THE TTALK QUOTES
On Global Trade & Investment
Published Three Times a Week By:
The Global Business Dialogue, Inc.
Washington, DC   Tel: 202-463-5074
Email: Comments@gbdinc.org
No. 9 of 2017
WEDNESDAY, FEBRUARY 15, 2017


Click  here for last Friday's China quote from Ed Brzytwa. 
CHINA: THE TRADING SYSTEM'S STRESS TEST

"There are few existing rules that deal with the types of distortions the Chinese system has created and continues to create. Whether new rules can be negotiated bilaterally with other countries, with China, and within the WTO is a major question that goes to the viability of the existing trading system."

Terence P. Stewart
January 27, 2017
CONTEXT
Terry Stewart is the Managing Partner at the law firm of Stewart and Stewart, and he was the last of five speakers at the GBD China event on January 27. He had been asked to cover a lot of ground, and he did so impressively. Unfortunately, the limited format of the TTALK Quote means that we can only highlight a very few of the many points he made. The audio file of his full presentation is available on the GBD website, however, as are the PowerPoint slides he shared. And looking ahead, we expect we'll be coming back to this presentation in the weeks ahead, as the China debate evolves. 
 
Most, if not all, of the facts Mr. Stewart shared led in one way or another to the question implicit in today's featured quote. That is, given both China's enormous weight in the global trading system and China's patterns of conduct since becoming a member of the WTO in 2001, has the time come to reassess the global trading system and China's role in it? 

Three of the elements that went into Mr. Stewart's discussion of that question were 1) the assumptions underlying America's efforts to bring China into the WTO in the first place; 2) perspectives on the U.S. trade deficit, and in particular America's bilateral deficit with China; and 3) the disturbing effects of China's massive overcapacity in key industries, notably steel, aluminum, and tires. We'll take them one at a time. 

America's Trade Policy Assumptions in the 1990s. Mr. Stewart set the scene this way: 

"When the U.S. was negotiating a bilateral trade agreement with China in the late 1990s, we were running a trade deficit in goods of about $39 and a half billion dollars in 1996. That grew to $83 billion dollars in 2001 by the time that China joined the WTO in December. Talk in the Administration and Congress in the 1990s was that having China as a member of the WTO would be good for the U.S. and would lead to a reduced trade deficit with China, as they would be dismantling many barriers and lowering relatively high tariffs versus the U.S. and other WTO members who would not be further opening their markets to China from the accession. That, at least, was the idea. 

"Well, there is no doubt that WTO membership has been good for China and that U.S. exports of goods and services to China have grown significantly, and many U.S. companies have invested in China to take advantage of a growing Chinese market." 

"There can also be no doubt that the relationship between the U.S. and China remains as distorted today as it was back in 2000.
  Despite WTO commitments made by China, China has engaged in massive subsidization, development of national champions, [and] limiting market access to many U.S. goods."

And that was just the beginning of a much longer list. 

The Bilateral Trade Deficit. This is not an area where Mr. Stewart seemed the least bit sanguine nor inclined to accept the view that, well, things are getting better. As he explained:

"Between 2001 and 2015, the trade deficit in goods grew to $367.2 billion dollars. In fact, it went up every year with the exception of the recession year of 2009. ... Over the '96 - 2015 time period, and through November of 2016, the collective trade deficit in goods is a staggering $3.89 trillion dollars with China alone. "

A little later in his remarks, Mr. Stewart referenced and responded to the calming argument that U.S. exports to China are growing faster than imports from China. He said: 

"If the rate of growth of our imports from China and the rate of our growth of our exports to China continued as they did between 2000 and 2015 to 2030, our trade deficit in goods with China would ... [then be] $1.5 trillion dollars, even though our exports are growing at twice the rate of our imports. 
 
"... When you see discussion about our trade balance, and how well we're doing with China, we're told that exports grew twice as fast as imports - put pennies on one side and dollars on the other and say, if I'm doubling the number of pennies I'm getting and I'm only increasing by 50 percent the number of dollars, which pile would I rather have over the next 10, 15 years? The answer turns out to be pretty obvious, and that, in fact, is what is going on."

For Mr. Stewart, those trade imbalances-more accurately, the policies behind them-have consequences. " The toll on American manufacturing has been horrific," he said. 

When it comes to China's trade distorting policies, the giant factor in Mr. Stewart's remarks was China's enormous overcapacity in certain sectors. Steel, aluminum, and tires were the sectors he focused on. But, that overcapacity too is as much a result as it is a cause. "A colleague of mine," Mr. Stewart said, "has done a fair amount of research on the subject of China's excess capacity. China's investment driven growth model, in her view, is the main driver for its excess capacity." 

 Terence Stewart
Stewart & Stewart 


China & Aluminum. Steel gets the lion's share of the headlines when it comes to China's excess capacity and the story on tires is pretty impressive too. In this entry, however, we'll focus on some of what Mr. Stewart had to say about aluminum.

MR. STEWART: 
 
"Another sector receiving a lot of attention has been the Chinese aluminum sector. It's trajectory has been just as dramatic as that of steel, with capacity increasing from 1.75 million tons in 2000 to 36 million tons in 2015 and going from roughly 10 percent of apparent consumption to more than 50 percent. 
 
"By comparison, U.S. capacity went from 4.2 million tons in 2000 to to 2 million tons in 2015 and has dropped to roughly 1 million tons today, a number which is at or below where we were at World War II. In fact, our production is less, far less, than a million tons in 2016. ...

"In the aluminum sector, China imposes an export duty on unwrought aluminum, which favors furthering processing of Chinese unwrought aluminum in country. While China has had a plan in place to reduce capacities since 2010, recognizing that they're seeing a sector with significant excess capacity, and has been able to claim a reduction of 4 million tons, an amount equal to the U.S. entire production of capacity in 2000, the reality was that, at the same time that they were eliminating 4 million tons, their policies were promoting the addition of an additional 17 million tons. So in a period in which they claimed great success for reducing capacity 4 million, in fact their global capacity or their national capacity went up 13 million tons. 
 
"There have been some aluminum cases around the world, and the U.S. is challenging the large array of subsidies provided to the sector by China in a case filed very recently. Where there are some tools that industries can pursue, in nearly all cases, other countries than China are ceding domestic capacity and production and employment to deal with the crisis that China has created in many sectors. This is a huge problem in the manufacturing sector. It affects the United States, and it affects most other developed and developing countries around the world.
COMMENT
To repeat, Mr. Stewart touched on a number of important issues that we have not mentioned. The nature of the trade advisory system was one. Some thoughts about possible new arrangements in U.S. trade was another. We expect to highlight some of those in other entries. In this Comment Section, however, we will stick to the issues discussed above, namely the U.S. bilateral trade deficit with China, the ability of the WTO to manage global trade in this first half of the 21st century, and the twist of overcapacity. 

On the trade deficit (and jobs), we don't flatter ourselves that we can sort out all of the debates sparked by those numbers with a few cursory sentences here. The only point we will make is that the Chinese market is huge - for many products the largest in the world. That means that American companies - if they want to be successful global companies - simply have to be there. That's China's leverage. We do not doubt that trade has done grievous damage to segments of the U.S. economy, but neither are we blind to the fact that, as bad as the current situation is, it could be made worse. 

Mr. Stewart implicitly faulted all of the U.S. administrations of last 40 years for never producing an estimate of the jobs lost to imports, notwithstanding the fact that the U.S. Government regularly estimates the number of U.S. jobs created by exports. We are familiar with the academic arguments as to why the figures can't be worked out for imports. Maybe those arguments are correct. It is also the case, we suspect, that there is no official imports-to-jobs-lost ratio because no administration has ever wanted to deal with the liability associated with that kind of figure. 
 
In any case, Mr. Stewart came up with his own number - an estimated 1.9 million U.S. jobs lost as a result of imports from China. Whatever the figure, whatever the methodology, we think Mr. Stewart had the politics right when he said, "It is those jobs that the people who voted for the current administration were concerned about." The Administration is going to try to address that problem, he said, " and it isn't going to happen through the incremental approach that most industries feel comfortable with and use and believe is the correct course for bilateral relations."

The WTO and Overcapacity. "China's trading partners," Mr. Stewart said, "have few tools to use on excess capacity." Yes, there are trade remedy cases, but it is not at all clear that they are adequate to the task. As we reviewed his comments in our mind, we found ourselves wondering if the familiar elements of his remarks weren't in fact obscuring how much was new. 
 
For example, when people talk about protectionism, what they think about is import protectionism, the unhappy effect of one country after another raising import barriers in the vain hope of protecting its market and saving jobs. Smoot-Hawley and the 1930s are the usual example. But that is not the charge Mr. Stewart was making against China. What he was talking about-overcapacity-might as well be thought of as export protectionism, an effort to save jobs (and destroy competitor industries) with massive over investment.  

And export protectionism too has had its imitators. Mr. Stewart referenced the phenomenon in his discussion of the numerous trade cases in the steel sector. "While China was the principal target of the cases, spreading dislocation resulted in many countries trying to export their way out of the crisis. So literally hundreds of cases were filed over the last couple of years around the world against producers from many countries." This is a new situation, in degree if not in kind. 

***

It was way back in the middle of the last century, when your editor, a high school student at the time, read Miss Lonelyhearts by Nathaniel West. We don't have a copy now, but this is what we remember. The "hero" of the piece, a man, wrote a Miss Lonelyhearts column for a city newspaper. Some of the letters he received were quite banal. Others beyond poignant. The most memorable for us was the one from the girl born without a nose who asked if she should kill herself. Well, there was quite a bit of class discussion about that. Some even thought she should. 
 
Our takeaway from the whole discussion was this private axiom: In an impossible situation, something has got to give. The U.S.-China trade situation may not be impossible yet, but it is getting there. Something has got to give.
SOURCES & LINKS
A Terence Stewart Presentation is the MP3 recording of Mr. Stewart's remarks at the GBD event on January 27.  This recording, or rather our transcript of it, was the source for today's featured quote. 

Slides from Stewart and Stewart is a link to the PowerPoint deck that Mr. Stewart used to illustrate some of the points in his remarks. 

GBDINC.ORG  is the welcome page of the GBD website.  Here you will find all of the audio recordings from GBD January 27 event. 

TO GET THE TTALK DAILY QUOTE IN YOUR INBOX

Or Other GBD Notices, click below.
©2017 The Global Business Dialogue, Inc.
1717 Pennsylvania Ave., NW, Suite 1025
Washington, DC   20006
Tel: (202) 463-5074
R. K. Morris, Editor