Category Archives: Wall Street Journal

Elephant in the Room

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OPINION

Elephant In the Room

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GREG RUSHFORD The Wall Street Journal Asia
Updated Dec. 14, 2007 12:01 a.m. ET
At the World Trade Organization’s headquarters in Geneva, there’s a growing sense that a global trade deal is finally possible. The negotiations are now mostly characterized as serious. Big players, notably including the United States and the European Union, want to move forward. But that still doesn’t mean a deal is necessarily probable. This six-year, on-again-off-again process is now being threatened by a country that can least afford the collapse of the Doha Round: India.

Last week, the Indians were back to the rhetoric that has marked their negotiating style throughout the Doha process. The latest spat was over a newly circulated draft negotiating text on “rules,” including possible reforms of protectionist antidumping laws. The measure is controversial, and even the Americans have voiced concerns on some issues. But whereas U.S. officials expressed willingness to negotiate, their Indian counterparts threatened to close the door. Ambassador Ujal Singh Bhatia, India’s top trade diplomat in Geneva, called the draft text effectively an insult. India has been committed to the Doha negotiations, the ambassador said, “but if, God forbid, a time comes when that price of engagement is unpayable by us, then we will have to stand up and say that.”

That’s a rich statement, given India’s negotiating tactics. Rather than express willingness to negotiate gradual, phased-in liberalizations — which is how the Doha process is supposed to work — Trade Minister Kamal Nath has a long list of sectors he has insisted are “non-negotiable” from the get-go, including a “negative list” of politically “sensitive” imports that are discouraged, if not actually prohibited, from fruits and vegetables to grains, edible oils, rubber, cotton and silk.

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While the rich Europeans and Americans actually could afford to walk away from the Doha Round, India would pay a dear price for its failure. Consider the gains India has already reaped from earlier rounds of partial trade liberalization.

Over the past 16 years, India has already unilaterally cut many tariffs to the 10%-12% range from an average of more than 40%. The effects are palpable. In 1991, trade was only 17% of GDP; by 2005 it was 45% and rising. India has become a major player in information technology, which has shot up to nearly $24 billion in exports from $13 billion four years ago, and now accounts for about 30% of its exports. The earlier tariff cuts, by lessening the costs of imports for Indian manufacturers, have contributed to average annual GDP growth of 8.5% in recent years, and have pulled millions of Indians out of poverty.

Yet India’s industrial tariffs are still high enough to put Indian manufacturers at a competitive disadvantage by taxing essential imported raw materials, which is why Doha is such a critical next step. For instance, India’s two biggest exports are petrochemicals and jewelry. But 14% tariffs on machinery, 15% on chemicals and 20% on transport equipment drive up the costs for domestic firms that need the foreign inputs. Thanks in large part to the barriers that are built into its tariff schedule (combined with the domestic red tape and bottlenecks), India produces fewer than 1% of the world’s manufactured goods.

India’s history of liberalization also shows how tariff reductions and the ensuing exposure to international market forces can create useful pressure to implement domestic reforms. Following the earlier trade liberalization, India found itself with little choice but to ease some licensing requirements on imports of capital goods. The country has been looking to attract more foreign investment by beginning to dismantle barriers that have long held its heavily regulated banking, pharmaceutical and insurance sectors back.

This is no small consideration in India, where domestic regulatory and infrastructure bottlenecks are notorious. The World Bank’s latest Doing Business survey estimates that the cost, including tariffs, poor roads, others customs duties and bureaucratic red tape, for India to export a carton of goods to the U.S. is $820; for China, it’s $390. It costs India $910 to import a carton from America, compared to $430 for China. Overall, the survey ranks India 120 out of 178 for ease of doing business. China ranks 83.

Absent pro-trade legal structures — like Doha — there’s little concrete pressure to change. Even with Doha, bottlenecks at ports would throw up short- to medium-term roadblocks to economic development. In one sense it’s a catch-22. Under Doha, India would chafe under its infrastructure constraints. But without Doha, there’s no pressure to fix those problems.

Take the rag trade. Given its large, hard-working population, India should also be able to compete with China in textiles and apparel. It’s not. Last year, China sold clothing worth about $27 billion to the U.S., a 25% increase over 2004. India’s clothing exports to the U.S. were about $5 billion last year, an increase of less than 2%, and only about $2 billion more than Bangladesh’s clothing exports to the U.S.

India is clobbered by an economic double whammy. First, its domestic labor laws make it near-to-impossible to fire workers, even if there is no work for them to do. This discourages large companies from moving into the market, ensuring that the industry remains at the mom-and-pop stage. And in the Doha Round, India’s negotiators are fighting hard to keep its protectionist tariffs averaging 42% on imports of clothing, which would result in little incentive to change the labor laws. Chinese clothing manufacturers must be laughing.

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Since the economic logic is so powerful, one would think that India’s trade negotiators would be eager to bargain away tariff walls that hurt the country’s competitiveness. Wrong. In the Doha talks, India wants to retain “policy space” — a code word for protectionism — to raise tariffs any time it might find it convenient to prop up this or that uncompetitive domestic industry, like Brazil has been doing. Somehow it doesn’t occur to the Indians that their models on tariffs, instead of Brazil, should be the likes of Singapore and Hong Kong, where tariffs are negligible and economic growth is rampant.

India, of course, is hardly the only major WTO player that is playing brinksmanship games as the Doha negotiations lurch toward an end. Mr. Nath is right to complain that the EU’s infamous farm subsidies, which inflict hardships on poor countries, shouldn’t have existed in the first place. He isn’t the only trade minister to lament rising protectionist sentiments in the U.S. And other developing countries in the Doha process — Brazil, to name the most notable — have been busy raising their own tariffs while ostensibly negotiating in Geneva to lower them.

Despite India’s overall intransigence, Mr. Nath declared in late October that “We are in the last mile” in reaching some sort of Doha consensus. Key to further progress will India’s recognition that it stands only to benefit from freer trade.

Walk that last mile, Mr. Nath.

Mr. Rushford is editor of The Rushford Report, an online journal that tracks trade politics and diplomacy.

Seoul’s Bureaucracies Have Consequences

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One of South Korea’s great economic successes of the past 10 years has been its embrace of free trade. High-profile free-trade agreements with the U.S. and European Union have opened new markets abroad for Korean manufacturers, while also bringing more competition and lower prices to a long-sheltered economy. So it is troubling to see that President-elect Park Geun-hye is undermining this success before she even takes office.

Ms. Park, who will be sworn in on Feb. 25, has set off a firestorm with her plan to reorganize the country’s bureaucracy. In particular, she wants to shift responsibility for international trade negotiations away from the Ministry of Foreign Affairs and Trade, or Mofat, into an agency equivalent to America’s Commerce Department, to be christened the Ministry of Industry, Trade and Energy. Bureaucratic reshuffles are common in Korean politics, but this one will have serious negative consequences.

Trade policy will come back under the control of a ministry that, despite periodic name changes, always maintains close relations with the country’s largest manufacturing companies. The commerce ministry traditionally “regulates” domestic industries, which in practice means feeding steady government guidance to the country’s chaebol, or large, family-run conglomerates. But in practice, the influence flows both ways. Bureaucrats are often explicitly tasked by the country’s leaders with fostering those companies. In a system where a prevalent view holds that what’s good for the chaebol is good for Korea, regulatory capture is a particular problem.

The commerce ministry’s industrial policy hurt trade liberalization when it was responsible for trade policy up until 1998. The ministry showed minimal interest in negotiations with the country’s economic partners, while Korea imposed a bewildering array of protectionist barriers on imports that competed with chaebol products. Policies such as uniquely onerous safety standards on imported cars created ever-increasing friction with Americans and Europeans, among others.

All that changed when, in 1998, responsibility for trade was shifted to the foreign ministry under then President Kim Dae-jung. The renamed Mofat boasted an elite corps of English-speaking diplomats who became more involved in trade. They brought to the job a focus on Korea’s broader economic interest, rather than on the interests of individual industries or companies, as well as a keen sense of how Korean protectionism affected Korea’s relationships with strategic partners.

A golden era of sorts followed, as Seoul signed trade agreements with Chile, the U.S. and the EU, among others. These high-quality deals brought a dramatic opening of the Korean market across a wide range of goods and services, and stimulated new investor interest in the Korean economy. Attuned to the strategic implications of trade agreements, Mofat is now negotiating with China, Australia, Canada and New Zealand, and is considering joining negotiations for a Trans-Pacific Partnership trade deal. Indeed, when Seoul hosted the G-20 summit in 2010, Korea emerged as a leading voice for trade liberalization.
Returning trade policy to the commerce ministry’s domain threatens all this progress. Commerce bureaucrats, with their narrow domestic orientation, are simply not equipped to handle such issues where geo-strategic considerations must be weighed alongside a sophisticated grasp of economics.

Although some key personnel could be expected to move their offices to the new ministry, the best and brightest will have a strong incentive to stay in the foreign ministry’s elite diplomatic corps. Meanwhile the inward looking culture of the commerce ministry doesn’t match the outward focus of a foreign ministry when it comes to fostering trade negotiations. Not to mention that the minister ultimately in charge of the commerce ministry would find himself caught in conflicts between the interests of domestic industries and the dictates of trade negotiation.

This is why Korea’s Minister of Foreign Affairs and Trade Kim Sung-hwan and Trade Minister Bark Tae-ho, along with others who share a more enlightened worldview, publicly opposed the president-elect’s plans this week when the reorganization was presented in the National Assembly. It is unclear whether Ms. Park, who is reportedly adamant that her plan be passed next week, will succeed.

It’s in everyone’s interest that this plan fail. In the U.S., which has long been a global leader on trade issues, President Obama is contemplating a similar bureaucratic reshuffle that would downgrade the Office of the U.S. Trade Representative by moving it into the Commerce Department from its current home in the White House—a move that would have similar effects to Ms. Park’s proposal.

If Seoul rushes ahead down the same road, it will cede a promising area of international influence where its leadership is especially important. That would be a bad result for an economy that has benefited so much from trade already, and for a new president whom voters expect to deliver growth over the next five years.

Mr. Rushford publishes an online journal that tracks trade politics and diplomacy.

Manila’s Loss is Free Trade’s Gain

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Instead of giving trade preferences to Philippine textiles, Obama should cut tariffs across the board.

Philippine President Benigno Aquino III visited Washington last week with two objectives. One, reaffirming bilateral security ties, was a success. But on Mr. Aquino’s other goal—dropping U.S. tariffs on his country’s clothing exports—the Obama administration sent the president home empty-handed.

The Philippine leader urged Barack Obama to support a bill introduced in both the Senate and House of Representatives to boost Philippine clothing exports to the U.S., which amounted to $1.7 billion last year. The SAVE Act—for Save Our Industries—would give Philippine garment manufacturers duty-free access to U.S. clothing markets as long as they buy U.S. fabrics to make their jeans, shirts and dresses.

Instead, Mr. Aquino got the brush off. All Mr. Obama offered regarding economic issues was a vague statement that he was working “on how we can make sure that we are structuring a relationship of expanding trade and commerce.”

As disappointing as this is to some Filipinos, the outcome is actually good news for free trade. Both sides want trade distortions, so the lack of agreement could end up putting pressure on them to make concessions in multilateral forums. Ultimately the U.S. needs a complete overhaul of its high clothing tariffs, which generally range from 18% to twice that.

The SAVE act is flawed because it would use tariff preferences to divert trade flows to the benefit of a few firms doing business in the Philippines, mainly two well-known names in the world of fashion: Ann Taylor and Ralph Lauren. The tariff breaks for the Philippines would come at the expense of more efficient producers in Asia.

Of course, the Philippines’ beleaguered garment industry doesn’t see it that way. A decade ago, it employed roughly 700,000; now it’s down to 150,000. The industry’s former success relied on guaranteed access to American markets because of assigned quotas Washington doled out to more than 40 countries pursuant to the Multifibre Arrangement. But when these quotas were eliminated in 2005, Filipinos could no longer compete with lower-wage Asian neighbors.

It’s clear this Philippine industry is globally uncompetitive and has thus suffered after the trade quotas were withdrawn, but its advocates don’t want to admit that. For one thing, today’s remaining workers rely on high-end fashion makers like Ralph Lauren and Ann Taylor, who sell to price-insensitive markets. Thanks to the Philippines’ comparatively high-cost labor markets, the rag trade has found more economical opportunities elsewhere in Asia.

That’s why Philippine boosters are resorting to historical and emotional appeals to get back on America’s trade dole. Many ask why the U.S. hasn’t eliminated tariffs for Manila, while doing so for some African clothing exporters like Mauritius, which has an economy five times that of the Philippines.

“It’s kind of perverse” to exclude the Philippines, a former U.S. colony, argues Ron Sorini, a former U.S. textile negotiator who is lobbying for the Philippines. And Chris Panlilio, the Philippine undersecretary of trade who came to Washington with Mr. Aquino, says it is unfair “given our historical relationship with America” for the Philippines not to enjoy preferential trade.

The SAVE proposal might help the Philippines, but it would only be robbing Peter to pay Paul, shifting the relative tariff burden between countries instead of promoting freer trade. For years, diplomats from lower-cost Asian clothing exporters like Bangladesh and Cambodia have been asking American presidents of both political parties to give them tariff breaks on their clothing exports—requests that have consistently been rejected.

The big problem for all textile traders around the world is that the leader of the biggest economy is running a zero-sum game, where the winner has to lobby his way out. There is a simple way Mr. Obama can help all these countries, and at the same time avoid distortions: He can cut these tariffs across the board.

But not only is this not on the agenda, the Obama Administration is these days pushing to create more two-way trade preferences. During the ongoing Trans-Pacific Partnership negotiations, Mr. Obama has been fighting tooth and nail to make Vietnam buy American fabrics in return for tariff reductions. The Vietnamese, sensibly, have pointed out the economic absurdities of this policy. Undeterred, the Obama White House vows to keep up the pressure until Vietnamese negotiators give in. The hypocrisy is too hard to ignore: Washington wants from Hanoi what it won’t give to Manila.

President Obama, who once promised to change how America treats other countries, shows no signs of shame at pitting poorer nations against each other in the scramble to get around high U.S. clothing tariffs. Nor does he appear to see the intellectual inconsistencies between his various trade positions. Dropping tariffs across the board would end the political merry-go-round and allow healthy competition based on efficiency and quality.