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September 18, 2009
Exclusive: Protectionism Has a Long Way to Go
The news media, and particularly the business press, have been in an uproar since it was announced September 11th that President Barack Obama would accept the results of an investigation by the U.S. International Trade Commission and impose safeguard tariffs on imported Chinese tires. Some of the news has been sparked by Beijing’s strong reaction to the trade sanctions, but most of it has come from China’s friends in the transnational corporate community who have bet heavily on being able to profit from Beijing’s rise to world power.
Let’s first look at the facts in the case. Under Section 421 of the 1974 Trade Act, complaints can be filed against foreign countries if a “surge” of imports into the United States disrupts domestic production and costs American jobs. Between 2004 and 2008, China's tire production capacity expanded by 152 percent and is projected to jump another 16 percent by 2010. At 235.2 million tires, production capacity in 2008 was far more than could be sold in the Chinese market, making it another export-driven industry. U.S. imports of tires jumped from 14.6 million in 2004 to 46 million in 2008, with China's share of the U.S. tire market surging from 4.7 percent o 16.7 percent. Four U.S. tire plants closed in 2006 and 2007, and three more were set to close this year. Over 5,000 jobs have been lost in the U.S. tire industry during the 2004-2008 period.
Surges can occur any time, especially when dealing with an aggressive trading state like China. But they are more likely (and harmful) during economic downturns. Foreign producers want to capture larger overseas markets to offset falling demand at home. It is an attempt to export unemployment by keeping their factories open and closing down those of rivals. The world economy runs on the basis of cutthroat competition, which intensifies during hard times. Only those who survive recessions are able to benefit when recovery sets in. The aim is to force others to “adjust” downward or go out of business.
The three-year remedies approved by President Obama were less than the USITC recommended, but are still substantial. They consist of an additional tariff of 35 percent ad valorem in the first year, 30 percent in the second, and 25 percent in the third year. Trade Adjustment Assistance will also be targeted to help affected workers, industries, and communities immediately, while tariff changes take effect. Unfortunately, TAA is not an adequate remedy for trade conflict because it is a “work to welfare” program that surrenders markers to imports and accepts the loss of jobs.
Beijing has filed a protest with the World Trade Organization, but it does not have merit. "When China came in to the WTO, the U.S. negotiated the ability to impose remedies in situations just like this one," said U.S. Trade Representative Ron Kirk, “We consulted with China as allowed for under the WTO. This decision has been based carefully on America's rights under WTO rules, namely China's accession agreement, and on sound economic calculations.” Unfortunately, the safeguard agreement with China, which Beijing is trying to ignore, expires in 2013.
Beijing has also threatened unilateral retaliation outside any WTO framework. One of the first industries mentioned for Chinese action was auto parts imports. Beijing lost a WTO case to the U.S. on auto parts last year and wants an excuse to offset the ruling with higher tariffs. China promised during the WTO accession negotiations to lower its very high tariffs on auto parts, but it had been imposing an extra 25 percent tax on auto parts if they are used in the production of vehicles that end up having less than 40 percent Chinese-made content. The WTO ruled this was illegal.
Beijing industrial policy has long been based on the principle that if something is going to be sold in China; it should be built in China. A very logic approach to industrialization that has kept Chinese imports low and its trade surplus high, supporting rapid economic growth and the accumulation of the world’s largest foreign currency reserves. Thus, when Premier Wen Jiabao claims, “We must guard against and redress all forms of covert protectionist activities. As an active participant in economic globalization, China will never engage in trade or investment protectionism,” one can only marvel at his blatant hypocrisy. China has benefitted greatly by protectionism at home and from vulnerable, open markets overseas.
More facts: U.S. goods exports to China in 2008 were only $69.7 billion, while imports were $337.8 billion, a 5-1 imbalance in Beijing’s favor. The top U.S. export categories were: electrical machinery ($11.4 billion) and other machinery ($9.4 billion), miscellaneous grain, seeds, and fruit (mainly soybeans) ($7.3 billion), aircraft ($3.9 billion), and plastics ($3.8 billion). The main U.S. goods imports from China were: also electrical machinery ($80.3 billion) and other machinery ($65.1 billion), but in much larger amounts. China only imports what it cannot make itself, yet. But as it moves up the production ladder, it replaces imports and starts exporting. In general, Chinese imports are mainly raw materials and fuel to power its domestic economy. Its economic ambitions are limitless.
Chinese mercantilism (government support for national industry) poses a substantial threat to American prosperity. But wealth is also the basis for diplomatic and military power. And Beijing uses its gains from trade to support a foreign policy that is at odds with U.S. interests around the world. Every rogue state can count on China for support.
Though a major U.S. export to China is aircraft, Beijing is investing heavily in developing its own aerospace industry. In exchange for purchasing American aircraft (and European aircraft as well), China requires the transfer of technology that will help its own industry improve, both as a future commercial rival and as a expanding military power. Beijing’s buildup of air and naval forces is sending shockwaves across the Pacific. Defense Secretary Robert Gates told a meeting of the Air Force Association Sept. 16, Beijing’s “Investments in cyber and anti-satellite warfare, anti-air and anti-ship weaponry, and ballistic missiles could threaten America's primary way to project power and help allies in the Pacific – in particular our forward air bases and carrier strike groups.” Trade with America has given China the money to make these investments in weapons aimed at Americans.
On September 15th, the Wall Street Journal, speaking for the transnational corporate community, attacked the tire tariffs, claiming President Obama is “abdicating U.S. trade leadership.” What the editorial called for was the continued embrace of the academic sophistry of “free trade” used as cover by off shoring manufacturers and out sourcing retailers who place private profits ahead of national interests. Beijing may have adopted a form of state capitalism, but it is still a Leninist dictatorship. And it was Lenin who boasted that the capitalists would sell the rope the communists would use to hang them. The temptation of too many people in business to throw in with a foreign power for pay is why there must be a strong national trade policy integrated with national security strategy.
No American president is elected to lead on “trade.” They are elected to lead the nation and protect its interests. President Obama would have been abdicating the responsibility of his office not to accept the USITC finding. But there was no mention in the WSJ editorial about China’s “beggar-thy-neighbor” mercantilist policies, only a protest against American “protectionism.” But it is the duty of the government to protect America from attack, whether by commercial warfare or military action. International conflict takes more than one form. As Mei Xinyu, of the Research Institute of Foreign Trade and Economic Cooperation in Beijing’s Ministry of Commerce, said in the Chinese press September 13th,“To keep peace, you need to have the capability to attack the other side. The same is true for trade.”
Beijing ran a $268 billion trade surplus with the United States last year, clear evidence that American “protectionism” has a long way to go to right an imbalance that has transferred over $1.5 trillion to China since 2001; undermining the dollar, ballooning U.S. debt, and destroying millions of good American jobs in manufacturing. The tire tariffs are not the start of a trade war, but a belated acknowledgement that a war has been in progress for years. It is time to counterattack before even more of America’s national market-territory is lost.
FamilySecurityMatters.org Contributing Editor William R. Hawkins is a consultant specializing in international economic and national security issues. He is a former economics professor and Republican Congressional staff member.
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