U.S. Trade Politics is its Own Weird Form of Internal Trade War

U.S. industry in general has been strongly supportive of trade liberalization. There are, of course, a few exceptions, like steel, textiles and footwear, and a few select agricultural products. And I do mean a few. One Ag expert once told my trade class that if it’s white, it’s protected: sugar, cotton, milk, and rice. Everything else is on its own. However, for the most part, U.S. industry understands the modern global economy and America’s role in developing a global marketplace in which American industry can thrive. Consequently, Republicans in Congress and the White House historically have been extremely supportive of globalization, multilateralism, and trade liberalization.

Labor union leaders and certain public interest and environmental groups have opposed trade liberalization with varying degrees of intensity. For them, its about losing jobs to foreigners and harm to the environment. As a result, Democrats in Congress and the Oval Office have sat in opposition to trade agreements, or are at least been deeply reluctant.

In contrast, according to a series of Pew Research surveys over the past half-decade, nearly twice as many Americans see trade as a good thing as those who see it as a bad thing. Middle class, and the college educated respondents are the most supportive. Ironically, Democrats have for many years been more supportive of trade than Republicans. In fact, both Republicans and Democrats across the nation are much more supportive of trade and support trade agreements, like the Trans-Pacific Partnership (TPP) and NAFTA, than their representatives in Washington. The long-term disconnect between the American people and their representatives on international trade is disturbing.

Not surprisingly, things got even more disjointed in the last election. Thanks to Trump’s relentless attacks on trade, Republican support for multilateralism and trade liberalization plummeted. It fell from well above 50% supportive to below 30% during the campaign. The good news is that it has now climbed back to about 43%.

A silver lining in the dark cloud Trump has created over trade is that Democrats increased their support for trade, even though their representatives in Congress have not. More tellingly, the percentage of Democrats who view trade agreements as “bad for the U.S.” has dropped by half over the past 6 years.

If ‘the enemy of my enemy is my friend,’ perhaps Democrats in Washington can now embrace trade agreements because Trump hates them. It would at least get them more in line with their many constituents, at least those who are not Labor Union Leaders.

To compound this disruption, we now also have the spectacle of the Republicans in Washington at war with themselves over trade. There is every indication that this war will heat up dramatically heading toward the November election given Trump’s growing animosity toward our most important trading partners and Congressional Republicans’ apparent willingness to take him on.

It is clear that a large majority of Americans recognize the dynamic nature of global competition and the remarkable success of our own economy in it. Americans seem to recognize that trade agreements are about creating an open, rules-based trading system that is a key source of economic growth and prosperity for Americans.

American business excels because it faces competition on a global scale. Manufacturing in the U.S. is growing rapidly, especially innovative ‘smart manufacturing.’ Even faster export growth comes from Services and U.S. agricultural—its own remarkable story of advanced technology. (For just one small example, did you know that in 1950, the average dairy cow produced about 5,300 pounds of milk? As a result of improved bovine genetics, feed formula, and farm management practices, a single cow today can produce 22,000 pounds.)

The exploding Asian middle-class offers a vast new market for America’s products. Effective trade strategy should to break down barriers between those consumers and American businesses. Dropping out of the Trans-Pacific Partnership—now re-forming without the U.S– will not help. The current discombobulated economic diplomacy, driven by inter-party warfare, intra-party warfare, and intra-Executive Office warfare at the highest levels, is a poor strategy.

Members of Congress and the White House regularly express their deep concern for their constituents but work in concert against them. Washington today seems incapable of producing a coherent trade policy that will further open Asia’s rapidly growing markets, strengthen American global leadership, and build effective strategic partnerships with our North American neighbors and European allies. Perhaps for starters, Washington should seriously re-connect with its constituents.

Robert A. Rogowsky is Professor and Program Co-chair of the Masters in International Trade & Economic Diplomacy at the Middlebury Institute of International Studies in Monterey, CA and Adjunct Professor of Trade & Diplomacy at Georgetown University’s Masters School of Foreign Service.
These essays are the opinions strictly of the author. They do not necessarily reflect the views of the Institute or any officials of the Institute.

 

Trade Wars Are Weird

A trade war is a weird kind of war. We think of war as sending warriors and ordinance somewhere else to destroy a lot of people and stuff “over there,” to fight until finally someone gives up. Trade “war” is different because the weapons are different: trade barriers are imposed aggressively against another trading partner to stop ourselves from buying their stuff. They, in turn, will retaliate by not buying our stuff until someone “surrenders.” The war ends so trade can flow even more freely than before the “war.”

I can’t think of trade wars without recalling the scene from Mel Brooks’ iconic movie Blazing Saddles. The small, all white western town of Rock Ridge anxiously awaits its sheriff. A black man (Cleavon Little) shows up dressed in gold. Realizing their intense hostility to a black man parading himself as sheriff, he draws his gun, puts it to his own head, and takes himself hostage. The town, befuddled by the cognitive dissonance of a black stranger taking their sheriff hostage, lets him drag himself to the safety of the sheriff’s office. Catastrophe avoided; life, weird and confused, goes on because, well, life has to go on even in the face of life’s various dissonances.

Trade wars are a lot like this: nation’s taking themselves hostage to inflict pain on someone else. That is why there are always winners and losers in a trade war, just as there are always winners and losers in a trade peace. In fact, commercial activity and economic progress always means there are winners and losers. Recall the long-gone and little lamented buggy whip manufacturers.

One trade scholar described trade theory as the study of whose hand is in whose pocket, and trade policy as who will be pulling it out first. When we restrict imports, it punishes both domestic interests and our trading https://ixquick-proxy.com/do/spg/show_picture.pl?l=english&rais=1&oiu=http%3A%2F%2Fspencemunsinger.com%2Fwp-content%2Fuploads%2F2013%2F02%2FblazingSaddles.jpg&https://ixquick-proxy.com/do/spg/show_picture.pl?l=english&rais=1&oiu=http%3A%2F%2Fspencemunsinger.com%2Fwp-content%2Fuploads%2F2013%2F02%2FblazingSaddles.jpg&sp=643fd38774d6b67d0a8731b9c85f1a96sp=643fd38774d6b67d0a8731b9c85f1a96partners (reminder: these are not enemies, they are allies and partners in our economic progress who buy our stuff and sell us their stuff). Because we have punished them, they must retaliate. When they do, we counter-retaliate. Hence, war.

The problem, again, is the weapon. We block our purchases of their products, which some of us want. We shoot them in the foot, but through our own foot, or calf or thigh, depending on how recalcitrant our retaliating trading partners feel compelled to be. We hope that enough blood spatters on them to force surrender.

When George W. Bush imposed steel tariffs in 2002, retaliation was focused on Florida oranges, cars produced in Michigan, and other products in key swing states. The United States withdrew the tariffs on December 4. When the EU refused to let U.S. beef into European stores, the U.S. retaliated with tariffs on beef and pork products, goose pâté, Roquefort cheese, truffles, onions, carrots, preserved tomatoes, soups, yarn, Dijon mustard, juices, chicory, toasted breads, French chocolate, and jams, as well as agricultural-based byproducts, such as glue and wool grease. The list targeted especially France, Germany, Italy, and Denmark, Products from the United Kingdom were excluded because they had indicated support for lifting the ban.

The hard part with this weapon is to find goods for which trade will hurt the enemy more than yourself. In our trade skirmishes with the Japanese over autos under President Reagan, tariffs on luxury Japanese cars were initially thought strategically sound because rich U.S. consumers could afford it. Unfortunately, they were both unwilling and politically connected. That weapon was quickly withdrawn.

Trump’s trade war (sorry Mr. Kudlow, I mean “discussion”) has, of course, spurred retaliation. Canada, for instance, released a strategic swing state response targeting Mr. Ryan’s home state of Wisconsin—dairy, Harley-Davidson motorcycles, and his own district’s big cucumber and gherkin industry. Also making the list is Mitch McConnell’s Kentucky bourbon, Bernie Sander’s Vermont maple syrup, Pennsylvania’s Hershey chocolate, and Florida’s fresh orange juice, along with beer kegs, mineral water and soy sauce, mayonnaise, salad dressing, automatic dishwasher detergents and certain types of plywood.

The weapons for a trade war are crude and Pyrrhic.  They must be used carefully and strategically with an eye to the political pressure points that will make the ‘enemy’ blink before your own wounded make you blink. Fair warning Messrs Ryan, McConnell, Sanders, and of course Trump as we head into the November referendum. Some very carefully devised punishments will force selected domestic sectors to pay for the special subsidies given to steel and aluminum. The question is how they will make you pay?

Robert A. Rogowsky is Professor and Program Co-chair of the Masters in International Trade & Economic Diplomacy at the Middlebury Institute of International Studies in Monterey, CA and Adjunct Professor of Trade & Diplomacy at Georgetown University’s Masters School of Foreign Service.
These essays are the opinions strictly of the author. They do not necessarily reflect the views of the Institute or any officials of the Institute.

 

U.S. Trade Policy: One Heck of a Week for U.S. Economic Diplomacy

Discombobulate, (Oxford Dictionary): Verb: Confuse or disconcert. Synonyms: astonish, dumbfound, stagger, startle, stun, stupefy, daze.

I am steadily drawn back to these descriptors as I try to parse U.S. trade policy. Frankly, I was confused during the campaign. I hit disconcerted shortly after the election. I quickly passed astonished. I am well into dumbfounded and, almost happily, seem to be reaching dazed.

President Trump dumped the Trans-Pacific Partnership (TPP), abandoned the Trans-Atlantic Trade and Investment Partnership negotiations (TTIP), let the Trade in Services (TiSA) negotiations whither, ended the US-China Strategic and Economic Dialogue, along with the associated US-China Joint Commission on Commerce and Trade. He re-opened the U.S. Korea Trade Agreement and the NAFTA. All this, according to Bloomsberg, is part of the costly “exercise in grandstanding, intended to impress his supporters.”

The pace is accelerating. In the past week, the Administration claimed to have called off a trade war with China, cast doubt over the framework of talks with Beijing, and threatened new tariffs on car and truck imports to protect America’s national security. Yesterday he re-asserted his threat to impose a raft of new tariffs, export controls and investment restrictions on China.

“In other words,” Bloomberg notes, “it’s been just another week for the volatile trade policy of President Donald Trump. The coming days aren’t looking much calmer.”

Specifically, Commerce Secretary Wilbur Ross is scheduled to visit China June 2-4 for more talks with Vice Premier Liu He, with a long list of topics from narrowing the trade gap to the fate of China’s telecommunications giant ZTE Corp. These talks might ease tensions with Beijing, or they might ramp it up. Hard to know.

It seems to depend on who is speaking and how they perceive on that day, the mad scramble to deliver on election promises by challenging trade practices—fair and unfair—using weapons often negotiated away long ago.

Pulling claims of national security from his back pocket, Trump threatened substantial tariffs on steel and aluminum and immediately used it as a negotiating bludgeon with our largest trading partners and closest allies. The current exclusion for the EU and NAFTA partners expires Friday. On a roll, Trump launched another probe into the national security problem of auto imports, which ironically has been opposed by the auto producers.

Meanwhile, Speaker Paul Ryan has made it clear that the deadline for getting a NAFTA agreement submitted in time to clear the current Congress has nearly passed. Unfortunately, “the NAFTA countries,” Robert Lighthizer, Trump’s USTR states, “are nowhere near close to a deal,” Republican Senator John Barasso (WY) then proposed a “skinny” version (that is, a new NAFTA deal that would not need Congressional approval because it changed no laws). That idea has been strongly opposed, by Republicans.

The Commerce Department imposed record sanctions on Chinese telecomm giant ZTE. Trump promptly shocked Washington when he tweeted that he was working to give ZTE “a way to get back into business, fast.” “President Xi of China, and I, are working together” as “too many jobs in China lost.

The Republican led Senate Banking Committee approved 23-2 an amendment that would prevent President Trump from reversing the sanctions levied against ZTE. The House Appropriations Committee likewise approved an amendment to a Commerce Department funding bill that would preserve the U.S. sanctions.

The problem got more complicated when it became known that the Chinese government is contributing a $500 million loan to a subsidiary of the state-owned construction firm Metallurgical Corporation of China, which signed a deal with Indonesia’s MNC Land company to build an ambitious theme park outside Jakarta. The project includes Trump-branded and managed hotels, residences and a golf course. Not to mention that Ivanka Trump coincidentally just got 13 trademarks approved in China.

As the trade war with China was being put on hold, the EU is preparing to hit roughly $3.34 billion worth of U.S. goods with a 25 percent tariff and an additional $4.22 billion worth of U.S. goods with tariffs ranging from 10 to 50 percent.

Also in retaliation, Japan filed its intent to withdraw WTO concessions equal to the amount of trade affected by Section 232 tariffs imposed by the U.S. on steel and aluminum imports. India has formally requested WTO dispute settlement consultations with the United States over U.S. Section 232 tariffs on steel and aluminum.

As we stir up a trade war with our most important allies, the White House, pressured by China’s threats to reduce US agricultural imports, suspended plans to impose the new tariffs on Chinese goods. The trade war with China at least was put on hold, despite the President’s confidence that ”trade wars are good and easy to win.

The President’s Trade Representative quickly challenged the move with a strong statement that tariffs are still a very important tool “to protect our technology.”

Democrats of course are shouting their opposition, as the administration allows “China to buy their way out instead of making real reform.” Even industry supporters are lamenting that the art of war has vanquished the art of the deal.

Republican Senator (NE) Ben Sasse complained that he has yet to see any “substantive facts” behind a U.S.-China deal and agrees that the U.S. is losing the trade negotiation with China. He states:

“Frankly, I’ve read lots of stories over the last three or four days about the trade deal and the particulars of how the U.S. won. I have yet to find a story that actually has any substantive facts underneath it to explain what the deal is.… It looks to me like we are losing the trade negotiation with China but the administration has done a masterful job of spinning a lot of reporters to say the administration says they just won a China trade negotiation.”

Republican Senator Rob Portman (OH), a former USTR, says the U.S.-China talks were “moving in the right direction,” but concedes “we’ve got a lot of balls in the air right now, too many I think. You need to focus on one issue at a time.”

Sasse disagrees about the right direction, arguing that the “single best thing” the U.S. could do to combat “bad behavior” in China was to not only rejoin the Trans-Pacific Partnership, but to lead the bloc because “…the single best thing we could do to push back against Chinese bad behavior — because there’s a lot of it — would be leading TPP.”

Sasse reported that Trump directed U.S. Trade Representative Robert Lighthizer and National Economic Council Director Larry Kudlow to “negotiate U.S. entry” into TPP. The White House later disputed it; President Trump reiterated his opposition to TPP. Sasse responded:

“So, going from being a pro-free trade party to being apparently an anti-free trade party is not because anybody thinks that’s the right, constructive play for the future … but because it’s the right way to capture a whole bunch of angst in the short-term. So, I can’t speak to the Republican party on trade because I think much more broadly it’s hard to articulate any clear Republican vision.”

It is indeed exhausting. The problem with “transactional” trade policy is that it is simple-minded. As a result, it leads to fundamental internal conflict—in this instance, internal to the formerly free-trade Republican Party. The reasons for conflict are, in turn, simple: too many inexperienced cooks with too many disproved recipes stirring an undefined concoction in a surreal pot whose dimensions are still being molded, largely against best evidence. For example, a recent report by NY based Conference Board found that non-Chinese companies make up 43 percent of China’s exports. Foreign-invested entities (FIEs) in China commands 79 percent of ICT exports from China to the U.S.; even higher in the more sophisticated ICT sub-sectors — including computers, electronic components, and electronic devices. Many of these are American firms. They conclude that the proposed Section 301 tariffs will hurt non-Chinese companies operating in Beijing more than the domestic Chinese ones the policy ostensibly targets. But no matter.

The complex global network of value chains and production networks that have arisen over the past seven decades under the leadership of the old Republican Party is now being challenged by the new Republican Party. It occurs at a head-spinning pace against best economic evidence and with no easily discernible long-term strategy.

Robert A. Rogowsky is Professor and Program Co-chair of the Masters in International Trade & Economic Diplomacy at the Middlebury Institute of International Studies in Monterey, CA and Adjunct Professor of Trade & Diplomacy at Georgetown University’s Masters School of Foreign Service.
These essays are the opinions strictly of the author. They do not necessarily reflect the views of the Institute or any officials of the Institute.

 

A Big Week In Trade—No other way to describe it.

The past week was a busy one in trade. The NAFTA negotiations faltered and seem to have missed their U.S. domestic deadline. Hearings on the Section 301 action allowed scores of special interests to make their case for either imposing or not imposing scores of particular tariffs. Secretary of Commerce Wilbur Ross publically lamented that the U.S. has locked itself into complying with the fundamental principles of the multilateral trading system that the U.S. has developed over the past 70 years—Most Favored Nation (giving your best tariff offer to all members of the trade agreement; in this case the World Trade Organization) and living up to our obligation to not raise tariffs we have promised (“bound”) not to raise.

In the face of all this Sturm and Drang, two important events occurred that frame a fundamental question facing the community of industrial nations: what is appropriate State support for national industries. Those events are, first, the determination rendered earlier this month by the WTO Appellate Board on the epic-length saga of Boeing versus Airbus. In this ongoing dispute, the U.S. and EU are wrestling over subsidies to the world’s only two commercially relevant large civil aircraft producers. The second event is the introduction of the “Fair Trade with China Enforcement Act,” by Senator Marco Rubio, a member of the Senate Foreign Relations Committee.

The coming together of these two events highlights the dilemma the industrial nations face with the rise of China as a great economic power. Specifically, the striking contrast between how the great economic powers—in this particular case the U.S. and EU—are using the WTO mechanism to define the scope and acceptable limits of self-serving industrial policies in a rules-based, market-oriented trading system, and how to deal with those not so constrained.

The Boeing v. Airbus dispute is a 14-year saga of suit and countersuit under the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) to define what constitutes appropriate state intervention into industry. Defining appropriate state intervention in turn defines the nature of competition between industrial competitors in a free-market system.

The U.S., representing Boeing, in 2004 challenged the direct subsidies provided to start up Airbus; followed immediately by the EU, representing Airbus, defining at least 29 forms of regulatory, administrative and contractual (primarily military) programs as forms of subsidy. What followed was a long series of decisions, appeals, more decisions and yet more appeals, including a raft of hearings to judge if steps taken to comply are actually compliant.

This is complicated stuff. In the latest decision, on March 10 of this year, the WTO Appellate Body agreed with the U.S. that EU’s “launch aid” for the A380 and A350 XWB models provided to France, Germany, Spain and the United Kingdom breached WTO rules. Specifically, Airbus got a below-market interest rate to finance the development of the A350 XWB, and that such below-cost financing constituted a subsidy within the definition provided by the SCM.

Among other findings, the decision reversed an earlier compliance panel finding that the remaining EU subsidies undermined U.S. exports of single-aisle aircraft. The U.S. lost its claim that the EU subsidies constituted prohibited import substitution subsidies.

EU reports that it will quickly comply with the Appellate Body ruling, even as it waits anxiously for yet another Appellate Body ruling later this year. In that matter, the EU appealed a 2017 compliance panel ruling that only 28 of 29 subsidy programs granted to Boeing by various U.S. agencies were not longer injurious to Airbus.

And so it goes with rules-based litigation qua negotiation. Developing the appropriate form and scope of state intervention in advanced economies is frustratingly slow, deeply complex, hard-fought, and intermittently disappointing and satisfying as the rules get hammered out.

Enter Made in China 2025, a detailed industrial strategy to catch up with rivals like the U.S., Japan and Germany in advanced manufacturing such as robotics, medicine and medical devices, and large civilian aircraft. The complex evolving analysis of appropriate state intervention, already hard, is now confounded by a massive new player eager and willing to do whatever it takes to become both self-sufficient and a global supplier in the critical technologies of the next half century.

“The root of the challenge,” Harvard Law Professor Mark Wu argues, “lies with China’s distinctive economic structure. Some commentators refer to this structure as Chinese state capitalism. This terminology suggests that the Chinese economy resembles other economies, such as Russia’s or Brazil’s, that are also labeled as state capitalist.” Professor Wu contends however, “that China’s economy is fundamentally different—even unique.” Professor Wu, instead uses “the shorthand reference of “China, Inc.” to describe the Chinese economy.”

The state is heavily engaged, but economic intervention does not always flow through the state. “Alongside the state,” Professor Wu notes, “is the Chinese Communist Party (“Party”), a separate political actor that plays an active role in the management of state-owned enterprises (“SOEs”). The economy embraces market-oriented dynamics, yet it is not strictly a free-market capitalist system. Networked hierarchies and embedded relationships exist among businesses, but not necessarily in the way they operate elsewhere in the world.”

ZTE is a good example of the complicated relationship between State and State-Owned Enterprises competing aggressively across the globe.

Enter Senator Rubio, whose Bill would, among other things, bar the sale of national security-sensitive technology and intellectual property, increase taxes on multinational corporations’ income from China, and impose duties on, and cap Chinese investor shareholding in U.S. companies producing goods targeted by China’s “Made in China 2025.”

Rubio’s hard-line Bill pushes Congress toward a tougher national response to China’s strategic industrial policy. Perhaps it is in part a reaction to the elusive “strategy” flowing from the White House. It is likely that the Bill as proposed does not get it all right. It is not clear that any single piece of legislation can. However, it is crystal clear that a vigorous and thoughtful national debate—indeed, an international debate– is needed on just how to get our existing institutional rules-based system to work constructively with “China Inc.” to ensure balanced and harmonious economic progress for all nations over the next several decades.

Robert A. Rogowsky is Professor and Program Co-chair of the Masters in International Trade & Economic Diplomacy at the Middlebury Institute of International Studies in Monterey, CA and Adjunct Professor of Trade & Diplomacy at Georgetown University’s Masters School of Foreign Service.
These essays are the opinions strictly of the author. They do not necessarily reflect the views of the Institute or any officials of the Institute.

Discombobulation Diplomacy—A Theory of U.S. Trade Policy 2018

When Richard Nixon flew to Beijing in 1972 to open relations with China, he famously sketched out some simple answers to two basic questions: What does China want? What do we (the United States) want? Those same questions loom heavily now. The recent trip by Secretary Mnuchin and six other top U.S. official, which fell flat this past week, is important because the relationship between these two nations is so critical. But the strategy, unlike that of Nixon and Kissinger, seems, well, discombobulated.

The Trump administration has captured a popular and important strand of economic statecraft by taking on China. It is widely accepted across American industry—indeed, industry everywhere but China—that China’s assertive state capitalism must be taken on. The imperative is caught nicely by Rana Fahoor in relaying a conversation she had with a high-ranking officer in the People’s Liberation Army. “I ….asked her about Chinese state-sponsored intellectual property theft and the notion that technologies taken from the West might be used for both economic and national security advantage. She made it quite clear that “capitalism with Chines characteristics” meant that there was not real boundary between corporate interests and national interest. Indeed, she seemed to think it a bit naïve that anyone would assume otherwise. It was the country that mattered, not the company.”

Accepting China’s soft line between corporate interests and national interests– and it is hard to refute under President Xi’s strong leadership– strategic management of the relationship with China is paramount. It is paramount because China will soon be the largest economy in the world. By 2030 it could be substantially larger than the United States. With more efficiency than any democracy, it has the authoritarian structure to strategically exercise its great power for the good of China. China has, for the past, 20 years effectively used its ‘sharp power’ to pursue China’s rise as a Great Power– the first in history to do so based on its economic prowess rather than military might. China’s power grows in lock-step with its economy and as more countries become dependent upon it as a trading partner and as a source of investment and foreign aid. Moreover, President Xi Jinping has made it clear that ‘good for China’ means good for the Communist Party, locking in direct state authority.

Battle lines have been forming for more than two decades, since Deng Xiaoping’s 1992 ‘Southern Tour,’ opening China’s incredible entrepreneurial energy. China since then has grown rapidly along the traditional development path: textiles through low-end manufacturing and assembly of basic consumer goods to high-value technology goods. The Made in China 2025 Agenda lays out China’s plan for 70 percent self-sufficiency in the high-tech industries (robotics, aerospace, telecommunications, etc) that will drive wealth creation in the 21st century. It is the natural goal of any nation working its way up the economic ladder. Made in China 2025 is the blueprint to escape the middle-income trap. Everyone aspires to it. Few succeed. Where China has been competing ruthlessly with Mexico, Brazil, Taiwan and South Africa, it is now setting up a roadmap for taking competition directly to the United States, the EU, Japan, and South Korea. There is nothing in China’s record since 1992 to suggest that it will not be certain in its goals, ruthless in its pursuit of them, and successful in the end.

The good news is that China’s success in technology will be a boon to the entire world. It will bring remarkable welfare enhancing advances in innovation at lower prices and greater accessibility to billions of people around the world beyond what could otherwise be possible.

The bad news comes in two parts. The first is that it will bring remarkable economic power to a one-party system increasingly dominated by a single powerful leader who, for the past 5 years, has consolidated power into a smaller and smaller group led ever more tightly by himself, and who has eliminated any term limits. The future is hard to predict, but thousands of years of human history suggests this may not progress well.

The second part of the bad news is that the 2025 Plan involves heavy government subsidies, supports, administrative guidance, targeting, and protecting; as well as buying up foreign technologies, requiring tech transfers, joint ventures, and sharing trade secrets. It creates an environment in which firm-to-firm competition—the foundation of the Bretton Woods rule-based trading system– is replaced with the mercantilist system of nations competing against nations.

Here is where the dicombobulation appears. A thoughtful “America First” grand strategy would focus first on a highly efficient and competitive North American industrial platform integrating the economies of the United States, Mexico and Canada into an economic stronghold. It would tie a unified North America economy into a Pacific carefully woven geo-economic and geo-political strategy built on major and emerging trading partners across Asia and Latin America, as was created in the Trans-Pacific Partnership. Finally, by pulling in the EU, our major competitor for sales to and consumption from China—and hence the biggest wedge in China’s negotiation with either the U.S. or the EU– the strategy would build a unified coalition of liberal democracies supporting the rules-based trading system as leverage in negotiations with Beijing.

A discombobulated ‘America First’ strategy, in contrast, abandons all that, and insults the leaders while doing it, just for good measure. It reverts to crude protectionist measures built heavily on claims of national security, which threatens the rules-based trading system. It obsesses on trade deficits and resurrects old tactics like voluntary export restrains and ‘managed trade’ tactics to reduce it, such as demanding that China to somehow reduce the deficit by $200 billion. These measures were unsuccessful and abandoned in the 1980s. It is not surprising, as Martin Wolf states, that China finds this “incomprehensible.” (“People closely engaged in the trade talks,” Wolf writes, “are puzzled by what the US is after. Does Donald Trump even want a deal, they wonder, or is his aim just conflict?”) It is not that the Chinese don’t understand the specific demands, it must be that they cannot fathom the dismantling of a grand strategy and replacing it with contentious, ad hoc impulses, that seem like narrow, industry-specific protections measures, which, ironically, the industries do not want. What could go wrong?

Five to ten years from now we shall know. Perhaps it will work. But more likely the U.S. and its current trading allies will be paying a heavy price.

Robert A. Rogowsky is Professor and Program Co-chair of the Masters in International Trade & Economic Diplomacy at the Middlebury Institute of International Studies in Monterey, CA and Adjunct Professor of Trade & Diplomacy at Georgetown University’s Masters School of Foreign Service.
These essays are the opinions strictly of the author. They do not necessarily reflect the views of the Institute or any officials of the Institute.

The National Security Defense for Trade Protections is a Troubling Slippery Slope

Economic Diplomacy Blog
April 27, 2018.

The war on trade is settling into a new phase. Hard lines of trade are being drawn and will increasingly test the capacity, and durability, of the World Trade Organization (WTO), set up to administer the rules-based trading system. In most ways, the WTO system is showing itself robust and still leading a viable multilateral system. However, it is being challenged in a potentially existential way by the use of national security as a justification for aggressive trade actions.

A previous essay looked at how aggressive trade actions can lead to a hot war. A critical link in that scenario is that trade could trigger serious national security concerns. National security is the first duty of any legitimate sovereign. It triggers a deeply emotional response that can be easily exploited for protectionist measures. Escalation of trade conflicts from the cold calculation of commercial transactions to the passions of national pride and safety approaches a worrisome slippery slope.

The original General Agreement on Tariffs and Trade (GATT; and updated in the Uruguay Round with the creation of the WTO in 1994 as the “GATT 1994”) recognized the importance of national security. It set forth in Article XXI that nothing in the Agreement would interfere with any actions taken by a Member with regard to that Member’s national security. It is worth reviewing this in detail:

Nothing in this Agreement (GATT) shall be construed:

  1. To require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or
  2. To prevent an contracting party to take any action which it considers necessary for the protection of its essential security interests
    1. Relating to fissionable materials or the materials from which they are derived;
    2. Relating to the traffic in arms, ammunition and implements of war and such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;
    3. Taken in time of war or other emergency in international relations; or
  3. Prevent any contracting party from taking any action in pursuance of its obligations under the UN Charter for the maintenance of international peace and security.

The GATT 1994 Agreement is built on layers of positive obligations, but recognizes the need for exceptions. Article XX outlines many, including monetary stability, renewable resources, moral and religious reasons, protecting natural and renewable resources, archeological considerations, prison labor, short supply, protecting against monopolies and protecting patents, among others. All these exceptions, however, are constrained by the overarching principle articulated in its Chapeau: Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade…

In contrast, Article XXI has no limiting preamble. Moreover, it is distinct in that it is “self-declaratory.”  Unlike the case with the other exceptions commonly found in trade agreements, Article XXI allows each WTO Member to determine and define what it considers to be its own “essential security interests.” The Article offers some defining constraints, but the Member need not meet an objective standard. In other words, it can take any action it considers necessary to protect it’s own self-defined essential security interests.

The logic behind Article XXI is undeniable. Nations are reluctant to subject their judgment of their country’s security interests to review by another body (i.e. WTO or any arbitral panel). A deal as broad and deep as the one creating the WTO could not be negotiated without an Article XXI. However, the scope for abuse is vast. For the past 70 years, thoughtful diplomacy and prudent leadership—largely from the US and the EU– with a keen eye on sustaining the rules-based system has constrained claims of ‘national security.’

It has been used, but sparingly. In the mid 1970’s Sweden cited Article XXI to justify restricting imports of certain footwear because a fall in the production of domestic footwear posed “a critical threat to the emergency planning of its economic defence.” It was abandoned a few months later, after much amused opprobrium from its trading partners.

A decade later, the United States pulled out Article XXI to defend measures prohibiting imports of all goods and services from, and U.S. exports to, Nicaragua. Nicaragua’s challenge at the GATT failed. The United States successfully blocked the Panel from examining the validity of using Article XXI.  While the Panel remonstrated that a party relying on the exception must balance its need to do so against the more fundamental need for stable trade regulation, the U.S. position prevailed– that Article XXI leaves it to each contracting party to judge what action it considered necessary for the protection of its own essential security interests.

Again in the mid 1990’s, National security was raised again to justify the so-called Helms-Burton Act. The Act extended the U.S. embargo on Cuba to penalize foreign companies “trafficking” in property formerly owned by U.S. citizens but confiscated by Cuba after the Cuban revolution. It is difficult to argue that foreign companies trading with Cuba posed a genuine national security interest, certainly given that the Russian missiles were removed in 1962. Resisted by President Clinton, the political realities in the U.S regarding Cuba were such that it could not be abandoned. Understood widely by U.S trading partners as a domestic political issue, it, nonetheless, stood lonely but virtually unchallengeable as a self-declared essential security interest.

This year, we see the Article XXI defense rise up again, and in a way that moves it perilously close to the slippery slope. On request of President Trump, the Department of Commerce has found that the loss of production of domestic steel and aluminum constitute a national security threat that will justify an Article XXI defense of any and all import restrictions on those products. The President can and does declare national emergencies, with virtually no legal recourse for other private parties to challenge it. However, the President immediately diluted the justification by holding the threat of these tariffs out as a bargaining chips—to the Koreans for a new US-Korean FTA; to the Canadians and Mexicans as hard pressure on NAFTA; to the Chinese to implement better intellectual property rights for American business; and to the Europeans as leverage in discussions to re-start Trans-Atlantic negotiations.

This tactic is especially troublesome because he is negotiating away the import restrictions with the largest suppliers of steel and aluminum to the U.S. market. If imports are a national security problem, how do we justify negotiating away the restrictions with the largest suppliers? If aluminum is critical to our aviation industry—one of our largest export industries—and, and autos, and construction, and national defense production, how is it that we benefit from restricting access in the first place?

The national security concern seems unconvincing given the economic conditions in the industries. Steel has been episodically protected for the past 50 years and still America imports it heavily, mostly from our closest partners, Canada, Brazil, South Korea and Mexico. Aluminum is a rapidly growing industry that should foster domestic growth. The price of aluminum climbed 26 per cent in the two years leading to March of this year. The U.S. trade actions pushed the price up an additional 10 percent. Given the booming prices and shortage of supply for a product critical to our exports and military, it is hard to justify an Article XXI claim.

The slippery slope draws nearer as President Trump asks his USTR and Commerce Secretary to assess the likelihood that imports of rare earths can be a national security problem. If they agree that it is and propose import restrictions, will it be just another bargaining tool for the Administration to use in the Art of the Deal? As appealing as it is to strengthen our negotiating leverage, it is also dangerous if it threatens the institutions on which the negotiating framework depends.

Managing an aggressive trade strategy like the one the United States seems to be undertaking is a highly delicate task. The contentious departure of Gary Cohn, National Economic Advisor to the President, over the steel and aluminum tariffs suggests strongly that this is not a well-constructed strategy. It seems more like impulsive negotiating tactics with political overtones but with profound implications for the global trading system if not managed with extremely thoughtful and diplomatic leadership.

Russia has recently used an Article XXI justification for broad restrictions on Ukrainian commerce. The EU weighed in to argue that Russia’s use of national security to restrict Ukraine’s access to international markets should be carefully scrutinized. The United States jumped in to support Russia: “Every Member of the WTO retains the authority to determine for itself those matters that it considers necessary to the protection of its national security” and whatever action are necessary to ensure it.

This logic is persuasive, but there is the slippery slope. If the United States too freely uses, or defends as others pick up the pace, the Article XXI national security defense in ways not clearly tied to critical national security concerns, but instead as tool to generate negotiating leverage, the walls could crumble quickly. Other countries would be foolish to not use this tool. Retaliations justified in turn on essential security grounds and without any WTO examination or authorization could finally erase the institution’s role in international trade. Such escalation is what could turn trade spats into a full-blown war. Ironically, U.S. trade tactics could be the vehicle that brings down the trading system it has spent the past 75 years creating.

Robert A. Rogowsky is Professor and Program Co-chair of the Masters in International Trade & Economic Diplomacy at the Middlebury Institute of International Studies in Monterey, CA and Adjunct Professor of Trade & Diplomacy at Georgetown University’s Masters School of Foreign Service.
These essays are the opinions strictly of the author. They do not necessarily reflect the views of the Institute or any officials of the Institute.

U.S and China Relations: Time for Serious Food Diplomacy

The ominous drumbeats of a trade war underscore the critical juncture of US-China relations. It is a good example of, what business theorists call coopetition—the complex game of competing and cooperation at the same time. An illustrative example might be Samsung-Apple’s dog-eat-dog global competition in smartphones and patent litigation, while maintaining a supportive and lucrative supplier-customer relationship. It’s just business.

The US and China face the same complex partnership: increasingly tense competition that needs to be balanced by cooperation. China’ rise to Great Power status creates competition for geo-political influence, national security, territorial control, global prestige, and influence over the many mechanisms of the international order that has evolved– without China– since 1947. Not seeing eye-to-eye is not surprising for two nations with such different histories and cultures. The problem is that disagreement can turn into conflict. An intense trade war could stumble out of control. John Merscheimer, Dean of international relations realists, puts the historical probability of a significant military clash at only 70 percent.

As cyber-espionage, human-rights disagreements, tensions in the South China Sea, and now in-your-face tariff skirmishes fuel the competitive flames; the cooperative components become critically important to avoid the incomprehensible—military conflict. If over the next 5 years the cooperation elements do not overwhelm the growing competition, Merscheimer may well prove disastrously prescient.

One area with vast potential for cooperative progress, ironically, is trade in agriculture. Or, framed more precisely—and more positively– collaborative integration of the U.S-China food systems. Agricultural trade has been a steady source of conflict between the United States and China (as it has among all countries). It is, almost inevitably, among he hottest fronts in the current trade hostilities. President Trump’s trade war started with steel and aluminum. China quickly retaliated with agriculture. Current U.S headlines highlight the pain targeted to American farmers. Trump is raising the ante.

However, food production is a commercial relationship in which the world’s two largest economies have an opportunity for stunning economic gains. Perhaps more important, if framed properly, successful cooperation in food presents an opportunity for a partnership that could undergird a broad foundation of trust and collaboration for years to come. Success here could offer a much-needed model for building trust and inclusive commercial integration between these two giants. It could be a model for others.

U.S.-China agriculture trade is among the most rapidly growing commercial relations in the world. U.S agriculture sales to China have grown 5-fold in the past two decades. Demand for food is growing rapidly in China in the face of serious production constraints posed by China’s limited arable land (much contaminated by toxic chemicals), rapid urbanization, and extreme water shortage. China has steadily increased agricultural exports to the United States. The interdependence of the U.S and China food systems can only increase.

China’s is adding to growing global demand. Global population is increasing by more than 200,000 each day. It is expected to hit, and with luck plateau at, 9.2 billion by 2050. That is, over the next 32 years the equivalent of another China and Africa will be added to the current pool of mouths to feed. More than 95 percent of that population growth will occur in what are currently low-income countries without the arable land and water to provide the food they will need. Equally important, most will be born in cities. In 2011, half of humanity lived in cities. By 2050 it will be 70 percent; 73 per cent in China. China has plans to have 1 billion people living in cities by 2030.

The second major driver of food demand is income; specifically whether one is poor, middle-class, or rich. Today, 1.8 billion people, or 28 percent of the global population, are “middle class,” Fewer than 2 percent of the world’s people are rich. The remaining 70 percent are poor. Fortunately, this is changing. Hundreds of millions are rising out of poverty into the middle class.

This demographic shift is where the problem becomes especially sticky and the opportunities for US-China collaborations particularly valuable. Asia, notably China, has the fastest growing middle class. If present trends continue, according to a recent Brookings study, by 2021there will be more than 2 billion Asian middle class consumers, and 3.2 billion by 2030.
As the middle class grows, food consumption patterns will shift dramatically from basic staples toward food that is more appetizing, nourishing, varied, consistently available, reasonably priced, and, especially, safe. Rural Chinese survive on a starch-based diet. Not so for urban China. Food consumption increases 20 percent immediately for the Chinese farmer who moves to the city. Since 1990, Chinese consumption of beef, pork, and poultry has increased 300 percent. Chinese spending on food is expected to increase another 150 percent by 2030.

Food shortage quickly becomes a global phenomenon. The United Nations Food and Agricultural Organization (FAO) predicts a 60 percent increase in demand for meat, milk and eggs by 2050; primarily in Asia, Africa and the Middle East. The consequences could be dire. Producing one pound of protein requires the production of seven pounds of grains. Meat consumption alone, by 2030, will require a doubling of global grain production. The unavoidable prognosis is rapidly rising prices that will cause significant pain for the poor around the world. The food shortage in 2008, for example, pushed 44 million people back into poverty.

Why is this grim news useful? To meet the rapidly growing global demand for high-quality, varied, reliable and safe food without jeopardizing the poor, a revolution in agriculture policy is needed. This revolution will require collaborative efforts by world leaders to maximize innovation, productivity, and trade. China and the United States can take the lead. China will have to abandon its food self-sufficiency obsession and open its markets further to America’s rich supply. The United States must open its protected markets. Leaders in both countries must encourage joint innovation efforts, collaboration on safety standards, and face down formidable special interests. This can only be achieved by clear goals presented as a collaborative effort at the very highest levels. They must work jointly to link food security to trade. This link assumes building substantial trust in ‘others.’ It is this trust-building that undoubtedly will prove to be the hardest and yet most valuable part of the initiative.

If bold enough, Xi Jinping and Trump should invite Japan to join. Japan is desperately in need of both agriculture reform and a collaborative enterprise with China to balance growing military tensions. Powerful special interests in Japan were a critical barrier to completion of the Trans-Pacific Partnership (TPP). The TPP remains a cornerstone to the Free Trade Agreement of Asia-Pacific (FTAAP) proposed by China. Estimates have put the economic value of an FTAAP at more than $1 trillion. What better way to begin capturing those benefits than for the leaders of the United States, China and Japan to call for a comprehensive Reforming Global Food negotiation– aimed at opening markets, collaborative innovation, regulatory coherence, and safe and secure food for all? Rather than a source of conflict, agriculture could become a bridge to the future.

Pie in the sky? Yes, of course. But for the moment, just imagine. Innovative integration between China and the United States could rapidly embrace others. It would spur coordination of numerous disparate international efforts addressing food security. And it is a model program to build trust and mutual reliance on a critical sector of human need and could easily spillover into other sectors in dire need of creative collaboration. Quite frankly, it could be the best way to avoid conflict with China. If demographic predictions are correct, it may be the only way to avoid a grim future for the billions of poor around the world.

Robert A. Rogowsky is Professor and Program Co-chair of the Masters in International Trade & Economic Diplomacy at the Middlebury Institute of International Studies in Monterey, CA and Adjunct Professor of Trade & Diplomacy at Georgetown University’s Masters School of Foreign Service.
These essays are the opinions strictly of the author. They do not necessarily reflect the views of the Institute or any officials of the Institute.

Trump’s Trade War

Trump’s Trade War

Korea: Front and Center

The world’s attention to the U.S. threat of a global trade war—which now seems underway with China’s announcement that it has raised tariffs on 128 U.S. exports—has been deflected to a true hot spot—the Korean Peninsula. President Trump has exercised his gift for stirring troubled pots by impulsively agreeing to meet with North Korean dictator Kim Jung On in May. These sorts of sensitive negotiations typically take a year or more of hard preparation by experienced technocrats on both sides negotiating scores of substantive issues and protocol measures necessary to lay the foundation for a fruitful meeting of heads of state. This foundational work typically leads to meetings of Deputies and then Ministers and Secretaries, all to create a final opportunity for Heads of State to meet and consummate a strategic and well-designed agreement.

President Trump’s model is different: A promise—or threat– to exercise the Art of the Deal with an erratic, nuclear-armed dictator based on virtually no foundation. A skeletal and disassembled staff of knowledgeable people on the U.S. side is scrambling to target vague ambitions and is surely struggling even to get logistics in place. Add in a new Secretary of State trying to piece together his own team. What could go wrong?

In parallel– or perhaps more accurately, a perpendicular move– President Trump re-opened the Korea-US Free Trade Agreement (KORUS) to strong-arm more U.S. exports to South Korea. Re-opening KORUS was complemented quickly by high-tariffs on steel and aluminum—perceived as the first volley in a global trade war. Trump has claimed that the threat of steel tariffs has forced the South Koreans to concede to opening up their market to more U.S auto exports. The new deal doesn’t appear to open much else, and could be a threat to U.S. agricultural exports, but it does increase the sales each auto producer can make in Korea from 25,000 to 50,000 a year. Yet, it is reported that no U.S. producer has shipped more than 11,000 in any year so far. That is, it doubles the amount of auto’s the Koreans will permit in from more that twice as many as ever actually make it into the Korean market to nearly four times as many as ever make it in. It appears to be a Pyrrhic victory at best.

This form of managed trade—forcing other governments to ensure that their private citizens buy a negotiated volume of U.S. goods was tried unsuccessfully in the 1980’s and is unlikely to work any better now. It turns out that opening markets, especially Asian markets, is a longer, more difficult process of economic diplomacy: breaking down layers of regulatory barriers, business practices, cultural norms, and nationalistic pride. It also requires very high quality products at a very competitive price.

As reported in the Financial Times [March 26, 2018], “The changes came after US companies have long complained of regulatory trade barriers in South Korea that were hampering US exports to the country. US carmakers in particular have taken issue with Seoul’s environmental and certification procedures that have limited their market share in South Korea to roughly 15 per cent.  ‘South Korea did a relatively good job, making some concessions in the auto sector in return for steel tariff exemptions. Not a bad deal,’ said Lee Hang-koo, researcher at the Korea Institute of Industrial Economics & Trade. ‘But we are unlikely to see much bigger US auto exports to South Korea because of the limited US sedan models imported to the country.’

If this trade deal, and concessions on steel (not applying the new steel tariff) are as minor as they appear, they contrast starkly with the sharp power being exercised by the other major player in the Korean story– China. Kim Jong Un recently was beckoned to Beijing, as his first venture abroad since taking power, to pay tribute to Xi Jinping. To encourage his visit, and to clarify for Kim his client status, China virtually halted exports of refined petroleum (down to about 1.3 per cent of monthly average)—well beyond UN sanctions. Coal exports were cut to zero, the FT reports. Steel exports dropped to a slow dribble and autos fell to literally one car exported in February. At this rate, North Korea, already plagued by deep poverty, could be starved out in months. Even Kim’s regime would be unsustainable.

The message is clear, to Kim and to the rest of the world. China has control over Kim’s regime. Kim has been beckoned to Beijing. His dependence and corresponding allegiance has been made clear to him and to all relevant parties in anticipation of Kim’s meetings with Moon Jae-in, President of the Republic of South Korea set for April and with President Trump in May.

China has not ignored South Korea. Beijing is taking advantage of an important opportunity to re-set its relations with South Korea with skilled use of economic carrots and sticks. China is already the top destination for Korean manufacturing. China has shown its ability and willingness to use that advantage as a negotiating tool. China punished Korea for its participation in THAAD (Terminal High-Altitude Area Defense) system. Regulatory measures and government encouraged consumer boycotts forced the South Korean Department store Lotte from China. It also banned K-pop music stars from China.1 Millions more was lost in consumer boycott of Korean goods and local markets avoided by Chinese tourists.

South Korean President Moon Jae-in has made a pilgrimage to Beijing to rebuild diplomatic bridges and restore Chinese favor for Korean goods. Beijing has sped up the China-South Korea trade negotiation. A successful Sino-South Korean Free Trade Agreement would be an important boon to South Korea and every useful political carrot for Beijing.

In contrast, Washington has created tensions by demanding, in the face of a faltering Korean economy, more financial support for military operations, including THAAD, re-renegotiating its trade agreement, and unilaterally imposing new tariffs on Korean steel. All these measures offers very little real economic benefit to the United States. Instead they help pave a smoother path for China to build its bonds, and hegemonic influence, step-by-step across the Korean peninsula. The next step is a successful meeting between North and South, followed by a successful Free Trade Agreement between China and South Korea, then pressure to reduce or eliminate THAAD, possibly followed by agreement to reduce military exercises with the U.S., and reduce South Korean financial support for U.S. presence. All this leads to a slow, patiently constructed alliance between South Korea and China,

With China’s proposal for a dual freeze – North Korea freezes nuclear testing and the United States freezes its military exercises with Seoul—rejected, it has pushed for bilateral talks between North Korea and the United States as the best option to manage a potential crisis. Washington has now obliged. There should be zero hope that Kim Jong Un will eliminate or even reduce his nuclear capability, even if he promises to do so. It is not clear what President Trump hopes to accomplish. It is less clear what he will accomplish. It is a better bet to try to understand what Beijing would like to see from this negotiation, and to put better than even odds that it will be the outcome.

Deft and effective Chinese economic statecraft has strategically positioned both North Korea and South Korea. Meanwhile, President Trump’s team blusters and fumes over bilateral trade deficits and high-profile and meaningless trade victories against one of South Korea’s top manufacturing industry. China seems to be playing a much more adroit game of economic statecraft than is the United States.

Robert A. Rogowsky is Professor and Program Co-chair of the Masters in International Trade & Economic Diplomacy at the Middlebury Institute of International Studies in Monterey, CA and Adjunct Professor of Trade & Diplomacy at Georgetown University’s Masters School of Foreign Service.

Reflections on a Trade War

The current “trade war” that the U.S. appears to be launching is, fortunately, still at the level of frontier skirmishes. The theaters of war are being explored and the resolve of the enemy is being tested. With any luck, this will be mostly theater and little war. However, one cannot help but believe that a little bit of war could be a good thing, for a few very important reasons. It is these reasons that we shall explore over the next few weeks in this blog.

First, recognizing the wisdom in Colin Powell’s warning that no battle plan survives contact with the enemy, it is still wise to at least plan for battle. More specifically international trade is always a form of ongoing, simmering warfare. The economics of trade is an optimistic, entirely positive-sum story: cooperation, collaboration, expanding commerce, escalating opportunities, partnering for innovation, and creating mutual prospects for growth. The politics of trade, however, is always a form of warfare.

A bit of history will help set the stage. From the time of Marco Polo Continue reading “Reflections on a Trade War”