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By Elizabeth M. Lynch, April 27, 2010

With the fortieth anniversary of Earth Day this past April, Americans celebrated with vigor and advocated saving the planet.  Well, most Americans did.  As China-observer Marcy Nicks Moody notes, recent breakdown between Democrats and Republicans in the Senate could forestall any hope of the U.S. moving forward on climate change legislation.  And could allow China to remain ahead of the green technology game for a long time.

Happy 40th? – Congress Says Bye, Bye Climate Change Legislation

By Marcy Nicks Moody

Last Thursday, Americans celebrated the fortieth anniversary of Earth Day, established by U.S. Senator Gaylord

Earth Day Founder, Sen. Gaylord Nelson

Nelson in 1970 to raise awareness of environment-related issues. Last Sunday, thousands gathered on the National Mall in Washington, DC to participate in the Earth Day Climate Rally with the alleged goals to “stop protecting polluters,” “enact comprehensive climate legislation,” and “demand accountability from Washington.” There were exhortations to grow kitchen gardens along with clamorous chanting of the word ‘green.’ The weather was glorious, and spirits did not seem dampened by the blow dealt to climate legislation by the U.S. Senate just the day before.

Sandwiched between Earth Day and the Earth Day Climate Rally was the day on which another U.S. Senator, Republican Lindsey Graham of South Carolina, announced that he would no longer participate in negotiations on a Senate version of proposed climate legislation. In a letter to colleagues Senators John Kerry (D-MA) and Joseph I. Lieberman (I-CT), Senator Graham cited his disappointment over reports that the Democratic leadership of the Senate was planning to take up discussions of immigration before addressing climate change as a reason for his changed stance.

Senators Graham, Kerry, and Lieberman were the primary architects of this bill-to-be and had been planning to formally announce the bill with the White House last Monday. But any debate on immigration would make it impossible to deal with national energy and climate change policy, the South Carolina Senator said. So he won’t support the draft climate change bill, in spite of the fact that he helped create it. Senator Graham won’t support some legislation because talking about something else would just be too painful or distracting? This seems a bit irrational.

In Happier Times - Senators Graham, Kerry & Lieberman

Setting aside speculation over why Senator Graham radically and suddenly changed positions, the simple fact that he did it is disappointing. To be sure, the Senator is not the only culpable party in this turn of events. He is likely under enormous pressure from fellow Republicans to stop negotiating with Democrats. And if reports are true that both the White House and the Democratic Senate leadership had been planning to take up immigration first not because it could pass (the House has not yet discussed the matter) or because it is more urgent (climate change is equally as urgent: the longer we wait to address climate change, the more expensive it will be), but because it could present a useful wedge issue for the Democrats in the coming election cycle, then Senator Graham has every right to be peeved.

But unless Graham’s strategy has the result of getting climate change legislation considered in this session of Congress, it is bad for Americans. The science demonstrating the negative and possibly catastrophic consequences of anthropogenic climate change is overwhelming. That emissions of greenhouse gases (GHGs) must decrease is flagrantly obvious. And that the United States, which prides itself on its innovative strength, global leadership, and remains the largest economy in the world, has still not acted on this evidence is disgraceful.

It is also bad for business. The clean technology market is big and growing, but without the passage of climate change legislation, signals to U.S. businesses as to the future prices of clean versus pollution-intensive energy remain unclear. A recent Pew report on clean energy in the G-20 economies notes that appropriate domestic policies—such as those aimed at reducing GHG emissions or incentivizing the use of renewable energy—have tended to positively affect a country’s competitive position in the clean-tech market. The winners in this race include Brazil, the United Kingdom, Germany, Spain, and—who else?—China. The United States does not make the shortlist of enlightened energy and environment policymakers of the rich world.

Lights out for the U.S. in the race for green tech?

In fact, the Pew report finds that China has already overtaken the United States on several important measures (including, of course, its dubious distinction of being the largest emitter of greenhouse gasses for the past several years). In 2009, for instance, China overtook the United States for highest financing of and investment in clean energy. And it is likely to overtake the United States in installed renewable energy capacity soon. Though targets are not always met, Beijing has set ambitious targets for wind, biomass, and solar energy usage, and these targets do not exist solely not to be met. They may currently be aspirations, but that’s more than the United States currently has to go on.

Mitigating climate change and making U.S. clean-tech business better is accomplished by limiting greenhouse gas emissions. The best way to limit GHG emissions is to put a price on them. Indeed, the fact markets have not already done so has been described by climate expert Nicholas Stern as “the greatest market failure the world has ever seen.” The climate legislation which has been stalled and stalled and stalled again in the U.S. Senate is generally envisaged as a cap and trade system that would cap GHG emissions at a certain level, create a scheme in which licenses to emit GHGs could be traded, and eventually shrink gross amount of permissible emissions. This amounts to an indirect tax on GHG emissions, and though it is far from ideal, it would create a price for emissions at the margin and therefore makes strides in the right direction.

As the Senate continues to dawdle, the Earth Day Climate Change rally on the National Mall was far from unimportant. Especially in a democracy like the United States, it is important that citizens buy into ‘going green.’ It is important, frankly, that green be cool. But though considerations of how to green one’s lifestyle are admirable, they are not game changers. Coal is still cheap; Whole Foods is expensive, and “going green” remains largely the privilege of the wealthy in society.  Unless we change our laws.  The Senate should get to work. The alternative is to accept an outcome in which a hundred U.S. kitchen gardens bloom while a hundred Chinese companies compete for the top spots in clean-tech. In addition to, well, catastrophic climate change.

Marcy writes about China. In 2007-08, she was a Fulbright Scholar in China, where she was also a Research Fellow with the U.S.-Asia Law Institute. She received an M.A. in East Asian Studies from Columbia University and graduated from Brown University.

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By Elizabeth M. Lynch, March 30, 2010

Is it St. George or Google that Slays the Dragon?

Google has become the Western media’s new Saint George.  With its pullout from China last week and its refusal to submit to the Chinese government, Google slew the dragon of censorship, or at least that is the story being marketed by the press.

But if we look back to Google’s announcement from January 12, 2010, the catalyst of Google’s troubles in Beijing had little to do with censorship.  Instead, what initiated Google’s eventual withdrawal from China was the hacking attack of its computer infrastructure and the theft of valuable intellectual property.  Absent this attack, would Google have left China?  How did we go from a cyber-attack to a principled stance on censorship and why?  And is relying on Google to promote human rights a good thing?

Don’t Be Evil….Unless it Doesn’t Correspond with Shareholders’ Interests

Google claims that its informal motto of “don’t be evil” is a central pillar of its corporate core values.  But in reality, its motto can only be applied to the extent that it does not conflict with shareholders’ interest.

Google is a publicly traded company and as such, its primary duty to is to its shareholders, usually achieved through the maximization of profits.  This isn’t just a precept of sound business; it is an actual requirement of the law.  In the U.S., directors and officers of a corporation have certain fiduciary duties toward the corporation’s shareholders; if an officer or director acts in a way that breaches these duties, shareholders may bring an action against the board of directors and the officers.   This is to guarantee that the directors and officers act in good faith toward a corporation’s shareholders and make decisions based upon reasonable business interests and not upon personal ones.

Before Google made its January 12 announcement, rest assured that it probably checked with legal counsel to guarantee that shareholders could not bring a suit against it for violating fiduciary duties.  Most likely someone wrote a memo analyzing the merits of shareholders’ potential claims against Google for pulling out of the largest internet market in the world.

The current China internet market totals around 348 million users, more than the population of the United States but less than a third of China’s potential internet population of 1.3 billion people.  With such an untapped potential, even if Google maintained its 33% market share of the Chinese search market, it could potentially reach 429 million people.

Can walking away from a market that potentially could be that big ever be justified to shareholders on the grounds of Google’s censorship?

Likely not.  A rational shareholder purchases shares of Google not because of its founders’ stance on censorship in China but more for high return on its equity investment; in other words, profits through increased share price.

So how does Google get away with avoiding a shareholder lawsuit?

First, Google’s foray into China resulted in marginal benefits for the company.  Google did not enter the Chinese market with its Chinese search engine google.cn until January 2006 (to understand the difference between google.cn and google.com see CL&P’s previous article).  However, prior to 2006, Chinese internet users were able to access the U.S.-based search engine, google.com.  At the end of 2005, just through the use of the U.S.-based google.com, Google already had 27% of the Chinese search engine market.  Fast-forward to 2010, four years after it launched its censored Chinese search engine, Google was only able to raise its market share six percentage points to 33%.  Even with its withdrawal from the Chinese mainland, Chinese internet users will still have access to Google either through its U.S.-based search engine, google.com, or its newly established Hong Kong-based search engine, google.com.hk.  Thus, Google’s market share in China will likely continue to hover around 30%.  So the impact of Google’s withdrawal on its profits is relatively small, staving off a shareholder lawsuit.  If profits in China were higher, would Google still have left?  Maybe not.

Furthermore, the initial reason behind Google’s departure – a cyber-attack – is likely sufficient to justify giving up the domestic China market and the meager increased profits.  Although the cyber-attack has been pushed to the background, it’s actually a pretty big deal.  The attack on Google, which was coordinated with an attack on over 30 other western high tech companies, resulted in the theft of proprietary source code and other intellectual property.  While Google hasn’t openly discussed the extent of the cyber-attack, Adam Segal of the Council on Foreign Relations and an expert on cyber-espionage, hypothesizes that the Chinese hackers made substantial inroads in obtaining some of Google’s core technologies, namely “how it collects information on users and how it uses it to exploit its [Google’s] market advantage.”  This is information that is core to Google’s success and not something that it wants hackers to be able to access.  Any gains from protecting this information far outweighs the losses of shutting down its Chinese search engine.

Cyber-attacking or Playing the Art of Warcraft?

Why then the censorship angle?  First, companies don’t really like to announce their vulnerabilities to cyber-attacks.  It’s not surprising that not a single company out of the other 30 that were attacked has stepped forward.  But second, and perhaps slightly cynically, the censorship angle is a marketing bonanza for Google.  Google is the West’s white knight, and although its share price has dropped significantly since it first threatened to leave China, it could have fallen lower absent the positive press surrounding its departure.

And if this was really just about the censorship, why did it take over two months for Google to leave the mainland?  The Chinese government is not about to give up on censorship, as Google executives must be keenly aware of.  So why prolong it?  And if censorship is so abhorrent to Google’s mission, why continue to promote your Android technology on Chinese mobile networks?  Censorship in China is not limited to computers.  A tremendous amount of censorship and surveillance also occurs on mobile devices.

Google’s principle stance against censorship likely has merit and its belief in “don’t be evil” isn’t idle chatter.  But in regards to Google’s withdrawal from China, censorship was neither the only nor the primary reason for its departure.

What’s the Big Deal if Google wants to Say it Left because of the Censorship?

First, by relegating the cyber-attack aspect of the Google-China incident to the background, the press, U.S. government and corporate America avoid confronting what some call the greatest threat to U.S. prosperity.  Adam Segal – in an interview on Digital Age – offered a sobering account of cyber-espionage and the U.S.’ lack of preparation to deal with this increasingly sophisticated threat.  Although previously focused on military secrets, Mr. Segal argued that the threat is increasingly on corporate secrets.  One of the last vestiges of the U.S.’ success lies in its intellectual property.  But cyber-espionage, especially by the Chinese, puts this very much at risk.  Before, companies avoided intellectual property theft by not doing business in China or setting up an office there.  But now, with increasingly sophisticated hacking, companies can no longer avoid the risk that their research and development is vulnerable – the physical location of a company’s R&D does not matter.  According to Rahm Emanuel, “never let a serious crisis go to waste.”  But that is exactly what happened here.  Every discussion about Google – from the press to Capitol Hill to the Administration –  has been about censorship, not about the more serious threat to the U.S.’ national security, cyber-espionage.  Google should certainly be commended for being so open about the Chinese cyber-attack.  Such frankness and cooperation with the U.S. government is important in battling cyber-espionage.  But the U.S. government appears to have largely ignored this opportunity to create a structure or a defense to deal with this issue.

But perhaps more importantly, should we rely on Google, a publicly traded company, to serve as our proxy on issues

Human Rights Attorney, Gao Zhisheng

of human rights?  Google was not created to promote human rights; Google’s dual aims are technology innovation and profits.  And there is nothing wrong with that; it’s what corporations do.  But by focusing so much on Google’s decision to leave China and cloaking it in this narrative of a principled stance against censorship, are we excusing our own behavior and inaction?  While the press has focused on Google’s departure from China, a real human rights defender, GAO Zhisheng, has “disappeared” in China.  Detained by the Chinese police last year, Mr. Gao went missing a few months ago with Chinese officials stating that he was “where he should be.”  Only yesterday was he found, alive.  But this story has received little attention from mainstream press and scant consideration from the Administration (the Google incident inspired a speech from the Secretary of State).  What kind of emerging superpower says that one of its citizens is where he belongs?  And what kind of society that is considered a bastion of human rights allows this power to get away with it?

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By Elizabeth M. Lynch, February 2, 2010

In yesterday’s New York Times, Helene Cooper argued that the Obama Administration’s recent announcement of over $6 billion in arms sales to Taiwan shows a “new toughness” toward Beijing and perhaps even a “fundamentally new direction” in the Administration’s China policy.  But, by focusing on the arms sales, Ms. Cooper overemphasizes the event.  U.S. arms sales to Taiwan are far from novel or tough, and some may argue, periodically required under U.S. law.

Similarly, Beijing’s angry reaction was predictable.  In fact, for each prior Administration’s arms sales to Taiwan, the Chinese government has responded in much the same way: postponement of military-to-military meetings, issue formal protests with U.S. officials, and saber-rattling for the domestic consumption.  However, Beijing’s recent threat of sanctions against U.S. companies involved with the arms sales is new and serious.  But this is more a reflection of China’s growing confidence and less a reflection of a changed or “tough” U.S. policy toward China.

Why Does China Care so Much about Taiwan?  Isn’t it a Separate Country?

Nope, scrap that vision from your mind.  Taiwan is not a separate country, at least not in the eyes of the Chinese, Taiwanese or U.S. governments.   The People’s Republic of China (a.k.a. the mainland) views Taiwan (a.k.a. “The Republic of China”) as a renegade province and any relations between Taiwan and other countries is viewed as interference in the mainland’s domestic affairs.  While Taiwan has largely developed as an independent society, it agrees with the mainland’s assessment that there is only “one China.”  The Taiwanese government has never called for independence and the Kuo Min Tang party (pronounced Gwo min-dang and a.k.a. “the Nationalists” or KMT), which has ruled Taiwan for most of Taiwan’s separate existence, also espouses the view of “one China” and that eventually, the mainland and Taiwan will reunite.  The difference is who rules this reunited China.  For Taiwan, it’s the KMT; for the mainland, the Chinese Communist Party (CCP).

All of this stems from World War II.  After the War ended in 1945, the KMT and the CCP resumed their civil war, a civil war that was put on hold to fight the Japanese invasion from 1937 to 1945.  By 1949, the CCP’s victory was certain and the KMT government fled to the province of Taiwan to continue the Republic of China.

Thus began the baffling existence of two Chinas – the communist People’s Republic of China on the mainland and the KMT’s Republic of China on Taiwan.  Each China claimed that it was the “official” and “rightful” China and the other a mere province; each forced the international community to recognize only one China – either China on the mainland or China on Taiwan – hence the birth of the “one China” policy.

The U.S. continued to ally itself with the KMT and the Republic of China, recognizing Taiwan as the official China and all but denying the existence of the mainland.  But starting in 1972, with President Richard Nixon’s historic visit to the mainland, relations between the U.S. and the PRC began to improve and in 1979, the U.S. switched recognition of China from Taiwan to the mainland.

Obama’s Arms Sales to Taiwan Is Par for the Course in U.S.-China Relations

The Obama Administration’s recent announcement of arms sales to Taiwan follows a long line of arms sales by the U.S.  Almost every president since 1978 has sold arms to Taiwan.  In fact, the U.S., under the 1979 Taiwan Relations Act (TRA), is required to sell defensive arms to Taiwan.  In 1979, after changing recognition to mainland China, the U.S. did not want to leave its former ally completely open to attack or takeover.  As a result, Congress passed the TRA.

The TRA authorizes quasi-diplomatic relations between the U.S. and Taiwan.  For example, instead of having an official embassy on Taiwan, the TRA allows for the “American Institute in Taiwan.”  Additionally, and more importantly, the TRA established the U.S.’ responsibility toward Taiwan if it is threatened.  At issue here is the TRA’s requirement that the U.S. periodically sell defensive arms to Taiwan.

In announcing arms sales to Taiwan, the Obama Administration is merely following its obligations under the TRA.  Additionally, the Obama Administration has not acquiesced to Taiwan’s request for F-16s.  During the George W. Bush Administration, Taiwan repeatedly requested the purchase of F-16s.  Similarly, Taiwan put out feelers with the Obama Administration to see if there was a possibility that they could purchase F-16s.  Again, Taiwan was told not to put in a formal request for F-16s.

The F-16s are a big issue since they are not “defensive” arms; Beijing would very much view a sale of F-16s to Taiwan as going a bit too far.  But Obama’s package to Taiwan merely includes the usual: Patriot missiles, Black Hawk helicopters, mine-hunting ships and information technology.

If the Obama Administration wanted to use the Taiwan arms sales requirement to “toughen” its stance to Beijing as the New York Times claims it has, the Administration would have acquiesced to Taiwan’s request for F-16s.  Instead, it merely sold similar arms to Taiwan that President George W. Bush sold in 2008.

This is not to say that the Obama Administration does not have a strong China policy.  Secretary of State Hillary Clinton’s recent policy speech on internet freedom was a robust critique of countries like China that censor their internet and partake in cyberhacking.  This follows President Obama’s strong and public criticism of internet censorship while in China this past November.  The New York Times would have done better to focus its argument on the Administration’s novel and forceful rhetoric on internet freedom vis-à-vis China.

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By Elizabeth M. Lynch, December 17, 2009

Sec. of State Hillary Clinton in Copenhagen

Who would have thought that the U.N. Climate Change Conference could tear the world away from the on-going saga of Tiger Woods?  With protests in the streets of Copenhagen that escalate every day (click here for an insider’s perspective on the protests), a mass walk-out by developing nations from the conference, and constant barbs between the world’s two largest emitters of greenhouse gases (GHG), the U.S. and China, the drama is running high in the closing days of Copenhagen and the world is on edge.  Will there be a deal?

As Marcy Nicks Moody noted, a legally binding treaty will not emerge from Copenhagen. However, going into Copenhagen last week, with both the U.S. and China announcing their respective commitments, a strong political agreement seemed possible.  But with the increasingly antagonistic discussion between the U.S. and China delegations, has the world reached an impasse?  Should everyone pack their bags now and head home?

Not quite yet.  There is still reason to have hope.

First, the very fact that there is heated discussion, disagreement and even anger is a good thing.  If Copenhagen was going to be a rubber stamp, a mere sheet of paper that no one was going to pay attention to, there would not be such dissension in the ranks, especially from the U.S. and China.  But countries like China and the U.S. are strategically considering their interests in anticipation of a strong political agreement that will likely provide the framework for a legally binding one in the future.

Second, we are still in the negotiation stages.  Yes, the exchanges between the U.S. and China over financial assistance,

China's Climate Change Ambassador Yu Qingtai at Copenhagen

transparency, and caps have become more hostile, but that could also be because, now with China on a more equal footing in the world, it is able to negotiate harder and play both offense and defense.

Additionally, the climate change talks have proved to be a growing experience for China and its leadership.  Copenhagen is the first international summit of substance that China is a part of in its new status as an emerging global power, forcing its leadership to confront the reality that such a title comes with both advantages and disadvantages.  China’s increased status in the world gives it the negotiating power to better protect its interests in the final document, surely a distinct advantage.   But its increased status also means that China’s interests are no longer completely aligned with the other developing countries’ interests; while China is still the de facto leader of “the Group of 77 plus China” and holds sway over many of the African nations because of trade alliances, there are times when China’s interests are adverse to the developing world’s.  As China’s power continues to grow, such division between it and the developing world will inevitably increase and China will have to become more comfortable with this fact.  Copenhagen is a reflection of these growing pains.

So how do we move forward?

Tomorrow, the leaders of the world will converge on Copenhagen with the goal of producing a clear and strong roadmap to a legally binding treaty.  The biggest issue that could prevent some form of a deliverable is the U.S. and China relationship.  So how do we move forward?

China has demanded international funding for its climate change commitments.  China argues that the western nations, for the past few hundred years, have been able to grow without any restrictions on their development.  Fossil fuels were used without consideration for the climate and lands were deforested with abandon.  China argues that the West’s irresponsible development vis-à-vis the global environment is the cause of the current climate change crisis.  But by asking that all nations partake in a climate change deal, China maintains that the West is unfairly spreading the costs of its own development on all countries.  As a result, China is demanding that if the West wants it to agree to a climate change bill that would require China to pay for past western growth, the West needs to offer some form of payment.

The logic underlying China’s argument cannot be denied.  However, if a deal at Copenhagen is not reached, China will be the cause of the world’s future climate crisis.  By that time, when the “score” between the West’s development and China’s will be equal, it will be too late to broker a deal.  Additionally, China’s demand for some form of climate reparations comes at a financially difficult time.  Politically for the U.S., it’s difficult to justify a blank check to the U.S.’ largest debt holder.

However, the U.S. should not just walk away from China’s demand since the U.S. could benefit from this as well.  China has already stated that without international funding, it will not allow outside international verification of its Copenhagen commitments.  The U.S. has balked at China’s refusal to allow for outside verification, and rightfully so.  While China has made some progress in improving its statistical measurement ability, it is still worlds away from the West and given some of China’s past practice of using measurements that produce falsely positive results, the West is right to be skeptical.

But Copenhagen could serve as an opportunity to help China develop its capacity to measure and verify data as well as implement its commitments on the local level.  And this would not just help with climate change.  China has a horrible record of statistical reporting in every sector – environmental, criminal justice, trade disputes, and economic development.  However, with the assistance from the West, China will not just learn to better measure its own development but will become more comfortable with public reporting.  This could create a more reliable and transparent government, something that both the Chinese people and the outside world could benefit from.

Thus, hopefully in these last few days, the U.S. and China can reach a targeted agreement whereby the U.S. and the West will provide financial assistance to China’s attempts to better measure its data as long as China opens this process to U.S. and Western observation.

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By Elizabeth M. Lynch, December 13, 2009

China’s response to reports that the U.S. will sell arms to Taiwan has been swift, with an official response

Chinese Foreign Ministry Spokeswoman Jiang Yu

coming within 24 hours of the first U.S. news articles.  As reported in the English language edition of the state-run Global Times, Chinese Foreign Ministry spokeswoman Jiang Yu (pronounced Geeang You) not surprisingly reiterated China’s strong opposition to arm sales to Taiwan and called on the U.S. to stop its intended actions.  China’s response offers an interesting glimpse into how the government and the Party often use the media to respond to crises. 

The English language editions of China’s newspapers never tell the full story and usually are written with China’s foreign audience in mind, presenting a peaceful, soft and conciliatory China.  But if the English language editions are politically correct vis-à-vis the Western world, the Chinese language editions of the same newspapers answer to the political correctness of the Chinese market, presenting an image of China that is often bolder, stronger and less forgiving, but at the same time the victim of Western (usually U.S.) aggression.

In reporting on the proposed U.S. arm sales to Taiwan, the Global Times continued with this Jekyll and Hyde approach, providing more detail in their Chinese language edition.  Below we translate one of two (and the more interesting) articles that appeared in Friday’s Global Times.

The Global Times, an uber-nationalist newspaper, has very strong connections to the Chinese government and the Chinese Communist Party and at times, the CCP uses the Global Times to inform the public on the subtleties of some of their policies (see Susan Shirk, China: Fragile Superpower, p. 86-87).  Thus, the Global Times is not objective journalism; in reporting on international issues, it is communicating the views of the Party.  Because it is the mouthpiece of the Party, the article translated below shows the Chinese government’s likely response to U.S. arm sales to Taiwan, and it does not look particularly good for the U.S. if it should go forward with its plan.

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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.

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By Elizabeth M. Lynch, August 9, 2009

On Friday, the day before breaking for a month-long recess, the Senate finally confirmed Gov. Jon Huntsman as U.S.

Our New Ambassador to China!

Ambassador to China.  In the coming weeks, Ambassador Huntsman, his wife and two youngest daughters will move to Beijing.  In addition to managing the U.S.-China relationship and working with Chinese officials on North Korea, climate change and other difficult issues, Ambassador Huntsman will also be helping to arrange President Obama’s first trip to China, scheduled for this fall.

For more information from the Salt Lake Tribune, click here.

For an analysis on the Huntsman confirmation from the China Daily’s English edition, click here.