Author Archives: Greg Rushford

Obama’s Double Standard on TPP

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The president wants other countries to embrace free trade, while defending tariffs for domestic textiles.

Trade officials from nine dynamic Asia-Pacific economies begin 10 days of talks today in Dallas, Texas, hoping to finalize the Trans-Pacific Partnership pact by the end of this year. President Obama has said the deal will be “a model not only for the Asia-Pacific but for future trade agreements.” Perhaps, but the president’s ambitious Asian agenda has run smack into protectionist lobbying back home.

The White House is demanding TPP partners, chiefly Vietnam, agree to new rules that would bring transparency and market-oriented efficiencies to their inefficient (and often corrupt) state-owned enterprises. SOEs are indeed a drag on Vietnam, comprising around 38% of the economy. Prime Minister Nguyen Tan Dung has struggled with the problem for years with little result.

Though the U.S. is pushing Vietnam to help itself by reforming SOEs, Hanoi wants something in return. The country is America’s second-largest supplier of clothing, and Mr. Dung’s trade negotiators insist the U.S. get rid of high tariffs on clothing and footwear, which generally range from 18% to 36%.

This is a chance for Mr. Obama to live in a “21st century economy,” as he often says. Unfortunately, he seems to be caught in 18th century mercantilism.

The American president is in tight with the U.S. textile lobby, which supported him in 2008. The industry has benefited from high tariffs and various protectionist schemes since the 1700s. So U.S. trade negotiators have taken a hard line against liberalizing the U.S. rag trade. The Vietnamese know a double standard when they see one, and are incensed. No deal on market access for us, no deal on SOEs, they say.

 

New Balance’s “Made in America” shoes are mostly made in Asia.

Here’s how the debate plays out in Washington. On the “21st century” side are the mainstays of the American economy. Giants like Boeing, General Electric, Intel, Microsoft, New York Life, Citi and Federal Express strongly support a TPP that would write new competition and transparency rules for Asian government-run corporations. Opposing the TPP deal is one shoe manufacturer in New England that employs about 1,200 Americans, New Balance Athletic Shoe, and a handful of mid-sized textile manufacturers in the American south.

The giants of American manufacturing and finance, which have major offshore operations, can’t get serious consideration from this White House. Mr. Obama—the “Buy American” candidate—stands behind any company like New Balance that vows to keep jobs at home.

New Balance’s advertising boasts that it remains “the only athletic shoe manufacturer still making shoes in the U.S.” It has five factories in Maine and Massachusetts run by a handful of dedicated American workers who are fearful that getting rid of protective tariffs would throw them out of work.

But behind the pro-American propaganda is a harder economic truth. New Balance makes 75% of its shoes in places like Indonesia and China, even some in Vietnam. The remaining 25% come from the New England factories. But most of those sneakers aren’t really “Made in America,” but “Made in the U.S.A. of Imported and Domestic Components,” as the technical label reads. To be the former, at least 70% of the sneakers must be made from components sourced domestically. Company officials declined to comment or provide a detailed breakdown of their Asian-made components.

This much is clear: New Balance imports shoe parts from Asia and then has their American workers glue the shoes together. Without imported components, the American workforce couldn’t make shoes at a competitive price.

Why is New Balance against giving Hanoi trade concessions? Its operations in Vietnam are tiny compared to elsewhere in Asia. But tariff cuts would give a big boost to its competitors, Adidas and Nike, which have significant footprints in Vietnam.

The company’s patriotism feels even flatter if you consider Nike and Adidas, which unashamedly manufacture their footwear in Asia, together employ some 27,000 Americans. This highly paid workforce in marketing, logistics, design and advertising is 22 times New Balance’s American presence.

Not that New Balance is alone in putting phony nationalism ahead of free trade. The National Council of Textile Organizations, whose members are mostly mid-sized textile producers in the American south, has persuaded the White House to insist that all TPP partners agree to “yarn-forward rules of origin” for their clothing and footwear exports.

This means TPP signatories will only qualify for tariff concessions for their exports to the U.S. if they buy their yarns and fabrics from TPP member countries. Translation: The yarn-forward rule of origin would require clothing exporters like Vietnam and Malaysia to buy American, not Chinese fabric.

This mirrors requirements American officials have inserted into preferential trade pacts with Latin America, which has propped up niche markets for the U.S. rag trade. Similar stipulations the U.S. has obtained in other trade pacts, notably with Singapore and Australia, have protected the Latin niches, while not expanding the U.S. rag trade across the Pacific.

To be fair, Mr. Obama also is hardly the first U.S. president to bow to domestic textile interests. But with the TPP, he’s demanding America’s trading partners summon the political will to dismantle their protectionist rackets. As long as he’s unwilling to do the same, we shouldn’t expect much progress toward this trade agreement.

Trustbusters

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Why the Obama Administration is targeting Malaysia and Vietnam in the trans-Pacific trade talks.

.Unless you happen to be a trade policy junkie like me, odds are you haven’t been following the progress of talks on the Trans-Pacific Partnership, the latest regional group formed out of frustration with the glacial pace of global trade liberalization. But it’s worth paying attention. The TPP discussion offers a good excuse to take a closer look at the problematic impact of crony capitalism in Southeast Asia — and, in particular, at the fate of government monopolies in countries whose leaders are loath to relinquish control to the market.

The TPP negotiations, which should be concluded by the end of this year, are largely the brainchild of Singapore and New Zealand, which launched them, along with Chile and Brunei, back in 2006. Australia, Peru, and the United States have since joined the party. But it’s the application of Malaysia and Vietnam — and U.S. demands on them — that are causing the biggest stir. For, to its credit, Washington is pressing both countries to agree to “21st century” rules for leveling the international playing field that go far beyond the elimination of tariffs and plain-vanilla government subsidies. The primary target: big state-owned enterprises (SOEs).

For years, SOEs in Malaysia and Vietnam have been criticized for murky business practices that keep competitors at bay and government employees in Mercedes. The idea now is to use the lure of membership in the TPP to persuade the Malaysians and Vietnamese to emulate Singapore — specifically, the government’s giant investment company, Temasek, whose business is both transparent and on the up-and-up.

Don’t pop the champagne corks just yet, though. While Hanoi acknowledges that its SOEs have, well, certain problems, the Vietnamese Communist Party is deeply reluctant to cede control of its big enterprises and the patronage that goes with it.
A quick look at how the enterprises in question operate sheds light on why prospects for serious reforms are unlikely. In Malaysia, powerful SOEs cast a long shadow over the economic landscape. Today, these corporations sit astride some 15 percent of the economy, including the key energy, telecommunications, and financial services sectors.

Consider Khazanah Nasional Berhad, the government’s investment arm, which dates to 1993 and now owns over 60 corporations. Among its investments are the UEM Group (which dominates highway and commercial construction), financial institutions (including Santubong Ventures), and Integrated Healthcare Holdings (a major hospital operator). Khazanh also holds a 60 percent stake in Malaysia Airports and 36 percent of Telekom Malaysia.

And then there’s Petronas, Malaysia’s giant oil and gas corporation, which has enjoyed a monopoly since 1974. With profits of $40 billion in 2010 ($10 billion more than ExxonMobil!), Petronas is one of the world’s great money machines.
The anti-corruption watchdog Transparency International ranks the Malaysian energy giant at the bottom of its company scorecard both on anti-corruption efforts and organizational disclosure. Petronas probably has good reasons for secrecy; it has only grudgingly launched an anti-corruption initiative that will compel it to share information with the Malaysian Anti-Corruption Commission.

Prime Minister Mohamed Najib has acknowledged the need for broad SOE reforms on the grounds that crony capitalism is discouraging foreign investment. He also pressed for Malaysia’s first antitrust law, which went into effect in February 2012. From now on, the SOEs will have to answer to a Competition Commission with wide investigative powers. While the prime minister (who appoints the members of the commission) faces some opposition from within his ruling party, he’s positioned to use the TPP talks as an excuse to sustain the effort to rein in state-owned enterprises.

The same cannot be said for Vietnam. To be sure, the Politburo started down the capitalist road as far back as 1986 with the Doi Moi reforms, which were intended to mirror Deng Xiaoping’s capitalist-socialist hybrid in China. By 2006, the SOEs’ share of GDP had been whittled to “just” 38 percent. But the party and the bureaucracy have since managed to push back, stalling further efforts at privatization or internal SOE reform.

In 2008, a group of Harvard economists who run an advisory program in Vietnam drove the point home with a detailed 56-page analysis of why Vietnam hasn’t managed the sort of growth that would put it in the income category of, say, South Korea or Taiwan. The report places much of the blame on the SOEs, which include the country’s dominant oil, electricity, railroad, telecommunications, banking, and insurance companies. Not only did the companies lack professional management, the report concluded, but they also failed to focus on improving their ability to compete in international markets. Worse still, the economists said, insiders had used the SOE reforms to build personal fortunes by misappropriating state assets.
While it is a crime in Vietnam to criticize the economic policies of the Communist Party, SOE scandals have occasionally become a matter of public record.

Vinashin, the state-owned shipping company that Prime Minister Nguyen Tan Dung once predicted would become the world’s fourth-largest shipbuilder, collapsed in 2010 under the weight of $4.6 billion in debts — a good chunk of which was owed to foreigners. The impulse to use government credit to invest in businesses beyond Vinashin’s competence (such as speculating in real estate) had proved irresistible, it seems. (Nine of Vinashin’s executives, including its chairman, were recently sentenced to long prison terms.) Post-scandal, Vinashin is now being restructured, but not necessarily reformed. According to Jonathan Pincus, Dean of the Fulbright Economics Teaching Program in Ho Chi Minh City, the government’s approach to reform does not involve “tightening corporate governance” or “increasing transparency.”

Much the same story can be told about EVN, the state-owned electricity monopoly. Like Vinashin, EVN neglected its core business to speculate in real estate. Of course, investing in anything but power plants may have looked reasonable from EVN’s perspective, since the company’s owners (the government) required EVN to sell power for less than the real cost of producing it.

In any event, last year Prime Minister Dung ordered EVN to spin off its telecom and banking subsidiaries. But EVN’s incentives to mimic the private market are still undermined by the need to keep the party and the bureaucracy happy (and affluent).
Meanwhile, U.S. trade negotiators are making it too easy for the Vietnamese to hang tough: The one carrot that might tempt Hanoi to challenge the stakeholders in the SOEs — greater access to U.S. clothing and shoe markets, where tariffs run as high as 36 percent — is off the table. So Washington’s ambition to bring trade into the 21st century has effectively been stalemated by its own insistence on what amounts to 18th century protectionism back home. “They are asking us to swallow a lot,” one Vietnamese negotiator says, “but we don’t want to choke.”

Why, you might ask, is the Obama Administration so determined to reform the SOEs in Malaysia and Vietnam? It would certainly mark a step forward in the effort to promote global economic efficiency by expanding trade. But Washington also has a bigger goal in mind: using reforms in Southeast Asia to set an example for China, the world’s epicenter of state capitalism.

The auguries are not favorable, at least in the near term. China, like Vietnam, views state-owned enterprises as a means to a political end — a mechanism for reaping the fruits of growth without sacrificing the perquisites of government power. And nothing that comes out of the TPP is likely to change hearts and minds in Beijing.

GE’s Jeff Immelt: How Not to Explain Trade ?

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For want of a single wire imported from Mexico, jet engines built by General Electric’s American workers in Ohio would fail to ignite. Nor would GE washing machines that are assembled in the United States function without printed circuit board assemblies from countries like the Philippines and China. Such imports — and thousands more — are vitally important to the 131,000 Americans who make those engines, washing machines, and other products of the GE Imagination. You’d think that Jeff Immelt, GE’s chairman and CEO, would be eager to point to the imported components that sustain his company’s American jobs. That Immelt would be eager to explain in such real-life terms, why international trade flows are so important to prosperity. But he isn’t.

Like President Barack Obama and many other U.S. business leaders, Immelt instead promotes the benefits of international trade using the language of mercantilism: trade is about creating American jobs, about promoting American exports. Pragmatic business leaders like Immelt and economic nationalists like Obama long ago have calculated that ordinary working Americans respond better to patriotic-sounding slogans than the simple truth about the connection between imports and exports. In Washington, D.C., exports are highly praised; imports are mentioned as little as possible.

Meanwhile, across the Atlantic Ocean, more enlightened European thinkers in cities like Stockholm, Geneva and Paris have been busy explaining to their publics the all-important connection between imported components and finished manufactured goods.

The contrast between how trade is being talked about differently on the two sides of the Atlantic Ocean helps illuminate why, on the American side, public support for international trade has deteriorated so sharply in recent years. Here’s what’s going on:

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