Global Business Dialogue TTALK

“Blowing up the trading system” — Clyde Prestowitz’s suggested way for the world to move forward in light of China’s economic system

Terence P. Stewart · March 31, 2021 · WTO reform · Canada, China, Clyde Prestowitz, European Union, France, Germany, Global Business Dialogue TTALK, Italy, Japan, United Kingdom, United States · No Comments

The Global Business Dialogue (GBD) publishes periodically “THE TTALK QUOTES”. On March 30, 2021, GBD posted a TTALK Quotes on “CHINA, THE TRADING SYSTEM, AND THE ALTERNATIVES” with a quote from Clyde Prestowitz, ‘[There is] only one alternative – “blowing up the system” or, more politely, creating a new or alternative system.”

The quote is from a Washington Monthly article by Mr. Prestowitz from March 24, 2021 entitled, “Blow Up the Global Trading System, Yes, really. U.S. and international efforts to stop Beijing’s economic onslaught haven’t worked. It’s time for President Biden to go big,” https://washingtonmonthly.com/2021/03/24/blow-up-the-global-trading-system/. Mr. Prestowitz has a new book out, The World Turned Upside Down (Yale University Press, 2021) and some of the recommendations in the Washington Monthly article reflect his thinking from his new book.

While the title is provocative, the concerns expressed are similar to the ones reviewed in Amb. Dennis Shea’s remarks to the Coalition for a Prosperous America and those expressed last year by Mogens Peter Carl that China’s economic system isn’t consistent with the WTO rules and China has no intention of modifying its approach to global trade. See March 29, 2021: China and the WTO – remarks by Dennis C. Shea to the Coalition for a Prosperous America, https://currentthoughtsontrade.com/2021/03/29/china-and-the-wto-remarks-by-dennis-c-shea-to-the-coalition-for-a-prosperous-america/.

Unlike Mr. Carl’s call for market economy countries to withdraw from the WTO and start a new organization, Mr. Prestowitz proposes in the Washington Monthly article “Reinventing the Globalization System” which involves seven action steps.

The first is for the United States “to impose a Market Adjustment Charge (MAC) on all non-direct investment (not in new means of production) into the United States.” The MAC is explained in his new book (pages 276-277) but is a charge that would vary based on the size and trend of the U.S. trade deficit.

The second step “would be for the International Monetary Fund (IMF) to adopt Keynes’ Bretton Woods proposal that all countries should have balanced trade in the medium to long term.” To achieve this result, a duty would be applied on imports from countries that run persistent trade surpluses.

The third step would be for the United States to seek strong enforcement within the IMF and by the U.S. Department of the Treasury.

The fourth step would be forming a supersized FTA including USMCA, CPTPP and the EU, and open to other market economies. Prestowitz calls this grouping the “Free World Free Trade Agreement”.

The firth step addresses the need for market economies to improve their competitiveness against the state directed and massively subsidized world of China. The step calls for the creation of “a free world high technology leadership project”

The sixth step calls on the U.S. to reorganize government and concentrate resources to support the technology leadership initiative.

The final step involves actions the U.S. can take to spur domestic manufacturing (use of Defense Production Act, curbing corporate lobbying, and review corporate overseas investment plans.

In his book, Mr. Prestowitz has a chapter on actions the U.S. should take to regain its leadership position. It starts with a Market Access Charge, calls for the imposition of a value added tax and a host of actions to ensure the U.S. is “the world’s most competitive economy.” Page 278.

U.S. actions are aimed at improving U.S. competitiveness

A number of the actions Mr. Prestowitz calls for on U.S. competitiveness are similar to actions being introduced today in part 1 of President Biden’s American Jobs Plan (est. cost of $2.5 trillion). See White House Briefing Room, FACT SHEET: The American Jobs Plan, March 31, 2021, https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/. Excerpts are copied below. The full fact sheet is then embedded.

“While the American Rescue Plan is changing the course of the pandemic and delivering relief for working families, this is no time to build back to the way things were. This is the moment to reimagine and rebuild a new economy. The American Jobs Plan is an investment in America that will create millions of good jobs, rebuild our country’s infrastructure, and position the United States to out-compete China. Public domestic investment as a share of the economy has fallen by more than 40 percent since the 1960s. The American Jobs Plan will invest in America in a way we have not invested since we built the interstate highways and won the Space Race.

“The United States of America is the wealthiest country in the world, yet we rank 13^th when it comes to the overall quality of our infrastructure. After decades of disinvestment, our roads, bridges, and water systems are crumbling. Our electric grid is vulnerable to catastrophic outages. Too many lack access to affordable, high-speed Internet and to quality housing. The past year has led to job losses and threatened economic security, eroding more than 30 years of progress in women’s labor force participation. It has unmasked the fragility of our caregiving infrastructure. And, our nation is falling behind its biggest competitors on research and development (R&D), manufacturing, and training. It has never been more important for us to invest in strengthening our infrastructure and competitiveness, and in creating the good-paying, union jobs of the future.

“Like great projects of the past, the President’s plan will unify and mobilize the country to meet the great challenges of our time: the climate crisis and the ambitions of an autocratic China. It will invest in Americans and deliver the jobs and opportunities they deserve. But unlike past major investments, the plan prioritizes addressing long-standing and persistent racial injustice. The plan targets 40 percent of the benefits of climate and clean infrastructure investments to disadvantaged communities. And, the plan invests in rural communities and communities impacted by the market-based transition to clean energy.”

FACT-SHEET_-The-American-Jobs-Plan-_-The-White-House

Reform of the WTO or a different approach?

The U.S. is looking to push WTO reform and work with trading partners to address challenges posed by China’s economic model. The EU and Japan are similarly looking at WTO reform as a way forward. See, e.g., February 18, 2021, The European Commission’s 18 February 2021 Trade Policy Review paper and Annex — WTO reform and much more proposed, https://currentthoughtsontrade.com/2021/02/18/the-european-commissions-18-february-2021-trade-policy-review-paper-wto-reform-and-much-more-proposed/.

The G7 trade ministers are meeting today. See Reuters, UK trade minister tells G7: We must stop fragmentation of global trade, March 31, 2021, https://www.reuters.com/article/britain-trade-truss-idUSS8N2L708T. The seven G7 countries are Canada, France, Germany, Italy, Japan, the UK and the US (EU participates as a guest). WTO reform is one of the topics being discussed today. The U.S., EU and Japan have been working on potential reforms to the Subsidies Agreement to address the massive industrial subsidies provided by China as well as looking at potential disciplines on state-owned/invested enterprises and forced technology transfer. However, in a consensus system like the WTO, it is hard to imagine meaningful reforms that will address Chinese distortions achieving results within the WTO.

The U.S. is not presently considering a “Free World Free Trade Agreement” as proposed by Mr. Prestowitz. The U.S. is also not proposing pulling out of the WTO as suggested last year by Mogens Peter Carl and entering into a new organization that is limited to market economies. Each of the U.S. and the EU have the ability to act unilaterally if necessary but obviously that is a less desirable approach to global governance.

So it is likely that the U.S., EU, Japan and other leading market economies will continue to seek reform within the WTO but with likely limited results putting pressure on free trade agreements or on plurilateral arrangements to achieve a trade regime acceptable to the major market economies.

Mr. Prestowitz’s article and recent book are well done and raise some interesting ideas for addressing U.S. trade concerns with China. Some of his ideas have been advocated for by others before and have significant potential whether they have much political possibility for adoption. But in a changing global trade environment, his writings are a useful contribution and worth reading by those in trade policy positions.

For the Biden Administration, new trade agreements do not appear to be a short-term objective. Getting control of the pandemic through vaccinations and building back better through the jobs bill are the two major priorities. Trade can contribute to both, but a push for Free World Free Trade Agreement is not likely in the Biden years.

Still China’s economic system and incompatibility with the WTO are major concerns for many countries including the United States. Reform of the WTO would obviously be the best outcome for addressing China’s distortions. While hope spring eternal, the Ministerial Conference in late November 2021 in Geneva will give an idea of whether meaningful WTO reform is likely in the cards in the coming years. Such reform is highly unlikely to happen during the 2020s, if ever.

Mr. Carl’s suggestion of mass withdrawal from the WTO and creation of a new entity of market economies is interesting in addressing the blocking capacity of China but seems improbable because of China’s size and importance. With no major economy having suggested any interest in the idea, it seems implausible in the 2020s, if ever.

Mr. Prestowitz’s idea for a super-FTA of market economies is doable within the WTO and simply depends on majors like the U.S., EU, Japan and others being willing to put in the effort. But the U.S. and EU have not been able to make meaningful progress on an FTA or even harmonization of regulations over recent decades. If past is prologue, it is unlikely that such an undertaking will occur in the 2020s either, if ever.

As British trade minister Liz Truss is reported to have said to her G7 fellow trade ministers, “We need to reverse the fragmentation of global trade and get the global system and WTO working again, otherwise we risk big countries going their own way and operating outside an agreed set of rules, which always spells trouble.” Reuters, UK trade minister tells G7: We must stop fragmentation of global trade, March 31, 2021, https://www.reuters.com/article/britain-trade-truss-idUSS8N2L708T. China has effectively been going its own way even after joining the WTO at the end of 2001. Actions by the U.S., EU and others in recent years have occasionally been outside of the agreed set of rules as well. So a fourth option is that of the collapse of the global trading system (actually or practically) with a law of the jungle reasserting itself.

Time will tell which direction global trade will take.

China’s trade restrictive actions against Australia — what they say about China’s compliance with notification requirements and the importance of market-economy conditions in global trade

Terence P. Stewart · October 23, 2020 · China, industrial subsidies, non-market economy, State Ownership and State Investment, transparency, WTO reform · Australia, barley, beef, Brazil, China, coal, cotton, European Union, Global Business Dialogue TTALK, Japan, wine · No Comments

One of the challenges companies and trading partners of China have faced in having the global rules of trade actually honored by China has been the informal actions of China’s government at the central, provincial and local level which result in clear violations of WTO obligations as well as the fear of retaliation companies trading with China may face if specific examples of non-compliant actions are raised bilaterally or through dispute settlement.

In yesterday’s Global Business Dialogue TTALK entitled “China and Aussie Cotton,” the challenges that Australia’s cotton producers are facing in China are reviewed including apparent verbally communicated requirements to Chinese cotton purchasers not to buy Australian cotton. See Global Business Dialogue TTALK of October 22, 2020, “China and Aussie Cotton,” https://myemail.constantcontact.com/CHINA-AND-AUSTRALIAN-COTTON—-TTALK-FOR-OCTOBER-22.html?soid=1101547782913&aid=L4XRKbnPF_A. The post has links to various sources for the concerns raised in the post.

A good summary paragraph from the TTALK piece follows:

“All of that said, this has been a tense year for China-Australia trade, as China has taken aim at one Australian export after another to signal its displeasure with Australian policies. Australian barley, beef, and wine were hit with import restrictions earlier. Last week it was coal and cotton – what might be called Australia’s black and white exports to China. This time, though, China’s restricted policies were not in black and white. They were instead oral instruction to Chinese buyers of those products not to buy from Australia.”

As the WTO Members consider reforms needed to improve the functioning of the global trading system, the challenges Australian producers are facing in having access to the Chinese market should help inform some of the critical challenges and needs.

Obviously, there are transparency requirements on all WTO Members on actions taken that affect access to a Member’s market. It is unlikely that any of the non-written actions, policies or practices taken by the Chinese government at the central, provincial or local level that affect foreign goods or services or foreign investors are notified to the WTO. If so, this is a major problem in the third leg of the WTO structure – notifications and oversight. While similar problems may exist for other WTO Members, the Australia example is a clear instance where China has discriminated against products of a trading partner without formal notification or justification.

Similarly, the Australian example raises concerns about China using the influence of the state to distort trade outcomes. This is, of course, the core concern of the United States, Japan, Brazil and others that the global trading system is premised on market-economy conditions within WTO Members and that systems like that of China don’t fit well under existing global rules. The state directing companies not to purchase commodities like cotton from foreign suppliers is inconsistent with such market-economy conditions.

For any reform initiative to permit the WTO to ensure conditions of fair trade in the global market, state actors need to sit out the vast majority of trade actions involved in the production, sale, import and export of goods and services. There have been proposals to date to address some of the notification deficiencies that exist, but nothing really focused on informal actions of states. Similarly, the U.S., Japan and the EU have also identified a series of issues (industrial subsidies, forced technology transfer) where the existing rules of the WTO are inadequate to address some of the distortions caused by economic systems like that employed by China. It is unclear that the areas being considered deal with some of the distortions flagged in the Australian case or the issue of threats or acts of retaliation by a WTO Member against companies engaged in trading with the Member or who have invested in the Member. While China is certainly a Member where companies often complain privately about retaliation or threats, China is not alone in that regard.

Without serious reform to address these and other existing problems as well as update the rules to reflect 21st century trading realities, countries will need to increasingly look outside the WTO for tools to address the distortions created.