Tag: China

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.

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.