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By Elizabeth M. Lynch, November 8, 2009

Last Wednesday, November 4, the European Union, the United States and Mexico filed a complaint with the World Trade Organization (WTO) against China for its quotas, export duties and minimum export prices for raw materials essential to the manufacture of steel and aluminum.  Noticeably absent from the complaint though, is any mention of China’s restriction on rare-earth elements.

Rare Earth - Much More than a Band from the 70s.

The raw materials at issue in the WTO complaint, while important to key manufacturing industries in the US and the EU, in many ways represent the economy of old.  Rare-earth elements, which China also heavily restricts export of, represent the economy of tomorrow; many of these rare-earth elements are indispensable for a greener, more environmentally-friendly world.  The magnetic properties of rare-earth elements like dysprosium and terbium are important for wind turbines and essential for the production of long-lasting, light-weight batteries for electric cars.

China, and its rare-earth enriched Inner Mongolia, account for 93% of the global production of rare-earth elements and 99% of the world’s dysprosium and terbium.  While countries have sought to expand green technologies, thus increasing the demand for rare-earth elements, China has continued to restrict the amount exports of rare-earth materials.  This past September, China, for the third year in a row, lowered the amount of rare-earth materials allowed for export by 6% overall, double-digits though for certain rare-earth materials .

China wants not just the monopoly on the production of rare-earth materials, but also on the more profitable business of producing down-stream products like electrical cars and wind turbines.  Japan, which is the largest importer of rare-earth materials because of Toyota and Honda’s drive to expand the market for hybrid and electric cars, feels the biggest pinch of all.  In fact, Japan purchases from a fifth to a quarter of its rare-earth materials on the black market, a black market where Chinese sellers thwart their own government’s restrictions.

In addition to its own domestic production, China, with its large foreign reserves to spend, has attempted to be a controlling share holder in other countries’ rare-earth industries.  Last spring, Chinese government-controlled mining companies purchased a 25% share of Australian rare-earth mining company Arafura.  China’s offer to purchase 51% of another Australian rare-earth mining company, Lynas, was likely going to be denied by the Australian government because of the Chinese government’s mishandling of the Rio Tinto case and the detainment of Australian citizen.  The Chinese mining company pulled out of the deal before it could be denied by the Australian government.

After China’s CNOOC’s failed bid to purchase California oil company Unocal in 2005, CNOOC  made overtures to purchase a single asset of Unocal’s: Mountain Pass, the U.S.’ only rare-earth mine.

Thus, the future of some green technology is beholden to China.  But Japan, instead of investing in China’s rare-earth elements industry, is looking to invest elsewhere – likely because of the danger in investing in a country with a fickle commitment to rule of law.  Japan has signed a deal with one of Kazakhstan’s largest mining companies for rare-earth excavation and is looking to Australia, Canada, Vietnam and the U.S. as alternate suppliers.  However, it will take at least 10 years before any of these new mines will produce rare-earth materials.  Until then, anticipate delayed development of green technologies and hopefully a WTO complaint.

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By Elizabeth M. Lynch, September 29, 2009

Originally posted on the Huffington Post

President Obama, with President Nicolas Sarkozy and Prime Minister Gordon Brown on Friday, Sept 25 at the G-20 Summit

China remained noticeably mum on Friday as other member nations of the U.N. Security Council stood before the world and accused Iran of developing a secret nuclear enrichment site.  Flanked by Prime Minister Gordon Brown of the U.K. and President Nicolas Sarkozy of France, President Obama promised to take strong action against Iran if the country did not fully disclose its nuclear ambitions and open all sites to international inspectors.   Such strong action would include crippling sanctions on all trade to and from Iran.  Even Russia appeared willing to consider sanctions if Iran failed to cooperate, breaking with Russia’s long opposition to such action.

China, on the other hand, prefers a different route.  Stressing the need for diplomacy and negotiations, China announced that “sanctions and pressure should not be an option” in dealing with Iran.  Although not completely ruling out sanctions, China desperately hopes that the upcoming talks with Iran scheduled to begin this Thursday satisfy the U.S. and obviate the need for sanctions.

Why is China so hesitant to support sanctions against a country that is secretly developing nuclear capabilities?  History, geo-politics and economic ties are what set China apart from its Security Council brethren in dealing with Iran.  But China’s growth as a world power has caused it to become a stakeholder in the current system.  With this new-found power, China has begun to realize its actions, or lack of action, does in fact shape the world’s future course and as a result, its own global prospects.

History, History, History

China has long been an outsider to the western world order.  Even after mainland China’s return to the U.N. Security Council in 1971, China was still largely considered a pariah state, a Communist country with severe human rights violations.  China’s violent crackdown on the 1989 Tiananmen protests rolled back any international good will it was amassing and subjected China to crippling economic sanctions.  It has only been in the past few years that China has become a significant voice in the international arena and respected by Western powers.

But for China, its past is far from forgotten.  While it has significantly benefited from the current world order, China understands that other countries, either rightly or wrongly, are marginalized because of alleged human rights violations or nuclear development.  As a result, China has developed a philosophy of “non-interference” in other country’s domestic affairs and has largely stuck to that attitude in dealing with countries that the U.N. or the U.S. might consider rogue.  This is not to say that China condones such behavior; in fact China has been an ardent supporter of various global nuclear non-proliferation efforts and supported sanctions against North Korea for its nuclear development.  However, with its sense of history, China will be slow to agree to sanctions against Iran, even if sanctions are in its long-term self-interest.

Geo-strategic Considerations

Iranian President, Mahmoud Ahmadinejad at last week's U.N. Security Council

Iran plays an important role in China’s aspiration to become a regional power.  With its rise, China has sought to create political alliances and economic ties with other countries in Asia and reduce the influence of the U.S. in the region.  One such effort is the Shanghai Cooperation Organization (SCO).  China leads the organization which has created greater economic interdependence among Russia, China and the Central Asian states.  Iran, although not a member, currently holds observer status.  China, along with Russia, has used the SCO to reduce the U.S. military presence in Central Asia when in July 2005, its members signed an agreement to push the U.S. to set a deadline for troop withdrawal from the region (Library of Congress Report, p. 68).

The SCO is beginning to function as a multilateral alliance system allowing China to exert its influence in a region where western powers are largely absent.  To move too quickly in calling for sanctions against Iran, a country within the SCO’s domain, China could jeopardize its current leadership role in the region.

Economic Ties

China’s strongest reason to oppose sanctions against Iran lies with its current economic ties to the country.    In 2008, 12% of China’s crude oil imports were from Iran; the first five months of 2009 have seen an increase and China is on target to import 15% from Iran (Energy Information Administration Country Analysis Brief) .  Furthermore, Chinese oil companies have invested heavily in Iranian oil fields.  In December 2007, China’s Sinopec signed a $2 bn contract with Iran to develop the Yadavaran oil fields; in January 2009, CNPC, China’s largest oil and gas company signed a $1.7bn oil contract to develop the Azadegan oil fields.  Although these investments are large, many question whether the Chinese companies have in fact moved forward with developing these fields.  In the past, Chinese oil companies have signed deals with countries but have waited, even as much as ten years, for geopolitical issues to settle (According to the Brookings Institute, CNPC signed a contract with Iraq in 1997 but did not begin to the develop the oil fields until 2008, after threats of sanctions were over).

Similarly, China has looked to Iran for its large quantities of natural gas.  In March 2009, the L.A. Times reported that Iran and China signed a $3.2 bn deal for natural gas development. But like the oil contracts, it is unclear if China intends to follow through with this agreement given the current politically-sensitive climate.

More real though is Chinese oil companies’ sale of gasoline to Iran.  Although Iran has the second largest crude oil reserves in the world, it has little capacity to refine that oil and make it into usable gasoline.  In fact, Iran imports 40% of its gasoline, mostly from European countries but also from China.  Because of China’s increasing economic ties with Iran, sanctions that impact all trade with Iran could be particularly damaging to China.

China’s Countervailing Interests

On Sunday, it seemed as though everyone on the political talk shows called for China to join the U.S., France, Britain and Russia in condemning Iran and agreeing to join sanctions if need be.  But China has not wavered on its stance of trying diplomacy first.  At the same time, it has also not stated that it will oppose sanctions if the October 1 talks fail.  And while political pundits, the media and elected officials in the West are currently criticizing China for not throwing its weight behind sanctions, it is China’s current silence on the issue that gives the October 1 talks the best chance of success.  Without China’s commitment for or against sanctions, Iran is left guessing what its trading partner will do, and could acquiesce to U.S. demands to show blueprints of the new nuclear site and open its country to inspectors.

But if the October 1 talks fail, expect China to agree to sanctions, but likely not the ones that will be proposed by the U.S., France and Britain.  In December 2006 and March 2007, in response to Iran’s nuclear development, the U.N. Security Council unanimously agreed to sanctions.  However, through China and Russia’s insistence, these sanctions were substantially watered down and merely limited the sale of nuclear equipment and technologies to Iran and froze the assets of key individuals involved in Iran’s nuclear development.

The Obama Administration has already realized that a total embargo on gasoline shipments is not in the cards.  Not only would Chinese companies be negatively impacted, but so would European oil companies that sell gasoline to Iran.  Many E.U. countries have already come out against a total embargo.

But other measures, such as eliminating investments in Iran, might have more traction with China and could be something it agrees to in this round of sanctions.  China has a lot to lose if Iran becomes a nuclear power or appears to be a nuclear power.  First, while 12% of China’s crude oil imports are from Iran, 20% are from Saudi Arabia, a country that has already reprimanded Iran for its nuclear aspirations.  Will China jeopardize that relationship by opposing sanctions?

Second, Israel’s response to an unchecked Iran could potentially lead to such instability in the region cutting off not only oil from the Middle East, but also key shipping lanes for China’s oil imports from other countries.  China cannot afford to be cut off from any oil shipments since currently it only has 25 days worth of oil reserves.

Third, a nuclear Iran threatens the Central Asian strategic alliances that China has worked hard to create through the SCO.  Arguably, the other Central Asian countries might begin to take their cues from Iran, dissipating China’s leadership role in the region.

Fourth, it remains unclear if China’s investments in Iranian gas and oil fields actually exist.  If not, then China could easily agree to stop its investments in Iran.  Even if China has already begun to develop these oil and gas fields, it is only at the start of these investments and under its contracts with Iran, China does not receive a return on the investment until development is completed.  Any of China’s current contracts have a long way to go before completion.

Finally, China does want to become a responsible world player.  It has actively sought membership in various international organizations and largely abides by their rules.  Last year, during the North Korean missile crisis, China was on board in issuing a harsh reprimand of Kim Jung-Il’s actions.

If the situation with Iran further disintegrates and sanctions become necessary, the Obama Administration should push China to agree to sanctions that include a cut-off of investments in Iran.  China might hesitate at first, but for the reasons stated above, they could agree to such measures.  Getting China to stop importing crude from Iran could prove harder.  Although interestingly enough, Iran’s largest importer of its crude is Japan, a strong U.S. ally, and Japan might actually be the strongest opponent of such measures.  Including an embargo on sales of gasoline to Iran would be impossible.  But asking China to join sanctions that limit investment in the region, is doable.

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By Elizabeth M. Lynch, September 16, 2009

On Friday, in a move that some claim to be political posturing and others claim to be a long overdue enforcement of trade laws, President Obama decided to levy tariffs on tire imports from China.  In issuing these tariffs, President Obama relied on Section 421 of the Trade Act of 1974.  Section 421 is exclusively about imports from China and permits the President to issue tariffs on a product from China if the product is being imported “in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of a like or directly competitive product….”  That’s right, neither “unfair trade” nor “dumping” has to be alleged; just market disruption (see analysis here).  But China agreed to this specific provision in order to join the WTO.  In response to President Obama’s decision, China has threatened to levy tariffs against automotive imports and chicken meat.

So while President Obama’s decision was likely “legal,” was it the right move to make?  Trade law expert and China

Adam Bobrow

specialist Adam Bobrow offers his take on the President’s recent decision for tire tariffs below.

Trade Policy by Proxy—§421, Lost Opportunities, and a Prescription for Improvement

By Adam Bobrow

Last Friday, President Obama announced his decision in response to the first China-specific safeguard petition of his term.  The U.S. International Trade Commission (USITC) recommended imposing tariffs of 55%, 35%, and 25% ad valorem, for one year each to compensate for a market disruption to the domestic industry caused by a surge in imported car and light truck tires.  The President was predictably Solomanic:  he accepted the USITC’s framework, but substituted a tariff of 35%, 30%, and 25% ad valorem, in each of those years.  The President’s move upset many observers and interest groups—as it would have if he had imposed the relief recommended or no relief at all.  (In each case, a different distinct group would have applauded while the others jeered.)  To perhaps a greater extent than with most Presidential choices, this was a no-win situation.  In fact, the safeguard will not have a large impact on the U.S. economy.  So why spill so much ink over it?

This decision has taken on heightened importance because it is the Administration’s most important action related to trade policy to this point.  As such, it will be interpreted as a statement of trade policy, rather than as a single, and possibly singular, event.  In deciding to impose the safeguard, the Administration does not seek to make a general statement concerning its trade policy, but because the President has taken no other high-profile actions nor made a clear statement of his trade policy (routine reports to Congress don’t count), observers must treat this decision as trade policy by proxy.

But what could this Administration have done on trade in the first 8 months that would have made a difference today

Made in China - Tires

and avoided some of the avalanche of criticism that the safeguard has engendered?  Even more important, for a President who has claimed to be nominally in favor of trade liberalization but with supporters in Congress and organized labor who are not, how could the President enunciate a trade liberalizing agenda that might succeed?  First, a primer on the politics of trade policy is in order.

During the last half of the 20th century, there was a centrist consensus on trade in the United States.  Based on a general understanding of the economic implications of comparative advantage, the memory of the “beggar thy neighbor” policies of the 1930’s, and the benefits conferred by successive rounds of multilateral trade liberalization, the center held through the Clinton Administration.  That center crumbled in the last 8 years during an Administration that believed in trade liberalization but reflexively opposed any policy that could be construed as intervention in the economy.  Ultimately, the Bush Administration mismanaged the economy and undermined the consensus on trade liberalization in which its officials believed.

The situation now, with the Democrats in control of Congress and the White House, challenges the premises of the centrist consensus on trade liberalization more directly than did the divisive style but nominally free trade ideology of the Bush Administration.  According to Public Citizen, all the races in which trade played a part in 2006 favored the Democratic candidate, the one Public Citizen identified as favoring “fair trade,” a term that embraces a policy with less liberalization, more tools to protect existing workers in domestic industries, and less autonomy for Executive Branch trade negotiators.  (The results in 2008 were similarly one-sided from a trade perspective, if not quite as dramatic.)  As a result, a significant part of the majority caucus now believes in opposing continued trade liberalization and will fight for that position.  Assuming that the White House would like to rebuild a centrist consensus around the continued benefits of trade liberalization, the current make-up of the Congress poses a tremendous challenge.  The partisans on President Obama’s side of the aisle do not believe in trade liberalization and potential allies on the other side of the aisle have been unwilling to support any White House initiative in any meaningful numbers thus far.  How to thread this needle?

The way forward is a trade policy that embraces the entire economic impact of increased globalization throughout the U.S. economy and does not remain tied exclusively to the issue of lowering tariffs and eliminating non-tariff barriers alone.  Freer trade makes good economic sense:  in the common parlance, trade is a win-win economic deal.  But while economies experience trade as win-win, there is no guarantee that those benefits will reach all communities—and in almost all cases, some communities will lose because of freer trade meaning that the economic pain felt by some is both undeniable and due to trade.

The key is to find a way to lessen the economic pain and insecurity in those communities.  The answer lies not in instituting protectionist policies and raising barriers or in trying to impose standards on our trading partners that they cannot meet.  The answer lies in changing two things right here at home:  the framework in which we view trade and the way in which we manage our economy.

With regard to adjusting our lenses on trade, the issue must become one that recognizes the extent to which trade policy is not an arcane subject but one that touches everything about the U.S. economy.  As such, the trade policy debate should embrace fiscal policy:  fundamentally, the benefits of trade must be spread more widely.  A dramatic expansion of the Trade Adjustment Assistance programs that would allow for worker retraining and provide support to businesses transitioning due to losses in their communities arguably related to trade.  The health-care debate currently underway in Washington should be harnessed to support a liberalizing trade policy at the level of the individual worker:  given the dynamic and ever more productive job market in the United States, it is critical to down-sized workers to provide an affordable option to employer-based health care.  Longer term goals would include specific support for the industries of the future instead of simple protection for the industries that have trouble meeting globalized competition and a tax code designed to distribute the benefits of increased national wealth attributable to trade to more of the population.

These proposed measures are all political; all would be designed to create a grass-roots environment in which the benefits of trade permit the political space for elected representatives to continue trade liberalization.  While the idea of exporting jobs will always cause problems politically, removing the fear of job losses in which the entire community faces a different economic future is essential to create that political space.  By addressing trade through a fiscal policy lens, difficult reciprocal liberalization will also be easier, albeit still hard.  Completing the Doha Development Agenda at the WTO will offer many of the traditional benefits familiar from previous rounds of trade liberalization, but it will require that the United States address the inequities in its agricultural support system.  With the disproportionate weight in the Senate given to farm states, without a political consensus on the benefits of trade liberalization, such an initiative will never progress.

Perhaps President Obama sought to pursue such a paradigm shift in trade policy with the failed attempt to convince Representative Xavier Becerra to take the job as USTR.  This Latino Democratic Member from Los Angeles is the first to serve on the House Committee on Ways and Means and is one of the most senior Latinos in Congress as well as a member of the Democratic leadership.  As USTR, he would have had the opportunity to discuss the fiscal elements of rebuilding a centrist trade consensus based on improved fiscal and immigration policy.  Although generally in favor of trade liberalization, Representative Becerra has opposed recent trade measures, from bilateral free trade agreements (FTAs) to any extension of trade negotiating authority to President Bush.  As USTR, he would have shaken up the trade bar but would have actually represented a fresh face and a fresh approach to trade policy.

Representative Becerra reportedly refused the position.  Although speculation, the tenuous nature of the White House support and the difficulties inherent in trying to link so many important policy areas as USTR, traditionally one of the least powerful cabinet positions, certainly factored into his decision to decline the nomination.  Thus far, given that the Administration has not embraced a far reaching trade policy and has let its §421 decision speak louder than its policy prescriptions on trade, it appears that Representative Becerra made the right choice.  The question is, will the Administration learn from this criticism and make the right choice to broaden the trade policy debate beyond the China-specific safeguard.

Adam Bobrow is an international trade lawyer in Washington, DC.  He has experience working on trade policy, especially the U.S-China trade relationship, for the federal government in both the Executive Branch and on the Hill.  He has several years of experience advising companies and individuals doing business in China.  He can be reached at afb3@georgetown.edu.