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.
The Wall Street Journal
The WTO Struggles in Nairobi
There is serious doubt the organization will ever be able to negotiate meaningful trade liberalization again.
By GREG RUSHFORD
Dec. 21, 2015 12:58 p.m. ET
The World Trade Organization’s ministerial conference in Nairobi last week brought one bit of good news. After five days of wrangling, the 164 member countries announced on Saturday that they had agreed to phase out export subsidies for agricultural products. That’s a small but worthy accomplishment that had eluded the global trading system for five decades.
Otherwise there wasn’t much reason in Nairobi to cheer. The deep divide between rich and poor countries on trade persists. There is serious doubt that the WTO will ever again be able to negotiate meaningful multilateral trade liberalization.
While the Americans, Europeans and Japanese succeeded in killing off the economically outdated Doha negotiations that date to 2001, they offered no new road map. Nor did the Indians, Chinese and some Africans who still pretend that the Doha patient still has a pulse. Accordingly, the Geneva-based WTO remains an institution with an uncertain future.
In the past 20 years, the WTO has completed one multilateral trade negotiation. At the 2013 Bali meeting, members agreed to give the world’s poor nations something called trade-facilitation assistance. That aimed at smoothing the flows of goods across presently clogged borders: modernizing inefficient customs procedures by introducing electronic payments and tracing, and so forth. As Hong Kong’s chief representative to the WTO, Irene Young, reminded everyone in Nairobi this week, that deal “is expected to reduce average trade costs by more than 14%, an impact possibly greater than the elimination of all remaining global tariffs.”
But the Bali deal hasn’t yet been implemented, as only 63 of the 108 necessary WTO members have ratified it. As WTO Director General Roberto Azevêdo told reporters in Nairobi, one successful multilateral negotiation in 20 years “is not good enough.” At the WTO’s closing ceremonies Saturday at the Kenyatta International Convention Center, Mr. Azevêdo referred to the continuing impasse between the rich and poor countries, noting “the world must decide what path this organization should take.”
The fundamental problem is weak political leadership that is mired in parochial protectionist politics, especially in capitals such as Beijing, New Delhi, Pretoria and Washington. In 1948, when the WTO’s predecessor organization, the General Agreement on Tariffs and Trade, was launched, there was a shared consensus that the gradual dismantling of trade barriers was the goal.
From 1948 to 1995, when the GATT morphed into the WTO, seven rounds of multilateral trade liberalization slashed tariffs to an average of 5% from 40%. But nowdays, the GATT/WTO could more aptly be dubbed the General Disagreement on Tariffs and Trade. Few still believe in the WTO’s core multilateral negotiation function.
Some poor countries such as India never really believed. In Nairobi, India’s main goal was the opposite: demanding that the rich countries slash their trade barriers, while raising its own. India already has authority to raise its average agriculture tariffs to more than 100%, yet still demands an additional “special safeguard mechanism” rights.
Last week, India was unable to play its customary role as a wrecker, as spoiling the only WTO ministerial meetings ever held on African soil would have been unthinkable. Besides, India lost the support of traditional allies like Brazil, who demanded more access to protected Indian markets.
The Chinese also were focused almost exclusively on restricting agriculture imports and on continuing the Doha negotiations as planned in 2001. That’s because back then, China was promised preferential treatment as a poor country.
Other examples of economic short-sightedness are depressingly petty. Pakistan came to Nairobi angry that a South African cement cartel has persuaded Pretoria to slap more than 60% tariffs on Pakistani cement imports. Meanwhile, the Pakistanis were against a proposal to give Bangladesh duty-free treatment for Dacca’s clothing exports. African countries like Lesotho, which have been granted preferential tariff-free treatments on their clothing exports to the U.S., also piled on Bangladesh.
So did the Americans, who remain in thrall to their own protectionist textile lobby. Meanwhile, South Africans came to Nairobi with assurances they would stop blocking American poultry imports—hoping that would persuade U.S. President Barack Obama from denying them preferential access to American markets.
Even sadder, when the Philippines offered an excellent idea to streamline export opportunities for small entrepreneurs, the usual nay-sayers—including Bolivia, Cuba, India, and South Africa—shot it down. Don’t give the capitalists anything until our demands for additional protection are met, they insisted.
U.S. Trade Representative Froman made a fine speech to his colleagues in Nairobi. It’s time for WTO members to stop playing cynical games, he said. He meant the other guys.
Mr. Rushford is editor of the Rushford Report, an online journal on the politics of trade.
(The conclusion of a two-part series)
Note to readers: Yesterday, in an article headlined “Fed Up,” I reported that many members of the World Trade Organization have reached the end of their patience with a handful of members — India, and a few African and Latin Americans who love to nurture their grudges against the “rich” countries. Frustrations that such countries have poisoned the WTO’s negotiation atmosphere have been gradually building since the WTO was launched in 1995. The tipping point came in July, when India’s new prime minister, Narendra Modi, vetoed the only successful multilateral trade negotiation the WTO has ever conducted.
As the future viability of this vital international trade rule-making institution is now on the line, it’s important to take a closer look at how the present fight started, and why. Today’s report offers more details on: where Modi is coming from, exactly what he wants, and who his sympathizers are. While India claims to speak for the world’s poor, that certainly is not the view of an increasing number of developing countries around the world. India’s trade distorting agriculture subsidies have caused food riots in parts of Asia, Africa, and Latin America. These days, complaints of the harm that India is inflicting upon other poor countries are surfacing again, particularly in Rwanda and other African countries. Concluding, the report highlights how leading WTO member countries plan to move on, with or without the cooperation of India and the other laggard countries.
So where is Modi coming from?
Modi, proudly, is a hardline Hindu right-winger, an economic nationalist who boasts of a 56-inch chest. He is a tough guy, a man who loves a brawl. His top political aide is dodging a prosecution for various murders. Modi himself has denied (unconvincingly) his role in the killings of some 2,000 Muslims in organized riots in his home state of Gujarat, back in 2002.
And in the past week, Modi has rather exuberantly been raining mortars and machine-gun fire across a populated India-Pakistan border area of Kashmir. The fighting, which has broken a tenuous truce reached in 2003, has so far killed nearly 20 civilians and displaced nearly 20,000 civilians, according to news reports. “The prime minister’s office has instructed us to ensure that Pakistan suffers deep and heavy losses,” a senior Indian Home Ministry official has told Reuters reporters Rupam Jain Nair and Mehreen Zara-Malik. Modi himself has boasted that “it is the enemy that is screaming.” Kashmir, with the possible exception of the Korean DMZ, is perhaps the world’s most dangerous border. A border where Hot Heads on both sides brandish their nuclear weapons.
Some of the other opinions that Modi brandishes are less scary, but well, unusual. Speaking to the United Nations General Assembly in New York on Sept. 27, Modi called for an “International Yoga Day.” He asserted that “yoga,” “spiritualism” and clean living could contribute to a better global environment. “By changing our lifestyle and creating consciousness, it can help us deal with climate change,” he explained to the diplomatic dignitaries. Meanwhile, back in New Delhi, the clean-living prime minister has authorized “hundreds of projects” to clear pristine forests, making way for mega power plants and other industrial projects that previous Indian governments had rejected on environmental grounds, Tommy Wilkes has reported for Reuters.
Modi held the WTO’s trade-facilitation package hostage to India’s demands to be allowed — permanently — to violate existing WTO restrictions on the subsidies it is allowed to dole out to uncompetitive Indian subsistence farmers. Adding to the indignity: previous Indian governments had agreed to those WTO rules in the 1980s. And the Indian government that Modi replaced in May had duly signed onto the Bali Package last December. As U.S. Trade Representative Michael Froman said last week, India has now “reneged” on its signed obligations.
Moreover, Modi’s demands have left WTO diplomats scratching their heads, wondering what he might have been smoking.
Since obtaining independence from Great Britain in 1947, India’s leaders have never figured out how to feed their people. In the name of “food security,” Indian governments have been buying food from the country’s farmers, paying above-market prices. The grains are then stockpiled. Perhaps half of the mountains of grain rot away, or are eaten by rats. Much of the rest is siphoned off by corrupt (politically connected) operators for sale on the black market.
What doesn’t rot or is not stolen is then doled out to feed India’s infamously malnourished urban population — especially when elections loom, which in India is often.
Perhaps because politics trumps economics, Indian politicians — no matter which party is in power — have been increasing the subsidies, making bigger stockpiles. And they have been demanding permission from the WTO to keep jacking up the subsidies as much as they want, even higher than the allowable limits that Indian governments have pledged to honor.
In Bali last December, the Indian negotiators won a generous four-year “peace clause.” That gave New Delhi four years to go ahead and violate existing WTO limitations by increasing agriculture subsidies, without fear of being held legally accountable. As the purpose of the WTO’s trade negotiations is to reduce trade barriers, not allow additional protectionism, this was arguably overly generous.
Yet the four-year grace period still wasn’t enough for Modi, when he came into office in May. He demanded that India be given the “permanent” right to break the existing rules — and right away, by the end of this year, thank you. Many diplomats, in many ways, have told the new Indian leader that this would never happen. Undeterred, Modi, somewhat joyously, brought down the Bali Package, thus shaking the foundations of trust that the WTO must have to remain viable.
At least, the ploy has generally played well at home. Indian officials have launched a whispering campaign, some of which has made its way into various Indian news accounts, falsely accusing the WTO’s top leadership of favoring the rich countries.
Claiming the Moral High Ground
Modi, like all of his predecessors dating to Jawaharlal Nehru (who ran India from 1947 to 1964, useful information for readers who are crossword puzzle addicts), has claimed that he holds the high moral ground. We are simply demanding the rights to feed our own poor, and we are the champion the world’s poor, so goes the refrain.
India is the world’s largest exporter of (subsidized) rice. The subsidies distort food markets in other countries by driving down prices. That’s bad enough in normal years for farmers in African and other nations who have to compete with the cheap Indian rice. Of course, the Europeans and Americans aren’t exactly innocents in such matters. But at least they have long ago moved away from stockpiling surpluses that cause real damage in world markets, preferring to pay their farmers cash subsidies that are considered less trade-distorting.
But India seems stuck on stockpiling and other protectionist schemes that cause real harm to trading partners. Remember the 2008 food riots in Haiti, Cameroon, Senegal and other countries? Global rice prices had skyrocketed after India put a damper on supplies by slapping on export controls during the previous year’s election season. Not only has no Indian politician ever apologized for the damage those export controls inflicted — after coming to power this May, Modi quickly imposed new price controls on onions and potatoes.
More recently, Rwanda’s trade minister, Francois Kanimba, explained to Shawn Donnan, the world trade editor of the Financial Times, how India’s present agriculture subsidies are hurting his country’s farmers. Rice and sugar from India had been reaching Rwanda “at such low prices [that] you are left wondering if these are really global market prices, simply explained by the competitiveness of the Indian economy,” Kanimba said. Donnan noted that the same concerns are being expressed in Nigeria, Benin, and other African food importers. This is “why the solution India is seeking at the WTO, which celebrates its 20th birthday in January, is unlikely to be palatable to many of its members,” Donnan concluded.
India’s claims to speak for the world’s poor used to be accepted automatically in the Third World. Signs that that’s been changing surfaced at the WTO’s Bali meetings last December. At a press conference, India’s then top trade official, Anand Sharma, asserted that India was only seeking “food security” for poor people everywhere. Sharma was humiliated by a furious journalist from Benin, one of the world’s poorest countries. “You don’t speak for us,” the Benin journalist angrily shouted. Those of us who were in the room will never forget the emotions on display at that press conference. (For further details, see “India’s Bali Debacle,” which I authored for the Wall Street Journal Asia. The piece, along with two other investigative reports into India’s WTO stance in recent years, is posted on the Wall Street Journal section of www.rushfordreport.com.)
These days, Modi’s been enjoying his success in having placed himself on the WTO’s center stage, even though he is playing the role of a pariah. Modi knows he enjoys the tacit backing of envious fellow economic nationalists in places like Venezuela, Bolivia, Zimbabwe, Ecuador and Cuba. Such leaders love to nurture their grudges against the rich countries, seeing the WTO as a tool of the rich. President Jacob Zuma of South Africa runs with this crowd. These days, Zuma must be especially envious of Narendra Modi’s nerve.
Zuma is another economic nationalist who is skeptical that the WTO’s multilateral trade liberalizing negotiations will benefit South Africa. But he might be better advised to seek some sound economic advice as to why South Africa’s economy has been losing its dynamism.
Two very savvy Pretoria-based authorities on what used to be called “political economy” — Mzukisi Qobo of the University of Pretoria and Peter Draper, of Tutwa Consulting — recently succinctly explained Zuma’s attitude on economics in a May 27 article in South Africa’s Business Day. Under Zama’s economic guidance, South Africa’s economic growth has been on a steady decline, Qobo and Draper noted. Nor does Zuma seem to grasp the “gravity” of the economic challenges that are holding his country back, they added. “He also seems to have given up on leaving a great economic legacy, and instead prefers to manage a balancing act of contending factions within the African National Congress (ANC).”
Zuma’s trade minister, Rob Davies, is a member of the Politburo of South Africa’s Communist Party. That fact speaks well of Davies’ personal courage in having opposed apartheid in the days when to do so was to risk one’s life. But it doesn’t necessarily suggest that Davies’ economic credentials are sterling. Many African observers worry that South Africa, traditionally the most solid African economy that still regards itself as the “gateway” to the rest of Africa, will inevitably be left behind. Watch the East Africans — especially the emerging ties and improved infrastructure linking Rwanda, Tanzania, Uganda and Kenya — many African watchers say. Yes, these countries also have their own economic weaknesses. And in the WTO, the East Africans seem to be split on whether to speak out in favor of India, or against. Still, one has a growing sense that their future could be brighter than South Africa’s, depending upon how well they manage to integrate themselves into the global economy. At some point, the South Africans will likely kick themselves for their lack of economic foresight.
Zuma first worked earlier this year behind the scenes with the Addis Ababa-based African Union (an opaque organization which wasn’t even a participant in the Bali negotiations) to reopen the Bali deal. Conveniently, Zuma’s former wife now heads the AU. But Zuma and the AU came under intense pressure, mainly from Europeans and Americans, but also by dozens of other WTO member countries. They backed down during African Union meetings held in Malabo, Equatorial Guinea, in August. Since then the African Group of WTO members has basically been holding their tongues, trying to pretend that what India has done, hasn’t really happened. (For the background, see “Power Plays in the WTO,” www.rushfordreport.com, June 3, 2014). South African and African Union officials declined repeated requests for comment, as did a spokesman for the WTO’s Africa Group.
In sum, what the Africans started and India’s Modi finished was the tipping point. Leading circles in the WTO — the “North” definitely, and many in the “South” — believe that this time, the chronic naysayers have simply gone too far.
An Uncertain Plurilateral Future
While the WTO’s future is presently clouded, one thing appears clear: no longer will a handful of malcontents be allowed to poison the chances of dismantling as many of the world’s remaining trade barriers as possible. That means the WTO will turn away from its tradition of conducting trade-liberalizing negotiations on a multilateral basis. Instead, there will be smaller groups of like-minded countries that will work together to facilitate trade flows. This is the so-called plurilateral option.
The future likely model has precedents. The WTO’s Government Procurement Agreement has 43 member countries (counting the European Union’s 28). The GPA’s rules, which are only extended to participating countries, are aimed at improving transparency and competitive bidding when governments agree to award contracts to all bidders (as opposed to just doling out lucrative contracts to well-connected domestic cronies). China, New Zealand, and eight other countries have been negotiating to join in that plurilateral. No African country has shown interest in joining in such an experiment in open government. Nor has India.
India is, however, a member of the WTO’s Information Technology Agreement, a plurilateral WTO success story that dates to 1997. ITA signatories, including India, have slashed tariffs on imports of high-tech gadgets like computers and telecommunications equipment. But India has refused to participate in ongoing negotiations to expand the ITA’s product coverage to include new inventions — iPhones, iPods and so forth — that weren’t invented in the 1990s. In fact, Modi has already moved in the opposite direction: jacking up tariffs on imports of iPhones.
Late last week, the WTO’s director-general, Roberto Azevedo, described the uncertain future for further WTO multilateral trade negotiations, especially if “no solution” is found for the “Bali impasse.” In such a case, the director-general noted to a business audience in Toronto on Oct. 9, “then members must ask themselves some tough questions — about how they see the future of the Bali package and the post-Bali agenda. And what this means for the WTO’s negotiating function.”
Translated from the nuanced diplomatic language, Azevedo was pointing to a plurilateral future for the WTO, at least until the benefits of multilateral trade liberalization become apparent to the laggards. It might even turn out that the Bali deal will proceed as a plurilateral arrangement. India and the backward-looking African and Latin countries will be offered the choice to be left behind, if they prefer. Such, it appears, is their future — at least until the day comes when they will be willing to take off their economic dunce caps.
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.