An Important Lesson from Brexit

I have, I must confess, not studied Brexit. Seceding seemed like a poor choice a priori, but a pretty straightforward process once undertaken: disengage from the regulatory regime in Brussels, negotiate a trade deal with the EU equivalent to that of the 36 other trade agreements the EU has negotiated, and finally, actively negotiate comparable deals with other trading partners. A worst-case scenario, it seemed to me was for the UK to live with its trade agreement it has with 163 other members negotiated in the WTO. Not costless and not without some effort, but a fairly straightforward and manageable task. One might forgive me for thinking that the Great Britain, home to Adam Smith, David Ricardo, Alfred Marshal, John Hicks, Joan Robinson and many more pillars of free and open trade, would be up to the challenge. Well.

I am drawn into commenting on Brexit only because while vacationing in Alaska for the past fortnight, I uncovered the solution. And, it is a lesson that also offers an important path for some of America’s more pressing problems.

On June 23, 2016, Britain conducted a referendum to leave or stay in the EU. It was essentially an opinion poll in which 51.9 percent voted, apparently to everyone’s surprise, to leave. This simple act has led the nation into a morass of financial uncertainty, political upheaval, administrative angst, and no small amount of buyer’s remorse. Brexit is complicated. Who knew?

And expensive. Estimates I have seen to be north of $40 billion dollars. One puts it at nearly £1,000 per UK citizen. Not to mention a lot more disruption economically, politically, and socially than anyone seemed to expect. Much of the angst is naturally how to pay for it.

Alaskans, a playful but pragmatic group of libertarians, offer a sound solution.

In 1974, in the frenzied days of oil exploration and development, 56 percent of Alaskan voters embraced the idea of moving the capital from Juneau (which Juneauans playfully tell me you can reach only by plane, boat or birth canal). Alaskans finally settled on Willow, currently home to about 2,100 residents.

Shortly after the new capital site was settled, the pragmatic side kicked in. Alaskans passed the Fiscally Responsible Alaskans Needing Knowledge (FRANK) Initiative. Simply put, it required that the expenses for the move be assessed in detail and revealed before being spent. A bond issue appeared on the same ballot, asking voters to approve $966 million in debt for a new capital city in Willow. The FRANK Initiative was approved by more than 55 percent of voters. Spending almost $1 billion on the new capital got a resounding “no” from 74 percent.

The FRANK requirement was tested again, in 1982 when 53 percent of voters rejected spending almost $2.9 billion to build a new capital in Willow. The severe economic downturn in the late 1980s prevented the issue from resurfacing again for over a decade.

In 1994, the capital move saga returned. Again, nearly 55 percent of voters said no to moving the capital, this time to Wasilla. More than 77 percent of voters approved a renewed FRANK Initiative to ensure that no capital move scheme could advance without ample information about its direct and indirect costs.

Alaska’s “move the capital” initiative remains alive. The legislation to move it is still on the books. But the FRANK requirement also remains alive and kicking, and the voters still refuse to pay for it.

For Brexit, the lesson seems clear. Rather than a referendum to question its previous decision, responsible leadership in London should reveal the cost of Brexit and get a proper ballot in place to confirm that British voters are willing to pay for it. If not, it stands as a referendum to leave the EU, on hold until the British citizens decide officially that they want to pay for it. Alaskan’s seem entirely comfortable with the ambiguity. I don’t know why the British shouldn’t be as well.

We assume our elected leaders are launching new initiatives and paying attention to the cost. In fact, they usually are not. The debt explosion in our national and state governments is abundant evidence of that. For instance, would Americans have jumped into the Iraq War if they had a detailed assessment of the roughly $1 trillion cost? Would California voters have accepted the devastating pension obligations negotiated by their state and municipal administrators if they had an honest assessment of the long-run cost?

A Fiscally Responsible Americans Need Knowledge initiative is not a bad idea as our governments—at all levels—struggle desperately with often wasteful projects and historic debt overloads.

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.

An Inconvenient Truth about Trade Wars

Robert A. Rogowsky,
Professor, Trade & Economic Diplomacy,
Middlebury Institute of International Studies
Adj. Professor, Georgetown University School of Foreign Service

The inconvenient truth about a Trade War is that you actually have to pay for it as you go. The weapons of a trade war—restricting our own desires to buy a trading partner’s goods until they cry uncle—are by definition pay-as-you-go. It hurts here and now. It may or may not disturb our sensibilities, but it is likely to deeply disrupt our lifestyle. As a result, democracies are not nearly as good at this as a more tightly controlled autocratic style system. It is a game that must be played with incredible skill, especially in a democracy.

The President thinks trade wars are easy and winnable. They are neither, as we are learning the hard way. War is hell. But conventional war—military actions we normally think of as war—is different than a trade war. The United States has engaged in many conventional wars. They are horrendous activities that cost American lives and many hundreds of billions of dollars.

Wars are heavily debated and much anguished over, as they should be. However, American wars have one convenient feature. They are conducted by professionals who have opted to join the military, they happen far away, and no one seems to have to pay for it because the government borrows the money. There is no Afghanistan War surtax this year. Or any year. Debt explodes, but that is someone else’s problem (our grandchildren, I suppose).

A conventional war witnessed on the news can disturb our sensibilities, but it doesn’t disrupt our lifestyles. As a result, it can be waged even by a democracy.

The inconvenient truth about a Trade War, however, is that you actually have to pay for it as you go. The weapons of a trade war—restricting our own desires to buy a trading partner’s goods until they cry uncle—are by definition pay-as-you-go. It hurts here and now. There is no professional army to send off to fight. It is not conducted far away. There is no deflecting the costs into the distant future. It may or may not disturb our sensibilities, but it can deeply disrupt our lifestyle.

Yes, there are winners and losers in a trade war. On the other hand, trade liberalization creates winners and losers. Protectionism creates winners and losers. Policy stasis creates winners and losers. The creative destruction of capitalism inevitably leaves winners and losers in its wake. This is the great advantage of free and open markets.

The problem is that because a trade war is both up-front-and-personal and pay-as-you-go, it is extremely hard for a democracy to conduct it well. The intense pressures being put on the Administration by the ‘losers’ are highly likely to get the President to blink (if his immigration enforcement is any indicator).

Many will be relieved when the President caves. The truth is, however, that caving is not the right solution. Trade is a positive-sum activity– more is good. But trade policy in every country (including the United States) is essentially mercantilist. Trade negotiations are about reducing the barriers created by domestic politics. It is often ‘war by other means,’ and at times it must be aggressive. The United States has used its economic muscle to twist other countries into policies we prefer. Every country that can do it does do it. China is showing great deftness at this game. When negotiations get too aggressive, we call it war.

The question is how to do it well. It is a game that must be played with incredible skill, especially in a democracy. It can require more skill than for a military conflict because the weapons impose immediate costs—who will pay tariffs immediately and who will soon be punished by retaliatory tariffs. The range and scope of these weapons, and their consequences, will be determined a little by strategy, a lot by luck and a whole lot by sheer special interest politics.

Clearly the United States is not doing it well. The U.S. non-strategy is impulsive, insular, ill-conceived, and ignores key stakeholders. The internal battle among Trump and parts of his own administration and the Republicans in Congress over how to punish or to aid the Chinese industrial giant ZTE is a good example. ZTE, a serial violator of US law, is facing both severe punishment and tactical support by various parts of the Trump Administration. Both sides of this intra-Party fight are trying to best use this weapon in the trade “war” with China, but at bewildering cross-purposes.

Here is the larger problem. Good strategic trade policy identifies the two, maybe three critical objectives, carefully aligns weapons and allies, and targets the battle to those objectives. Team Trump has opened fronts willy-nilly across the globe. Losers abound (see Harley-Davidson), winners are uncertain, allies are alienated, and any important objectives are lost in the melee. As the losers garner political support, the weapons for an effective trade war shift and wane, and eventually disappear.

The most important point is that even a brilliant trade policy conducted in a well-functioning democracy is at a disadvantage in the face of a strong authoritarian system, where decisions are made by a “technocratic elite of highly-educated bureaucrats under party control” with both the authority to effectively apply its economic weapons and the patience to employ them for the duration.

It is not at all clear a democracy can win against such an opponent. It is certainly clear that a lone democracy—even the largest one– confronting a very large and determined authoritarian structure should not open simultaneous fronts against every possible ally.

This self-destructive strategy seems to be exactly how Team Trump is conducting the war. Not to mention that no one seems to know just what success actually means to the Team. We will likely get all the destruction without any of the creation.

The most likely outcome to this ill-conceived multi-front trade war will be a group of solidly antagonized trade partners, substantial damage to the multilateral infrastructure, an end to unified support to help draw China into a liberal ruled base trading system, and a growing sense of defensive nationalism across the globe that will require years of exceptionally good diplomacy to overcome.

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.


History Doesn’t Repeat, But it is Rhyming Like Crazy.

As we daily explore the consequences of discombobulation diplomacy—of which an important subset is what Ed Luce has exquisitely labeled “diplotainment”—we plumb ever deeper levels of concern for America’s future, for Pax Americana, and for the liberal order in general. China, we hear regularly is playing ‘the long game.’ The United States does not seem at all in that game.

Contrasting transactional impulse-driven diplotainment to the long game draws us to lessons history might offer. Those who do not know history are destined to repeat it. The consequences can be grim.

Jay Cost offers a splendid review of the friendship turned feud between Alexander Hamilton and James Madison over the political soul of a new country. Our current divisions, like those at the start of the Republic are “manifestations of public frustration over the sense that the government is dominated not by the people but by “special interests.” Yet what often makes those interests “special” is their relationship to public goods essential to national strength. This is the paradox that drove Hamilton and Madison apart more than two centuries ago, and it continues to bedevil us today.”

Ed Luce looks further back, insightfully and grimly comparing U.S. politics today to Nero’s Rome as it begins its mutation from Republic to Empire. Trump is taking care of the circuses, Luce warns, but how long will the bread last? At some point, Trump’s trade rhetoric must start to jeopardize growth.

In the spirit that history does indeed rhyme, I find perhaps history’s most valuable warning for us—and the long game—is a more recent story.

I am thoroughly enjoying the task of reading Henry Kissinger’s 1994 classic Diplomacy. I stumbled into a reverse déjà vu in 19th century Europe as Bismarck perfects the Realpolitik long game to create a new, dominating Great Power. It is an eery parallel to today. With full credit to Prof. Kissinger (specifically Chapter 5), let me retell his story.

With the defeat of Napoleon Bonaparte and 25 years of near constant war across the continent, the Great Powers of Europe formed the Congress of Vienna in 1815. The “Congress” was to be a vehicle for discussions to resolve disputes among the Europe states. It was a carefully designed web of relationships based on respect for sovereign states and suppressing disruptive liberalizing (i.e., democratic) efforts that would disturb the equilibrium. Through “congresses and careful diplomacy,” especially the efforts of the brilliant Austrian foreign minister Klemens von Metternich and like-minded statesmen in England, France and Russia, war in Europe was avoided for four decades. Sadly, the carefully constructed system that brought peace for the first half of the 19th century succumbed to new ambitious, competing personalities.

Emperor Napoleon Bonaparte III—nephew of the great general defeated at Waterloo– was voted into the French presidency in 1848. Erratic, ambitious and with an overly grand sense of himself, he successfully overturned the constitutional prohibition on his re-election and proclaimed the Second French Empire. An empire needs an emperor and in 1852 he dutifully appointed himself to the job.

Bonaparte III was called the “Sphinx of Tulieres” because he was believed by his supporters to be hatching vast and brilliant designs, the nature of which would be unclear to anyone else until they unfolded. Many were baffled, but his nemesis, Otto von Bismarck, was neither impressed, nor fooled. Bonaparte’s “intelligence,” he noted, “is overrated at the expense of his sentimentality.”

Pained deeply by the snubs of European royalty—not being of a true royal bloodline—Bonaparte III’s exclusion became a ‘worm that ate at the heart of Emperor Napoleon.’ That worm, his desperate need for approval among his French supporters, and his deep animosity of the Austrian-Hungarian empire drove his foreign policy. His overarching goal was to abrogate the territorial boundaries defined in 1815 that had kept the peace for decades. As Kissinger puts it:

The erratic nature of his policy was therefore a reflection of his personal ambivalence. Distrust of his ‘brother’ monarchs Napoleon was driven to dependence on public opinion and his policy fluctuated with his assessment of what he needed to sustain his popularity. In 1857, the ubiquitous Baron Hüber [Austrian ambassador to Paris] wrote to the Austrian Emperor:

In his [Napoleon’s] eyes foreign policy is only an instrument he uses to secure his rule in France; to legitimize his throne, to found his dynasty. …[H]e would not shrink from any means, from any combination which suited itself to make him popular at home.

In this process, Napoleon made himself the prisoner of crises he had himself engineered, because he lacked the inner compass to keep him on course.”

Like our current diplotainment, Bonaparte III would manufacture crises “only to recoil before its ultimate consequences.” He had his famous uncle’s ambition, but “lacked his nerve, genius, or for that matter, his raw power.”

British Prime Minister Henry Palmerston summed up Bonaparte’s statesmanship by saying that “…ideas proliferated in his head like rabbits in a hutch.” “The trouble was,” Kissinger assesses, “that these ideas did not relate to an overriding concept.” As the Metternich system crumbled, Bonaparte III had two strategic but contradictory options. He pursued both. In the end his energetic efforts “were largely idiosyncratic and driven by his mercurial nature.”

Kissinger lays out the dark consequences

“Having brought European diplomacy to a state of flux under the banner of national self-determination, Napoleon now found himself alone, when out of the turmoil he had done so much to cause, a new German nation materialized to spell the end of French primacy in Europe.”

Bonaparte III launched into a war which if successful would create a foe that could block his expansionist ambitions. If it failed would bring humiliation to him and France. Hüber captures it nicely, again:

“We could scarcely comprehend this man [Napoleon], having reached the pinnacle of honor, unless he was mad, or afflicted with the madness of gamblers, seriously could consider, having no understandable motive, joining in another adventure.”

Kissinger concludes ominously, for France then and America today:

“Napoleon conducted his foreign policy in the style of modern political leaders who measure their success by the reaction of the television evening news. Like them Napoleon made himself a prisoner of the purely tactical, focusing on short-term objectives and immediate result, seeking to impress the public by magnifying the pressures he has set out to create. In the process, he confused foreign policy with the moves of the conjuror.”

Bonaparte’s nemesis, Bismarck, was not at all confused and played Bonaparte brilliantly. After antagonizing Russia, Bonaparte III offered neutrality to Prussia as he encouraged a war between Prussia and Austria. But, expecting Austria to prevail, then offered alliance to them. The loose and fiercely independent German states were held apart by the Congress of Vienna and Metternich’s strategic diplomacy. Bonaparte’s feckless efforts created for Bismarck the overwhelming external threat needed to pull the contrary members of the confederation together under Prussia leadership in defense of the attack by a hapless and declining Austria. The rising military and industrial power of the German Confederation now fell under the control of the militaristic Prussia, which in turn was firmly under the ambitious, hand of Bismarck. Germany became a dominant, ambitious new Great Power—the Second Reich— set on using its growing industrial and military powers to realize its continental ambitions. World Wars I and II followed.

History becomes alarming prologue if we replace “Napoleon Bonaparte III” with “Trump” and “Bismarck” with “Xi Jinping.” It will be up to future historians to reveal how this game plays out. Meanwhile, we, and our children, must live its consequences. Bismarck—ambitious, strategic, focused, persistent, and ruthless—trumped the erratic, impulsive, popularity-driven, transactional Bonaparte III. He re-define the power structure of Europe. Kissinger concludes his chapter with a crystal clear warning:

“Napoleon’s tragedy was that his ambitions surpassed his capacities. Bismarck’s tragedy was that his capacities exceeded his society’s ability to absorb them. The legacy Napoleon left France was strategic paralysis; the legacy Bismarck left German was unassimilable greatness.”

Germany’s nationalism “unleavened by democracy” turned increasingly chauvinistic and militant. Raw power became the currency of the realm.

The same is happening now on a global scale. U.S. trade policy seems to be trying to harness Bismarck but is channeling Bonaparte III. China will soon enough be 25% larger than the United States and the dominant trading partner for virtually every nation on earth. The existential destructiveness of modern weaponry means that economic power is the most important form of power. China is no stranger to clear and effective application of it. To handle a rising China, the United States and China need Metternichs. We elected a Bonaparte III. China selected a Bismarck. It is certain that we are galloping headlong into rough waters. History does not offer grounds for much optimism.

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 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 (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.