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The General Disagreement on Tariffs and Trade

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The General Disagreement on Tariffs and Trade

The system that has underpinned global trade for the past 70 years is foundering. So why is no one paying attention?

The General Disagreement on Tariffs and Trade

Nearly 70 years ago, with fresh memories of the disastrous trade wars of the 1930s, leaders of the United States and 22 other countries launched the GATT, the General Agreement on Tariffs and Trade. The GATT was charged with slashing tariffs and dismantling other protectionist barriers to global economic growth. And the Geneva-based international organization delivered. By 1995, when the GATT morphed into the World Trade Organization, a series of successful multilateral trade-liberalizing negotiations had slashed average global tariffs, which had been in the 40 percent range in the 1940s, to about 5 percent. Even though many protectionist schemes remained, the WTO seemed poised to continue the good work. But in the last two decades, the WTO has descended into dysfunction, lurching from one bitter fight to another.

A deeply concerned WTO Director-General Roberto Azevedo has bluntlywarned the WTO’s 160 member countries that the GATT/WTO system has been “living on borrowed time.” He’s spot-on. I’ve been watching the GATT and its successor global trade rules-making institution for nearly four decades — witnessing the gradual destruction of the world’s most successful experiment in peaceful international economic cooperation. Although the most recent crisis that sparked Azevedo’s warnings was averted on Nov. 27, at least for now, the tensions that have weakened the WTO will remain for the foreseeable future.

The root of the problem is that too many countries either no longer believe that multilateral trade liberalization is beneficial for them, or that they lack, for varying reasons, the political will to lead.The root of the problem is that too many countries either no longer believe that multilateral trade liberalization is beneficial for them, or that they lack, for varying reasons, the political will to lead. Too many shortsighted political leaders, forgetting their history, are back in the business of creating trade blocs. They are more interested in defending their own protectionist trade schemes to fret much about what they have been doing to the WTO-supervised multilateral trading rules. And without a shared core belief that the non-discriminatory global rules work for all, the WTO cannot deliver.

In Washington, D.C., President Barack Obama has never given high priority to the WTO. Neither have Republican or Democratic leaders in Congress. While individual European WTO members like the United Kingdom, the Netherlands, and Sweden still believe in the organization’s rationale, the 28-member EU makes the notion of “European leadership” an oxymoron. Tokyo’s main goal in any trade negotiation is to preserve Japan’s stratospheric 500-plus percent rice tariffs. The Chinese now run the world’s second-largest economy, but they aren’t leading either. In parts of Africa and Latin America, leaders tend to see multilateral trade liberalization as a plot for economic domination perpetuated by their rich former colonial masters. AverageAfrican tariff barriers still hover in the 12 to 20 percent range. And when it turns to former colonies that enjoy playing the spoiler, India leads the pack.

In May, India’s new prime minister, Narendra Modi, cast a gimlet eye on the only successful multilateral trade-liberalization deal the WTO had concluded in nearly 20 years of trying. Last December, when WTO members convened in Bali, India’s government (then controlled by the leftish Congress Party that Modi’s right-wing Bharatiya Janata Party trounced in this spring’s elections) signed a deal that was widely cheered. For good reason: The so-called Bali Package was guesstimated to give the global economy a trillion-dollar boost. The WTO’s richer countries pledged to provide developing countries with billions of “trade facilitation” dollars to modernize clogged ports, fix terrible roads, and streamline corrupt customs procedures. But Modi balked.

On July 31, the strong-willed Indian leader took trade facilitation hostage,refusing to sign the necessary legal protocol to implement it.

India’s veto — unprecedented in GATT/WTO history — brought the WTO into what Director-General Azevedo called a state of “paralysis.”India’s veto — unprecedented in GATT/WTO history — brought the WTO into what Director-General Azevedo called a state of “paralysis.” The good news is that after months of bitter wrangling, Modi released his veto, declaring victory.

Some victory. Essentially, India “won” the right to continue to increase the amount of subsidies that New Delhi has been lavishing upon its farmers into an indefinite future, without fears of being held legally accountable in the WTO. India’s “food security” program — paying globally uncompetitive farmers above-market prices to stockpile grains that are later doled out to the urban poor — has been widely criticized. Perhaps half the grain rots, or is sold on the black market. Meanwhile, Indian exports of surplus rice have distorted global markets for years. Undeterred by criticisms that the purpose of WTO trade negotiations is to reduce protectionism, not enhance it, Modi nevertheless claimed the high moral ground: asserting that Mother India is only fighting for the rights of the world’s poor.

The hypocrisy extends beyond agriculture. Modi has hiked tariffs on imports of high-tech equipment from other developing countries like the Philippines, Vietnam, and China. Meanwhile, India’s main goal in the WTO’s long-stalled Doha Round of broader trade liberalizing negotiations — which the Bali deal was intended to revive — is the “flexibility” to raise all industrial tariffs even more, whenever New Delhi finds enhanced protectionism politically attractive.

As it turns out, that’s basically what many African leaders also want from the WTO: the right to raise tariffs and advance their own industrial policies — while the rich countries dismantle theirs. It’s called necessary “policy space.” South Africa’s president, Jacob Zuma, has hardly bothered to disguise hissuspicions that the WTO’s Bali deal was tilted in favor of the rich “North.” And some officials in Uganda, Tanzania, and Kenya also complained that trade facilitation meant opening their borders to import competition from giant multinational corporations.

On April 27, after meeting behind closed doors, a handful of African diplomats — nobody has publicly claimed credit — persuaded the African Union to “instruct” African WTO ambassadors in Geneva to try to delay the Bali deal’s implementation. As the AU, based in Addis Ababa, hadn’t even participated in the Bali negotiations, the power play ran into intense criticism from furious Americans, Europeans, and a long list of others. The Africans subsequently backed down, but the poisonous distrust that has paralyzed the WTO’s negotiations was back.

That distrust memorably first surfaced in late November 1999, when WTO ministers convened in Seattle, hoping to launch a new round of multilateral trade-liberalizing talks. The Battle of Seattle is best remembered for the vociferous band of anti-globalist protestors (colorfully dressed as sea turtles or ninjas) who trashed that city’s streets. Less noticed were the secret smiles from key African trade officials inside the barricaded convention center who were happy that the talks failed.

In 2001, it seemed trade liberalization was on the move again when the WTO’s Doha Round was launched. But then in September 2003, there was open cheering from African officials when WTO meetings in Cancun again collapsed in acrimony. The meetings in the Mexican resort had been intended to breathe life into the Doha Round, but instead threw those negotiations into intensive care, where they still remain. (The trade-facilitation deal that was reached in Bali last December was split off from the broader Doha negotiations, the idea being to harvest the easier parts to generate momentum to complete the Doha Round.)

Just a few hours after the Cancun debacle, I ran into a Kenyan diplomat named Mukhisa Kituyi in an Argentine-style steakhouse. It was a memorable September evening in the famous Mexican resort. Kituyi and his colleagues were celebrating that afternoon’s failure of the WTO meetings, washing down copious quantities of red meat with red wine.

“We killed it,” one of the Kenyan officials boasted, referring to that afternoon’s negotiating failure.“We killed it,” one of the Kenyan officials boasted, referring to that afternoon’s negotiating failure.

Kituyi is now secretary-general of UNCTAD, the United Nations Conference on Trade and Development. While he declines to comment, it appears the Kenyan official remains a trade skeptic. Kituyi invited President Rafael Correa of Ecuador to deliver on Oct. 4 a rousing Special 50th Anniversary speech at UNCTAD’s Geneva headquarters, just a few blocks from the WTO’s offices along the Rue de Lausanne. Correa railed against “an immoral and unjust” world economic order. In a world “dominated by transnational capital and the hegemonic countries,” the Ecuadorian leader declared, the poor countries should protect themselves by forming regional trade accords. “The world of the future is a world of blocs,” he declared. Led by an approving Kituyi, the UNCTAD audience applauded.

This is not a trivial matter. In recent years, WTO members have cut more than 300 trade-distorting preferential trade deals with various favored trading partners. They all violate the fundamental GATT/WTO principle that member countries should not discriminate against each other. Perhaps half of global trade is diverted through these discriminatory “free trade” routes.

The top U.S. trade priorities are forming two regional trading blocs, one with Europe and the second with some Asian countries. China is excluded. Meanwhile, the Chinese are advancing their own regional trade bloc that would exclude the Americans. Many Africans are looking to their own side deals with each other.

Preventing the re-emergence of discriminatory trade blocs is exactly why the GATT was created in 1947. It’s a history lesson that present world leaders would be well advised to reflect upon.

BAY ISMOYO/AFP/Getty Images

It’s the Imports, Stupid!

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A Gallup Poll this February reported that 57 percent of Americans view open trade positively. That’s certainly an improvement from surveys a few years ago, which found that far more of them believed in flying saucers (35 percent) than supported free trade (9 per- cent). Yet, Gallup found that 35 percent of the public – that’s some 100 million Americans – still see imports as an unambiguous threat to their jobs.

No wonder, considering that all recent American presidents, regardless of party, have had the same take on the benefits of trade: exports are good things, because they create jobs; job-threatening imports, we won’t talk about. George W. Bush, speaking in 2003 to an audience of importers and exporters at the Port of New Orleans, explained that the famous port existed to promote U.S. exports, avoiding any mention of the politically incorrect “i” word. And Barack Obama helped win a second term by skillfully tapping into fears of import competition. “I don’t want to buy stuff from someplace else,” he said, vowing to spark a U.S. manufacturing renaissance by doubling exports by 2014. Audiences cheered when Obama told them that his three favorite words were “made in America.”

Come again? The mercantilist political premise – we want to sell our products to for- eigners and buy as little from them as possi- ble – is a ticket to stagnation and conflict. In- deed, rapidly evolving trade patterns have scrambled who does and who doesn’t benefit from imports, putting many opponents of open trade in the position of undermining their constituents’ long-term interests – in ef- fect, cutting off American workers’ noses to spite their faces.

In the 21st century, imports are as vital to the health of American manufacturing as the coronary artery is to the health of the human heart. Nearly two-thirds of the $2-trillion- plus worth of U.S. imports are component parts and raw materials that sustain Ameri- can jobs. If you want to export more manu- factured goods, you’ll need to import more components. “Manufacturing in today’s world of interdependent global supply chains,” Pascal Lamy, the director-general of the World Trade Organization, explains, “is no longer just about products made in the U.S.A., or France or China – but ‘made in the world.’”

Lamy’s reasoning is supported by solid re- search. Economists at the Word Trade Orga- nization, working with their colleagues from the Organization for Economic Cooperation and Development, have created sophisticated databases that show how global supply chains (sometimes called value chains) dominate just about all manufacturing. Sweden’s Na- tional Board of Trade has published research that translates this data into common sense terms. Thus, for example, about half of a Volvo’s value is added by parts imported from the United States, Japan, England, Canada and Argentina. So, while Volvos may be less Swedish these days, the supply chain that al- locates component acquisition according to what individual economies do best makes it possible to do a fair share of the manufacturing in high-wage Sweden.

locking in economic logic

To be sure, neither of the 2012 presidential candidates could be accused of walking an extra mile to enlighten the public on the job- sustaining role of imports. Mitt Romney’s most relevant utterance was a promise that, on his first day in the Oval Office, he would roll back imports from the “cheating” Chinese. Romney also accused his Democratic opponent of having been “asleep” on promoting job-creating U.S. exports.

Obama definitely didn’t look sleepy when he reminded American audiences that, with trade, employment was priority No. 1. “It’s time to stop rewarding companies that ship jobs overseas, and start rewarding companies that are creating jobs right here in the USA,” Obama told the cheering workers at the Mas- ter Lock Company in Milwaukee.

Master, which for nearly a century has made the iconic locks that adorn so many high-school lockers, had come to Obama’s attention when it moved about 100 jobs back to Wisconsin from China. The president got the point that supply chains matter; when businesses like Master Lock create new American jobs, he explained, “it’s also good up and down the supply chain, because if you’re making this stuff here, that means that there are producers and suppliers in and around the area who have a better chance of selling stuff here.” But he neglected a critical extension of the argument – that supply chains ignore borders.

boeing, boeing

Two days later, Obama was in Everett, Wash., where he visited the assembly line for Boeing’s new 787 Dreamliner, which he called “the world’s most advanced commercial air- plane.” “Companies like Boeing,” Obama pro- claimed, “are realizing that even when we can’t make things cheaper than China, we can make things better. That’s how we’re going to compete globally.”

While Dreamliners are made in Washing- ton State, the entire U.S. economy gets a boost, thanks to “nearly 11,000 small, medium and large supplier businesses,” the economist-in- chief explained. “Boeing has suppliers in all 50 states, providing goods and services like the airplanes’ groundbreaking carbon-fiber- composite aircraft structure from Kansas, ad- vanced jet engines from Ohio, wing compo- nents from Oklahoma, and revolutionary electro-chromic windows from Alabama,” he said. Again, though, he stopped short of ac- knowledging the role of imports in the mix.

The following month, Obama visited a Rolls-Royce plant in Petersburg, Va. that makes jet engines for the Dreamliner. The president praised the venerable British manufacturer for investing in America. It is “creating jobs here, manufacturing components for jet engines, for planes that we’re going to send all around the world,” he declared. What Rolls- Royce has been doing in the United States rep- resents “the kind of business cycle we want to see,” Obama stressed. “Not buying stuff that’s made someplace else and racking up debt, but by inventing things and building things and selling them all around the world stamped with three proud words: ‘Made in America.’”

Well, sort of. It doesn’t take any special eco- nomic insight to see how global supply chains sustain the jobs of Americans who make locks, airplanes and jet engines. Just consider their provenance.

where do master locks come from?

Master Lock’s signature products are composed of a dozen or so parts, notably cylinders, ball bearings, shackle pins and screws. In 1995, the last year for which publicly available documentation is found in U.S. Customs’ re- cords, 9 of the 11 parts used in one of Master’s locks were made in Milwaukee. But the lock case and cylinder-retainer block were imported from Taiwan – and those two parts constituted an estimated quarter to a third of the production cost of the finished lock.

In Milwaukee, Master Lock now employs more than 400 workers, including the workers in the 100 jobs repatriated from China. The company has another 700 workers in Nogales, Mexico. The Milwaukee and Mexican plants account for about 55 percent of the company’s lock production, with the remainder still in China. These Chinese, American and Mexican workers depend upon each other so much to complete the supply chain that it is often difficult to say which country really makes the locks. Indeed. In 2010, U.S. Customs officials struggled to determine where one of Master Lock’s products really was made. It had ten components, of which the principal ones, the lock body and the shackle, were made in Milwaukee and China, respectively. All of the components were then assembled in Mexico. Customs finally decided the finished padlock should be marketed as a product of Mexico – a judgment call that reflects political and bureaucratic imperatives more than reality.

Other times, Master Lock has imported the lock bodies and shackle assemblies from Asia or Mexico, with workers in Milwaukee finish- ing the product by attaching the cylinder locks. Those padlocks were labeled “Made in USA.” (As a chastened Karl Marx might have quipped if he were alive today: “Workers of the world: you really are united.”)

global dreams

It’s the same story for Boeing’s Dreamliners, which Obama praised for having supply chains that stretched to all 50 states. The Swedish National Board of Trade estimates that 70 percent of the Dreamliner’s components are produced outside the United States, with suppliers “spread over 135 sites around the world.” In fact, the board said, “the wings are produced in Japan, the engines in the United Kingdom and the United States, the flaps and ailerons in Canada and Australia, the fuselage in Japan, Italy and the United States, the horizontal stabilizers in Italy, the landing gear in France, and the doors in Sweden and France.”

fuzzy economics

When Obama toured the Rolls-Royce engine plant near Richmond, “I learned a bit about how a jet engine comes together,” he told the workers there. The president drew appreciative chuckles when he added, “I’m a bit fuzzy on some of the details.”

But the president insisted he was clear on one principle: the virtues of a buy-American world. “Think about how important this is,” he said. “I mean, imagine if the plane of the future was being built someplace else.”

But while we’re in an imagining mood, re- flect on how the jobs of those Americans who make jet engines in Virginia would fly away if the plant lacked easy access to imported com- ponents. For example, the Rolls-Royce AE 3007 gas-turbine engine – a workhorse in short- haul passenger jets – requires titanium fittings imported from “unspecified” countries, U.S. Customs records show.

Those engines also need fire-resistant braided cord that ties bundles of electric cables together, which is imported from England. There are also stainless steel oil-seals and bolts from Great Britain, and stainless steel gravity tanks from Sweden. Imported socket screws, shaft liners and sleeves for thruster-propulsion systems from Finland, Sweden and Norway (and machine screws from too many countries to mention) keep Rolls-Royce’s Virginia workers busy.

Throughout the presidential campaign, Obama wrapped himself in the flag of eco- nomic nationalism without saying much about imports. And the shtick worked. Rom- ney tried his best to turn the tables, calling Obama the true “outsourcer-in-chief ” for hav- ing spent federal stimulus funds on American manufacturers who had been making wind turbines from – horrors! – imported blades. But it apparently didn’t quite resonate. (And it didn’t advance the candidate’s buy-American credentials when it came out that his wife had been flying around the country on a chartered regional jet made in Canada.)

export this!

Obama’s first-term, five-year goal of doubling U.S. exports of goods, which totaled $1.07 trillion in 2009, remains a worthy objective. To accomplish that, the president is busy tout- ing the usual policy mix: trade missions, in- vestment in infrastructure and breaks for small businesses. In his 2013 State of the Union message, the president announced that he would like to create 15 “manufacturing hubs” around the country. He also wants Congress to give the Defense and Energy Departments $1 billion, “to turn regions left behind by globalization into global centers of high- tech jobs.”

Ironically, though, the president’s national export initiative has pretty much ignored one federal program that has a highly successful record in promoting American exports. In fact, expansion of U.S. foreign-trade zones – which revolve around cheap access to imports– weren’t even included in the Obama export- doubling program.

Foreign-trade zones have been around since the Great Depression, when Congress and President Franklin D. Roosevelt were scrambling for ways to keep Americans work- ing by getting around the crippling Smoot- Hawley tariffs that hovered in the 50-plus percent range.

Manufacturers in these special zones – ad- ministered by the Commerce and Treasury Departments – were allowed to import the raw materials and components to manufac- ture finished products without initially paying import duties. The goods could then be sold in the United States, where they would be sub- ject to the lower U.S. duty rate for the finished product. Or they could be exported to other countries without paying any U.S. tariffs.

That model for stimulating exports is still in place. These days, some 2,800 companies em- ploying more than 340,000 American workers operate in such zones in every state of the union. And talk about results: from 2004 to 2008, the value of exports from U.S. foreign- trade zones more than doubled, from $19 bil- lion to $41 billion. Since 2009, they are up by more than 80 percent.

Moreover, these zones operate in parts of the country that have lagged behind in the rapidly evolving economy. BMW has ex- ported more than one million spiffy roadsters and four-wheel-drive vehicles from the free- trade zone in Spartanburg, S.C. since 1994. Mercedes exports its M-class SUVs and other luxury vehicles from a duty-free zone in Ala- bama. Meanwhile, Toyota recently announced it will be selling its Kentucky-made Venza crossover to customers in Russia and Ukraine.

Another shining export success originates in Elkton, Va. (pop. 2,700), nestled in the Shenandoah Valley about 100 miles south- west of Washington. There, pharmaceutical giant Merck operates a sprawling factory that makes drugs to treat diseases from HIV to river blindness to Parkinson’s to cervical cancer. In a story that should now be familiar, the Merck plant depends on cheap imports, pay- ing no U.S. tariffs on the imported raw mate- rials – various chemicals, gums, resins – that otherwise would be subject to duties.

Nonetheless, it remains an uphill battle to beat back opposition to foreign-trade zones. The United Auto Workers opposes them – especially those in the South that use non- union labor. Detroit automakers, which have in the past operated from U.S. foreign-trade zones, no longer serve as a counterweight. Thanks to the North American Free Trade Agreement, General Motors can make its Silverados and Suburbans in Mexico and export them duty-free to the United States. The foreign automobile manufacturers that operate in foreign-trade zones in the rural South have to pay normal U.S. tariffs on automobiles if they sell their cars in the United States (as op- posed to exporting them).

When Obama became president in 2009, he was offered the opportunity to support an idea aimed at boosting the number of jobs of Americans who work in foreign-trade zones. Representative Bill Pascrell, a New Jersey Democrat, was pushing legislation that would have put the Americans who make BMWs in South Carolina on an equal footing with GM’s Mexican workers by exempting domes- tic sales of autos made in free-trade zones from the regular tariff.

But Obama, loath to challenge the auto workers’ union, refused to support Pascrell’s proposal. Nor did any major Republican show much interest. Even Pascrell decided not to speak in favor of his own bill, which he quietly dropped.

reality check

Though polls show a majority of Americans are inclined to accept global economic integration, politicians see little advantage in of- fending the vociferous third who are still demonizing imports. That’s why both Republican and Democratic bigwigs decline to explain the relationship between exports and imports in intellectually honest terms.

But corporate CEOs don’t have that excuse. And many of America’s top business leaders – who certainly know better – have refused in recent years to acknowledge the vital role that imports play in keeping domestic jobs, preferring to invest their political capital on other issues. U.S. steelmakers, to cite the most glaring example, know that their American workers cannot make finished steel products without access to duty-free imports of semi- finished steel. Yet presidential candidates who want to win votes in steelmaking states like Pennsylvania and Ohio long ago learned not to rock that particular political boat.

The more encouraging news is that some influential trade groups have begun to speak candidly about the role of imports in the U.S. manufacturing supply chain. For the past two years, the U.S. Chamber of Commerce has been supporting an Imports Work For America week. The Business Roundtable –- not so long ago a bastion of anti-imports sentiment –- recently posted a study by Matthew Slaughter, a Dartmouth economist, that praises the contributions of imported goods to U.S. manufacturing.

“Exports are great for Caterpillar, but so are imports, and that’s a point that often gets overlooked,” Doug Oberhelman, Cat’s chief executive and the head of the Roundtable’s task force on trade, said. “Without access to manufacturing inputs from around the world, Caterpillar’s global supply chain would be less competitive and our ability to compete in all markets would be diminished.”

Free trade has always been controversial because it produces both winners and losers, even though the evidence that open trade promotes innovation, retards inflation and increases consumer-centric competition is undeniable. But with the economy changing, the exports-good/imports-bad mantra is less and less relevant to groups traditionally op- posed to free trade. The more the American public hears the simple truths about why im- ports are good things, the sooner the politics of trade will cease to be dominated by interests stuck in the 1980s.

 

Mr. Sang Comes to Washington

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Mr. Sang Comes to Washington

Vietnamese President Truong Tan Sang — a powerful senior member of the ruling Politburo, where the major governmental decisions are hammered out for the Central Committee of the ruling Communist Party — will meet with U.S. President Barack Obama in the White House on July 25. One way or the other, Thursday’s meeting for the two heads of state will be important. It comes at a time of increased tensions that have been holding back closer strategic and economic ties between the two former war enemies.

Sang and Obama have an opportunity to forge a deeper (mutually respectful) bilateral relationship. But it is not at all clear whether either leader has the vision or the necessary political instincts to seize it.  The two heads of state may just try to put out an attractive spin, hoping to gloss over important differences on the core issues that presently divide Washington and Hanoi. The two most difficult of those: Vietnamese human-rights practices that insult accepted international legal norms (as seen from Washington’s perspective), and insulting rich-country economic pressures (Hanoi’s view).

The White House has listed “human rights” as the first of three topics that will be on the agenda when the two leaders meet on Thursday. “Climate change” is the second named priority, followed by the Trans-Pacific Partnership trade talks involving the United States, Vietnam and ten other Asia-Pacific countries.

But the real agenda is broader, involving fundamental decisions that need to be made by both countries on whether to deepen their strategic and security cooperation. The sharp-eyed David Brown, a special correspondent for the Asia Sentinel, has written that President Sang and the Politburo appeared to have been “shaken” when Sang visited Beijing in June. Apparently in his private talks with top Chinese leaders, including President Xi Jinping, the Vietnamese president came away with nice words, but little of substance. Because of the “evidently jolting encounter with China’s leaders,” Brown wrote, a “hurried” visit to Washington was then arranged. In Washington, the Politburo wants Sang to find out whether President Obama — a politician who, in some Asian eyes, has acquired a certain reputation for offering mostly happy talk in his dealings with his foreign peers — will be any more helpful.

Neither government was divulging further details of what Sang and Obama will have to chat about on Thursday. A White House spokesman refused even to say in what room of the White House Presidents Obama and Sang would be talking, much less identify who else might be in that room.

A close look at each of the three specific items on the Sang-Obama agenda suggests that for each president, any truly “frank” diplomatic exchanges would pose awkward questions, not to say outright mutual embarrassments.

For Sang, the most awkward question would be to explain to Obama what benefit Vietnamese leaders think they really gain by holding hostage more than 160 political prisoners. These are Vietnamese citizens who have committed no “crimes” — other than to peaceably voice their complaints that their government is seen as becoming increasingly corrupt and unaccountable.  And Obama might ask about a July 15 Hanoi decree that is aimed at prohibiting speech that goes “against the state of the socialist republic of Vietnam,” or any criticism that the party fears could “jeopardize national security,” Radio Free Asia has reported. The targets are popular internet icons like Google and Facebook.

Of course, it’s always tricky business for Americans to express reasonable opinions on human rights without sounding arrogant and self-righteous to always-sensitive Vietnamese leaders. Press too hard, and too publicly, and the commies could just arrest more innocent bloggers to stick it to the Americans. Press too quietly, and the authorities in Hanoi could just keep on doing whatever they please. Nobody’s ever really figured out the most appropriate diplomatic language.

[And if Obama’s tone on human rights offends Sang, the Vietnamese president might bring up the subject of dioxin. Sang might ask if the U.S. leader feels a sense of shame over the fact that a spokesman for the U.S. Embassy in Hanoi has recently denied to McClatchy reporter Drew Brown that many Vietnamese citizens today are still suffering from the tragic effects of dioxin sprayed by the U.S. Air Force on Vietnam during the shooting war.]

For Obama, perhaps the most embarrassing thing is that his White House — for purely domestic parochial reasons involving his political ties with U.S. organized labor and the globally uncompetitive U.S. textile lobby — has been stridently making demands of the Vietnamese in the TPP trade talks that the Politburo would be foolish to accept. Obama’s rather crude economic pressures, in fact, have been playing into the hands of those in Hanoi who increasingly question the value of closer commercial and strategic ties with the United States.

Beyond the mutual embarrassment potential, it turns out that what the White House wants to talk about regarding climate change illustrates — most likely, unwittingly for both Sang and Obama — just how complicated deepening the bilateral economic relationship has become.

Power Politics

On climate change, it could be that all Obama wants to do is burnish his “green” credentials by giving President Sang a nice lecture on the importance of nations’ working together to combat global warming.

But there’s something else important going on between Washington and Hanoi that illustrates how the politics of climate change have interjected themselves into the bilateral relationship. It’s not certain that the White House staff — which seems to be spread pretty thin these days — has briefed Obama on the implications of a decision last week by the U.S. Export-Import Bank to deny U.S. export financing to build a 1,200-megawatt coal-fired power plant in Vietnam’s Thai Binh province. But for sure, President Sang wouldn’t need a special briefing to understand fully the implications of the American act. This is because the Ex-Im decision goes directly to the heart of how political power is exercised in today’s Vietnam — and touches sensitive nerves in the Politburo.

Greenpeace, Friends of the Earth and other environmental groups complained in a July 17 letter to Obama that “this dirty coal plant will emit unacceptable air pollution that will worsen climate disruption and poison local communities.” Obama’s climate action plan, they (rightly) noted, is against U.S. financing of overseas coal projects, on grounds they increase greenhouse gas emissions.

The green lobbyists portrayed the Obama climate-action policies correctly. Ex-Im’s guidelines basically discourage financing for high carbon density overseas projects like coal plants. These days, Ex-Im is more interested in participating in viable renewable-energy projects. Anyway, after conducting an environmental “due diligence” examination, the U.S. export-financing agency found that the Thai Binh plans failed to pass muster. Because of that, the bank did not examine the other details of the project: financing, credit-worthiness, and so forth.

Most of the above was reported by U.S. wire services — but the best part of the story has gone unreported: precisely who wanted U.S. export financing for the Thai Binh coal-power plant?

Ex-Im doesn’t put such details on the public record before projects are approved.  But a little digging reveals that the Ex-Im financing was sought to help one of Vietnam’s giant state-owned enterprises, PetroVietnam Power Corporation, which refers to itself as PV Power. PV Power is a subsidiary of the Vietnam National Oil and Gas Group, which goes by its acronym, PVN. According to a 2011 Vietnamese news report, PV Power’s Thai Binh 2 Thermo Power Plant is a $1.6 billion project. The main players are Korean and Japanese construction firms.

On August 3, 2012 the Charlotte, Va.-based Babcock & Wilcox Co. announced that a Beijing-based subsidiary — Babcock & Wilcox Beijing Co. Ltd. — had won a $300 million Thai Binh-related contract from South Korea’s Daelim Industrial Co. Ltd.  Babcock & Wilcox said that it would do the engineering work in Beijing for two coal-fired boilers for the Thai Binh project, and would also participate in the manufacturing.

While a Babcock & Wilcox spokesman was unable to respond to questions asking about Thai Binh before this article went to press, it seems logical that PetroVietnam and the Korean company could have sought financing from the U.S. Ex-Im Bank to buy U.S.-manufactured equipment. How many American jobs would have been supported with the financing is not on the public record. (Nor is it clear what role coal plays — or perhaps should play — in addressing the energy needs of a developing country like Vietnam.)

The involvement of PetroVietnam, for those who know how what might be called the Vietnamese “political economy” works, suggests that the story’s ramifications go way beyond a normal fight over money and jobs with just one construction project.

State-owned corporations control perhaps a third of the Vietnamese economy. Inefficient, secretive and widely considered corrupt, SOE’s are also cash cows for senior members of the Communist Party. They report to the Prime Minister’s office, and are thus an important source of political patronage. (Imagine if President Obama would appoint the top echelons of a third of the Fortune 500, the likes of Boeing, General Electric, Microsoft, Google, Exxon, and so on.)

In the Trans-Pacific Partnership trade talks, the Americans are demanding that the Vietnamese enact transparency reforms, and also that steps be taken to bring SOEs more market-oriented. It’s asking a lot, considering that the same government corporations have been making a lot of senior party officials — including at the Politburo level — very rich. The Politburo has been wrestling for most of the past decade over what to do about all this.

PetroVietnam  has become controversial in Vietnam. Last October a report by Thanh Nien Daily, a Vietnamese newspaper, noted that PetroVietnam had been cricitized by economist Le Dang Doanh on grounds it “needs to disclose its finances and profit numbers.”

The Thanh Nien report added that the giant government corporation had denied accusations made publicly by National Assembly members that it had been using its taxpayers’ money to engage in real estate speculation. Then the Vietnamese newspaper asked why PV Power and other wholly-owned subsidiaries of PVN have their own real estate companies. The newspaper even ran a photo of the Nam Dan Plaza in Hanoi, described as “a new luxury department store project developed by PV Power.” (From the view of SOE executives, speculating in real estate ought to be more commercially attractive than power, because the government forces them to set electricity rates too low for Vietnamese consumers to be commercially viable.)

This week, Vietnamese officials who will be travelling with President Sang will be pressing their case with their Ex-Im counterparts. It is unlikely they will succeed. The U.S. officials might wonder whether PetroVietnam officials might just take any profits obtained from low-cost U.S. Ex-Im financing to speculate in even more dicey property deals.

A delicate mix

The Obama administration has turned up the pressure on Vietnam’s human rights practices. The price of Vietnam’s admission to the TPP, and of forging a genuine strategic relationship with Washington, will be explicitly linked to “demonstrable” progress on human rights, as U.S. Ambassador to Vietnam David Shear put it on June 1 to a Vietnamese-American audience in Orange County, California. The ambassador’s context was unambiguous: “I have been telling senior Vietnamese officials since my arrival in Vietnam in August of 2011, that if the Vietnamese people want a Trans-Pacific Partnership, if they want stronger cooperation in regional diplomacy leading to a strategic partnership, then we need to see demonstrable progress on human rights in Vietnam.”

Traditionally, it has not been official U.S. policy to make such an explicit link with human rights in any commercial negotiation. Shear’s remarks — which he declines to comment further upon — were initially dismissed as unserious by some veteran trade observers who cautioned that they should not be taken literally. Shear was just telling his California audience what it wanted to hear, according to this interpretation. Vietnamese-Americans and their representatives in the U.S. Congress have been critical of Shear, on grounds he has not done enough to improve Vietnamese human-rights practices.

Still, Shear is a senior, well-regarded American diplomat with considerable experience in Asia — he’s served in Japan, China, and Malaysia, and speaks Japanese and Mandarin. Nor does Shear have a reputation for loose talk. In his June 1 Orange County appearance, the ambassador spoke slowly and deliberately, conveying the impression that he was reciting officially authorized talking points. Also, Shear’s reference to how lack of human-rights progress has been the biggest obstacle to closer U.S.-Vietnamese strategic ties was fully consistent with official U.S. foreign policy as expressed often by senior State Department officials. The official State Department position is that U.S.-Vietnam strategic ties will not improve until there is “demonstrable, sustained improvement in the human rights situation.”

U.S. Trade Representative Michael Froman has declined to engage in any diplomatic walk-back that would put distance between U.S. trade policy and Shear’s remarks in Orange County. So it appears that the White House is comfortable with the notion that the Vietnamese should take Amb. Shear’s words at face value.

Enter the U.S. trade police

From the Vietnamese perspective, what Obama is asking them to do on “human rights” in the TPP trade talks appears, well, insulting.

Obama’s trade negotiators have been insisting in the TPP that the Vietnamese agree to the U.S. labor lobby’s demands that they permit independent union organizing — which U.S. officials insist must be enforceable. Such could be considered “human rights” progress, in American eyes.

Before it signs onto this idea, the Politburo might consider how similar arrangements have worked out for other countries that have struck recent trade deals with the Americans.

In the U.S.-Colombia bilateral trade agreement, that Latin country has been required to set up an “action plan” on labor that contains measurable “milestones” and a “robust enforcement regime,” with American officials playing their roles as the enforcers. The way this works practice in Washington, the American officials pay close attention to AFL-CIO labor activists, who never seem to be satisfied that foreigners are doing enough to live up to American standards.

On April 11, 2013, the Office of the U.S. Trade Representative and the Labor Department touted how they had pressed Guatemala to submit to “a robust enforcement plan to resolve concerns” that had been raised in a labor complaint by the United States in the preferential trade agreement involving the U.S. and the Latin country. The American officials congratulated themselves for making Guatemala come up with an 18-point plan to satisfy Washington’s demands. The plan “includes concrete actions with specific time frames that Guatemala will implement within six months to improve labor law enforcement.”

This is the first labor case that the U.S. has brought in any of its preferential trade deals — but the Vietnamese would have good reason to suspect that the American labor police have plans for them.

U.S. double standard

Enter the outright embarrassing part of the story for Obama. The reason the Vietnamese find the TPP talks attractive is the possibility of gaining additional access to protected U.S. clothing- and footwear markets — protected by high tariffs that hover in the 16-18 percent range, but for some lines, twice that. The Obama trade negotiators have been demanding essentially that the price of any tariff cuts  for shoes and apparel be that the Vietnamese agree to purchase their fabric from U.S. suppliers.

The idea is hardly attractive to Hanoi.

First, as I reported in “Imperial Preferences” in this space on Sept. 11, 2012, one of the main reasons that Napoleon III sent the French navy to take the port of Saigon in 1859 was to force the Vietnamese to open their markets to exports of French textiles. Economists would agree that current American pressure in the TPP is just a modern-day version of French colonialism.

Secondly, the so-called “yarn forward” rules of origin don’t work. Only about 17 percent of U.S. imports of clothing from Mexico and other Latin American countries that have been forced by U.S. trade negotiators to accept the cumbersome rules actually get duty-free treatment. The importers prefer to pay the duties, rather than jump through the bureaucratic hoops, bear the costly paperwork burden, and such.

And last, think of how President Sang — under fire from Washington because of the Vietnamese government’s many interventions in its economy —  could turn the tables on Obama. Sang might ask: Is it right for the U.S. government to pressure such major American corporations like the iconic Levi, Strauss & Co. and Gap, to agree to buy their (heavy) denim from U.S. suppliers and ship it all the way across the Pacific to Vietnam? Is it right for the White House to pressure Hanesbrands, which has its underwear plants and supply chains in nearby Asian countries like Thailand and China, to buy its cotton instead from the continental United States, and ship that cotton across the ocean? How about Patagonia, which makes down vests in Vietnam from high-tech Japanese materials? Why would the U.S. government want to disrupt the global operations of other respected private-sector corporations: Nike, Adidas, Macy’s, Nordstrom, and so many others?

Obama would, of course, be hard-pressed to respond with credible economic answers to such questions. But the White House has repeatedly insisted that Vietnam swallow the “yarn forward” rules of origin for textiles, and also the high tariffs on footwear.

From a Vietnamese perspective, Obama’s TPP negotiating strategy is reminiscent of how Presidents Lyndon Johnson and Richard Nixon once based American policies during the Vietnam war upon the premise that, with enough pressure from the rich superpower, this small Southeast Asian nation would ultimately bend to America’s will. But unless the Vietnamese get meaningful additional U.S. market access they are seeking in the TPP, it is difficult to think of good reasons why they should cave.

Prospects for closer U.S.-Vietnamese relations?

The final uncertainties involve just what the Vietnamese really want from their relations with Washington.

“There’s a delicate game going on” presently in the Politburo, explains scholar Carlyle Thayer of the Australian Defence Force Academy. Hardly for the first time in its long history, Vietnam is striving to balance it’s always-contentious relations with China, the Southeast Asian country’s closest neighbor, and at the same time with the United States. “Some in Hanoi want better ties with the U.S., while another group would sabotage those ties,” observes Thayer.

It’s the latter group that currently appears to have the upper hand, according to Thayer and other experienced Vietnam watchers interviewed for this article. That would help explain why Vietnam has arrested more than 40 peaceable bloggers this year, more political prisoners than all of 2012 — perhaps a deliberate hostile signal to the U.S. State Department and the White House.

To be sure, with any issue involving Vietnam there are so many nuances that nothing is ever what it seems to be. Sang’s three-day visit to China that began on June 19 could be interpreted as a sign that closer Vietnamese-Chinese ties were being considered. Even if it’s true that Chinese intransigence marred those meetings, Beijing could recover (by being less aggressive in claiming waters in the South China Sea that are clearly Vietnamese, for instance).

But how to interpret a visit that Vietnam’s deputy defense minister, Sen. Lieut. Gen. Do Ba Ty, made to the Pentagon on June 20, while Sang was in China? The Vietnamese general met with Chairman of the U.S. Joint Chiefs of Staff Martin Dempsey. Gen. Ty’s was the first such visit by a Vietnamese chief of staff to the United States, a Dempsey spokesman observed. The senior Vietnamese military delegation also notably included Lt. Gen. Pham Ngoc Hung, the deputy chief of the general intelligence department. Something’s afoot.

The only reasonably clear conclusion at this point in time is that the traditional Vietnamese foreign-policy balancing act will continue. And because the issues and differences that divide Vietnam, China, and the United States are so difficult to resolve neatly, the situation will continue to remain messier than it should.