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By Elizabeth M. Lynch, October 1, 2009

China does very few public celebrations haphazardly and yesterday’s National Day Parade, marking the 60^th anniversary of the People’s Republic of China, was no exception. With months of pain-staking practice, teaching participants to march in perfect formation and training them to change formations at the drop of a hat to create intricate symbols and slogans, the 2009 National Day spectacle will be the military parade by which all future military parades are judged.

Women Soldiers in Hot Pink, October 1, 2009

But if you were looking for the subtle artistry of the Beijing Olympics’ Opening Ceremony, forget about it.  This parade was about military might and lots of it.  As if out of a hip-hop video, President Hu Jintao rolled his bad-self onto the scene in a black limousine, standing up through the sunroof and pugnaciously shouting at each of the military branches as his car drove by.  Even the women of the parade were flexing their military muscles.  Don’t let those hot pink skirt suits fool you; with guns drawn, these ladies were ready to play with the boys.  The Rockettes should be afraid, very afraid.

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Most interesting though was what President Hu Jintao was wearing or in the alternative, what no other Chinese leader was wearing: a Mao suit.  Did President Hu not get the memo to wear a boring black western suit with some version of an equally uninspiring maroon tie?  Or was he just throwing all caution to the wind, blazing his own path?  In 2005, the fashion world decreed that the Mao suit’s peak was reached; that it was going the way of the fedora, in other words, to the scrapheap of fashion.  But recently the fedora has made a comeback among the hipsters in places like Williamsburg and Wicker Park.  Does President Hu sense an emerging trend amongst the hipsters that even the editors of

Former President of China or Leader of the Hipsters?

Vogue and GQ are missing?  Former Chinese president Jiang Zemen rocked the old lady-style glasses during his tenure and since then, such glasses are ubiquitous among the hipster set.  Will President Hu do for the Mao suit what President Jiang did for the old lady-style glasses?  Perhaps. Expect to see Mao suits soon on a hipster near you.

All in all, the Chinese should be very proud of yesterday’s festivities.  The parade was more than just impressive – it was a powerful reminder of how far China has come in the past 60 years.  The only thing we at China Law & Policy thought was missing was Matt Lauer and Al Roker and their endless commentary about every unimportant, but yet fascinating detail of the parade.  Perhaps for the 70^th anniversary.  And yes, Matt Lauer and Al Roker would definitely wear Mao suits for the event.

Matt Lauer and Al Roker of the Today Show dressed in Rhythmic Gymnastics outfits for the Beijing Olympics

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By Elizabeth M. Lynch, September 30, 2009

Chairman Mao Zedong proclaims the founding of the PRC, Oct. 1, 1949

October 1 marks the 60th anniversary of the People’s Republic of China and to all our friends in China, China Law & Policy wishes you a happy birthday!

China’s history spans over 2,000 years, but the existence of China as a communist country has only been for the past 60.  Up until 1911, China was ruled by various different Chinese dynasties.  The last imperial dynasty, the Qing, ruled China from 1644 until its overthrow in 1911 (The Last Empror tells the story of the final days of the Qing).  While the Kuomintang (pronounced Gwo-Min-Dang and also known in English as the Nationalist Party) nominally ruled China, control really rested with the various Chinese warlords.  It was not until 1927 that Nationalist leader and Republic of China president, Chiang Kai-shek, was able to eliminate the warlords and truly unify a modern China.

However, while the Nationalists unified the country, the Chinese Communist Party (CCP), which was founded in 1921 as

The Last Emperor of China, Child Emperor Puyi, 1909 (3 years old)

an urban intellectual movement, was quickly becoming a revolution in the countryside under the leadership of Mao Zedong.  Soon, the Nationalists had to contended with the growing forces and guerilla tactics of the CCP, beginning the Chinese Civil War.  However, both sides came to a truce in order to fight the Japanese invasion and World War II (1937-1945).

At the conclusion of the War, the Nationalists and the CCP resumed their civil war.  By 1949, CCP victory was all but certain and the Nationalist forces began to flee to Taiwan.

Sixty years ago, On October 1, 1949, Mao Zedong stood on the gate of Tiananmen in Beijing and declared the People’s Republic of China.

60th Aniiversary festivities have already started in Beijing and will continue throughout the day Thursday.  Pictures have yet to be released from the celebrations (it started 10 AM Beijing time), but Reuters has a great live blog going.  According to Reuters, President Hu Jintao has dusted off his Mao suit and is going retro!  Only question remains – is it a blue, green or a black Mao suit? Inquiring minds want to know.

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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 24, 2009

This past week the U.N. General Assembly in New York was filled with wave after wave of speeches and meetings dedicated to limiting global climate change.  With the December Copenhagen conference less than three months away, the question remains – has there been any progress?

On Tuesday, September 22, both President Barack Obama and President Hu Jintao (pronounced Who Jin-Dao) separately addressed the General Assembly, each discussing their country’s commitment to a global climate change agreement.   Their rhetoric was considerably more conciliatory, signaling that perhaps the two largest polluters of greenhouse gases are finding common ground.  The substance of their speeches though, indicated that there still remains a large division between these two critical countries.

Conciliatory Rhetoric

This past summer saw many important countries digging in their heels on climate change.  In July and August, both China and India adamantly stated that they would not agree to any type of defined targets that would limit their greenhouse gas emissions.  In June, the U.S. House of Representatives narrowly passed a climate change bill which received notable criticism from both sides of the aisle upon its passage, questioning the bill’s ability to pass the Senate.

But on Tuesday, President Barack Obama reinforced his Administration’s commitment to limit greenhouse gases, indicating his willingness to push his Democratic colleagues in the Senate to pass a climate change bill.  In response to the E.U.’s recent promise to assist developing nations both financially and technically in battling climate change, President Obama also committed the U.S. to help.

President Hu Jintao’s speech was heralded as a huge step forward for the Chinese.  President Hu affirmed his country’s

President Hu Jintao speaking to the U.N General Assembly on Tuesday, Sept 22, 2009

promise to tackle climate change and surprisingly mentioned China’s “mandatory national targets for reducing energy intensity and discharge of major pollutants…”

India also seems to be moving in the direction of targets.  In an interview with the Financial Times on Tuesday, India’s environment minister, Jairam Ramesh discussed the possibility that India could adopt legislation increasing its energy efficiency and thus having “implicit targets.”

Divisions That Could Hamper an Agreement in Copenhagen

Target: What is in a Word?
The press has largely been positive to President Hu’s discussion of “mandatory national targets for reducing energy intensity,” heralding such a step as China’s “first commitment to climate change targets” and that China “pledges to lead effort to combat climate change.”

While it is true that this is a step forward for the Chinese – never before have they used the word “target” in reference to climate change on the world stage – in no way is this a “carbon emissions target.”  In fact, China has been using “energy efficiency targets” domestically since 2005.  As John Romankiewicz explained on the Green Leap Forward, in China’s 11^th Five Year Plan passed in 2005, the Chinese government established a 20% reduction target in energy intensity from 2006 to 2010.  While this is a laudable goal, it still allows China to increase its carbon emissions since there is no cap – the calculation is relative to the percentage growth of GDP.

China’s goal is to cut energy intensity as a percentage of its GDP.  If GDP rises, a rise in energy use, as long as it is lower than the previous year, can still show a reduction in energy efficiency.  For example, China’s National Development & Reform Commission (NDRC) noted that a 4% rise in energy consumption in 2008, matched with a 9% increase in GDP for that year, resulted in a 4.2% decrease in energy intensity from the previous year (see Green Leap Forward).

Additionally, a focus on energy intensity only marginally impacts carbon emissions, a fact not lost on President Hu in his speech on Tuesday.  After committing China to set targets to reduce its energy intensity, President Hu vaguely addressed carbon emissions by noting that China will “endeavor to cut carbon dioxide emissions [inaudible in original speech but likely “as a percentage of”] GDP by a notable margin by 2020 from the 2005 level.”

China has certainly taken a step forward on approaching some form of targets.  Furthermore, by even mentioning targets, China implicitly commits to making those targets measurable and verifiable as Julian L. Wong from the Center for American Progress noted, something that China in the past was not willing to do.  So there has been progress which China should be rightly commended for.  But at this stage, to limit global warming to the U.N. target of 2º Celsius, the world community needs to push China to agree to carbon emissions targets.

Obama Adverse to China Being Defined as a Developing Nation?
Central to the requirement of carbon targets is the definition of “developing nation” and this was perhaps the greatest divide between the U.S. and China, and could possibly stall progress in Copenhagen.

For purposes of climate change negotiations, China has repeatedly portrayed itself as a developing country.  In his speech on Tuesday, President Hu dedicated around two-thirds of it to discussing the special circumstances of developing countries, implying that China is one such nation.

Under the previous international climate change treaty, the Kyoto Protocol of 1997, China was defined as a developing nation.  China is keen to keep this definition in Copenhagen for two reasons: (1) emission targets are not applicable to developing nations, and (2) developing nations can avail themselves of financial and technical aid provided by developed nations.

It is the second reason that appears to be more important to the Chinese.  In prior climate change negotiation simulations that global power participate in as practice for Copenhagen, the Chinese representatives do not budge unless there is an offer of technical or financial assistance from other countries like the U.S. or the E.U.  President Hu’s speech reiterated the importance of such assistance to the Chinese: “developed countries should take up their responsibility and provide new, additional, adequate and predictable financial support to developing countries…”

President Obama wholeheartedly agreed with President Hu’s sentiment to assist developing nations.  However, he

President Barack Obama before the U.N. General Assembly on Tuesday, Sept. 22, 2009

appeared to disagree with President Hu that China is such a country.  In his speech before the U.N., President Obama put China and the U.S. on the same level in assisting developing countries: “These [developing] nations do not have the same resources to combat climate change as countries like the United States or China do…” (emphasis added).

This division between the two countries regarding the developmental status of China could do one of two things: (a) completely derail any agreement in Copenhagen that includes both the U.S. and China, or (b) provide the compromise necessary to have the two largest emitters of greenhouse gases agree to a climate change agreement.  U.S. policy makers should look to the latter.  Agreeing to provide financial and technical assistance to China might just be the push necessary to get it to agree to carbon emission targets, a necessary goal to limit global climate change.

For a transcript of President Barack Obama’s address to the U.N., click here.

For a transcript of President Hu Jintao’s address to the U.N., click here.

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By Elizabeth M. Lynch, September 23, 2009

Subsequent to Presidents Barack Obama and Hu Jintao’s meeting, Administration officials met with the press to answer questions regarding what was discussed between the two. Below is a transcript of that Q&A session. Stayed tuned to China Law & Policy as we delve deeper into some of the issues raised during the two Presidents’ meeting.

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By Elizabeth M. Lynch, September 23, 2009

Today, after the U.N. General Assembly meeting, Presidents Barack Obama and Hu Jintao met for a one-on-one meeting to discuss issues pertaining to the U.S.-China relationship.  Although the meeting was off the record, below is the official transcript of their remarks prior to their private discussion.

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By Elizabeth M. Lynch, September 21, 2009

The United States is not the only country that will face a potential leadership change in 2012.  Under the Chinese Constitution, the President of the People’s Republic of China (“PRC”) is limited to two consecutive five-year terms,

Heir Apparent? Current Vice President of China, Xi Jinping

forcing the current Chinese president, Hu Jintao (pronounced Who Gin-Tao), to step down in 2012.  This past weekend saw a setback for his presumed successor, Xi Jinping (pronounced She Gin-Ping).

Unlike the U.S., a change in leadership in China is anything but apparent and requires the successor to simultaneously hold three positions:  General Secretary of the Chinese Communist Party (“CCP”); President of the PRC, and Chairman of the Central Military Commission.  Only by filling these three roles is the individual considered the paramount leader.  The person to fill these posts is hand-selected by the current CCP leadership, even for President of the PRC, which is arguably not a party position.  But in a country with one-party rule, the National People’s Congress of the PRC (“NPC”) merely confirms the successor chosen by the Party leadership.  Click here for an in-depth illustration of the Chinese government and party structure.

While the next leader of the PRC will be only the fifth since the PRC’s founding in 1949, the road to that position is fairly settled.  First is the presumed leader’s appointment to the CCP’s Politburo Standing Committee.  The Politburo Standing Committee, currently made up of nine members, is the highest-ranking decision making body of both the Party and the Chinese government.  Second is the individual’s “election” by the NPC to the position of vice-president of the PRC (again more a rubber stamp of the Party’s selection than an actual election).  Finally, the individual, usually three years prior to the change in leadership, is appointed to the vice-chairmanship of the Central Military Commission (CMC) by the CCP.  The CMC controls the People’s Liberation Army and while there is a Party CMC and a government CMC that is supposed to be independent from the Party CMC, the two are identical, with the same people filling the same positions in both CMCs.  Although nominally accountable to the NPC, in reality, the government CMC answers to the Party.

Xi Jinping, 56, just needed the final appointment of vice-chair of the CMC to be solidly on the road to paramount leader.  In 2007, he was appointed to the Politburo and 2008, elected vice-president.  But this past week, in a shock to most China-watchers, the CCP closed its annual meeting without designating a new vice-chair of the CMC.  Current President Hu was appointed to the vice-chairmanship of the CMC three years prior to his accession to top leader.  The same was true of his predecessor, Jiang Zemin.  Is China in the wake of a succession crisis?

Some argue no; that the pattern established by Mr. Xi’s predecessors is not set in stone; perhaps he will be appointed vice-chair of the CMC next year.  But what is causing this delay?

Many speculate that there is dissension amongst the top ranks of the Party as to who should be the paramount leader in 2012.  Underneath the veneer of uniformity and consensus that the Party maintains to the outside world, lies at least

Looking over the rice fields, Vice Premier Li Keqiang - President Hu's Protegee

two factions that often wrestle for control.  Interestingly, Mr. Xi is not the chosen heir of President Hu Jintao.  Instead, President Hu’s protégé has been Li Keqiang (pronounced Lee Kah-Chiang), a mentee of his from when he headed up the Chinese Communist Youth League.  Mr. Li was appointed to the Politburo at the same time as Mr. Xi but was ranked lower in command of that body.  Then in 2008, when Mr. Xi was elected to the office of Vice President, Mr. Li was elected as Vice-Premier, signaling that Mr. Li would take over the premiership in 2012.

While Mr. Li is a member of President Hu’s faction of “Youth Leaguers,” Mr. Xi is a member of former President Jiang Zemin’s “Shanghai Clique.” As Cheng Li of the Brookings Institute points out, there is a big difference between the two factions.  The Youth Leaguers are more concerned about the growing inequities between the rich and poor in China and providing a better social safety net for those areas of China negatively impacted by its quick economic rise.  The Shanghai Clique on the other hand stresses economic development, high GDP, and continuing China’s integration into the world economy.  Currently, the CCP leadership is evenly split between the two factions.

Furthermore, since ascending to the vice-presidency, Mr. Xi has at times been outspoken of China’s foreign critics, contrary to the diplomatic image that President Hu works hard to portray.  While on a state visit to Mexico and before a crowd of overseas Chinese, Mr. Xi criticized China’s critics stating that “a few foreigners with full bellies who have nothing better to do than try to point fingers at our country.”

However, Mr. Xi has the support of the powerful Shanghai Clique and appears to, at least in the past, have had the support of President Hu and the Youth Leaguers since Mr. Xi was appointed to the Politburo and elected to the vice-presidency.  Mr. Xi’s appointment to vice-chair of the CMC has likely been postponed, affording the leadership time to work out fundamental issues pertaining to the direction of China is this current economic crisis.

While what happens in the inner workings of the Chinese Communist Party is anyone’s guess, most likely Mr. Xi will become paramount leader in 2012.

Let's Shake on It - Former PRC President Jiang Zemin and Current PRC President Hu Jintao

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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, September 11, 2009

France's President, Nicolas Sarkozy

Does France’s president Nicolas Sarkozy read China Law & Policy?  Sure looks that way.  In an effort to promote carbon caps domestically, Sarkozy also called for any international climate change agreement to include a carbon tax on imports into Europe from countries that do not impose carbon emission caps.

In response, many economists argued that Sarkozy’s push for a carbon tax on imports could lead to alienating China from agreeing to any sort of emission caps in Copenhagen.  This is the same criticism lodged against the tariff provisions in the U.S. House of Representatives’ Climate Change Bill.

There is a real risk that these economists are right; China will begin to feel bullied and, for its domestic audience’s consumption, walk away from an international climate change agreement.  Although the Chinese government enjoys one-party rule in an authoritarian state, it is still susceptible to domestic public opinion, especially given the fact that nationalism runs very high.

But at least our European allies realize that any international agreement is a give and take; there are carrots and sticks.  On the same day that Sarkozy called for carbon tariffs, the European Union’s (E.U.) environment chief, Stavros Dimas, announced that the European Commission would pledge $3 billion per year to developing countries, including China, to assist with capping emissions and developing clean technologies.

A key issue for China in its lead up to Copenhagen has been financial and technological assistance from developed countries in implementing carbon emission caps or clean technology.  China has repeatedly stated that they will not be able to meet the requirements of an international treaty unless there is assistance from developed countries.

The E.U.’s pledge is the carrot in this situation.  It is agreeing to a term that China has said is necessary for it to consent to any international climate change treaty.   So even in light of Sarkozy’s call for carbon tariffs, the Chinese government can turn to its people and show that it was not bullied.  Instead, China received the one element that it considered indispensible.

The U.S. unfortunately has only been providing sticks.  There is evidence that the tariff provisions provide some leverage against a country like China, but without providing some sort of bargaining chip, China will likely not respond positively to the U.S.’ hard-line tariff provisions.  Instead, the U.S. should learn for the E.U. and look to see where it can find common ground with China.  Without this common ground, it starts to look a lot like bullying.

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By Elizabeth M. Lynch, September 10, 2009

An Expert Weighs In

On Monday, we ran a piece on the international trade implications of the border adjustment measures of the House’s climate change bill.  The article ends with a section questioning the legality of the tariff provision under WTO rules.

China Law & Policy was fortunate to have Henry Gao, Associate Professor of Law at the Singapore Management

Prof. Henry Gao

University and expert on WTO law comment on our analysis.  In his comments below, he questions whether the provisions would in fact violate WTO rules.

If I understand it correctly, this means that the carbon tariff provision is in violation of the national treatment obligation under the WTO. However, this seems to be rather unlikely. The national treatment obligation only applies with regard to domestic taxes and other regulations. The carbon tariff, by definition, is not a domestic tax. Instead, it is a tariff that will be applied before the goods enter the border. Thus, for me, it appears that it’s more accurate to say that this is a violation of the MFN clause (given the assumptions in your article that some foreign firms will qualify while others don’t), or possibly the tariff binding obligation under GATT Article II, assuming that the US might exceed its bound tariff levels by imposing the extra tariff.

Also, legally speaking, while the US will surely have to fight hard to defend its case if the issue is really referred to the WTO, it’s less than certain that the US will win.  Indeed, in the very first case that went before the WTO Appellate Body (AB), the US-Gasoline case, the WTO has, contrary to popular belief, affirmed the right for WTO members to take actions to conserve exhaustible natural resources, which has been explicitly interpreted by the AB to include clean air. Of course, this doesn’t give countries an open license to do whatever they want. They will need to demonstrate first, that are no less trade-restrictive measures; second, that their measures do not constitute arbitrary or unjustifiable discrimination. To sum up, it’s OK to take actions to control climate change, but the legality of the measure would depend on how you structure your package. The devil, as always, is in the details.

Henry Gao
Professor of Law
Singapore Management University
Editor, WTO & China Blog

As Prof. Gao notes, the devil is most certainly in the details.  As of yet, the House bill does not clearly spell out how exactly these tariffs will be applied.  Because of this, experts fall on both sides of this issue.  Paul Krugman of the New York Times expressed the opinion that the tariff provisions would like be okay under WTO rules.  However, attorneys at Akin Gump’s Climate Change practice disagree and offer their assessment that the provisions are a violation of WTO rules.

While there is a call by some moderate Democrats and many Republicans in the Senate to make the provisions stronger, expect at the very least for the provisions to be made a bit clearer.