Tag: China

Congress Poised to Escalate the U.S.-China Trade War

U.S. policymakers hold the key to vastly improved economic relations with China.  They also have the key to the vehicle that will take the bilateral relationship over the cliff, which appears to be the route that has been chosen. Republican House Ways and Means Chairman Dave Camp will introduce legislation this afternoon that makes explicit the applicability of the U.S. Countervailing Duty (anti-subsidy) law to imports from countries considered to have “Non-Market Economies” (i.e., China and Vietnam). 

Maybe that’s not as obvious an example of escalation as Nixon’s bombing of Cambodia during the Vietnam War, but it is very likely to accelerate the deterioration of U.S.-China economic relations.  Costs will rise and life will become more difficult for U.S. companies trying to do business in China, as well as for U.S. producers and consumers who rely on imports from China.

Those pushing the legislation don’t want the public to understand the issues, which are highly technical and legalistic (and, quite frankly, too much trouble for our legislators to think through, particularly when there’s only political upside in China-bashing). But the consequences will be felt broadly – and there’s danger in that – so let me attempt to boil the matter down to a few salient points.

The U.S. government considers China a non-market economy for purposes of how it applies the antidumping law.  Certain outdated assumptions about prices, wages, and interest rates being unreliable and fictitious in non-market economies result in China being subject to a punitive antidumping calculation methodology – the NME methodology – by the U.S. Commerce Department.  Under the terms of the treaty by which China joined the World Trade Organization back in 2001, the United States must end the NME designation by no later than December, 2016, which means that China will then be subject to the still-onerous, but less-punitive, market-economy methodology.

The United States also has a Countervailing Duty law, which for 22 years up until 2007 had not been applied to imports from countries that, for purposes of the antidumping law, were deemed NMEs.  In not applying the CVD law to NMEs during that period, the Commerce Department was being consistent: if prices and other market signals are unreliable or fictitious in Country A for purposes of antidumping determinations, then they cannot be reliable of useable for purposes of measuring the benefits of subsidies in Country A in CVD cases. 

For political purposes, that logic suddenly ceased to apply in 2007, when Commerce changed its policy and began initiating CVD cases against NMEs.  Today, the U.S. government has 24 separate CVD orders in place on various imports from China (in addition to 5 cases pending determinations).  In December, the U.S. Court of Appeals for the Federal Circuit ruled that it is illegal for the United States to apply its countervailing duty law to NMEs because Congress’s intent had been subsumed in the policies of multiple administrations to not apply the law to NMEs, and reinforced by the fact that there had been substantial revisions to the trade laws during that 22-year period – a period during which Congress did not make CVD application to NMEs explicit. (Scott Lincicome is the authority on the background and legal interpretation of the “GPX” case.)

Excluding legal appeals (which take us to the same decision tree if the CAFC decision is upheld), the Obama administration has three choices.  First, it can abide the CAFC decision, revoke the 24 existing CVD measures, drop the pending cases, and initiate no more CVD investigations against NME countries. Second, it can do what it is doing: work with Congress to pass a new law making CVD explicitly applicable to NMEs, which will be perceived by Beijing as taking extraordinary measures to punish China, which will invite blatant and subtle forms of retaliation from the Chinese government against U.S. interests and produce numerous lawsuits over the myriad legal issues stemming from the acts of preserving 24 CVD measures imposed under a law that has been found to be illegal.  Third, it can graduate China to “market economy” status now, instead of waiting until 2016.  Option three requires no legislative action whatsoever, preserves domestic industry access to both the AD and CVD laws, and wins enormous amounts of goodwill from Beijing.

From the perspective of a free trader, the first option is best.  But its likelihood can be measured in terms of hundredths of a percentage point.  The second option, which leaves use of the CVD law as well as applicability of the NME methodology of the AD law to China in tact, is the worst.  The third option preserves access to the CVD law, as well as the antidumping law, for U.S. protection-seekers, but requires the Commerce Department to use the market economy methodology in cases involving China.

Option three is the great compromise.  It makes antidumping actions against China slightly less onerous for U.S. consumers and Chinese producers, but domestic industries still have access to both laws.  That’s not great for consumers, consuming-industries, or free-traders on its face, but it would be considered a sufficiently decent gesture of good will by Beijing that it could stop and possibly reverse declining relations.  And that could head off a destructive trade war and be the catalyst for considerably more trans-Pacific cooperation resolving issues that adversely affect consumers, producers, workers and investors in both countries, and beyond.

Unfortunately, dark clouds are gathering as pursuit of that path seems less likely this afternoon.

Trying to Do Everything, Doing Nothing Well

One of the perennial laments about American strategy offered by people like me is that Washington seems incapable of setting out clear priorities in its foreign policy. Everything is urgently important. The business section of today’s New York Times highlights the unfortunate results of this orientation.

You may have heard by now that the United States and other allied countries are currently trying to strangle the Iranian economy to the point where the regime in Tehran feels enough pain—or, more accurately, fears for its survival enough—that it is forced to comply with the preconditions for negotiations and come to the table. This is deemed a Very Important Objective by the Washington foreign-policy elite.

But what you may have forgotten is that the United States is currently undertaking a “pivot” away from the Near East and toward the region where Washington believes the future of international politics lies: the Asia-Pacific. In pursuit of that objective, the United States is currently trying to pull together a coalition of junior partners to help diplomatically and militarily surround China so as to hem it in, should it have any ambition to take charge of the security environment in its region. This, too, is a Very Important Objective.

And before you get ahead of yourself, don’t forget about Poor Little Georgia, which got a chunk of its territory annexed after it lost a war to Russia in 2008. As President Bush pointed out, America’s vital interests and its deepest beliefs are now one. And surely our deepest beliefs don’t involve leaving a flawed-but-promising democratic nation to the tender mercies of a predatory and authoritarian Moscow regime, do they? So let’s agree that keeping Georgia safe is a vital interest.

The problem with this approach is that it’s very hard to pursue these difficult objectives at once. As the Times piece points out, the sanctions coalition against Iran conflicts with a number of these other objectives:

[N]ew threats to Iranian oil flow could have at least one beneficiary: Russia…

For Russian oil companies like Rosneft and Lukoil and the Russian-British joint venture TNK-BP, the international tensions that began over Iran’s nuclear development program last autumn have meant a windfall. Analysts estimate that Iran jitters have added $5 to $15 a barrel to the global price of oil, which means an extra $35 million to $105 million a day for the Russian industry. And the taxes the Russian government has received from those sales have been a political windfall for Prime Minister Vladimir V. Putin as he campaigns to return as Russia’s president. The extra money has helped further subsidize domestic energy consumption, tamping down inflation.

“It’s good for Putin,” Mr. Mercer said. “In the United States, when oil prices go up, the president’s ratings go down. In Russia, it’s the opposite.”

So our Iran policy helps Russia and Putin, and that’s bad. But wait:

[A]t least one exemption [to the Iran sanctions] under discussion is meant specifically to limit the strategic benefits for Russia, which has been an outspoken critic of American and European strictures against Iran.

The United States and European Union are negotiating an exemption that would continue to provide the former Soviet state of Georgia—a nation that is now a Western ally—an alternative to Russian natural gas. The workaround allows payments to an Iranian company, Naftiran Intertrade, that has a share of the Shah Deniz natural gas field in the Caspian Sea.

The field, managed by the Western petroleum giant BP, is a supplier to Georgia. It is also a potential source for the proposed Nabucco pipeline, which would be managed by a consortium based in Vienna and backed by some Western European governments to create European competition with Gazprom. But the pipeline, seen as a maneuver to weaken Russia’s hand in European energy politics, has been stalled in the planning phase for years.

So we’re carving out an escape hatch for Iranian natural gas to get to Georgia, because we have friends in Tbilisi. Oh, and what about that pivot to Asia? Any trouble on that front?

China, meanwhile, is expected to circumvent the Iranian sanctions with tacit American approval by settling its oil purchases with Iran through banks that have no dealings in the United States. India, for its part, has negotiated to barter wheat for oil, or pay Iran directly in rupees.

Hmm. Oh, and what about our war in Afghanistan, which has already cost hundreds of billions of dollars, with the meter currently running somewhere between $8 and $10 billion per month? What’s going on over there? Maybe the Post has something on that:

ISLAMABAD, Pakistan — At one end of the flower-festooned table sat the president of Iran, Mahmoud Ahmadinejad, perhaps the world’s most relentless America basher.

At the other end sat Hamid Karzai, Afghanistan’s leader, who owes his nation’s survival to the United States.

And in the middle was Pakistani President Asif Ali Zardari, whose country’s complex relationship with Washington swings from pole to pole.

If there existed any conflict among the chief executives of the three neighboring Islamic nations, they certainly weren’t showing it Friday at the close of a trilateral summit in Pakistan’s capital. At a news conference Zardari hosted in his splendid official residence, the theme was fraternal unity as the trio pledged to work for peace and prosperity in a region raging with war and terrorism.

It’s almost as if there are tradeoffs among our objectives.

Cross-posted from the Skeptics at the National Interest.

What Was the Point of Romney’s China Op-Ed?

Mitt Romney has an op-ed in today’s Wall Street Journal that Dan Drezner has aptly characterized as “Romney SMASH China!” Drezner takes Romney’s arguments on their own terms, but I’m more cynical, and accordingly I’m interested in why Romney wrote this piece. Sure, sure, maybe it’s possible that he just has strongly held ideas about U.S.- China policy and chose to voice them, but let’s be real: the man is trying to get the GOP nomination and then get elected president. He or someone in his campaign decided that now was a good time to reach out to the largest circulation conservative op-ed page in the country—one that gets read by a lot of people from whom he’d like to get contributions—with this message.

And what is the message? There’s the usual inchoate American nationalism (making the 21st “an American, not a Chinese century”) and criticism of Obama’s extravagant spending, sure, but there are also some fairly clear signs that Romney wants to signal he’ll get tough on China. He argues that Washington must “directly counter abusive Chinese practices in the areas of trade, intellectual property, and currency valuation.” On the latter, he goes so far as to promise that “on day one of my presidency I will designate [China] a currency manipulator…” despite gradual appreciation in the renminbi highlighted in today’s New York Times.

On the security side, he unsurprisingly suggests that the United States should bolster its role as the balancer-of-first-resort in the Asia-Pacific, claiming without evidence that our allies are worrying that we’re going to leave the region.

Now let’s go back to my question: What’s the play here? Does he think that this is some sort of mass appeal argument that will burnish his credentials in the eyes of the median Republican primary voter? Is he trying to tie economic malaise to the looming ChiCom menace? Maybe so, but does he think that the wealthy potential contributors who read the Journal op-ed page are going to be aroused by this message? That doesn’t seem right to me at all.

There are lots of people who’ve gotten wealthy running political campaigns who no doubt got this piece placed (and probably wrote it), but the questions remain: Why this message? Why this outlet? What was this piece supposed to accomplish? I can’t figure out a persuasive answer.

U.S.-China Summit Likely to Downplay Security Issues

The fact that Chinese Vice President Xi Jinping’s visit to Washington has been overshadowed by the frenzy over Iran is an indictment of the Beltway foreign-policy establishment’s priorities. The U.S.-China relationship is far more consequential than Iran, the Israel/Palestine dispute, the war in Afghanistan, or any other development in southwest or central Asia. This relationship will define U.S. foreign policy in the 21st century.

During the trip, Xi is likely to highlight the cooperative aspects of the U.S.-China relationship such as trade and the two countries’ shared interest in shoring up the global economy. The leaders are likely to gloss over their differences on issues such as intellectual property, the value of the renminbi, and creeping protectionism. Further down the list of issues are the growing security disputes between China and U.S. partners in the Asia-Pacific: the status of China’s claims in the South China Sea, the growing U.S. military presence in China’s region, and Beijing’s belief that Washington is encircling China militarily. It should be expected that these more contentious issues will take a backseat in the discussions, at least in public.

But putting the relationship on a sounder footing requires addressing security issues. Power transitions have represented some of the most unstable periods in world history. Should China’s relative power continue to grow, its ambition is likely to do the same. Given that there are few signs that Washington will welcome a larger Chinese role in Asian security issues, this could portend serious disagreements in the years to come.

Understanding the U.S.-China ‘Trade War’

An emerging narrative in 2012 is that a proliferation of protectionist, treaty-violating, or otherwise illiberal Chinese policies is to blame for worsening U.S.-China relations. China trade experts from across the ideological and political spectra have lent credibility to that story.  Business groups that once counseled against U.S. government actions that might be perceived by the Chinese as provocative have relented and changed their tunes.  Use of the term “trade war” is no longer considered taboo.

The media have portrayed the United States as a victim of myriad Chinese provocations, including currency manipulation, dumping, subsidization, intellectual property theft, forced technology transfer, discriminatory “indigenous innovation” policies, raw material export bans, industrial espionage, and other ad hoc restrictions on U.S. investment and exports.  Indeed, it is beyond doubt that certain Chinese policies have been provocative, discriminatory, protectionist and, in some cases, violative of the agreed rules of international trade.  But, as usual, the story is more nuanced than its early renditions allow.

U.S. policies, politics, and attitudes have contributed importantly to the atmosphere of rising frictions, as have rabble-rousing politicians and a confrontation-thirsty media.  If the public’s passions are going to be inflamed with talk of a trade war, prudence demands that the war’s nature be properly characterized and its causes identified and accurately described.

Politicians, policymakers, and members of the media should put down their battle bugles and consider that trade wars are never won.  Instead, trade wars claim victims indiscriminately and leave significant damage in their wake.  Even if one concludes that China’s list of offenses is collectively more egregious than the U.S. list of offenses, the most sensible course of action – for the American public, if not campaigning politicians – is for U.S. policymakers to avoid mutually destructive actions and to pursue constructive measures that will reduce frictions with China.

The full paper discussing this topic will be published sometime this week, but feel free to dikenson [at] cato [dot] org">contact me if you would like a preview of its contents.

Is the U.S. Trade Representative a Closet Free Trader?

Not to get him in trouble with his boss, but U.S. Trade Representative Ron Kirk has been sounding like a free trader lately. I’m beginning to think Ambassador Kirk consumes the analyses we produce over here at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies. Well, let me rephrase: that he consumes the meat of our analyses, but still hides the vegetables under the picked-over potatoes.

Still, that’s pretty commendable for a Washington policymaker.

Just the other day, Ambassador Kirk lamented how policymakers do a poor job selling trade agreements to a skeptical public. Inside U.S. Trade [$] paraphrased Kirk as saying:

[P]oliticians must ‘talk about trade differently’ and demonstrate how trade policy is directly responsible for sustaining economic growth and creating jobs. If the focus is only on how trade deals will improve supply chains for businesses, for instance, that is not enough to build the base for support for trade deals.

That is a sound criticism. The typical, mercantilist arguments that tout the benefits of exports and rationalize imports as necessary evils are foolish and self-defeating—particularly in a country that will run trade deficits into the distant future as its economy continues to grow and attract greater amounts of foreign investment. The freedom to engage in commerce with whom and how one chooses, and the impact of import competition are the real benefits of freer trade.

Like some others in town, we at Cato advocate free trade. But unlike most, we advocate free trade here in the United States—not just over there in foreign countries. Free trade requires more than getting other governments to eliminate their barriers to U.S. exports; it requires getting the U.S. government to eliminate its barriers to U.S. imports from abroad. The latter is the real objective of free trade advocacy and the well-spring of most of its benefits.

But the economic benefits of imports rarely make the Washington “free trade advocate’s” Top-10 list of talking points, nor do they officially register in the minds of trade negotiators, whose chief aims are to secure for their exporters the greatest possible access to foreign markets, while simultaneously conceding to foreigners as little access as possible to the domestic market. “Import” is a four-letter word in the Washington trade policy community.

That’s why Ambassador Kirk’s recent comments have me thinking: epiphany?

In a statement responding to the WTO Appellate Body ruling last week that China’s export restrictions on nine raw materials were not in conformity with that country’s WTO commitments, Ambassador Kirk made the point that U.S. firms that use those raw materials will be better able to compete once those restrictions are lifted.

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.

The USTR had previously made the following point:

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.

Technically, Ambassador Kirk is not engaging in profanity—he doesn’t use the word import. But his argument against Chinese export restrictions is 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.

So let’s take Ambassador Kirk’s sound logic and see if it might apply elsewhere in the realm of U.S. trade policy. If the U.S. government thought it worthwhile to take China to the WTO over the restrictions it imposes on raw material exports because those restrictions hurt U.S. producers, then why does the same U.S. government impose its own restrictions on imports of some of the very same raw materials? That’s right. The United States maintains antidumping duties on magnesium, silicon metal, and coke (all raw materials subject to Chinese export restrictions).

If Ambassador Kirk ate the vegetables as well as the meat of Cato’s trade policy analyses, he would recognize that his logic provides a compelling case for antidumping reforms, such as one requiring the administering authorities to consider the economic impact of antidumping measures on producers in downstream industries, such as magnesium-cast automobile parts producers, manufacturers of silicones used in solar panels, and even steel producers, who require coke for their blast furnaces.

We will know that the ambassador has eaten his free-trade vegetables when he starts sounding like former USTR Robert Zoellick who once hoped for the Doha Round of trade negotiations that it would “[T]urn every corner store in America into a duty-free shop.”

President Obama Could Improve Relations with China at the Stroke of His Pen

When China joined the WTO in December 2001, one of the many terms it agreed to was to allow the United States to continue to treat it as a non-market economy under U.S. antidumping law for a period of 15 years. China has regretted that concession ever since, and there are precious few gestures that would win more goodwill from the Chinese government than a decision by President Obama to graduate China to market economy status now.

A ruling last month from the U.S. Court of Appeals for the Federal Circuit making it illegal to apply the U.S. Countervailing Duty Law (anti-subsidy law) to imports from non-market economies gives the president the perfect opening to make the change now. From the perspective of a free trader, that solution is far from ideal: it preserves domestic industries access to the antidumping law and countervailing duty laws, both of which produce egregiously punitive duties on imports and are ripe for serious reform or outright repeal.

But the benefit of granting market economy status to China now is that it will help slow, and likely reverse the deterioration in bilateral economic relations. And that would be an important benefit for all of us.

At the very beginning of the Obama administration, Scott Lincicome and I urged the new president to consider more than just the litany of gripes so often heard at home and to recognize that China has its own justifiable concerns about U.S. policy:

The time has come to seriously consider carrots and not just sticksparticularly since the pain from the sticks is not limited to its intended targets, but is felt in the United States and in other countries, given the transnational nature of supply chains. President Obama would invigorate the relationship if he were to grant China market economy treatment in anti-dumping cases. While such a reform would take very little out of petitioning industries hides, the gesture would win vast sums of goodwill from the

Chinesegoodwill needed to resolve more important issues going forward. Indeed, repeal of the non-market economy (NME) designation presents a win-win scenario for several reasons.

First, graduation from NME status is one of the Chinese governments top international

trade priorities. China wants to be treated like all other major economies, and accordingly, the Chinese government is likely willing to make important concessions in other contested areas of trade policy to achieve market economy status. But the longer we wait to grant market economy status to China, the less valuable that concession becomes. Under the rules governing Chinas accession to the WTO, the United States must repeal Chinas NME designation by 2016. Thus, the value of that concession

will be greater in 2009seven years earlythan it will be in 2010 or 2012. Much beyond

2012, and the concession looks a bit like Confederate money.

Second, Chinas NME designation has drawn intense criticism from domestic consuming industries, trade policy experts, and U.S. trade partners because of its incongruous application (for example, Russia was deemed a market economy in 2002, yet still is not a WTO member, while China became a WTO member in 2001) and the latitude for abuse of administrative discretion it affords. Also, the relatively recent change in policy that opened the door to countervailing duty cases against China has sparked controversy about whether NME treatment in anti-dumping cases should still be permissible.

U.S. revocation of Chinas NME status would alleviate many of those domestic concerns at virtually no cost to domestic petitioning industries, but petitioners value NME because of the trade-suppressing uncertainty the process engenders. It is important that President Obama understand that our trade relationship with China has been mutually beneficial, that the rhetoric about the impact of unfair Chinese practices has been highly exaggerated, and that unnecessary provocation could open a Pandoras Box of economic problems.

(Read the whole analysis here.)

Well, Lincicome (in a thorough analysis) and I (in a fairly technical one) continue to make the case for market economy designation, and welcome the retorts of those who are opposed.