Don’t Believe China’s Trade Hype

Don’t Believe China’s Trade Hype

Beijing runs with the G-33—poorer, protectionist-minded WTO laggards.

Don’t expect much progress in dismantling global trade barriers from the World Trade Organization’s meeting in Buenos Aires this week. The Trump administration will take most of the blame. American trade negotiators have even said they will refuse to sign the customary ministerial declaration expressing support for the “centrality of the multilateral trading system.” The U.S., as WTO Deputy Director Alan Wolff noted, is “sitting this one out.”

In the absence of American leadership, all eyes are on Chinese President Xi Jinping. Mr. Xi has missed no opportunity to declare his support for the WTO’s mission of advancing free trade. He acknowledges that China has benefited greatly since becoming a WTO member in 2001.

“We should uphold multilateralism and pursue shared growth,” Mr. Xi declared last month in a speech to Asia-Pacific business leaders in Vietnam. His remarks were well-received—in clear contrast to Mr. Trump’s insular America First exhortations at the same forum. Global economic leadership is a key part of Mr. Xi’s “Chinese Dream.”

 But going by China’s actual record in the WTO, Mr. Xi will have to dream on. Despite the glowing free-trade rhetoric from Beijing, inside WTO negotiating rooms China is hardly a champion of free trade. Instead, the Chinese run with the G-33, a group of poorer, protectionist-minded WTO laggards—the likes of South Africa, Venezuela, Zimbabwe and India.

These countries tailor their negotiating positions to longstanding grudges against their former European colonial masters, as well as rich Americans. They support China’s assertion that it remains a developing nation deserving of “special and differential treatment” when it comes to dismantling trade barriers.

In the WTO’s thorny agriculture negotiations, for example, China and India stand together in demanding that rich Europeans and Americans dismantle trade-distorting subsidies. Yet they demand that “developing” countries be allowed to continue propping up tens of millions of subsistence farmers indefinitely.

Beijing insists that it made enough concessions on lowering agriculture tariffs and subsidies when it joined the WTO in 2001. When the WTO held its ministerial meetings in Bali in 2013, the Chinese and Indians won the “temporary” right to circumvent their existing legal restrictions on exceeding their (wasteful) domestic support programs. In Buenos Aires, they will push for the permanent right to prop up their globally uncompetitive farmers.

Beijing is also resisting an initiative to curb governmental subsidies that contribute to overfishing. In 2002 a group of WTO members led by Australia, New Zealand, Iceland and Chile established the so-called Friends of Fish to try to reach consensus. But China wants a carve-out to protect its subsidies and insists that countries be allowed to police violations themselves—an approach that threatens the collapse of already depleted global fishing stocks.

China has also failed to join the WTO’s Government Procurement Agreement. Forty-seven advanced economies have opened bidding on more than $1.7 trillion of their governmental contracts to foreign competition. China entered negotiations to join the GPA in 2002. The big news from the WTO’s 2011 ministerial meetings in Geneva was that Beijing would sign on. But that deal has never materialized, while talks drag on and on.

While Chinese rhetoric doesn’t square with the country’s record in the WTO, Beijing’s performance is not all negative. After arduous negotiations, Beijing joined the Information Technology Agreement, where 82 WTO members have agreed to slash tariffs on trade in high-tech goods.

 China also slashed average tariffs on industrial products to less than 9%, and has promised early action to slash its 25% auto tariffs. Chinese officials from President Xi on down vow that China will continue to play a “constructive” role inside the WTO.

Just how constructive depends on whether Beijing continues to seek special treatment at the expense of its partners. This week’s meeting might begin to shed light on an important question: Is Mr. Xi’s free-trade talk worth more than scoring political points against Donald Trump ?

Mr. Rushford edits the Rushford Report, an online journal that tracks trade politics.

Imports Are Good for American Workers

by Greg Rushford (Milken Institute Review, April 21, 2017)

Recent polling by the Wall Street Journal suggests that Americans have become skeptics about international trade, with less than half believing that cross-border commerce is, on balance, beneficial. A vociferous third go further, agreeing with their new protectionist-in-chief that “our free trade has led to a lot of bad things happening.” And while President Trump’s trade agenda is yet to be fully shaped, the outline of what he wants is becoming clear: high tariff walls to curb competition from imports and more stringent Buy American laws for U.S. manufacturers — all in the name of protecting domestic jobs.

So what should Americans who reflexively cringe at the economic nationalism currently in vogue say to the skeptics? One option is to point to history: countries in the post-war era that have relied upon high protectionist tariffs and “buy domestic” import-substitution schemes — think India, Brazil and Argentina — lost their economic mojo and only began to recover their places in the sun when they opened their borders.

But there’s also an argument that doesn’t require historical perspective. Just look around at the most successful American manufacturers, and observe how access to global markets sustains their American workforces. Of course, it isn’t quite that simple. As David Autor of MIT reminds, trade produces losers as well as winners. But this reality can’t be allowed to block the American economy’s only plausible path toward ongoing prosperity.

Hogs and Drugs

Take Harley-Davidson, the motorcycle maker headquartered in Wisconsin that sells its iconic “hogs” in a zillion countries. The jobs of the men and women who make those Fat Boys growl depend upon imported components — transmissions from Japan, wheels from Australia, tires from Spain and Thailand. While Harley declines to reveal specifics, it’s a safe bet that, all told, about one-third of the value comes from outside the United States.

It’s a similar story for Merck, the New Jersey-based pharmaceutical giant that makes some of its lifesaving potions in Elkton, Va. (pop. 2,042). Because it operates there in a free-trade zone authorized by the federal government, Merck can save serious amounts by importing chemicals. But nobody has told Merck’s Elkton workers that free trade puts food on their tables.

Likewise for the venerable diesel-maker Cummins, which is based in Indianapolis. Cummins’s American workers could not make those engines as well or as cheaply without key imports including gaskets, bearings and cylinder heads.

Half of the goods the United States imports are inputs and raw materials that are necessary for U.S. companies to operate their domestic production. Those imports are absolutely essential to the health of American manufacturing.

“Half of the goods the United States imports are inputs and raw materials that are necessary for U.S. companies to operate their domestic production,” explains Scott Miller, a former Procter & Gamble executive who now edits TradeVistas, an economic research website for the Center for International and Strategic Studies in Washington. Those imports, Miller stresses, are “absolutely essential to the health of American manufacturing.”

True, Miller adds, the U.S. government could adopt the Indian-Brazilian-Argentine import-substitution model to force domestic manufacturers to bring their global supply chains back to American shores. But there would be consequences in the form of higher consumer prices, problematic quality resulting from undermining competition — and ultimately fewer American jobs.

Ironically, though, you aren’t likely to hear the CEOs of American export-oriented companies celebrating the role of imports in sustaining the jobs of their workforces. When I first started writing about the importance of imported components to domestic jobs in the 1990s, Harley-Davidson’s supply-chain managers freely acknowledged that they bought the best parts wherever they could be found. But these days the company is lying low, loath to offend customers who apparently assume their hogs were born and raised exclusively in Menomonee Falls and Kansas City. Cummins and Merck are hardly more communicative about their dependence on international trade, both for imported components and markets.

Ignorance Is Not Bliss

The explanation for the low profile of American corporations whose employees as well as profits depend on open trade is that few companies are prepared to stick their proverbial necks out when political leaders find it more convenient to pretend they never took Econ 101. Echoing Republican presidents Ronald Reagan and the two Bushes, Bill Clinton said he was for “free and fair trade” without specifying what the qualifier “fair” meant. Barack Obama was hardly better: his three favorite words, he often told audiences, were “Made in America.” Meanwhile, the populist from Mar-a-Lago — who does everything bigger — says that his four favorite words are “Made in the USA.”

Over the years, America’s corporate leaders have gotten the message: limit the anti-protectionist talk to only friends and family. There’s no good reason to spend goodwill on the topic, especially when corporate America has bigger fish to fry in the form of corporate tax reform and deregulation.

This see-no-evil approach has often translated into economic buffoonery when presidents and CEOs talk about trade to the American people. Obama, for instance, perfectly illustrated the point in a February 2012 speech to Boeing’s workforce in Everett, Washington. That’s where Boeing makes its newest commercial aircraft, the dazzling 787 Dreamliner. “Boeing has suppliers in all 50 states, providing goods and services like the airplane’s ground-breaking carbon fiber composite aircraft structure from Kansas, advanced jet engines from Ohio, wing components from Oklahoma, and revolutionary electrochromic windows from Alabama,” Obama boasted. American workers, he said, are the best in the world.

Boeing executives on that stage beamed enigmatically — perhaps because they were aware that some 70 percent of the Dreamliner’s parts come from an atlas’ worth of countries. “The wings are produced in Japan, the engines in the United Kingdom and the United States, the flaps and ailerons in Canada and Australia, the fuselage in Japan, Italy and the United States, the horizontal stabilizers in Italy, the landing gear in France, and the doors in Sweden and France,” a study by the Swedish National Board of Trade concluded. “All in all, a Boeing airplane is not particularly American.”

Perhaps irony is less surprising in the case of Donald Trump — but it is still striking. The president’s private Boeing 757, famous for its silk-lined master bedroom and solid gold bathroom fixtures, is kept airborne by Rolls Royce 211 fanjets, the UK-made workhorse of an entire generation of Boeing aircraft. Somehow, as Trump campaigned in front of the plane railing against nefarious foreigners stealing our manufacturing jobs, nobody seemed to take note of the “RR” logo prominently displayed on the portside engine.

As for the new American president’s passion for slapping high tariffs on imports from Mexico, perhaps Trump might consider some awkward facts. The Dreamliner’s wiring comes from Mexico. And, in return, the Mexicans are among Boeing’s most enthusiastic customers for the big plane — Mexico’s president Enrique Pena Nieto proudly flies one. Boeing’s CEO, Dennis Muilenburg, who seems no more enthusiastic about throwing his weight behind open trade than the CEOs of Merck, Cummins and Harley-Davidson, did not respond to an invitation to say whether he thought that was a pretty good deal for his company and its nearly 150,000 U.S.-based workers.

Somebody (other than college professors and think-tank nerds) needs to get back in the game of explaining the benefits of trade to American audiences. The Geneva-based World Trade Organization is giving it a shot. In a recent speech, WTO Director-General Roberto Azevedo appealed to a younger audience: “A jar of Nutella can contain hazelnuts from Turkey, palm oil from Malaysia, cocoa from Nigeria, sugar from Brazil and flavoring from China,” he noted. Meanwhile the company, which is headquartered in Italy, has a plant in Canada that brews up the chocolatey goodness sold by retailers across America.

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It’s easy to dismiss the awkward silence of American corporate executives who know American jobs (and profits) depend on global supply chains simply as pragmatism-as-usual. But one indirect consequence, the sheer ignorance of American workers and politicians as to how their bread is buttered, is dangerously exposing the global economy to uncertainty. Is it too much to ask corporate America to explain that economic nationalism is a recipe for stagnation and joblessness?

How China Tamed the Green Watchdogs

Wall Street Journal

Too many environmental organizations are betraying their ideals for the love of the yuan.

Chinese dredging vessels in the waters around Mischief Reef of the Spratly Islands.

By

Greg Rushford

Scores of Chinese dredgers ground up the coral of semisubmerged reefs in the South China Sea over the past three years to build artificial islands that are now becoming military bases. The enormity of the destruction to marine biodiversity is unprecedented. The Chinese government has destroyed more than 5 square miles of coral reef in fishing grounds that help feed hundreds of millions of people, including Chinese.

“China is committing a grand theft of the global commons,” says Philippine Supreme Court Justice Antonio Carpio in an e-book published earlier this month. It’s a theft that has inflicted “permanent and irreparable harm to the coral reef ecosystem,” an arbitral tribunal in The Hague determined last year in litigation brought by the Philippines.

Yet Greenpeace, the World Wide Fund for Nature and Conservation International have all averted their eyes. “None of them have really stepped up to the plate,” says Edgardo Gomez, an award-winning professor emeritus of marine biology at the University of the Philippines.

China’s environmental crimes have been well-documented by Mr. Gomez and a small band of dedicated marine scientists. Biologist John McManus at the University of Miami’s Rosenstiel School warns of a major fisheries collapse if China continues to thwart remedial action. Kent Carpenter, a professor at Virginia’s Old Dominion University, has demonstrated China’s extensive damage to threatened marine species.

The best-funded environmental groups don’t have much to say when asked about the issue. A spokesman for Conservation International in Manila declines to comment. “As we’re sure you can appreciate, we cannot undertake conservation efforts everywhere,” says WWF spokesman Christopher Conner in Washington. “WWF is not a political organization,” adds Joel Palma, president of WWF-Philippines.

It’s the same story with Greenpeace. “The reason we don’t work on the South China Sea is because the nations around the area are embroiled in a territorial dispute,” says J.P. Agcaoili, the communications manager for Greenpeace Southeast Asia. Mr. Agcaoili asserts that it would be “counterproductive” to tackle the South China Sea issue.

But the environmental NGOs don’t usually hesitate to confront governments. For example, Greenpeace activists scaled an oil rig in 2012 to protest Russian drilling in the Arctic Ocean. The WWF and Greenpeace even spoke out against Chinese-government subsidies that have resulted in destructive overfishing, especially off the coast of West Africa.

So why didn’t they utter a peep about China’s degradation of the South China Sea?

Knowing when to keep their mouths shut seems to be the price these organizations must pay to enjoy the good will of Beijing. It’s one thing to offer respectful criticism over Chinese fishing subsidies within the bounds that the Communist Party tolerates as a social safety valve. But it’s another matter entirely to condemn the crimes that China is committing in the South China Sea, a position that would infuriate the Politburo.

Greenpeace, Conservation International and the WWF all have offices in China. The WWF’s programs to protect the giant panda drive donations globally, and well-heeled do-gooders pay $10,000 per person for panda safaris in Sichuan. Mr. Gomez of the University of the Philippines laments, “Sad but true, money talks.”

As the WWF notes on its website, it operates in China “at the invitation of the Chinese government.” But invitations can be withdrawn. With dozens of Chinese nationals employed on the mainland by the WWF, Greenpeace and Conservation International, the NGOs’ operations in the Middle Kingdom are hostage to the whims of the Party.

The WWF’s international board of directors includes Wang Shi, founder of China’s biggest residential real-estate developer. An avid sportsman, Mr. Wang is no stranger to danger, having climbed Mt. Everest. Yet he declined to comment on China’s actions in the South China Sea.

Likewise the WWF-Philippines board, which includes some of that country’s wealthiest executives, has stayed silent. Christopher Po, the CEO of Century Pacific Tuna, is looking to China as a major growth market for his seafood exports. Jaime Augusto Zobel de Ayala, who chairs one of the Philippines’s largest conglomerates, is currently in talks with Chinese enterprises about infrastructure projects.

Hotel developer Elizabeth Sy has even closer ties to the mainland. Ms. Sy is an advisor to the board of SM Prime, which has shopping malls across the Philippines and also in five Chinese cities. She is the daughter of the Philippines’s richest man, Henry Sy Sr. , who was born in Fujian and has large ventures on the mainland.

WWF-Philippines president Joel Palma, on behalf of the board, declined requests for comment on conflicts between members’ businesses and protecting the marine environment. The WWF has revenue of more than $300 million annually.

Environmental organizations appeal for donations by pointing to their record of speaking truth to power. But the flagship groups are betraying their ideals in the pursuit of money and access in China. That’s the real reason we don’t see Greenpeace’s Rainbow Warrior protesting Beijing’s environmental crimes in the South China Sea.

Mr. Rushford is editor of the Rushford Report, which tracks international economic and security issues.