Starting Points: trade issues

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Dec 28, 2009

In Southeast Asia, Unease Over Free Trade Zone

By LIZ GOOCH

KUALA LUMPUR — When the clock strikes midnight on New Year’s Eve, China and 10 Southeast Asian nations will usher in the world’s third-largest free trade area. While many industries are eager for tariffs to fall on everything from textiles and rubber to vegetable oils and steel, a few are nervously waiting to see whether the agreement will mean boom or bust for their businesses.

Trade between China and the 10 states that make up the Association of Southeast Asian Nations has soared in recent years, to $192.5 billion in 2008, from $59.6 billion in 2003. The new free trade zone, which will remove tariffs on 90 percent of traded goods, is expected to increase that commerce still more.

The zone will rank behind only the European Economic Area and the North American Free Trade Area in trade volume. It will encompass 1.9 billion people. The free trade area is expected to help Asean countries increase exports, particularly those with commodities that resource-hungry China desperately wants.

The China-Asean free trade area has faced less vocal opposition than the European and North American zones, perhaps because existing tariffs were already low and because it is unlikely to alter commerce patterns radically, analysts say.

However, some manufacturers in Southeast Asia are concerned that cheap Chinese goods may flood their markets, once import taxes are removed, making it more difficult for them to retain or increase their local market shares. Indonesia is so worried that it plans to ask for a delay in removing tariffs from some items like steel products, textiles, petrochemicals and electronics.

“Not everyone in Asean sees this F.T.A. as a plus,” said Sothirak Pou, a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore.

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Asean and China have gradually reduced many tariffs in recent years. However, under the free trade agreement — which was signed in 2002 — China, Indonesia, Thailand, the Philippines, Malaysia, Singapore and Brunei will have to remove almost all tariffs in 2010.

Asean’s newest members — Cambodia, Laos, Vietnam and Myanmar — will gradually reduce tariffs in coming years and must eliminate them entirely by 2015.

Most of the goods that will become tariff-free in January — including manufactured items — are currently subject to import taxes of about 5 percent. Some agricultural products and parts for motor vehicles and heavy machinery will still face tariffs in 2010, but those will gradually be phased out.

In recent years, China has overtaken the United States to become Asean’s third-largest trading partner after Japan and the European Union. The overall trade balance has shifted slightly in China’s favor, although there are significant differences among Southeast Asian countries’ trade balances, said Thomas Kaegi, head of macroeconomic research for the Asia-Pacific region at UBS Wealth Management Research.

Singapore, Malaysia and Thailand have only small trade deficits with China, while Vietnam’s has grown substantially in recent years. In 2008, Vietnam exported items worth $4.5 billion to China but imported about $15.7 billion worth of Chinese goods.

In Indonesia, the textile and steel industries are particularly nervous about the lifting of tariffs, prompting the government to say that it would ask for a delay on some provisions. No time frame for submitting the request was given, but the Asean secretariat said it had not yet received an official request.

While competing with more Chinese imports may pose new challenges for Asean manufacturers, analysts say increasing their access to the 1.3 billion people of China could produce significant benefits.

Rodolfo Severino, who was secretary general of Asean from 1998 to 2002, identified Malaysia — which already exports palm oil, rubber and natural gas to China — as one of the countries that might benefit most from the removal of tariffs.

But nations like Vietnam that focus on the production of cheap consumer goods are more likely to be hurt, said Mr. Severino, head of the Asean Studies Center at the Institute of Southeast Asian Studies in Singapore.

Those countries may need to look for new export products and identify new niche markets, he said: “This is the nature of competition.”

Song Hong, an economist, expects that China will import more agricultural goods, like tropical fruit, from countries like Thailand, Malaysia and Vietnam when the trade area takes effect. That could hurt Chinese farmers in southern provinces like Guangxi and Yunnan, said Mr. Song, director of the trade research division at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences in Beijing.

Mr. Sothirak, who was Cambodia’s minister of industry, mines and energy from 1993 to 1998, said the removal of tariffs might help increase Cambodia’s agricultural exports to China. Cambodia needs to diversify its export markets because its exports to the United States and Europe have declined, he said.

While he does not hold much hope that Cambodian textile exports would be able to compete with China’s highly developed garment industry, he said he believed the free trade area might entice more Chinese garment factories to set up operations in Cambodia, where production costs and labor are cheaper.

Pushpanathan Sundram, deputy secretary general of Asean for Asean Economic Community, acknowledged that there would be “some costs involved” for some countries when the free trade area took effect, but he said he believed China and Asean would “mutually benefit.”

Despite the expectations for increasing trade, Mr. Severino predicted that the introduction of the trade zone would not be a “breakthrough event” setting off a dramatic surge in commerce come January.

“There are many factors that traders and investors consider, and the trend has been going this way anyway,” he said. “What this does is to send out good signals and show the determination of governments to make things easier.”

Nov 14, 2009

A rising China is changing the way Americans live overseas and at home - washingtonpost.com

Image by Joits via Flickr

Rising global power is reshaping the way Americans do business and live their lives

By John Pomfret
Washington Post Staff Writer
Saturday, November 14, 2009

WAUSAU, WIS. -- In a cavernous warehouse amid rolling hills and dairy farms, a group of farmers recently gathered around a buyer in a conversation heralding a sea change in the United States.

"I don't think you Americans get it," said the buyer, dressed casually in designer brands and sporting a watch worth as much as the mud-splattered GM trucks in the parking lot outside. "We need quality. We demand quality. Top quality. If you work with me, we can win together. But if you don't, there's nothing I can do."

Being harangued by a pharmaceutical company executive from China was new for these burly farmers, but no one complained. These tough men from the American Midwest treated their Chinese guest as a savior of sorts, in an important economic and cultural reality that will confront President Obama on his first visit to China, starting Sunday.

On visits to Shanghai and Beijing, Obama will encounter not simply a rising global power but a nation that is transforming and challenging the way Americans live overseas and at home, from college classrooms to real estate offices to the ginseng farms of central Wisconsin.

Americans have been selling Panax quinquefolius to China since 1784 when the first China-bound trading ship sailed from New York to Canton, today's Guangzhou, weighed down with 30 tons of the root, prized in Asia for medicinal properties. But today the U.S. ginseng industry, centered here in Wisconsin, is on its back, kicked down by bogus imitations from Chinese competitors and state-subsidized crops from Canada.

Twenty years ago, 1,500 farmers grew ginseng in Wisconsin for the China market; now the number is down to 150. Prices have dropped from $60 a pound to $24. The farmers around the ginseng barrels on this rainy fall night looked for an answer from Chun Yu, a Chinese businessman dangling his company's chain of 1,000 retail stores throughout China as the ultimate prize.

"Years ago, it didn't matter what we grew. They bought everything we had," said Randy Ross, a 54-year-old former dairy farmer who has been growing ginseng since 1978. "Now we've got to learn how to satisfy them. They are changing us."

Catching China fever

While it's not exactly the People's Republic of Wisconsin, this state has been seized with a China fever of sorts. Throughout the United States, old notions of China have been replaced with a deeper understanding that China is a force that must be reckoned with. Hate it or love it, China is a major player in American life.

China is now Wisconsin's (and the country's) third-biggest export market, buying more American soybeans, oil seeds, hides and animal skins, raw cotton, copper, nonferrous metals, wood pulp, semiconductors and miscellaneous chicken parts (a.k.a. chicken feet) than anyone else.

At the University of Wisconsin, as at college campuses across the United States, mainland Chinese dominate the study of science and technology and form the backbone of the engineering, chemistry and pharmacy departments. They receive twice as many doctorates in this country as students from India, the next-closest foreign competitor. And among foreigners, they register by far the most patents in the United States.

Chinese investors have snapped up pieces of distressed real estate in Milwaukee, as they have in other crumbling Midwestern industrial cities, not to mention in Florida, California and Arizona. Last year, a group from Germantown, Md., and China bought an empty mall on Milwaukee's depressed northwest side for $6 million, down from its $8 million list price. In July, a Chinese steelmaker bought 54 acres in an industrial park off Interstate 94 between Milwaukee and Chicago.

A team of Midwestern businessmen, including the former CIA station chief in Beijing, has recently established, in cooperation with the Department of Homeland Security, a special zone in Wisconsin that would grant U.S. citizenship in exchange for a $1 million investment.

Meanwhile, in a state that has lost more than 160,000 (or one-third) of its manufacturing jobs in a decade, local newspapers have been running editorials praising the People's Republic and blasting those who oppose closer trade ties or Chinese investment. "China is a friend to Wisconsin and its businesses, not an enemy in a trade war," the Wisconsin State Journal said in an editorial.

Seeking out business

Wisconsin's governor, Jim Doyle (D), has been to China to promote Wisconsin three times since he took office in 2003. When he first went, he said, fellow governors in other states worried about the appearance of an American governor going to China seeking business. Now, it's commonplace. More than 14 of his counterparts have visited China in the past two years.

"China is incredibly important to us," he said in an interview. "Even in these difficult times, some of the industries getting by are the ones selling to China. If we didn't have the Chinese, we would have been in much, much tougher shape."

One of those firms is Bucyrus International, based in South Milwaukee, which has exported coal-mining equipment to China since trade relations were opened in the 1970s. In the past three years, it has doubled its workforce, in part because of the China trade.

"We were still skeptical seven or eight years ago that these guys were for real," said Bucyrus chief executive Tim Sullivan. "Now we know."

The boosterism about China sometimes reaches a fever pitch. One of the businessmen who helped set up the special investment zone, Robert Kraft, said China in the future will do what the Germans did for Milwaukee in the past. "The Chinese are coming," Kraft said in a telephone interview from China, where he was scouting for Chinese investors. "We're just trying to get a piece of it for Wisconsin."

"The Chinese Are Coming" was the title of a session in late September in Baltimore at the annual meeting of the National Association for College Admission Counseling. There educators spoke about skyrocketing numbers of Chinese high school graduates applying for admission at U.S. colleges. That's new. For the last 20 years, Chinese have been at or near the top of the number of foreign students in the United States -- but most were in grad school. In all, about 89,000 are currently in the United States, according the Chinese Embassy.

China has also helped establish 61 Confucius Institutes across the United States, including one in Wisconsin, to teach Chinese and undertake "cultural dialogues," the embassy said.

At the University of Wisconsin in Madison, Chinese undergraduates now account for more than half of the 1,109 Chinese students there. That increase is another sign that China is coming because Wisconsin, like many state schools, doesn't provide scholarships for international undergrads. Last year, Chinese students paid out $2 billion in tuition nationwide. "That money is keeping some American colleges alive," said Laurie Cox, who runs the international student center at the Madison campus.

"Every time I turn around, another campus has signed a memorandum of understanding with another Chinese university," said Kevin Reilly, the president of the university's 26 campuses. Reilly recently joined Doyle on a trip to China. "I came away thinking, if the 20th century was the American century . . . you have to believe that the 21st century will be the Chinese century."

Difficulties and disputes

Wisconsin is not immune to troubles with China. For years, until they were stopped in 2004, two Chinese nationals used Milwaukee as a base from which they exported restricted electronics and computer chips to Chinese institutes that make missiles.

Quality problems with China's imports have also bedeviled Wisconsin firms -- as they have American consumers who purchased deadly pet food, lead-laden toys, and defective drywall that is believed to have rendered thousands of homes in the South almost uninhabitable.

One Wisconsin company, Scientific Protein Laboratories, was in the center of a supply chain making the blood-thinner heparin.

Hundreds of allergic reactions to the drug, including 81 reported deaths, led to a nationwide recall that was linked to tainted raw materials from China in 2007 and 2008.

These days Wisconsin is at the center of a new trade dispute with China. Appleton Coated of Kimberly was one of three paper companies to join with the United Steelworkers to file a petition with the government alleging that China was dumping certain types of paper products in the U.S. market. On Nov. 6, the U.S. International Trade Commission decided to investigate allegations of unfair subsidies.

Jon Geenan, international vice president for the United Steelworkers, grew up near the Kimberly plant. He estimates that Chinese and Indonesian imports have cost the state more than 5,000 jobs in its paper mills. That means dozens of foreclosed homes and hundreds of people who are behind on their property taxes. "Even the churches say that donations are down," he said. "They are definitely challenging the way we live."

In Marathon County, where the glaciated soil makes for a bitter ginseng, the way many Chinese like it, Yu, the ginseng buyer, appears content with his new role as big shot. He recently met Gov. Doyle and signed a deal to become China's exclusive importer of Wisconsin's prized root. "But only if the quality is good," he said. "The student has become the teacher!

Sep 15, 2009

Threat of Trade War With China Sparks Worries in a Debtor U.S. - washingtonpost.com

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By Steven Mufson and Peter Whoriskey
Washington Post Staff Writers
Tuesday, September 15, 2009

The prospect of a trade war with China fueled fears of wider fallout Monday, rattling bond markets and prompting many economists to criticize President Obama's decision to slap import tariffs on Chinese-made tires.

Traders fretted that the 35 percent tariffs might prompt China to send a sign of disapproval by paring purchases of U.S. government bonds. And a chorus of economists and climate activists fretted that the president's action might undercut U.S.-China climate talks and poison relations just two weeks before the summit of the Group of 20 major economies to be held in Pittsburgh.

Moreover, economists argued that it would all be for nothing; they said tariffs on Chinese tires would probably boost U.S. imports from countries like Poland and Mexico and do little to help the American steelworkers whose union brought the trade action in the first place.

Obama said Monday on CNBC that the tariffs, which were announced late Friday night, were necessary to maintain the "credibility" of trade agreements. "I'm not surprised that China is upset about it, but keep in mind, we have a huge economic relationship with China," he said.

China's commerce minister, Chen Deming, called Obama's action an "abuse" of trade provisions and said it "sends the wrong signal to the world." China said it would look into punitive measures against U.S. exports of auto and poultry parts.

"I think it's a terrible message in the run-up to the G-20, and we are all very concerned about the escalation of protectionist measures," said Uri Dadush, senior associate at the Carnegie Endowment for International Peace and long-time international trade director at the World Bank.

"If there were any prospect of the United States taking the moral high ground in Pittsburgh at the G-20, there isn't any longer, and that's unfortunate," said Daniel Rosen, partner at the advisory firm Rhodium Group and a former senior adviser for Asia at the National Economic Council. "Instead . . . people are going to be talking about the U.S. and China squabbling over tires and chickens."

One person who said such fears are overblown: Leo W. Gerard, the former nickel mineworker and leader of the United Steelworkers who instigated the current flap by filing the trade complaint that pushed Obama to impose a tariff on Chinese tires imports. Brushing aside concerns over a trade war or China's purchases of mountains of U.S. debt, he said that China exports far more than it imports and so has much more to lose.

"Eh," Gerard said when asked about fears of Chinese retaliation. "Are they going to kick the three chickens out they let in? . . . We've got into a situation now where everyone's afraid to tick off our banker," he said. "If our government had the guts to retaliate, [China] is going to be on the losing end."

The Obama administration also said it was not worried. "We do not expect that it will have an impact on the broader relationship," said a senior administration official who spoke on the condition of anonymity because he was not authorized to speak publicly. He said that there had been a "robust effort" by the administration to negotiate with China for a settlement on tires before imposing import tariffs. He asserted that U.S. imports of Chinese tires, which more than tripled since 2004, clearly met the test for tariffs aimed at reducing "surges" in imports.

But when asked about whether the United States would simply import from other nations, he conceded that "it is hard to predict the impact with specificity."

'Not to Be Provocative'

"A healthy economy in the 21st century also depends on our ability to buy and sell goods in markets across the globe. And make no mistake, this administration is committed to pursuing expanded trade and new trade agreements," Obama said in a speech Monday in New York's financial district.

"But no trading system will work if we fail to enforce our trade agreements," he added. "So when -- as happened this weekend -- we invoke provisions of existing agreements, we do so not to be provocative or to promote self-defeating protectionism. We do so because enforcing trade agreements is part and parcel of maintaining an open and free trading system."

There are reasons why the dust-up over tires might settle down. China exports three times as much to the United States as it imports from the United States. It also has relatively few secure places to park its huge foreign-exchange reserves other than U.S. Treasury bonds and government-backed U.S. mortgage securities.

Thea Lee, an economist and policy director for the AFL-CIO, said the concern over an incipient trade war was overblown and called China's reaction "blustering."

"The Chinese government is trying to raise the rhetoric and scare off the U.S. We should not be scared off," she said. "We are within our rights. . . . It's not the beginning of a trade war."

From 2004 to last year, the number of Chinese tires imported in the United States more than tripled and their share of the U.S. market rose from 5 percent to 17 percent. Over the same period, the share of the U.S. market served by U.S. factories declined by a corresponding amount. More than 5,000 U.S. jobs were lost.

Opponents of the tariff say the U.S. industry's shrinkage is unrelated to the surge in Chinese imports. U.S. manufacturers, they say, have strategically moved into pricier, more profitable tires, shifting production of cheaper tires overseas. Yao Jian, a Chinese Commerce Ministry spokesman, said, "Four U.S. companies have tire production operations in China and account for two-thirds of exports to the U.S. The tariffs will have a direct impact on them."

Under the so-called "421 clause" that China agreed to as part of its bid to gain admission to the World Trade Organization, the United States does not need to prove unfair trade practices.

Bad Timing?

But other observers said the timing was particularly bad, regardless of the case's merits. "They may have the basis for doing this, but the point in my mind is not the legality but the overall political impact and the message this gives the world," said Dadush of the World Bank. "Over the last several months, Chinese imports are exploding and thank God for that because that's holding up all of Asia and having a good impact on the rest of the world." By contrast, he said, U.S. imports are declining.

Moreover, globally, new requests for protection from imports in the first half of 2009 are up 18.5 percent over the first half of 2008, according to the World Bank-sponsored Global Antidumping Database, organized by Chad P. Bown, a Brandeis University economics professor. That increase follows a 44 percent increase in new investigations in 2008.

On Tuesday, Obama is scheduled to address the AFL-CIO's annual convention. Some analysts said that the tire tariffs were a political favor to trade unions, whose support Obama needs for health-care reform and who backed Obama in the 2008 election. Gerard dismissed the idea that the tire tariffs were political payback. The people who say that "are smoking something," he said.

Some observers said Obama might follow the Bush administration, which initially seemed to adopt a tough stance on trade. In March 2002, President Bush imposed tariffs on foreign steel, but later he backed off and rejected proposals to impose trade sanctions for other products.

"He pulled the plug on us because he didn't think we were grateful enough," Gerard said. "He didn't have the guts to enforce the law. He basically invited the Chinese to keep doing the same thing."

Whoriskey reported from Pittsburgh.