Tag: China

Solar Panels Trade Case Mocks Washington’s Ways

Later today the U.S. Department of Commerce is expected to announce preliminary antidumping duties on solar panels from China. This case might normally be met with an exasperated sigh and chalked up as just another example of myopic, self-flagellating, capricious U.S. antidumping policy toward China.

But in this instance the absurdity is magnified by the fact that Washington has already devoted billions of dollars in production subsidies and consumption tax credits in an effort to invent a non-trivial market for solar energy in the United States.  Imposing duties only undermines that objective. With brand new levies on imports to add to the duties already being imposed on the same products to “countervail” the lower prices afforded U.S. consumers by the Chinese government’s production subsidies, the administration’s already-expensive mission will become even more so – perhaps prohibitively so.

It’s not that President Obama and the Congress woke up one morning and agreed to craft policies that simultaneously promote and deter U.S. solar energy consumption. But that’s what Washington – with its meddling ethos and self-righteous politicians – has wrought: policies working at cross-purposes.

The Economic Report of the President in 2010 (published before Solyndra became a household name) boasts of the administration’s tens of billions of dollars in subsidies for production and tax credits for consumption of solar panels. This industrial policy continues to this day and there is no greater cheerleader for solar than the president himself. In this year’s State of the Union address, President Obama said:

I’m directing my administration to allow the development of clean energy on enough public land to power three million homes.

One month later, noting that 16 solar projects have been approved on public land since he took office, the president said:

[Solar] is an industry on the rise. It’s a source of energy that’s becoming cheaper. And more and more businesses are starting to take notice.

The president has couched his support for solar in terms of what he sees as the environmental imperative of reducing carbon emissions and slowing global warming. Thus his policy aim is to encourage consumption by making solar less expensive to retail consumers with production subsidies and consumption tax credits. (Of course, lower-cost solar is a mirage – accounting smoke and mirrors – because the subsidies come from current taxpayers and the tax credits deprive the Treasury of revenues already earmarked, forcing the government to borrow, burdening future taxpayers with principle and interest debt, which is paid with higher taxes down the road).

However, the president also sees solar and other green technologies as industries that will create great value, spawn new ideas and technologies, keep the United States at the top of the global value chain, and serve as reliable jobs creators going forward. And he seems to think that realization of that objective requires his running interference on behalf of U.S. producers.  He says:

Countries like China are moving even faster… . I’m not going to settle for a situation where the United States comes in second place or third place or fourth place in what will be the most important economic engine in the future.

There is nothing incompatible about holding the simultanous beliefs that greater use of solar power could reduce carbon emissions and that a solar industry has great potential to spur innovation, create value, and support good-paying jobs.  But promoting the realization of both premises simultaneously through policy intervention is a fools errand, and we are caught in its midst.

Efforts to protect and nurture these chosen industries by keeping foreign competitors at bay is incompatible with the president’s environmentally-driven objective of increasing retail demand for solar energy.  Intervening to reduce the supply of solar panels will cause prices to rise and rising prices (particularly in light of abundant cheap alternatives like natural gas) will cause demand to fall.  Sure, we may be left with some protected producers in the short-run, but how will they endure without customers.

That question is, apparently, far from minds of perennial interventionist Senator Chuck Schumer (D-NY) and arch-protectionist Senator Sherrod Brown (D-OH).  Just this week, the duo released a proposal that would make ineligible for the 30% tax credit, solar panels made outside of the United States, claiming that “Chinese solar panel producers’ eligibility for tax credit undercuts Amercian companies and jobs.”  The senators should tell that to the American business owners and employees in the much larger and more economically significant downstream industries that install and service solar panels in the United States.  The proposal would cause a dramtic increase in the retail price of solar panels and imperil livelihoods in these downstream industries.

This Cato video should be required viewing for Washington’s meddling policymakers.

Law of the Sea Treaty: A Tool to Combat Iran, China, and Russia?

Every few years, the Law of the Sea Treaty rears its head as a one-size-fits-all solution to a host of current maritime problems. This time, Secretary of Defense Leon Panetta and General Martin Dempsey, chairman of the Join Chiefs of Staff, are urging the Senate to ratify the treaty. The officials claim it will act as a tool to deal with aggressive actions by Iran, China, and Russia. But as I have long argued, no matter the current rationale for the treaty, it represents a bad deal for the United States.

Panetta and Dempsey rolled out three hot issues to make their case:

  • Iran is threatening the world economy in the Strait of Hormuz? The Law of the Sea Treaty (LOST) will help solve this.
  • China is threatening the Philippines in the South China Sea? LOST is a crucial tool to prevent war.
  • Russia is claiming land in the Arctic region to extract natural resources? LOST will put the screws to Moscow.

These international controversies will be magically resolved if only the Senate ratifies the convention.

If this sounds too good to be true, it is. It is not clear the treaty would do much at all to alleviate these flashpoints. Especially since the two most important potential antagonists, China and Russia, already have ratified LOST. And it is certainly not the best option policy-wise for the United States with each issue: Iran’s bluster in the Strait of Hormuz may prove its weakness. U.S. policy in the South China Sea suffers from a far more serious flaw: encouraging free-riding by allied states. Russia’s move into the Arctic has nothing to do with Washington’s absence from LOST.

The treaty itself, not substantially altered since 1994, is still plagued by the same problems that have halted its ratification for decades. Primarily, it will cede decisionmaking on seabed and maritime issues to a large, complex, unwieldy bureaucracy that will be funded heavily by—wait for it—the Untied States.

On national security, the U.S. Navy does not need such a treaty to operate freely. Its power relative to all other navies is the ultimate guarantee. Serious maritime challengers do not exist today. Russia’s navy is a rusted relic; China has yet to develop capabilities that come close to matching ours. Moreover, it is doubtful that the United States needs to defend countries such as the Philippines when flashpoints over islands in the region affect no vital American interests.

The average American knows very little about this treaty, and rightly so. It is an unnecessarily complicated and entangling concoction that accomplishes little that the longstanding body of customary international law on the high-seas or the dynamics of markets do not account for. My conclusion in testimony before the Senate Committee on Armed Services in 2004 still holds true:

All in all, the LOST remains captive to its collectivist and redistributionist origins. It is a bad agreement, one that cannot be fixed without abandoning its philosophical presupposition that the seabed is the common heritage of the world’s politicians and their agents, the Authority and Enterprise. The issue is not just abstract philosophical principle, but very real American interests, including national security. For these reasons, the Senate should reject the treaty.

The TPP Trade Negotiations Need More Japan and Less Detroit

If you harbor any doubts that the parameters of U.S. trade policy are defined by a few politically-important domestic industries, take a look at the debate over whether Japan should be allowed to join the Trans-Pacific Partnership trade negotiations.

Did you miss it?  That’s because there really hasn’t been much debate; there has been near-unanimous support for the idea in the United States.

In December 2011, the Office of the U.S. Trade Representative requested comments from the public about Japan’s expression of interest in joining the TPP talks.  In response, 115 submissions were filed on behalf of various U.S. interests (small to large companies, trade associations, unions, and other NGOs).  Five of the responses flat out rejected the idea of Japan’s participation; five expressed a willingness to support Japan’s participation with conditions, and 105 expressed no-strings-attached support for Japan joining the talks.  In other words, 91 percent of the respondents were unequivocally in favor of Japan’s participation in the negotiations.

Yet, four months after reviewing those comments, the Obama administration is equivocal about the matter.

With 91 percent in favor, the only formula that could produce executive equivocation is one that weights extremely heavily the views of those expressing opposition to Japan’s participation.  Which of these five dissenters’ views are likely to be getting extra special consideration from the administration on this matter: Humane Society International, the National Marine Manufacturers Association, the Maine Citizen Trade Policy Commission, the Central Union of Agricultural Cooperatives, or the American Automotive Policy Council (hint: the lobbying arm of the “Detroit 3” – Ford, GM, and Chrysler)?

Yes, the same GM that American taxpayers bailed out and are still involuntarily vested in to the tune of $27 billion has interest in seeing those same taxpayers denied the enormous benefits of liberalizing trade with the world’s third largest economy.  And yes, this is the same Chrysler that masquerades as an American company (remember the Clint Eastwood Super Bowl ad), but is owned by the Italian automaker Fiat. Add that little detail to the fact that GM produces more cars in China than it does in the United States and one has to question how, exactly, the process of U.S. trade policy formulation is reality-based.

There is nothing wrong with companies investing across borders and producing wherever they can to serve demand across the globe.  Indeed, freedom of capital, trade, and labor should be the rule, not the exception that it is today.  Likewise, it is to be expected that companies will respond to incentives and if policy is perceived as malleable, the incentive to influence favorable outcomes will motivate companies to lobby.  And as entities beholden to the fiduciary duty to maximize profits for shareholders, these companies try to influence the rules to their own advantages.  But who’s watching over the hen-house here?  Policymakers have a responsibility to the public interest, not to specific industries or companies.

What is proper, democratic, or civic-minded about U.S. policy formulated with the views of a few politically-favored companies – companies that are lobbying foreign governments on some of the very same issues – trumping the opinions of a diverse 91 percent of respondent interests?  If the goal of trade policy is to deliver the benefits of trade liberalization to a broad cross-section of Americans, then why is there this egregious imbalance of influence on the process? What is the point of collecting comments from the public on such matters, if not just to create the illusions of policy accessibility and transparency?  The whole exercise renders trade policy indistinguishable from corporate welfare and gives trade a bad name.

Consider the realpolitik of the matter.  The Chinese government sees the TPP negotiations as a U.S.-led effort to counter China’s growing influence, a perception the administration has not been shy about helping to cultivate.  Presumably, the Chinese government would like to see those efforts fail, and one way to undermine the TPP is to ensure that Japan stays out.  How might China accomplish that?  GM and Ford have big and growing stakes in a Chinese auto market that has been subject to various regulations to control rapid demand growth and stifling traffic congestion.  Might GM’s and Ford’s adamant opposition to Japan’s joining the TPP negotiations be animated by these considerations?  The argument put forward by the American Automotive Policy Council that Japan should be excluded from even negotiating because it has allegedly impermeable non-tariff barriers seems to miss the whole point that negotiations are where those barriers are discussed and, ultimately, dismantled.  It’s like disqualifying someone for a haircut because he wears his hair too long.  To my mind (and I neither offer nor have any proof), the adamancy of AAPC’s opposition whiffs of their trying to uphold their end of a bargain with Beijing.

Another explanation put forth for official U.S. equivocation over Japan is that the administration wants to proceed quickly, but the Japanese government itself has not decided whether it even wants to join the negotiations.  Even if Japan were entirely committed to the negotiations and had no domestic opposition to overcome, the process would be slower.  But there is domestic opposition in Japan, so, in fairness, the Obama administration’s concern for Detroit’s feelings doesn’t present the only obstacle.

Getting the deal done quickly is a valid reason to oppose Japan’s participation if the administration sees the TPP only as a means to a political end: having a deal – a relatively minor one, no doubt – to tout before November.  But this isn’t going to be done before November 2013, let alone November 2012.  And the economics of a Japan-less deal are, frankly, underwhelming.

Japan is the world’s third largest economy and the fourth largest trading partner of the United States.  The $6 trillion Japanese economy is more than double the size of the economies of the eight current U.S. negotiating partners combined.  The $200 billion in two-way trade between the United States and Japan equals that of trade between the United States and all of the eight current negotiating partners combined – and the United States already has free trade agreements with four of them.  If there are good reasons for pursuing a trade agreement with the eight, the reasons are much stronger if Japan is included.


Just a few short weeks ago, U.S. Trade Representative Ron Kirk waxed in the Wall Street Journal about the importance of the U.S. services sector industries.  In a piece titled “Rethinking ‘Made in America’,” Ambassador Kirk made the point that the United States is a services-exporting powerhouse and that industries in those sectors would drive growth and job creation in the 21st century. He wrote:

A commitment to services exports is why services and investment are a [sic] cornerstone of the current nine-country Trans-Pacific Partnership negotiations, in which the U.S. is seeking broad, nondiscriminatory market access for a wide range of services.

There isn’t a bigger ready-market for U.S. services in the world than Japan’s, but as of this moment an icon of the 20th century’s manufacturing economy is in the driver’s seat of this 21st century agreement.

Those who claim to want to move fast assert that Japan can always accede to the agreement at a later date – when it is good and certain that it wants to join.  But there are no guarantees that Japan would want to get into the club on terms undoubtedly less favorable than those it could secure as a charter member.  Rather than view the TPP as a model for the region, Japan, Korea, Indonesia, Canada, Mexico, China and even Europe might create their own alternative.  If the TPP is to have guaranteed drawing power, it needs the anchor of a large Asian economy.  And adding Canada and Mexico makes the endeavor all the more worthwhile.

China Old and New

The developing scandal and opaque power struggle surrounding fall princeling Bo Xiali, once thought to be a shoe-in for a top party position, reminds us of the old China. The fate of a nation of 1.3 billion people has been decided by relatively few men in Zhongnanhai, Beijing’s leadership compound. Bo’s ouster appears more likely to strengthen those dedicated to maintaining a system of stable authoritarianism than those hoping to promote political liberalism, but the outcome may still be better than the alternative.

Although in this way the “new” China doesn’t look very different from the perpetual back room machinations under Mao Zedong, the communist Humpty Dumpty really has fallen off the wall, never to be put back together again. After all, during the Cultural Revolution no one looked to citizens of the People’s Republic of China to enhance the profits of upscale New York City retailers. Today, Chinese travelers are spending some of their country’s expansive export earnings in America.

Reports the New York Times:

Over five days in January, a group of visitors to New York was treated to a private concert with the pianist Lang Lang at the Montblanc store, cocktails and a fashion show attended by the designers Oscar de la Renta and Diane Von Furstenberg, and a tour of Estée Lauder’s original office.

They were not celebrities. They were not government officials. They were Chinese tourists with a lot of money.

The most important relationship of the 21st century is likely to be that between the United States and China. Both countries have a big stake in emphasizing cooperation over confrontation. But a prosperous, even democratic PRC still could pose a significant geopolitical challenge to America. After all, nationalism knows no ideological bounds, wealth enhances military potential, and vote-seeking politicians have been known to harness the whirlwind of demagoguery to win. Nevertheless, a China where the majority of citizens are still desperate to climb the income ladder and the elite are enjoying their privileges is far less likely to intentionally blow up the international system that has moved their nation from poverty to prosperity.

Whether out of ideological conviction or political convenience, Bo was seen as pushing for a return to Maoist values. However, most Chinese seem to believe “Been there, done that” during the not so Great Leap Forward and the catastrophic Cultural Revolution. For a lucky few in the new China, it’s now even time to shop at Bergdorf Goodman!

Cross-posted from the Skeptics at the National Interest.

Trade Policy Lessons in WTO Challenge of China’s Rare Earth Restrictions

This morning the Obama administration lodged an official complaint with the World Trade Organization’s (WTO) Dispute Settlement Body over China’s ongoing restrictions of exports of “Rare Earth” minerals. Rare Earths are crucial ingredients used in the production of flat-screen televisions, smart phones, hybrid automobile batteries, and other high technology products.

The formal complaint was not entirely unexpected since the dispute has been on a low boil for nearly 18 months; the U.S. government recently prevailed in a WTO dispute over a similar issue concerning Chinese export restrictions on nine raw materials used in manufacturing; and, this is an election year in which President Obama has carte blanche to outbid the Republican presidential aspirants’ China-bashing rhetoric with administrative action. So, no surprises really.

Despite the added political incentive to look tough on China this year, the administration should be applauded for its efforts to compel China to oblige its WTO commitments. This is a legitimate complaint following proper channels. In fact, this is exactly the course of action I have long argued for. Negotiations, consultations, and formal WTO dispute resolution (which begin with a long consultation period in which the parties are encouraged to find solutions without formal adjudication) are precisely the methods of dispute settlement conducted by governments that respect the process, their counterparts, and the rule of law in international trade.

In a Cato paper published last week, I wrote:

There is little doubt that certain other Chinese policies would not pass muster at the WTO. China’s so-called indigenous innovation policies, forced technology transfer requirements, porous intellectual property enforcement regime, and rare earth mineral export restrictions are some of many legitimate concerns that might justify formal WTO challenges. (Emphasis added.)

Now, my perspective is not motivated by a fetish for WTO litigation, but a certainty that the alternatives would be bad. Unilateral, discretionary actions taken by governments to redress perceived violations or shortcomings of another government undermine the rule of law in trade and encourage retaliation. Both China and the United States are guilty of taking such unilateral, discretionary actions, and bilateral tensions have increased as a result (see here).

U.S. policymakers should appreciate that today’s formal complaint on rare earths is an example of the right way to address perceived trade barriers. They should also recognize in the arguments advanced by the Office of the U.S. Trade Representative the flawed economics in their support of last week’s countervailing duty legislation (the so-called GPX or NME/CVD bill).

Here’s the USTR’s rationale for the Rare Earths complaint:

China imposes several different types of unfair export restraints on the materials at issue in today’s consultations request, including export duties, export quotas, export pricing requirements as well as related export procedures and requirements. Because China is a top global producer for these key inputs, its harmful policies artificially increase prices for the inputs outside of China while lowering prices in China. This price dynamic creates significant advantages for China’s producers when competing against U.S. producers – both in China’s market and in other markets around the world. The improper export restraints also contribute to creating substantial pressure on U.S. and other non-Chinese downstream producers to move their operations, jobs, and technologies to China.

And here’s a quote from USTR Ron Kirk:

America’s workers and manufacturers are being hurt in both established and budding industrial sectors by these policies. China continues to make its export restraints more restrictive, resulting in massive distortions and harmful disruptions in supply chains for these materials throughout the global marketplace.

And here’s Ambassador Kirk in a statement responding (a few months ago) to the WTO Appellate Body ruling that China’s export restrictions on nine raw materials were not in conformity with that country’s WTO commitments:

Today’s decision ensures that core manufacturing industries in this country can get the materials they need to produce and compete on a level playing field.

And, finally, a statement from the USTR’s website on the raw material export restrictions cases:

These raw material inputs are used to make many processed products in a number of primary manufacturing industries, including steel, aluminum and various chemical industries. These products, in turn become essential components in even more numerous downstream products.

USTR’s argument against Chinese export restrictions in the raw materials and Rare Earths cases are just as applicable to U.S. import restrictions. Removing restrictions—whether the export variety imposed by foreign governments or the import variety imposed by our own—reduces input prices, lowers domestic production costs, enables more competitive final-goods pricing and, thus, greater profits for U.S.-based producers.

Yet the U.S. government imposes its own restrictions on imports of some of the very same raw materials. It maintains antidumping duties on magnesium, silicon metal, and coke (all raw materials subject to Chinese export restrictions).  In fact, over 80 percent of the nearly 350 U.S. antidumping and countervailing duty measures in place restrict imports of raw materials and industrial inputs—ingredients required by U.S. producers in their own production processes. But those companies—those producers and workers for whom Ambassador Kirk professes to be going to bat in the WTO case on rare earths (and the previous raw materials case)—don’t have a seat at the table when it comes to deciding whether to impose AD or CVD duties. (Full story here.)

Ambassador Kirk’s logic and the facts about who exactly is victimized by U.S. trade policies provide a compelling case for trade law reform, such as requiring the administering authorities to consider the economic impact of AD/CVD measures on producers in downstream industries—companies like magnesium-cast automobile parts producers, manufacturers of silicones used in solar panels, and even steel producers, who require coke for their blast furnaces.

Last week, when the CVD legislation passed both chambers overwhelmingly, Congress was implicitly thumbing their noses at these same producers and workers who the USTR rightly identifies as victims of Chinese trade restrictions. They are clearly victims of our own policies, derived in dark shadows by interests with asymmetric influence on the process. Maybe we should dwell on that hypocrisy for a while, and work to fix it by reconsidering the self-flagellation that is the U.S. trade remedies regime.

Time for Some Rapprochement in U.S.-China Economic Relations

Has the Chinese government indulged in protectionist, provocative or otherwise illiberal policies that have, on occasion, violated its commitment to the rules of international trade? Yes.

Do the Chinese maintain other policies that very likely would be found to violate China’s WTO obligations? Yes.

Is the U.S. government within its rights to bring formal complaints about benefit-impairing Chinese trade practices to the World Trade Organization for adjudication and resolution? Yes.

But before getting all righteous and patriotic and demanding that China be deemed an economic pariah worthy of exceptionally harsh treatment, keep in mind that the U.S. government has been found out of compliance with its WTO obligations more than any other WTO member, and it remains out of compliance on a few issues to this very day.

In some respects, the Chinese are emulating the tack taken by U.S. policymakers during the past three presidential administrations and ten congresses by presuming there is no policy or practice that violates WTO rules unless and until that policy or practice has been determined by the WTO Appellate Body to be out of conformity, and sometimes not until after retaliation has been authorized, and sometimes not even then.

China’s protectionist policies – policies that make its markets less accessible to U.S. exports and investment – should be identified and challenged. But U.S. policymakers should consider abandoning self-destructive, protectionist policies that hurt U.S. interests more than Chinese ones in favor of greater cooperation from China resolving problems facing U.S. companies in that market. But greater cooperation doesn’t come at the barrel of a gun.  It requires good will and an attitude of willing reciprocity from the U.S. side.

This new paper gives some background and offers the one important reform that could prove to be the elixir.

The GOP Foreign Policy Establishment Is Still Neoconservative

Karl Rove’s and Ed Gillespie have written a piece arguing that the conventional wisdom is wrong because a) foreign policy can be made into a big issue in the 2012 presidential campaign, and b) Obama is vulnerable on the subject. I did not find the piece persuasive at all, and my disagreement with it has produced not just a podcast on the subject, but an appearance on bloggingheads. The University of Kentucky’s Robert Farley and I discuss a range of subjects, from the Rove/Gillespie piece, to burning Qurans in Afghanistan, to the future of U.S.-China relations. To give you a flavor, here’s a clip where I denounce the GOP foreign policy establishment:

For what it’s worth, I think the only way to solve the problem I identify above is a decades-long project to build a counter-counterestablishment of foreign policy thinkers who could staff the foreign policy wing of a notionally sensible GOP presidential candidate. I have not yet read this book, but in reading reviews of it, my understanding is that it does a good job describing how the neocons built their counterestablishment, which I think by now has essentially become the establishment. The neoconservative insurgency benefited from remarkable largesse from their funders, a large bench of aspiring policy professionals, and a sharp-elbowed ability to successfully fight within bureaucracies. If people wish to reverse the course of GOP foreign policy, I suspect a similar effort will be needed on the part of realists. (We’re working on it. Happy to talk to any Democrats, too.)

For the entire bloggingheads video, go here. For my podcast on the Rove/Gillespie piece, go here. For my prior denunciation of the Beltway foreign-policy establishment, here.

My thanks to Farley and the bloggingheads people for having me on.