TRADE IS A TWO WAY STREET
“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”
PRESIDENT RONALD REAGAN, JUNE 28, 1986
US CHINA TRADE WAR AUGUST 30, 2017
Dear Friends,
As stated in many past blog posts, it is easy for Candidate Trump to talk protectionism, but President Trump is now learning it is much more complicated. Trump’s decision to push protectionism endangers his standing with a core constituency—farmers and rural America. As stated below, Trump’s decision to tear up the Trans Pacific Partnership (“TPP”) has already had a major negative impact on farmers.
Trump’s call for an economic war with China and other countries is already having a ramification. Trump’s threat to pull out of NAFTA is not helping the US position in the negotiations. Trump simply does not understand the ramifications of the trade deal when he terminated the TPP or when he threatens to tear up NAFTA.
The Trump trade policy is based on one arrogant presumption—the US market is the largest in the World and the rest of the World must kowtow, come on bended knee, to get into the US and that fact gives the US leverage. But that fact is no longer true. The 11 countries in the TPP have a larger market than the US. China has a larger market than the US so the Trump Administration has to be very careful when it plays this card.
In fact, Canada and Mexico already can fall back on trade agreements they have with other countries, such as Europe. The United States does not have that luxury. The US decision by both Trump and the Democrats to go protectionist is further isolating the US in the trade area and is and will have major negative economic ramifications on the US economy. The chickens will come home to roost.
Trump simply did not understand the dynamics of the Trans Pacific Partnership (“TPP”) and the ramifications of simply terminating it. During the campaign, Candidate Trump stated that the TPP was a bad deal and if only he led the negotiating the team, it would be a better deal. Thus, Trump argued that the TPP deal should be terminated and the US should then negotiate bilateral deals with the eleven countries in the TPP.
But two major problems with that strategy are becoming very clear. First the United States Trade Representative (“USTR”) does not have the personnel to negotiate 11 separate trade deals with the individual countries. It took more than five years to negotiate the TPP. With Trump’s steep cuts to the Government bureaucracy, the government resources simply are not there.
Second, Trump did not understand the dynamics of the TPP deal. During those negotiations, countries could give the US concessions because they would get offsets from other countries and the importance of gaining access to the markets of 11 other countries was worth the concession to the US.
But with no other countries in bilateral deals, the other countries are less willing to make the concessions the US is demanding. In fact, as Robert Lighthizer, the USTR, has discovered, many of the countries in the TPP do not want to have a bilateral deal with the US. They fear and rightly so that the US will demand too much. Much easier to export and import from other countries.
The same problem is happening in the NAFTA negotiations. Trump is threatening to leave NAFTA when he simply does not understand the dynamics of the deal and the devastating impact that such a withdrawal would have on US farmers and also US manufacturing industries, such as the US auto industry. Trade is very complicated and running into the trade area like a bull in a China shop simply creates enormous damage. That damage will be borne by the US agricultural industry and US manufacturers and that means the loss of 1000s if not 100s of thousands of jobs.
Labor unions and working men like the sound of being politically tough on trade and the foreigners, but when jobs are lost, those same people may not like the actual reality of a very protectionist policy. Many American politicians, such as Donald Trump and Senators Chuck Schumer and Bernie Sanders, like to be tough on trade because foreigners do not vote. But if the economy is hurt by Trump’s trade actions, his base will be hurt and he will not be the next President. So there a lot riding on Trump’s trade policy and his Administration has run straight into the Wall of actual trade reality.
The only saving grace for Trump is that as evidenced by Senators Chuck Schumer and Bernie Sanders, the Democrats are even more protectionist than Trump. But neither the Democrats nor Trump understand the true ramifications of simply walking away from trade deals that open up foreign markets. The US agricultural industry is now learning those ramifications.
By kowtowing to the Steel industry with its 141,000 jobs, these trade actions could costs thousands, if not hundreds of thousands, of jobs in downstream industries and other industries, such as Agriculture. It is time for the United States to wake up to the benefits of trade.
It is also time for the United States to find a way to make its companies more competitive in the US and international markets as they exist now rather than erect protectionist barriers to international competition. See the article on Trade Adjustment Assistance for Companies below and how companies, including steel companies, can be saved from import competition by making them competitive again.
USTR has also initiated a section 301 case against forced technology transfers in deals with China. But in an August 30, 2017 article by Dan Harris, my partner, entitled “China US Trade Wars and the IP Elephant in the Room”, Dan states that in over one hundred deals with Chinese companies, he has not seen US companies forced to give over their Intellectual Property (“IP”) by the Chinese government. Instead he has seen US companies make bad decisions leading them to give away their IP by their own volition. If US companies do not protect their IP rights, they will lose them. The US Government cannot protect against stupid mistakes.
Meanwhile, the Section 232 Steel and Aluminum cases remain on hold. The Section 201 case against imports of Solar Cells continues with the ITC hearing being 11 hours long. The United States has intervened in a False Claims Act case against Furniture. Commerce has also issued a circumvention determination in the Aluminum Extrusions case.
More Antidumping and Countervailing Duty and 337 cases have been filed against China and the trade beat goes on.
If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address [email protected]
Best regards,
Bill Perry
THE WEAKNESS IN DONALD TRUMP’S ECONOMIC POLICY—TRADE
Donald Trump’s political strategy is fight the cultural war, but win the next election because of his economic policy. If jobs and wages are up, more companies move into the US, Trump’s firm belief is that he wins the next Presidential election. Even Michael Moore, the Democratic gadfly, believes that Trump will win reelection by carrying the states that he already won. See https://www.fastcompany.com/40459122/michael-moore-says-trump-is-on-track-to-win-again-in-2020.
There is only one fly in the ointment, flaw in this strategy—Trade. If the Trump trade policy hurts farmers, Trump could lose the rural states: Iowa, Kansas, North Dakota, South Dakota, Montana, Wisconsin, Oklahoma, and Arkansas, to name a few and that could lead to Trump’s loss in the next Presidential election.
The economic nationalist Steve Bannon, who is credited with helping get Donald Trump elected by in part pushing the American First Trump policy, was recently forced out of the White House. Before he left, however, Bannon made his trade position crystal clear. in an article entitled “Steve Bannon Unrepetent”, in the American Prospect” magazine on August 16, 2017, Bannon stated with regards to trade policy:
“We’re at economic war with China,” he added. “It’s in all their literature. They’re not shy about saying what they’re doing. One of us is going to be a hegemon in 25 or 30 years and it’s gonna be them if we go down this path. . .
Bannon went on to describe his battle inside the administration to take a harder line on China trade, and not to fall into a trap of wishful thinking in which complaints against China’s trade practices now had to take a backseat to the hope that China, as honest broker, would help restrain Kim.
“To me,” Bannon said, “the economic war with China is everything. And we have to be maniacally focused on that. If we continue to lose it, we’re five years away, I think, ten years at the most, of hitting an inflection point from which we’ll never be able to recover.”
Bannon’s plan of attack includes: a complaint under Section 301 of the 1974 Trade Act against Chinese coercion of technology transfers from American corporations doing business there, and follow-up complaints against steel and aluminum dumping. “We’re going to run the tables on these guys. We’ve come to the conclusion that they’re in an economic war and they’re crushing us.”
From Bannon’s point of view, trade is economic war.
Although Bannon has since left the White House, President Trump and Commerce Secretary Ross apparently share Bannon’s thinking. On August 22nd, without understanding the ramifications on his voter base, President Trump announced that he might simply cancel NAFTA. Apparently, Trump believes that both Mexico and Canada are winning the economic war against the United States.
On August 28th, in an article entitled “Exclusive: Trump vents in Oval Office, “I want tariffs. Bring me some tariffs!”, Axios reported that in the first Oval Office meeting with Chief of Staff John Kelley and the last meeting with Steve Bannon, President Trump stated:
Trump, addressing Kelly, said, “John, you haven’t been in a trade discussion before, so I want to share with you my views. For the last six months, this same group of geniuses comes in here all the time and I tell them, ‘Tariffs. I want tariffs.’ And what do they do? They bring me IP. I can’t put a tariff on IP.” . . .
“China is laughing at us,” Trump added. “Laughing.”
Kelly responded: “Yes sir, I understand, you want tariffs.” . . . .
Staff secretary Rob Porter, who is a key mediator in such meetings, said to the president: “Sir, do you not want to sign this?” He was referring to Trump’s memo prodding Lighthizer to investigate China — which may lead to tariffs against Beijing.
Trump replied: “No, I’ll sign it, but it’s not what I’ve asked for the last six months.” He turned to Kelly: “So, John, I want you to know, this is my view. I want tariffs. And I want someone to bring me some tariffs.”
Kelly replied: “Yes sir, understood sir, I have it.” . . .
Trump made sure the meeting ended with no confusion as to what he wanted.
“John, let me tell you why they didn’t bring me any tariffs,” he said. “I know there are some people in the room right now that are upset. I know there are some globalists in the room right now. And they don’t want them, John, they don’t want the tariffs. But I’m telling you, I want tariffs.” . . . .
Emphasis in the original.
Trump’s statements in this article ring true because during the Presidential campaign, Donald Trump made it very clear that he likes tariffs.
On August 28th, however, George Will in an Op-ed article entitled “Trump, The Novice Protectionist” in Investors Business Daily responded to the Trump trade policy stating:
“Foreigners, however, have their uses. After the president trumpeted that the Dow surpassing the 22,000 mark was evidence of America’s resurgent greatness, The Wall Street Journal rather impertinently noted this: Boeing, whose shares have gained 50% this year and which accounted for 563 of the more than 2,000 points the Dow had gained this year en route to 22,000, makes about 60% of its sales overseas. Boeing has a backlog of orders for 5,705 planes, 75% going outside North America. For Apple, the second-biggest contributor (283 points) to this year’s Dow gain at that point, foreign sales are two-thirds of its total sales. Foreign sales are also two-thirds of the sales of McDonald’s, the third-biggest contributor (239 points).
Mark Perry of the American Enterprise Institute says that in the last 20 years the inflation-adjusted value of U.S. manufacturing output has increased 40% even though — actually, partly because — U.S. factory employment decreased 5.1 million jobs (29%). . . . Increased productivity is the reason there can be quadrupled output from the same number of workers. According to one study, 88% of manufacturing job losses are the result of improved productivity, not rapacious Chinese.
But those Democrats who think government should fine-tune everything are natural protectionists (Sen. Charles Schumer: “They’re rapacious, the Chinese”) and probably think Trump is too fainthearted because he is not protecting Americans from competition from Americans. . . .”
TRUMP TRADE WAR—THE SIMPLISTIC APPROACH TO TRADE COULD WELL DAMAGE THE US ECONOMY AND DOOM THE TRUMP ECONOMIC PLAN
In the above articles about Bannon’s and Trump’s approach to trade along with the below op-ed article in the Wall Street Journal by Commerce Secretary Wilbur Ross, the Trump trade team reveal the protectionist bent of the Trump Administration, which is based, in part, on blind arrogance and a simplistic approach to trade policy.
The Bannon and Trump approach reveal fatal misunderstandings: trade is a two-way street, and US exports are critical to the wellbeing of Donald Trump’s own constituents. In international trade, what goes around comes around. What the US does to other countries, they can do back to the US.
Moreover, Bannon, Ross and Trump are confusing economic warfare with economic competition. The United States has always strongly believed that economic competition is good for the economy, the country and the US consumer. The bedrock principle of the importance of economic competition to wellbeing of the US economy is the reason the US antitrust laws were enacted. As Deputy Assistant Attorney General Roger Alford of the US Justice Department’s Antitrust Division recently stated on August 30th at a Competition Policy Forum in Shanghai China:
Our continued engagement on this topic is significant for competition enforcement. We are the guardians of strong and vigorous competition for economic prosperity. Our lodestar is to promote competition, not to give preference to specific competitors, even when individual businesses jockey for advantage. . . .
Emphasis added.
Bill Gates believed that Microsoft had to go to war with its competition, but frankly that is why Microsoft produced such good software. CEOs of companies are driven by competition to produce better products at lower prices, which means stronger US companies and prosperity for the US economy and US consumers. Stronger US companies means more jobs at higher wages.
Protecting US companies from international competition does not strengthen the US companies. It weakens them and the poster child for such a point is the US Steel industry, which has had 40 years of protection from steel imports.
This is exactly why President Ronald Reagan was so opposed to protectionism. As President Reagan stated above in June 1986: “Protectionism is destructionism. It costs jobs.”
Moreover, Steve Bannon and Donald Trump have not figured out one important point: Not only do companies compete against each other and States compete against each other, but the United States and other countries compete against each other. The US decision to go the Protectionist route means it has given up competing, and, therefore, it will lose the economic war. Trump’s and Bannon’s combined with the Democrat’s protectionist policies mean the US will lose the economic war because of its decision to look inward and no longer compete in the international economic marketplace.
US companies do not get stronger by protecting them from international competition, which simply promotes the mentality of international trade victimhood. US companies get stronger by looking inward and working harder to become internationally competitive. See the article about Trade Adjustment Assistance for Companies below.
The arrogance of the Steve Bannon and the Trump trade policy is based on the principle that the United States is the largest market in the World, and this gives the US leverage and, therefore, countries must kowtow and bend their head to get into the US market. Although that principle may have been true twenty years ago, it is simply no longer true.
The Trans Pacific Partnership, for example, combines the markets of 12 countries, now 11 with the US exit, into one “huge” trading block. Since Mexico, Canada, Japan, Australia and New Zealand are part of that block, the TPP market is a much larger market than the US alone. Mexico and Canada are also in a stronger trade position than the US because they already have free trade agreements with a number of other countries, including the EC, and that gives them a substantial competitive advantage getting into those markets. This fact gives Canada and Mexico leverage in the NAFTA negotiations even though Trump, Lighthizer and Ross simply do not understand the dynamics of the deal.
Maybe this is a major reason US companies move to Mexico and Canada to get better access to other foreign markets. The United States is competing with other countries too.
Also in many ways, with 1.37 billion people China has a larger market than the US. In 2006, at a speech in Beijing, the US Commercial Attaché stated that 75% of all Chinese, including rural Chinese, have a color television set. Now that is close to 95% of 1.37 billion. That is a larger market than the US with its 323 million.
Also the upper class and upper middle class in China, which numbers between 250 to more than 300 million, have an income closer to the US and that segment of the China market is the same size, if not larger, than the US. That is why in the push for the Trans Pacific Partnership (“TPP”), House Speaker Paul Ryan used to state that 75% of the World’s consumers are outside the United States.
But China is also not this overwhelming behemoth with an economic juggernaut that is going to crush the US. Yes, it may have a larger market, but on a per capita basis, it is much smaller. Thus, the US per capita income on average is $57,000 where the Chinese per capita income is $8,000. China has its own problems—keeping its people happy and fed.
Along with these problems, China has major weaknesses, which can be exploited by the US. China has a very high personal tax rate, which can be as high at 45%. This high tax rate is why many Chinese have emigrated to the US, looking for a lower tax rate and a better opportunity to keep the money they earn. If Trump can drive taxes lower, that may result in more entrepreneurs and businesses moving to the US, e.g. Foxconn.
Another problem is the Chinese government’s strict control of information flowing into China by its very strong control of the internet. Strict control of the internet stops knowledge flowing into China, which especially hurts the country’s high tech sector. When information and knowledge stop, economies do not do as well. The free flow of knowledge and ideas is critical for the most advanced economies and yet that is not true in China.
But arrogance is one of the great sins because it blinds you to all options. To make a better deal in trade negotiations, the Administration has to do its homework and first understand the actual American interest. If one is going to make America great again, one must first understand what is the nature of America’s interest in trade. This requires understanding the dynamics of the trade deal in question, which President Trump prides himself in doing. The Trump Administration must understand the actual trade deal closely, the US leverage points and the US weaknesses, what trade deals will help the US and the what trade deals will hurt the US interest. Donald Trump’s failure in trade negotiations is to understand the dynamics of the deal and the leverage that the US has in trade negotiations. In other words, with regards to trade, Trump simply does not understand “The Art of the Deal”.
In ripping up the TPP without even trying to renegotiate, Trump failed his own test because he did not understand the elements of the deal. Trump’s philosophy was to do away with multilateral deals because they fall to the lowest common denominator and do only bilateral deals because that gives the US more control over the deal and if the country does not live up to its side of the bargain cancel the deal.
The problem with that approach is first the US government does not have the personnel at USTR, which is very lean and mean, to negotiate 11 separate trade deals with all the countries in the TPP. It took more than 5 years to negotiate the TPP.
But secondly and more important, in recent bilateral negotiations, Canada, Mexico and Japan have all told the US do not assume that in bilateral deals or NAFTA, the United States will get the same deal it would have gotten in the TPP. In fact, as indicated below, many countries in the TPP simply do not want to do a bilateral deal with the US—too much work. Canada, Mexico and Japan were willing to give the US a better deal because they would gain access to a much greater market, the market of 11 additional countries. That gave countries the political ability to play one national interest against another national interest. Thus, Canada could give in to the US on dairy products because of the potential access to the much larger TPP market, including the Japanese and US markets. Thus, countries in the TPP could use tradeoffs with other countries to open their markets further to US exports. Those trades offs and the market access to the markets of 12 different countries does not exist with a bilateral deal with just the US.
On August 24, 2017, in an article entitled “Revived TPP may exclude trade concessions sought by US”, Nikkei, a Japanese newspaper, stated:
TOKYO — Japan is proposing suspending trade concessions made to the U.S. as part of the Trans-Pacific Partnership in order to resurrect the pact with the 11 remaining members.
Tokyo sounded out that proposal to other nations in the “TPP 11,” as those members became known after the U.S. withdrew from the deal. Senior negotiators will cite items they wish to see shelved during three days of talks starting Monday in Australia.
Washington had secured a number of major concessions from other nations in exchange for lower American tariffs on their exports. Though President Donald Trump pulled the U.S. out of the deal, those concessions remain on the TPP’s books — to the consternation of other members.
If all the 11 participants agree unanimously, any such concession would be put on hold, and national regulations governing that element of the pact would remain in place.
But the suspensions would be lifted if and when the U.S. decides to return to the partnership.
While the remaining members are leaning toward keeping the lower tariffs agreed on among the initial group, they are likely to revisit specific trade rules.
The U.S. sided with major domestic drug companies and settled on an effective eight-year window before competitors can have access to proprietary pharmaceutical data. That moratorium exceeds international standards, and other countries think it would impede development of cheap generics. All members of the TPP 11 are expected to agree on freezing that provision.
Other provisions that may be suspended involve copyright protection periods, fair-competition policies governing state-owned enterprises and the opening of government procurement to foreign capital.
American exports would face a competitive disadvantage if an 11-member TPP goes into force. Tokyo hopes that U.S. meat industry leaders will speak up in favor of rejoining the trade deal.
Trade is the one weak link in Trump’s economic plan. As indicated below, the decision to kill the TPP has already had a major negative impact on US agriculture and part of Trump’s base, the rural states, where agriculture is king.
SIMPLICITY IS OFTEN A GOOD TRADE POLICY BUT NOT WHEN THE POLICY IS SIMPLE MINDED AND NARROWLY FOCUSED
Trump has slowed down the Section 232 Steel and Aluminum Investigations because its “complicated”, but when Bannon and Trump take a very simplistic, black and white view of trade, it is extremely dangerous to the US economy and Donald Trump’s own constituents.
This is not a fight between Globalism and America First. The America First strategy requires the Administration to understand deeply the interest of the United States and the interest of all the significant US industries in trade negotiations, including agriculture, not just the narrow Steel and Aluminum Industries. The Trump and Bannon statements indicate a deep failure to analyze why Trump won the election and what the interest of the entire United States is in trade negotiations and also the interest of Donald Trump’s own constituents, the voters that elected Donald Trump President.
Bannon thinks that if we create a trade war with China and are tough on them we will win the economic trade war with China. But Bannon truly has forgotten why voters elected Donald Trump.
First, it was not just the US Steel and Aluminum industries that put Trump in the White House, it was the working man in many manufacturing plants throughout the United States. Because of their economic, black white view of the World, Trump and Bannon want to put up barriers to steel imports to protect the US Steel industry and its 141,000 jobs without realizing the damaging impact of such an action on the millions of jobs in the downstream steel consuming industries. Truthfully, if Donald Trump is going to be reelected, Trump himself, his trade team and Steve Bannon cannot be so simple minded.
More importantly Donald Trump also won because of farmers. Although Trump won the States in the Blue Wall, Michigan, Ohio, Pennsylvania and Wisconsin, he was also able to win the Presidency because he won the US heartland, including the states of Iowa, Kansas, Nebraska, Wyoming, Montana, North Dakota, South Dakota, Arizona, Oklahoma, Utah and Florida. What do those states have in common and in common with Wisconsin—Agriculture. And the Trump trade policy is and has seriously hurt US farmers because US farmers are dependent on exports.
As the US Wheat Federation stated in the Section 232 Steel case, half of US wheat is exported. Putting up protectionist walls invites retaliation against US agricultural exports.
Finally, one other point in direct response to Steve Bannon’s and Trumps statement, substantial trade relations prevent real shooting wars. As indicated below in the Section 301 article, China is becoming more amenable on North Korea because of its enormous trade relationship with the United States. The total US China trade relationship is $578.6 billion with $115.8 billion in US exports and $462.8 billion in imports from China.
In direct contrast, the US trade relationship with Russia is much, much smaller. The total US Russia trade relationship is $38.1 billion with $11.2 in US exports and $27 billion in imports from Russia. Truly peanuts in the global trade market. It is better to compete with countries in the economic arena as compared to a real war, where millions die.
DEMOCRATS MORE PROTECTIONIST THAN DONALD TRUMP
The only saving grace for Donald Trump on trade is that the Democrats are even more protectionist. On August 13th, Senator Chuck Schumer, who heads the Democrats in the Senate, told John Catsimatidis on his New York AM 970 radio show “The Cats Roundtable” that he is closer now to President Donald Trump than he ever was with former President Barack Obama on trade. Senator Schumer stated:
“Trade is the thing [China cares] most about, and they’ve been treating us very badly on trade for a long time, frankly,. I was closer in trade views to Donald Trump than I was to either George Bush or Barack Obama, on China anyway. I think we were much too easy on them. But if we got tough on them now, maybe they would relent, but we have to be real tough. So far, the administration has not been as tough as they should be, as far as I’m concerned.”
The Trump Administration should be very tough with China on trade, but it should carefully analyze what its true interests are and the interests of US voters that elected Donald Trump. The US government should do everything in its power to drop barriers to US exports in China and other countries. But protectionism for protectionism’s sake will not cure the problems of US manufacturing and right the US China trade balance
TRUMP’S TRADE WAR HURTS US AGRICULTURE AND US FARMERS
As mentioned in prior newsletter, the ox that will be gored by Trump’s trade policy is agriculture and that is just what is happening. On August 7, 2017, in the attached extensive article entitled “Trump’s Trade Pullout Roils Rural America”, Trump’s Trade Pullout Roils Rural America – POLITICO Magazine, Politico did its homework and described in detail the deep negative impact of the Trump trade policy on US agriculture:
EAGLE GROVE, Iowa—On a cloud-swept landscape dotted with grain elevators, a meat producer called Prestage Farms is building a 700,000-square-foot processing plant. The gleaming new factory is both the great hope of Wright County, which voted by a 2-1 margin for Donald Trump, and the victim of one of Trump’s first policy moves, his decision to pull out of the Trans-Pacific Partnership.
For much of industrial America, the TPP was a suspect deal, the successor to the North American Free Trade Agreement, which some argue led to a massive offshoring of U.S. jobs to Mexico. But for the already struggling agricultural sector, the sprawling 12- nation TPP, covering 40 percent of the world’s economy, was a lifeline. It was a chance to erase punishing tariffs that restricted the United States—the onetime “breadbasket of the world”—from selling its meats, grains and dairy products to massive importers of foodstuffs such as Japan and Vietnam.
The decision to pull out of the trade deal has become a double hit on places like Eagle Grove. The promised bump of $10 billion in agricultural output over 15 years, based on estimates by the U.S. International Trade Commission, won’t materialize. But Trump’s decision to withdraw from the pact also cleared the way for rival exporters such as Australia, New Zealand and the European Union to negotiate even lower tariffs with importing nations, creating potentially greater competitive advantages over U.S. exports.
A POLITICO analysis found that the 11 other TPP countries are now involved in a whopping 27 separate trade negotiations with each other, other major trading powers in the region like China and massive blocs like the EU. Those efforts range from exploratory conversations to deals already signed and awaiting ratification. Seven of the most significant deals for U.S. farmers were either launched or concluded in the five months since the United States withdrew from the TPP.
“I’m scared to death,” said Ron Prestage, whose North Carolina-based family pork and poultry business made its huge investment in the plant near Eagle Grove in part to reap expected gains from the TPP. “I don’t guess I’ve gone beyond the point of no return on the new plant, but we did already start digging our wells and started moving dirt.”
He and other agricultural business people and workers have reason for concern.
On July 6, the EU, which already exports as much pork to Japan as the United States does, announced political agreement on a new deal that would give European pork farmers an advantage of up to $2 per pound over U.S. exporters under certain circumstances—a move which, if unchecked, is all but certain to create a widening gap between EU exports and those from the United States.
European wine producers, who sold more than $1 billion to Japan between 2014 and 2016, would also see a 15 percent tariff on exports to Japan disappear while U.S. exporters would continue to face that duty at the border. For other products, the deal essentially mirrors the rates negotiated under the TPP, which the United States has surrendered, giving the EU a clear advantage over U.S. farmers.
The EU’s deal is all the more noteworthy because American farmers were relying on the TPP—to which the EU was not a member—to give them an advantage over European competitors. But in a further rebuke to the United States, Tokyo decided within a matter of weeks to offer the European nations virtually the same agricultural access to its market that United States trade officials had spent two excruciating years extracting through near-monthly meetings with their Japanese counterparts on the sidelines of the broader TPP negotiations; the United States is now left out.
The EU, which also recently inked a deal with Vietnam, is now moving forward with talks with Malaysia and is in the process of modernizing a pre-existing trade deal with Mexico.
Meanwhile, a bloc of four Latin-American countries—Mexico, Peru, Chile and Colombia, known as the Pacific Alliance—is quickly becoming the leading force for free trade in the region, announcing near the end of June it would commence its own negotiations with New Zealand, Australia and Singapore, heedless of its neighbor to the north.
On its own, Australia, which in 2015 cut a deal to undersell the United States in beef exports to Japan, announced another round of scheduled tariff cuts with Japan. Without the TPP, Australian ranchers eventually will enjoy a 19 percent tariff advantage over U.S. competitors. Australia is also prioritizing the conclusion of trade talks with Indonesia, the largest nation in Southeast Asia by gross domestic product.
The remaining 11 TPP countries have already met two times, with a third meeting planned, to move ahead with the revival of the deal without the United States. The so- called TPP-11 would be in direct response to Trump’s trade policy. Economic forecasts already show projected gains for countries involved. Canada, according to one estimate, could permanently gain an annual market share of $412 million in beef and $111 million in pork sales to Japan by 2035, because lower tariffs would enable it to eclipse America’s position in the market.
As China, which was never a part of the TPP, senses blood in the water, it is moving quickly to assert itself, rather than the United States, as the region’s trade arbiter. China is aiming to close talks by the end of this year on its behemoth Regional Comprehensive Economic Partnership—a trade agreement involving 15 other Asia-Pacific countries.
None of these deals are yet in effect. But already there are signs that competitors are gaining market share over U.S. producers in the post-TPP landscape, as Pacific nations take a closer look at alternatives to U.S. exporters.
Over the first five months of 2017, U.S. exports to Japan of chilled pork, which is preferable to frozen meat, are up 2 percent over the previous year. But exports of chilled pork from Canada, a prime competitor, are up 19 percent. Likewise, in frozen pork, U.S. exports are up 28 percent. But exports from the EU, the leading competitor, are up 44 percent.
Japan, which saw the TPP not only as a source of economic growth but a counterweight to China, is now taking the lead in salvaging the deal. Its goal is to have some sort of agreement between the 11 other countries in place for the annual summit of Asia-Pacific leaders in November. Trump is expected to attend, creating the awkward possibility that he will witness all the handshakes and back slaps as his fellow leaders congratulate themselves on a deal.
For his part, Trump once promised a slew of “beautiful” deals to replace the TPP, but his administration has yet to lay out a detailed strategy. U.S. Trade Representative Robert Lighthizer told lawmakers that an analysis is underway to determine where it makes most sense to pursue negotiations.
In the meantime, Lighthizer, a trade attorney who pressured Japan to voluntarily restrain its steel exports when he was a trade official in the 1980s, said Tokyo should just go ahead and lower their tariffs without expecting anything in return.
“I think in the areas like beef and the others, they ought to be making some unilateral concessions, at least temporary concessions,” he told lawmakers in June. “And I don’t quite understand why that doesn’t happen.”
Lighthizer said the administration still hopes to strike bilateral trade deals—that is, separate agreements with individual countries—but he conceded that “some of the TPP countries don’t want to do bilaterals.” The value of the TPP for many countries was that they could justify giving up protective tariffs in exchange for their own access to the markets of a wide pool of countries; many are unwilling to make such concessions for the smaller gains of a bilateral deal.
Lighthizer acknowledged that even Japan, at least for the time being, may not be interested in one-on-one negotiations with the U.S. . . .
That leaves workers in 13,000-person Wright County, whose survival depends largely on agriculture, with relatively few signs of optimism. Trump’s decision to walk away from the TPP has stoked uncertainty about U.S. trade policy and, more notably, the president’s commitment to rural America.
“He fooled a lot of people,” said Sandy McGrath, mayor of Eagle Grove, who is not affiliated with any party and did not support Trump. . . .
But the plant’s success will depend largely on export opportunities. More than 26 percent of the pork produced in the U.S. in 2016 was exported to foreign markets. And more than $1.5 billion of the nearly $6 billion in U.S. pork exports in 2016 headed for Japan.
“At the time those investment decisions were made, the U.S. had never turned down a free trade opportunity,” said Dermot Hayes, an agricultural economist at Iowa State University, referring to the Prestage plant and other pork-industry investments.
Hayes said the livestock industry had in its sights a future of expansion amid soaring export growth. After Trump’s withdrawal from the TPP, “that has pretty much disappeared,” he said. . . .
In April, when Trump was on the verge of withdrawing from NAFTA, Maier said he watched corn prices plummet in anticipation of the president’s decision. Trump relented, at the request of Perdue, the agriculture secretary, who appealed to the president with colorful maps showing the president’s base was largely concentrated in states that heavily rely on agriculture.
Ultimately, Trump agreed to renegotiations with Canada and Mexico instead. But Maier remains wary that, despite pledges by the administration to “do no harm” for agriculture, the mere act of reopening the deal with Canada and Mexico, the two largest destinations for U.S. agricultural exporters, could mess up what has been a very good thing for American farmers in the Midwest.
“Farmers are willing to open up NAFTA, but if we open up NAFTA, there’s the risk of going backwards,” he said. . . .
The Obama administration, backed by a large cadre of free-trade Republicans, used that reality to grow support for the TPP among businesses and agricultural interests eager to grab a better foothold in a fast-growing area of the world where the U.S. has few formal trade deals.
But through the slow churn of negotiations, the dazzlingly complex deal among 12 countries soon fell victim to time and circumstance. After more than five years of talks, bleary-eyed trade negotiators were finally able to close the deal at an Atlanta hotel on October 5, 2015. But the agreement quickly became mired in election politics. Labor unions and blue-collar voters declared it to be a successor to NAFTA, which was blamed for the loss of factories. And while the U.S. trade commission predicted the deal would be broadly beneficial to the overall economy, some areas including food and agriculture were predicted to score more gains than others.
Even as supporters of the deal insisted it would put U.S. manufacturers on a stronger footing versus overseas competitors by enforcing higher labor and environmental standards, Trump and Bernie Sanders used anti-TPP fervor as a key plank of their campaign platforms, declaring that it would cost America jobs. Even Hillary Clinton, normally a supporter of freer trade, turned on the deal, saying she wanted to negotiate better terms.
Trump escalated his rhetoric on trade after the primaries and Congress, which has final say on trade deals, shied away from bringing TPP up for a vote. After Trump’s victory, the fate of the deal in the GOP-controlled Congress was all but sealed as Republican lawmakers put it aside to concentrate on tax reform and a bid to roll back Obamacare.
On his first full day in office, Trump signed an executive order withdrawing from the TPP, calling the action a “great thing for the American worker.”
“The Trans-Pacific Partnership is another disaster done and pushed by special interests who want to rape our country, just a continuing rape of our country,” Trump said during a campaign stop in Ohio. “That’s what it is, too. It’s a harsh word: It’s a rape of our country.” . . .
But even as Iowa was voting for Trump by 51 percent-42 percent, its farmers were looking to Asia as their savior. . . .
But despite Trump’s intense personal interest in trade, the White House has been slow to build the dream team of negotiators the president promised on the campaign trail. Lighthizer, who once served as a deputy U.S. trade representative under President Ronald Reagan, was confirmed on May 11. The people tapped to serve in the agency’s three deputy positions await confirmation, as does the administration’s pick for chief agriculture negotiator.
Iowa’s Republican Sen. Chuck Grassley says he thinks a trade deal with Japan would make up for much that was lost for agriculture by dropping TPP, but it will take “a lot more personnel, a lot more time to get it done, a lot more separate actions by Congress.”
As far as the administration’s strategy to get there, Grassley, who still owns his farm in Butler County, Iowa, said he hasn’t gotten much direction.
“I asked Lighthizer maybe a month ago in a meeting, and I didn’t get an answer,” Grassley said in a recent interview. “In a sense he answered, but not very definitively because their policy isn’t established.” . . .
Maybe the lesson of TPP demise for the protectionist firebreathers is be careful what you wish for. The negative ramifications of not doing the TPP appear to be infinitely higher than doing the trade deal.
NAFTA NEGOTIATIONS
On August 16th, United States, Canada and Mexico sat down together for the first round of talks to formally reopen NAFTA. On July 17th, the USTR released its attached “Summary of Objectives for the NAFTA Renegotiation”, USTR NAFTA RENGOTIATION OBJECTIVES.
But Trump keeps stirring the pot with his anti-NAFTA rhetoric. On August 22nd, during a speech in Phoenix President Trump announced that he might simply cancel NAFTA.
As Politico stated on August 23rd, “Trump’s threat of NAFTA withdrawal lose its edge”:
“Canada and Mexico appear to have reached a conclusion that when President Donald Trump threatens to withdraw from NAFTA, it is a negotiating ploy that is all bark and no bite. . . .
Instead, concerns were raised from within the United States government, where officials and lawmakers who support the deal see little value in the president repeatedly going to the well of harsh rhetoric in a way that makes the United States’ negotiating position more difficult.
“I don’t know a single person with a working brain cell that thinks that’s a good idea,” said one U.S. government source close to the talks, referring to renewing the threat of terminating the deal. “It’s a stupid message to send during the negotiations.”
Part of the reason Mexico and Canada might be less intimidated by Trump’s bluster is that they have plenty of other trading partners to fall back on if the relationship with the U.S. sours. Both countries have separate deals in place with the European Union — Mexico is currently ramping up talks to update theirs — and both are part of the effort to reboot the Trans-Pacific Partnership, which the remaining 11 members are pushing toward completion even without the U.S.
But after Trump cast aside the TPP almost immediately upon taking office, the U.S. has fewer such options to fall back on — so pro-NAFTA lawmakers and those from export- dependent states have repeatedly urged him to focus on modernizing and updating NAFTA, rather than terminating it.
House Ways and Means Chairman Kevin Brady — whose home state of Texas counts Mexico as the No. 1 market for its exports, followed by Canada — cautioned Trump on Wednesday to be more aware of the effects his words have on the country’s trade relationships.
“The president’s rhetoric is red-hot, and it creates real impact,” Brady said during a town hall discussion at AT&T headquarters in Dallas. “I think the rhetoric, the words from the president matter, so I’d like to see that take a different approach in tone.”
Brady, whose powerful committee oversees trade on Capitol Hill, is one of a core group of Republicans whose support will be crucial if the administration succeeds in renegotiating a new deal with Canada and Mexico, since it will likely have to go through Congress for approval . . ..
The political question is whether Trump would discard NAFTA in the face of what certainly would be fierce resistance from Congress and industries like agriculture, which would take a significant hit in that event amid a sustained downturn in the farm economy.
Back in April, intense lobbying from the Hill and on the farm helped talk Trump down from inking a prepared executive order to withdraw from the deal. News of the planned order sparked such a public outcry and flurry of reaction in support of the deal that business and trade insiders sometimes refer to it as “Black Wednesday.” . . .”
Meanwhile, a chorus of industries are telling the Administration not to be so tough in the NAFTA negotiations because tweaks are fine, but the failure of the NAFTA deal would be disastrous to US industry and US agriculture. On August 10th Automobile and Auto Parts makers urged the Administration to cool down the rhetoric on rules of origin for automobiles and auto parts because major changes to automobile rules of origin through NAFTA modernization could have the unintended consequence of making North America’s auto industry less competitive. As Charles Uthus, vice president of international policy at the American Automotive Policy Council, the main lobbying arm of U.S. auto companies in Washington, stated:
“It’s the highest automotive rule of origin anywhere that you can find. It’s already extremely rigorous, very difficult to meet as it is. To actually strengthen it, there is a huge risk of unintended consequences.”
Ann Wilson, senior vice president of government affairs for MEMA, stated:
“Our members really struggle with finding a connection between changing the rules of origin and the reshoring of jobs. They do not see that connection.”
On August 17th Politico reported that Trump’s tough rhetoric has created intense hatred in Mexico, which will make it politically very difficult for Mexico to make concessions or agree to a deal that would clearly benefit the US. Thus, Mexican President Enrique Peña Nieto is not afraid to walk away from the table if needed, potentially overturning the entire U.S.-Mexico bilateral trade relationship in the process.
Again, Trump does not understand the dynamics of the deal and the fact that since Mexico has more trade agreements than the US, it has leverage and is not afraid to walk away from the table.
Thus, both Mexico and Canada are resisting US pressure for a new “national content” provision in NAFTA’s auto trade rules to encourage more parts to be made in the United States. As Mexican Economy Minister Ildefonso Guajardo stated:
“It will not be best practice to introduce that kind of rigidities into the industrial process. It’s not good for American companies. It’s not good for Mexican companies.”
Canadian Foreign Minister Chrystia Freeland also stated: “Canada is not in favor of specific national content in rules of origin”.
Meanwhile, the Canadian Dairy Producers stated that they will fight any U.S. effort to duplicate in NAFTA the dairy concessions secured through TPP negotiations. As Yves Leduc, director of policy and international trade for the Dairy Farmers of Canada, stated, “Not a possibility – as far as we are concerned, we would never agree to that.”
The small amount of dairy access that Canada granted the U.S. during the TPP talks – equal to 3.25 percent of Canada’s domestic milk production – was balanced out by concessions Canada secured in negotiations involving all of the 11 other countries. Those circumstances don’t apply to NAFTA, which involves only three countries. As Leduc stated, “To ask us to open up our market to allow more subsidized goods from the U.S. to enter the Canadian market, the answer is simple: It’s no.”
Meanwhile, US famers joined with Canadian and Mexican farmers to urge US negotiators to not let specific demands undermine the market access US farmers and ranchers enjoy under the existing agreement. Although all three groups want to lower trade barriers to exports and imports, it was their unified position to defend existing market access that was most notable, given the fear on the farm that Trump could use agriculture as a bargaining chip to satisfy his obsession with reducing America’s trade deficit in manufactured goods.
THE PHRASE “FREE BUT FAIR TRADE” IS A FRAUD BECAUSE COMMERCE HAS SO DEFINED DUMPING AS TO FIND ALMOST EVERY IMPORT DUMPED
In an article along the same lines as the Bannon article and the Trump quote, on August 1, 2017, Commerce Secretary Wibur Ross penned an article in the Wall Street Journal entitled, “Free Trade Is a Two Way Street”. In the article, Commerce Secretary Ross argued that many countries erect barriers to US exports, but then went on to state:
“Both China and Europe also bankroll their exports through grants, low-cost loans, energy subsidies, special value-added tax refunds, and below-market real-estate sales and leases, among other means. Comparable levels of government support do not exist in the U.S. If these countries really are free traders, why do they have such formidable tariff and nontariff barriers?
Until we make better deals with our trading partners, we will never know precisely how much of our deficit in goods is due to such trickery. But there can be no question that these barriers are responsible for a significant portion of our current trade imbalance.
China is not a market economy. The Chinese government creates national champions and takes other actions that significantly distort markets. Responding to such actions with trade remedies is not protectionist. In fact, the World Trade Organization specifically permits its members to take action when other countries are subsidizing, dumping and engaging in other unfair trade practices.
Consistent with WTO rules, the U.S. has since Jan. 20 brought 54 trade-remedy actions— antidumping and countervailing duty investigations—compared with 40 brought during the same period last year. The U.S. currently has 403 outstanding orders against 42 countries.
But unfortunately, in its annual reports, the WTO consistently casts the increase of trade enforcement cases as evidence of protectionism by the countries lodging the complaints. Apparently, the possibility never occurs to the WTO that there are more trade cases because there are more trade abuses.
The WTO should protect free and fair trade among nations, not attack those trade remedies necessary to ensure a level playing field. Defending U.S. workers and businesses against this onslaught should not be mislabeled as protectionism. Insisting on fair trade is the best way to ensure the long-term strength of the international trading system.
The Trump administration believes in free and fair trade and will use every available tool to counter the protectionism of those who pledge allegiance to free trade while violating its core principles. The U.S. is working to restore a level playing field, and under President Trump’s leadership, we will do so.
This is a true free-trade agenda.”
Let me begin by saying no one has a problem with US government actions challenging foreign, including Chinese, barriers to US exports. Every Administration be it Republican or Democrat has taken a tough stance to drop foreign barriers to US exports. In fact, many Senators and Congressmen are pressuring the Trump Administration for more free trade agreements because they remove barriers to US exports. The TPP, Trans Pacific Partnership, would have dropped tariffs down to 0 on more than 18,000 products exported by US companies, many agricultural products.
Although no one doubts that the Chinese market is significantly distorted, many foreign markets and in some cases US markets are significantly distorted. The US steel market with the many outstanding trade orders blocking steel imports is a good example of a significantly distorted market in which the US price for steel is much higher than the World market price.
Also no one doubts that many countries subsidize their exports or dump in the US market. For many years, the Commerce Department was able to find very high dumping rates on Japanese imports in antidumping cases by using price to price comparisons, which found that Japanese prices were significantly higher, sometimes four times higher, than US prices for the same Japanese product. That is classic dumping using higher prices in the home market to fuel lower prices to the United States.
The Japanese companies were able to use dumping because the Japanese Government erected non-tariff trade barriers to block imports from the US and other countries creating very high domestic Japanese prices. To protect its mikan /tangerine industry, for example, for many years Japan blocked all imports of citrus fruit. But it is also interesting to note that there are no outstanding countervailing duty/anti-subsidy orders against Japanese products.
The Chinese governments, especially the local governments, also subsidize their exports and provide low interest loans to their companies, but so does the US government, through its subsidies in the Agriculture area, and the State Governments, which will waive state income taxes or help with low interest loans, to encourage production of companies, such as Foxconn, to move to their states.
But the US Countervailing Duty law applies to China now and the Commerce Department has not been shy in finding Chinese imports into the United States to be subsidized. It should be noted, that the WTO has overturned 28 US Countervailing Duty cases against China, in part, because the WTO has ruled that Chinese state-owned companies are not necessarily the Chinese government itself, as the Commerce Department has ruled.
The US too has state-owned companies, such as the Tennessee Valley Authority, which provides electricity to certain parts of the US. Should foreign governments assume that all electricity from the TVA is subsidized because it is owned by the US government?
The major problem, however, is the Commerce Department’s application of the antidumping law.
In the 1980s, James Bovard authored a book called the “Fair Trade Fraud”, which outlined many of these same problems in the US antidumping law. But nothing has changed. Instead Commerce has just developed new methodologies to increase antidumping rates even higher.
Moreover, the same economic warfare arguments were made about Japan in the 1980s. Although China does not have clean hands, that does not mean that every single import from China is unfairly traded. In fact, I would argue that a significant percentage, if not the majority, of imports from China are fairly traded. The Chinese government simply does not care about the Chinese Mushroom, Honey, Crawfish or Shrimp industries and does not set the prices for those products or any of the inputs. Does the Chinese government really care about the price of cow manure in China, a major input for mushrooms?
Remember Commerce over decades has so distorted the US antidumping law that it finds dumping in 100% of the cases from China because it refuses to look at actual prices and costs in China. If you have a hanging judge, does that mean every single import from China is dumped/unfairly traded?
Instead, Commerce should start easing the restrictions on the market economy status of China so as to determine which Chinese companies are truly dumping in the US market and nail them to the wall. Commerce should make its antidumping cases against China mirror actual reality in China, not for the Chinese companies, but for US importers and downstream customers.
Right now, because of its refusal to use actual prices and costs in China, neither Donald Trump, nor Wilbur Ross nor the Commerce Department know which Chinese companies are truly dumping and which Chinese companies are not. Until Commerce starts uses actual prices and costs in China, no one will know which Chinese company is truly dumping,
Finally, the Commerce Department decision to tilt the playing ground and find dumping in every antidumping and countervailing duty case against China and also against almost all every other foreign county has created a situation so that the public perception is that almost every import into the US is dumped. These hanging judge decisions fuel the protectionist/isolationist political rhetoric in the United States badly damaging US industry and agriculture. It has also led to a mentality by many US companies of international trade victimhood. We poor US companies simply cannot compete in the international or US market because all foreign exports and US imports are subsidized or dumped.
Instead, US companies want to rely on US government issued protectionist walls to protect themselves from competition rather than finding a way to make the US companies competitive again. See the article on Trade Adjustment Assistance for Companies below.
SECTION 232 STEEL AND ALUMINUM CASES STALLED
The Section 232 Steel and Aluminum cases continue to be stalled. On August 21ST, Politico reported:
“WHITHER THE NATIONAL SECURITY STEEL INVESTIGATION? White House chief strategist Steve Bannon’s departure from the White House . . tipped the balance of Trump’s economic advisers firmly toward the more centrist “globalist” wing – and that could mean that two reports examining whether to limit imports of steel and aluminum for national security reasons could be indefinitely delayed. The Commerce Department has prepared a report on its findings that is circulating among agencies, but the administration has decided to dial down the investigations as it turns its attention to tax reform . . . .
Part of the reason is the departure of Bannon, who had been a major proponent of the move. But the decision to put off the investigations was also made in part because of opposition from business groups and Republican lawmakers who were worried it would hurt steel users and the broader economy, the news report said. .
Although President Donald Trump and Commerce Secretary Wilbur Ross thought they had found a panacea, cure all, for US trade problems, using Section 232 National Security cases to put large tariffs and/or quotas on Steel, Aluminum and other raw material products, something happened on the way to the Trump trade heaven—reality. The major problem is that the steel industry has only 141,000 jobs at stake while downstream steel users have millions of jobs at stake.
As background, on April 20, 2017, President Trump and the Commerce Department in a press announcement and fact sheet along with a Federal Register notice, Presidential Memorandum Prioritizes Commerce Steel Investigation _ Department of Commerce Section 232 Investigation on the Effect of Imports of Steel on U.S COMMERCE FED REG SECTION 232 NOTICE, announced the self-initiation of a Section 232 National Security case against imports of steel from every country. See video of Trump signing the Executive Order with Secretary Ross and Steel Producers at https://www.youtube.com/watch?v=EiVfNOl-_Ho.
Commerce held a hearing on May 24th in this case. The video of the hearing can be found at https://www.commerce.gov/file/public-hearing-section-232-investigation-steel-imports-national-security.
In the past Secretary Ross has stated that the Section 232 case is meant to fill the gaps created by the patchwork of antidumping and countervailing duties on foreign steel, which he said have provided only limited relief to the U.S. industry.
Under the terms of the executive order, an interagency group will present a report to the White House within 270 days that identifies goods that are essential for national security and analyzes the ability of the defense industrial base to produce those goods.
If the Secretary reports affirmatively, the President has 90 days to determine whether it concurs with the Secretary’s determination and “determine the nature and duration of the action that, in the judgment of the President, must be taken to adjust the imports of the article and its derivatives so that such imports will not threaten to impair the national security.”
Although Commerce Secretary Wilbur Ross pledged to get the Section 232 Steel and Aluminum reports to President Trump’s desk by the end of June, that did not happen as the Administration began to realize the impact a broad tariff on steel or aluminum raw material inputs would have on downstream steel and aluminum users, which are dependent on high quality, competitively priced steel products to produce competitive downstream products made from steel and aluminum.
In response to the delay in the Section 232 Steel case, American steel industry executives appealed directly to President Donald Trump for immediate import restrictions because steel imports have surged back to 2015 levels. As the letter states:
“The need for action is urgent. Since the 232 investigation was announced in April, imports have continued to surge. Immediate action must meaningfully adjust imports to restore healthy levels of capacity utilization and profitability to the domestic industry over a sustained period.”
The American Iron and Steel Institute (AISI), an industry trade group, reported on Wednesday that total steel imports through July this year were up 22 percent from the same period a year ago, with imports taking 28 percent of the U.S. market.
In the letter, Steel company executives from Nucor Corp., U.S. Steel, ArcelorMittal and Commercial Metals Co. said the sustained surge of steel imports into the United States had “hollowed out” much of the domestic steel industry and was threatening its ability to meet national security needs.
“Your leadership in finding a solution to the crisis facing the steel industry is badly needed now. Only you can authorize actions that can solve this crisis and we are asking for your immediate assistance.”
The collateral damage to the many US producers that produce downstream steel products created by any across the board tariffs on steel imports makes it very difficult for the Administration to use a broad brush to fix the steel problem. That is the problem with purely protectionist decisions. They distort the US market and simply transfer the problems of the steel industry to other downstream industries.
But does that mean the US government should simply let the US Steel industry and other manufacturing industries die? The election of Donald Trump indicates politically that simply is not a viable option.
Although Joseph Schumpeter in his book Capitalism, Socialism and Demcracy coined the term “creative destructionism”, which conservatives and libertarians love to quote, they do not acknowledge the real premise of Schumpeter’s book that capitalism by itself could not long survive. Schumpeter himself observed the collateral damage created by pure capitalism.
So what can be done for the steel and other manufacturing industries? Answer work with the companies on an individual basis to help them adjust to import competition and compete in the markets as they exist today. Moreover, there is already a government program, which can serve as a model to provide such a service—the Trade Adjustment Assistance for Companies Program.
What is the TAA for Companies secret sauce? Making US companies competitive again. Only by making US manufacturing companies competitive again will the trade problems really be solved. US industry needs to stop wallowing in international trade victimhood and cure its own ills first before always blaming the foreigners. That is exactly what TAA for Companies does—helps US companies cure their own ills first by making them competitive again.
TRADE ADJUSTMENT ASSISTANCE FOR FIRMS/COMPANIES – A BETTER ALTERNATIVE TRADE REMEDY WHICH ACTUALLY WORKS
As stated above, there is another more productive way to solve the Steel crisis and fix the trade problem and help US companies, including Steel and other companies, adjust to import competition. This program has a true track record of saving US companies injured by imports.
The Trade Adjustment Assistance for Firms/Companies program does not put up barriers to imports. Instead the TAA for Companies program works with US companies injured by imports on an individual basis to make them more competitive. The objective of TAA for Companies is to save the company and by saving the company it saves the jobs that go with that company.
But as stated in the video below, for companies to succeed they must first give up the mentality of international trade victimhood.
In contrast to TAA for workers, TAAF or TAA for Companies is provided by the Economic Development Administration at the Commerce Department to help companies adjust to import competition before there is a massive lay-off or closure. Yet the program does not interfere in the market or restrict imports in any way.
Moreover, the Federal government saves money because if the company is saved, the jobs are saved and there are fewer workers to retrain and the saved company and workers end up paying taxes at all levels of government rather than being a drain on the Treasury. To retrain the worker for a new job, the average cost per job is $5,000. To save the company and the jobs that go with it in the TAA for Companies program, the average cost per job is $1,000.
Moreover, TAA for Firms/Companies works. In the Northwest, where I am located, the Northwest Trade Adjustment Assistance Center, http://www.nwtaac.org/, has been able to save 80% of the companies that entered the program since 1984. The Mid-Atlantic Trade Adjustment Assistance Center, http://www.mataac.org, uses a video, http://mataac.org/howitworks/, to show in detail how the program resulted in significant turnarounds for four companies. The reason the TAA for Firms/Companies is so successful—Its flexibility in working with companies on an individual basis to come up with a specific adjustment plan to make them competitive once again in the US market as it exists today. For a sample recovery plan, see http://mataac.org/documents/2014/06/sample-adjustment-plan.pdf, which has been developed specific to the strengths, weaknesses and threats each company faces.
But TAA for Companies has been cut to the bone. On August 22, 2017, in the attached press release, US Commerce Department Announces $13.3 Million to Boost Competitiveness of US Ma, the U.S. Commerce Department announced $13.3 Million to Boost Competitiveness of U.S. Manufacturers. The press release specifically stated:
“WASHINGTON – U.S. Secretary of Commerce Wilbur Ross today announced $13.3 million in U.S. Economic Development Administration (EDA) grants to support 11 Trade Adjustment Assistance Centers (TAACs) in California, Colorado, Georgia, Illinois, Massachusetts, Michigan, Missouri, New York, Pennsylvania, Texas, and Washington that help manufacturers affected by imports adjust to increasing global competition and create jobs.
“The Trump administration is working every day to help America’s manufacturers, their workers, and their communities,” said Secretary Ross. “This funding is one element of a government-wide effort to restore American jobs and strengthen U.S. manufacturing.”
The 11 grants include:
$1.7 million to the University of Michigan, Ann Arbor, for the Great Lakes Trade Adjustment Assistance Center
$1.2 million to the Mid-Atlantic Employers’ Association, King of Prussia, Pennsylvania, for the Mid-Atlantic Trade Adjustment Assistance Center
$978,000 to the New England Trade Adjustment Assistance Center, Inc., North Billerica, Massachusetts
$1.1 million to the Research Foundation, State University of New York Binghamton, for the New York, New Jersey and Puerto Rico Trade Adjustment Assistance Center
$1.2 million to the University of Colorado at Boulder for the Rocky Mountain Trade Adjustment Assistance Center . . .
$1 million to the University of Missouri–Columbia for the Mid-America Trade Adjustment Assistance Center …
$1.2 million to the Trade Task Group, Seattle, Washington, for the Northwest Trade Adjustment Assistance Center…
EDA’s Trade Adjustment Assistance for Firms program funds 11 Trade Adjustment Assistance Centers across the nation. The centers support a wide range of technical, planning, and business recovery projects that help companies and the communities that depend on them adapt to international competition and diversify their economies. . . .
The mission of the U.S. Economic Development Administration (EDA) is to lead the federal economic development agenda by promoting competitiveness and preparing the nation’s regions for growth and success in the worldwide economy.” . . .
Are such paltry sums really going to help solve the manufacturing crisis in the Steel and other industries? Of course not!!
But when the program was originally set up, the budget was much larger at $50 to $100 million. If the program was funded to its full potential, yes steel companies and other companies could be saved.
To those libertarian conservatives that reject such a program as interference in the market, my response is that this program was personally approved by your icon, President Ronald Reagan. He understood that there was a price for free trade and avoiding protectionism and that is helping those companies injured by import competition. But teaching companies how to be competitive is a much bigger bang for the buck than simply retraining workers. And yes companies can learn and be competitive again in the US and other markets.
In the attached article entitled “Steel Competitiveness Seriously?”, Steel Competitiveness, William J. Bujalos, the head of the Mid-Atlantic Trade Adjustment Assistance Center, makes the proposal to expand the program to help large manufacturing companies, including steel producers. Mr. Bujalos states:
“Current reports suggest that the nation’s steel industry is experiencing a rebound – a rebound driven by a growing collective confidence about America’s economic future.
That’s all good but irrelevant because confidence is not a strategy for growing the nation’s global competitiveness. What is relevant is the extent to which our companies are able to grow other much more important things, like metrics critical to their competitive success. Do that and the power of any confidence index won’t matter.
Let me explain. Since 1998 I have been leading the nation’s Trade Adjustment Assistance for Firms (TAAF) program in the Mid-Atlantic region. My business experience during the last 50 years has yielded insight into the kinds of things that have the highest probability for success at reversing an enterprise’s negative fortunes irrespective of the competitive battlespace that they’ve chosen to play in. Prior lives involved corporate management in both private and public sectors (large and small companies) in a wide variety of markets that included: management consulting, chemicals, plastics, medical devices, pharmaceuticals, automotive systems, battery tech and steel – and I’ve learned that there are some things that are universal …
For example, I’m a believer that, for businesses of all stripes, there is only one true asset to be quantified and listed on the Balance Sheet – knowledge. Nothing else really matters at the end of the day. And the overarching value of TAAF is that it is this nation’s singularly effective business model that injects it directly into a company’s bloodstream over an extended period of time, i.e. half a decade. That sort of holistic, long-term approach yields the biggest chance for success because it has a high probability of permanently upgrading a company’s core DNA.
In my view steel companies don’t operate in markets that are fundamentally any different from markets in general. No markets are forgiving. No customer base is loyal. Some players don’t play fair. No amount of investment is worth it if indigenous leadership is of poor quality. So as a direct consequence, all companies that are serious about permanently enhancing their global competitiveness must achieve mastery over stuff like: competitive intelligence, customer intelligence, market dynamics intelligence, costs/managerial finance, talent/leadership development, product development, planning effectiveness, etc., etc., etc.
In other words: it’s the knowledge stuff that’s critical and little else. And in my humble opinion, focusing the attributes that TAAF brings to the table on that industry on a larger scale would yield stunning results.
The TAAF business model places its nationwide network of Trade Adjustment Centers (i.e. TAACs) in the unique position of being the right catalyst at the right place at the right time. Does it always work? Certainly not. What does? But it works better than just about anything else in America’s tool kit. It is unique. And here’s the kicker, we don’t ask for equity. On behalf of the American taxpayer we simply insist on pure, unadulterated, robust, and relentless commitment from the Chief Executive Officer down to the shop floor. Absent that? Well, it’s unfortunate but some companies probably should fail.
This approach really works, without costing a great deal of money or causing economic disruption while at the same time providing our political establishment the cover it needs to smooth passage of critical treaties – and, because a company must match our injection dollar-for-dollar throughout the process, the American taxpayer is assured of management’s total and focused commitment for one simple reason … they share in the risk!
Bottom line? The long-term holistic approach is effective. The business model, stipulating unique strategies addressing each company’s unique circumstances, is effective. The program’s neutral economic impact is effective. It’s ability to support passage of trade agreements while not impeding the benefits of free trade is effective. It’s ability to lessen the costs associated with the engagement of outside expertise to reengineer critical business processes is effective.
And I firmly believe that it’s application is not limited to America’s smallest makers – only its funding is. For several decades that’s been little more than an afterthought.
Consider …
- All manufacturing companies were at one time small ones.
- All manufacturing companies are impacted by globalization.
- Small ones need outside expertise to teach them basic stuff.
- Larger ones need outside expertise to teach them sophisticated stuff.
- Small makers, because they’re learning the basics and have little resources to tap, take a longer time to turn the corner.
- Larger makers, because the basics are already inculcated and they have the requisite resources at hand, can turn the corner at much higher speed.
- And if you were the Chief Executive of a tier-one domestic manufacturer, would you doubt for a minute –
- That your supply chain probably has several thousand companies in it?
- That extensive improvement in their performance would have a significantly positive impact on your performance?
- Improvement in the performance of the small cohort will increase the probability that fewer will fail because a greater proportion will grow into larger ones – driving concomitant growth in good-paying manufacturing jobs and the creation of wealth. Go ahead. Beat that with a stick!”
For those who would simply dismiss the idea as impossible and too simplistic, watch the video. The program works. See http://mataac.org/howitworks/.
TRUMP AND CHINA
SECTION 301 CASE AGAINST CHINA ON FORCED TECHNOLOGY TRANSFERS MOVES FORWARD
In an attached August 18th Federal Register notice based on an August 14th Presidential Memorandum, 301 INITIATION NOTICE Presidential Memorandum for the United States Trade Representative whitehouseg, President Trump pulled the trigger on the Section 301 Intellection property case against China. The Section 301 investigation could take a year and probably will lead to negotiations with the Chinese government on technology transfer. If the negotiations fail, the US could take unilateral action, such as increasing tariffs, or pursue a case through the World Trade Organization. Unilateral actions under Section 301, however, also risk a WTO case against the United States in Geneva.
The notice states that the USTR will specifically investigate the following specific types of conduct:
“First, the Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies’ operations in China, in order to require or pressure the transfer of technologies and intellectual property to Chinese companies. Moreover, many U.S. companies report facing vague and unwritten rules, as well as local rules that diverge from national ones, which are applied in a selective and non-transparent manner by Chinese government officials to pressure technology transfer.
Second, the Chinese government’s acts, policies and practices reportedly deprive U.S. companies of the ability to set market-based terms in licensing and other technology-related negotiations with Chinese companies and undermine U.S. companies’ control over their technology in China. For example, the Regulations on Technology Import and Export Administration mandate particular terms for indemnities and ownership of technology improvements for imported technology, and other measures also impose non-market terms in licensing and technology contracts.
Third, the Chinese government reportedly directs and/or unfairly facilitates the systematic investment in, and/or acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.
Fourth, the investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber-enabled theft of intellectual property, trade secrets, or confidential business information, and whether this conduct harms U.S. companies or provides competitive advantages to Chinese companies or commercial sectors.”
The United States Trade Representative (“USTR”) will hold a hearing on October 10th at the International Trade Commission and public comments are to be submitted by September 28th.
In an August 30, 2017 article by Dan Harris, who heads my law firm, on his China law blog at http://www.chinalawblog.com/2017/08/china-us-trade-wars-and-the-ip-elephant-in-the-room.html, entitled “China-US Trade Wars and the IP Elephant in the Room”, Dan states that in over one hundred negotiations with Chinese companies, he has not seem the Chinese government demand IP rights. What he has seen is bad negotiating:
“I have been called by reporters at least a half dozen times in the last couple of weeks regarding the Trump Administration’s planned investigation of China’s IP practices. But what I tell these reporters fits so badly with THE narrative that my name is not showing up in print. Sorry, but I can’t help it.
Here’s the situation. The Trump Administration is claiming that China’s government forces American companies to relinquish its IP to China and my problem is that despite my firm having worked on literally hundreds of China transactions that involve IP, I have very little proof of this. So no real story there.
Here though is the story as seen from my eyes and from the eyes of the China attorneys at my firm, readily conceding that we have not seen even close to everything.
We have never been involved in a China transaction where it has been clear to us that the Chinese government has forced our client to relinquish its IP to China. We have though been involved in a million transactions where the Chinese party on the other side — sometimes a State Owned Entity, but way more often not — has vigorously and aggressively sought to get our client to part with its IP for a very low price. Is the Chinese government behind this sort of pressure? Don’t know? Probably sometimes, but probably most of the time not. If the transaction involves rubber duckies, we can assume not. If it involves next generation computer chips, well that is probably a very different story.
Anyway, as we write on here so often, there are many terrible technology transfer and other sorts of IP deals to be had with Chinese companies and we have too often — even against our China attorneys’ clear counsel to our clients not to do it — seen our clients make bad deals that will involve them turning over their IP with little to no chance of receiving full value for it. But these companies have not been forced, not in the sense that any government was forcing them to do anything. These companies were simply willing to take huge risks either because they could not grasp the risks or because they felt they had no other choice for financial reasons.
In Three Myths of China Technology Transfers, we wrote about how our clients all too often forge ahead with bad deals and why, and we nowhere mention government compulsion:
A Chinese company that intends to violate a licensing agreement and run off with the foreign company’s IP will usually have a very clear plan. What the China lawyers in my office call the Standard Plan works as follows. First, the Chinese company will negotiate in a way that guarantees a weak license that cannot be enforced against them by the foreign party. The tricks used to do this are quite standardized. Second, the Chinese company will ensure that it does not make any (or else it makes very few) payments until after it has already received the technology. If the Chinese company makes any payment at all, it will make a minimal number of payments, usually late and in violation of the agreement and then once it has received enough of the technology it seeks, it will cease making any payments entirely.
When our China attorneys encounter a Chinese company clearly working on the Standard Plan, we warn our clients. However, it is also typical for our clients to nonetheless want to forge on ahead. The client will usually explain how their situation is unique and that means the Chinese could not possibly be planning to breach.
We discuss again in China Technology Transfers: The Relationship and Deal Structure Myths how it is that American companies lose their IP to Chinese companies and we again leave out government force:
Due to a partnership relationship, the foreign side often wrongly believes it is somehow better protected against IP theft. The foreign side then lets down its guard, only to learn that its China partner has appropriated its core technology. This sense of partnership is most common with SMEs and technology startups, especially those companies whose owner is directly involved in the relationship with the Chinese entity.
In China and The Internet of Things and How to Destroy Your Own Company I rant about technology companies that literally destroy themselves by failing to do enough to protect their IP from China:
Well for what it is worth, I will no longer describe technology companies as a whole as our dumbest clients when it comes to China. No, that honor now clearly belongs to a subset of technology companies: Internet of Things companies. And mind you, we love, love, love Internet of Things companies. For proof of this, just go to our recent post, China and the Internet of Things: A Love Story. Internet of Things (a/k/a IoT) companies are sprouting all over the place and they are booming. Most importantly for us, they need a ton of legal work because just about all IoT products are being made in China, more particularly, in Shenzhen. And just about all IoT products need a ton of complicated IP assistance.
So then why am I saying they are so dumb about China? Because they are relinquishing their intellectual property to Chinese companies more often, more wantonly, and more destructively than companies in any other industry I (or any of my firm’s other Chinese lawyers) have ever seen. Ever. And by a stunningly wide margin.
I then list out the following as “my prime example, taken from at least a half dozen real life examples in just the last few months”:
IoT Company: We just completed our Kickstarter (sometimes Indiegogo) campaign and we totally killed it and so now we are ready to get serious about protecting our IP in China.
One of our China Lawyers: Great. Where are you right now with China?
IoT Company: We have been working with a great company in Shenzhen. Together we are working on wrapping up the product and it should be ready in a few months.
China Lawyer: Okay. Do you have any sort of agreement with this Chinese company regarding your IP or production costs or anything else?
IoT Company: We have an MOU (Memorandum of Understanding) that talks about how we will cooperate. They’ve really been great. They have told us that they would enter into a contract with us whenever we are ready.
China Lawyer: Can you please send us the MOU? Have you talked about what that contract will say?
IoT Company: Sure, we can send the MOU. It’s one page. No, we haven’t really talked much beyond just what we need to do to get the product completed.
China Lawyer: Okay, we will look at your MOU and then get back to you with our thoughts.
Then, a day or two later we a conversation like the following ensues:
China Lawyer: We looked at your “MOU” and we have bad news for you. We think there is a very good chance a Chinese court would view that MOU as a contract. (For why we say this, check out Beware Of Being Burned By The China MOU/LOI) And the Chinese language portion of the MOU — which is all that a Chinese court will be considering — is very different from the English language portion. The Chinese language portion says that any IP the two of you develop (the IoT company and the Chinese manufacturer) belongs to the Chinese company. So what we see is that as things now stand, there is a very good chance the Chinese company owns your IP. This being the case, there is no point in our writing a Product Development Agreement because your Chinese manufacturer is not going to sign that.
IoT Company: (And I swear we get this sort of response at least 90 percent of the time) I’m not worried. I think you have it wrong. I’m sure that they will sign such an agreement because we orally agreed on this before we even started the project.
China Lawyer: That’s fine, but I still think it makes sense for you to at least make sure that the Chinese company will sign a new contract making clear that the IP associated with your product belongs to you, because if they won’t sign something that says that, there is no point in our drafting such a contract and, most importantly, there is no point in your paying us to do so.
So far not a single such IoT company has been able to come back to us with an agreement from their Chinese manufacturer to sign.
Again, no government force, just an overzealous and insufficiently careful foreign company.
Now before anyone excoriates me for ignoring reality, let me say that I have read about instances where the Chinese government has “forced” foreign companies to turn over their IP to China; high speed rail is an often cited example of that. And I do not doubt that it happens in critical industries (nuclear power would be another example). And I am also not unaware of how China is increasingly forcing foreign companies to store their data in China, which absolutely puts technology at risk. But even in these instances the foreign company has some choice. Not good choices, I know. And arguably it is no choice at all when the decision is between doing business in China or not. The last thing I want to do is get all philosophical on anyone regarding what constitutes choice so I will leave it to our individual readers to determine for themselves where on the continuum of force and choice they want to put any and all of the above.
There is plenty to complain about how China protects IP and there is plenty to complain about how China protects foreign companies that do business in China or with China, but I am just not sure complaining about forced IP transfers goes at the top of that list for most American companies. When I talk with American and European and Australian companies about China their biggest legal complaint is invariably how expensive it is for them to comply with China laws and how they resent that their Chinese competitors generally are not held to the same legal standards.
A couple of years ago, I gave the following testimony before The US-China Economic and Security Review Commission of the United States Congress:
I was introduced as an expert, and I’d like to qualify that by saying do not think of myself as an expert. I am just a private practice lawyer who represents American and Australian companies and some European and Canadian companies as well in China.
I’m going to tell you a little bit about what we do so you can get a little bit better perspective of where I’m coming from on this. The bulk of my firms’ clients are small and medium-size businesses, mostly American businesses, but some European and Australian and Canadian businesses as well. Most of them have revenues between 100 million and a billion a year. Our clients are mostly tech companies, manufacturing companies and service businesses.
About 20 percent of our work is for companies in the movie and entertainment industry. We have some clients in highly-regulated industries, like health care, senior care, banking, insurance, finance, telecom and mining, but those companies make up less than ten percent of our client base.
Most of the China work we do for our clients is relatively routine. We help them register as companies in China. We register their trademarks and copyrights in China. We draft their contracts with Chinese companies. We help them with their employment, tax and customs matters. We oversee their litigation in China, and we represent them in arbitrations in China. We help them buy Chinese companies.
For our clients, the big anti-foreign issue is whether they will be allowed to conduct business at all in China as that is certainly not always a given. Certain industries in China are shut off or limited to foreign businesses acting alone. For our clients, publishing and movies are most prominent.
Essentially anything that might allow for nongovernmental communication to or between Chinese citizens is problematic, but it is not clear to me that these limitations are intended to be anti-foreign, as China does not really want any private entities, foreign or Chinese, engaging in these activities without strict governmental oversight.
So do these limits against foreign companies arise from anti-foreign bias or just the Chinese government’s belief that it can better control Chinese companies? To our clients, that distinction doesn’t matter.
On day-to-day legal matters, our clients are almost invariably treated pursuant to law, and so long as they abide by the law, they seldom have any problems. The problem for our clients isn’t so much how the Chinese government treats them; it’s how they are treated as compared to their Chinese competitors who are less likely to abide by the laws and more likely to get away with it.
I have no statistics on this. I doubt there are any statistics on this, but I see it and I hear it all the time.
I see it when one of our clients buys a Chinese business that has half of its employees off the grid and has facilities that are not even close to being in compliance with use laws, and I know foreign companies cannot get away with that.
And I hear it from Chinese employees of our clients who insist that there is no need for our clients to follow various laws. They insist there is no need to follow various laws and to do so is stupid. Is this disparity due to anti-foreign bias or is it due to corruption? Again, for our clients, the answer is irrelevant.
Is the Trump administration’s IP investigation a negotiating ploy done as much to get at disparate treatment as it is to get at forced technology transfers? I do not think it is, but some who know more about such things tell me it may be.
CNN was the only one of the media companies that both interviewed me on the above issues and ended up quoting me and I like how it handled the issue in its article, President Trump is set to crank up the pressure on China over trade:
Beijing has other ways of getting its hands on valuable commercial information. Officials often insist on taking a close look at technology that foreign companies want to sell in China.
“Chinese government authorities jeopardize the value of trade secrets by demanding unnecessary disclosure of confidential information for product approvals,” the American Chamber of Commerce in China said in a report published in April.
Some experts say that handing over technology has effectively become a cost of doing business in China — a market too big for most companies to ignore.
“Many Chinese companies go after technology hard and the tactics they use show up again and again, leading us to believe there is some force (the government?) teaching them how to do these things,” said Dan Harris, a Seattle-based attorney who advises international companies on doing business in China.
“The thing is that the foreign companies that give up their technology usually do so at least somewhat of their own volition,” he told CNNMoney. “Yes, maybe they need to do so to get into China, but they also have the choice not to go into China, right?”
Closing the stable door?
Other analysts say that the U.S. administration is coming to the problem too late.
“Intellectual property (IP) theft is yesterday’s issue,” wrote Lewis of the Center for Strategic and International Studies.
“In part because of past technology transfer and in part because of heavy, sustained government investment in science and research, China has developed its own innovative capabilities,” he wrote.
“Creating new IP in the United States is more important than keeping IP from China.”
These are really complicated issues and I realize the above is more of a stream of consciousness “thoughts dump” than a coherent position paper. So more than ever, I’d love to hear your thoughts in the comments below.”
Dan’s point is that it is often bad negotiating tactics by the US side that leads to companies giving away their technology, not Chinese government pressure.
On August 15th, Investors Business Daily speculated that “Trump’s Trade War With China Is War On North Korea By Other Means” stating:
“But they [the Chinese government] may have underestimated Trump: He has the will, and likely the political support, for an even-more damaging war with China over trade. With the U.S. China’s largest market — in 2016, U.S. imports from China totaled nearly half a trillion dollars — a trade war is a serious threat to China, which is already showing signs of economic slowing.
That’s what’s behind Trump’s sudden decision to investigate China’s rampant theft of U.S. intellectual property. And on trade grounds only, Trump is right to investigate this, since it’s enshrined in both U.S. law and international trade treaties that egregious trade violations warrant retaliatory actions if the violations aren’t fixed.
The U.S. has been jawboning China on this for years, to no effect. China for years has seen the U.S. as a paper tiger, too feckless to act on its own behalf. Now, Trump is showing it otherwise. . .
Once again, Trump the savvy business negotiator seems to know his foe’s weak points.
Perhaps hoping to stall Trump’s trade action, China announced that it would cease North Korean imports of coal, iron and lead, and seafood, starting Sept. 5, in keeping with U.N. sanctions imposed on Kim Jong Un’s regime.
In a joint statement Monday, Secretary of State Rex Tillerson and National Security Advisor Gen. James Mattis made explicit the link between China, trade and North Korea: “China is North Korea’s neighbor, sole treaty ally and main commercial partner,” they wrote. “Chinese entities are, in one way or another, involved with roughly 90% of North Korean trade. This affords China an unparalleled opportunity to assert its influence with the regime.”
The clear message: If you support North Korea’s regime economically, we’ll hurt you economically in return. It’s a Trumpian twist on Von Clausewitz’s famous dictum about war and politics: “(A trade) war is the continuation of politics by other means.”
As we’ve said before, we take a back seat to no one in advocating on behalf of free trade. But when one side routinely and systematically steals hundreds of billions of dollars worth of intellectual property, that’s no longer free trade. It’s piracy. . . .
North Korea’s nuclear blackmail, aided by China’s patronage, is not acceptable. If it takes trade sanctions to get China’s diplomatic attention, so be it. It’s time that China’s charade over its support of North Korea comes to an end.”
On August 8th, in an article entitled “Second Thoughts on Trade with China” William Galston for the Wall Street Journal stated:
“It is China’s techno-nationalism that poses the greatest threat to our future. In 2006 the Chinese government adopted a long-term plan to promote what it called “indigenous innovation.” As James McGregor, a leading expert on the Chinese economy, writes, China’s leading-edge firms were directed to obtain technology from their multinational partners through “co-innovation and re-innovation based on the assimilation of imported technologies.”
In practice, this meant giving American firms an offer Don Corleone would have recognized—either to “share their technologies with Chinese competitors—or refuse and miss out on the world’s fastest-growing market.” China’s ultimate goal is to use forced technology transfer to replace the U.S. as the world’s leading economy. . . .
Existing legal tools may not suffice to end these discriminatory practices. Although the WTO prohibits mandatory technology transfers, the Chinese government’s position is that trading technology for market access is purely a business decision. Protectionist government purchases are a key part of China’s strategy. . . .
If turning over our technological crown jewels to a foreign power is against the national interest, then our government should have the power to prevent it. But wielding this power without blowing up the international trade regime will not be easy.”
On August 21st, in an editorial entitled “Yes, China Steals U.S. Intellectual Property, But That Doesn’t Mean Trade With China Is A Bad Thing” Investors Business Daily tempered its initial response on the Section 301 case stating:
“Everyone is angry at China right now, and perhaps with good reason. China’s regime often bends trade rules to its own needs, and breaks them or ignores them when it’s convenient. . . .
The U.S. shouldn’t tolerate cheating on trade, by China or anyone else. It’s a matter of jobs and income for Americans and the companies that employ them.
Even so, that doesn’t mean everything China has done has been bad for the U.S. Far from it.
A new study, ” How Did China’s WTO Entry Benefit U.S. Consumers?” from the prestigious National Bureau of Economic Research, shows why. It notes that from the time China joined the World Trade Organization in 2000 to 2006, the U.S. inflation index for factory goods fell an estimated 7.6%.
This might not sound like a lot, but it is. “The resulting savings were large,” the study says. “U.S. manufacturing sector production was valued at $4.5 trillion in 2014, so if prices had been 7.6% higher, that production would have cost $340 billion more.”
That is, profits for U.S. firms were likely billions of dollars higher over that six-year period than otherwise. And prices to American consumers fell.
How did this happen? The simple answer is freer trade. China cut its average tariff on manufacturing inputs from 15% in 2000 to 9% in 2006, a 40% reduction. Meanwhile, China’s government lifted export limits on its domestic companies, got rid of capital requirements, eased restrictions on foreign investment, raised its limits on textile exports and lowered the number of goods that required import licenses.
The result: China’s factory exports to the U.S. surged 290% from 2000 to 2006.
According to the study, “69% of the growth was driven by new exporters offering a widening variety of products, while 16% was created by incumbent firms exporting new products.”
The lower tariffs and other reductions in trade restrictions led to a Chinese productivity boom, with an average 10% per year gain in productivity for Chinese companies that exported to the U.S. As for the price of U.S. manufactured goods, about two-thirds of the 7.6% reduction in factory prices here was due to China’s tariff cuts.
But didn’t the food of Chinese factory-made goods to the U.S. decimate American manufacturing during this period? That’s a myth. As the U.S. Federal Reserve’s monthly manufacturing index shows, from 2000 to 2006 American factory output rose a healthy 11.5%. It wasn’t decimated by the surge in Chinese exports to the U.S. It only crashed when the financial crisis hit.
For its part, China’s communist government in the early 2000s found that taking its hands off the economy’s windpipe and engaging with the rest of the world through trade was an effective strategy for making its economy grow. We also benefited from that.
Now the Trump administration is warning an increasingly hostile China that its recent trade violations aren’t acceptable. China, in response, has blasted the U.S. for its “protectionism.”
We hope a negotiated solution can be found. At the same time, we might want to think seriously about it before we back a giant U.S.-China trade war that could make all of us, Americans and Chinese, much worse off.”
In early 2000, China’s brilliant economic guru Premier Zhu Rongyi believed that China should join the WTO, not for the benefit of the United States or Europe, but for the benefit of China. Premier Zhu realized that China would benefit from free trade by breaking down its own protectionist walls, which isolated China from the rest of the World.
It is somewhat ironic that the United States is apparently moving in the opposite direction, building protectionist walls to protect its companies from foreign competition. Many US politicians have fallen into the trap of international trade victimhood because they simply do not understand the benefits of free trade to the United States.
SECTION 201 SOLAR CELLS CASE
On May 17, 2017, Suniva filed a Section 201 Escape Clause against all Solar Cell imports from all countries at the US International Trade Commission (“ITC”). On May 23, 2017, in the attached Federal Register notice, ITC iNITIATION NOTICE SOLAR CELLS, the ITC decided to go ahead and institute the case. If the ITC reaches an affirmative determination, within 60 days the President must decide whether or not to impose import relief, which can be in the form of increased tariffs, quotas or an orderly marketing agreements.
At the ITC, Section 201 cases are a two stage process. The ITC must first determine whether “crystalline silicon photovoltaic (“CSPV”) cells (whether or not partially or fully assembled into other products) are being imported into the United States in such increased quantities as to be a substantial cause of serious injury, or the threat thereof, to the domestic industry producing an article like or directly competitive with the imported articles.” The ITC has determined that the investigation is “extraordinarily complicated” and will make its injury determination within 128 days after the petition was filed, or by September 22, 2017. The Commission will submit to the President the report required under section 202(f) of the Act (19 U.S.C. § 2252(f)(1)) within 180 days after the date on which the petition was filed, or by November 13, 2017.
Prehearing briefs and posthearing briefs have been filed at the ITC and the ITC hearing was held on August 15th and was reportedly 11 hours long.
If the ITC reaches an affirmative determination, it will go into a remedy phase and the hearing in that phase will be on October 3, 2017. Attached is the ITC public prehearing staff report, 2017.08.01 ITC Solar 201 Prehearing Report PUB.
The Staff Report shows that imports are up, value of imports are down, but US producers’ production and capacity have increased during the period of investigation 2012-2016. Moreover, US producers’ profits and sales have increased in the period. This is a very mixed staff report with no clear trends and could lead to a negative ITC injury determination on September 22nd.
Meanwhile, sixteen US senators have urged the ITC to consider how the increased tariffs on foreign solar cells could hurt the broader domestic solar industry. The letter specifically stated:
“We respectfully request that the commission carefully consider the potential negative impact that the high tariffs and minimum prices requested would have on the tens of thousands of solar workers in our states and on the hundreds of companies that employ them.”
The letter was signed by Senators: Heinrich (D-N.M.), Tillis (R-N.C.), Bennet (D- Colo.), Feinstein (D-Calif.), Whitehouse (D-R.I.), Perdue (R-Ga.), Gardner (R-Colo.), Heller (R-Nev.), Van Hollen (D-Md.), Moran (R- Kan.), Scott (R-S.C.), Cardin (D-Md.), King (I-Maine), Collins (R-Maine), Markey (D-Mass.) and Cortez Masto (D-Nev.).
ALUMINUM EXTRUSIONS CIRCUMVENTION
On July 26, 2017, in the attached memorandum, prc-aluminum-extrusions-ar-072617, the Commerce Department published in the Federal Register a notice of affirmative final determination of circumvention of the antidumping and countervailing duty orders on aluminum extrusions from the People’s Republic of China. The Department determined that heat-treated extruded aluminum products that meet the chemical specifications for 5050 grade aluminum alloy, regardless of producer, exporter, or importer, constitute later-developed merchandise, are circumventing the orders.
As a result of the Department’s anti-circumvention determination, all heat-treated extruded aluminum products from the People’s Republic of China that meet the chemical specifications for 5050 grade aluminum alloy are considered to be in-scope merchandise and must be included in responses to the Department’s questionnaires.
FALSE CLAIMS ACT—FURNITURE
In a previous blog post, I mentioned that the real hammer against transshipment of products to evade trade orders is not recent legislation from Congress, but the False Claims Act. Under the False Claims Act, private parties can file suits in Federal District Court alleging fraud on the US government because of foreign exporters and US importers decision to use transshipment and other methods to evade US antidumping and countervailing duties. Under the FCA, the relator can look back at 10 years of past imports and the antidumping duties in question can be over 100, 200 or even 300%. Under the FCA the remedy is triple damages and when looking at imports over such a long period of time, the remedy can result in enormous payouts.
The private party files an FCA complaint as a relator on behalf of the US government. The US government then decides whether or not to intervene in the case. If the US government chooses to intervene, the relator is entitled to 15 to 25% of the recovery of the US government. In one small FCA case here in Washington regarding medical bills, a clerk at a hospital received a payout of $2 to 3 million so anyone can be a relator.
More on point, In an intervention complaint, US GOVT INTERVENTION BLUE FURNITURE CASE, the US government intervened in a False Claims Act filed against evasion of millions of dollars in antidumping duties on imports of wooden bedroom furniture from China.
The lawsuit brought by University Loft Co., an Indiana-based wooden bedroom furniture company, accuses Florida-based Blue Furniture Solutions LLC, founder and president and its chief financial officer of importing wooden bedroom furniture from China without paying the 216.01 percent anti-dumping rate by making false statements to U.S. Customs and Border Protection (“CBP”).
In doing so, Blue Furniture escaped paying millions of dollars in duties and fees owed to the federal government from 2011 through 2015, the suit says.
The complaint states:
“To avoid the payment of anti-dumping duties and fees, defendants conspired with their Chinese manufacturers and exporters to fraudulently avoid customs duties and underpay fees owed to the United States by making false representations in entry documents about the nature and value of the imported merchandise.”
Specifically, the complaint states that Blue Furniture falsely identified its entries to Customs and Border Protection with codes and descriptions for merchandise that are not subject to antidumping duties. But the complaint states that many of the wooden chests, dressers, nightstands, wardrobes and many of the beds imported were subject to antidumping duties.
In addition, the FCA complaint accuses the Florida-based company of instructing its China-based manufacturers and exporters how to mislabel and misclassify the merchandise on documents to be shown to CBP.
NEW TRADE CASES
ANTIDUMPING AND COUNTERVAILING DUTY CASES
STAINLESS STEEL FLANGES FROM CHINA
On August 16, 2017, the Coalition of American Flange Producers and its individual members, Core Pipe Products, Inc., and Maass Flange Corporation filed new antidumping and countervailing duty cases against imports of Stainless Steel Flanges from China and India.
FOREIGN ANTIDUMPING AND COUNTERVAILING DUTY LAW AND CASES
UNIVERSAL TRADE WAR CONTINUES
CHINA AD/CVD NEWSLETTERS
Attached are newsletters from Chinese lawyer Roland Zhu and his trade group at the Allbright Law Office about Chinese trade law. Team’s newsletter-EN Vol.2017.30 Team’s newsletter-EN Vol.2017.32 Team’s newsletter-EN Vol.2017.33.
SECTION 337 AND IP CASES
NEW 337 CASES AGAINST CHINA
WI-FI ENABLED ELECTRONIC DEVICES
On August 29, 2017, Sharp Corporation and Sharp Electronics Corporation filed a section 337 case against imports of Wi-Fi Enabled Electronic Devices. The respondent companies named in the complaint are:
Hisense Co., Ltd., China; Hisense Electronic, Co., Ltd., China; Hisense International (Hong Kong) Co. Ltd., Hong Kong; Hisense USA Corporation, Suwanee, Georgia; Hisense Electronics Manufacturing Company of America Corporation, Suwanee, Georgia; Hisense USA Multimedia R&D Center, Inc., Suwanee, Georgia; and Hisense Inc., Huntington Beach, California.
If you have any questions about these cases or about Trump and Trade, including the impact on agriculture, the impact on downstream industries, the Section 232 and 301 cases, the 201 case against Solar Cells, US trade policy, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.
Best regards,
Bill Perry