Hillary Clinton does Asia

posted by
on February 19, 2009

Hillary Clinton has been in Jakarta yesterday and earlier today, completing the second leg of her inaugural “listening” tour of four key Asian capitals this week. Clinton’s Asia week began in Tokyo on Feb. 16. The U.S. secretary of state has just flown to Seoul (it’s already Thursday evening in Asia), and will wrap up her week on Sunday, after two days in Beijing.

In each city, naturally, there is great interest in what Clinton’s visit will likely foreshadow for the direction of President Obama’s evolving diplomatic agenda. For observers who track trade issues, particular attention focuses on Clinton’s own perceived emerging role as a player in forming international economic policies. While the administration is still just getting started, the initial perceptions in Washington are that as secretary of state, Clinton could well be far more deeply involved in trade than any of her recent predecessors. There are several reasons for this.

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Ron Kirk, Obama’s nominee to be the U.S. chief trade negotiator, is a trade-policy neophyte whose confirmation hearings aren’t likely to be scheduled until sometime next month. Word is, Clinton already has her eye on some of Kirk’s turf. And over at Treasury, Secretary Tim Geithner seems to have his hands full in struggling with the administration’s domestic economic stimulus plans. Well-informed Washington street talk has it that the State Department is already moving to eclipse Treasury’s traditional dominance on China policy. Besides, Clinton’s personal stature and political clout far outweigh either Kirk’s or Geithner’s, so the field would seem to be open for some State encroachment on international trade policies.

But what sort of encroachment? Will Clinton be the tough-talking trade cop that she played on the presidential campaign trail? Or will she look at trade like most residents of Foggy Bottom have tended to do — always careful not to let the inevitable parochial trade tensions get in the way of broader U.S. foreign policy goals? After all, the major push in the early 1960s to create the bureaucracy that has evolved into the present Office of the U.S. Trade Representative stemmed from concerns from protectionists on Capitol Hill that the State Department tended to give the foreigners trade concessions in return for their cooperation on Cold War security issues.

Sen. Jesse Helms, for example, never got over his outrage that secretaries of state and presidents considered advancing U.S. national security goals a higher priority than the agenda of the domestic textile lobby. But then again, Clinton still has political ambitions, so perhaps the secretary will keep her options open to pick up that tough trade cop’s club in a future national campaign, where she would once again look for support from the protectionist wing of the Democratic Party. While Clinton watchers will have to stay tuned, in the meantime the secretary’s Asia week deserves a closer look for clues that suggest how trade issues will be playing as the Obama administration takes shape. (Characteristically, most press coverage was skimpy on details involving contentious trade issues, and the U.S. and foreign insiders, as usual, were happy to keep mutual embarrassments out of public view.)

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If her Asia week could be likened to a baseball game, in her first at-bat Clinton hit the ball very well in Tokyo, displaying a sure diplomatic touch. But she also looked to face some very tough pitching as her trip continued through the region, especially with regard to contentious trade tensions in Jakarta, Seoul, and Beijing.

When she gets to Seoul, the questions on trade for Clinton watchers are obvious. Will she say whether the Obama administration now intends to go to the mat to obtain U.S. congressional passage of the pending U.S.-Korea trade deal — the same deal that both Obama and Clinton trashed during the 2008 campaign?

While awaiting signals from Seoul and, later in the week, Beijing, here’s a quick rundown of Clinton’s Asia week, beginning in Japan, where trade issues were clearly subordinated to the broader U.S. foreign policy agenda.

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In Tokyo, Secretary Clinton drew good marks for her initial diplomatic instincts, saying that she understood that “the U.S.-Japanese alliance is vitally important to both of our countries, to the Asia-Pacific region and to the world.” Clinton also expressed sympathy for Japanese hostages in North Korea, deftly aligning herself with the majority of Japanese people, whose feelings run deep.

Indeed, the U.S.-Japan security relationship has been at the very core of American foreign policy for more than a half century, which has worked to keep the Pacific, pacific.

But Hillary Clinton, whose foreign policy credentials were questioned when she ran for president last year, didn’t have to look far to see how American politicians have at times tended to neglect the vital Washington-Tokyo relationship.

When he was president, husband Bill Clinton first displayed his inexperience by famously disregarding Japanese diplomatic sensitivities when he bypassed Tokyo enroute to Beijing. This spawned the unhappy term “Japan passing” to describe American interest in maintaining the relationship. In his first term, President Clinton was also a Japan basher, which he found useful for domestic political considerations. Clinton sought to shore up his position with the Detroit auto lobby and the anti-trade elements within the Democratic Party by threatening to slap on crippling 100% tariffs on Japanese autos. Finally, the U.S.-Japan auto fight of 1995 grew so emotional on both sides of the ocean that it caused strains in the security relationship. The Japanese sent not-overly-subtle signals to Washington that suggested the Americans might have to look elsewhere for high-tech components of U.S. weapons systems. And in Washington, officials let it be known that perhaps the Japanese should not take the U.S. security umbrella for granted.

But his Japan bashing worked for Clinton in a domestic political sense. During the 1996 presidential campaign, Republican challenger Sen. Robert Dole, himself no slouch at bashing the Japanese, was in no position to argue that Clinton was soft on Japan. And after he was reelected, Clinton wisely dropped the matter. (In the long run, the U.S.-Japan auto war helped encourage Japanese automakers like Toyota, Honda and Nissan to shift some production to the United States, where to this day they have kept on taking market share from their less competitive American counterparts.)

Of course, considering how Japan’s economy is currently in the dumps, it was easy for Secretary Clinton to put diplomatic issues front and center earlier this week in Tokyo. Nobody on Capitol Hill is really mad at Japan these days anyway.

But in Jakarta, where Barack Obama lived for four years as a child, it’s a different story. While her visit didn’t get much coverage on trade matters, behind the scenes there’s a lot going on.

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In Jakarta, Indonesian President Susilo Bambang Yudhoyono has been calling for closer strategic ties between the United States and the world’s most populous Muslim nation. And in Washington, President Obama has already signaled his hopes to work through Indonesia to boost perceptions of America in the Muslim world. In both capitals, the current diplomatic vibes are very good, full of hopeful talk of enhanced U.S.-Indonesian ties across the board: diplomatic, military, intelligence sharing, cultural, and economic. The problem is with the latter — and it’s serious, as both Indonesian and American diplomats look across the table and see evidence pointing to disturbing protectionism.

First, the American side of the story.

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If there is one country that makes U.S. trade officials’ livid (besides China), it’s Indonesia. The Americans see an Indonesia that has always had a difficult investment climate, and that is now afflicted with economic nationalism in the wake of the global recession. U.S. officials complain about a new mining law that gives preferential treatment to state-owned enterprises — adding to a lengthy “negative list” that closes, or limits severely, important sectors of the Indonesian economy to foreigners: hospitals, courier services, telecommunications, and too many more. And Indonesia’s health ministry has alarmed foreign pharmaceutical manufacturers with a recent decree that requires them to either manufacture their drugs in Indonesia, or find a local (politically connected) licensee to work through.

The new regulations associated with the drug decree, Washington officials believe, could violate Indonesia’s obligations as a member of the World Trade Organization, while also keeping necessary medications out of the hands of Indonesian patients. For example, Johnson & Johnson and Lilly each manufacture drugs in Japan and China, not Indonesia. Pfizer makes some medications in Indonesia, but hardly all. Pfizer’s well-known anti-cholesterol drug, Lipitor, for instance, is made in Ireland and Puerto Rico, for distribution all over the world. The Americans ask: does it make sense for individual countries like Indonesia to tell such sophisticated multinational operators to disrupt their global supply chains and relocate to Indonesia, simply to appease Buy Indonesian sentiments?

The Indonesians can expect to hear a great deal more from Washington about their protectionism in the coming months. The same is true in reverse for the Americans, as when Indonesians look across the Pacific, they also sometimes see the ugly face of protectionism.

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If the Americans fume that Jakarta’s new pharmaceutical regulations could violate WTO rules, Indonesians can point to the Buy American provisions in Mr. Obama’s economic stimulus bill that require the use of US-made steel in highway construction. And during his campaign for president, Obama endorsed — in a letter written to the National Council of Textile Organizations a few days before the November 2 elections — existing American laws requiring the Pentagon to buy American-made fabric and clothing for the troops. The American Recovery and Reinvestment Act also has Buy American requirements to please the domestic textile lobby. While President Obama has, to his credit, pledged to to issue Buy American regulations in his economic stimulus package that will not violate America’s own WTO commitments, experienced legal observers will want to see the fine print first.

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And when Indonesians look at trade policies coming from Washington, they — like many other U.S. trading partners — are familiar with the U.S. double standard. The Americans are always demanding that countries like Indonesia summon the political will to tackle their own protectionist lobbies — while refusing to even consider doing the same, where entrenched U.S. special pleaders are concerned.

Specifically, Indonesians point to high, discriminatory US tariffs on important Indonesian exports like tuna, clothing and shoes; complain about harassment by customs officials at US ports of entry; and worry about a congressional push that would bar Indonesia’s famous clove-flavored cigarettes in a WTO-inconsistent fashion.

While neither Hillary Clinton nor Indonesia’s President Yodhoyono offered many details about what they discussed in Jakarta for 45 minutes behind closed doors this week, there sure are a lot of trade issues that will be much discussed by officials of both countries later this year (and beyond).

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When I asked Indonesia’s ambassador in Washington about the various trade tensions, Sudjadnan Parnohadiningrat had his own list of economic injustices to cite. You can talk about harassment at Indonesian ports, he said, but look at how Indonesia’s largest shrimp exporter, the giant CP Prima, is being treated by American officials. In recent months, US Customs and Border Protection officials have seized CP Prima shrimp shipments, alleging that they may have been illegally shipped from China to evade 112% US anti-dumping tariffs on Chinese-grown shrimp. CP Prima executives have vehemently insisted they are not in the business of exporting Chinese shrimp at all. The Indonesian seafood exporter has practically had to beg US officials to come to Indonesia and see the production records that would prove CP Prima’s innocence, the ambassador told me. “We really want to be treated fairly,” Mr. Sudjadnan declared.

While all the facts of the CP Prima case are not yet known, several seafood industry experts I have spoken with said that their gut feeling is that the suspicions coming from U.S. Customs officials sound more than a little flimsy. The big Indonesian shrimp exporter, they relate, has a clean reputation, and no real financial incentive to take the risks of trying to sneak in some Chinese shrimp. Moreover, U.S. Customs officials themselves have a history of bowing to political pressures from the American shrimp lobby. Citing documents in U.S. Customs’ officials own files, U.S. Judge Timothy Stanceu concluded in Nov. 2006 that they had been motivated “by domestic political pressures to take action directed against the shrimp-exporting industry.” The politics that the judge referred to have not changed.

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When it comes to fair treatment for their seafood exports, the Indonesians have other gripes. The US subjects Indonesia’s canned tuna to 12 percent tariffs — but canned tuna that is processed in Australia is duty free, thanks to the US-Aussie preferential trade deal. That Australian tuna is the same fish, often spawned in Indonesian waters, Amb. Sudjadnan relates, noting the obvious protectionist irony.

The Indonesians can say — like their mostly Muslim counterparts in the tuna industry in the southern Philippines — that if President Obama wants to do something concrete that would help boost America’s reputation in the Islamic world, cutting those offensive tuna tariffs would be a great way to start. But the Asians have been disappointed before. During his two terms in office, President George W. Bush refused to do anything about those tariffs. And now, US diplomats like Ms. Clinton will also face strong domestic pressures to stick with the tariffs, despite the obvious hypocrisy.

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And when it comes to talking about possible WTO violations, the Indonesians point to pending legislation in the US Congress that would bar various flavored cigarettes, including Indonesian-made clove cigarettes — while exempting American-made cancer sticks that are laced with menthol. The measure enjoys strong support on Capitol Hill because of its well-intentioned efforts to do something about flavored cigarettes that have become teenage fads. Still, health advocates seem to gloss over the core principle of the WTO, which is what trade experts call “national treatment” — meaning that trading partners must treat all other WTO members equally. It would be WTO-consistent to bar all flavored cigarettes, including U.S.-made menthol smokes and also Indonesia’s clove cigarettes. But if the foreign-made products are not treated on the same basis as the domestic products, Indonesia would seem to have a strong case to bring before the WTO’s dispute-resolution process. “We do not want our products to be discriminated against,” Amb. Sudjadnan told me, pointing to hundreds of thousands of Indonesian farmers and workers who are in the clove-cigarette industry.

But in terms of volume of trade that is even more important to Indonesia, it’s American protectionism involving the rag trade that takes the most money out of the pockets of poor people.

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For the strongest Indonesian complaint about unfair US trade practices, consider high American tariffs on clothing and shoes, which can range from “only” 8 percent to a whopping 30-plus percent, or even twice that. By contrast, high-tech products that wealthy European countries export to the US, like airplanes and telecommunications equipment, face minimal American duties. Last year, Indonesia’s exports of clothing to the US were $4.6 billion, and were subject to tariffs of $790 million. The total 2008 exports of all products exported across the Atlantic by Britain and France combined were $101 billion — but thanks to lower U.S. tariffs for the Europeans’ products, the Brits and French together paid US tariffs at the same $790 million level as did the Indonesians. As Edward Gresser of the Progressive Policy Institute in Washington (PPI is the Democratic Party’s pro-trade think tank) points out, the high shoe- and clothing tariffs are not only “regressive, but they impact poor women in countries like Indonesia, and poorer American shoppers, the hardest.”

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Indonesia’s vice president, Jusuf Kalla, was in Washington earlier this month, busy promoting closer US-Indonesia ties. When I asked him about his country’s perceptions of the US double standard, Mr. Kalla diplomatically declined to use that phrase. Instead, he conveyed his feelings with a knowing nod and some classic Asian indirection. “Perhaps the lesson is that we need to listen to each other better,” the vice president observed.

Obama is famously a good listener. But listening to the other guy is one thing, changing one’s behavior is another. The high U.S. tariffs are likely to remain.

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For Asians, the old Washington preaching on trade is looking more than a bit stale, even if America is still big enough to get away with its double standard most of the time. While smaller economies like Indonesia might find it difficult to push back against the mighty U.S., with China it’s becoming a different story. In Beijing, where Clinton will wind up her trip, what will she say about longstanding American criticisms of the Chinese banking system? For any American diplomat these days, the subject is a bit awkward.

Shang-Jin Wei, a professor of Chinese business and economy at Columbia Business School, observes that Americans believe that the Chinese have been violating their WTO obligations, on grounds that “majority state-owned banks are subsidizing the cost of capital for their exporting firms.” Wei, who is also the director of the respected National Bureau of Economic Research’s working group on the Chinese economy, adds: “Now, other countries might argue that the bailout packages effectively offer government subsidies to the cost of capital for U.S. manufacturing firms, giving U.S. exporting firms an unfair advantage in the world market.”

Looking ahead, the only sure bet is that when President Obama and his trade diplomats ask other countries to do more to open their markets to American exporters, the foreigners increasingly will be asking Uncle Sam to do the same for them.