Note: Dr. Elliot Feldman on April 15, 2010 presented the following speech at AmCham-China’s Conference of the Asia-Pacific Council of American Chambers of Commerce (APCAC).
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Difficulties with China are now on Page One of The New York Times and The Washington Post almost every day. There is consensus in Washington that relations between China and the United States will get worse before they get better. There are many issues, most related only marginally, if at all, to trade. As examples, there is frustration in Washington that China does not share a western view of the nuclear threat from Iran, nor the urgency of the nuclear threat from North Korea. There is disappointment and chagrin over Copenhagen, and obvious disagreement over Taiwan and over the Dalai Lama. These issues are mostly strategic, sometimes cultural. Cooperation on them would go a long way toward calming concerns in other areas. There is no sign, however, of mutual understanding.
There are many additional issues dividing China and the United States that are economic. The most obvious is that China, as of January, held $2.4 trillion in foreign exchange reserves, of which nearly $900 billion was in U.S. Treasury bonds and securities. The reserves had grown $453 billion in 2009, and economists predict similar growth again in 2010.
No less important to the United States and other countries is the valuation of the RMB. After the end of the dollar peg in July 2005, the RMB appreciated over 20 percent against the dollar. With the global economic crisis, however, China froze the RMB and let its value relative to other world currencies drift down with the dollar. Premier Wen Jiabao dashed American hopes last month that China would permit some adjustment any time soon.
Within the U.S. administration it is said that the word “currency” is not to be spoken, but the characterization of the associated issues as “mercantilism” seems more than tolerated. Meetings between Chinese and American leadership since September 15, 2008 frequently have invoked references to “rebalancing,” the idea that Americans should save more, Chinese should spend more, and Chinese exports to the United States should decline as they find a market at home among consuming Chinese. Such rebalancing, endorsed publicly by both countries, is difficult, however, when an undervalued RMB persistently makes Chinese goods comparatively inexpensive abroad and foreign goods expensive in China.
Both countries, and as important, the governments of both countries, are preoccupied with job creation. Weaker currencies tend to keep jobs at home. Chinese intransigence about currency valuation raises doubts among Americans, however, about the sincerity of Chinese pledges to rebalance. Those doubts are shared, perhaps even more acutely, in Europe. In a form of diplomatic jiu-jitsu, Premier Wen has called the U.S. demand for currency adjustment “a type of trade protectionism,” and Commerce Minister Chen Deming has escalated the rhetoric, threatening that American action on currency would precipitate a trade war that, he insisted ominously, the United States would lose.
Many in Congress, and some in the Administration, want to make currency valuation a trade issue, which perhaps Premier Wen already has done for them by calling it one, confirmed by Minister Chen. Countervailing duty petitions now routinely allege currency valuation as an illegal subsidy (three times in 2009 alone), and many in Congress, and in the business community, want the Treasury Department to label China a currency manipulator. The U.S. Department of Commerce, however, consistently refuses to investigate the allegation, concluding each time that the elements of an export subsidy have not been pleaded sufficiently, particularly as to the subsidy law’s specificity test: the laws and regulations pertaining to valuation of the RMB, Commerce has concluded, are not specific to any industry or group of industries in China, nor is the valuation conditioned on exports.
This legal conclusion has enabled both the Bush and Obama Administrations to avoid a major confrontation with China over the RMB in trade remedy cases, while both Administrations have refused, at least so far, to acquiesce to congressional pressure. The aggressive language adopted by Premier Wen and Minister Chen on this subject, however, could change the dynamic and make it much more difficult for President Obama to hold the line. The postponement of a Treasury Department determination, an apparent trade-off for President Hu’s visit to Washington this week, may only preserve a U.S. card that could be played, in any event, only once.
While China’s exports benefit from an undervalued RMB, China insists that it is contributing to global economic and financial stability, and points to its faster recovery from global recession. China’s friends remind critics of the role of a stable Chinese currency more than a decade ago in halting an Asian financial meltdown. China is not without defenses for its conduct over currency valuation.
In view of the non-trade issues – and the internet dispute over Google is many things, including strategy, technology, human rights, but also trade -- it is arguable whether “pure” trade disputes between China and the United States, trade remedy actions regarding allegations of dumping, subsidies, safeguards, patent and trademark infringements, are all that important. The value of Chinese goods exported to the United States peaked in 2008; less than 2 percent of the value of those goods were subjected in 2009 – the year when U.S. manufacturers were most severely impacted by world trade conditions -- to trade remedy investigations. The official U.S. trade line, in every Administration, reflects such data and has had the following elements:
• The Administration is following the laws as set out by Congress, nothing more;
• There is considerable friction in every significant trade relationship;
• Such friction is normal and indicative of a healthy relationship;
• Trade disputes represent a tiny fraction of overall trade and should be considered nothing more than irritants.
Unfortunately, U.S. trading partners rarely see the disputes this way. While successive Administrations try to minimize them, another branch of the U.S. government, Congress, takes them very seriously and promotes them. Congress, and American trading partners, see trade disputes as economically, politically, even diplomatically important, while Presidents try to ignore them. President Bush, it is said, was amazed at how distressed Canadians were over the treatment of Canada’s softwood lumber exports to the United States. Yet, the trade represented between $7 and $10 billion annually, and there were many U.S. Senators signing letters, testifying at International Trade Commission hearings, and lobbying the Office of the United States Trade Representative and the Department of Commerce. Frequent representations were made by the Canadian Ambassador. For years, no Canadian prime minister failed to raise the issue with the president whenever they met. It probably should have occurred to the president that, since it was apparently important to everyone else, it just might be important.
There is a similar imbalance in trade disputes with China, and to date a similar presidential inclination to minimize them. Although I believe President Obama did what he had to do politically and legally with respect to commercial tires from China in September 2009, and that he acted with as much diplomatic sensitivity as possible within the requirements of the law, I also believe that he underestimated the Chinese reaction just as President Bush misunderstood how the U.S. treatment of softwood lumber was poisoning relations with Canada. The U.S. Department of Commerce, which answers to the President, is, and always has been, systematically deaf to complaints from foreign governments, invoking the mantra that the disputes are minor, normal, even healthy. The apparatus of the Department, meanwhile, and the biases of the laws, are organized and designed to protect the interests of U.S. industry against foreign competition. China, like Japan and Canada before, do not see trade disputes the way Presidents and the Commerce Department see them, and for China, as occasionally for other countries, there are additional, non-economic issues of national pride. Canadians, for example, were furious at the transparent American disrespect for the rule of law in the lumber litigation.
The United States tends to underestimate the Chinese Government’s sensitivity to domestic interests. The Western press has been translating this sensitivity into “hubris” or “triumphalism,” even simple “arrogance,” but whatever it might be called, Chinese concerns for domestic interests reflect a sense of national pride.
The Western press also underestimates internal Chinese debate. The voices of a harder line are heard, notwithstanding the many moderate and engaged voices among elites. Unfortunately, the same is true as to what the Chinese hear from the United States.
Most important to China has been the refusal of the United States to treat China as a market economy. Legally and financially, non-recognition enhances the ability of U.S. industry to succeed in antidumping complaints. Politically and psychologically, however, the issue is far more important. The Communist Party believes it is governing a capitalist state that, economically, should be treated like every other capitalist state. The indicia of a market economy, governed by supply and demand, contracting labor, and competition, are everywhere in China. It is decidedly not a command economy like the Soviet Union.
The United States sees something else. It sees national planning, central control, and a restricted currency. It sees dominant government banks and state-owned enterprises.
When China as a government appears in trade remedy disputes, for example, its counsel sometimes represent the principal Chinese enterprises as well as the Chinese government. This inherent conflict of interest raises doubt about the independence from the government of these enterprises. The counsel for no other foreign governments appear in U.S. proceedings simultaneously representing supposedly private enterprises. It is widely presumed that the Chinese enterprises engage the government’s counsel at the government’s direction. China and the United States are, thus, looking past each other as to China’s very identity.
In November 2006, right after congressional elections produced a Democratic majority, the Bush Administration, while refusing to recognize China as a market economy, nevertheless accepted a petition to investigate Chinese government programs alleged to confer countervailable subsidies on goods exported from China to the United States. A countervailable subsidy, until that time, had been treated in U.S. law as a market-distorting government subsidy. Inasmuch as the United States denied that China had a market, government support would have nothing to distort. The United States Department of Commerce, however, cheered on by Congress and supported by the rest of the Administration, was not deflected by this apparent anomaly. The Chinese Government would now have to answer questions sent to it by the United States Department of Commerce, and would have to receive Commerce Department auditors who would inspect government books and test the veracity of government answers, all the while being treated as a non-market economy.
This recipe for confrontation did not produce a satisfying meal for anyone. Chinese officials were insulted and often adjusted doubtfully to the diplomatic cooperation the new investigations required. U.S. Embassy personnel in Beijing and officials from Washington were not unwilling to make their dissatisfaction with China known. Moreover, U.S. officials began to accuse Chinese officials, in print, that they had not been entirely truthful or accurate in responding to American inquiries. In one published preliminary determination, the Department of Commerce alleged that, “the GOC has withheld the information requested by the Department,” and “the GOC has failed to act to the best of its ability.” The Department declared, “the GOC’s claims of non-use are incorrect as a matter of fact,” and “the GOC’s statements . . . are unreliable and are contradicted by other facts on the record.” I am not aware of comments of this type printed in the Federal Register about other governments.
The multiplying investigations have not enhanced relationships, regardless whether the cases have involved much money or little, or whether the products in dispute have been significant or trivial. The process, and the underlying premises, which the United States insisted was business as usual, have been damaging. In the slow economic recovery we all anticipate in the United States, there will be more cases, more misunderstanding, and more difficulty.
China’s worldwide exports increased from 1999 to 2008 from $195 billion to $1.4 trillion. One of the great surprises accompanying this growth is how few trade complaints, compared to the scale of the growth, that it produced. There were 21 antidumping cases brought against China worldwide in 1999 (often against the same product but in several countries). While China’s exports multiplied seven-fold, in 2008 only 52 new cases were brought against Chinese products (again, often involving the same product but in several different countries). The United States, between July 1, 2007 and June 30, 2008, became China’s leading export destination and China’s leading trade antagonist, with 18 initiated cases. During the previous decade, however, India initiated 120 antidumping cases against Chinese products while becoming China’s leading trade partner in goods; the United States, by contrast, initiated 87, barely more than the European Community, which initiated 84.
Although these numbers for formal disputes are surprisingly small under the circumstances (for the volume and variety of trade), there are at least a couple of notable trends. One is that the number of cases initiated against Chinese products has increased every year except in 2007, albeit in small increments. Another is that more cases are brought against Chinese products around the world than against the products of any other country, by far. Against no other country is so much suspicion expressed about business dealings, honest reporting, and sincere cooperation in the interests of free trade. Since accession to the WTO, China has begun to test trade remedies itself. It initiated 14 antidumping cases against the products of other countries in 2001, more than doubled that number, to 30, in 2002, and through 2008 had initiated 151 antidumping investigations against foreign products. The United States was one of its first targets (along with Japan), and is now its leading target.
When negotiating accession to the WTO, China sought concessions because of its self-characterization as a developing country, a forgiving explanation for a transition from a government-controlled economy. China graduated very quickly from this self-definition, although it still invokes it frequently. It has now initiated three different subsidies investigations, all into products from the United States. In the case against automobiles, initiated on the eve of President Obama’s visit to China last November, the application for duties endorsed by China’s Ministry of Commerce proclaimed a declining United States unfairly trading with an ascendant China. It claimed technical superiority in a pillar industry, what it called the key industry of America’s industrial revolution.
This development, I submit, is of dramatic implication and potential consequence. The United States, since 2006, routinely entertains petitions against China complaining of subsidies due to state-owned banks and state enterprises. China has responded with a complaint about the U.S. bailout of the Big 3 automobile manufacturers and the infusion of capital into U.S. banks. China alleges non-market loan guarantees and special loans to the U.S. steel industry. More jiu-jitsu: China is accusing the United States of government involvement in the economy in programs nearly identical to U.S. allegations against China, and China has begun bringing cases against the United States at the WTO, a forum in which the United States usually wins the cases it initiates, but usually loses the ones brought against it.
The United States is an historic sore loser at the WTO, in one celebrated instance taking more than five years to comply with an adverse decision. China, by contrast, promptly capitulated when the United States brought its first two complaints against it, by requesting consultations, at the WTO; now, the world will watch how the United States responds as China brings more complaints against the United States. To date, China has made a doubtful strategic choice, to appeal its trade disagreements exclusively to the WTO, never seeking recourse in U.S. courts. Between the pattern of American non-compliance at the WTO, for which there are few punitive mechanisms available and all remedies are prospective, and the decision to permit adverse administrative precedents to accumulate without legal challenge, Chinese frustration with the United States as a trading partner is likely to grow, even as the partners can hardly escape one another.
China, it seems, is responding to the United States by acting like the United States. Whatever the poetic justice, this course is perilous. China, unlike the United States, is still dominated by state-owned enterprises, does provide central direction to important segments of its economy, and is still learning how to conduct business in trade remedy disputes.
At a more policy-based level, the United States appears, at the behest of Asian countries, to be in hot pursuit of the Trans-Pacific Partnership, which looks and feels like an economic reincarnation of George Kennan’s cold war approach to the Soviet Union. China, so far, apparently has said nothing, and there is more than enough skepticism, in the United States and abroad, about the trajectory of the TPP despite American enthusiasm. China, nonetheless, cannot be pleased by an even implied encirclement, and an answer to the question of what the United States will gain from this initiative seems to be buried in unexamined assumptions.
These developments, taken together, are unnecessarily ominous. Asian countries are urging the United States to engage more in Asia because, they readily say, they are afraid of China. While China is flexing the muscles of a world power, it is still the fragile developing country it claimed to be only a few short years ago. Tensions in trade are symptomatic of other problems. They are also the essence, because trade and commerce constitute functional interaction more than anything outside armed combat. Trade disputes, it is true, are but a tiny fraction of trade, and there are fewer of them than might be justified given the clash of systems, defiance of rules on all sides, and fundamental underlying political needs, above all for jobs. But they resonate.
Governments in Beijing and in Washington both need to find more jobs for their populations. Both need to promote production and exports. The only possible compromises require consensus about what the rules should be and how they should be obeyed. Those compromises require trade policies.
Trade disputes shape trade policy. The pursuit of trade disputes is determined in U.S. law by the petitions of private enterprise that the Department of Commerce and the International Trade Commission can rarely avoid investigating. By contrast, Chinese law permits the Ministry of Commerce to keep the existence of petitions secret, and the initiation of investigations to be determined by the Ministry’s private assessment of the “public interest,” a provision that does not exist in U.S. law. Consequently, China can, and does, have a trade policy. The United States can have one only with difficulty, and at present has none. U.S. trade policy, such as it is, inherently is protectionist because it follows the protectionist inclinations of private enterprise in hard times. China’s trade policy, unfortunately, is equally or even more protectionist, and is unquestionably the product of government choice. Today, it is hard to tell the pot from the kettle because they are both black.
The United States needs a policy, and China needs a new one. Like almost every major international issue today, this one dividing the United States and China requires the two countries to work together from first principles. They need to examine together what defines and runs and regulates markets. They need to decide together how to keep markets open and free and how to assure fair treatment of foreign investments. That China is standing up to the United States at the WTO is good – it is about time someone besides the European Community and occasionally Japan or others did. It is also not so good if it means antagonism rather than accommodation.
The United States needs to understand that the lack of democracy in China does not mean government unconscious of its responsibility to its people; China needs to understand that central paralysis of American institutions does not necessarily mean American weakness. Both have to keep reminding themselves, lest every now and again they seem to forget, how much they need each other.
I want to conclude briefly with some practical suggestions about how the private sector might respond in these antagonistic times. There are things you can do to cushion the shocks and protect your interests without necessarily changing government policies. The operating assumptions here are that, on the one hand, there will be more trade disputes, and more orders imposing duties and restricting trade; and on the other hand, that business between the two countries will continue to grow.
Should you be a company exporting goods, you should be sure to monitor dumping and subsidy orders in every country where you are doing business, whether in-house or with outside counsel. Even the most sophisticated companies can run afoul of orders, facing penalties and customs duties, because they have not monitored thoroughly. Chinese companies that are exporting should examine carefully the loans they are taking from Chinese banks. They should consider whether they are receiving better-than-market terms, and whether they are exposed to allegations of benefitting from government subsidies. Exporters should learn everything they can about their foreign competition, especially regarding pricing and costs of production: careful pricing can minimize risks of dumping allegations. Such study could also lead to the acquisition of foreign companies. Ownership can reduce dramatically exposure to trade remedy actions. Exporters should cultivate relations with importers, for it is important to have allies in countries where you are doing business. And Chinese companies should make sure they are perceived as private and independent of government.
There are many practical things American companies doing business in China can do to help themselves. They can enlist in trade associations that lobby the U.S. government, beyond the U.S. Chamber of Commerce. They can participate in, or seek to create, boards or commissions to advise the government. Like Chinese companies, American companies now should be wary of better-than-market bank loans or subsidies, especially in agriculture and steel, and like Chinese companies cultivating relations with importers in the United States, American companies should cultivate relations with importers in China.
The corporate world does not control its own destiny, but it need not be tossed without recourse in a turbulent sea. Every company, and every industry, can make things better for itself and, by so doing, contribute to an overall improvement in a bilateral relationship that sorely needs improvement.
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