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.

Korea: Front and Center

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

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

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

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

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

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

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

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

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

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

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

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

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

Reflections on a Trade War

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

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

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

Elegy for the Trans-Pacific Partnership

Elegy for the Trans-Pacific Partnership

Robert A. Rogowsky
Professor of Trade & Diplomacy
Middlebury Institute of International Studies in Monterey, CA

It has been more than a year since President Trump pulled the United States from the Trans-Pacific Partnership: the result of nearly a decade of negotiations with 11 other countries, including three of our largest trading partners, two South American trade partners and six more in Southeast Asia. The jilted trading partners have found their way back to a new TPP-11, which will undoubtedly open new opportunities for their industries and consumers, much at the expense of their U.S. counterparts.

The TPP was the new gold standard in trade agreements, to be surpassed in the future to be sure, but for now a major step forward in the hard task of negotiating rules for the rapidly evolving global marketplace, increasingly dominated by complex supply chains. It was the latest version of a long evolutionary process begun by Ronald Reagan when he proposed the expanded and visionary trade agenda to the GATT in 1982. Hard fought negotiations to open a new Round of negotiations in 1986 led to the Uruguay Round Agreement in 1994 creation of the WTO and expanded the trade agenda from manufacturing tariffs to begin to incorporate the global nature of business into rules defining a new level of governance for international commerce. Continue reading “Elegy for the Trans-Pacific Partnership”