quit. The same goes for the anti-globalization crowd in the U.S. and elsewhere. But if it decides that it enjoys the benefits, then it cannot merely pick and choose what rules it feels like following.

Why does this Op/Ed bother me more than the usual protectionist blather? Because it’s different. Usually when China, or the U.S. (or any WTO member) breaks the rules, it says: 1) we didn’t think we were breaking the rules; and 2) now that WTO has said we were wrong, we will remedy the situation.

This Op/Ed not only says that China should not feel obligated to follow WTO rules, but that such activity should increase over time. Not a happy vision of the future of international trade, folks.

I really hope that this line of thinking is not shared by many in Beijing.

© Stan for China Hearsay, 2012. | Permalink | 11 comments | Add to del.icio.us
Post tags: rare earths, raw materials, world trade organization, WTO

Chrystia Freeland of Reuters has a highly recommended article on U.S.-China trade and worker dislocation. While this might appear to be your standard American screed against Chinese competition, it falls quite short of calling for any sort of protectionism.

Freeland’s approach should be lauded, because although she presents information from a recent study about the negative effects on the U.S. from China trade, she does not wrap up the article, as so many do, with a unworkable or illegal policy suggestion.

While I tend to criticize protectionists more often than free traders, I have problems with anyone who does not admit the reality of globalization and international trade. While protectionists come at the problem with bad solutions, some free traders do not even acknowledge the negative aspects of trade. I think that this position is becoming more and more difficult as time goes on and more information comes to light.

Freeland references a recent paper:

In the debate about the causes of growing income inequality, U.S. economists have tended to opt for technology as the driving force. Indeed, in his remarks, Mr. Krueger referred to a survey he did of those economists, who overwhelmingly cited technological change as the most important factor.

But, drawing on detailed data from local labor markets in the United States, the authors of the “The China Syndrome” argue that globalization, and in particular trade with China, is having a huge impact on blue-collar U.S. workers: “Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment.”

Free traders tend to downplay this sort of thing, while protectionists like to think that raising tariffs is a quick fix.

Here’s the thing. International trade is generally beneficial to nations. At the same time, there are winners and losers within sectors. U.S. blue collar workers have taken a series of hits, from productivity gains to competition from abroad. It is not surprising that new evidence shows that China trade has led to job losses and wage decreases in the U.S.

Freeland quotes economist Joseph Stiglitz on this issue:

What happens when you bring together countries which are very different like the United States and China, what happens is that the wages in the high-wage country get depressed down. This was predictable.

At the same time, we should admit that if it wasn’t China, that dynamic would still have occurred but with competition from other low-wage nations. China just happened to be in the right place at the right time with hundreds of millions of workers. I’m not quite sure that protectionists understand this, since many of them believe that China’s “cheating” is the source of these ills, not the obvious wage differential.

And this thinking makes a big difference. If you believe that China’s trade policies are to blame, then it follows that some sort of punishment may force China to stop what it is doing, level the proverbial playing field, and bring everything back to the status quo. In other words, all those jobs will simply come back.

This brings us back to a familiar refrain, though. Those jobs aren’t coming back. Even if China were somehow taken out of the picture, those manufacturers are going to move to Vietnam, Indonesia, or another low-wage nation. You can’t put the trade genie back in the bottle.

If the international trade conversation could be dominated by realists, folks who on the one hand admit that trade dislocation is a huge problem, but on the other hand acknowledge that protectionist quick fixes are fantasies, then we could get down to real solutions.

How might the U.S. attract more jobs in the future? That’s a difficult question, but at the very least, it wouldn’t hurt to start spending more money on education and infrastructure.

© Stan for China Hearsay, 2012. | Permalink | 7 comments | Add to del.icio.us
Post tags: free trade, protectionism

If you’ve been wondering why I haven’t mentioned anything about this WTO dispute, which involved China versus several other nations, including the U.S., I frankly haven’t found much here that I can say with certainty. (Most of my readers were probably thinking “Thank God he didn’t write a long and rambling techno-legal post on another boring trade fight.)

Since there isn’t much else going on today, perhaps a quick mention is in order, with an explanation as to why this is rather difficult to deal with.

I first wrote about the dispute when it was filed in November 2009, and then when the panel report was leaked to the Wall Street Journal about a year ago. The latest news is the judgment of the appellate body (here’s the full report), which sided with the nations that brought the case against China (on several grounds, though not all).

What followed was the usual international trade blah blah blah. The U.S. Trade Rep’s office issued a statement, which included this predictable language:

U.S. Trade Representative Ron Kirk today announced that the World Trade Organization (WTO) Appellate Body found China’s export restraints on several industrial raw materials used as key components in the steel, aluminum, and chemicals industries to be inconsistent with China’s WTO obligations. The Appellate Body affirmed a WTO dispute settlement panel’s July 2011 finding, therefore agreeing with the United States and rejecting China’s attempts to portray its export restraints as conservation or environmental protection measures or measures taken to manage critical shortages of supply.

“Today’s report is a tremendous victory for the United States – particularly its manufacturers and workers,” Ambassador Kirk said. “The Obama Administration will continue to ensure that China and every other country play by the rules so that U.S. workers and companies can compete and succeed on a level playing field.

China hit back with this extremely terse writeup in Xinhua (the full MOFCOM statement was lengthier), which as usual included its “regrets” about the ruling:

China expressed regrets over the World Trade Organization (WTO)’s ruling against China in raw material exports, the Ministry of Commerce (MOC) said Tuesday.

Mind numbing. At least the Xinhua article was blissfully short.

So why is this tough to deal with? Well, unless you’re a trade lawyer, the issues here are a bit boring and hard to pin down. For example, one concern is whether this ruling will be applied to China’s restrictions on rare earth exports. The arguments made on both sides are similar enough to warrant the comparison and speculation, and this is the issue on which most of the press accounts have focused.

However, while that’s a valid discussion, it may not matter all that much at the end of the day. Without delving into the legal details, the raw materials case that just wrapped up essentially stands for the idea that WTO members may not improperly restrict exports of these products to the detriment of other members. The appellate body upheld the decision of the panel that China did not have a valid excuse (e.g. conservation efforts, or environmental degradation from mining) for such restrictions.

Right. So what’s the problem? The issue is exports and the effect on the international market. Taxes and quotas distort that market in favor of domestic firms and to the detriment of foreigners, forcing some firms to move production to China to obtain access. The ruling is good news for those folks.

But for others who are most concerned with supply/pricing, the news is not so good. You see, there’s a handy solution here that China may use to maintain at least part of the status quo: production quotas. These would not involve exports and would therefore not be in violation of WTO rules.

As long as all this is not a restraint on exports in favor of domestic firms, China may be able to assert a great deal of the control it seemingly lost from this ruling.

In that case, this is not such a clear victory for anyone, and it’s therefore very difficult to say anything at this point about the significance of the appellate ruling.

© Stan for China Hearsay, 2012. | Permalink | No comment | Add to del.icio.us
Post tags: protectionism, rare earth exports, raw materials exports, world trade organization, WTO

My guess is that the U.S. will do nothing (that’s my default position on trade cases), but I don’t say that with a great deal of certainty. Here’s what is going on:

Midwestern lawmakers and union groups on Tuesday urged President Barack Obama to restrict imports of auto parts from China that they said benefited from massive illegal subsidies and threatened hundreds of thousands of American jobs. (Reuters)

There is no doubt that the U.S. auto parts sector has been absolutely hammered by imports, and particularly those from China. According to the Economic Policy Institute, which produced the study that the complaint has been built around: “the U.S. trade deficit in auto parts increased from $9.5 billion in 2000 to $31.2 billion in 2010.” Significant, yes.

Three things about trade cases like this. First, there has to be political will to go the distance and actually initiate a formal process, such as calling for an investigation or, later, filing a case with WTO. The Obama administration thus far has been quite aggressive on the WTO front when it comes to China, so no reason to think that they wouldn’t sign on for another one.

Then again, if we take the words of this guy who talked to Reuters as any sort of guidance, maybe Obama would like this one to just go away:

A U.S. trade official stopped short of committing to action on the issue, but said the Obama “administration will not stand by when our competitors don’t play by the rules.”

“We will continue to identify and address unfair trade practices to ensure … U.S. workers and companies can compete and succeed on a level playing field,” the official said on condition of anonymity.

Not only is that language chock full of the worst insipid international trade politics blather, but the guy didn’t even feel confident enough in spouting the blather to go on the record with it. Please excuse my inside-the-beltway politically incorrect political jargon, but that guy is a real pussy.

The political decision always comes down to a balancing of constituencies of course. We’ve got unions and the auto parts industry, plus their Congressional reps, on the one hand, and then other industry groups that do business with China on the other. A familiar dynamic.

To complicate matters, the states involved here, including Michigan and others in the Midwest, will play a key role, as usual, in the upcoming presidential election. Perhaps Obama will appoint a “Blue Ribbon” committee to study the issue and push things until after the election?

Second, the complaint against these imports contains a very long list of unlawful trade practices. Its sheer breadth, however, is a bit problematic. If this was a litigation complaint, I’d understand the tactic: you throw everything you can in there and hope something will stick.

In this case, the charges might be way too ambitious. In addition to a number of illegal subsidies, you’ve got currency manipulation, forced technology transfer, deals cut by local authorities, and the list goes on. It’s almost a comprehensive list of all the problems faced by foreign investors in China. A lot of them may even be true, but it would take years to follow up on all of it. Seems like a real danger of this getting bogged down.

Third, even if some of these charges are substantiated via an investigation, the hard part will be gathering sufficient evidence to win over a panel at WTO. For example, everyone knows that several U.S. auto companies have been given approvals for Sino-foreign Joint Ventures conditioned on technology transfer. Knowing that and proving it was an official (or tacit) government policy, however, is a very different thing.

So we’ll see what happens with this complaint. Apologies for the cynicism, but since it is an election year, I’d say that whatever decision is ultimately made will reflect more of a political calculus than the merits of the case.

FYI, if you are interested in this case and want more details than what the major media outlets have, take a look at the briefing paper prepared by the Economic Policy Institute, which has links to other sources at the end. For my purposes, the position paper drafted by D.C. trade law firm Stewart and Stewart was most interesting.

© Stan for China Hearsay, 2012. | Permalink | 5 comments | Add to del.icio.us
Post tags: auto parts, subsidies, world trade organization

This is a bit over the top, all things considered:

A Chinese scholar of foreign trade said Wednesday that a ruling by the US Court of Appeals for the Federal Circuit (CAFC) was an epoch-making victory for Chinese exporters who have long suffered unfair countervailing duties from the United States on top of anti-dumping duties (AD).

Yes, there was a ruling on this issue, but the long term prospects for Chinese exporters hoping for relief from countervailing duties is quite unsettled. The basic issue was addressed in the Financial Times:

A federal circuit court, the highest level under the Supreme Court, on Monday said the US could not use so-called “countervailing duties” against imports from highly regulated countries such as China which are designated as “non-market economies”.

[ . . . ]

Countervailing duties are imposed against imports deemed to be unfairly state-subsidised. A landmark 1984 US court ruling prevented their use against non-market economies, in effect saying it was double-counting to impose them on top of so-called “anti-dumping” tariffs, which are used against imports deemed to be unfairly priced.

Sounds OK so far. If I’m an exporter, this is all good news. Anti-dumping fees plus countervailing duties for subsidies doesn’t sound like a lot of fun. Indeed, the WTO seems to agree.

But here’s the problem. The US court admitted that this was all a matter of Congressional intent:

Although commerce has wide discretion in administering countervailing duty and anti-dumping law, it cannot exercise this discretion contrary to congressional intent. If commerce believes that the law should be changed, the appropriate approach is to seek legislative change.

In other words, Congress has the authority to reverse all this and return to the status quo ante. One trade lawyer, quoted in China Daily, thinks that’s exactly what will happen next:

“I’ve always felt that if the courts were to ultimately declare that the administration cannot apply the anti-subsidy law to China, Congress will act within about a week to make it clear that the administration can,” said David Spooner, a former Commerce Department official now at the law firm Squire Sanders & Dempsey LLP in Washington.

Since this provision wouldn’t exactly be controversial in D.C., I could certainly see quick action. On the other hand, Congress can’t seem to even get the easy stuff done these days, so who knows?

The bright side here for Chinese exporters is not that the US will never again apply both anti-dumping levies and CDs to the same parties, but that all the cases pending since 2007 on this issue are now in jeopardy. Whoever is waiting in that queue might get some relief.

Other than that, the next move will be made by Congress. Stay tuned and beware of trade experts acting like giddy schoolgirls.

© Stan for China Hearsay, 2011. | Permalink | 4 comments | Add to del.icio.us
Post tags: anti-dumping, countervailing duties, subsidies, WTO

You’ve probably been doing your best to ignore the “WTO 10-year Anniversary” retrospectives in the press over the past couple of weeks. I don’t blame you. Most of these are either yawn-inspiring amalgams of past WTO stories, eye glazing cheerleading pieces in the Chinese press, or mind-numbing chest thumping from foreigners who are (as usual) dissatisfied with the status of trade liberalization here in the PRC.

Bleah.

We all know what the criticisms are all about: closed markets, IP infringement, government procurement, RMB, etc. Nothing new there.

But these are all specific issues that are often addressed via bilateral negotiation. Some problems get fixed (e.g. indigenous innovation restrictions), some do not. And life goes on. Is that the story of the first ten years of China’s WTO experience?

I don’t think so. There’s something a lot more interesting going on, something that is hinted at in these press treatments of the topic. And it brings us to the West’s greatest fear regarding China and free trade.

EU Trade Commissioner Karel De Gucht got close with this recent comment:

China is having to increasingly recognize and respect not only the legal responsibilities it now faces as a member of a global rules-based body, but also the WTO ‘spirit’ of promoting open markets and non-discriminatory principles in its domestic legislation, and the enforcement of it,” De Gucht said[.]

Yes, the West is certainly concerned that China will not live up to its WTO promises, particularly those that are not enumerated in law or in the schedules attached to China’s Accession Protocol.

But that’s not exactly the fundamental concern. If China proves recalcitrant on further liberalization or ramps up non-tariff barriers to trade, the West can handle that. It will then just come down to negotiation, leverage and diplomacy. Surely the EU and U.S. can navigate that world just fine.

This all assumes, however, that both the West and China are “on the same page” when it comes to the international trading system and that China is just jockeying within that system for the best position. Again, if that’s true, the West knows how to play that game.

But what if it isn’t true? What if China and the West have a fundamentally different understanding of what the game is? This is certainly a possibility, given differences in culture, attitudes and modern historical experiences.

So does China “get” the WTO and the international system of free trade? I have no idea. There is plenty of evidence to support either position. Take this provocative article in Global Times for instance, entitled Official Suggests Halting New Auto JVs, which starts off with this:

A Chinese official yesterday suggested that the authorities should suspend approval of new auto joint ventures in the country so as to support the development of domestic brands.

“It is not necessary to approve too many auto joint ventures which always focus on fast market expansion in the country,” Cui Dongshu, deputy secretary-general of the National Passenger Car Association, told the Global Times yesterday.

Cui noted that the competition at the domestic passenger car market is already fierce and “domestic brands have little room to expand.”

Obviously this fellow is not being properly supervised. Officials are not supposed to say things like that in public, particularly if they represent an honest opinion about policy.

To compound the error, another official was also caught on record with this revealing statement:

[A]nalysts said halting approvals for new auto joint ventures is not a realistic move.

“Actually, nearly all well-known and popular foreign brands have already entered into the Chinese market,” said Chen Guangzu, committee member of the China auto industry consultancy commission.

Chen suggested Chinese automakers should focus on brand building and after-sales services, and try their best to expand into overseas markets, rather than limiting foreign brands’ entry into China.

Wow. The way this guy so blithely discusses protectionism suggests to me that there might be some confusion about what China has promised in the past when it comes to the WTO and free trade. It’s possible that both these officials are just plain ignorant, but that seems quite far fetched.

For officials to come right out with a public statement to a newspaper about the possibility of engaging in outright protectionism speaks volumes about whether these individuals “get it.” To be fair, though, I am not suggesting that these two jokers speak for the rest of the government or anyone else in China. Indeed, the Global Times reporter was sharp enough to include this quote at the end of the article for balance:

Zhang Junyi, a project manager at Roland Berger Strategy Consultants, said that halting new auto joint venture approvals could not be achieved since the country is already a member of the World Trade Organization.

It would have been nice if that last quote was from someone in the government, but I guess that’s too much to ask.

Look, this kind of talk just reinforces the feeling among a lot of foreign investors (and their home country governments) that China is not just playing hardball, they are playing a completely different game.

One further example from the auto industry. The “win-win” idea of China’s WTO entry in a sector like this was that foreign automakers could get access to the China market, while at the same time, China would gain technology and expertise. In order to safeguard those benefits, China insisted that it would restrict foreign investment in the sector to Joint Ventures, ensuring that foreign firms would not completely take over the market and that local firms would indeed enjoy the technology transfer.

Neither side got everything it wanted, but both sides have benefited from investment in the auto sector thus far. That’s the spirit of the WTO right there, which makes this comment from a JD Power analyst confusing:

But JVs do not reflect the original intention of the Chinese government’s regulations.

The government encourages localization, which was supposed to include the whole value chain, not just a factory. But while local partners may be able to fully participate in the R&D, production and human resource systems, such cases are rare.

Sure. No one likes JVs. They are a compromise. The Chinese firm might be limited in terms of the entire value chain. On the other side, the foreign investor is virtually handcuffed to their partner, sometimes in a death grip, all the while teaching a possible future competitor how to run the business.

But if JVs were not the original intent here, what exactly did the Chinese government expect was going to happen? Were foreign auto makers going to simply hand over the keys to the kingdom, governed by even less favorable terms?

Again, I’m not sure who actually believes that, but if that does represent a popular government position, then both sides might not be reading from the same free trade page. If so, the next ten years should prove fascinating for WTO watchers.

© Stan for China Hearsay, 2011. | Permalink | 24 comments | Add to del.icio.us
Post tags: auto sector, free trade, WTO

When the political rhetoric over international trade policy heats up, I tend to side with the free traders against the protectionists. In both China and the U.S., the latter are often nationalists, although many trade critics in America also couch their arguments in terms of labor rights, jobs and environmental protection.

So even though I’m a Lefty on most issues, I find myself siding with the centrists and pro-business folks on trade. However, that doesn’t mean that I’m willing to accept false or misleading arguments from folks on my team. Free trade advocates should stick with the facts and hope to win the argument on the merits.

Therefore, in the interests of fair play, allow me to point out a certain blog post from The Heritage Foundation, a conservative American think tank that has a lot of clout in D.C. (for reasons that escape me). The offender author is Charles Kaupke, whom I suspect may be an intern, in which case he should not be allowed to put up stuff like this without supervision. Anyway, I’ll need to give you some extended excerpts to present the entire context:

Conventional wisdom has it that China’s growing economy poses a serious threat to America’s status as a global economic superpower. The media and politicians repeat time and again that the United States is losing much of its manufacturing base to China and that American jobs are disappearing as a result. Many Americans who believe these claims vote for politicians who promise to “protect” American jobs from foreign competition.

At this point, I’m still on board. This is an accurate description of mainstream American criticism of China. Indeed, a lot of China bashers base their entire schtick on the whole eroding manufacturing base/outsourcing meme.

Regular readers of this blog already know my position on this issue. Yes the U.S. has lost a huge number of manufacturing jobs, many of which are now in China. However, this doesn’t make China “evil” and the process by which this happened was inevitable given globalization and wage/cost differentials. Moreover, those jobs ain’t coming back, and protectionism will not help in the long run.

Onward:

A look at the numbers reveals that, contrary to the assertion that corporations prefer to invest in low-wage countries like China, the United States is the world’s strongest magnet for investment dollars.

[ . . . ]

According to the World Bank, FDI in America has been higher than FDI in China every year except one since 1970.

OK, a good point. The U.S. does indeed benefit from the free flow of capital for several reasons: the U.S. has a huge consumer market, is the financial capital of the world, and (in addition to FDI) enjoys many benefits on account of the special status of the dollar.

Now, if Mr. Kaupke had stopped there, essentially leaving the reader with the argument “Hey, globalization/free trade critics, this whole thing has its benefits too. Look at how much money is being invested in the U.S., amounts that offset many of these losses you complain about,” I’d say well done, sir.

Too bad he ends with this:

In 2010, even as commentators complained about jobs being outsourced from the United States to China, foreign investors continued to favor the United States, pouring $236.2 billion into the U.S. economy—about 28 percent more than they sent to China.

Although scary stories about U.S. jobs being outsourced to China continue to make headlines, these numbers reveal that international investors consistently prefer to send their job-creating dollars not to China, but to the United States.

This is the funny thing about statistics. They only tell you part of a story, and it’s dangerous to make up the rest when you don’t know what you’re talking about.

Maybe I’m wrong, but I don’t recall trade critics suggesting that aggregate investment into the U.S. was more or less than that of China FDI. Doesn’t really come up that often in political discussions, and it certainly wasn’t asserted by the author of the New York Times article linked to by Kaupke.

No, most critics talk about things like jobs, and although there are ways to estimate jobs gained per dollar of investment, I don’t have a lot of faith in the applicability of that data.

Why not? Here’s a question: do you think that U.S. FDI and China FDI result in similar types of investments? Are the targets of M&A deals similarly situated in terms of technology, capital equipment and manpower?

How about a completely speculative question: I wonder how many jobs are created in China per dollar of FDI compared to U.S. FDI? Given the different strengths of each economy and the mix between labor and capital in these economies, why would we expect these numbers to be the same in terms of jobs created? Correct me if I’m wrong, but I doubt that the U.S. and China are identical when it comes to labor and capital intensity.

Therefore, unless I’m completely off base here (I’m no economist, so who knows?), Kaupke’s concluding statement that investors prefer to send their “job-creating dollars” to the U.S. as opposed to China is quite misleading. If he had left out the “job-creating” bit, he would have been safe. Too bad.

Thanks for the effort, Mr. Kaupke, but no thanks. Free trade is a good thing, but we don’t need to pretend that investors are clamoring to set up factories in the U.S. to assemble mobile phones and manufacture textiles. Next time come up with a better argument.

© Stan for China Hearsay, 2011. | Permalink | 5 comments | Add to del.icio.us
Post tags: FDI, foreign direct investment, Heritage Foundation

It’s no secret that the U.S., specifically certain American industries and their champions in the U.S. government, are less than pleased with the state of intellectual property rights enforcement in China. The big players here include pharmaceutical companies, the entertainment industry, and software developers.

What are their options? One line of attack is through multilateral negotiations and use of multilateral organizations, like the WTO. These industries were instrumental in having IP rights included in the trade agenda in the 1990s via the Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement. This was part of the grand bargain struck between developed and developing nations when the WTO was established. The promise: we’ll throw you a bone when it comes to areas like agriculture if you’ll agree to tougher IP laws and market access for services (e.g. banking and finance).

Some would argue that the developing countries are still waiting to this day for that promise to be fulfilled, but that’s a subject for another post. On the IP side, those Member States adopted TRIPs and agreed to the minimum standards established under that agreement. As other countries joined WTO, including China, they also agreed to uphold TRIPs.

The problem with that, from the industry perspective, is that TRIPs sort of froze everything in time. Sure, the agreement forced many developing countries to upgrade their legal systems. China, for example, engaged in a sweeping change of its IP laws in the late 90s/early 2000s, including amendments to the trademark, copyright and patent laws.

All well and good, but industry did not get everything it wanted, and going back to the WTO and getting that consensus-driven body to adopt tougher standards in a future negotiating round has proven impossible. Indeed, we’ve been stuck in the next negotiating round (Doha) for many years now, with no end in sight.

So much for the WTO. But if industry is not happy about IP in China, what else can be done? Well, there’s always bilateral negotiation, and certainly whenever the U.S. and China get together for official talks, intellectual property issues are high on the agenda. Several notable victories have been made over the past few years, including the fairly recent debate over China’s “indigenous innovation” policy, which has been revised to reflect industry concerns.

However, bilateral negotiations can only get you so far. Certainly the pharmaceutical, entertainment, and software industries (among others) have had agenda items hanging out there for years, with no indication that their wishes will be granted by Beijing, notwithstanding pressure by the U.S. government.

So much for bilateral talks. Any other options? If multilateral and bilateral solutions aren’t working, there is always the regional option. If the entire WTO membership won’t play ball, and China refuses to accede to demands by itself, what about a regional solution?

Enter the Trans-Pacific Partnership:

Ongoing trade negotiations involving the United States and eight other Pacific Rim nations have come under increasing scrutiny for the intellectual property provisions being discussed, amidst concerns that they could lead to higher drug prices, harming public health and access to medicines in developing countries.

The objective of the TPP is to establish a free trade agreement among the United States, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam. Five rounds of negotiations have taken place since March 2010; still in its early stages, the TPP has been the subject of growing global interest. (ICTSD)

What’s the plan here? The U.S. has a history of entering into bilateral and regional trade agreements and including IP provisions that are tougher than TRIPs standards. This is usually referred to as “TRIPs plus” and includes issues like data exclusivity and patent linkage (for the drug industry) and extension of copyright protection (for the entertainment industry). The U.S. strategy has been criticized in the past as utilizing unequal power to foist industry-driven legal reforms on developing countries.

In other words, the U.S. couldn’t get certain reforms past the entire WTO membership, but perhaps it can pick off developing nations via bilateral, or alternatively regional, trade agreements. This is one of the issues surrounding the TPP negotiations.

The language recently released by USTR gives a clue to where negotiations are at this point:

TPP countries have agreed to reinforce and develop existing World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) rights and obligations to ensure an effective and balanced approach to intellectual property rights among the TPP countries. Proposals are under discussion on many forms of intellectual property, including trademarks, geographical indications, copyright and related rights, patents, trade secrets, data required for the approval of certain regulated products, as well as intellectual property enforcement and genetic resources and traditional knowledge.

First, note that the goal is to “reinforce and develop” TRIPs, which is as close to a direct reference to “TRIPs+” that we’re going to get. It means provisions that raise TRIPs standards and make further progress on issues important to U.S. industry.

Second, the list of areas under discussion not only include the ones driving the discussion (copyright, patents, trade secrets and data protection), but also throws in other IP issues that are important to developing countries (genetic resources and traditional knowledge).

Third, there has obviously been some pushback on the U.S. agenda, otherwise we would not be seeing language like “balanced approach” and some of those line items mentioned above. Cautionary comments from one nation, New Zealand, have already been leaked to the public (read it here).

What does all this have to do with China? After all, the TPP negotiations do not include China at the moment, and many have characterized the U.S. move as a way to coalesce regional support behind the U.S. as an alternative to China, a rising Pacific power. Indeed, much of the coverage of the TPP in the past couple of weeks has focused on defense issues.

But even if China never becomes a member of TPP, such a regional agreement would have a significant effect on international IP standards. If the U.S. is successful in getting all of these nations to sign off on TRIPs+ provisions, then those standards become more widely recognized internationally.

For example, if the TPP includes a minimum copyright protection period of 70 years (many nations only have a 50-year period), the U.S. could at some point bring this up in bilateral negotiations with China, essentially saying “Hey, why are you guys holding out on this issue? All the other nations around you already changed their copyright laws. Why are you the only hold out?”

In effect, when it comes to the TPP, U.S. strategy may include not only the military containment of China, but also a legal encirclement with respect to IP laws.

© Stan for China Hearsay, 2011. | Permalink | One comment | Add to del.icio.us
Post tags: regional trade agreements, Trans-Pacific Partnership, TRIPs, WTO

This story broke last week while I was incapacitated following a valiant, yet ultimately unsuccessful, attempt by my students to infect me with a killer virus. It looks like this topic will require a couple posts at least, so I’ve tentatively tacked on a “Part I” to this post. We’ll see how it goes.

A good place to start is the information request by the U.S. Trade Representative’s office last week. This is a formal request by the U.S. government to China based on WTO law, which China agreed to follow when it joined that organization. The USTR’s justification for all of this stems from the possibility that China’s Net regulations are posing a trade barrier to U.S. businesses:

[T]he United States is seeking detailed information on the trade impact of Chinese policies that may block U.S. companies’ websites in China, creating commercial barriers that especially hurt America’s small business.

I’ll have more to say later on about that fundamental complaint, but for now, I want to look at the information request itself. For all you legal wonks out there, here is the specific language, with a citation to the relevant provision of the GATS:

The United States submitted its requests for information under paragraph 4 of Article III of the General Agreement on Trade in Services (GATS), which provides in relevant part: “Each Member shall respond promptly to all requests by any other Member for specific information on any of its measures of general application or international agreements within the meaning of paragraph 1.” Paragraph 1 of GATS Article III provides: “Each Member shall publish promptly and except in emergency situations, at the latest by the time of their entry into force, all relevant measures of general application which pertain to or affect the operation of this Agreement. International agreements pertaining to or affecting trade in services to which a Member is a signatory shall also be published.”

Before looking at the substance of the request, one brief comment on the tactic. It’s possible that the U.S. is either attempting to build a legal case against certain Chinese policies or simply gathering information that might be used within the context of bilateral negotiations. Either way, using the mandated WTO information request procedure to do so seems like a very smart tactic to me, something that perhaps should be done more often.

I always approve of methods that take the legal “high road.” In this instance, the U.S. wins notwithstanding the Chinese response. Either China discloses relevant information (which is what the U.S. wants) or it refuses (or, more likely, drags its feet), making the PRC look like the bad guy. Excellent positioning by the U.S.

Okay, so what information is being requested? I’ll give you the first of the five parts in this post, which I think turns out to be the most interesting anyway since it deals directly with website blocking:

1. Websites of service suppliers based outside of China are sometimes inaccessible in China, which can prevent those companies from marketing products and supplying services to the Chinese market. The United States would like to better understand China’s rules governing website blocking so that service suppliers based outside of China may adopt appropriate policies to avoid encountering this problem.

a. Who or what ministry is responsible for determining if and when a foreign website should be blocked in China?

b. What are the guidelines and criteria for blocking access to foreign websites? How often are these guidelines and criteria changed or published? Where are these guidelines published? Are they made public in advance of their implementation? Which ministries are responsible for drafting them?

c. What is the process for implementing a restriction on a website? How does the relevant entity determine whether an entire website should be blocked or only services or content deemed illegal?

d. Is the blocking implemented directly by the government, or indirectly by Internet service providers (ISPs) and/or telecommunications companies?

e. If blocking is carried out by ISPs or telecommunications companies, are these actions typically implemented through written governmental orders? If so, which governmental organs are authorized to issue such orders?

f. How can a service supplier without a physical presence in China determine if access to their website is or will be blocked in China? To whom should such a supplier direct questions if there are any misunderstandings?

g. Can an affected service supplier appeal a decision to block access to their website? If so, what is the procedure for appealing, and where is that procedure published? Can a service supplier use the court system to appeal a decision to block access to their website? If so, has any such appeal ever been successful?

h. Is the same process used to prevent access to foreign and domestic websites providing similar services in China? If the process is different, please describe the differences.

Keep in mind that this is only one part of the information request. Moreover, it addresses offshore websites only, and the process by which domestic traffic to those sites is regulated by the Chinese government and handled by Chinese ISPs.

We already know the answers to several of these questions, but only informally. There are a whole lot of folks out there who would literally pay huge sums of money to have something down on paper from the government.

How is China likely to respond to these questions? If you’re familiar with the process of litigation in the U.S., you can think of this as pre-trial discovery. The U.S. has sent over a list of questions, and now China (the opposing party) will do everything it can to delay the process, respond with objections and vague, unhelpful answers, and so on.

Despite the WTO context here, this is an adversarial process. Don’t expect a transparent, open dialogue. There is a lot at stake here, including a tight focus on an area of the law that China considers to be a national security issue. If nothing else, at some point China will assert some sort of privilege based on national security concerns, and it will be interesting to see how the U.S. responds to that objection.

The other fascinating issue here is of course censorship. I’ve said in the past that issues relating to censorship should not be dealt with in the trade arena (I think WTO should not be involved in this). From statements I’ve seen by USTR, it seems like it is attempting to attack the Great Firewall by making a non-tariff trade barrier case. Whether this is a good move remains to be seen.

Stay tuned. Once I read through some of the commentary and reporting on this, I’ll be back with more.

© Stan for China Hearsay, 2011. | Permalink | 10 comments | Add to del.icio.us
Post tags: Internet, ISPs, web site blocking, world trade organization, WTO

For the Chinese government, sick and tired of having to defend its currency policy to the Americans: China’s overall trade surplus narrowed from $17.8 billion in August to $14.5 billion in September.

For all those folks in the U.S. Senate who recently voted for a punitive measure based on the value of the RMB: the bilateral trade deficit with China rose to $29 billion, a new record high.

Generally, the numbers show that China is having a tougher time selling these days. Some countries are facing slower growth, while Chinese products are increasingly expensive, reflecting higher domestic costs (e.g. labor) and a rising RMB. Looks like the U.S.-China political dynamic over this issue won’t change anytime soon, though.

© Stan for China Hearsay, 2011. | Permalink | No comment | Add to del.icio.us
Post tags:

Trying to counter conventional wisdom about China trade in the U.S. is always difficult, and given the current employment situation, it’s downright impossible. I therefore have a lot of sympathy for the folks at the Global China Summit, a day-long event at the United States Institute of Peace (USIP).

Doing their part to push back against erroneous assumptions, speakers who included Henry Kissinger, David Miliband and Daniel Rosen stated that the bilateral trade situation was more complicated than most people think.

China investment in the U.S. was emphasized:

Americans in recent years have taken to wringing their hands over leakage of U.S. jobs to China and other developing nations. But on this side of the Pacific, Chinese businesses are quietly making deep investments in the United States that could play a significant if little acknowledged role in the American economic recovery.

[ . . . ]

The trade relationship pumps some five to seven billion dollars into the U.S. economy every year, said Daniel Rosen, a USIP panelist and a member of the Council on Foreign Relations. Thirty-four U.S. states are involved in some kind of business with China — and the number of bilateral deals being struck is growing annually at a rate of 130 percent.

The data defies conventional wisdom that suggests the trans-Pacific economic relationship is lopsided in favor of rising China, which holds $1.2 trillion worth of U.S. debt.

Well, I suppose “lopsided” is a rather subjective term. Most people look at a trade relationship and focus on a nation’s current account (basically trade in goods and services). The U.S. has been running a trade deficit with China for many years. This is seen by a lot of folks as a big negative.

But as we know from Macroeconomics 101, that current account deficit translates to a capital account surplus. That means money flowing into the U.S. in the form of investment, which historically has been portfolio investment, such as purchases of bonds and securities. What Rosen is talking about, foreign investment, is also factored into that capital account figure.

One could argue, therefore, that there is nothing lopsided at all here. That’s the beauty of macroeconomics and accounting identities – they have to balance. All that money that the U.S. shovels out the door to pay for goods and services comes back in the form of some sort of investment.

Sounds good to me, but then again, I’m already on Rosen’s side. Unfortunately, a lot of other folks see huge trade deficits and significant Chinese holdings of U.S. Treasuries as a bad thing. I’m not sure that this is going to resonate with that crowd.

How about you? Are you convinced? Rosen et al point to several examples of Chinese companies, like ZTE and Air China, that have set up shop in the U.S. and hired a lot of Americans. There, see? American factories have gone overseas and hired Chinese workers, but don’t worry, a lot of those workers will be picked up by PRC companies in the U.S.

Meh. Not so convincing. Now, I realize that Rosen was not making an equivalency argument here. Obviously China’s investment and employment numbers in the U.S. are a tiny trickle compared to the involvement of U.S. firms in China.

I suppose the real argument here is that even if the trade relationship is indeed lopsided, it isn’t quite as bad as you think. Unfortunately, I really doubt that many protectionists or China critics are going to be swayed by that argument. The numbers are just not there, and the “feel good” anecdotes from ZTE are not going to cut it in the face of double digit unemployment and the constant drumbeat of negative press related to the value of the RMB and China’s trade practices.

A valiant effort, but ultimately this is not going to win many hearts or minds.

© Stan for China Hearsay, 2011. | Permalink | 4 comments | Add to del.icio.us
Post tags: bilateral trade, employment, foreign direct investment

Image via AEI

Daniel Mitchell, writing at Forbes, poses eight questions to protectionists. This is great stuff by and large, although I can’t sign off on all eight of these questions. Mitchell’s arguments are a reminder to me how difficult it is being a liberal free trader. Unfortunately many of my fellow free trade enthusiasts turn out to be libertarian types whose opinions on other issues make me very uncomfortable.

Let’s have a quick look.

Question 1: Do you think politicians and bureaucrats should be able to tell you what you’re allowed to buy?

This has obvious appeal to the libertarian set as it poses the issue in terms of personal freedom. These are the same people in the U.S. who passionately believe that their ability to purchase incandescent light bulbs is something akin to a God-given right.

Nevertheless, Mitchell’s question is a good one in terms of imports versus domestic products. Unless there is a good reason (e.g. product safety), I don’t think the government should get in the way of that purchasing decision. All else being equal, therefore, why should the government force us to buy a domestic product just to make a domestic producer happy?

Question 2: If trade barriers between nations are good, then shouldn’t we have trade barriers between states? Or cities?

This is probably my favorite one. Generally speaking, if you’re willing to sign up for protectionism in the international context, then why shouldn’t those barriers be allowed within nations? If the answer relates at all to efficiency, then you (protectionist) are in trouble, from an argumentation standpoint.

The other day, I saw a clip of an interview Jon Stewart (The Daily Show) conducted with former Michigan Governor Jennifer Granholm. She talked about how some of the competition between States in the U.S., including tax subsidies to businesses, is very inefficient. Seems to me like this translates internationally as well.

Question 3: Why is it bad that foreigners use the dollars they obtain to invest in the American economy instead of buying products?

Or to put it another way, is that capital surplus a bad thing? Many protectionists will instinctively not like it when foreigners purchase domestic assets. The recent rumor of a Chinese group trying to bid for the LA Dodgers baseball team comes to mind.

To me, this is about reciprocity. If we want countries like China to open up to foreign investment, then those nations need to welcome Chinese investment. And if that doesn’t sound good, isn’t inward foreign investment a sign that your economy (and economic future) is attractive? Seems like a good thing to me.

Question 4: Do you think protectionism would be necessary if America did pro-growth reforms such as a lower corporate tax rate, less wasteful spending, and reduced red tape?

Okay, here is where I start to part company with Mr. Mitchell. If you aren’t familiar with U.S. politics, “pro-growth reforms” is a Republican code phrase. Mitchell doesn’t hide behind it (unlike many politicians), and admits that it means lower taxes, less regulation and lower spending. In other words, the basic Republican agenda.

Obviously I don’t agree that I have to be a Republican to believe in free trade. Indeed, Mitchell’s attempt to tie the two things together is pretty weak. Consider if we substituted the term “industrial policy” for “pro-growth reforms.”

As some very smart folks have said, the U.S. would be more competitive if it adopted an industrial policy. This would obviate the “need” for protectionism without adopting the “race to the bottom” Republican policies touted by Mitchell.

Question 5: Do you think protectionism would help, in the long run, if we don’t implement pro-growth reforms?

Superfluous question given #4. Not sure why Mitchell put it in here. Maybe he wanted to ensure that he ended up with eight questions? It is a lucky number, after all.

Question 6: Do you recognize that, by creating the ability to offer special favors to selected industries, protectionism creates enormous opportunities for corruption?

Excellent. This is Political Economy 101 and is a great argument against protectionism. The Lefties who usually argue for trade barriers are also critics of corporate cronyism, and yet the policies they argue for result in rent seeking.

Question 7: If you don’t like taxes, why would you like taxes on imports?

Actually, I don’t mind taxes. Protectionists on the political Left won’t be at all swayed by this argument. Next?

Question 8: Can you point to nations that have prospered with protectionism, particularly when compared to similar nations with free trade?

Mitchell probably should have included a time frame in this question, because many countries have prospered for a short time with protectionist policies, but I’m quibbling. Certainly China is a good example here. The growth seen here since the late 1970s is undeniable. (I would also point out that this is a good argument for having an industrial policy – see Question 4).

Right then. Some good arguments to use the next time you’re stuck in an elevator with a protectionist. Works best on Libertarians.

© Stan for China Hearsay, 2011. | Permalink | 4 comments | Add to del.icio.us
Post tags: free trade, industrial policy, protectionism

If you thought the bilateral chicken wars were over, think again:

United States Trade Representative Ron Kirk announced today that the U.S. has filed a case against China before the World Trade Organization (WTO) to protect jobs in America’s poultry processing sector, which directly employs 300,000 workers, as jobs in this sector are threatened by China’s imposition of duties on imports of American chicken products.

I did a quick search on this topic right here on China Hearsay and found that I had posted no less than three times in 2009. Here’s the first installment of how we got here:

1. Bird Flu scares everyone, and bilateral chicken trade grinds to a halt.
2. 2007 – U.S. Congress stops Bush Administration from lifting the ban. {cough – protectionism – cough}
3. March, 2009 – U.S. Congress adds provision in law stripping funds from any attempt to lift the ban (i.e. these guys are serious)
4. March, 2009 – China threatens WTO case

When next we became embroiled in this dispute, it was August, 2009, when China decided to go ahead with a formal complaint. That apparently was sufficient prodding, because the U.S. compromised at the end of September, 2009 when it lifted the ban. If you want some laughs, follow that last link to what I wrote two years ago. The bullshit statements from U.S. Congressmen are precious. One yokel from Georgia praised the compromise after visiting a chicken processing plant in China and getting access to “their books.” Ha ha ha. You can’t make this stuff up, folks.

Okay, so that brings us up to date. Why has the U.S. filed a case against China? Well, the U.S. did lift the ban on China chicken imports, but China slapped tariffs on U.S. chicken in September, 2010. A bit of a reciprocity problem.

If this is confusing, note that many experts attribute China’s move not only to the earlier U.S. chicken ban, but also to the bilateral dispute over U.S. safeguard duties on Chinese tires. The appeal in that case was recently decided by the WTO in favor of the U.S. (here’s a link to my write-up of the initial panel decision).

So the new duties have been in place for a while, despite what I assume would be quite an energetic behind-the-scenes lobbying campaign by the U.S. The market in question is worth about USD 1 billion, and the companies involved have quite a lot of juice with D.C. (e.g. Tyson Foods).

Let’s also not forget that there is an election coming up next year in the U.S., and Obama is hating life at the moment, dog paddling desperately in a sea of disapproval as the economy worsens. Any move against China is good campaign fodder, and trade actions are political gold with the Democratic base. Note that headline of the USTR press release: “United States Files WTO Case Against China to Protect American Jobs.” It could easily have read “For God’s sake, let us win just one news cycle on an economic issue.”

What happens next? The consultation period will probably end with no deal, and then a panel will eventually be established at WTO to hear the dispute. If at any point the two nations cut a deal, then the case goes away.

You’d think that China might be motivated to cut a deal and end these additional chicken duties. Tit-for-tat is fun and entertaining, but when your citizens are reeling under high meat prices, slapping duties of between 50-100+% on chicken seems like a bad idea. But that’s just my opinion.

On the other hand, if I was involved in arguing the case, I’d probably want to be China. Granted, it’s possible that the U.S. has some exceptionally clear and persuasive arguments here. But we shouldn’t lose sight of the fact that this is about anti-dumping and countervailing duties. WTO establishes some limits, but the specific procedures followed in this case were according to Chinese law. Who do you think has the edge in a legal dispute?

If the case proceeds, I’ll let you know when/if something interesting happens.

© Stan for China Hearsay, 2011. | Permalink | No comment | Add to del.icio.us
Post tags: anti-dumping, chicken, countervailing duties, poultry, tariffs, world trade organization, WTO

Hey Mitt? Do you support your own China policy?

U.S. Republican presidential hopeful Mitt Romney unveiled his economic growth plan, which translated into D.C.-speak is a “jobs plan,” and the China part of it was so funny that I almost pissed myself laughing so hard.

Remember that Romney, late of Bain Capital and a bona fide “country club” Republican, is a total whore of Corporate America. Unfortunately, his party is being taken over by a populist movement (aka “Teabaggers”). Therefore tough China rhetoric is a must for any aspiring Republican looking for help in 2012.

So here’s what Romney has to say about China:

In a speech today, Mitt Romney took an unusual step for a GOP leader. He suggested the United States restrict trade with China over its many predatory tactics that hurt foreign businesses – from stealing patents to reneging on contracts to allowing fake Apple stores to outright bans on certain imports or services. [my emphasis]

Does he even care anymore whether anyone believes what he says? Or are the Teabaggers so ignorant that they’ll believe anything with the correct code words?

Let’s take a look at some of those policy points. First, banning imports. That’s a serious, and broad, charge. Luckily both countries are members of the WTO, so if China outright bans U.S. products in violation of WTO, the U.S. can file a dispute. I don’t recall the last time the U.S. filed a case that involved an import ban. That could mean that the U.S. has “surrendered” to China (as Romney claims), but since the U.S. has filed other kinds of cases against China, I’m going to assume it means that this simply doesn’t happen all that often and that Romney is confused.

Next, to the extent that China does “ban” goods and services, Romney fails to mention that it is allowed to do so under the WTO Accession Protocol. In other words, a lot of this was agreed to over ten years ago, and using the terms of this agreement to complain that China’s markets are somehow closed to U.S. goods and services in violation of trading rules is rather disingenuous.

What about the fake Apple stores and patent infringement? By the way, “stealing patents” is horribly inaccurate language. You can’t steal a patent, you can only infringe upon one. (Nice going, Christian Science Monitor editorial team.) Obviously China has a problem with IP infringement, but I’m not sure what Romney can do about it. Indeed, in Romney’s policy documents released to date, there are no specific solutions to this source of bilateral friction.

Why not? Because: 1) no good solution exists except for the U.S. to have patience and pick its battles for bilateral negotiations; and 2) unilateral action (including some sort of punitive tariffs) would be counterproductive. Romney has no plan to change U.S. policy with respect to intellectual property infringement; he just wants to let the folks out there know he is aware of the problem.

About the only thing Romney actually promises to do is label China a currency manipulator. Of course he is lying about this, but at least it’s the most specific thing he’s said about China thus far. Look, his party would be against that move, his financial backers wouldn’t tolerate it, and even many of the Democrats in Congress don’t want to rock that particular boat. If the Obama Treasury blinked on this issue, there’s no way a Romney administration would be any different. (Although I have to admit that Mitt Romney is not necessarily more pro-business than Obama has proven to be.)

So Romney the patriotic tough guy says he will stand up to China, but the details are a bit sketchy, and his one concrete proposal is something he’d never do. Moreover, everyone knows that his core supporters would never allow him to throw a wrench into the complex U.S.-China trading relationship. In other words, it’s all empty rhetoric, political theater. Shocking, I know.

Given Romney’s reputation for switching policy positions and pandering to whatever audience he happens to be addressing at the moment, I suppose it’s not surprising that no one has challenged him on his absurd China policy.

© Stan for China Hearsay, 2011. | Permalink | 7 comments | Add to del.icio.us
Post tags: Mitt Romney, Republican Party, U.S.-China trade

Monday is the Labor Day holiday in the United States. Why is this relevant for a China blog? Because no discussion of American labor, apparently, is complete without bemoaning the fate of U.S. manufacturing. And of course that has to include some good old fashioned China bashing.

At the very least, the protectionists come out of the woodwork with the usual appeals that make no sense once they are examined. Case in point, a lovely article in USA Today entitled ‘Buy American’ Gets New Emphasis.

The article itself is pretty much a fluffy feature describing the efforts of a guy in Orlando who has written a book about how everyone can, and should, buy as many American-made products as possible. Doing so, I assume, will make the trade deficit disappear, cure cancer, and do wonders for the moral fiber of the nation’s youth.

This is drivelicious:

With Monday being Labor Day, a U.S. unemployment rate of 9.1% and a creeping dread about the economy, [Roger] Simmermaker is part of a renewed movement to persuade American consumers to buy products made in the U.S. to advance economic growth and keep people working.

Yeah! Economic growth and employment! Who wouldn’t like that, particularly when the economy is in the tank? That guy is such a patriot!

Barf. The usual economic answer to protectionism is a technical explanation about aggregate consumer welfare, which unfortunately includes drawing graphs and comparing triangles of different sizes, and using math to do all of the above. Can’t have that on a blog (much too boring), so we’ll go with Plan B.

Suppose everyone in the U.S. decided to only buy domestically manufactured socks from a company called Carolina Socks. Demand spikes, and all of a sudden Carolina Socks has to hire a huge number of new workers. All the sock profits go to Carolina Socks, and all the wages they pay go to U.S. workers. Awesome, yes? It’s a Carolina textile protectionist’s wet dream.¹

But wait. There are a few issues to ponder here. First, this must have happened spontaneously, through the actions of good people like Mr. Simmermaker. It couldn’t have been the government, because the U.S. is a WTO member and has already promised most of the world that it will not raise tariffs beyond a certain level (there are exceptions, but that statement is generally true). So OK, we’ll go with an explanation based on consumer preferences.

Second, since tariffs didn’t go up, and consumers being who they are, let’s further assume that the price of socks hasn’t changed from what you get now at Wal-Mart. How does that work out?

Well, all those lucky folks who work at the U.S. sock factory get really crappy wages, because that’s the only way those prices can stay that low. You think wages at Wal-Mart are low now? You ain’t seen nothing yet!

However, there are minimum wage laws in the U.S. (pitiful as they are), so actually Wal-Mart can’t pay low enough wages to maintain those prices without being thrown in jail. In other words, the numbers probably don’t add up at all.

Third, if low prices don’t work, then let’s assume that consumers are willing to spend more money to pay for products made in the USA. Okay, problem solved?

Hmm. Maybe not. If a typical consumer has to spend more on those socks (and clothing, and electronics, etc.), then they have less money at the end of the month to spend on other things.

So what are Americans willing to give up for this protectionist fantasy? Maybe just go with Basic Cable instead of premium channels? Stop going to the movies? No iPad this year (which will run you hundreds of dollars more anyway)? If you’re already poor, maybe you have to choose between food and those expensive socks.

Now, I’m not saying that there aren’t some products out there that couldn’t be made in the U.S. at a competitive price. Surely there are quite a few. But if they do not have a significant market share in the U.S., one has to ask why. (The protectionist answer to that question is that China doesn’t play fair, an answer that simply doesn’t account for a significant percentage of the trade deficit.)

So where does that leave ‘Buy American’ campaigns? They sound great, but the numbers just don’t add up. Either you end up paying a lot more for a wide range of goods, or you pay low wages to your workers. When the economists talk about an aggregate loss to consumer welfare, this is what they’re talking about.

U.S. unemployment is way too high, and something definitely needs to be done about it. However, perhaps a pro-growth investment plan from the government is a better solution than ridiculous “feel good” autarchic fantasies.
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1. I won’t even bother talking about what happens to all the jobs held by folks involved with foreign trade, who are now out of luck.

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© Stan for China Hearsay, 2011. | Permalink | No comment | Add to del.icio.us
Post tags: Labor Day, protectionism, trade deficit, unemployment