(First of a two-part series)
Sometimes in life, there comes a tipping point when — enough is enough. And that pretty much describes the present mood in the Geneva-based World Trade Organization. The Americans, Aussies, Kiwis, Europeans, Canadians, Scandinavians, Japanese — basically, all of the most important trading centers around the world that comprise the vast majority of world trade — have had it. They are fed up. Fed up with India, especially. India’s new prime minister, the pugnacious Narendra Modi, has brought all WTO negotiations to a halt, thanks to his unprecedented recent veto of the only successful multilateral trade-liberalizing negotiation in the institution’s nearly twenty years of existence. “Disgusted” even more, as one diplomat based in a European country un-delicately puts it, because Modi’s reasons simply defy economic logic.
Leading WTO members have also had it with various African and Latin American leaders like those in South Africa, Zimbabwe, Venezuela, and Bolivia. The leaders of such countries have gradually eroded their credibility by making no secret of the fact they just don’t really believe in the WTO’s core mission of dismantling trade barriers on a multilateral basis. Fed up with how the economic laggards have meanwhile been holding the rest of the WTO’s 160-member countries hostage to their parochial demands.
Over the years, the WTO and its predecessor international trade rules-making organization have operated on two core beliefs. First, that trade liberalization must be done for the good of all members, on a multilateral basis. Second, that the negotiations to dismantle trade barriers will be reached by consensus — but with the expectation that member countries will conduct themselves with a certain civility, and restraint. The institution cannot function when those core beliefs are trampled upon.
True, some WTO members like Switzerland, Norway and Japan who are presently outraged at India have their own protectionist rackets that they defend vigorously in negotiations (think only of Japan’s 500-plus percent rice tariffs). But, in significant contrast with India, such respected WTO member countries always conduct themselves with civility and restraint. It is unthinkable that they would wreck the institution for domestic political gain.
The frustrations with India and the other chronic economic under-achievers who have anti-colonial chips on their shoulders hardly stop at the traditional “North-South” divide between the rich countries and their former colonial possessions. Privately, some key officials from countries that have traditionally identified themselves with the WTO member countries from the “South” — including Mexico, Brazil, Pakistan, and even some in Rwanda, Ghana, Kenya, Nigeria, and Benin — share the frustrations. True, some of these same countries can’t seem to make up their minds which side they are on — Kenya comes immediately to mind, as do Tanzania and Uganda. Africans have often joined in the constant attacks against the WTO since it succeeded the General Agreement on Tariffs and Trade in 1995. But now, there seems to be an emerging fear in Africa that things have gotten out of hand, and that vulnerable African economies will suffer the consequences of India’s irresponsibility.
And there are the more economically enlightened smaller countries in the “South” — like Panama, Costa Rica, Peru, and Chile — that have been prospering because they have wisely embraced the global trading system. These admirable symbols of what trade liberalization can accomplish have been leading by their examples. And they are growing weary of the continuing shrill attacks against the system brought by WTO members who just don’t get it.
In short, there is a growing belief in leading WTO circles that if the institution is going to survive, it can no longer continue to do business as usual. Leading trade diplomats in Geneva and other key capitals have concluded that WTO’s future ability to liberalize trade cannot be based on the traditional consensus-based multilateral approach, where any single member can enjoy veto power. Instead, the WTO’s future negotiations will focus on a so-called plurilateral approach, where smaller groups of like-minded countries that genuinely want to liberalize trade will do so. If the laggards don’t participate, fine. From now on, well-placed diplomatic insiders vow, no longer will weak countries which aren’t really important international trade players anyway, be allowed to poison progress for everyone else. India, for example has about a 1.9 percent share of global trade flows, but Indian leaders seem to think they deserve 90 percent of the attention.
U.S. President John F. Kennedy once famously said, “trade, or die.” Now, for the World Trade Organization, the new mantra is becoming “change, or die.”
Such are the impressions gleaned from nearly two-dozen confidential interviews conducted over the course of several months with key players in the USA, Europe, Africa, Asia, and Latin America. This two-part series offers details and analysis aimed at explaining in in clear language what many thoughtful trade diplomats would like to say publicly, if they were not constrained by the requirements of diplomacy.
An Institution Under Constant Attack
With apologies for the use of the personal pronoun, I have been covering the WTO and its predecessor the General Agreement on Tariffs and Trade — the GATT — for more than three decades. Launched in 1947 by the United States and 22 other countries, the GATT became the world’s most successful international economic experiment. Seven successive multilateral trade-liberalizing rounds contributed to expanding global prosperity by slashing tariffs and dismantling trade barriers. The last of those negotiating successes, called the Uruguay Round, set up the WTO in 1995.
And that’s when multilateral trade liberalizing negotiations pretty much hit the wall. One could say the GATT morphed into the General Disagreement on Tariffs and Trade.
Remember the famous 1999 anti-trade riots in the streets of Seattle? Many Third World countries inside the WTO’s ministerial meetings quietly cheered the unruly protestors who trashed that beautiful city. There would be no Seattle Round. In 2001, the WTO did manage to launch the Doha Round (for trivia fans, named for the city in Qatar where that year’s ministerial meetings were held). But the Doha Round has been in deep trouble ever since.
In 2003 many African countries openly celebrated their success in killing that year’s WTO ministerial in Cancun. We came to make demands, not make concessions, the Africans boasted. Indian negotiators contributed to that failure, although to their credit, the Indian official delegation seemed crestfallen that they had gone too far. They had not meant to put the Doha negotiations in intensive care.
Then in 2008, a deal was close to being struck in Geneva that would have completed the Doha Round. Among other economic benefits, trade-distorting agriculture subsidies for both rich- and poor countries would be substantially reduced. Financial services would be allowed to flow more freely across international borders. And both rich- and poor countries would do more to open their markets to global competition. But that deal also collapsed in bitterness. While there is plenty of shared criticism for the 2008 failure, it was clearly India’s intransigent “non-negotiable” demands that did the most to poison the atmosphere. And this time the Indian negotiators, led by their abrasive trade minister, Kamal Nath, returned to New Delhi boasting of their triumph.
In those previous WTO trade spats, at least, everyone came away from the battlefield vowing, at least for public consumption, to do better the next time. Until this year, when some of the Africans and the Indians struck again. The bitter irony is that the present mood comes in the wake of the WTO’s most impressive negotiating success, where the rich- and poor countries (finally) worked together for the common good to give global trade flows a significant boost.
Meeting in Bali last December, the WTO’s then 159 member countries agreed to a so-called Trade Facilitation deal that promised, over time, a trillion-dollar economic payoff. Essentially, the wealthier WTO members have already been giving poorer countries hundreds of millions of dollars annually to help facilitate trade by fixing embarrassments that have long clogged Third World borders — corrupt customs offices and cumbersome red tape, inefficient ports, shoddy roads, and such. It doesn’t take a PhD in economics to understand why difficult borders prevent the rising economic prosperity that stems from enhanced trade flows. The Bali deal promised much more assistance to speed the movement of goods and services across borders. The deal was a win-win for everyone: both for giant multinational corporations that move goods and services across borders, and for millions of citizens of poor countries whose living standards would stand to rise along with the resulting expanded trade opportunities.
The Bali Package was the first successful multilateral trade-liberalizing deal in the nearly two decades of WTO history. Finally, the institution had shown that it could deliver something meaningful on the multilateral negotiating table. The general belief was that the success in Bali would spur the revival of the Doha Round, which now has been floundering for thirteen years.
But now those hopes have been dashed. On July 31, India’s Narendra Modi vetoed the schedule to implement the Bali deal. Since then, all subsequent efforts to give Modi a face-saving way to back off have failed. There are some (slim) hopes that meetings in the WTO’s headquarters in Geneva scheduled later this week could put the deal back on track. But the sad truth is that the Bali deal has acquired a definite Humpty Dumpty look. The essential trust in the system — that countries will honor what they have agreed to instead of negotiating in bad faith — has been lost. It will not easily be regained. Whether it will be officially declared or not, the Doha Round is dead.
The WTO’s wealthy countries are even bitterer because they had had to work very hard, for years, just to persuade the poor countries to accept substantial financial sums to bind themselves to do things they should have long ago done themselves, in their own self-interests.
Adding to the bitterness, Modi’s demands simply made no good sense. He was fighting for policies that are clearly not in India’s best interests. “India’s economy is today the least integrated into global production chains among the world’s top-25 exporting economies,” Hosuk Lee-Makiyama, Natalia Macyra, and Erik Van Der Marel of the highly respected European Centre for International Political Economy in a recent paper: India & the WTO. “India is failing in sectors it chooses to protect, and is only competitive in sectors where it chose to liberalise, for example its IT services sector and the outsourcing business.”
Nor are the specific agriculture policies that Modi has fought for in the interests of other WTO countries that import Indian rice and other grains. In recent years, and up to the present, India’s domestic farm policies have inflicted economic damage in other poor countries. India’s grain exports have distorted food prices not only in neighboring Pakistan and Bangladesh, and on to Haiti and some African countries as well.[Coming tomorrow, the conclusion: “Hot (Headed) Yoga”]
Power Plays in the WTO
The African Union — which lacks official standing to participate in the World Trade Organization’s multilateral trade-liberalization negotiations — has nonetheless sparked a high-stakes diplomatic dogfight inside the WTO’s headquarters along the Rue de Lausanne in Geneva. The bitter wrangling threatens to derail the most significant negotiating success — the only such success — that the WTO has enjoyed in nearly two decades. (The WTO was launched in 1995, succeeding its venerable predecessor multilateral trade rules-making institution, the General Agreement on Tariffs and Trade.)
Should the African Union’s power play succeed, the WTO’s credibility would be seriously damaged. “All the air will go out of our balloon,” as one European trade negotiator who asks to remain anonymous puts it. The reputation for effective leadership that has been forged by the WTO’s energetic new director general, Brazil’s Roberto Azevedo, (who succeeded outgoing Pascal Lamy last September) would be tarnished. Most importantly, aspirations that millions of impoverished people from the poorer corners of the world have for better lives once again would be put on indefinite hold.
The story’s backdrop — and the agendas driving some of the secretive operatives whose fingerprints are all over the AU’s power play — dates to the anti-globalist passions of December 1999, when some of the same people famously helped wreck the WTO’s 3rd Ministerial Conference in Seattle. But the current news is pegged to important events that transpired only six months ago, on Indonesia’s famous resort island of Bali.
On Dec. 7, 2013 there were plenty of well-deserved smiles inside the convention center in Nusa Dua, Bali. After four days of intensive negotiations at the WTO’s 9th ministerial conference, the multilateral trade organization’s 159 member countries had finally overcome years of failure to negotiate a truly big international trade deal. “In recent weeks the WTO has come alive,” declared an exuberant Azevedo. “I am delighted to say that, for the first time in our history: the WTO has truly delivered.”
Win-win, for the global economy
Delivered, big time. The deal promised to boost global trade flows substantially, upwards of one trillion dollars in the coming years, according to economic guesstimates. The core of the Bali Package was a so-called “trade facilitation” agreement. Trade facilitation involves a win-win trade-off: more money and technical assistance given by rich Europeans and North Americans to poorer countries in the developing world. Trade facilitation dollars and euros help smooth international trade flows in places that badly need helping hands.
In the poorer parts of Africa, Asia and Latin America, borders are notorious for being clogged. Blame the usual suspects: bureaucratic red tape that raises the costs of transactions by slowing them down, corrupt customs officials, bad roads, inefficient ports, and such. The WTO’s richer countries are already giving about $400 million annually in trade-facilitation aid to help streamline border crossings, according to OECD figures. (Unsurprisingly, Sweden and Norway have been among the most dedicated players, and also the WTO’s International Trade Centre and the World Bank.) According to the OECD, the poorest WTO member countries stand to cut their transaction costs by more than 14 percent, if the Bali Package is fully implemented. And as soon as it is, more trade-facilitation dollars are promised.
Bali was also a big win for multinational corporations — Apple, Vodafone, GE and Caterpillar, FedEx and UPS, Ericsson, E-bay, it’s a very long list — that are poised to profit from seamless movements of goods and services across presently difficult borders. But anyone with a heart would say the biggest winners — the point bears repeating — were the millions of presently poor people throughout Africa, Latin America and Asia who will have new chances to earn decent livings, thanks to the expanded commercial opportunities. Many of these deserving people have probably never heard of the WTO or its Bali Package. So there was good reason for the smiles last December in Bali.
But not everybody left Bali smiling. A handful of the WTO’s more economically troubled members who are always suspicious of rich-country motives — including Ecuador, Bolivia, and some members of the African Union who had resisted the Bali Package — griped that the Bali deal was designed to be legally binding.
Also, in recent months, some countries like Uganda and Tanzania, which had supported trade facilitation in Bali, have apparently had second thoughts about implementing the agreement. “[R]atification of the trade facilitation agreement within the next 12 months implies that Tanzania shall be compelled to import even more goods from developing countries, thus further threaten its ailing local industries and ignite job losses,” reporter Bernard Ampulla noted in April in Tanzania’s leading Daily News. “Moreover, Tanzanian producers find it difficult to meet international competitiveness standards and other technical standards, this being an area which still needs a lot of capacity building.”
In Bali, WTO members had agreed they would draw up a formal protocol to implement the deal by July 31. The legally binding accord would then go into effect by the end of July 2015, or as soon as two thirds of the WTO’s member countries (soon to be 160, with the accession of Yemen) ratify it. Negotiators left the Nusa Dua convention center exhausted, but with high expectations that only the technical language leading to ratification remained to be ironed out.
Most importantly, the atmosphere of distrust and mutual suspicions that had dogged previous WTO ministerial meetings had started to fade away. The success in Bali spurred hopes for quick progress to (finally) conclude the broader Doha Round of trade liberalization negotiations that has made little progress since they were launched in 2001.
But it took only a little over three months for the old resentments to burst back into the open. Now, it is uncertain whether the Bali Package will be implemented on its intended schedule — or derailed.
Surprise attack from Addis Ababa
On April 27, the African Union’s trade commissioner, Fatima Acyl, issued a startling statement from the African Union’s headquarters in Addis, Ababa, Ethiopia. In it, the commissioner revealed that, at an “extraordinary session,” the AU’s trade ministers had decided that the Bali Package should not be implemented until the broader Doha Round would be concluded. (Acyl refuses to identify which African trade officials had attended the meeting.)
Acyl, a former deputy general of the Agricultural Bank of Chad, is a polished young woman, fluent in English, French, and Arabic. She was born in Washington, D.C. on May 5 (her biography does not list the year, nor note that the African diplomat is eligible to hold an American passport). She earned an MBA with honors at Ohio’s Xavier University, in Cincinnati. In the 1990s, she was an associate in PricewaterhouseCoopers’ offices in Chicago, Il. The personable Acyl was subsequently promoted several times, ending up as a manager. Her resume marks her as a rising African star.
But perhaps a lesser star in leading WTO circles in Geneva, where it has been noted that Acyl’s otherwise impressive resume does not identify any previous experience in international trade negotiations. The available public record indicates that since she was named to her present position in October 2012, Acyl has been inside the WTO’s Geneva headquarters perhaps only a handful of times, involving ceremonial occasions. The African Union has only an “ad hoc” outside observer status in the WTO, and has no role in official WTO negotiations. Acyl did not respond to repeated attempts for comment.
But there is no doubt that Acyl’s April 27 statement boldly asserted a leading role for the African Union, in instructing African ambassadors to the WTO on how they should handle implementation of the Bali Package.
“A number of our countries feel that the decisions reached in Bali, while noteworthy and commendable, were not the most optimal decisions in terms of Africa’s interests,” Acyl noted. “We have to reflect and learn from the lessons of Bali on how we can ensure that our interests and priorities are adequately addressed in the Post Bali Negotiations.”
Then she added the sentence that has resulted in the present WTO impasse in Geneva: “It is important that at this Ministerial, we instruct the negotiators of the Africa Group in Geneva to formally submit language on the Protocol of Amendment — the legal instrument that will enter the TF Agreement into force at the WTO — to the effect that the Trade Facilitation agreement will be provisionally implemented and in completion of the entire Doha Round of Negotiation.”
The Doha process has been halted several times in the past thirteen years, most recently in 2008. WTO members have failed to agree on a variety of thorny issues involving agriculture subsidies, intellectual property rights, enhanced access to protected markets for both goods and services, preventing environmentally destructive fishing practices, to cite some of the most politically sensitive.
The Bali Package’s driving idea with separating the Bali Package for early ratification was to demonstrate that the WTO could start delivering important economic benefits to all members — aiming to spark revival of the broader Doha process.
But now the African Union wants to hold the Bali deal hostage, as Africa’s bargaining chip in the overall Doha issues. Acyl admitted as much in her April 27 statement, asserting that withholding formal implementation of the Bali Package “creates strong negotiating leverage to achieve satisfactory outcomes” in the broader Doha negotiations. Whatever one’s views on trade liberalization, the “extraordinary” AU session constituted an extraordinary power play.
Talks in Geneva
Taking its cue from the AU, the WTO’s Africa Group of countries has followed the April 27 instructions. (The Africa Group’s members are essentially the same as the AU’s; with the exception that Morocco isn’t a member of the African Union. In Geneva, Lesotho’s WTO ambassador is the spokesman for the group.)
On May 26 the WTO’s trade-facilitation panel met in Geneva to draw up the official protocol for implementing the Bali Package. At that meeting, Lesotho’s Ambassador Nkopane Monyane, introduced a document that he said reflected the African Union’s April 27 statement — essentially recommending only “provisional” implementation of the Bali Package, based on the outcome of subsequent Doha negotiations. The ambassador suggested informal consultations to resolve the differences.
The next day, Uganda, which speaks for the least-developed WTO members, submitted language that would clearly peg implementation of the Bali Package to conclusion of the Doha Round. In the meetings, Tanzania and South Africa also played important supporting roles, according to diplomats who were present on both days.
Strip away the legalese and the bottom line was clear: The Africans had essentially sought to re-open the Bali negotiations. (Talk about punching above their weight in the WTO: South Africa, Tanzania, Uganda and Lesotho together comprise one-ninth of one percent of global trade flows.)
“No Bali, No Doha”
The African negotiating ploy has not been well received. When he heard about Fatima Acyl’s April 27 statement at a meeting in Paris last month, Karel De Gucht, the European Union’s trade commissioner, hit the ceiling. The gruff Belgian’s outburst was not meant for public attribution; EU officials decline to comment. But privately, several diplomats interviewed for this article say De Gucht issued a very blunt warning to the African Union: No Bali, No Doha. Kill the Bali Package, and you kill the Doha Round.
In last month’s Geneva meetings of the WTO’s trade facilitation group, representatives from a range of countries — including Norway, the EU, the United States, Mexico, Hong Kong, Costa Rica, Australia, New Zealand, and Singapore — have echoed De Gucht’s warnings, although in more diplomatically nuanced language. The Bali deal has very generous terms for the African countries, they have argued. The pro-Bali WTO leaders have noted how the trade-facilitation deal was designed to take the political poison out of the air, and build confidence for the successful conclusion of the broader Doha process. Don’t destroy the crucial good will, the Africans are being urged.
The African side of the story
The only African ambassador who responded to a request for comment was Lesotho’s Nkopane Monyane.
The African Union “is a member driven organ based in Addis Ababa, that takes continental decisions not attributable to any single member,” the ambassador explains. “Lesotho as a member, with a resident Ambassador in Addis, has not made any effort counter the Bali process.”
Concerns that his country is out to delay or kill the Bali deal are based on mere “speculative misinformation,” he insists. “I will guarantee that you will not find any evidence, written oral or in any form of presentation, of Lesotho as a sovereign state advocating a delay in the implementation of the Bali Decision.” The ambassador adds: “Lesotho remains fully committed to the successful implementation of Bali, conclusion of the DDA and stability of the Multilateral Trading System.” (DDA refers to the Doha “Development” Round.)
Other experienced WTO watchers point out that Africans are legitimately concerned that the Europeans and Americans have been slow to detail precisely how they intend to implement their Bali (financial) promises. When the Africans say, “Show us the money” on trade facilitation, they aren’t necessarily being cynical, one senior European diplomat observes.
Moreover, there is plenty of room for skepticism that the rich countries still lack the political will to make the necessary bargains that would resolve the difficult Doha Round issues. The Africans are clearly right to complain that the Obama White House in Washington, D.C. has never assigned a high priority either to the WTO or its Doha process. It is important to understand that there are “good-faith” reasons for African doubts about the rich countries’ intentions, as another well-placed European trade official puts it.
But not all players have reputations for supporting WTO negotiations in good faith. Enter the South Centre. Based in Geneva, the South Centre’s 51 member governments range from Algeria to Zimbabwe. North Korea (not a WTO member) apparently finds the intergovernmental organization as a listening post, as does Iran (not a member, but which has official observer status in the WTO).
On trade, the Centre serves as a useful platform to advance the views of WTO member countries that tend to resist trade liberalization: Malaysia, Bolivia, Cuba, South Africa, Venezuela, and Tanzania. The South Centre does not cultivate a reputation for transparency; it refuses to disclose the sources of its financing, other than to assert on its website that the majority comes from member countries.
Transparent or not, the South Centre’s fingerprints are evident in the ongoing African moves to delay or undo implementation of the Bali Package’s trade-facilitation deal. The legal arguments advanced by the African Union’s Fatima Acyl, for example, dovetail with language used by the South Centre. On Nov. 15, 2013, the Centre published a “South Experts’ Report” that argued that the WTO should reject any Bali Package that would be legally binding upon poor countries. The “least developed countries should be exempted from undertaking binding commitments,” the document asserted. The paper also argued that any deal that might be reached on trade facilitation in Bali only be implemented upon the subsequent conclusion of the Doha Round.
To veteran WTO observers, the fact that the African Union used the same legal arguments first advanced by the South Centre is no coincidence. The South Centre’s executive director, Martin Khor, declines to comment. (A Centre spokesman was not authorized to share any information that wasn’t already on the organization’s website.)
Khor is a well-known figure in Geneva, where his basic approach to the WTO is that it lacks transparency and is a forum where rich countries foist their will upon poor countries.
Khor played a leading role in the vociferous anti-globalist demonstrations that wrecked the WTO’s 1999 Seattle meetings. He opposed the launch of the Doha Round two years later, and in 2003 helped cause the acrimonious collapse of the WTO’s meetings in Cancun. Another South Centre activist who has long been in the same anti-globalist network is Aileen Kwa. Kwa has written a book based on the premise that the WTO’s Doha negotiations are “a byword for the perversion of democracy.”
Last December, Khor worked against adoption of the trade-facilitation deal in Bali as an official member of the delegation from Ecuador.
A Malaysian, he has long been considered close to former Malaysian Prime Minister Mahathir Mohammad. (Long known for his tart tongue when it comes to anything American, Mahathir has recently blamed the CIA for a conspiracy to hide information on missing Malaysian Airlines flight MH370. Khor, a columnist for the Malaysian newspaper, The Star, has also been railing against spying by U.S. intelligence agencies.)
Ironically, while Khor is a strong critic of any economic proposal tainted with American backing, he personally has long benefitted from American financial support. For example, the Rockefeller Brothers Fund, which formerly supported Khor when the activist was with the Third World Network, has given the South Centre $1.6 million since 2009. Last year, the Ford Foundation chipped in another $250,000 — saying that the money was needed because “financial markets need the oversight of democratic institutions to ensure transparency and accountability.” (Another irony: of well-heeled American philanthropy citing transparency as justification for supporting an organization that has North Korea as a member.)
The $1.8 million American cash from Ford and Rockefeller far outweighs what some South Centre members contribute in dues to the WTO. Last year, Kenya, Ghana, Tanzania, and Uganda, for instance, contributed a collective $362,481 in WTO dues. Given the South Centre’s secrecy, it is not possible to compare the sums such member countries give to the WTO.
WTO watchers will have their next opportunity to learn if the Africans have released their Bali hostage when the trade-facilitation group meets again on June 24 in Geneva to consider adopting the protocol for implementing the Bali Package. Stay tuned.
Don’t Blame (Just) Obama
As anyone who has even casually skimmed recent headlines would already be aware, President Barack Obama’s international trade agenda is basically stuck. Blame Washington, D.C.’s familiar political gridlock. As the incumbent president, Obama, who has never made trade a high priority, naturally is getting the lion’s share of the blame. But while the president is hardly beyond criticism, don’t just blame him. Trade became a wedge issue long before Obama became president. And many of the dubious policies that Obama is being criticized for endorsing — protectionist Buy America laws, complex and basically unworkable special rules for textiles, regressive high U.S. tariffs on shoes and clothing, and so forth — were inherited from his predecessors of both political parties.
So anyone who really wants to play the blame game — and in Washington, D.C., who doesn’t? — would be well-advised to look beyond the White House to both sides of the aisle on Capitol Hill.
Scratch deeply enough into any policy failures in Washington, and Congress is usually the culprit. On trade, Senate and House Democrats are basically controlled by the party’s union-dominated protectionist wing that fears global competition as a threat to American jobs. The more encouraging news should be that most Republican lawmakers’ instincts are that trade expansion and free markets are good things. Still, Republican leadership on trade has become an oxymoron, as a look at the recent record of the House Ways and Means Committee reveals.
To take a glimpse into how U.S. trade politics are (not) working in Obama’s Washington, the story begins with the unfortunate recent headlines.
In his Jan. 28 State of the Union 2014 message Obama asked Congress to pass legislation giving him so-called Fast Track trade promotion authority (fast track is sometimes called by the acronym TPA, for the latter three words). This would allow the president to negotiate trade-liberalizing pacts with the European Union and important Asia-Pacific trading partners. Fast Track legislation would require Congress to vote either Yea or Nay to any trade deal that Obama would submit for ratification. Such a special rule would bypass the inevitable crippling amendments that lawmakers would offer on behalf of protectionist constituencies — crippling because the amendments would undo the carefully crafted negotiations.
But the next day, Sen. Majority Leader Harry Reid (NV) warned Obama “to not push this right now.” The feisty Reid, who controls the senate calendar, bluntly said that Fast Track would not be on it. Within days, other influential leaders of the Democratic Caucus like Sen. Richard Durbin (IL) weighed in. Their clear message: we have zero interest in forcing Democrats to approve Fast Track — and thus offend the party’s protectionist wing — before the November midterm elections.
The White House protested, sort of, with spinmeisters insisting to reporters that the president still hoped to get Fast Track, sometime anyway, in an unspecified future. When Obama met on Feb. 3 with Reid and the chairman of the Democratic Senatorial Campaign Committee, Sen. Michael Bennet (CO), the president never mentioned trade, according to a report by New York Times reporters Peter Baker and Ashley Parker that the White House did not dispute. Instead, Obama, Reid and Bennet talked about the upcoming November congressional elections, and how Obama might help raise money for the party’s coffers. (Reid is perhaps the most implacable opponent of international trade on the Hill. In 1994, he even voted against legislation that ratified the so-called Uruguay Round of multilateral trade liberalization that created the World Trade Organization.)
House Minority Nancy Pelosi and other prominent Democratic trade skeptics also were not shy about saying they also didn’t want to see a Fast-Track vote before the midterm elections. On Feb. 14, Vice President Joe Biden met with House Democrats and said that he “understood” their political concerns, according to other authoritative news accounts. No president has had Fast Track negotiating authority since 2007, when Pelosi, then House Speaker, killed it. Three preferential trade deals (with South Korea, Colombia, and Panama) that had been signed by Bush were not ratified by Congress until 2011, after the Republicans had won control of the House.
Stalled in Singapore
Predictably, Obama’s trade agenda stalled in Singapore on Feb. 25, after several days of talks between U.S. trade negotiators and their official counterparts in the 12-nation Trans-Pacific Partnership talks. U.S. Trade Representative Michael Froman had hoped to seal the deal in Singapore. But when he arrived in Singapore, Froman quickly learned that his counterparts were not willing to reveal their bottom lines. “If I were a minister from one of the TPP countries, I would be extremely reluctant to put my most sensitive items on the table,” explains Deborah Elms, a respected American trade watcher who is based in Singapore.
Elms and other veteran trade watchers point out that it would be foolish for any country to try to negotiate an end game with U.S. trade negotiators, knowing that without Fast Track, the U.S. Congress is poised to move the goal posts that would undo any “binding” trade deal that Obama might cut. Until this is fixed, the Obama trade agenda will remain stuck: no TPP deal, and no trade agreement with the European Union, either.
There will be geopolitical consequences. The longer Washington’s isolationist international trade gridlock lasts, the more other countries will move on without American participation. That has, in fact, been the trend for several years. China, Canada, Japan, the European Union, Singapore, the Association of Southeast Asian Nations, Hong Kong, New Zealand, Australia and others have all been busy enhancing their economic ties with selected trading partners, while Uncle Sam has been sidelined. The latest news on that front came on March 11, when Canada and South Korea announced that they had concluded a preferential trade deal. The United States is the one country that once did the most to foster multilateral trade liberalization. But nowdays, memories of the terrible tit-for-tat protectionism of the 1930s that contributed to the devastation of World War II have faded in official Washington. The emerging 21st century story line is how America is being left behind.
Froman goes to Capitol Hill
In recent weeks, U.S. Trade Representative Michael Froman has been prowling the corridors of Capitol Hill, doing everything he can to persuade reluctant congressional figures to grant the president the necessary Fast Track negotiating authority. While Froman’s meetings have been held behind closed doors, by all accounts the USTR has changed few if any (closed) minds.
Froman is considered an able man, and his political strength is anchored to his close relationship to Obama that dates to their days at Harvard Law School. That’s always valuable currency in Washington. But neither Froman nor the president has the stature to cajole, pressure, intimidate and otherwise move difficult members of Congress than the late Robert Strauss memorably displayed, when he served as the chief U.S. trade negotiator in the late 1970s.
Consider Froman’s recent efforts to reason with Rep. Rosa DeLauro (CN), a member of the House Democratic leadership. DeLauro’s basic view of international trade blames China for stealing American jobs. She has lined up 151 Democratic lawmakers who say they will not support Fast Track legislation. A few weeks ago, Froman was observed talking with DeLauro in the halls. When he tried to reason with her, the congresswoman subjected the USTR to a shrill earful about how trade deals like the TPP were only going to “kill” more American jobs. The likes of DeLauro would never have dared to speak to Bob Strauss that way.
(DeLauro represents New Haven, an important U.S. port that brings thousands of jobs to her district. The port makes a lot of money from traffic that comes through the Panama Canal, yet DeLauro voted against the U.S.-Panama preferential trade agreement.)
Froman’s efforts to try to reason with Democratic senators have not been much more rewarding. The man he’s got to deal with first-and-foremost is Sen. Ron Wyden (OR). Wyden assumed the chairmanship of the Finance Committee in February, replacing Max Baucus, who is now the U.S. ambassador to China. (Wyden has also chaired Finance’s trade subcommittee, a position he is holding onto.)
Before he left the senate, Baucus had worked successfully with pro-trade Republicans Orrin Hatch (UT), the Finance Committee’s top Republican, and House Ways and Means Chairman Dave Camp (MI), to come up with a bipartisan Fast Track bill. But while Wyden has a history of generally supporting trade deals, he has been lukewarm at best to the carefully-crafted Baucus-Hatch-Camp compromise.
At a March 13 hearing, Wyden highlighted his declared economic priorities, which he said were to come up “innovative approaches to strengthen and expand the middle class.” His priorities involved “education,” “savings,” “tax reform,” “health care,” “strengthening the social safety net” and raising the “minimum wage.” Expanding international trade flows and passing Fast Track legislation were not mentioned.
Railing against Secrets
Wyden has developed a certain style since he was first elected to the House 33 years ago (he became a senator in 1996). Whatever the issue, he’s always looking out for ways to rail against government secrecy, while at the same time never making much effort to dig deeply.
As a member of the Intelligence Committee, Wyden frequently rails against alleged CIA secrecy abuses — as least when the cameras are around. In 2007, Wyden played a leading role in killing the nomination of John Rizzo to become the general counsel of the Central Intelligence Agency. Anyone who wants a glimpse into what it is like to deal with the senator from Oregon might want to read Rizzo’s riveting account of his thirty-plus years in the CIA, Company Man. Rizzo relates that he learned only by reading an account in the New Yorker that Wyden had put a hold on his nomination in August, 2007. Rizzo wrote that he had never spoken with Wyden. He further related that the senator had declined a routine personal “courtesy” pre-hearing meeting.
But when the CIA lawyer’s public confirmation hearing was held in September, Wyden asked Rizzo a series of questions about classified CIA operations. Rizzo understandably demurred, saying that he could not respond fully in a public setting. “With everyone watching, he wagged his finger at me and vowed to get deeply into these issues at the closed session,” Rizzo relates of Wyden. Yet when the cameras were turned off, and that closed session was held, Wyden— along with Sens. Diane Feinstein (CA) and Carl Levin, who had also helped trash Rizzo’s nomination — failed to show up. In the face of such shabby treatment to a civil servant who had served his country for three decades, the White House ultimately was forced to withdraw Rizzo’s nomination.
Wyden has also been a vocal critic of the TPP trade talks, on grounds the White House has been negotiating the details in secret. So it raised some eyebrows on March 10, when this champion of openness in government called a “Senators’ Meeting” to talk about the TPP with USTR Mike Froman — behind closed doors. When he came out of the secret meeting, the senator wasn’t particularly forthcoming to reporters about what had transpired. “This was the first of what is going to be a series of discussions on the committee on a bipartisan basis,” he told Politico’s Doug Palmer.
While Wyden criticizes the White House’s secrecy on the TPP talks, there is nothing to prevent the senator from holding a number of informative hearings that would illuminate in great detail what’s at stake in each of more than 20 TPP chapters — without ever getting into classified U.S. negotiating positions. But that would take a certain amount of intellectual effort — and a close attention to the sort of details that all successful trade agreements turn on.
A Stacked Subcommittee
Beyond the lackluster Wyden, the Finance Committee’s trade subcommittee is stacked with anti-trade Democratic stalwarts. There’s Sherrod Brown (OH), a union ally and economic nationalist who basically speaks for the interests of the insular-looking western parts of his state. Debbie Stabenow (MI) watches out for the Detroit auto lobby. Chuck Schumer (NY) is mainly interested in punishing China. Jay Rockefeller (WVA) has long been the senator from the steel lobby. And there is Michael Bennet, the Colorado elections strategist who does not want to force Democrats to vote on Fast Track before this November’s congressional elections. Imagine being a U.S. trade negotiator who has to try explaining the benefits of trade liberalization to such a crowd.
Which brings us to the Republicans, who are generally pro-trade, pro-Fast Track, Pro-TPP and pro-T-TIP (the acronym for the Trans-Atlantic U.S.-EU trade talks that Obama has launched.) Here’s where the news should become more positive — but it doesn’t.
The Republicans control the House of Representatives, with a 33-seat advantage over the Democrats. Speaker of the House John Boehner (OH) has the votes to pass Fast Track. But when the president asked for that two months ago in his State of the Union address, Boehner’s reaction was tepid — while the Democrats started immediately building up a political head of steam to kill the idea.
On Jan. 29, the day after Obama’s declaration he was committed to Fast Track, Boehner said that while Republicans would support the idea, it was really up to the president to lead. “We cannot pass this bill without his help,” the Speaker said of Obama. “If this is one of his own priorities, you would think that he would have the Senate Majority Leader working with him to pass Trade Promotion Authority in order to expand opportunities for our fellow citizens.”
By passing the buck, Boehner has — so far at least — been passing up a wonderful opportunity to demonstrate real bipartisan leadership. If House Republicans were to move aggressively to pass Fast Track, Republicans would demonstrate that they will support the president on a matter of great economic importance to the country. The political beauty is that forcing the Democrats to vote for Fast Track would split the opposition party in an election year. Such opportunities for Republicans to do the right thing for the country, while embarrassing the Democrats, don’t come along every day in Washington.
Boehner, a decent but sad-looking man — perhaps because of his well-known inability to control the intransigent tea party Republicans — has had other “fast track” legislative priorities. On March 12, the Speaker pushed through by a 233-181 vote a bill that would expedite congressional lawsuits to sue Obama for failing to enforce certain federal laws. One of those, predictably, was Obama’s health-care law. The others, noted AP reporter Donna Cassata, involved steps the president has “taken to allow young immigrants to remain in the United States and the administration’s resistance to defend the federal law banning gay marriage.”
Ways and Means: No Way
Meanwhile, the Republican-led Ways and Means Committee (the House Committee that has jurisdiction over trade) hasn’t been able to pass legislation that even the Democrats also support. It’s difficult to be worse at one’s job than that.
Consider the Miscellaneous Tariff Bill. For three decades, Congress has approved bills allowing American manufacturers to import raw materials and components they need to make products without paying tariffs. The MTBs have traditionally been so devoid of controversy that they used to be passed unanimously. And why not, as the duty-free imported components are reserved for products not manufactured in the United States. There are no domestic protectionist lobbies to appease, as MTB is only aimed at helping American manufacturers become more efficient.
The previous MTB authority that allowed duty suspensions on more than 600 products expired at the end of 2012. There had been very influential warnings all year that Congress should not let such a thing happen.
Throughout 2012, the National Association of Manufacturers, saying that the absence of tariffs supported some 90,000 American jobs, repeatedly urged passage of a new MTB bill. NAM pointed out that paying duties on items that are not available in the United States constitutes an unnecessary tax on American manufacturers. On April 20, 2012, Auggie Tantillo, the top executive of the American Manufacturing Trade Action Coalition, announced that 65 Republican freshmen members of the House supported prompt passage of an MTB renewal bill. “Plain and simple, the MTB is a trade bill that is a job creator for U.S. manufacturing,” Tantillo noted. The American Apparel & Footwear Association also registered its strong support. “By reducing or suspending duties on certain imports that are not found in the United States, the MTB lowers costs for U.S. companies that depend on those imports for their competitiveness,” the AAFA reasoned in a press release on May 10, 2012. “It’s that simple.”
Despite such broad support, the MTB authority expired on Dec. 31, 2012. On July 17, 2013, Dave Camp, the Republican from Michigan who chairs the Ways and Means Committee, and also the committee’s top Democrat, Sandy Levin (also of Michigan), introduced a bill to extend the MTB on July 17, 2013. They were joined by other key lawmakers from both parties. The Camp-Levin extension proposal to extend MTB has gone nowhere.
There’s more bad news. The Generalized System of Preferences legislation that provides duty-free access to U.S. markets for 123 U.S. trading partners, some of them among the world’s poorest countries, expired in July, 2013. In 2012 American companies imported some $19 billion worth of products covered by GSP — many of them necessary components that U.S. workers needed to manufacture products. Although both the Republican and Democratic leadership of Ways and Means have strongly supported GSP’s renewal, it hasn’t happened. Estimates are that the costs to U.S. manufacturers, who now have to pay the (unnecessary) tariffs, has been more than $750 million. Congress has been willing to let this happen.
The Ways and Means trade subcommittee held only three hearings last year: covering U.S. trade relations with Brazil, India, and the European Union. The full committee called USTR Michael Froman, who had just assumed the office, to a hearing in July. The questioning was light.
This year Chairman Dave Camp has issued 49 press releases on various topics ranging from healthcare to taxes. Two of them were about international trade. On Jan. 9, Camp noted that he had introduced Fast Track legislation, along with Sens. Max Baucus and Orrin Hatch. And on March 4, Camp issued a release commenting on Obama’s trade agenda. “TPA is my top trade priority,” he insisted. Rep. Devin Nunes, a California Republican who chairs the trade subcommittee, added: “TPA must be enacted immediately.”
In the past year, a Ways and Means Committee that was on top of its job might have held at least a dozen in-depth hearings that would have better informed the American public — and many of us in the press — on a variety of interesting international trade issues. The committee could have highlighted the stakes involved in pressing countries like Vietnam, Malaysia, and China to bring their state-owned enterprises more market-oriented. It could have highlighted what intellectual property issues in the TPP talks are all about. It could have highlighted the important contribution that imports make to sustaining American manufacturing jobs. It could have highlighted the World Trade Organization’s ongoing efforts to expand international support for multilateral trade liberalization. But the Ways and Committee has chosen to highlight —- nothing.
Blame Obama for his own contribution to the stalled U.S. trade agenda, if you will. But don’t just blame him.
Obama: Back on the Campaign Trail
The “Made in America” president got back on the campaign trail last week.
Barack Obama’s name, of course, will not be on anyone’s ballot come the Nov. 4 mid-term congressional elections. But the president, fearing he could become a politically impotent lame duck during his last two years in the Oval Office, is naturally keenly interested in doing whatever he can to head off any possibility that the Republicans could control both the House of Representatives and the Senate.
A key part of Obama’s current politicking portrays congressional Republicans as uninterested in using sensible government leverage (and a few tax dollars) to keep what the president calls good “middle class” American manufacturing jobs at home in a competitive global economy. It is a continuation of a successful political formula based on patriotic-sounding Buy American rhetoric that has helped an inexperienced junior senator from Illinois win two terms in the White House. The Republicans have never figured out an effective response to Obama’s economic nationalist rhetoric.
But while his politics have been savvy — or at least smarter than his political opposition —Obama’s grasp of global economic realities remains uncertain. He’s been missing a simple insight that is at the core of International Econ 101. Nearly four years ago, then-WTO Director General Pascal Lamy began issuing repeated — and well-publicized — reminders to World Trade Organization member countries why open international trade flows are so important. Thanks to the rapid development of modern global supply chains, the WTO chief explained, manufactured products are no longer made in just any one country. Rather, they are assembled from components and raw materials that are “Made in the World.” Put another way, countries that pursue inward-looking policies pressed by parochial politicians who play to protectionist-minded lobbies — whether Buy America, or Buy India, or Buy China — are going to be left behind.
The WTO’s cutting-edge economic research continues under Roberto Azevedo, Lamy’s energetic successor from Brazil. Obama, however, remains a Made in America politician — and bases his economic policies on such. Over the last year, Obama’s top trade negotiator, Michael Froman, has declined to respond to persistent inquiries as to whether the White House would care to associate itself with the WTO’s Made in the World educational endeavors. But that background gets ahead of the facts that drive this story, which begins on Jan. 15, when Obama flew to North Carolina’s celebrated Research Triangle Park.
Some 170 companies conduct advanced high-tech research and development in the Triangle. Some of the biggest names that are associated with modern technological advances —- think America’s IBM, Intel, Microsoft, Biogen, and Cisco; and also BASF, Ericsson, Sumitomo and even China’s Lenovo — have made the Raleigh-Durham-Chapel Hill area a living illustration of American technological innovation at its best. Last week, Obama singled out one particularly admirable company to visit, the research and development offices of Vacon Inc. The president’s idea was to explain how federal subsidies for such praiseworthy private-sector innovators could help keep manufacturing jobs in America.
Never heard of Vacon? Well, this smart company is in everyone’s daily lives, one way or another. Vacon makes something called AC drives. While AC drives are hardly household words, they are highly useful things. Essentially, they use software attached to electronic boxes to make electric motors run more efficiently. Vacon’s clean-energy drives lower costs for a great many useful things that help make the American economy run more efficiently: including elevators, escalators, fans, pumps, compressors, you name it. Vacon’s biggest customers include the likes of giants like Honeywell and Eaton. As Obama rightly noted, Vacon’s innovations tell a very “good news” story.
Vacon is one of 18 corporations that are participating in a federally supported consortium of six universities led by North Carolina State that aims to come up with even more advanced clean-energy ideas. Obama’s Energy Department has pledged to support the hub with $70 million over five years, drawing on funds that the president says he has the existing executive authority to spend. The White House says it has another $130 million available to launch two more so-called “manufacturing hubs” that have yet to be announced.
In his 2013 State of the Union address, Obama said he would ask Congress for $1 billion to create a nationwide network of 15 manufacturing hubs. But unsurprisingly, the idea stalled on Capitol Hill. This election year, the president has doubled down politically, saying that what he’d really like is congressional authorization to subsidize 45 public-private manufacturing institutes. While this is hardly likely to happen, Obama at least has the more opportunities to criticize a do-nothing Congress between now and the Nov. 4 vote. And that’s exactly what he did (with tub-thumping relish) in North Carolina last week. “Where I can act on my own, without Congress, I’m going to do so,” Obama declared on Jan. 15. “And today I’m here to act,” Obama said to applause.
The president’s message was delivered to an enthusiastic audience of some 2,000 at North Carolina State: Smart spending of tax dollars is what it takes to promote an American manufacturing renaissance that will keep good “middle class” jobs at home, rather than continue to ship them overseas, Obama declared. “So the reason I came here today is because we’ve got to do more to connect universities like NC State with companies like Vacon to make America the number-one place in the world to open new businesses and create new jobs,” Obama declared. “We want to do that here in North Carolina, and we want to do this all across America,” Obama vowed.
The president recalled how North Carolina had seen textile- and furniture-making factories “closing their doors down” while “jobs were getting shipped overseas.” More federal support for such “good news” success stories like Vacon, Obama said, will keep the jobs of America’s future here at home. “I don’t want the next big job creating discovery, the research and technology, to be in Germany, or China or Japan; I want it to be right here in the United States of America,” Obama said.
The following six sentences about Vacon from Obama’s Jan. 15 speech are worth quoting in their full context, as they clearly illuminate the president’s view of what international economics is all about: “So this company is making these engines and these systems more efficient, saving businesses big bucks on energy costs, improving the environment. Those savings get passed on to customers, puts money in people’s pockets. And growing companies that need the products that Vacon makes, they’re benefitting enormously. So it’s a good-news story. But in a global economy, that company, just like every company in America, has to keep inventing and innovating in order to stay on the cutting edge. And that’s where all of you come in.”
And that’s where the Made in the World trade flows enter this story. Obama was certainly correct in portraying the innovative Vacon as an entrepreneurial success story. But the praiseworthy entrepreneurial energy came from — Scandanavia. Vacon Plc is headquartered in Vaasa, Finland. Its U.S. operations are only a small (if important) part of the Finnish company’s international business strategies.
Yes, it stands to follow that Vacon’s factory workers in America will benefit from whatever technological advances come from the tax dollars that Obama will channel to the North Carolina manufacturing hub. But that’s only part of the story. Vacon also has factories in Europe and Asia, as well as R&D operations in other countries. So any high-tech breakthroughs that are made in the Triangle will also help Vacon’s workers around the world, including, you guessed it…China.
A quick look at how Vacon is thriving in a competitive global marketplace easily explains.
In 1993, thirteen engineers who worked for the ABB Group in Vaasa, Finland, faced an uncertain future when the giant Swedish-Swiss conglomerate decided to shut down its Finnish lab. At the time, Finland’s economy was in the tank, suffering from a lingering economic hangover after the collapse of the neighboring Soviet Union. Still, the intrepid Finns bravely struck out on their own, launching Vacon Plc. They risked their job security, their homes, their families’ welfare, and took all the other usual risks that aspiring entrepreneurs do as they summon the inner strength to endure. But the geeks believed in the strength of their ideas.
Today, this fine Finnish company that figured out smarter software to transform the ways that electrical energy is processed holds about 5 percent of a worldwide $11-plus billion AC Drive market. Company revenues were over $500 million in 2012. Altogether, Vacon employs about 1,500 people worldwide. Some of these work in the United States.
Vacon employs nearly 20 highly motivated workers in the Research Triangle. (The words “highly motivated” explain why innovators from around the world find the Triangle attractive.) Another 100 Americans work in Vacon’s factory in Chambersburg, Pa. The company’s U.S. headquarters are in Milwaukee, with support offices in Chattanooga and Houston. They have reason to be enthusiastic about the possibilities of the manufacturing consortium that Obama is pushing — as do Vacon’s factory workers in Suzhou, China, and also in Europe.
Vacon’s website notes that the Finnish company sees its “focus of growth” in six other countries besides the United States: Germany, Brazil, Canada, India, South Korea, and China. Vacon’s website notes that it’s “focus of production is moving to Asia.” Vacon, like other globally competitive corporations, has a natural economic incentive to be near to its growth markets, whether they are in Chambersburg, Pa., or Suzhou.
Moreover, all of Vacon’s factory workers, no matter which country they live and work in, are dependent upon international trade flows across borders, which give them the necessary components they must have to assemble their AC drives. Without access to the imports, all of the factories would fold.
According to Import Genius, an authoritative private research firm that tracks U.S. Customs’ records online, Vacon’s U.S. operations import key parts such as frequency connectors from Finland, valves from China, and control modules from Mexico. Likewise, the workers in Vacon’s factory in China could not assemble their Made in China AC drives without the necessary imported components from various countries. As Karl Marx might put it if he were alive in the 21st century: Workers of the world, you really are united.
But when the president of the United States talks of promoting an American manufacturing renaissance, he is loath to mention that imported components help sustain American manufacturing jobs. The protectionist-minded labor unions that heavily influence the Democratic Party’s trade policies don’t much like to talk about such things.
The puzzle is why the Republicans — who have allowed themselves to be the Fall Guys in Obama’s successful economic morality play — have never figured out how to deflate the patriotic sounding presidential rhetoric. Especially as evidence they would need to put Obama on the defensive is right under their noses.
Remember Obama’s much-touted pledge, first uttered in 2010, that he would move heaven and earth to double U.S. exports between 2009 and 2014? Obama said his White House had a Five Year Plan, which he called the National Export Initiative? It sure had a nice ring to it during the 2012 presidential campaign.
Last week in North Carolina, Obama — who now has new buzz words for job creation, like “manufacturing hubs” — didn’t mention his so-called National Export Initiative. No wonder, considering the numbers.
In 2009, during the economic whirlwinds created by the Great Recession struck, U.S. exports of goods and services totaled $1.5 trillion. But by 2012, the 4th year, U.S. exports had only risen to $2.2 trillion. The numbers aren’t in for all of 2013 (they will be released on Feb. 6.). But it looks like last year was about the same as 2012. So U.S. exports, instead of doubling in five years, have risen by only about one third. To reach Obama’s goal of doubling in five years, U.S. exports this year would have to reach a little over $3 billion. It’s not likely.
But that’s only part of the story. It turns out that there is one existing federal program that actually has an enviable track record of sustaining American jobs — a government program that has steadily been helping exports skyrocket for many years. The reference is to the nationwide network of highly successful U.S. Foreign Trade Zones, which are administered by the Commerce and Treasury departments.
Some 2,800 corporations employ more than 340,000 American workers in FTZs located in every state of the Union, plus Puerto Rico. Manufacturers in these special zones are allowed by the federal government to import the raw materials and components they need to manufacture the finished products, without initially paying import duties. If the goods are sold in the United States, they pay the lower U.S. duty rate for the finished product. Or they could be exported, paying only whatever tariffs buyers in foreign countries are subject to.
The FTZ’s performance clearly illustrates the benefits of a duty-free world. From 2004–2008, the value of exports from FTZs more than doubled, from $19 billion to $41 billion. Since 2009 they have been up more than 80 percent. Last year the department reported that exports from the zones reached a record-high of $54 billion in 2011, a 56 percent increase from fiscal year 2010. (These are the most current numbers the federal government has published.)
Dan Griswold, the president of the National Association of Foreign Trade Zones, has observed that the export numbers “confirm that companies operating through the FTZ program are contributing more than their share toward meeting the president’s National Export Initiative goal of doubling U.S. exports between 2009 and 2014.” Yet the Obama White House, far from putting FTZs at the center of the president’s National Export Initiative, basically has talked about the free-trade zones as little as possible. The economically thriving zones have been about as far from the center of the president’s National Export Initiative as the White House can keep them.
During the 2012 presidential contest, neither Obama nor his Republican challenger, Mitt Romney, visited a Foreign Trade Zone to tout the benefits of a zero-tariff world. In fact, in more than a quarter century of covering the politics of international trade, memory does not recall any example of a presidential candidate of either party who ever trumpeted the jobs-creating virtues of FTZs.
Still, such export success stories are dotted all over the U.S. BMW has exported more than one million spiffy roadsters and four-wheel drive vehicles from the company’s zone in Spartanburg, S.C. since 1994. Mercedes exports its M-Class SUVs and other luxury cars from a duty-free zone in Alabama. Toyota has announced it will be selling its Kentucky-made Venza Crossover to customers in Russia and Ukraine.
Another shining FTZ success is found in Elkton, Va. (pop. 2,700), nestled in the Shenandoah Valley about 100 miles southwest of Washington, D.C. There, pharmaceutical giant Merck operates a sprawling factory that, according to the company’s federal filings, makes drugs to treat diseases ranging from HIV to river blindness to Parkinson’s to cervical cancer. Workers in Elkton make their pills without Merck’s paying U.S. tariffs on imported raw materials (various chemicals, gums, resins) that otherwise would be subject to duties. Free trade is what Elkton, Va. is all about — ask the Merck workers whose jobs depend upon it.
Or take Caterpillar Inc.’s operations in a Foreign Trade Zone in Victoria, Texas, where it makes its iconic yellow excavators and frame assemblies. There is a very long list of imported parts that Cat brings in duty free to keep its Texas workers busy: including various rods and tubes, hoses, fittings, seal strips, clamps, caskets, glass, ceramics, and many more.
There’s another company that has been creating American jobs in a place where they are much needed, but which isn’t in a Foreign Trade Zone. A commendable start-up named Shinola has started putting Americans to work making fine watches and bicycles in bankrupt Detroit. “We know there’s not just history in Detroit, there’s a future,” the company declares on its website.
Hopefully, savvy risk takers like Shinola will become shining successes, inspiring other intrepid entrepreneurs to start re-building Detroit — a sad city that is perhaps the nation’s number one example of the consequences of unenlightened economic policies. (The AFL-CIO’s unions and the old-line U.S. auto manufacturers bear the responsibility for this, but prefer to blame import competition.)
And of course it happens that Shinola’s prospects for success turn on the ability of this entrepreneurial-minded company to benefit from global trade flows. Shinola sources its bike frames and fork tubing from Mississippi, the chainstay plates from Wisconsin, spokes from Colorado — but also imports other necessary parts from Asia and Europe. And the Shinola workers who assemble watches in Detroit, make them from Swiss movements, and also cases, dials, hands, crystals and buckles from China. So this success story is Made in the World, not Made in America.
Given his attitude towards import competition, Obama is not likely to go to Detroit and call for economic policies that would make the entire city a free-trade zone. Nor have prominent national Republicans expressed any such interest.
While American politicians of both political parties remain intellectually trapped in their insular Made in America mentality, other countries — China, for instance — are thinking of better adjusting their economic policies to fit Made in the World economic realities.
Last summer, with the apparent endorsement of Chinese Premier Li Keqiang, Beijing announced plans to make parts of Shanghai a free trade zone. As the South China Morning Post, the respected Hong Kong daily newspaper, has observed, this will be the “first Hong Kong-like free trade area in mainland China.” And according to various recent news reports, Beijing is also considering creating another dozen such duty-free zones around the country. They include Guangdong, which is economically close to Hong Kong, the port of Qingdao, and Hangzhou, home of the e-commerce giant Alibaba. While the Chinese plans’ implementation are still works in progress, at least Beijing’s leaders are asking the right questions.
As for Obama, it might help if the president would spend less time thinking about effective campaign rhetoric, and more effective governance. After all, it’s the latter that eventually determines presidential legacies.
Obama’s “Déjà vu” Vietnam Diplomacy
A high-stakes diplomatic drama is playing out between the United States and Vietnam. While the focus is on enhancing bilateral economic ties in the ongoing Trans-Pacific Partnership negotiations, the economics are also related to broader security- and human rights issues. This article has some fresh news to report on what’s going on behind the scenes: What the ruling Politburo in Hanoi has decided about deepening its economic ties with the major powers. What Vietnamese President Truong Tan Sang and U.S. President Barack Obama had to say to each other during their July 25 White House meeting in the Oval Office. Who else was in the room — and why that was important.
There is also background information to report that sheds light on the intense pressures that U.S. Trade Representative Michael Froman has been bringing to bear on Vietnam, notably last week in Bandar Seri Begawan, Brunei. On Aug. 22-23, Froman had private talks with his Vietnamese counterpart, Vu Huy Hoang, on the sidelines of the 19th round of the TPP trade talks, which are continuing this week in Brunei. Washington has been playing an intimidation game, pressuring Hanoi to accept an economic deal that is clearly not in Vietnam’s best interests — and just might get away with it.
But it’s not the hard news that captivates, but rather, the déjà vu feeling of another historical turning point in U.S.-Vietnamese relations. On Aug 30, 1945 — 68 years to the day, it turns out, that the TPP’s 19th round of negotiations will conclude this Friday in Brunei — Ho Chi Minh wrote the first of several letters to U.S. President Harry Truman. Uncle Ho sought Truman’s support for Vietnamese aspirations to gain independence from French colonial rule. The letters went unanswered, as the Truman administration’s higher priority involved helping the French recover from the devastations of World War II.
“In historical terms, it was a monumental decision by Truman, and like so many that U.S. presidents would make in the decades to come, it had little to do with Vietnam herself — it was all about America’s priorities on the world stage,” historian Fredrik Logevall has observed in his acclaimed Embers of War. The concerns of more enlightened observers in the U.S. State Department and in the intelligence community, who worried about the consequences of getting on the wrong side of the battle against colonialism, were overridden.
When they met in the Oval Office last month, President Sang displayed a keen sense of history when he gave Obama a copy of one of Uncle Ho’s letters to Truman. Hanoi has good reason to worry that the top Obama White House priority, once again, is not really focused on the Vietnamese economy.
In the TPP trade talks, the White House has been fighting tooth and nail on behalf of the protectionist U.S. textile lobby — Obama’s loyal allies who have supported him in his two successful presidential races. The top priority of the (globally uncompetitive) U.S. mills is denying Vietnam more access to protected U.S. clothing and footwear markets in a TPP trade deal.
As in the late 1940s, a few enlightened U.S. diplomats (quietly) and intelligence officials (very quietly) have now let their concerns be known around Washington. But Washington’s seasoned Asia hands find themselves basically sidelined by the White House domestic political priorities, much as their predecessors were nearly seven decades ago.
Meanwhile, President Sang, on behalf of the ruling Politburo, had his own message to deliver to Obama last month.
To better understand the nuanced blend current spot news and history, let’s begin with that White House meeting.
Spinning Oval Office diplomacy
When it comes to diplomacy, sometimes what the public sees is true — just not the whole picture. Consider the video that the White House posted on its website on July 25. Viewers see Sang and Obama meeting alone in the Oval Office, sitting in armchairs in front of a fireplace, each wearing appropriate dark power suits with muted ties. The image that the White House spinmeisters — who also put the video on You Tube — intended to convey recalls famous historical one-on-one diplomatic talks at the highest level: Nixon with Mao, or Roosevelt and Stalin.
But the Obama-Sang meeting was hardly a Roosevelt-Stalin like moment. It was a scripted, ceremonial occasion, typical of how American presidents have come to host visiting foreign dignitaries in recent years.
An unpublished photo shot by someone else in the room with a wide-angle lens shows that Sang had nine men in the Oval Office with him. Trade Minister Hoang was there, along with Agriculture Minister Cao Duc Phat and the head of Vietnam’s presidential office, Dao Viet Trung. Vietnamese Ambassador to the United States Nguyen Quoc Cuong also was present, as was Lt. Gen. To Lam. Gen. Lam is the deputy minister of Public Security, and formerly headed the ministry’s counter-intelligence department. Lam is also a member of the Communist Party’s Central Committee.
With so many watchers — not all of them necessarily loyal to President Sang’s own supporters in the Politburo — no Vietnamese president would be positioned to engage in substantive bargaining.
A sense of history
Perhaps the three most interesting Vietnamese officials present were the translator, Pham Xuan Hoang An; Foreign Minister Pham Binh Minh, and Colonel General Nguyen Chi Vinh, the deputy minister of national defense. These men carry a sense of history with them — and a longstanding serious professional interest in U.S.-Vietnamese diplomacy. To experienced Vietnamese watchers, the news that An, Vinh and Minh were in the Oval Office will convey a sense of Vietnamese seriousness.
Interpreter An’s father, Pham Xuan An, was perhaps the most important communist spy during the Vietnam War. An’s cover was as a reporter for western news outlets, including Reuters and Time magazine. This complicated man was made a general after the North Vietnamese victory in 1975. But then Gen. An was also detained in a camp for “reeducation” for a year, because he was suspected as being too close to the Americans.
In fact, An loved America (he helped one of the CIA’s most important assets escape when the communists took Saigon). But after the war, the spy explained to his American friends that his top priority had always been working for his country’s independence. An’s double life was the subject of Larry Berman’s fascinating Perfect Spy, published in 2007. Now, An’s son, translator Pham Xuan Hoang An, works in Vietnam’s consulate in San Francisco. Like his father, the younger An is a man who knows both countries very well.
While Colonel Gen. Nguyen Chi Vinh is hardly a household name in America, he is well known to Vietnamese watchers. His father, Gen. Nguyen Chi Thanh, was Vietnam’s second-ever general, after Vo Nguyen Giap. Gen. Thanh was the mastermind of the coordinated uprisings in nearly every major South Vietnamese urban center during the Tet Lunar New Year festivities in January of 1968. The Tet Offensive did not succeed in a military sense. But it is credited with being the proverbial last straw for the fed-up American public, which realized that the White House claims that the communists were on the verge of defeat were false.
Vinh is a member of the Communist Party’s Central Committee, and formerly headed the military intelligence department known (and feared) as Tong Cuc 2. Veteran Hong Kong-based foreign correspondent Greg Torode has called Vinh Vietnam’s wily “Old Fox,” a man who is generally regarded as “Vietnam’s shrewdest strategic thinker.”
Vinh has been a key actor in Vietnam’s delicate balancing act involving major powers with security interests in the Pacific. He has been an important player in a variety of sensitive issues: countering Chinese intimidation in the South China Sea while simultaneously establishing military ties with Beijing; submarine and other weapons purchases from Russia; and also increasing U.S.-Vietnamese military cooperation. Vinh, who is well known in both Washington and Beijing, also showed up earlier this month for private talks with senior defense officials in Tokyo (who also have good reasons to worry about Chinese continuing aggressive moves in the Pacific).
Foreign Minister Pham Binh Minh also has a famous father. Nguyen Co Thach was Vietnam’s foreign minister from 1980 – 1991, where he worked unsuccessfully to normalize ties with the defeated Americans. Like his father, Foreign Minister Minh has a reputation as being keenly aware of the strategic importance of developing closer ties with the United States, by way of countering undue Chinese influence.
Minh related candidly at a Council of Foreign Relations event in 2011 that he had been full of “hatred” during the war, when as a child he endured the U.S. bombing of Hanoi. But ever since he joined the Vietnamese diplomatic service after the 1975 communist victory, Minh — like his father — has focused his own career upon finding ways to forge closer ties with Vietnam’s former war enemy.
Obama’s Diplomatic Team
While the July 25 Sang-Obama White House meeting was a tightly scripted affair, there was at least one moment of spontaneity, where Obama briefly reached out to strike a personal rapport with his Vietnamese guest. When U.S. and foreign “pool” journalists were admitted to the Oval Office for the usual photo opportunity, they shouted some questions to the two presidents. Obama ignored them, but was overheard whispering to Sang, “reporters are the same everywhere.”
A White House press aide declines to discuss who else was in the meeting on either the Vietnamese- or the American side. Pool reporters who were let in for the photo ceremony saw two U.S. officials besides National Security Adviser Susan Rice: Commerce Secretary Penny Pritzker, and U.S. trade negotiator Froman.
Pritzker, an Obama fundraiser from Chicago, is new to foreign affairs. Her Commerce Department is the agency that is widely resented in Vietnam for inflicting protectionist anti-dumping tariffs on the Vietnamese shrimp and catfish industries. And Froman, although also close to Obama, brings more of a domestic political focus to his job than genuine foreign policy experience. (Any diplomatic heavy lifting that was done would have been done a few blocks away from the White House, at Secretary John Kerry’s State Department. Kerry, a Vietnam War veteran, hosted the Vietnamese presidential delegation on July 24. He was in New York when the Vietnamese visitors met with Obama the next day.)
Scripted or not, still, important signals were sent by both presidents.
A Message from the Politburo
The Vietnamese delegation made it clear to Obama — as they had a day earlier in a meeting with trade negotiator Froman — that they were sincere about attaching a very high priority to advancing economic ties with the United States in the TPP negotiations, according to well-informed Vietnamese officials and also senior U.S. diplomatic officials who asked not to be identified.
Carlyle Thayer, a respected Vietnamese watcher who has excellent high-level connections in Hanoi, explains. Thayer, who is affiliated with the Australian Defense Force Academy, says he has seen a copy of an April 10 resolution drafted by the ruling Politburo, which has not yet been publicly released. “It makes economic integration with all the major powers Vietnam’s top priority, over all other forms of integration, including security,” Thayer reports.
In the Oval Office, President Sang stressed to Obama what Vietnamese officials have been saying for the last three years: that if the TPP negotiations are to succeed, Vietnam will need economic incentives — mainly substantial additional access to U.S. clothing- and footwear markets, which are currently encumbered with high tariffs. Vietnam’s main problem with the TPP is that for the same past three years, the White House has held up progress in the negotiations by refusing to make serious tariff-slashing offers.
White House press officials decline to discuss Obama’s response to Sang. For public consumption the two presidents agreed to put out a (bland) public statement noting that they would instruct their aides to do their utmost to complete the TPP by the end of this year. (The White House said the same thing last year, and also in 2011. Froman has been telling people that this time, the administration really means it.)
Signals from Washington
What little detail is known about what Obama said during the meeting has been revealed by U.S. Ambassador to Vietnam David Shear, who spoke to a high-powered Vietnamese-American gathering in Washington, D.C.’s Virginia suburbs on August. 16. Shear said that the Obama administration considers the TPP negotiations to be “extremely important.” But without “demonstrable progress on human rights” by Hanoi on human rights, “we will not be able to generate congressional support” for a TPP deal, the ambassador added.
Shear related that human rights had come up twice in the Obama-Sang meeting. The first, he said, was part of a general reference linking human rights as the key to enhanced economic and security ties.
According to the ambassador, the second reference to human rights came after Sang expressed Vietnam’s desire to purchase U.S. “lethal” weapons. “If you want to do that,” Shear said that Obama replied, “you’ve got to improve your human-rights practices.” (A full transcript of Shear’s remarks has not yet been posted on the U.S. embassy’s website.)
As Hanoi’s human-rights record is currently being compared unfavorably to Vietnam’s Asian neighbors — even notorious Cambodia has held elections, while Myanmar has been busy freeing its political prisoners — Obama’s point is well taken. The Politburo must be asking itself these days what benefits the country is getting by continuing to imprison more than 160 peaceable political prisoners, whose “crimes” were merely exercising their rights to free political speech and peaceable assembly.
But the same Politburo members who are on the defense on human rights must also be asking why they should sign onto a TPP deal that would offer Vietnam dubious economic benefits.
Secret “21st Century” negotiations
Some parts of the TPP negotiations, to be sure, would clearly be aimed at boosting the Vietnamese economy. Vietnam has been struggling with the politically difficult task of reforming the country’s famously inefficient state-owned enterprises for some two decades.
Vietnam’s SOEs basically are secretive black holes and a drag on more than a third of the country’s economy. When the Obama White House spins the TPP deal as a “high-standard, 21st century” deal that will set an enviable template for trade in the Asia-Pacific region, SOE reforms come immediately to mind.
But other than the self-serving slogans, the White House has been refusing to explain to the watching publics any details of what the Vietnamese are being asked to do. Ironically, the White House is demanding that the Vietnamese economy become more open to market-oriented economics, while classifying what that might entail as a state secret.
Enter “Yarn Backward”
What Hanoi wants most in the TPP is for the United States to slash its high tariffs on imported footwear and clothing. There is a sort of role reversal here. The commies in Hanoi are pressing for free-market access to protected American markets. The Americans are demanding state control. The economic notion is called “yarn forward,” but the economics are hardly forward looking.
As I’ve previously reported, the French 19th century colonialists required that their Vietnamese subjects supply the mother country with textiles. Such imperial preference schemes supported France’s economic domination of Indochina — and inspired Vietnam’s independence movement.
Now the Americans are demanding the same sort of arrangement in the TPP. Vietnam would only qualify for duty-free treatment on its clothing- and footwear exports to the United States if it bought yarn and fabrics from another TPP country — translation: from the declining mills in the U.S. South, not non-TPP countries like China.
It doesn’t take an economics degree to see the flaws. Nobody — beyond insular-looking U.S. mills that long ago lost their competitive edge in global markets — pretends it makes economic sense. Why would any White House pressure the likes of Levis or Gap to buy their (heavy) denim from U.S. suppliers and ship it across the Pacific to Southeast Asia? Why would Obama even think of trying to force giant underwear manufacturer Hanesbrands to stop supplying its Vietnamese manufacturing from Hanes’ established suppliers in China or Thailand? Why would any White House insist that it has the right to disrupt the global supply chains of such respected major American corporations?
U.S. Trade Representative Froman has refused repeated requests to explain exactly why “yarn forward” would be in Vietnam’s best economic interests.
I have also asked U.S. Ambassador Shear if he was able to point to any economic benefits to Vietnam in the yarn forward notion. Shear has been put in the diplomatically awkward position of defending the White House position on yarn forward to the Vietnamese. Shear declined to defend yarn forward’s economic rationale publicly. The ambassador referred the question back to trade negotiator Froman, who again declined comment.
[Ambassador Shear has a reputation as a thoughtful diplomat, albeit something of a team player. His deliberate non-answer could be interpreted as a diplomatic wink, conveying his distaste for the whole business. In private meetings with U.S. corporate executives, Shear has toed the Obama line, but his body language has suggested his discomfort.]
Meanwhile, the White House has been demanding that American clothing manufacturers turn over confidential information on how their global supply chains operate. Intimidated, the companies have mostly knuckled under. The Office of the U.S. Trade Representative even has a special web site for the companies to divulge their business secrets to the government. This access to the private proprietary data has given Froman and his aides the means to instruct the domestic industry where it can source their materials (the U.S. South) and where they can’t (China).
The American clothing importers are now scrambling behind the scenes to receive special exemptions for themselves from the White House. The corporate lobbyists are looking to protect at least parts of their global supply chains from White House interference.
Of course, even with the limited TPP carve-outs that the feds may grant, the rules would always still be subject to sudden change, depending upon unpredictable bureaucratic whims. The American companies could stop the whole business if they had the nerve to stop groveling — which they have never quite summoned in previous U.S. trade negotiations.
The White House unconvincingly denies that the TPP is part of an anti-China economic encirclement strategy. Yarn forward was first included in the U.S. preferential trade deal with Mexico in the early 1990s, and then to other Latin American countries. The idea then, as now, was to hold back Chinese and later, other Asian imports.
It has failed. The rules are so cumbersome that only about 17 percent of Latin American trade goes through the “yarn forward” rules. Companies mostly prefer to pay the tariffs rather than suffer the paperwork.
Relief for Africa
When the Africans were negotiating the Africa Growth and Opportunity Act with the United States in the 1990s, the congressional Black Caucus vehemently objected to yarn forward rules because the principle offended them. Congressmen like Charles Rangel, a Democrat who represents New York’s Harlem neighborhood, fumed that yarn forward reeked of colonialism. Moreover, Rangel protested, such rules were even racist. Consequently, the AGOA trade deal allows the Africans to buy their cotton and other fabrics from China, or anywhere, as long as the final clothes are “cut and sewn” in Africa. In the TPP negotiations, anything short of clean “cut and sew” rules for clothing would hold back Vietnam’s export potential.
Another bitter irony for Vietnam: These days Rep. Rangel and other African-American lawmakers are lobbying for Obama to force upon Vietnam the same yarn-forward rules they formerly attacked as colonial and racist. And Central American countries like the Dominican Republic, who aren’t in the TPP and want to keep Asian competitors at bay, are also piling on Vietnam.
Undeterred, in Brunei last week, trade negotiator Froman still insisted that strict yarn forward rules remained at the “core” of what the U.S. wants in the TPP. He continued to withhold from the public any real details of what was in the TPP, other than the spin that it would be a “high standard, 21st Century” trade template.
The smart money would bet that the Vietnamese will end up swallowing hard and accepting a watered-down TPP deal, giving them modest increased market access for shoes and clothes, while making minimal market-opening concessions to the Americans. Call that TPP Light.
But perhaps the shrewd Politburo operatives in Hanoi, or at least enough of them, have the same sort of determination as did their fathers’ generation. After all, the Vietnamese negotiators should understand that Obama is the one who needs a TPP deal most. Could the American president really allow the TPP to fail, just because the Vietnamese want to sell Americans more pairs of underwear, blue jeans, and sneakers?
Talk about a déjà vu feeling. In the 1940s, President Truman ignored prescient warnings from U.S. intelligence and diplomatic officials that it would be a big mistake for the United States to get on the wrong side of the struggle against colonialism. Now, President Obama pays little heed to warnings that it is unwise to risk important trade talks with Vietnam — and America’s standing in Asia — for parochial domestic politics.
Some people never seem to learn their history.