Technology, Not Trade Is Real China-US Fight

THE RETALIATORY 25% tariffs imposed on 128 US imports from frozen pork to specific fruit and nuts worth a total of some $3 billion are carefully chosen.  They mainly target products for which China is a principal market for US producers.

However, they are also a relatively mild retort to the tariffs imposed by the United States on steel and aluminium imports last month. The bigger concern is how Beijing will respond to the already announced but unspecified second set of tariffs that Washington has announced on $60 billion worth of Chinese exports in retaliation for alleged theft by Chinese companies of US technology and intellectual property.

“China has yet to unsheathe its sword,” state media commented.

The Trump administration is expected to announce the details of the second set of tariffs sometime this week ahead of Friday’s deadline.

For its first round of retaliatory tariffs, Beijing is acting under World Trade Organization rules that let countries impose tariffs to compensate for another country’s export restrictions. Hence Beijing’s use of the phrase in announcing its tariffs that they were ‘in order to safeguard China’s interests’, the necessary WTO condition that needs to be complied with in such circumstances.

Beijing is also arguing that the tariffs, which Washington imposed on national security, not market disruption grounds, contravene WTO rules.

Trump has attacked the WTO in a tweet, but at the same time, the US is pushing its technology transfer misappropriation claims through the global trade organization’s disputes procedures.

This Bystander remembers how in the 1980s when it was Japan not China that was going to take over the world and eclipse the American century, that the United States waved the big stick of tariffs and then negotiated a settlement with Tokyo for voluntary Japanese export restraints.

The problem with that approach today is that it might reduce a bilateral trade imbalance, but it does little for solving technology transfer issues when both sides are fighting an existential battle to dominate the industrial future which will turn on control of technologies.

What Can Beijing Expect From Obama 2.0?

U.S. President Barack Obama’s re-election has made moot the vacuous threat that China would be declared a currency manipulator on day one of the new administration as the Republican challenger Mitt Romney had promised to do had he won. Though China’s senior officials know enough of American presidential campaigns to ignore the shrillest words spoken on the campaign trail (and we may have Harvard University to thank for some of that, according to Bloomberg), Beijing is rarely a big fan of change. It will be happier with the devil it knows. One point of relief all round is that the unpredictability of an early test of a President Romney by Pyongyang will have been avoided. Yet it is worth asking how a second term Obama administration’s policy towards China could change from the first.

That was marked by Washington’s Asian pivot in foreign policy, still seen as a policy of containment of China by a hegemonic U.S. It will not escape Beijing’s notice that Obama’s first post-re-election-victory foreign trip will take in its old ally, Myanmar, which is shaping up as a testing ground of the competing thesis of whether economic reform has to precede political reform, the so-called Beijing consensus, or whether the two can move in lockstep, the Washington view. Yet the relationship between the superpowers is better characterized as increasingly tetchy, particularly over trade, tempered by the reality that they still have to deal with each other on a range of issues where their interests also range from competitive to common.

There was a cautionary note in Beijing’s official congratulations to Obama on his re-election, an expression of hope that the end to the election campaign would put an end to what it called the China-bashing game. That was played louder and more irrationally on the campaign trail by Romney, as is the wont of challengers unencumbered by the reality of office. Obama, as an incumbent, gets to play it for real.

The Obama administration has been ratcheting up the number of complaints about China it has filed to the World Trade Organization (and Beijing has responded in kind, we should note). There was one that is particularly significant to this Bystander’s eye. In September, Washington formally complained to the WTO about what it said were unfair subsidies to China’s auto and auto-parts makers. Obama needed, and got, the American auto workers vote this week. It won for him Ohio, one of half dozen key swing states with large numbers of electoral college votes and where one in eight jobs is tied to the auto industry, and Michigan, home state of Detroit and the Romney family as it happens. The labour vote also won for Obama Wisconsin, home state of Romney’s running mate, Paul Ryan.

One WTO complaint filing doesn’t make a swing, of course. Obama’s bail out of General Motors and Chrysler after the 2008 global financial crisis mattered a great deal more. Oddly, that was a lot less politically popular at the time of 2010’s mid-term elections, in which Obama’s Democrats were pummeled. But we do expect organized labor to be looking for a thank-you for turning that round and rallying to Obama’s cause this time.

We think that will manifest itself as intensifying trade disputes with Beijing, not just over the traditional parts of the car industry, such as tires and auto parts, but also wherever it touches the new technologies for alternative fuels and electric vehicles, solar power being one example of where it is already happening. As the Obama administration has been subsidizing electric vehicle development, that will provide plenty of scope, too, for Beijing to retaliate.

Greater trade friction is also inevitable as recovery of the U.S. economy requires export growth, an avowed Obama goal, and with that acceleration of  bi- and multi-lateral free trade negotiations, a game Beijing is playing, too. The TransPacific Trade Partnership could become a priority project for Obama as he looks to foreign policy in his second term to define his legacy. If there is a silver lining to any of that, it is that the detailed and unglamorous work of trade diplomacy could become a proxy for the security relationship, which then has some room to deteriorate, if it needs to on a rhetorical rather than real basis–and that might be driven as much as anything by internal Chinese politics as Xi Jinping establishes his grip on power with former Presidents Hu and Jiang looking over either shoulder.

There is one piece of change that we know is coming to Washington’s diplomatic front. U.S. Secretary of State Hilary Clinton has said she won’t do a second term in that exhausting office, and her assistant secretary of state for East Asia, Kurt Campbell, is also unlikely to continue. Senator John Kerry and U.N. ambassador Susan Rice are two names being floated as Clinton’s successor. Kerry might be the more welcome in Beijing. Rice would come fresh from the Security Council battles over Iraq and Syria.

New Rare-Earths Trade Group Aimed At WTO Complaint

Beijing’s creation of an industry association for rare-earths producers is best seen as an bulwark against the WTO complaint brought jointly by the U.S., the EU and Japan. This holds that China’s export quotas and other controls on rare-earths mining are not, as they purport to be, for environmental and sustainability reasons, but a pretext for protectionism as they drive up prices and favor end users that buy rare earths inside China, a provision intended to anchor in China manufacturers that are heavy users of rare earths, including high-tech, defense and green-technology firms. Beijing rejects the charge.

The new 155-member strong Association of China Rare Earth Industry, reporting to the Ministry of Industry and Information Technology, is charged with setting reasonable prices and properly handling trade disputes, as well as promoting the sustainable use of the minerals and environmental controls. The first two seem directly targeted at the WTO complaint, as were suggestions that China plans to abandon large-scale mining of the minerals.

Trade For Two, And Two For Trade

The South Korea-U.S. free trade agreement comes into force today–as this Bystander feels sure you have noted in your diaries. It is tangental to our brief but worth noting in passing for several reasons. Beijing, Seoul and Tokyo hope to start the sharp end of talks on their own free trade agreement later this year. China is both being dragged and dragging its trade partners before the World Trade Organisation with some regularity. And while the next round of the WTO’s global free trade talks, the Doha round, is proceeding even more glacially than reform in China, free trade agreements are popping up everywhere.

Nearly three score have come into force since January 2008. The total in effect is fast approaching 300 and many more are being talked about. (Trade trivia question: now Mongolia has struck a free trade agreement with Japan, which is the one WTO member left that is not party to any free trade agreement?)

The days when free trade agreements were seen as undermining the multilateral global trading system seem distant memory. Bi- or limited plurilateral regional free trade agreements will shape trade policies for the foreseeable future. They are also more suitable for developing existing cross-border trade flows being created by the needs of global logistics chains. Whether they undermine the big benefit  of multilateral agreements, that they increase trade overall by lowering restrictions across the board, is moot. But then the Doha round isn’t doing anything to boost trade overall for as long as it remains stalled.

The most significant of the free trade agreements under discussion for  the Asia-Pacific region is the Trans-Pacific Partnership (TTP) that the U.S. is taking over. China is on the outside of that at this point. Japan is the swing state. If it joins the TTP, China’s exclusion will be of more consequence than if it does not. Another free trade agreement in the pipeline that has implications for China is one between the EU and India. Meanwhile, Washington and Seoul are putting in place another piece of the new world trade order.

Footnote: The answer is Mauritania.

Rare Earths Pas De Deux

The joint complaint the U.S., EU and Japan are bringing to the WTO against China over rare earths has been a case in waiting ever since the U.S. and the EU won over other Chinese industrial raw material export restrictions in January. Those set a precedent for the successful argument that export restrictions by commodity producers glut domestic markets and thus let raw materials to be bought cheaply to domestic manufacturers in a way that can be considered trade distorting.

In the case of rare earths, the group of minerals used by high-tech, military and green technology manufacturers of which China produces 90% of the world’s supply, Beijing says it is prudently managing a scarce resource plagued by illegal mining–though rare earths would be less of a scare resource if more mines in the U.S., Australia and South Africa driven out of production by an earlier glutting of international markets were to reopen. The Catch-22 is the more mines that reopen, the more international prices are pushed down making reopening of more uneconomic, and leaving Chinese producers with great sway over international supplies.

This is a delicate dance for both sides, and one with political sub-themes, too, with there being leadership elections in Beijing and Washington. The two sides have 60 days to work out a deal before the complainants can ask the WTO to rule, which is what this Bystander expects to happen. However, we still hold to our view that, recent precedent not withstanding, this is far from an open and shut case. Beijing’s tough enforcement of its environmental protections of rare earths makes the case that they are a mere pretext for protectionism more difficult to sustain  than was the case with the export restrictions on coke, zinc, bauxite and the six other raw materials that the WTO ruled in January did break world trade rules.

Firming World Trade Recovery Provides Cheer For China

A glimmer of hope for China among the uncertainties over the world economy is that the recovery in world trade is firming up. The high trade growth rates of the double-digit export-led growth years are no where near being back. But the recovery from the mid-2011 contraction, slow though it is, has persisted long enough to suggest that global trade is past the trough of its current cycle.

Global trade levels rose by 1.4% in December, up from the 0.8% increase in November and a turnaround of the contractions of 0.9% and 0.7% in October and September, respectively, according to a new estimate from the Dutch Bureau for Economic Policy Analysis (the CPB; its figures are closely watched because they provide the earliest available measure of global trade.) The sharpest growth was among developing countries, up 3% over November’s rate, with export rates in Asia up 4.2%. Emerging economies are now firmly in the sights of Chinese exporters, who will get new government support to attack those markets.

That is doubly cheering for China’s exporters. In January, the country’s exports fell, largely because of the early Lunar New Year. Seasonally adjusted, they rose by 10.3% year-on-year, though that wasn’t the number that got the headlines.

The IMF still forecasts 6% growth in world trade in 2012, including a robust expansion in the trade in services. That is up from the 5.6% the CPB estimates for 2011, but down from 2010’s 14.9%. The brakes on a faster pick-up in trade are the expected ones:

• the slow pace of the global economic recovery and the continuing concerns about the euro-crisis:
• protectionist pressures increasing, if being kept politically constrained by mutual agreement of the G20, which has recently extended its pact not to go protectionist to the end of next year; and
• stalled progress on the Doha round of talks on new trade rules. In the face of that, free-trade agreements are likely to proliferate, particularly in the Asia-Pacific region.

WTO-referred disputes are also likely to be more frequent. Most will probably involve China, the U.S. and the EU as complainant or defendant. Just as they do now. The disputes mechanism is slow and unwieldy, but it does resolve disputes without letting them spill over into other areas of bilateral relations, a useful safety valve in difficult times, and not just for trade relations.

WTO Natural Resouces Ruling Not Prelude For Rare Earths

China’s WTO loss over certain natural resource exports shouldn’t overly encourage anyone who would like the same approach to be taken towards Beijing’s export restrictions on rare earths. These were introduced in 2010 to prevent environmental damage and unsustainable depletion of the country’s rare earth reserves. Beijing’s tough enforcement of them makes the case that they are a mere pretext for protectionism more difficult to sustain. Indeed, Beijing make make use of the latest WTO ruling to enforce them more vigorously and to bear down on foot dragging enterprises and local officials. China is the world’s largest supplier of rare earths. Unlike coke, zinc, bauxite and the six other raw materials whose export quotas, licences and duties the WTO has decided break world trade rules, rare earths are of such strategic importance to China’s economy and its military’s development that Beijing is not going to leave itself vulnerable to any trade challenge.
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Subsidy Or Welfare Spending?

In an economy such as China’s, standing somewhere uncertain in the transition from being centrally planned to a market economy, is everything a subsidy? The question is raised again both by the World Trade Organization’s surprise ruling that the U.S. had introduced illegal anti-dumping and anti-subsidy duties on some steel exports and by a new World Bank research working paper looking at the effects of a countervailing duties case brought by the United States in 2007 against Chinese imports of coated free sheet paper which were alleged to be being sold at below fair market value because of government subsidies to the Chinese manufacturers.

That case petered out after the U.S.’s International Trade Commission eventually found that no injury had been done to American paper producers. Its significance lies in that it reversed a long-standing American policy of not imposing countervailing and their sister anti-dumping duties on exports from non-market economies (into which category China falls until 2016 under the terms of its joining the WTO), thus opening the door for at least eight such trade actions from a wide range of industries.

Wonk warning: The paper will put any trade policy wonk in pig heaven. You will be neck deep in WTO rules and regs and the arcane arts of diving fair market value and identifying subsidies. If that is what fascinates you, you will find it a fascinating case study. If that’s not you, read on here.

The broader question is how does China, or any other transitioning economy for that matter, implement social and economic development policies it legitimately wants to pursue, as set forth, for example, in the new five-year plan, without distorting trade? What counts as an export subsidy and what is fair game for a countervailing or anti-dumping duty? For example, does the VAT rebate that Chinese farmers get (they effectively pay 5.8%, not the full 13% as part of the push to narrow urban-rural income disparities) count as an export subsidy, as some at the U.S. agriculture department argue? Or discounted land or energy supplies given by central or local governments as an inducement to attract new industry to desired regions, as some in the U.S. steel industry promote. What about a bank loan; the U.S. commerce department has determined that the domestic banking sector doesn’t operate on a commercial basis? Or China’s managed currency, which some in the U.S. Congress want made subject to trade remedies? Even censorship is starting to come under the microscope to examine if it, too, is a trade issue.

China has made great progress in reducing its overt subsidies (tariffs, subsidies and export taxes/rebates), down from 8% of GDP in 1985 to 0.7% by 2005 according to one 2007 study. But there are still a lot of subsidies designed to promote economic and social welfare goals, particularly poverty reduction and environmental protection, some of which are reported to the WTO but which need to be made trade neutral and applied according to universal principles not discriminatorily in line with WTO rules.

It is now a reasonable argument to make that U.S. trade remedy laws have strayed far from their original purpose, and are now being used by special interests to shield themselves from competition. Greg Mankiw, the Harvard University economist who is a former chair of the U.S. President’s Council of Economic Advisers, has said, “Anti-dumping is the ‘third rail’ of U.S. trade politics, with few politicians of either party willing to point out its broadly negative impact.” The World Bank paper quotes recent research that found that each job saved by steel tariffs cam e at the cost of three jobs in steel-using industries and caused economic distortion equal to some $450,000.

The paper suggests three remedies: contesting these cases in the courts or via the WTO disputes mechanism, as in the case of the steel duties–China and its companies now have hordes of trade lawyers in Geneva, Washington and Brussels on retainer; changing the rules on countervailing and anti-dumping duties via the Doha round of trade negotiations, but which would depend on the chimera of the Doha round actually being concluded; and China advancing the date of its recognition as a market economy from 2016, which would come with its own baggage. That, though, would be the idealists’ solution as it would let China provide a model for developing economies designing industrial and development policies intended to achieve social objectives that don’t simultaneously distort trade.

WTO Hands Beijing Big Trade Win

The World Trade Organisation’s ruling at the end of last week in favor of China’s appeal against E.U. anti-dumping tariffs of imports of Chinese screws and other fastenings is significant. It undercuts the basis on which the E.U. and the U.S. have imposed a welter of similar antidumping tariffs against other Chinese imports (WTO report in full). Chinese goods have been the subject of antidumping measures by the E.U. and U.S. in 445 cases over the past decade, accounting for one in four of those imposed by all WTO members (which has included China since 2001).

The essence of the WTO’s ruling is that the methodology that the E.U. uses to assess the true production cost of Chinese goods is flawed and thus there are factors other than state aid that makes their manufacture cheaper than European-produced equivalents. Beijing has publicly played down the importance of the decision, but E.U. officials have described it as a “significant setback”. They have 60 days to appeal. We believe that unless the E.U. can see some sort of workaround, a challenge will be mounted because of the precedent it sets. With Beijing playing increasing legal hardball at the WTO, it is game on.

China Inches Towards Opening State Contracts To Foreign Bidders

Both the U.S. and the E.U. have been pushing for China to join the World Trade Organisation’s agreement on government procurement (GPA) to open up a market for government work that was said to be worth 700 billion yuan ($100 billion) in 2009 and growing by more than 15% a year (though that numbers strikes us a low or narrowly defined). Last month Beijing submitted a revised version of its rejected 2007 proposal for GPA membership. That excluded local governments and state-owned enterprises from the scope of Beijing’s membership, had a high threshold for qualifying public-sector contracts and a 15 year implementation timetable.

In June China hawks in the U.S. Congress proposed to ban the U.S. government buying Chinese goods until Beijing joined the GPA (which would, it should be remembered, give it reciprocal access to government procurement in the 41 countries that are already GPA members). Today Sun Zhenyu, Beijing’s envoy to the WTO, told state media that it would take “time and effort” to improve Beijing’s offer, but that it still wanted to join “as soon as possible”.

Sun said China’s revised proposal addressed two of three main points of contention by noting that the qualifying contract sizes had been reduced and the implementation timetable cut to five years. The range of public sector entities hasn’t been expanded, though. Sun, doubtlessly prepping the ground ahead of the WTO taking up the revised offer in October, also said WTO members shouldn’t be “too demanding” of Beijing’s revised proposals, and indicated that foreign companies should consider the absolute size of even a small slice of China’s government procurement rather than worry about getting access to all of it. As a theatrical agent once said to us, 10% of something is better than 100% of nothing.

Looking at how Beijing has liberalized its trade rules since joining the WTO in 2001 — gradually — membership of the GPA is unlikely to provide an immediate bonanza for foreign companies especially given how close the state and corporate China remain. But even a couple of high-profile trophy awards would be a start, albeit of a long and hard road.