Tuesday, October 19, 2010

Administration's Big "China Friday" Was Probably the Best We Can Realistically Hope For, but It's Still Not Great

Last Friday, the Obama administration had a rather busy day handling China trade issues.  First, USTR announced that it was initiating, at the United Steelworker's request under "Section 301" of US trade law, an investigation of Chinese subsidies and other trade measures related to "green" energy production:
U.S. Trade Representative Ron Kirk announced today that the United States has initiated an investigation under Section 301 of the 1974 Trade Act with respect to acts, policies and practices of the Government of China affecting trade and investment in green technologies. The investigation has been initiated in response to a petition filed by the United Steelworkers (USW) on September 9, 2010.

The petition alleges that China employs a wide range of World Trade Organization (WTO)-inconsistent policies that protect and unfairly support its domestic producers of wind and solar energy products, advanced batteries and energy-efficient vehicles, among other products, as China seeks to become the dominant global supplier of these products. According to the petition, these policies include export restraints, prohibited subsidies, discrimination against foreign companies and imported goods, technology transfer requirements, and domestic subsidies causing serious prejudice to U.S. interests. The petition further alleges that China’s policies have caused the annual U.S. trade deficit in green-technology goods with China to increase substantially since China joined the WTO, making China the top contributor to the U.S. global trade deficit in the sector....

The investigation will consider whether acts, policies, and practices of the Chinese government deny U.S. rights or benefits under the GATT 1994, under the Subsidies and Countervailing Measures Agreement (SCM Agreement), and under China’s Protocol of Accession to the WTO.

Under the Section 301 statute, the U.S. Trade Representative may request consultations with the foreign country concerned at the time an investigation is initiated. The statute also provides, however, that the U.S. Trade Representative, after consulting with the petitioner, may delay for up to 90 days any request for consultations for the purpose of verifying or improving the petition.

In light of the number and diversity of the acts, policies, and practices covered by the petition, and after consulting with the petitioner, the U.S. Trade Representative has decided to delay for up to 90 days the request for consultations with the Government of China for the purpose of verifying and improving the petition. During this period, the U.S. Trade Representative will seek information and advice from the petitioner and advisory committees. The U.S. Trade Representative will take account of this information and advice, as well as public comments submitted in response to a Federal Register notice, in improving and verifying the petition.

Because the issues covered in the China-Green Technology investigation involve U.S. rights under the WTO Agreement, any consultation request will be made under the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), and unless consultations result in a mutually acceptable resolution, the U.S. Trade Representative will request the establishment of a WTO panel under the DSU.
Only a few hours later, the Treasury Department announced (as predicted!) that it was delaying its Semi-Annual Report to Congress on International Economic and Exchange Rate Policies, in which it can deem countries to be "currency manipulators" under Sections 3004 and 3005 of the Omnibus Trade and Competitiveness Act of 1988:
Since June 19, 2010, when China announced it would renew the reform of its exchange rate and allow the exchange rate to move higher in response to market forces, the Chinese currency has appreciated by roughly 3 percent against the U.S. dollar. Since September 2, 2010, the pace of appreciation has accelerated to a rate of more than 1 percent per month. If sustained over time, this would help correct what the IMF has concluded is a significantly undervalued currency.

By continuing to implement reforms to strengthen domestic demand and by allowing the exchange rate to move higher to reflect fundamental economic forces, China will make a significant positive contribution to the global rebalancing effort, help reduce pressure on those emerging market economies that have more flexible exchange rates, and provide a more level playing field for trading partners around the world.

The challenge of building a stronger, more balanced and sustainable global economic recovery is a multilateral challenge, not just the responsibility of China and the United States. It requires policy reforms in all major economies.

The Heads of State, finance ministers, and central bank governors of the G-20 and the Asia-Pacific region will participate in several important meetings over the coming weeks. These meetings provide an opportunity to make additional progress on the important challenge of securing stronger and more balanced growth.

The Treasury will delay the publication of the report on international economic and exchange rate policies in order to take advantage of the opportunity provided by these important meetings.
No one in the White House would confirm that these two major China-trade announcements were related, but, c'mon, let's get real: the White House has been in quite the pickle on China trade and currency, and this is its grand Solomonic compromise.  On the one hand, they had labor unions and congressional Democrats rabidly campaigning against China trade - especially Chinese currency policies - in advance of what's shaping up to be a mid-term election bloodbath.  On the other hand, they understand fully that (a) aggressive unilateral action against China would probably violate WTO rules and could provoke serious Chinese retaliation against  US exporters; (b) calling China a "currency manipulator" less than a month before the G-20 summit would almost certainly salt the next multilateral opportunity to address global currency reform (the White House's preferred course of action); and (c) a very good argument can be made that China doesn't actually meet the legal standard for a "currency manipulator" under US law.  And compounding this stress were statutorily-mandated deadlines for the Section 301 investigation and the currency report that fell only weeks before the mid-term elections.  Thus, as I said in a few media interviews on Friday: "Given that United States Trade Representative’s Section 301 decision wasn’t due until October 24, it is either tied to Treasury’s currency announcement or one extremely large and convenient coincidence."

And in all honesty, I must admit that, given this administration's routine prioritization of trade politics over trade policy, Friday's tandem announcements are about the best that we could've hoped for.  Let's face it: considering the aforementioned political dynamics and the fact that the Commerce Department recently rejected two petitions to investigate Chinese currency practices under the US countervailing duty (anti-subsidy) law, there was absolutely no chance - NONE - that the White House was going to issue the semi-annual Treasury report and not label China a "currency manipulator" a little more than two weeks before the mid-terms.  And by delaying the report, Treasury has allowed the G-20 negotiations to remain viable.  As I said on Friday: "The Treasury report’s delay is a good sign for those discussions. A bunch of name calling right before you get together for an adult conversation is not the best strategy to use when conducting international negotiations that could affect hundreds of billions of dollars in global trade." Harumpf!

Second, initiating the Section 301 investigation is relatively harmless.  As the USTR announcement makes clear, the agency will now hold 90 days worth of meetings with the USW and other interested parties in order to "improve and verify" the union's petition.  Then USTR will simply initiate bilateral consultations with China through the WTO - the preferred multilateral channel for global trade dispute resolution.  As I said when the USW petition first dropped: "Section 301 is not like Section 421 (the tires case) or antidumping and countervailing duty investigations (the other cases mentioned), which can result in the unilateral imposition of remedial US tariffs on Chinese products. Instead, the very best outcome here is (i) the mutual resolution of the matter through bilateral consultations or (ii) a WTO case adjudicated by an independent panel of arbiters (unlike the, ahem, sympathetic US Department of Commerce or USTR)."  And, really, the USW's petition probably has some merit.  Indeed, with hundreds of billions in Chinese government subsidies to its "green" manufacturers over the years, how couldn't it?

Third, even if the USW's case some day results in WTO-sanctioned retaliatory tariffs on Chinese "green" products (solar panels, wind turbines, etc.), at least it would be on only one class of products, whereas a broadbased assault on China's currency could literally end up affecting Chinese imports of everything.  (And China's retaliation would, of course, reflect that big difference.)

Finally, the administration's compromise was pretty successful politically.  As this McClatchy article demonstrates, the dual announcements caused congressional protectionists like US Sen. Sherrod Brown (D-OH) to focus on the "good" Section 301 news and mute their criticism of the "bad" news on the currency report.  (For example: "Top Democrats publicly ignored the Treasury decision, focusing instead on the administration's decision to accept a United Steelworkers complaint that China is unfairly subsidizing its "green technology" sector. The office of the U.S. trade representative will investigate the complaint.")

So all-in-all, the administration's move was a pretty agile political tap-dance that minimized anti-trade backlash.  Not too shabby, really, and probably the best we free traders could expect.

That said, Friday's Section 301 announcement wasn't completely free from problems.  First, it's not exactly clear how USTR will navigate the difficulties that the Section 301 law itself raises under WTO rules.  The EU challenged Section 301 at the WTO and, while the adjudicating panel found that USTR could apply the law consistently with WTO disciplines on the resolution of trade disputes, it also stated very plainly that its ruling was dependent on USTR sticking closely to those disciplines.  In particular, the panel found that the timelines established under US law for the imposition of unilateral trade measures under Section 301 could conflict with WTO timeframes for the resolution of a panel dispute, but USTR had discretion to ensure that those WTO timeframes weren't violated.  But can you imagine the ruckus that Sherrod Brown and his congressional cronies - many of whom routinely complain about the WTO - would cause if the "official" Section 301 deadline arrives, and a WTO Panel still hasn't ruled?  That should make for some, umm, interesting tension between Congress and USTR, don't you think?

Second, even though USTR's announcement is pretty benign, Chinese retaliation still might be on the way.  Indeed, preliminary news reports from today indicate that China may (and I stress the word "may") have restricted exports of "rare earth minerals" - necessary for all sorts of high tech manufacturing - to the United States as part of its angry response to USTR's decision.  (The "rare earths" dispute has been brewing for a while, so I'm not convinced that today's news is really related to the Section 301 decision.)

Third, the new 301 dispute could open a whole can of worms regarding international trade conflicts over "green" policies and protectionism.  A big, contentious US-China dispute on "green subsidies" raises much, much larger retaliation concerns than those raised by China's actions today.  As I noted last month, the USW's petition freely admits that the United States has doled out at least a $100 billion of its own cash on US green manufacturers, and I've been nervously reporting for over a year now on the growing number of trade disputes surrounding green subsidies and other forms of protectionism.  If USTR's case goes forward, and then China files its own case against US subsidies, that could affect hundreds of billions of dollars in global trade.  And other cases by other WTO Members could easily follow (global trade disputes are very prone to copycat cases) - further accelerating the tit-for-tat trade tensions surrounding trade in environmental goods.

In sum, while the White House's big "China Friday" was about as good as can be expected from this administration, it wasn't great.  So strap in, folks, we've still got a long way to go on this one.

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