America’s Philippines Blunder
Failing U.S. trade policy exacerbates Manila’s doubts of Washington’s security promises.
By GREG RUSHFORD
July 28, 2016 12:46 p.m. ET
U.S. Secretary of State John Kerry on Wednesday discussed the “full range” of economic and security issues with Rodrigo Duterte, the Philippines’ newly elected president. The visit comes in the wake of The Hague’s July 12 ruling that Chinese actions in the South China Sea violate Philippine rights.
Mr. Kerry’s diplomatic mission was to assure Mr. Duterte that Manila can count on Washington’s mutual-defense promises. But there are also Mr. Duterte’s doubts that the U.S. can support the Philippine trade and economy.
When Mr. Duterte was sworn in to office on June 30, U.S. Trade Representative Michael Froman announced a new trade policy that upends important economic growth plans in the Philippines. It threatens to wipe out an estimated $100 million annual boost to Philippine exports of travel goods such as luxury handbags, wallets and backpacks. It also complicates Philippine investment aspirations to create some 75,000 travel-goods-related jobs in the next five years.
At first glance, Mr. Froman’s announcement gives no hint of the economic controversy it has sparked. He says that President Obama wants to make “a powerful contribution to lifting people out of poverty and supporting growth in some of the poorest countries in the world, while also reducing costs to American consumers and businesses.” The policy benefits 43 least-developed beneficiary countries, such as Cambodia and Haiti, and 38 African nations. Pursuant to the U.S. Generalized System of Preferences (GSP) program, these countries will no longer have to pay stiff tariffs of up to 20% on handbags, wallets and other travel goods exported to the U.S.
The U.S. decision to give preferential treatment to the industry’s small players, while blindsiding the most competitive producers, is perplexing. Cambodia, for instance, holds a modest 0.4% of the U.S. market, producing mostly backpacks. Africa’s total travel-goods exports to the U.S. amount to roughly one hundredth of one percent market share. As a result, the policy gives just two countries—China and Vietnam—a combined 90% share of the $5 billion U.S. travel-goods market.
It is unlikely that preferential treatment will prompt least-developed countries to boost their exports. Even with 15 years of duty-free access to U.S. clothing markets under the African Growth and Opportunity Act, 40 African countries combined to export less than 1%, or $1 billion, of garments each year to the U.S. The Philippines alone exceeds Africa in clothing exports by more than $100 million.
Diplomats from other countries and industry giants in the U.S., such as Coach, Columbia Sportswear and Kate Spade, have written to Mr. Froman asking for an explanation. On Wednesday 14 members of U.S. Congress, including 10 from the powerful Ways and Means Committee that has jurisdiction over trade, also issued a strong letter to the U.S. trade chief. But Mr. Froman has yet to offer any economic rationale for the decision, nor is there any evidence on the public record to support it.
Developing countries with larger market shares of the travel-goods industry, such as India, Indonesia, Pakistan, the Philippines, Sri Lanka and Thailand, must now reconsider their plans to expand their investments. Major U.S. players such as Coach and Michael Kors, which looked to U.S. trade officials to provide financial incentives to shift production away from China, will now put those investment plans on hold. China is thus poised to keep its 85% share of the U.S. travel-goods market.
Vietnam, as a communist country, is not eligible for the GSP preferences. But in the Trans-Pacific Partnership trade deal, the U.S. agreed to give the Vietnamese—who now hold a 5% market share—the same duty-free treatment withheld from GSP-eligible countries. Pakistan’s Prime Minister Nawaz Sharif thought he had received assurances directly from President Obama last year that U.S. trade officials understood the “importance” of increasing enhanced market access for Pakistan’s GSP-covered exports. Diplomats I have spoken to chafe at the unfairness.
Viewed through the Philippine lens, the failure to connect economic cooperation with the security aspect of Obama’s pivot to Asia is glaring. Cambodia, apparently thanks to financial inducements from Beijing, has been the spoiler whenever the Philippines has sought solidarity from its partners in the Association of Southeast Asian Nations in standing up to China in the South China Sea.
Asked repeatedly for his side of the story, Mr. Froman asserted through a spokesman that “travel goods are a product particularly well-suited to be produced in least-developed countries.” He declined to explain further.
While the broader security relationship will survive, it is worth noting that in international economic diplomacy, like in personal relationships, unnecessary smaller slights erode trust. With the Chinese watching on the sidelines and eager to buy their way out of their South China Sea mess, this is not a wise time to rub the volatile new Philippine leader the wrong way.
Mr. Rushford edits an online journal that specializes in international economic diplomacy.
by Greg Rushford
If war is too important to be left to the generals, as Georges Clemenceau famously said, it is unwise to leave important international economic decisions to technicians who fail to connect them to broader U.S. national security priorities. This story concerns one such decision that was announced by U.S. Trade Representative Michael Froman on June 30. It immediately became the subject of heated controversy in Washington’s international trade circles.
It’s not difficult to see why.
Froman — characteristically — crafted his decision in excessive secrecy. An exhaustive research of the available public record turns up no economic evidence to support it. Pressed hard to defend it, Froman has been unable to point to any serious economic rationale. The intended beneficiaries, mainly in Sub-Saharan Africa, are not positioned to take advantage of it.
Meanwhile, important U.S. trading partners across Southeast Asia and the Indian Subcontinent that could benefit — from the Philippines, Thailand, and Indonesia to Pakistan, Sri Lanka and India —instead will be hurt. Diplomats from 14 of the affected countries just yesterday sent a strong letter to Froman bluntly expressing their “disappointment” concerning U.S. economic discrimination against them. The signatories included Brazil, Tunisia, Moldova, Thailand, Philippines, Indonesia, Pakistan, Sri Lanka, India, and Paraguay. Privately, diplomats I’ve spoken with express their frustrations with the inequities of U.S. trade policies in, well, much stronger language.
The unusually strong criticisms would surprise a casual reader of Froman’s June 30 press release. On the surface, at least, it appeared to be a shining example of American generosity aimed at helping the world’s least-developed countries. The Obama White House, declared Froman, wanted to make “a powerful contribution to lifting people out of poverty and supporting growth in some of the poorest countries in the world, while also reducing costs to American consumers and businesses.”
But will it? More than two weeks of weeks of intensive independent research — including repeated efforts to obtain Froman’s side of the story — suggests otherwise.
Let’s take it from the top:
The intended beneficiaries are African countries like Ethiopia, Rwanda, Ghana, Lesotho and Kenya, and also impoverished Cambodia and Haiti. They will be given preferential access to the $5 billion U.S. market for travel goods: think suitcases, handbags, wallets, and backpacks. No longer will their exports of 28 lines of handbags and such face U.S. tariffs that range from 4.5 percent to a stiff 20 percent. (Last year, Congress authorized adding travel goods to developing countries eligible to participate in the Generalized System of Preferences program, and for the 40 member countries of the African Growth and Opportunity Act.)
The entire American travel goods industry was blindsided. To understate the matter, the executives who actually make the investment decisions were not thrilled that federal officials with scant business experience would think that they knew more than the CEOs about where their future travel-goods investments should be directed. Outraged, the American Apparel & Footwear Association, the Outdoor Industry Association, the Sports & Fitness Industry Association, and the Travel Goods Association, have been demanding that Froman explain his decision, so far without success.
Comparing the June 30 Froman press release with the realities of the $5 billion U.S. travel-goods market sheds light on the emotions the U.S. trade negotiator has unleashed.
First, Froman’s determination does not appear to make anything close to a truly “powerful contribution to lifting people out of poverty,” and does not seem to be supported. Most of the intended beneficiaries, alas, have precious few travel goods to export, so the US preferences won’t help them much.
At least Cambodia, with 0.4 percent of the US market, does have a small-but-vibrant travel-goods industry, apparently mainly involving backpacks, that stands to benefit. So the Cambodians are poised to be winners. Still, Cambodia’s ambassador to the United States, Chum Bunrong, signed the July 18 letter from 14 countries expressing concerns about the discriminatory treatment. Cambodia had sought the GSP preferences, but had not lobbied to exclude other deserving countries.
Meanwhile, the Africans, the major intended beneficiaries, simply aren’t important players in the travel-goods industry. They aren’t positioned to become such anytime in the foreseeable future. All of Africa’s travel-goods exports to the United States amount to a roughly one hundredth of one percent market share.
There is (happily) some foreign investor interest in developing the African travel-goods industry, involving as much Chinese as U.S. and European multinationals. But (unhappily) not much. Stiff U.S. tariffs aren’t the main problems — clogged ports, bad roads, red tape, and too many other economic inefficiencies to list in one line are far more important obstacles to viable African trade expansion.
The Africans also have been slow to take advantage of the generous trade-facilitation financial assistance pursuant to the World Trade Organization’s so-called Bali Package aimed at smoothing the flow of goods across presently difficult borders. The WTO inked its trade-facilitation deal when ministers met on the famous Indonesian resort island in December 2013. To date, only eleven African WTO members have ratified it. One struggles to find a sense of economic urgency.
Moreover, making backpacks, for instance, with all their zippers and complex components, is far more difficult than making T-shirts. Yet even with 15 years of duty-free access to the U.S. clothing market under the African Growth and Opportunity Act, all of Africa’s apparel exports to the U.S. still only amount to about $1 billion annually. That’s less than one percent of the U.S. clothing market.
The Philippines, one of the smaller exporters of garments to the United States, exports about $1.1 billion worth of clothing to the U.S. annually. That’s roughly $100 million more than the yearly garment exports from all of the Africa countries combined. And Bangladesh’s US clothing exports are more than five times Africa’s total.
The Africans get duty-free treatment for their garment exports pursuant to the African Growth and Opportunity Act. But the Philippines, Cambodia, Bangladesh, and the rest of the world’s rag trade face stiff U.S. clothing tariffs. Those tariffs mainly hover in the 12- 16 percent range, but can shoot sharply higher. The unavoidable economic bottom line: African countries that struggle just to make shirts and trousers, even with the existing AGOA duty-free preferences, are not poised to attract major investments in travel goods.
Consider further the June 30 Froman press release’s boast of “reducing costs” for American consumers and businesses by slashing tariffs on travel goods for Africa. Driving up costs by upending multi-million dollar investment plans of major players in the industry — like Coach, Michael Kors, Under Armour, Columbia Sportswear, and Kate Spade — is more like it.
That’s because such stalwarts of the American travel-goods industry have been planning to enhance their investments in the countries which are poised to take advantage of them, mainly the Philippines, Thailand, Indonesia, Sri Lanka, Pakistan and India. The U.S. industry leaders have been aiming to shift production to such developing countries away from China, which holds an estimated 85 percent of the U.S. market. But now, that production will mostly remain in China — ironically making the Chinese the biggest winners of the U.S. trade representative’s decision.
Vietnam holds another 5 percent of the American travel-goods market. As a communist country, the Vietnamese are not eligible to participate in the American GSP preference program. But Froman has agreed in the Trans-Pacific Partnership trade deal to give Vietnam the same duty-free treatment for the same 28 tariff lines of travel goods. Put another way, U.S. trade policy has been shaped to carve out at least 90 percent of the American travel-goods market to two communist countries: China and Vietnam.
Meanwhile, the losers in Southeast Asia and the Indian Subcontinent will just twist in the proverbial wind. Froman’s June 30 announcement did not flat-out deny such developing countries the GSP duty-free preferences. Rather, the U.S. trade chief has said he is merely “deferring” their petitions into an indefinite future before deciding whether they deserve them. The government-induced market uncertainty, of course, is a nightmare scenario for any investor whose plans are thrown into limbo.
Do the math: Froman and President Obama will leave their offices in six months. It takes perhaps 18 months after an investment decision is made to get a travel-goods factory up-and-running. So assuming that such an investment plan were to be made this week, we’re looking at early 2018 before, say, a travel-goods operation would be established in, say, Rwanda. Then it would take another several years before export data would be generated. U.S. trade officials might be able, sometime after the 2020 presidential election, to start a lengthy review process. Imagine how the CEO of a major U.S. multinational would feel about that.
And imagine how poor women in places like the Philippines — a country of 100 million people, some 25 million of whom are suffering in poverty — might feel about the June 30 U.S. trade action that put equally deserving African workers’ interests ahead of theirs, should someone ask their opinions. (To their credit, the Africans did not ask that workers in other poor countries be excluded from the US travel-goods decision.)
Ironically, on June 30, as Froman was releasing his press release in Washington, the Philippines was swearing in a new president. Rodrigo Duterte has not been shy about the fact that over the years he has developed a certain attitude toward perceived American high-handedness.
President Duterte comes from the southern Philippine island of Mindanao. He and some of his key economic and security advisors have seen this sort of discriminatory behavior from Washington before. For years, Washington officials have refused to consider slashing high U.S. tariffs that would boost the economic prospects of (mostly Muslim) workers in Mindanao’s canned tuna industry. This is another example of how U.S. economic policies can be disconnected from important diplomatic priorities to win trust in the Islamic world.
And more recently, U.S. trade chief Froman has even turned a deaf ear on Philippine requests that garment workers in typhoon-ravaged areas be given duty-free treatment for their clothing exports to the United States. While this might be a largely symbolic gesture in the grand scheme of things, America would be highly praised for showing such generosity. Instead, on the very day he was sworn into office, President Duterte was greeted by still another example of American ungenerous economic thinking.
The Philippine travel-goods industry had been looking to create an additional $100 million in annual exports to the United States — that’s $500 million in five years, involving some 75,000 new jobs. Now U.S. Trade Representative Froman has put those aspirations on indefinite hold.
The Philippines is also one of America’s closest treaty allies, and sits astride sea lanes in the South China Sea that are of vital importance to global commerce. But the Chinese have an agenda that would put Beijing in charge of Philippine waters.
On July 12, Beijing’s claims to economic domination in the South China Sea were branded illegal by a well-crafted international tribunal’s ruling in The Hague. But while seriously embarrassed, the Chinese have other cards to play. They are infamous for their special brand of economic diplomacy (suitcases full of money).
China’s top leaders have made it no secret that they will try to offer financial inducements to the new Duterte administration. Meanwhile, the US travel-goods announcement has given Filipinos another reason to doubt America’s trustworthiness as an economic partner. Sometimes in international economic diplomacy, as in personal life, it’s the smaller slights that do the most to fray relationships.
Pakistan, although hardly a trusted ally like the Philippines, is nevertheless another country that is important in the U.S. national security equation. Now the Pakistanis must wonder how truthful President Obama was to their prime minister, Nawaz Sharif, when Sharif visited the White House last year.
On October 22, 2015, Sharif and Obama issued a joint statement that took note of the “importance” of increased “market access’ for Pakistan in the GSP preferences program. “President Obama indicated that the United States will help Pakistan create conditions for accelerated trade and investment-driven growth,” the statement noted. Now, Froman’s June 30 decision to defer Pakistani hopes for duty-free treatment regarding travel goods raises more questions about American sincerity.
Not everyone is unhappy with the U.S. trade representative. Stephen Lande, the president of a respected Washington consulting firm, Manchester Trade, has had many years of experience with Africa. “I am happy” that Froman decided to give African countries preferences on travel goods, Lande says. “Because that’s what AGOA is all about.”
Lande says that he hopes that Froman’s decision will encourage CEOs in the travel-goods industry to put more money into Africa. Countries in Southeast Asia like the Philippines could acquire the same GSP benefits by joining an expanded TPP trade pact, Lande adds.
Froman, meanwhile, is hunkered down. He refused to allow the U.S. trade officials who worked on the case to explain an economic rationale for his June 30 announcement. He wouldn’t even say which office handled the paperwork (apparently the economic-policy shop run by Assistant U.S. Trade Representative Edward Gresser). The organization chart at the Office of the U.S. Trade Representative — who reports to whom, and on what — is considered classified information.
When I pressed, Froman finally asserted through a spokesman, Trevor Kincaid, that “travel goods are a product particularly well-suited to be produced in least-developed countries.”
Will that be the last word? Stay tuned.
Let’s cast a gimlet eye on President Barack Obama’s “pivot” toward Asia.
Viewed from important Asian capital cities — Tokyo and Bangkok, Manila and Hanoi, Dacca and Phnom Penh, also Jakarta —the pivot is looking more like a half-pivot. The first half involves U.S. security ties to Asia. The Pacific Command — with its U.S. Seventh Fleet, the Fifth Air Force, and its Special Operations Forces — has been keeping the Pacific, well, pacific, for more than a half-century. In that sense, there is nothing especially new to the Obama pivot, except perhaps the spin. But give the White House credit for supporting officials in the State Department and the Pentagon, as they have been tending to America’s traditional diplomatic and security relationships.
But the same White House has failed to connect U.S. trade policies to the political-military part of the pivot. A search for a coherent U.S. trade policy for the region turns up a series of unconnected ad hoc policies. To the extent there is a common thread, it involves Washington’s familiar double standard. The White House demands that U.S. trading partners summon the political will to open their markets to American exports. But when the foreigners ask for enhanced access to U.S. markets, a tone-deaf Washington barely listens. While this is certainly not a game that Obama invented, it’s fair to say that on his watch, U.S. trading partners are no longer much interested in dancing to the superpower’s tune.
That’s sure not the way the White House wants its Asian policies to be perceived. In a speech to the Asia Society delivered in New York on March 11, Obama’s national security adviser, Tom Donilon, asserted that the pivot — which he preferred to call a “rebalancing” — has been fostering enhanced U.S. security and economic ties with Asia. The next day in Washington, Obama reiterated his administration’s claims that the Trans-Pacific Partnership trade negotiations — the centerpiece of his trade policies in Asia — involves defining new “high standards” that will modernize international trade and “generate billions of dollars in trade and millions of jobs” in the 21st Century.
But as our mini-tour of key Asian capitals helps illuminate, the U.S. rhetoric appears at variance with economic facts on the ground. Already, the consequences of shortsighted U.S. trade policies that provide incentives for Asian trading partners to leave Uncle Sam on the sidelines are showing up.
Thailand, for instance, is a longtime U.S. security ally. But the White House has not worked seriously to welcome the Thais into the Trans-Pacific Partnership preferential trade negotiations. As presently constituted, a successful TPP would divert trade flows away from important Asian countries like Thailand.
When Obama met with Prime Minister Yingluck Shinawatra in Bangkok on Nov. 18, 2012, Yingluck’s declared interest in joining the TPP talks wasn’t even on the agenda, the Thai leader told reporters in Bangkok. In a Nov. 19 joint press release with Yingluck, Obama said that “we’ll work together as Thailand begins to lay the groundwork for joining high-standard trade agreements, such as the Trans-Pacific Partnership.” Translation from the diplomatic politesse: it ain’t gonna happen anytime soon.
Meanwhile, Thailand’s business community is divided on the wisdom of strengthening trade ties with America anyway. The Thais already have cut their own preferential trade accords with China and New Zealand, and are also working to liberalize regional trade within Asean.
In the absence of meaningful TPP talks with the Americans, Yingluck has now decided instead to negotiate another Thai trade deal with the more reliable European Union. So have the Japanese.
Japanese Prime Minister Shinzo Abe is pressing a reluctant Obama White House to stop blocking his country’s entry into the TPP negotiations. Meanwhile, Abe is also talking to the Chinese and South Koreans about creating a three-way Seoul-Beijing-Tokyo trade axis.
Next stop: Tokyo.
The “chicken tariff” does Tokyo
On the security front, the good news is that U.S.-Japanese ties remain solid. And the importance of the U.S.-Japanese security alliance should never be underestimated. There is no more important military alliance for either country. The U.S.-Japan alliance has been marked with new energy on the Obama watch, thanks to mutual concerns over contentious Chinese-Japanese maritime disputes over islets in the East China Sea that, while uninhabited, are rich in fish and potentially so for oil and gas. Give the Obama White House credit for understanding the importance.
But for more than two years, Obama and his top international economic policy aide, Mike Froman — the man who has been doing the most to set U.S. trade policies — have been cool to Japanese participation in the TPP. One would think the White House would have been eager to welcome Japanese participation. After all, without Japan — the world’s third largest economy — the TPP is small ball. While readers will have seen various breathless press accounts that tout the TPP as a “blockbuster” of a trade deal, it is far from that.
The US already has preferential trade deals with Singapore, Australia, Chile, Canada, and Mexico. Nor is the White House eager to liberalize those accords in the TPP negotiations (such as opening the door to increased imports of Australian sugar, a subject which the Americans have so far refused even to discuss). The remaining TPP negotiating partners are four smaller, if admirable, economies: Brunei, Malaysia, Vietnam, and New Zealand. Is that what a “blockbuster” of a trade deal looks like? China, Australia, New Zealand, Japan — they all have, or are discussing, preferential trade arrangements with the entire Association of Southeast Nations.
Consider one of the most important reasons for the White House reluctance to welcome America’s most important Pacific ally into the TPP. This has nothing to do with so-called cutting edge, gold standard, state-of-the-art 21st Century trade rules. It’s all about old-fashioned tariffs. And one protectionist tariff in particular illustrates the White House focus.
Enter the Detroit auto lobby. Ford, General Motors and Chrysler fear they would lose domestic market share to the Japanese in a TPP deal that would get rid of the U.S. 25 percent tariff on imported trucks. Defending that tariff — mainly with Japan, but also regarding Thailand, where foreign auto transplants have set up shop —has become a top White House priority.
The problem is that there has never been any economic justification whatsoever for the 25 percent U.S. tariff on trucks. That tariff dates to late 1963 and a decision made during an unrelated trade spat of that era by President Lyndon Johnson (when Barack Obama was barely two years old).
Angry that the Europeans weren’t buying enough American chickens, Johnson retaliated by imposing the 25 percent tariff rate on trucks — a tenfold increase from the normal 2.5 percent U.S. tariffs on cars. The so-called “chicken tariff” was aimed at punishing Germany’s then-popular exports of the hippie-era vans. To repeat: to this day, nobody in the United States government has ever pretended that the chicken tariff had any economic merits.
Moreover, the protectionist truck tax has “worked” over the decades much as the U.S. trade embargo against Cuba has succeeded in ousting the Castro brothers. Toyota and other Japanese automakers — who weren’t competitive threats during Lyndon Johnson’s time — simply have gotten around the tariff by producing their trucks in U.S. states like Texas, where tariffs can’t be applied. Detroit and the United Autoworkers remain furious that the Japanese have created a non-unionized (and well-paid) segment of the “American” auto industry. Obama now has become the eighth American president after Johnson to defend the economically indefensible tariff.
But wait, it gets worse. For another example of how shortsighted auto policies risk Uncle Sam’s increasing marginalization, let’s head to Jakarta.
Indonesia: driving on without the Americans
Indonesia, where Obama lived for several years as a youngster, was supposed to be the beneficiary of enhanced Washington-Jakarta trade ties. Nobody’s talking like that now. Obama has shown no interest in including Southeast Asia’s biggest economy in the TPP. Nor have the Indonesians — who have recently fallen into the trap of economic nationalism — indicated they much care what the Americans think.
Channel NewsAsia, a Singapore-based television news organization that is widely watched throughout the region (and beyond, thanks to channelnewsasia.com); reported on March 17 that Indonesia hits imported autos with a 40 percent tariff. Yet Toyota, Nissan, Mitsubishi, and Daihatsu “supply around 95 percent of Indonesia’s car market,” the report noted. No wonder. Japanese auto imports, thanks to a preferential trade deal Japan has with Indonesia, are duty free.
The rightly concerned European Union is talking with the Indonesians about a preferential trade deal with the Indonesians “to allow European firms to compete on a level playing field” there, the report added.
ASEAN is also busy negotiating new trade rules that will facilitate the auto trade across Southeast Asia.
Meanwhile, the Obama White House, having put all of its negotiating chips in the TPP basket, is left on the outside. China, which has already cut its own preferential trade deal with ASEAN — as well as Australia and New Zealand — is well-positioned to further deepen trade ties with Indonesia also.
Next stop: Manila — to see more missed American trade-policy opportunities to be generous to an old friend.
The next Asian tiger
Perched along key Pacific trading routes, the Philippines — population approaching 100 million, the world’s third largest English-speaking populace — is rich in what economists call “human capital.” So relations with Manila would be important to any American president, even if the former U.S. colony weren’t one of America’s oldest treaty allies.
To its credit, the Obama White House has encouraged the Pentagon and the State Department to strengthen existing political-military relations with the government of President Benigno Aquino III, who was elected in 2010. Dubious Chinese claims to parts of the South China Sea that are clearly within Philippine waters have also underscored the continued importance of close U.S.-Philippine security ties. (Policy paralysis is not only an American disease, to be sure. One wonders if China’s new leadership appreciates the fact that Beijing’s clumsy maritime provocations would remind any Philippine government of the importance in sticking close with their historic friends the Americans.)
Once Asia’s second-largest economy, after only Japan, for most of the last half century the Philippines — mired in cancerous corruption and inward-looking economically — has conspicuously lagged behind its neighbors. But now, Aquino has gotten his country on the move, sparked by a crackdown on corruption that former U.S. diplomat John Forbes admiringly calls “truly unprecedented in scope.”
(Forbes is the principal author of Arangkada, a publication of the Joint Foreign Chambers of the Philippines (www.arangkada.com). Arangkada, which means “move twice as fast” in Tagalog, is full of solid economic prescriptions for what the former “sick man” of Asia can do to become economically healthy again.)
Indeed, under Aquino’s leadership, the Philippines has come out of intensive care.
Philippine GDP growth last year was 6.6 percent and is projected to top 7 percent this year — the highest in Southeast Asia. Construction cranes dot Manila’s skyline. The area just north of Manila that once housed major U.S. military bases at Clark Field and Subic Bay is booming. Clark International Airport — where more birds used to land than airplanes just a few years ago— has taken off, with passenger arrivals skyrocketing from 50,000 in 2004 to 1.3 million last year. Korea’s Asiana, Malaysia’s Air Asia, Hong Kong’s Dragonair, are flying passengers to the Philippines from all over Asia. Emirates will launch daily flights from Clark to Dubai later this year. For anyone looking at the beneficial advantages that happen when foreign investments that foster Philippine economic growth are welcomed, this is it.
Indeed, the former American bases have become models of the benefits of attracting foreign investment. Yokohama Tires and Texas Instruments have billion-plus dollar investments at Clark; Samsung also has an important semiconductor operation there. Korea’s Hanshin has the world’s fourth-largest shipyard at Subic Bay. In their Cold-War heyday, the former U.S. bases employed perhaps 40,000 Filipinos. Now, under Philippine management, the number of jobs in Clark-Subic corridor has shot up more than fourfold — more than 160,000. I don’t think there has been a better time for the Philippines than today,” says Dennis Wright, a dynamic former U.S. Navy captain who is now developing a $3 billion industrial park at the former Clark Field for a group of Kuwaiti investors.
Aquino, as mandated by the Philippine constitution, has one six-year term that will expire in 2016. Now is the time, the reformers stress, for urgency in locking in as many reforms as possible. After 2016, Aquino’s successor could well be another politician mainly interested in lining his (or her) own pockets.
Here’s where the half-pivot part comes in. While the White House has supported enhanced U.S.-Philippine security ties, Washington has not put serious energy into deepening trade ties.
The Obama administration has not welcomed the Philippines into the TPP negotiations. The European Union is interested in negotiating a preferential trade agreement with the Philippines; the White House is not. Washington has no present plans to engage Manila seriously to promote trade liberalization anytime before 2016, when neither Obama nor Aquino will be in office.
The Filipinos have noticed. Last September, speaking to an influential audience in Washington that was convened by the U.S.-Philippines Society and the respected Center for Strategic and International Studies, Finance Secretary Cesar Purisima lamented that his country was not wanted in the TPP. That trade deal as presently constituted, including some Asian countries and ignoring others, the secretary explained, would distort regional trade flows and thus “hinder” the laudable goal of promoting genuine trade expansion.
Meanwhile, where the Philippines is concerned, the USTR is in full “enforcement” mode.
On March 28, the USTR’s trade police will preside over a hearing into complaints of labor-rights abuses from 2001– 2007 that were perpetrated on former President Gloria Arroyo’s watch — murders of union organizers, and such. The implied threat is that if President Obama personally determines that Aquino has not been diligent enough by way of cleaning up the mess he inherited, Obama could yank the Philippines’ duty-free privileges pursuant to the Generalized System of Preferences program.
That would, of course, be ridiculous. After all, Aquino has put Arroyo — who never lost her GSP privileges when she ran the Philippines — under house arrest while she faces graft charges. Aquino’s labor secretary, Rosalinda Baldoz, is widely respected for her integrity and dedication in addressing the Arroyo-era abuses. Nobody, either at the USTR, or with the International Labor Rights Forum, which filed the original complaint, wants or expects Obama to humiliate Aquino. The Philippines has been “making progress” on labor-rights,” notes Jeff Johnson, who heads the International Labor Organization’s Manila office.
Why would the USTR be holding such a hearing that by its nature is demeaning to an important American ally? While it’s tempting to blame the bureaucrats, the trade cops are essentially playing out their intended roles of “enforcement” oversight that Congress mandated in the GSP legislation. Countries like the Philippines that sign up for the GSP program must agree to submit themselves to such oversight from Washington, notwithstanding the indignities. That’s one of the main reasons why the U.S. Congress likes the GSP program — there is always an implicit understanding that economic privileges granted, can also be taken away. And no American president has ever complained that the generous GSP program is also a diplomatic lever that can always be pulled, if necessary to keep allies in line.
The GSP program isn’t particularly generous to the Philippines anyway. To cite just one example: Philippine canned tuna exports are not eligible for the duty-free treatment, as they are politically “sensitive.” The sensitivity involves American Samoa, which is an American territory.
Official U.S. policy has long discriminated against Asian tuna exporters like the Philippines, Thailand, and Indonesia. The Asian tuna exporting countries face protective U.S. tariffs of up to 12 percent. But American Samoa, because it is officially U.S. territory, can export its canned tuna to the U.S. mainland duty free. Without the protective tariffs, the Samoans could not compete. (For further details, see: Charlie the Tuna’s Troubles in Pago Pago, July 12, 2010, posted on www.rushfordreport.com).
Obama inherited the economically indefensible U.S. tuna tariffs from his predecessor, George W. Bush, who inherited them from his predecessors. Bush rebuffed Gloria Arroyo when she sought their removal. It’s safe to say that Obama will also kick the tuna-tariff can down the road.
Onto Dacca, Phnom Penh, and Hanoi
Speaking of unjust American tariff barriers that U.S. presidents have passed along to their successors, who defend them more or less automatically, let’s head to the final three Asian stops, beginning with Dacca.
Bangladesh will also be in the dock at tomorrow’s USTR enforcement hearing. Unlike the Philippines, Obama really is considering yanking Dacca’s GSP preferences. And no wonder, considering Bangladesh’s dismal record over the years of cracking down on human rights abuses in its garment industry. The latest tragedy happened just last November, when at least 112 clothing workers were killed in a factory fire that should never have been allowed to happen.
But hold on. Garments and footwear are not eligible for duty-free treatment in the GSP program, anyway. (That decision that dates to President Richard Nixon and his national security adviser, Henry Kissinger, who framed the original political blueprint for GSP in the 1970s. Nixon and Kissinger faced a U.S. textile lobby that had considerable political clout in those days. Now Obama has the old protectionism still running on autopilot — even though very few items of clothing and footwear are still made in the U.S. and the diminished U.S. textile lobby no longer has the votes to defeat important trade legislation.
As viewed by developing countries that have women who want to sew their way out of poverty, the high U.S. tariffs — hovering generally around 12 percent, but which can be more than twice that for some items — are cruel.
Bangladesh’s exports to the U.S. totaled $4.9 billion last year. Of that, $4.4 billion was clothing, and thus not eligible for GSP. Put another way, 91 percent of what Bangladesh sells to the United States is excluded from the GSP’s duty-free privileges, notes Washington trade analyst Edward Gresser. “This not particularly generous,” he observes.
Gresser further points out that while U.S. tariffs hit poorer countries’ exports of clothing and footwear hard, the higher-end products that wealthy European countries sell to the United States — airplanes, electronics, automobiles and such (except for trucks) — face low tariffs. Last year, for example, Cambodia and Bangladesh exported $7.6 billion in goods to the United States, mostly clothing. These exports faced U.S. tariffs of 16.9 percent and 15 percent, respectively. U.S. Customs collected combined Cambodian and Bangladeshi tariffs amounting to $1.1 billion. German exports to the U.S. totaled $96 billion, and were taxed at only 1.4 percent — amounting to just $1.4 billion. This is “unfair” to two of the world’s most impoverished countries, Gresser reasons. No comment from the White House.
Does it make sense for Obama to take away Bangladesh’s GSP benefits when more than 90 percent of that country’s exports to the U.S. aren’t in the GSP program? Ask the Cambodians about such things.
When Bill Clinton was president, Cambodia agreed with the demands brought by U.S. organized labor to open its sweatshops to international labor inspections. It worked. Today, the International Labor Organization, through its Better Factories Cambodia program (www.betterfactories.org) conducts vigorous and effective oversight of that country’s garment industry.
Yet even though the Cambodians have done everything they could to meet the demands of the AFL-CIO, neither Obama nor his predecessors since Clinton, has been willing to give Cambodian clothing and footwear exports duty-free treatment. The Obama White House — now in its fifth year — has consistently refused to take questions on the subject.
Yes, Dacca ought to agree to open its sweatshops to ILO inspections. But from Dacca’s point of view, why should they, since the Americans wouldn’t give them any economic carrots for doing such anyway?
There’s a lot more of the same, as we end the tour in Hanoi.
As with the Philippines, the Obama administration is working with Vietnamese authorities — who also have good reason to fear Chinese aggressive moves in the South China Sea — to strengthen security ties. While Washington has welcomed Vietnam’s participation in the TPP trade talks, those negotiations have stalled. It’s a familiar story to regular readers of this journal (see: Imperial Preferences, www.rushfordreport.com). In short, the White House has held up the TPP negotiations by stonewalling Vietnamese requests to be granted more market access to the high-tariff U.S. clothing- and footwear markets. (The most recent protectionist move that Washington has inflicted upon Vietnam: hiking anti-dumping tariffs on imports of Vietnamese catfish (called Basa, or Tra, in Vietnamese) a whopping 79 percent, per kilo. Top leaders in Hanoi are very angry, because they have reason to believe that the U.S. Commerce bureaucrats deliberately crunched the numbers to punish Vietnam’s seafood industry — hardly for the first time.)
If there is a hint of more positive news to report, it’s that the more enlightened segments from the U.S. business community are becoming more outspoken about the need for a more effective U.S. trade policy.
Let’s end our tour back in Washington, D.C. by noting some basic insights offered by Rick Helfenbein and Harold McGraw III.
Helfenbein is the vice chairman of the American Apparel and Footwear Association. “For those of us engaged in the pursuit of trade, and for those of us who believe that a robust trade policy is essential to the enhancement of the U.S. economy, the last four years have been disappointing,” he recently wrote in an internal AAFA publication. “Both the Obama Administration and the U.S. Congress have demonstrated that talk about trade policy is simply a form of floating non-productive rhetoric, despite the positive economic growth that comes from achieving a robust trade policy. It makes one wonder as to how such a worthy group of elected officials can work so hard at talking a good game, yet fail to perform.”
McGraw, also one of of Washington’s most influential figures on the trade scene, chairs the Emergency Committee for American Trade. President Obama “should lead by example,” McGraw wrote in a March 7 op-ed column for Politico. “Unfairly restricting access to our market sends the clear message to other governments that they can do the same. Regressive U.S. tariffs on clothing and footwear, trade restrictions on sugar and dairy products and other barriers end up imposing significant costs on U.S. businesses and consumers and must be addressed,” the ECAT leader added.
“We can’t ask others to let us fully access their markets when we don’t let them fully access ours.”
Meanwhile, perhaps Obama might reflect upon the irony that because he has not connected the economic side of his Asian pivot to the political-military side, U.S. economic ties throughout the region could diminish on his watch.