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.