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.

 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.

 

 

 

 

 

 

 

 

Fed Up

(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.

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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”]