Wednesday, April 04, 2007

“Managed Trade” with China: Managed by the Treasury Department?

The countervailing duty (CVD) determination against China for subsidizing its paper industry points to the emergence of a new approach by the Bush administration.

With the Democrats in control of Congress and political pressure from both sides of the aisle to “do something” in response to the ballooning trade deficit with China, the Bush administration appears to be offering an alternative to a fireeating attack on China’s undervalued yuan by the Chuck Schumers of this world.

The alternative looks a lot like “managed trade”, the nibbling attack on Japan’s structural impediments, non-tariff trade barriers, and non-market self dealing begun in the reign of Bush the Elder.

The CVD decision itself eschewed claims of government subsidy of exports through the exchange rate. Instead, it appears to be responding to specific assertions by the US paper company, NewPage, that Chinese banks were propping up the Chinese pulp and paper industry with credit at preferential rates, and also by forgiving dud loans.

This is a reasonable approach—if difficult to prove in the case of the two Chinese paper companies that got whacked with the high CVD tariffs—and is reminiscent of U.S. gripes about Japanese industrial policy, with its overt and hidden promotion of certain export industries through preferential credit access in the 1980s and 90s.

The door is now open to a slew of similar complaints by every American industry under pressure from Chinese imports. And I suppose the U.S. government can be selective in which of these cases it chooses to support , and thereby use them as bargaining chips in negotiations with the Chinese government, both over trade and other economic concessions.

If the Bush administration has an objective in China, I imagine it would not be an apocalyptic political struggle over the yuan exchange rate that would provoke the Chinese to accelerate its switch from the dollar to the Euro, threaten to reduce purchases of U.S. government debt, and destroy life as we know it on this planet.

Maybe something more modest and welcome to Republican donors in the financial service industries—like greater opportunities in China’s protected financial markets for foreign firms, with the not unlaudable benefits of, in addition to enriching our deserving banks, insurance companies, and stockbrokers, accelerating the reform of China’s dismal domestic banking industry, compelling increased transparency in the equities markets, and heightening the pressure on China’s undervalued yuan from within the Chinese financial system.

The amazing thing is that the Bush administration, even with its house of cards crumbling around it, actually might have a China trade policy. And for this, I suppose we can thank Henry Paulson, Secretary of the Treasury.

Indeed, a recent article in the Financial Times identified Paulson, together with Secretary of State Rice and SecDef Gates, as the “Gang of Three” who might “leave office in January 2009 with higher standing” than when they came in.

It is perhaps both because of Paulson’s energy and focus and because the ultimate goal of the Bush policy is to open China’s financial markets to greater foreign participation, that the Treasury Department seems to be taking a lead role in China trade policy.

And the Treasury angle also raises the interesting question of there was any backscratching and logrolling involved in the fact that NewPage, filer of the paper complaint is controlled by Cerberus Capital, the finance firm run by ex-Secretary of the Treasury John Snow.

In the perceived context of a protracted negotiation process conducted through the carrot-and-stick tactics of “managed trade” given teeth by the threat of runaway protectionist political sentiment within the U.S. Congress, this Treasury press release from February is worth quoting in full:

Treasury Department Names Alan F. Holmer as Special Envoy for China and the Strategic Economic Dialogue

Today, US Treasury Secretary Henry M. Paulson announced he has appointed Ambassador Alan F. Holmer as Special Envoy for China and the Strategic Economic Dialogue. In that role, Ambassador Holmer will lead a strong Administration team managing the bilateral economic relationship with China.

Ambassador Holmer was Deputy U.S. Trade Representative under President Ronald Reagan, ran the anti-dumping and anti-subsidy programs at the Commerce Department, chaired the international trade practice at a major international law firm, and most recently was President and CEO of the Pharmaceutical Research and Manufacturers of America (PhRMA), where, among other responsibilities, he led efforts to improve intellectual property protection around the world, including in China. He has co-authored three books on international trade law.

"Alan brings a wealth of international and leadership experience that will allow him to hit the ground running, and lead successful efforts to help the Chinese government move toward a balanced, growing economy that is not reliant on large external surpluses," said Paulson.

President Bush and President Hu established the Strategic Economic Dialogue to manage our bilateral economic relationship effectively. The first meeting of the Dialogue was held in Beijing last December. After frank conversations on a range of cross-cutting economic issues, we agreed on work plans for services, investment, transparency, health care, and energy and the environment. Work has begun in each of these areas since the December meeting.

The second meeting will take place in Washington, DC, May 23 and 24.

"I believe that the Strategic Dialogue, where we speak with one voice with the highest levels of the Chinese government, is the most effective way to make progress on immediate issues and on the longer term issues that we face with China," said Paulson.

Beyond the quite remarkable fact that Paulson was able to recruit the head of Big Pharma, the most potent industry lobbying group on the planet, to descend into the smoking crater of the Bush administration for its last few months of existence—and the fact that Holmer ran anti-dumping and anti-subsidy programs at one time at Commerce but will now lead the charge from Treasury instead--the emerging outline of managed trade in the “Strategic Economic Dialogue” with Henry Paulson speaking as the "one voice" of the US on this issue make it possible that we might see something interesting and even productive from this administration with regard to China trade.


Unknown said...

Nicely done; I will read you regularly.


Joshua Shen said...

I wouldn’t worry too much about the investigators. Given our past experience with anti-dumping duties against China, it’ll be a matter of nearly 100 percent of U.S.-filed cases being approved.

Why doesn’t it matter? Because the Chinese defendants won’t be able to defend themselves, even when they are innocent. If they don’t show up in court (which happens often), they lose. If they can’t figure out how to submit all the proper documentations and proof, they lose. You see, with these cases, Chinese companies are guilty until proven innocent.

Why can’t the Chinese defend themselves? Because (1) Chinese companies may not even receive the USITC summons, as the American companies are usually responsible for providing the proper address. (If they don’t, it’s the Chinese companies’ fault for not receiving the summors. (2) The legal process is extraordinarily expensive, and the Chinese companies, many of whom are SMEs, don’t keep their finances and all documentation according to U.S. legal frameworks.

Now indeed there are some subsidies out there, just as we give our own sugar manufacturers hefty subsidies too. (Hypocrisy?… not when we’re protecting precious Cuban-American farmers!)

But the more worrying case is the Byrd Amendment, which gives the proceeds from the countervailing or anti-dumping duties TO THE AMERICAN MANUFACTURERS! Thus, especially if you are the only American company left of an inefficient and money-losing company, YOU GET ALL THE MONEY! The reality (if you examine the anti-dumping experience) is that in certain industries (fireworks, TVs), you can simply survive by not producing more than 100 “products” a year while you wait for your fat government duty kickback.

Joshua Shen said...

Oh, and good job with your blog. A fellow blogspot provacateur?

Unknown said...

CVD this time is very different from these anti-dumping. CVD is actually against Chinese government. It is very important policy change from the US side, which has been following a "rule" that CVD will not be used for non-market economy. Now, China is exposed for both anti-dumping and CVD.

Actually, Chinese government has been already fighting in the US court this time. Look at this

Agree with your comment on the Byrd Amendment. US has lost the case in WTO.

China Trade Study

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