U.S. Trade Representative Ron Kirk was here in Singapore yesterday and told an audience at the Singapore Management University that prospects are good for completion of talks by the end of July to establish a Trans-Pacific Partnership (TPP) free trade agreement among the United State, Singapore, Chile, Peru, New Zealand, Australia, Brunei, Malaysia, and Vietnam.
Since Singapore has been the brains and driving force from the beginning behind the TPP, it was only fitting that Kirk should give his status report here. However, it is the nature of these things that the truth is usually pretty much the opposite of what is publicly stated. Certainly that is the case with the TPP.
While Kirk was addressing students, I was speaking with several of Singapore's diplomats, journalists, and academics. Their views were much less sanguine than those of Kirk. Indeed, they sounded somewhat scared.
As originally planned by the strategists at Singapore's Ministry of Foreign Affairs, the deal was to be part of a grand scheme to reaffirm and revitalize the U.S. presence in Asia and to keep Washington engaged as a counterweight to Beijing in the region. The idea was to build on existing free trade arrangements between Singapore, the U.S., Australia, Chile, Peru, and others to create a high quality, so called 21st century, agreement that would serve as a core around which others could be gathered to eventually encompass most of the major trading countries in the Pacific basin. As a start, it was considered necessary to include key members of the Association of Southeast Asian Nations (ASEAN) such as Malaysia and Vietnam in addition to Singapore. Vietnam was particularly important because it represents a country that is at earlier stages of development and is coming out of a centralized communist environment.
Singapore also reckoned that the United States would quickly act to bring in Mexico and Canada with whom it, of course, shares the North American Free Trade Agreement. In addition, it seemed obvious that any free trade deal in the Pacific could not ignore the world's third largest economy -- Japan. Singapore thought the U.S. would manage to persuade Japan to sign up as well.
Well, we know the best laid plans often don't work out. Washington shied away from including Canada and Mexico until discussions had already gotten fairly far advanced and inclusion of the two other NAFTA members would have complicated matters for meeting the Obama administration's self-imposed deadline of completing the first deal before the U.S. election season. Moreover, Mexico had its own elections and free trade deal ideas. As for Japan, Washington was actually ambivalent. It knew that Japan's powerful agriculture lobby would be a problem and that that would slow down achieving any fast positive results. Of course, the White House wanted Japan in eventually, but just not quite now. But then Japanese Prime Minister Noda began talking like he was going to make a real effort to bring Japan in. Washington could not say no out loud and so welcomed the Noda initiative. The Japanese agriculture lobby had an entirely different reaction and geared up big time to stop all this dangerous talk of market opening in agriculture.
However, Noda's biggest problem was his own priority of getting an increase in the Japanese consumption tax. This is badly needed in order to keep the Japanese public debt from going too far beyond the 200 percent of GDP mark. (Yup, you got that right. Japan makes Greece look parsimonious). To get the consumption tax, which is opposed by many in his own party, Noda may have to play ball with the Liberal Democratic Party which looks like it is willing to play but only if Noda forgets about TPP and agrees to dissolve the Diet and call for new elections.
Of even more concern, however , is the sudden questioning by the Chileans of the value of the deal as presently being constituted. Chile had been considered a slam dunk supporter. So its raising of questions is a red flag danger signal. Beyond that it seems that the Malaysians are also questioning whether any benefits they may be getting are worth the trouble of further liberalization of their domestic economy. And just to put the icing on the cake, it is becoming ever clearer that the Vietnamese, whose economy resembles that of China with large segments controlled by state owned companies, are going to have great difficulty in actually meeting the high standards being proposed.
So even as Kirk talked success, the platform was trembling beneath his feet.
This is the problem with trying to use trade deals as tools of diplomacy. It may sound nice and positive for two countries to say they are tightening their relationship by doing a free trade deal. But eventually at some point, someone has to count the jobs and the balances of trade and financial flows. Typically, deals done primarily for geo-political purposes don't add up, and when they don't, all the "strengthening of commitments " in the world often doesn't save them.
We'll have to wait and see about the TPP, but things are not getting easier for it.
I must say that I have had a revelation about Japan this past week. There really is no one in charge and the country is adrift.
Yes, I know you've heard this many times before. For years, prime ministers came and went in Japan even more rapidly than in Italy. Ministers were a dime a dozen. Just about the time you remembered the name of the minister of foreign affairs or finance, the guy would be gone and you'd have to start trying to remember all over again.
But in the old days there was a division of labor in Japan that may have been murky to outsiders but that was very clear to those who ran and understood the system. The political scene was dominated by the Liberal Democratic Party. Of course, it was neither liberal nor democratic, but it was a party that understood how to grease the wheels of Japan's politics. So it did the politics. Meanwhile, Japan's superb bureaucrats took care of vision, policy, and actually running the country.
I remember being awed in the era 1965-2000 by the power of officials such as the vice minister of International Trade and Industrys (MITI), the director of the Industrial Policy Divison, and even the assistant director of the Auto Industry Section. I recall in 1984, Sony Chairman Akio Morita telling me apropos of disputes between the U.S. and Japanese semiconductor industries that the MITI officials needed to give "strong guidance" to the CEOs of the Japanese electronics companies. I recall being in the office of important Japanese CEOs such as the head of NEC when he received phone calls from these MITI officials and took them immediately. In 1985-86, I and Michael Smith and other U.S. trade negotiators cut a deal with the Japanese officials that halted dumping of Japanese semiconductors in the U.S. market and that assured the U.S. semiconductor industry or a very high probability of gaining a twenty percent share of the Japanese semiconductor market. Not only did these officials have the power to cut that deal, but they made it stick.
Well that was the "good old days" that are no more. Over the past week, I spent time at Japan's Ministry of Economics Trade and Industry (METI). It is the successor to MITI but only as a pale, pale facsimile. In discussion with one high official I noted that Japan is suffering a hollowing out of its big manufacturing industries such as autos, semiconductors, and consumer electronics (Can you imagine that South Korea's Hynix may acquire the bankrupt Elpida, Japan's last maker of semiconductor DRAMS?). His response was that METI's new theme is "Cool Japan" with emphasis on the writing of Manga (cartoons), cooking, and development of computer games. He actually said that Japan is suffering fatigue from its competition with Korea. I nearly fell off my chair. Where were the do or die men of yore who dared to challenge and beat the giants of American industry, men like Naohiro Amaya, Makoto Kuroda, and other unsung heroes of Japan's economic miracle.
Well, apparently what has happened is that in the past ten or fifteen years, the politicians have decided to do policy as well as politics. Power has moved out of the bureaucracy to the prime minister's office and to the Diet. Of course, this is what we Americans always wanted in the past as we wrestled with the bureaucracy. But what we missed at the time was the fact that, difficult as it was, the bureaucracy had a vision and ideas and a plan for realizing them. Unfortunately, today's Japanese politicians seem to have no vision and no ideas and no plan.
Years ago I wrote a book entitled Trading Places. It referred to Japan overtaking the United States in key areas of technology and industry. Now that seems to be happening in the political realm as well. Japan, like the United States, increasingly seems to have no idea of where it is going or how to get there.
In the context of the struggle over Iran's development of a nuclear industry and possibly of nuclear weapons, one often hears that Israel considers development of an Iranian nuclear bomb as an existential threat. The concern, of course, is that if they had the bomb, some of Iran's leading Mullahs might be mad enough to try to use it to wipe out Israel in one strike.
It is to counter that threat that there have been threats and much discussion of a pre-emptive Israeli or Israeli-U.S., or solely U.S. strike against Iran's nuclear development facilities.
Lost in the whole discussion is what any of these strikes might do to Japan. I know that might seem irrelevant in view of the fact that Japan is physically several thousand miles away from Iran and Israel. In actuality, however, Japan is right in the middle of the Persian Gulf. Let me explain.
As a result of the March 11, 2011 earthquake and tsunami, Japan's Fukushima nuclear reactors were knocked out and largely destroyed. Then safety checks and scheduled maintenance stops halted the remaining active reactors. Today, only one of Japan's reactors is operating and it is scheduled to go down for maintenance soon. Once the reactors are turned off, it is proving extremely difficult to overcome public opposition to turning them back on. Those living near the reactors are afraid of a repeat of the Fukushima experience and don't want to hear about the power being turned back on. While understandable, this means that over a third of Japan's electric generation capacity is out of action. With Japan's hot, humid summer approaching, there is fear of serious power shortages despite draconian conservation measures.
Now here's where the Persian Gulf comes in. To replace the lost nuclear power, Japan has been importing large quantities of oil from the Gulf to power its remaining conventional generators. This has driven up the price of oil, but at least it has relieved to some extent the electricity shortage.
However, any kind of strike on Iran or military action in the Gulf is virtually guaranteed to close, at least temporarily, the Straits of Hormuz and thereby to shut off the oil shipments to Japan. Thus, in a very real sense, a strike on Iran is also likely to be a strike on Japan.
At the German Marshall Fund meeting that I attended earlier in the week in Tokyo, there was much discussion of the North Korean missile failure and its implications. In the midst of this discussion, a senior Japanese official almost screamed at the audience not to become preoccupied with North Korea and missiles. Said this person, "the North Korean missile is not a real threat to Japan. The much greater threat is a closure of the Persian Gulf. We must prevent that by all means."
In the past six months, Washington has made much of its new "pivot to Asia" policy under which U.S. resources and priorities are to be concentrated on the Asia-Pacific region as a way of reassuring its Pacific allies of America's commitments to them. This is supposed to strengthen U.S. ties with key Asian countries as well as promote American exports and economic interests. It would thus be ironically counter-productive if a strike on Iran would prove to be an existential threat to America's greatest Asia-Pacific ally -- Japan.
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At today's opening meeting of the German Marshall Fund's Trilateral (EU, U.S., Japan) conference in Tokyo, the question of the future of the Euro turned into a discussion of German mercantilism.
Top leaders and analysts from Europe, the United States, and Japan all seemed to agree that Germany is in the process of killing the EU as we have come to know it. The consensus view seems to be that Germany is not only enforcing an unsustainable austerity on the rest of Europe (especially the southern periphery states of Portugal, Spain, Italy, and Greece) but that it is also unwilling to expand its own consumption and reduce its trade surplus as a way of stimulating growth in the rest of the EU. Indeed, rather than buy more from its EU trading partners, it is said to be insisting that they expand their exports to non-EU destinations, or, in other words, that they become Germans too.
The term mercantilist was regularly applied to Germany in today's discussion with no denial from the Germans present or from any of the other participants. I found this interesting because Germany is always considered much more dedicated to free markets and less socialist than say the French, or Swedes, and certainly than the Italians. Yet, while mercantilism is not socialism, neither is it the laissez-faire that we associate with Anglo-American free market capitalism. Mercantilists don't really embrace free trade. For them, the market is a tool rather than an end in itself. If the market can assist in achieving their primary goal of trade surpluses and large reserve holdings, fine, but if not, mercantilists do not hesitate to reshape the market. Germany is considered mercantilist because it does accumulate chronic current account surpluses, and embraces an export led economic growth model.
But mercantilism typically entails protection of the domestic market and/or subsidization of domestic producers. Penetration of mercantilist markets by foreign producers is typically much less than foreign penetration of more open, laissez faire markets. So the question today was: what are the barriers to foreign producers in the German market? It doesn't have much in the way of tariffs, or quotas, or other formal trade barriers nor does it provide much in the way of export and production subsidies. So, in what does German mercantilism consist?
There seem to be two major and related factors. The first is the embrace of a philosophy of export led growth and of doing whatever is necessary to assure continuing trade surpluses. Thus, the German government coordinates constant discussions between labor, government, and industry to arrive at agreements on wages, investment, productivity gains, and prices that will assure continued competitiveness to producers based in Germany. Brutal austerity will be imposed on the German economy to keep it competitive. Moreover, this constant coordination and emphasis on competitiveness engenders a "Buy German" mentality that tends to hold down the share of the German market held by imports. Of course, it is also true that enmeshing the German euro in a common currency with the euros of France, Italy, Spain, etc. also tends to keep the euro undervalued with regard to Germany. But in general we can say that German mercantilism is essentially a state of mind more than a collection of specific trade barriers or policies. And this state of mind is fundamentally opposed to what countries generally think of as "free trade."
More important is the fact that this situation is not characteristic only of Germany. It is also true of Japan, Korea, China, Taiwan, Singapore, the Netherlands, Malaysia, Vietnam, and Brazil to name just a few. In other words, the bulk of the global economy is more oriented toward mercantilism than it is toward free trade. That being the case, it suggests that continued calls for more Free Trade Agreements like the U.S.-South Korean FTA, or the Trans Pacific Partnership are unlikely to produce deals that will relieve current imbalances and tensions. Indeed, that may not even be their purpose at all. More on this later.
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A spate of recent books and articles has brought the long running debate over whether it's morning or dusk in America back to the front burner of public debate.
Writers like Robert Kagan and Walter Russell Mead argue that American fears of being surpassed by the Soviet Union and Japan proved groundless in the 1980s and 1990s and that similar fears of being overtaken by China and the other BRICS today will prove similarly unfounded. America they say is not in decline but is rather in the process of re-ordering a global structure weakened by the decline of Japan and Europe. Acute observers like Edward Luce of the Financial Times say it's Time (for America) to Start Thinking -- the title of Luce's just published book.
While I respect all three writers and consider them friends and colleagues, it will surprise no one who has read my own 2010 book -- The Betrayal of American Prosperity -- that I line up with Luce on this one.
Writing about The Myth of America's Decline in Monday's Wall Street Journal, Mead argues that the post World War II tri-lateral global system based on the U.S., Europe, and Japan is in decline because Japan and Europe have stagnated demographically and economically. So while the United States is faced with the necessity of constituting a new international system, it is not faced with any threat of its own decline.
But wait a minute. This line of argument presumes that the U.S. economic performance has been vastly better than Japan's over the past twenty years since the bursting of the Japanese asset bubble in 1992. This presumption is certainly in line with the generally accepted conventional wisdom. I mean, how many times have you read or heard about Japan's "lost decade" or "lost two decades?" The popular line of the media, professional economists, and conservative writers is that over that time poor, little, old Japan has languished while America has galloped ahead to ever new economic triumphs. The only problem with this view is that it's not true. What looked like high U.S. growth in the late 1990s and between 2002 and 2008, was actually two highly destructive bubbles from which we are still recovering. Once you account for differences in population growth, inflation, and differences in counting productivity, the rates of GDP and productivity growth of Japan and the United States over the past twenty years are not terribly different. So if Japan has stagnated, so has America.
But you don't need to compare to Japan to see that. Just compare to America. Except for the top one percent of the income distribution, Americans today have not seen much of an increase in real income since 1975. You'd have to be blind not to see the deterioration of our infra-structure. We used to have trade surpluses. Now we have chronic deficits. We used to tell ourselves that didn't matter because we had surpluses in high tech items. But now we have deficits there too. We used to be the world's biggest creditor. Now we are its biggest debtor. The dollar used to buy 360 yen and 4 German Marks. Now it buys only 80 yen and about .7 euros. How can anybody claim we're not suffering decline?
Of course, we're in decline. That's obvious to everyone outside the United States and to most inside except for firm believers in American exceptionalism for whom eternal American ascent and economic dominance must be articles of faith.
But the fact of decline is not the main issue. The real question is whether the evident decline is inevitable, stoppable, or reversible. Here I am much more positive. I say reversible.
Look at it like a round of bridge. Each country has a hand of cards. Ask yourself whose cards you'd prefer to play given a choice. I say America's. America's cards today are not as good as those of ten or twenty years ago. But they're still the best, the best universities, the most stable large market, the leading position in many technologies, the easiest place to take risks, and so forth. But, of course, in bridge as in life, you can lose with a good hand if you play the cards badly.
Here's America's real problem and one that Luce really puts his finger on. The United States is playing its cards just about as badly as it is possible to play them.
So what needs to be done. Nothing too complicated really. Just watch Singapore, China, Germany, and Brazil and do what they do. Do they offer substantial financial incentives to induce off-shoring of production to their shores? Fine. Study their programs and copy them. Do they target key industries for development? Fine, do the same. Do they coordinate closely between government, labor, and management. Great. Do the same.
Anything they can do we should be able to do as well, sometimes maybe even better.
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My questioning of the existence of a soul at Apple stirred up a lot of response, some in praise of me (thank you) and some questioning my sanity (a perfectly good question). What I found most interesting was two widely held false presumptions.
The first was well expressed by an Apple shareholder who said my notion that Apple owed some obligation to help with the problems of the United States is ridiculous. Clearly the writer takes the shareholder sovereignty view that has become the dominant corporate management doctrine over the past thirty years. According to this philosophy, the soul priority of CEOs and top corporate management is to maximize returns to shareholders. Management is said to have a fiduciary responsibility to shareholders. This thinking evolved out of an attempt to find an effective, readily available way to measure management performance. Returns to shareholders are quantifiable and readily available and so that became the measure.
It was not always so. In the early 1980s, the Business Round Table published a list of the CEOs recommended priorities. These included such things as producing and providing the best products and services, taking excellent care of customers, maintaining good relationships with suppliers, providing an outstanding work environment and developing the skills of the work force, supporting the local community and the nation, and, oh yes, earning decent returns for shareholders. That stakeholder view of the role and obligations of the corporation and its management was not changed by the Business Round Table until the mid 1990s.
But I can put the case for corporate responsibility to the nation in both more personal, and more organic terms. With regard to the personal, I suppose it to be an elementary aspect of human relations that having been helped by someone, each of us feels an obligation to return the favor if the occasion to do so arises. As a U.S. government trade negotiator in the 1980s, I was requested by top Apple executives on several occasions to help Apple crack the Japanese market, to help Apple prevent dumping of Japanese products in the U.S. market, and to enforce intellectual property laws in ways that would protect Apple from damage due to theft of its intellectual property. As a representative of the U.S. government, I, along with other government officials, responded and provided significant assistance to Apple that certainly enhanced its sales and profitability. Even as I write, Apple is expecting to receive substantial tax incentives from the state of Texas as part of a plan to expand production there. So it seems very clear to me that Apple has received a lot of help from the U.S . government over the years and has a fundamental human obligation to return the favor when the opportunity arises which it now seems to be doing.
A more fundamental point, however, is that Apple and other corporations owe their very existence to the society that gives birth to them. Readers must understand that neither corporations nor shareholders create corporations. They are all chartered by government. In the early days of the United States, both the federal and state governments were cautious about creating corporations and typically only chartered a few of them and those only for very narrow, well defined purposes, and only for limited periods of time such as 10-20 years. Corporations were seen as a potential threat to the freedom and well being of both the individual citizen and the state.
Keep in mind that when it charters a corporation, a government (as the representative of a society) is granting important privileges (such as limited liability, alternative taxation, and the rights and privileges of a citizen) and powers not always granted to individual citizens. The reason a government does this is because it believes and desires that the corporation will bring certain benefits to the society - that, of course, includes the corporations shareholders but is not limited to them. Rather it means the whole society. Thus, by definition, a corporation has obligations to the society and government that gave it birth.
It would seem that the stakeholder philosophy is inherent in the very act of a government chartering a corporation.
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Did you happen to read the story in Sunday's Financial Times headlined, in the print edition: Apple Listens to the Factory Floor in China?
The working hours survey said it all. Average working hours per week in the Foxconn/Hon Hai factories in China that make Apple products were put at 56.1 hours. Maximum hours worked in the last three months were 61.1 hours per week. And the longest consecutive work period without a rest day during the last three months was 11.6 days. These figures were released by the Fair Labor Association (FLA) as Apple Chief Tim Cook last week toured the factories where his company's products are made.
This Cook's tour was not for sightseeing purposes or for showing the flag. The FLA report had been commissioned to investigate complaints of inhuman work place treatment that were feeding a brush fire of charges that Apple is making enormous, obscene profits on the backs of poorly paid and badly treated assembly line workers in China. It was to put out this fire that the FLA report release was timed to coincide with Cook's visit.
Now, in case you didn't know, let me explain that China does not have the world's highest labor standards or most powerful labor unions. Indeed, indeed, it has among the lowest and the weakest. Nevertheless, the FLA found at least 50 "serious and pressing non-compliances" with China's cream puff workplace code of conduct and labor law. In addition, labor rights organizations from India, Indonesia, and Poland as well as from the United States wrote an open letter calling upon Apple to provide a living wage so that Chinese workers do not have to work excessive overtime and also calling for an end to use of involuntary labor.
Well, would you believe it? Apple and its factory operating contractor, Foxconn/Hon Hai, accepted each and every one of the FLA's recommendations. So now, working hours will actually be reduced to the legal limits while pay will be protected and conditions will be improved. FLA President Auret van Heerden said this would really improve the lives of more than 1.2 million Foxconn employees and set a new standard for Chinese factories. I mean, can you imagine. These factories will now be working no more than the legal maximum of working hours. That will be a new standard. I guess China's factories must have been working far above the legal limit until now. But now with this new standard they'll finally meet the old standard. If, that is, these commitments are implemented, van Heerden was careful to stipulate. Do you think maybe she's been here before? But how could she harbor any doubts that a class act like Apple wouldn't implement its commitments? Well, maybe the problem is not Apple but Foxconn. But would Foxconn really do things to which Apple objects? Well, you just never know about these kinds of things I guess. Shows you why these global supply chains are so tricky.
Course, this is going to cost Apple big time. I mean the manufacturing labor content of an iPhone or iPad is now about 5 percent of the total cost. By accepting every one of those recommendations, Apple might push this to 6 percent, meaning that its 30 percent operating profit margin might drop to 29.5 percent (if Foxconn shares part of the hit with Apple) or even to 29 percent.
Just think of the implications of that. Instead of $100 billion lying around the Apple headquarters in cash waiting to be invested, there might in the future only be $99.5 or $99 billion. But that's only if the deal is actually fully implemented. So I guess we'll have to wait and see.
All right, let me stop with the sarcasm and just ask straight forwardly, why does Apple have to do it this way? Making iPads is not war. Why does anyone have to work 60 hours a week? Why does anyone have to work eleven and a half days without a break day? Apple would be the world's most profitable company even it its gross profit margins dropped by a few percent.
I mean, here's Apple who's biggest problem is figuring out what to do with all the cash, and its executives take home really rich bundles of cash, stock grants, long term options, and all the rest of it which is taxed at only 14 or 15 percent while they agree to only make their Chinese workers work the legal maximum number of hours. Could you ask for a better more soulful bunch of guys and gals? I mean, really!
This is what's wrong with globalization. The big gains go to the one percent who need them the least. Developed world workers take a big hit, Chinese workers gain, but not nearly as much or as fast as they should, and First World consumers don't get very much of the benefit of the cheap Chinese labor because the bulk of the wage arbitrage between west and east is going into the coffers of the top executives and the middlemen between producers and consumers. It's not a sustainable way to run the world.
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The finding this week by the U.S. Department of Commerce that China has been improperly subsidizing its solar panel industry is the first step in what promises to be a repeat of the U.S.-Japan trade frictions of the 1970s-80s. The Department is expected to follow up the finding of relatively small subsidies (3-4 percent) with complementary findings of dumping that could trigger substantial anti-dumping tariffs.
There is no doubt that China's solar panel industry has been subsidized and protected in a variety of ways. The questions I have are whether this finding and a possible further anti-dumping finding are coming too late to make much difference to the structure of the global industry and why it takes so long to make these kinds of findings and to put counter measures in place.
The solar panel industry was identified by the Chinese government long ago as a target of special attention. Indeed, I recall being in a White House meeting in 2009 to discuss the prospects for the U.S. solar panel industry. I told the administration's top economists then that unless they were prepared to match the enormous incentives China was planning to provide to its industry ,the U.S. industry would be blown out of the water. They weren't prepared to match and the industry is, in fact, now being blown out of the water. Anyone who had had the experience with Japan or who had an ounce of understanding of how strategic industry targeting and export-led growth works could have foreseen exactly what has come to pass as China has poured about $34 billion of subsidies into its industry which exports about 95 percent of its production. That would be the loss of several thousand U.S. jobs and the bankruptcy so far of 12 U.S. companies. This is not to mention the inevitable reductions in R&D spending and innovation in the face of the tsunami of imports from China.
Perhaps the imposition of duties will save what is left of the U.S. industry, but why was it necessary for things to come to this pass before action could be authorized? The answer is that U.S. international economic policy is based on what we might call the free trade charade. It assumes that all U.S. trading partners in the World Trade Organization are committed to private enterprise driven laissez faire capitalism and comparative advantage driven free trade. Under this assumption no special subsidies and protections are supposed and the government waits for someone to complain before collecting any data or evaluating any impact on U.S. industry.
Once those investigations start, they take time during which the subsidized industry actually has an incentive to ramp up production and exports in order to destroy as many competitors as possible before any counter action can be taken. And the time can be prolonged because the U.S. subsidiaries of the Chinese producers, being legally U.S. citizens, are granted the privilege of contesting the findings and of arguing that no damage is done to the U.S. economy because they are creating longshoreman and trucking jobs to support the imports. So the fox in the hen house gets to argue, as he wipes blood from his lips, that he's just trying to help the hens.
The root of the trouble here is that the fundamental assumption of private enterprise driven free markets and comparative advantage-driven free trade is wrong. When governments have five-year plans that target certain industries for development aided by a plethora of incentives, the assumptions of free trade are out the window. This is even more true when those governments have powerful bureaucracies with broad discretionary powers to administer "guidance." It is even more true when the governments are authoritarian, and it is even more true when state owned enterprises are involved. When this combination of forces is present, you can be sure that the outcome is not going to be determined by unfettered market forces. So we shouldn't act like we think it will be.
Rather than pretend a free trade situation exists when it doesn't, we should define a targeted industry category of trade and establish a special set of rules to govern it separately from standard WTO-style trade. This could be done within the WTO or bi-laterally with particular countries, but in either case it would allow immediate imposition of offsets to market distorting subsidies and protections based on the presence of industry targeting policies. There might be a system of the issuance of warnings and consultation and a scaling of the offsets. But there would be no long delays and also no bitter exchanges of insulting pejoratives about cheating and unfairness between the parties. It would all just be business.
"Ah, I see that you, government X, are targeting industry Y. That is certainly your privilege. I can understand that you think it an important industry for you to have in the future. We think it's important too and while we are not especially targeting it we are invoking clause Z of the WTO to offset any negative impact on our industry of your policies. I'm sure you understand. Of course, we always stand ready to discuss the situation with you and to make appropriate adjustments. Many thanks for your understanding and cooperation."
Simple, polite, no lawyers, no expenses, no damages. Just business. That's how it could be if we scrap the free trade charade.
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.