PRC Rare Earth Metal Hoarding: Fake Trade Issue?

Given several new developments, today's a mighty fine time to update our coverage [1, 2] of worldwide rare earth metal availability provided its importance to modern industrial production. Beginning a year and a half ago, the US, EU and Mexico filed related WTO cases [DS 394, 395 and 398 respectively] challenging the PRC's use of quotas, export duties and licence requirements to limit exports of rare earth metals required in many high-technology products. With 95-97% of these metals emanating from the PRC at the present time, it is not a trivial problem for various manufacturing concerns abroad that rely on their supply. Although the PRC has claimed that environmental protection and conservation were the grounds for limiting exports, such claims have been undermined by largely unfettered access by local firms to these rare earth metals. The NY Times cheat sheet above graphically illustrates China's dominant position in sourcing these valuable materials.

To make a long story short, China has just been found in violation of trade rules via a ruling from the WTO's dispute settlement mechanism. Bloomberg offers a summary. The naturally pleased US Trade Representative claims victory while offering this version of what has just transpired:

U.S. Trade Representative Ron Kirk announced today that a World Trade Organization (WTO) dispute settlement panel has agreed with the United States, finding that export restraints imposed by China on several important industrial raw materials are inconsistent with China’s WTO obligations. China’s actions were not justified as conservation measures, environmental protection measures, or short supply measures. The raw materials at issue include various forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus, and zinc, and are used in a multitude of downstream applications in the steel, aluminum and chemicals industries...

The export restraints challenged in this dispute include export quotas and export duties, as well as related minimum export price, export licensing, and export quota administration requirements. These types of export restraints can skew the playing field against the United States and other countries in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products. The export restraints can artificially increase world prices for these raw material inputs while artificially lowering prices for Chinese producers. This enables China’s domestic downstream producers to produce lower-priced products from the raw materials and thereby creates significant advantages for China’s producers when competing against U.S. and other producers both in China’s market and other countries’ markets. The export restraints can also create substantial pressure on foreign downstream producers to move their operations and, as a result, their technologies to China.

The USTR's claims on "market distortion" grounds are straightforward: the Chinese are responsible for rare earth metal shortages worldwide that disadvantage foreign firms by limiting their availability while raising their prices. However, local producers do not face similar limitations. What's more, perhaps consistent with China's wish to be on the technological leading edge via knowledge transfer, such limitations encourage foreign manufacturers to bypass such restrictions by locating in the Middle Kingdom.

But is that all there is to this story? While the US, EU and Mexico chose the route of litigation to free up more supplies from China, Japan appears to have found a (potentially) superior solution: get these materials from non-PRC sources. And so we have another tale hot off the presses touting Japan's newfound sources that both cut out China and make these metals appear less rare than at first glance. Instead of being in Inner Mongolia, these finds are under the sea:

Vast deposits of rare earth minerals, crucial in making high-tech electronics products, have been found on the floor of the Pacific Ocean and can be readily extracted, Japanese scientists said on Monday. "The deposits have a heavy concentration of rare earths. Just one square kilometer (0.4 square mile) of deposits will be able to provide one-fifth of the current global annual consumption," said Yasuhiro Kato, an associate professor of earth science at the University of Tokyo.

The discovery was made by a team led by Kato and including researchers from the Japan Agency for Marine-Earth Science and Technology. They found the minerals in sea mud extracted from depths of 3,500 to 6,000 meters (11,500-20,000 ft) below the ocean surface at 78 locations. One-third of the sites yielded rich contents of rare earths and the metal yttrium, Kato said in a telephone interview.

The deposits are in international waters in an area stretching east and west of Hawaii, as well as east of Tahiti in French Polynesia, he said. [Kato] estimated rare earths contained in the deposits amounted to 80 to 100 billion tonnes, compared to global reserves currently confirmed by the U.S. Geological Survey of just 110 million tonnes that have been found mainly in China, Russia and other former Soviet countries, and the United States.

We then return to the geopolitics of it all:

A chronic shortage of rare earths, vital for making a range of high-technology electronics, magnets and batteries, has encouraged mining projects for them in recent years. China, which accounts for 97 percent of global rare earth supplies, has been tightening trade in the strategic metals, sparking an explosion in prices. Japan, which accounts for a third of global demand, has been stung badly, and has been looking to diversify its supply sources, particularly of heavy rare earths such as dysprosium used in magnets.

Kato said the sea mud was especially rich in heavier rare earths such as gadolinium, lutetium, terbium and dysprosium. "These are used to manufacture flat-screen TVs, LED (light-emitting diode) valves, and hybrid cars," he said.

As you would expect, there are qualifiers. First, Japan is not free and clear to mine them unlike if they were in its exclusive economic zone, i.e. its territorial waters. If it wishes to abide by international law which I presume it does, then it will have to consult with UNCLOS authorities--and likely with other countries which have manufacturing interests such as the litigants mentioned above. The Economist offers this take on potential complications:

Seafloor mining beyond countries’ territorial waters is regulated by the International Seabed Authority, set up under the United Nations Convention on the Law of the Sea. So far it has issued only eight licences, all for exploration, not production, all for nodules, not massive-sulphide deposits, and all to governmental or quasi-governmental agencies (of China, France, Germany, India, Japan, Russia, South Korea and an east European consortium). No wonder. Commercial miners want both a clear title to their holding and exclusive rights to exploit it. They also have to answer to shareholders.

Second, there are likely more technical obstacles to deep sea mining and, third, its environmental sustainability than the Japanese let on. From Nature News:

Current on-land mines, and sites picked out for future mines, have rare-earth concentrations of about 3–10%, he points out [whereas those found by the Japan researchers are in the 0.1-0.2% range]. The much lower concentrations at the Chinese clay mine mentioned by Kato and his colleagues are only economically viable because the material is much easier to access than it would be in hard rock. That's not true for mud located below 4 or 5 kilometres of water, which would require expensive ship time and equipment to pull up. "There are better options," he says.

Craig Smith, an oceanographer at the University of Hawaii at Manoa, notes that companies are exploring the idea of mining manganese nodules from the sea floor to exploit their commercially-valuable contents, including copper and nickel as well as rare earths. Commercial mining of nodules is "probably a decade away", says Smith. Ocean mud could prove another possible source of the increasingly valuable elements.

Smith and others have raised concerns about the environmental consequences of deep-sea mining, particularly around hydrothermal vents, which host unique worms, clams and other life. Kato points out that gathering the metals from mud won't involve disturbing the vents; he found the highest concentrations of rare-earth elements thousands of kilometres away from vents. Closer than that, the rare earths were diluted by other deposits. But Smith notes that sea-floor life away from vents could also be fragile. Ecosystems on the cold ocean floor regenerate very slowly, he says, so any damage done by mining could take decades or centuries to heal.

Qualifiers and all, it's a potentially significant discovery. Whether Japan itself stands to benefit from this find is a matter of interpretation concerning the law of the sea and the state of deep sea mining technology. (If you're further interested, io9 has a map depicting where these deposits lie as per the Nature Geoscience article.)

Returning to the main story, China also has the opportunity to appeal the WTO ruling, though I firmly believe that the PRC's claims are covers for protectionism plain and simple. Perhaps other countries ramping up the capacity to mine rare earth metals on land will be more viable than either the route of litigation or deep sea mining. That said, China being alone in continuing large-scale mining of such resources remains a testament to its foresight and long-term planning. In a way, it's being punished for being resourceful, dubious PRC claims at the WTO notwithstanding.

Gotcha! US Faulted by WTO on Susidizing Boeing

Today, the WTO finally released its panel report on the EU's complaint against the United States regarding American subsidies for Boeing (case # DS353). This, of course, is the countersuit launched by the EU in the wake of the US launching a case against Airbus on launch subsidies (DS316). I have always thought both parties, EU-Airbus and US-Boeing, culpable of subsidizing aircraft development and that it would ultimately prove to be a wash. And so it has come to pass: it seems Boeing too is not scot-free alike its European consortium counterpart.

The key part of the panel report faulting the US on aid to Boeing is here:

The Panel upheld the European Communities' claims that: (a) some of the measures maintained by the States of Washington, Kansas, Illinois and municipalities therein, the NASA aeronautics R&D measures, some of the DOD aeronautics R&D measures, and the FSC/ETI and successor act subsidies, constituted specific subsidies. The Panel estimated the total amount of these subsidies between 1989 and 2006 to have been at least $5.3 billion; (b) the FSC/ETI and successor act subsidies constituted prohibited export subsidies; (c) some of the specific subsidies (i.e. the NASA and DOD aeronautics R&D subsidies, the FSC/ETI and successor act subsidies and the Washington State and municipal B&O tax subsidies) caused adverse effects to the European Communities' interests in the form of serious prejudice, finding that the effect of these subsidies was displacement and impedance (or threat thereof) of Airbus large civil aircraft from third country markets, significant price suppression and significant lost sales.

For the sake of clarity, FSC/ETI refers to "[t]ax break exemptions under legislation relating to Foreign Sales Corporations (“FSC”) and the Extraterritorial Income Exclusion Act (“ETI”) and successor acts. Both function as effective subsidies when marketing Boeing civil aircraft abroad.

Transatlantic bickering has already begun, with EU Trade Commissioner Karel de Gucht (obviously) claiming a victory:

"This WTO Panel report clearly shows that Boeing has received huge subsidies in the past and continues to receive significant subsidies today. The US began this dispute in 2004 and now finds itself with a crystal clear ruling that exposes its long-running multi-billion dollar subsidisation of Boeing through Federal and State programmes as illegal.", said EU Trade Commissioner Karel De Gucht. "These subsidies have resulted in substantial harm to EU interests, causing Airbus to lose sales, depress its aircraft prices and unfairly lose market share to Boeing. The detrimental costs to EU industry from this lengthy and onerous subsidisation run into billions of euro. We therefore welcome the WTO Panel's report and call on the US Government to take the appropriate steps that may assist to achieve a mutually agreed solution to this dispute.", Commissioner De Gucht added.

Meanwhile, the Yankees point out that this ruling pales in comparison to launch aid violations previously found against the EU. (And of course the USTR was similarly chuffed when the findings came out against the EU last year.)

Compared with the ruling over Airbus aid, today’s panel report “reveals a market distorted by Airbus’ practices, with illegal launch aid being the key discriminator,” J. Michael Luttig, Boeing executive vice president and general counsel, said in a statement. Boeing wants its bigger rival to reimburse the illegal portion of so-called launch aid until repayments reach what they would have been had the loans been made at market rates.

Both sides can appeal their respective rulings, with the Europeans already having done so. Still, you have to wonder about how much time and effort is being put into something that will likely be deemed a wash at the end of a long process of litigation.

Who benefits in the end? As in many such proceedings, the (trade) lawyers, of course.

US Sues China at WTO on Wind Power Subsidies

This case has been anticipated for some time but is very interesting nonetheless. It is yet another entry in a series of steel-related actions by the US against China on the import front. Previous actions include those over tires and steel pipe. While China took the US to the WTO and recently lost its appeal over tariffs applied to its tires, this new action involves the US taking China to the WTO instead of unilaterally applying tariffs against Chinese steel products. On the export front, the US did take China to the WTO as well but that was over the PRC applying duties to American flat-rolled electrical steel.

From the USTR press blurb:
------------------------------

U.S. Trade Representative Ron Kirk announced today that the United States has requested consultations with the People’s Republic of China under the dispute settlement provisions of the World Trade Organization (WTO) concerning a program known as the Special Fund for Wind Power Manufacturing. Under this program, China appears to provide subsidies that are prohibited under WTO rules because the grants awarded under the program seem to be contingent on Chinese wind power equipment manufacturers using parts and components made in China rather than foreign-made parts and components.

“Import substitution subsidies are particularly harmful and inherently trade distorting, which is why they are expressly prohibited under WTO rules,” said Ambassador Kirk. “These subsidies effectively operate as a barrier to U.S. exports to China. Opening markets by removing barriers to our exports is a core element of the President’s trade strategy. Our decision today, along with the two other WTO cases that we recently filed against China, underscores our commitment to ensuring a level playing field with China for American workers and businesses.”

USTR is also including in its consultations request transparency-related claims, which address China’s failure to comply with its obligation to notify the subsidies at issue under the WTO’s Agreement on Subsidies and Countervailing Measures (SCM Agreement) and China’s failure to translate the underlying measure into one or more of the official languages of the WTO.

The size of individual grants currently available under the Special Fund for Wind Power Manufacturing ranges between $6.7 million and $22.5 million, and the recipients of these grants – Chinese manufacturers of wind turbines and Chinese manufacturers of parts and components for wind turbines – can receive multiple grants as the size of the wind turbine models increases. USTR estimates that grants provided under this program since 2008 could total several hundred million dollars.

Today’s action arises out of an investigation USTR initiated in response to a petition filed by the United Steelworkers (USW) under section 301 of the Trade Act of 1974, as amended. That investigation was initiated on October 15, 2010, and addressed allegations relating to a variety of Chinese practices affecting trade and investment in the green technology sector, including not only prohibited subsides but also export restraints, discrimination against foreign companies and imported goods, technology transfer requirements, and domestic subsidies causing serious prejudice to U.S. interests.

USTR was able to make progress on some of these other areas of concern during the course of the section 301 investigation through its bilateral engagement with China.

The USW raised a number of concerns regarding discrimination faced by U.S. firms seeking to supply equipment to large-scale wind power projects in China. At the December 14-15 meetings of the U.S.-China Joint Commission on Commerce and Trade (JCCT), USTR was able to address one highly problematic Chinese policy measure negatively affecting U.S. firms in China’s wind sector. Going forward, China agreed to modify its criteria for approval of new wind power projects by no longer requiring foreign enterprises to have prior experience supplying equipment to large-scale wind power projects in China and instead will recognize their prior experience outside China. Through the JCCT, China also reconfirmed its 2009 JCCT commitment that it had eliminated other discriminatory provisions related to local content requirements in the wind manufacturing sector.

During the course of the section 301 investigation, the United States was also able to obtain China’s clarification that two additional subsidy programs identified by the USW in its petition, the Export Research and Development Fund program and the Ride the Wind program, had been fully terminated. These programs appeared to have provided prohibited export subsidies and prohibited import substitution subsidies. Along with the case being filed today, these steps effectively address a substantial portion of the claims in the USW’s petition.

With respect to the remaining USW allegations, Ambassador Kirk stated that USTR will continue to investigate them even though no formal action is being taken under the section 301 statute. “We will continue to work closely with the USW and other stakeholders in the months ahead on the remaining allegations. If we are able to develop sufficient evidence to support those allegations and they can be effectively addressed through WTO litigation, we will pursue the enforcement of our rights at the WTO independently of section 301,” said Ambassador Kirk.

Background

On October 15, 2010, USTR initiated an investigation under section 302(a) of the Trade Act of 1974, as amended, with respect to acts, policies, and practices of the People’s Republic of China affecting trade and investment in the green technology sector. USTR initiated the investigation in response to a petition filed on September 9, 2010 by the USW. USTR delayed requesting WTO consultations pursuant to Section 303(b) of the Trade Act of 1974, as amended, which provides that USTR, after conferring with the petitioner, may delay for up to 90 days any request for consultations. Today’s announcement to request consultations on the Special Fund for Wind Power Manufacturing concludes the pre-consultation phase of USTR’s investigation under section 302(a) of the Trade Act of 1974, as amended.

The SCM Agreement differentiates between prohibited and actionable subsidies. Article 3.1(b) of the SCM prohibits subsidies conditioned on the use of domestic over imported goods – known as import substitution subsidies – because they are recognized to be especially trade distorting. The Special Fund for Wind Power Manufacturing appears to fall within the prohibition of Article 3.1(b). In contrast, actionable subsidies are permissible under the SCM unless they cause adverse effects or injury to the interests of another Member.

The two other WTO cases referenced by Ambassador Kirk were brought against China on September 15, 2010. In one case, the United States is claiming that China acted inconsistently with various substantive and procedural obligations under the applicable WTO rules when it imposed antidumping duties and countervailing duties on imports of grain oriented flat-rolled electrical steel from the United States. In the other case, the United States is challenging China’s restrictions on foreign suppliers of electronic payment services, like the major U.S. credit card companies.

Consultations are the first step in the WTO dispute settlement process. Parties are encouraged to arrive at a mutually agreed solution through consultations. If the matter is not resolved through consultations, the United States may request the establishment of a WTO dispute settlement panel.

Reviewing the Many, Many US-China Trade Battles

I thought it proper to take stock of where we are in terms of trade frictions between the US and China after US legislators finally decided to stick it to the PRC. This news has dominated the airwaves for two days straight, but unbeknownst to many, China has actually won a ruling lately at the WTO Dispute Settlement Mechanism (DSM) concerning US limitations placed on chicken parts coming from China. This poultry brouhaha stems from US non-removal of import restrictions after the bird flu scare came and went. These restrictions are still in effect today. So, about this same time last year, China took the US to the WTO. Our favourite official publication, China Daily, has a neat summary:

The World Trade Organization (WTO) issued a report of the panel on Wednesday, supporting China over its complaint against measures taken by the United States which have affected imports of poultry from China. The panel ruled that Section 727, the Omnibus Appropriations Act of 2009, applied by the US had effectively prohibited the lifting of the ban on poultry imports from China, and inconsistent with the WTO Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement).

The panel concluded that the United States trade regime has not acting in accord with the specified provisions of the SPS Agreement and the GATT 1994, and has "nullified or impaired benefits accruing to China under those agreements." In 2004, China and the United States stopped importing poultry products from each other for fear of the bird flu. China had called off the ban on poultry import from the United States when the situation was relieved.

Access of Chinese poultry to the US market is still blocked, because of the application of Section 727 passed by the US congress, which restricted the United States Department of Agriculture (USDA) and its agency, the Food Safety and Inspection Service (FSIS) from using funds allocated by the US Congress to create a rule to lift the poultry ban on China. At the request of China, a panel was established by the WTO on 23 September 2009 to investigate the case.

So chalk one up for China. For trade completists, you can also visit the WTO site for further details about the ruling. Let me also take this opportunity to commend China Daily for writing such a detailed yet easily understood summary of this dispute. Chinese state media is improving all the time and their command of English is becoming impeccable. Meanwhile, Reuters offers a comprehensive summary of the myriad of other trade disputes between these two countries (I've omitted the two above for brevity's sake)...

SPECIALTY STEEL

The United States filed a case with the World Trade Organization to challenge anti-dumping and countervailing duties China placed on a U.S. specialty steel product called grain-oriented flat-rolled electrical steel. U.S. Trade Representative Ron Kirk accused China of imposing these duties to "harass U.S. exports."

CREDIT CARDS

The United States accused China of creating a monopoly in its electronic payments market, allowing China Union Pay to handle most credit and debit card transactions made by Chinese consumers. In an attempt to open up access for U.S. credit and debit card companies, the United States filed a complaint with the WTO.

COATED PAPER

The United States set combined duties ranging up to 313.8 percent on coated paper from China. The duties come after accusations were made that Chinese paper companies were receiving government subsidies and selling their goods to the United States at unfairly low prices. The paper is used in the printing of corporate annual reports, high-end catalogs and magazines, and in other prestigious applications.

SEAMLESS STEEL PIPE

The United States imposed anti-dumping duties ranging from 48.99 percent to 98.74 percent on seamless steel pipe from China. It also slapped countervailing duties of 13.66 percent to 53.65 percent on the pipe. The U.S. Commerce Department levied the steep duties to offset below-market pricing by Chinese exporters and Chinese government subsidies. The Chinese Ministry of Commerce called preliminary anti-dumping duties set in November 2009 protectionist and launched its own investigation into imports of U.S.-made automobiles.

TIRES

China has taken its case over U.S. tire duties to the WTO, arguing that the 35 percent additional duty imposed is unjustified protectionism. The Obama administration imposed safeguard duties on Chinese-made tires in September after a complaint by unions that low-priced Chinese imports were forcing U.S. factories to close.

RAW MATERIALS

The European Union and the United States are arguing to the WTO that Chinese export restrictions, including taxes and quotas, on several raw materials unfairly raise international prices, while keeping input costs lower for manufacturers in China. [No case yet, but review the goings-on over rare earth elements.]

COPPER PIPES

The United States has set final duties ranging up to 61 percent on hundreds of millions of dollars of copper pipe and tube from China. The U.S. International Trade Commission will vote in November on whether to uphold the duties or strike them down.

DISTRIBUTION SERVICES AND INTELLECTUAL PROPERTY RIGHTS

In December 2009, China lost an appeal against a WTO ruling that its curbs on importing and distributing foreign publications and audiovisual products violated its WTO commitments. The case was initially brought by the United States. Beijing accepted the ruling in July and U.S. industry groups are closely watching how it complies.

Currency, steel, credit cards, steel pipes, copper pipes, coated paper, tires, rare earth elements, poultry...the list goes on and on. And we're far from done.

At Long Last, WTO Faults EU Launch Aid for Airbus

These aircraft cases have set new benchmarks for duration and cost to prosecute. However, we finally get the report from the WTO dispute settlement mechanism (DSM) on the Boeing versus Airbus side of their respective countersuits (DS 316). In essence, it finds that Airbus received illegal government subsidies for the A300, A310, A320, A330, A340 and A380 models. Since the case was filed in 2004, the decision doesn't cover development of the upcoming A350 model meant to compete with Boeing's 787 Dreamliner.

Despite Boeing's "victory," note that details of the Airbus versus Boeing countersuit
will arrive on the 16th of July (DS 317). EC Trade Commissioner Karel de Gucht is already signalling that commentators should await the release of that decision's details before forming an opinion of where both the US and EU stand in relation to Boeing and Airbus. As the texts have been circulated to some extent among the litigants, I (again) fully expect matters to come out as more or less a wash. That is, settlement of these countersuits after years of costly and protracted litigation in Geneva will most likely result in Phyrric victories for both sides as each others' faults cancel each other out:

The World Trade Organization found Airbus SAS benefited from illegal European government subsidies, with money for the A380 jumbo topping the list of violations. The panel opinion, made public today in Geneva after a confidential ruling nine months ago, supports U.S. arguments that loans by European governments constituted unfair aid. In the case of the A380, the panel ruled the aid constituted the strongest violation, because interest rates on loans were too low and the support was linked to export performance.

The ruling raises the prospect of Airbus having to repay a portion of the aid provided by the governments. European governments paid out about $4 billion in so-called launch loans for the A380, the world’s largest passenger plane. The WTO didn’t specify what portion of that figure broke the rules and would require payback. It also said France’s loans for the A380 weren’t considered prohibited.

Boeing, which lost its industry lead to Airbus in 2003, called the WTO ruling a “sweeping legal victory,” saying the verdict called for Airbus to repay $4 billion in illegal launch aid for the A380, a statement that Airbus said is “deliberately misleading” and “wrong”...

About a third of Airbus’s development costs come from European governments in the form of loans that are repaid with interest only if the aircraft is a commercial success. The A380, launched in 2000, is a 550-seat plane that began service in 2007. Airbus has said the program is years from breaking even.

The ruling comes six years after the U.S. abandoned a transatlantic accord on aircraft aid over European Union objections and filed a case against the EU, alleging that aircraft development loans awarded by France, Germany, the U.K. and Spain constituted illegal support that helped Airbus develop new models to Boeing’s detriment.

The EU filed a counter-case, alleging that Boeing received illegal aid. A preliminary judgment on that case is scheduled for July 16. “This final report needs to be read together with the forthcoming interim report on subsidies provided in the U.S. to Boeing,” said EU Trade Commissioner Karel De Gucht in a statement provided upon release of the document. “The EU remains committed to a negotiated outcome to the dispute with no pre-conditions on either side.”

And the EU, cannily enough, hay have learned from these proceedings to administer aid in a manner which doesn't run afoul of WTO strictures:

The French government will continue to give development loans to Airbus, the transport ministry said in an e-mailed statement after the ruling. The U.K. also said its plan to offer launch loans for the A350 wouldn’t be affected by today’s ruling...“As the EU has reiterated in the past, support to the A350 is not within the scope of the proceedings,” an official for the U.K. Business Dept. said today. The official called government loans for aircraft development “a perfectly legal market based instrument.”

For those into trade minutiae, the IELP has a detailed breakdown of the ruling's text as well as a copy of the full ruling. Remember, both Airbus and Boeing can still enter the appeals process, adding further time and complexity to these already protracted affairs. The dogfight continues...

'Honey Laundering', Schumer, and China Bashing

Honey honey, how you thrill me, ah-hah, honey honey
Honey honey, nearly kill me, ah-hah, honey honey
I'd heard about you before...I wanted to know some more
And now I know what they mean, you're a love machine
Oh, you make me dizzy!

Though I highly suspect the venerable Senator Charles Schumer (D-NY) would like nothing better than to slap tariffs on Swedish pop like he does for anything remotely "harming" US industry--perhaps New York wants to contribute more to the endless parade of American entertainment bimbettes --his quixotic quest to bash others is reaching a fever pitch. Let me share with you some not-so-fine words that have since been bandied about "a country without a soul" (US senator on China), "baby-kissing politicians" (Chinese media on US politicians) and yes, the eponymous "honey laundering" episode -

1. In a press release a few days back, he wanted to introduce legislation disclosing the nationality of those answering enquiries in call centres for technical support as well as fining companies transferring call centre jobs abroad. In a way, Schumer is just as non-colour-blind as certain Arizonans when the measure of customer satisfaction is not where call centre handlers are from but if they can solve your technical issues. What a radical marketing concept.

2. However, Chuck still has bigger fish to fry even if he hasn't delivered on the past on his China-bashing. Which, he began to tackle in due course to no one's surprise. A few days after the call centre brouhaha, he called on the Department of Commerce to release the results of a pending countervailing duty investigation on Chinese paper faster.

3. Apparently unsatisfied with these efforts just yet, he renewed calls from his congressional colleagues from both houses including the usual suspects Graham, Brown, Stabenow, and Levin for action on China that he believes the executive branch is unwilling to pursue at the moment. There are two pieces of legislation on tap. First, Schumer and Graham are modifying their approach by introducing China-bashing legislation via a rider to another bill. Sneaky he is, Chuck. Second, Senators Graham and Stabenow plan to introduce a new bill challenging China's government buying practices by forcing it to adopt the WTO's Government Procurement Agreement (GPA). If you will remember, many countries have been critical of the PRC's drive to promote local technology firms by inserting preferences for them in public procurement [1, 2]. In essence, the proposed bill will ban US procurement from Chinese suppliers if the PRC doesn't adopt the GPA (which, on the face of it, represents a violation of America's WTO commitments) -

U.S. congressional anger over China's currency and trade practices boiled over on Wednesday as senators vowed to pass legislation soon and lashed out at President Barack Obama's administration for failing to get tough with Beijing.

"Years of meetings and discussions with Chinese officials in an effort to persuade China to float its currency have repeatedly failed to produce lasting and meaningful results," Senator Charles Schumer told the U.S.-China Economic and Security Review Commission, a watchdog group appointed by Congress...No question, this is what is called a 'put up or shut up' moment for lawmakers," the New York Democrat said.

Schumer told the commission that he and other colleagues would push for a vote "in the next two weeks" on legislation that would allow the Commerce Department to use anti-dumping and countervailing duty laws against China or any other country with a fundamentally misaligned exchange rate. He blamed China's undervalued currency for millions of lost U.S. manufacturing jobs and thousands of closed facilities...

Meanwhile, the House of Representatives Ways and Means Committee announced plans on Wednesday for a hearing on June 16 to examine China's trade and industrial policies. "The United States cannot take a passive or 'hands off' approach to trade when China's government is actively seeking to misshape the terms of trade to gain a competitive advantage over U.S. businesses and workers," Committee Chairman Sander Levin said in a statement.

Senator Lindsey Graham, a South Carolina Republican, called China "a country without a soul in terms of what's right and what's wrong" [oh Lindsey, what a moralist] and predicted there could more than 80 votes in the 100-member U.S. Senate for the legislation he has co-sponsored with Schumer and others. We have an unhealthy relationship with China and the only way we can get back to an even keel is for the Congress to insist to play by the rules," Graham told reporters after he testified before the watchdog commission. In addition to manipulating its currency, China also keeps its market closed to many U.S. goods and allows widespread intellectual property theft, he said. "The Obama administration hasn't been forceful enough," but neither was former President George W. Bush, Graham said.

Schumer and Graham are expected to offer their bill as an amendment to a broader piece of legislation, rather than try to pass it on its own. For the bill to be enacted, it would also have to be approved by the House of Representatives and signed into law by Obama. "There's a lot of pressure from the Obama administration to stop this legislation," Graham said.

The panel also heard from Senator Debbie Stabenow, a Michigan Democrat, who said she and Graham would introduce a separate bill next week barring the U.S. government from buying Chinese products until Beijing has joined the World Trade Organization agreement on government procurement.

Senator Sherrod Brown, an Ohio Democrat, told the panel he worried China was using its deep pockets to grab the world lead on clean energy manufacturing "while elbowing competition out of the way by discrimination against U.S. companies...He urged the U.S. Trade Representative's office to launch a formal "Section 301" investigation to determine whether China is violating its WTO obligations, "Just the launch of a '301' case by this administration will show China that we are serious about competing in this emerging market," Brown said

Apparently, the Chinese have been taken in by this rhetoric to a perhaps unwarranted extent. Here is a petulant editorial from our favourite official news agency, Xinhua. The points in this excerpt are generally sensible:

Some members of the U.S. congress are playing a dangerous game by manipulating the Chinese yuan debate for domestic political gains. These congressmen, prompted by a need to appease American workers frustrated by the loss of millions of jobs in the global financial crisis, and to woo constituencies in elections to be held later this year, are resorting to their old trick of blaming everything on China. They claim China's foreign exchange policy is costing America jobs and threaten to impose tough trade sanctions against Chinese imports. But they choose to ignore the fact that an appreciating yuan cannot rebalance Sino-U.S. trade or help create jobs for American workers. Both trade imbalance and high unemployment are deep-rooted economic problems that can only be addressed when the United States implements some painful yet necessary structural reforms.

These congressmen claim they are the white knights defending the interest of the American people, but in fact, they are nothing more than a bunch of baby-kissing politicians trying to swing voters by manipulating the yuan debate. They only served to divert the public attention from the much more serious domestic economic problems, which are caused in part by their incompetence.

4. Yes well, to heck with those baby-kissers (or something like that). But, to round off his China-bashing labours, Schumer also has another cause identified in the post title, "honey laundering" by the PRC:

“Honey laundering” by China is largely responsible for a decline in U.S. honey production, Sen. Charles Schumer charged this week as he called on U.S. agencies to enforce existing import duties on Chinese honey and purity standards. New York honey producers rank 12th in the nation and are experiencing their share of the decline as honey of Chinese origin undercuts U.S. sales despite a 10-year-old import duty enacted in reaction to predatory trade practices, Sen. Schumer told reporters during a telephone press conference Wednesday.

“New York honey producers are feeling the sting,” Sen. Schumer said. After the U.S. tariff was imposed on Chinese honey, the Chinese circumvented the tariff by exporting it to other countries before shipping it to this country. “China is bucking the (tariff) law,” he said, adding the U.S. was losing $100 million to $200 million a year in tariffs over the honey imports. China has also mislabeled its honey as a malt sweetener or syrup to avoid the tariff, the senator said. “It’s pure criminal behavior. China is acting almost like the mob,” he said.

Besides avoiding the tariff duties, Chinese honey has been known to be contaminated with antibiotics. Sen. Schumer said the U.S. Customs and the U.S. Food and Drug Administration could crack down on the Chinese honey trade if a pure-honey standard were adopted by the FDA. “It would give federal agents much greater authority to crack down on adulteration, misbranding and fraudulent mislabeling,” he said.

There is really no definitive answer to what the effect of America slapping tariffs on China will be, or of China firing warning shots first by selling a couple of billion worth of "safe" Treasuries. Both sides like to talk tough, but in the end you have to put your money where your mouth is at if you want to be taken seriously. I've said it before and I'll say it again: Why don't you just cut the crap and start fighting already?

The British are Coming to Kick Obama's Ass on BP

A few days ago, some bozo predicted that matters would come to a head between the US and UK over the nefarious BP spill:

It will be interesting to see how transatlantic relations will be affected by this spill. The Tories are usually sycophantic towards the Yanks, but their coalition partners the Lib Dems aren't. Perhaps Deepwater Horizon will finish off the hoary notion of a "special relationship" once and for all.

As I noted well before the American press did, the British public is up in arms over the way the Yanks have blackballed BP. Ever one to channel negative sentiment given his inability to do anything constructive to mitigate the oil spill, Barack Obama has labelled British Petroleum a "recurrent environmental criminal" while searching for "whose ass to kick" at the company. While the exceedingly litigious Yanks attempt to sock it to BP by tying it up in litigation sure to cost billions of dollars, the British are pushing back for the understandable reason that Britain's plight is very much tied to BP. Depending on whom you listen to, £1 out of every £6 to £8 in dividends paid out in the UK come from BP shares. What's more, UK pension funds have large holdings of BP stock. With the stock price of BP dropping like a blown offshore platform, let's just say many Britons are up in arms over American bellyaching over BP. Somewhat surprising to me is that the normally transatlantic-friendly Tories are leading the charge:

Senior Tories today warned Barack Obama to back off as billions of pounds were wiped off BP shares in the row over the Gulf of Mexico oil spill. [London] Mayor Boris Johnson demanded an end to “anti-British rhetoric, buck-passing and name-calling” after days of scathing criticism directed at BP by the President and other US politicians.

Former Conservative Party chairman Lord Tebbit branded Mr Obama's conduct “despicable”. And with the dispute threatening to escalate into a diplomatic row, Mr Johnson also appeared to suggest that David Cameron should step in to defend BP. He spoke as the US onslaught against the firm became a “matter of national concern” — especially given its importance to British pensions, which lost much of their value today as BP shares plunged to a 13-year low.

Asked on BBC Radio 4's Today whether he thought the Prime Minister should intervene, Mr Johnson said: "Well I do think there is something slightly worrying about the anti-British rhetoric that seems to be permeating from America. Yes I suppose that's right. I would like to see cool heads and a bit of calm reflection about how to deal with this problem rather than endlessly buck-passing and name-calling.

"When you consider the huge exposure of British pension funds to BP and its share price, and the vital importance of BP, then I do think it starts to become a matter of national concern if a great UK company is being continually beaten up on the international airwaves. OK, it has presided over a catastrophic accident which it is trying to remedy but ultimately it cannot be faulted because it was an accident that took place. BP, I think is paying a very, very heavy price indeed."

Downing Street steered clear of criticising Mr Obama's conduct but in an apparent reference to concerns over UK pensions highlighted the “broader impact” of the spill and the need to deal with it swiftly. British business chiefs are alarmed that tough talking by Mr Obama and other US politicians is undermining the battered oil giant.

BP's shares fell by 12 per cent at one point today on the London market, after hitting their lowest level since 1997 in New York trading overnight, amid intensifying political attacks in the US. Their price dropped to 345p in early London trading before recovering to 370p — still down five per cent. The slump means the firm's share price has almost halved since the spill started in mid-April, when a well ruptured and the rig exploded, killing 11 workers.

Mr Cameron is due to speak to Mr Obama at the weekend over the issue. Among the President's criticisms of BP was his suggestion that chief executive Tony Hayward would have been axed if he had been working for him. BP said its latest effort to capture oil from the leak with a cap was now collecting about 15,000 barrels a day.

Here's a fair warning to the Yanks: the British are coming to kick Obama's ass on BP as my post title goes. By comparison to what I'm hearing, other Evening Standard articles are almost sedate with titles such as "American attacks on BP help nobody" and "PM must counter this US jingoism that threatens our pensions." Meanwhile, the Telegraph says "Gulf of Mexico oil spill: David Cameron fails to back BP in fight with Barack Obama." Meanwhile, the Daily Mail is even more strident - "Stand up for your country, Cameron: PM ducks chance to speak up for BP after cynical attacks from Obama."

Make no mistake: this may indeed be the conflict that finally finishes off the hoary notion of a US-UK "special relationship." I think that the recent record of trying to get with America speaks for itself--fiascos in Afghanistan and Iraq as well as the subprime implosion borne of neoliberal ideology. Certainly, Nick Clegg thinks the "special relationship" is hogwash. If he listens more to the right-of-centre British press, David Cameron will soon be taking the fight to Obama as well. It lends that bit of frisson to the upcoming England vs United States World Cup match, no? In honour of the Americans, let's call it BP Bowl I.

PS: An unidentified wiseacre sent me an invitation to join the "Boycott BP" Facebook page. You needn't ask me to boycott BP for I already do in the sense that I travel via BMW: bus, metro rail (subway), walk. If I can get to my destination in under 30 minutes of walking, I do. Having lived in the US for some time and seen the bulbous girth of your typical Americans firsthand, let me just say their environmentally damaging and unhealthy ways are not for me. In the end, BP is in America because its services are indispensable to their way of life.

UPDATE: See my update on what happened during BP Bowl I and recent evolutions in the US-UK political row over BP.

BP Spill: How Litigious Yanks Hurt UK Pensioners

(Before reading on, I suggest playing AC/DC's "Cover You In Oil" above.) British Petroleum's oil spill in the Gulf of Mexico is not only an ungodly public relations fiasco but also a corporate social responsibility one. With the US government likely to fine BP over a billion dollars, its stock is sinking as quickly as thousands of barrels of oil are rising. To be sure, much blame falls on BP. It, after all, claimed in its permit application that it could handle a spill ten times the current one.

All the same, BP--despite its ham-fisted efforts at stopping the oil spill--probably has the most expertise in containing accidents of this sort. I am reminded of Charles Perrow's renowned volume on Normal Accidents where he investigated the Three Mile Island nuclear incident (as well as the space shuttle Challenger explosion in the revised edition). In it, while he does make suggestions for improving safety that can be done at little cost, these systems must ultimately be plotted on the dimensions of "Net Catastrophic Potential" and "Cost of Alternatives" to determine to see if they are worth pursuing.

Before you fire off angry e-mails in my direction, note that it's the Evening Standard's idea behind this post's title, not mine. Aside from hyperconsuming debt and grub, another American pastime is suing the bejesus out of all comers. (Possibly for rather irresponsible consumption of excess debt and grub, it ought to be noted.) While again reading the evening paper on the ride home, the newspaper's editorial section comes up with its own opinion of the Deepwater Horizon mess. While ranking offshore drilling as being high on net catastrophic potential, they tacitly believe that it is something worth pursuing in a world of dwindling natural resources. That is, the cost of alternatives is higher. There are few alternative domestic energy sources America can tap to replace the role petroleum fills at the current time.

What is more, there is an interesting IPE angle posed here: economic reality means that offshore drilling is not likely to abate in the near future. Therefore, American politicians' "smack BP and toss its execs in jail" attitude borne of American thirst for energy is misguided. Ultimately, pensioners whose funds hold many BP shares and rely on dividends from them are the real victims of US litigation lust (or so they say). There is something to be said for this line of argument. Alike the Mexican border being turned into on big crack house for America, this spill may be more an indictment of the energy-intensive American way of life than anything else. However, it would have helped if BP were more forthright about its damage limitation capabilities. At any rate, here's the op-ed:

The US government's decision to bring criminal charges against BP as a result of the oil spill in the Gulf of Mexico is a characteristically American reaction to a crisis: if something goes wrong, sue. But it is questionable whether that approach at this point will do anything at all to address the real problem, which is that every effort that BP has made to stem the leak has failed.

Bringing criminal charges against company executives will do nothing to add to the urgency with which BP is attempting to put matters right. Deep-water drilling is patently risky and, when it goes wrong, has potentially devastating environmental consequences. Almost certainly, better contingency plans should have been in place and may have prevented 11 deaths. But they weren't, there was an accident and there can be no doubt that BP, which has most to lose from this crisis, has done everything possible to put things right.

It has failed, but not from want of trying. And the notion that the US government can succeed where BP has failed by "taking over" the operation seems illusory. The US reaction is political, an attempt by the President to respond to increasingly angry calls in the US for him to be seen to do something. But sometimes this approach is downright damaging.

An attempt retrospectively to get tough with BP by bringing criminal charges will not help us now. Indeed, the prospect of a hugely expensive lawsuit in addition to the damage to the company's reputation in the US has already driven the BP share price down; there are likely to be cuts in the dividend. Some 40 per cent of BP profit is derived from the US.

One in every six pounds that UK institutions earn in dividends is derived from BP: a reduction will have a direct, adverse effect, not just on fat cats, but on British pensioners. This is bad for all of us. We can understand American anger at this environmental and human catastrophe but the punitive approach to BP will help no one.

Agreed--criminal charges are a nonsense. All the same, the usual suspects--Senators Charles Schumer (D-NY) and Ron Wyden (D-OR)--are calling on BP not to pay $10 billion out in dividends in anticipation of further obligations arising from this spill. I wonder how those UK pensioners would feel if BP is turned into a "growth stock" via American legislation:

Two Democratic senators pressed BP on Wednesday to delay plans to pay shareholder dividends worth an expected $10 billion or more until the full costs for cleaning up the oil spill in the Gulf of Mexico are calculated. Sens. Chuck Schumer of New York and Ron Wyden of Oregon called it "unfathomable" that the oil giant would pay out a dividend to shareholders before the total cost of the cleanup is known. In a letter to BP CEO Tony Hayward, the lawmakers said taking action to "move money off of the company's books" will make it more difficult for BP to pay the U.S. government, fishermen and others affected by the environmental disaster.

BP PLC has paid an estimated $1 billion to clean up the oil leak and expects to spend billions more. BP spokesman Toby Odone called the distribution of dividends "a company matter" that will be decided by company leaders. BP paid $10.4 billion in dividends last year and $10.3 billion in 2008.

But, does Tony Hayward listen to AC/DC? I think he's doing a fair bit of headbanging right about now. And definitely, he's got the (litigious) Yanks covered in oil. Send John Edwards to New Orleans, ASAP.

It will be interesting to see how transatlantic relations will be affected by this spill. The Tories are usually sycophantic towards the Yanks, but their coalition partners the Lib Dems aren't. Perhaps Deepwater Horizon will finish off the hoary notion of a "special relationship" once and for all.

WTO Bashes PRC in Trade Report; So Does US

There appear to be some fireworks in store as the WTO is about to release its biannual survey of China's trade practices in a Trade Policy Review. Think of it as the trade equivalent of the IMF's Article IV surveillance. This publication is the third such report to come out since China joined the WTO in 2001. The ever-reliable Reuters alerts us to potentially controversial viewpoints aired by the WTO. Although it's supposed not to take sides in looming trade disputes, it's said to clearly fault China on disallowing the export of rare earth metals and other important but not-so-abundant raw materials (more on this in a recent post):

China's curbs on exports of some raw materials to conserve resources may not meet the stated goals while giving Chinese manufacturers an unfair advantage, the World Trade Organization said on Monday. The remarks, in a report prepared for China's two-yearly trade policy review, constituted a rare comment by the WTO's secretariat on a current dispute between members.

By cutting off exports of some raw materials, China makes them more expensive for foreign manufacturers who use them while making them cheaper for its own processing industry, which is able to sell finished goods abroad more cheaply than foreign competitors can. China's restrictions on raw materials sales have been challenged by the United States, European Union and Mexico, and the WTO set up a panel in December to rule on the complaints...

China uses restrictions such as prohibitions, licensing, quotas, taxes and partial tax rebates to manage certain exports in order to conserve resources and energy, it said. The report questioned whether this approach was economically effective, and noted that such restraints tend to reduce export volumes of the targeted products, diverting supplies to the domestic market and depressing their domestic prices.

"Export restraints... may implicitly assist domestic downstream processing of the products concerned," it said.

For trade law junkies, the pending case at the dispute settlement referred to above is DS 398. So China has received a fairly hard time from the WTO. Those critical of the WTO will probably say that the US is simply getting its policy preferences across since it basically set the outlines of the organization. However, note that the current US Permanent Representative to the WTO Michael Punke is, if anything, even more critical of China than the WTO. In addition to it limiting the export of critical raw materials, Punke lodges a laundry list of grievances against China's trade practices, saying that progress towards trade liberalization since 2006 has stalled:

Turning to the analysis in the Secretariat’s Report, the United States notes its disagreement with the Report’s broad assertion that “China has maintained its long-term strategy of gradually opening up its economy to international trade and FDI” since its Trade Policy Review in 2008. In the United States’ view, this statement should be qualified.

In the first years after China’s accession to the WTO, China made noteworthy progress in adopting economic reforms that facilitated its transition toward a market economy and increased the openness of its economy to trade and investment. However, beginning in 2006, progress toward further market liberalization began to slow.

By the time of China’s Trade Policy Review in 2008, the United States noted evidence of a possible trend toward a more restrictive trade regime, citing several Chinese measures signaling new restrictions on market access and foreign investment in China. At the root of many of these problems was China’s continued pursuit of problematic industrial policies that relied on excessive government intervention in the market through an array of trade-distorting measures designed to promote and protect domestic industries. This government intervention appeared to be a reflection of China’s historic yet unfinished transition from a centrally planned economy to a free-market economy governed by rule of law.

Since China’s Trade Policy Review in 2008, there is increasing evidence of such a restrictive trend. Examples from the past two years include: (1) the continued and incrementally more restrictive use of export quotas and export duties on a large number of raw material inputs; (2) the selective use of other border measures such as value-added tax rebates to encourage or discourage exports of particular products; (3) the setting and enforcement of unique Chinese national standards, such as an informal requirement that all new 3G mobile handsets be enabled with a unique Chinese national standard for wireless Internet access; (4) China’s government procurement practices, including an array of new central, provincial and local government “Buy China” policies; (5) a new Postal Law that excludes foreign suppliers from a major segment of the domestic express delivery market; (6) impediments to the foreign supply of value-added telecommunications services and an informal ban on new entrants in China’s basic telecommunications sector; and (7) continuing significant restrictions on foreign investment in China, along with continuing consideration of “national economic security” when evaluating foreign investment through mergers and acquisitions.

As plentiful as it may seem, the above is only an excerpt of a very long list of US bellyaching about China's trade practices. Still, it's notable that currency matters were not brought up, as it does focus more on conventional trade-related issues (or those which have been subject to legal action at the WTO in the past).

The final report is yet to be posted on the WTO site, but I'll update this post when it is. At the end, of the day, though, it boils down to this question for Ambassador Punke & Co: so what are you going to do about it? Don't wimp out all the time like Geithner if you want some respect. Show them you're a real man, not a punk, Punke...

2/6/2010 UPDATE: The 2010 China Trade Policy Review has finally been posted on the WTO site.

Cross-Retaliation: Poor Countries' WTO Weapon

For reasons I can no longer remember, I signed up to e-mailed newsletters from the Berkeley Electronic Press featuring open access journals. Aside from the Journal of Globalization and Development which I've commented on before, they also publish The Law and Development Review. The latter journal now has an article which should be of interest to anyone interested in trade and development. Although developing countries have scored major legal victories at the WTO against developed ones--think of Antigua versus the United States over online gaming or Brazil versus the United States over cotton--their luck at obtaining compliance from the trade titans (US/EU) has been decidedly mixed.

The problem is that the US and EU have become extremely adept at delaying and watering down sanctions imposed by the WTO's judicial body, the Dispute Settlement Mechanism (DSM). Insofar as developing countries cannot apply remedies against similar products and services given their trade mix (the US doesn't offer substantial online gaming services in Antigua, for instance), they have had to cross-retaliate in accordance with approved WTO remedies. That is, they can apply sanctions in other products or services to compensate for damage caused against them.

In today's article for your consideration, Shamnad Basheer over at the National University of Juridical Sciences in Kolkota, India, submits that cross-retaliation is best done against offending bigwigs by waiving intellectual property (IP) provisions. Remember, developed countries have been very, very keen on enforcing this controversial aspect of the WTO. He suggests escalating sanctions in, you got it, hitting them where it hurts. See what you make of his idea. Below is the abstract; you can access the entire article online after registering as well:

The biblical David vs. Goliath paradigm plays out very frequently in international trade disputes. In 2003, a tiny island state, Antigua and Barbuda (hereafter Antigua) took on the United States (hereafter U.S.) in a WTO (World Trade Organization) dispute, alleging that the U.S. violated the General Agreement on Trade in Services (hereafter GATS) obligations by effectively foreclosing its borders to overseas internet gambling services. It won at both the panel and the appellate levels. However, to this date, it has been unable to secure compliance by the U.S.

This paper considers “cross retaliation" by suspending intellectual property rights under the Trade Related Intellectual Property Rights Agreement (hereafter TRIPS) as a viable remedy for developing countries such as Antigua that often find themselves at the receiving end of WTO inconsistent measures maintained by countries that are economically more powerful.

Towards this end, it proposes a “Tiered IP suspension model," where certain kinds of Intellectual Property (hereafter IP) are targeted first for suspension before others, depending on the ease of objectively ascertaining the harm caused by the unauthorized use of such IP and/or the potential to induce compliance by the defaulting state. Illustratively, copyrights over sound recordings that have established rates for public performance are targeted first. If working with this tier of IP subject matter does not yield desired results, then the complaining state moves on to other IP where it is relatively more difficult to compute the loss caused to the IP owner (such as pharmaceutical patents) but which may be a more powerful tool to induce compliance. Such a model could be useful for a large number of developing countries, such as India and Brazil, that often find that, despite WTO victories, scofflaw states such as the U.S. and EU fail to comply. Towards this end, this paper offers a very concrete “development" oriented international trade law remedy.

Next WTO Battleground: PRC Resource 'Hoarding'

Boy, these certainly are interesting days. A recurring complaint of China regarding bellyaching over trade imbalances is that many Western high-technology goods the Chinese would like to buy are off limits to it. That is, many are hands-off to the PRC over "dual use" concerns [1, 2]. True, the West often fans these fears of growing Chinese military power. However, if the West were to act more consistently in both security and trade domains, then it would at least consider lifting restrictions on more of these technologies in the interest of alleviating global economic imbalances. As Tesco's slogan says, every little helps.

Or does it? Call it tit-for-tat of a sort, but China has long been an important source of materials necessary in the production of these "dual use" technologies the West has wanted to keep from China and other goods. Given increasing resource scarcity--they call many of them "non-renewable" for excellent reasons--China has begun applying stricter controls of the export of these key materials. As a matter of historic precedent, the World Trade Organization has primarily been concerned with import restrictions, not export restrictions. However, there is already agitation that limits on the export of these key materials will be the next trade battleground. Indeed, many developed countries are mulling a case against China at the WTO. James Bacchus, former chairman of the WTO's Appellate Body, explains why in the Wall Street Journal:

The international trading system is about to encounter an entirely new challenge. The global hunger for natural resources is inspiring a surge in restrictions on exports of crucial raw materials. As with so much else in trade nowadays, the focus of this emerging conflict is on China. The Chinese stand accused by some trading partners of hoarding rare elements and other raw materials that are essential to many globally traded products.

But China is hardly the only country considering export restrictions as the race for natural resources heats up in the wake of the recession. The sharp increase in restraints is happening world-wide, and raises fundamental questions about the rules and the resiliency of the World Trade Organization...

Historically, however, conflicts over trade have almost always been about import barriers. It remains to be seen whether the current rules of the WTO-based trading system are strong enough to resolve the growing number of disputes over restrictions on exports.

The first test will likely come from a pending lawsuit in the WTO by the United States, the European Union and Mexico, challenging alleged Chinese export restrictions on nine key raw materials such as coke, bauxite, fluorspar and magnesium. These are vital to the production of steel, aluminum and certain chemicals. China produces 60% of the world's coke, and is a major producer of the other raw materials.

A second, and much tougher test, will come if the U.S., the EU, Japan and other affected countries follow up by filing a WTO complaint challenging increasing Chinese restrictions on the export of "rare earth elements." These are basic and so far irreplaceable parts of electronics that are bought and sold throughout the global economy.

China mines 93% of the total world production of 17 rare earth elements in the middle of the periodic table. Global demand for them is rising. They are used, often in small amounts, to make magnets, lasers, computer monitors, fiber-optic cables, cell phones, ceramics, stainless steel and much more. Importantly, rare earth elements are critical to new green technologies. Their magnetic properties are important to low-energy light bulbs and wind turbines, and essential to producing batteries for hybrid and electric cars. And, ominously, these elements have extensive military uses. Missiles, radar, navigation, jet engines, "smart" weapons and other cutting-edge military hardware all require rare earth elements [my emphasis obviously].

The General Agreement on Tariffs and Trade prohibits all measures that restrict the quantity of exports of a product unless they are applied as export duties, taxes or other charges ["made quantifiable"]. Thus, WTO member states are free under the current rules to impose export taxes instead of bans, quotas or other quantitative export restrictions.

However, as a condition of membership in the WTO, China agreed to eliminate taxes and other charges on all exports except those on a list of 84 products included in its WTO accession agreement. Neither the nine raw materials in the current WTO case nor the 17 rare earth elements are among the products that China listed.

The GATT permits measures that would otherwise violate WTO rules if they are "relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption," and if they are not applied as a means of "arbitrary or unjustifiable discrimination." This is likely to be China's defense in the raw materials case, and, should there be one, a rare earth elements case as well.

Ooh, the irony of it--Western countries claiming that China isn't exporting enough! Well here's my latest modest suggestion for setting matters right and it's pretty simple if you follow: if these developed countries want guaranteed access to these materials, isn't it only fair that the high-technology goods they are used in be made available to China?

"Dual use" = "protectionism." Nuff said.

Why EU Won't Play 'Bash RMB at WTO' With US

I almost forgot to post this, so today is as good a time as any. Nowadays, there is much commentary emanating from the Peterson Institute for International Economics--formerly just the Institute for International Economics--on how the United States should engage the World Trade Organization in bashing China over the value of the renminbi. Arvind Subramanian thundered that, well, a weak RMB is not just a problem for the United States but the rest of the world in a March op-ed in the Financial Times. Meanwhile, Peterson Institute Director Fred Bergsten has been, if anything else, even more strident than Subramanian in calling for congressional action. Here are some excerpts from what Fred said before the House Ways and Means Committee on "Correcting China's Exchange Rate: An Action Plan" on 24 March 2010--right before the Treasury decision on the currency practices of US trade partners scheduled for 15 April was delayed -

Much of the blame for this failure of policy to date falls on the US Government, which has been unwilling to label China the currency manipulator that it has been so clearly for a number of years. The unwillingness of the United States to implement the plain language of the Trade Act of 1988 has substantially undermined its credibility in seeking multilateral action against China in the IMF, the WTO, the G-20 or anywhere else. A sensible and effective strategy must begin by reversing that feckless position [but Dr. Bergsten, how do you really feel?]

Hence I would recommend that the Administration adopt a new three-part strategy to promote early and substantial appreciation of the exchange rate of the RMB:

1. Label China as a “currency manipulator” in its next foreign exchange report to the Congress on April 15 and, as required by law, then enter into negotiations with China to resolve the currency problem.

2. Hopefully with the support of the European countries, and as many emerging market and developing economies as possible, seek a decision by the IMF (by a 51 percent majority of the weighted votes of member countries) to launch a “special” or “ad hoc” consultation to pursue Chinese agreement to remedy the situation promptly. If the consultation fails to produce results, the United States should ask the Executive Board to decide (by a 70% majority of the weighted votes) to publish a report criticizing China’s exchange rate policy.

3. Hopefully with a similarly broad coalition, the United States should exercise its right to ask the World Trade Organization to constitute a dispute settlement panel to determine whether China has violated its obligations under Article XV (“frustration of the intent of the agreement by exchange action”) of the WTO charter and to recommend remedial action that other member countries could take in response. The WTO under its rules would ask the IMF whether the RMB is undervalued, another reason why it is essential to engage the IMF centrally in the new initiative from the outset.

Bergsten's China-bashing effort involves a rather optimistic sequence and, as you can read, a lot of "hopefully". First, Treasury must label the PRC a currency manipulator. Second, this action will supposedly prompt other aggrieved nations to impel the IMF into action by investigating China's antisocial currency practices. Third, the IMF having presumably determined that China is a currency manipulator, the anti-China bandwagon shifts fora to the WTO. At the WTO, the dispute settlement mechanism (DSM) can now rule on what sort of sanctions can be applied against China on the grounds that it violates Article XV of the GATT (text here).

As before, I believe that getting other countries to play along will the Peterson boys is a long shot. With so many developing countries still under "managed float" currency regimes similar to China's, it is unlikely that they will sign on to measures that will of course make them vulnerable to future currency bashing by Western nations in search of scapegoats. All the while, I can only wonder why Dr. Subramanian from India has such a narrow, parochial, and Amerocentric view of world politics.

And here's the punch line: a much more sensible voice is that of EC Trade Commissioner Karel de Gucht. Recently, the Belgian bigwig came to speak at the LSE and made much sense which is really no surprise as his current post is one of the most important posts in the EC. He basically scoffs at the notion that the EU will play along with an American action along these lines for the commonsense reason that China isn't likely to say yessuh, yessuh and back down easily:

Threatening China with WTO sanctions will not convince Beijing to revalue its currency, the European Union trade chief said following a meeting with his Chinese counterpart on Tuesday. Chinese Commerce Minister Chen Deming said the yuan was not undervalued and reiterated that China would only adjust the currency's exchange rate if it were beneficial to its own economy, EU trade commissioner Karel De Gucht said.

"I am quite convinced that they are going to do it for themselves and that openly insisting on it and even thinking about procedures within the WTO...is not going to resolve the matter," De Gucht told reporters. According to World Trade Organisation rules, countries are not permitted to use their exchange rate policies to counteract commitments to open trade. This stipulation about exchange rates has never been tested in practice in a WTO case.

Still, if the US is really up for it, I guess there's only one way to find out, eh?