Wednesday, 2 December 2009

From "Made in China" to "Sold in China", and "The People(Party) Wear Prada"

Two years ago, I blogged about a special program by the CNN called "Made in China" in the wake of the tainted milk scandal. Recently, CNN started to air another "Made in China" program. No it is not that the last program was so popular that they want to bring it back. Instead the new one is a TV commercial rumored to have been financed by the MOFCOM (MOFCOM later denied this) in an effort to promote Chinese products.

The key message is the following:
"When it says made in China, it really means made in China, made with the world."

In my view, if China were really serious in taming the increasingly harsh wave of protectionism, it should make a different commercial on "Sold in China". After all, the best way to gain popularly is letting people know that they can make money from you, rather than the other way around. 

Fortunately, China has firmly established its reputation as one of the best (read as "most gullible") customers for foreign goods. According to the People's Daily, China has become the 2nd largest luxury market. Some interesting sound-bites from the People's Daily story:

"In 2008, China's super-rich bought a quarter of the world's luxury goods.

According to the World Luxury Association, affluent Chinese lavished 8.6 billion US dollars on shiny and pretty things last year.

It's estimated that if China continue to grow at a similar pace, the nation will surpass Japan as the world's largest luxury goods market within five years upping its spending to a staggering bill of 14 billion US dollars every year.

Actually I think China might have already become number one, as the data probably doesn't capture the spending made by Chinese citizens in the fashion capitals of the world. Flying to Paris and return overnight just to get the latest Gucci bag has become a popular sport among the Nouveau Riches in China due to the high tariff and tax in the Middle Kingdom. Moreover, I'm not sure if the data includes the sales in HK and Macau, which are also driven primarily by mainland Chinese consumers.

So here are some ideas for the sequel to the popular Hollywood movie: 
1. The People Wear Prada
2. The Party Wears Prada
3. The Panda Wears Prada
4. The Prada Republic of China
5. Guccina

Warning: please don't forget to pay me royalty (for Hollywood producers) or license fee (for fastfood joints selling toys inspired by the same ideas), or legal actions will be taken. 

The Trans-Pacific Partnership (TPP) Agreement

The recent announcement by President Obama raised hopes again that the United States will start negotiations to accede to the Trans-Pacific Partnership (TPP). While such announcement is actually over-due, it is still not a bad news. However. the more important question is: is the TPP itself such a good thing? Recently, several colleagues and I have written a series of op-ed articles about the TPP in the East Asia Forum. Interested readers can find the articles here.

Tuesday, 24 November 2009

More Chinese and fewer Indians in the Secretariat?

It has been reported that India and China jointly sponsored a proposal in the WTO advocating more representation of staff members from developing countries in the WTO Secretariat. While it is understandable that China would want more of its citizens on the Secretariat, it is puzzling that India would support the move.

According to the WTO, out of the total of 629 members of the Secretariat, only 5 are from China, while 12 are from India. In other words, it's less than 1% for China, while about 2% for India. In 2009, China contributed to 5.898% of the WTO's budget, while India's share is only 1.243%. This seems to indicated that India is already over-represented while China is under-represented. If we look at the world trade shares, again the picture is largely the same.

Thus, if India were really serious about its support for China, the first thing it should have done would be asking half of its citizen's on the Secretariat's payroll to resign and give the seats to those from China. 

The only logical explanation seems to be that the claim is based on neither the real trade share or the contribution to the budget. Instead, there are three possibilities:
1. population: but this is rather unlikely. Otherwise, one third of the Secretariat staff members should be either Indian or Chinese;
2. real-world trade share multiplied by different co-efficients for developed and developing countries: but whatever co-efficient we are using, I think it is reasonable to assume that China and India will have the same co-efficient. Thus the net result would still be a very large share for China (assuming, for the purpose of argument, that we multiply developing countries' trade share by 2, this would mean China getting 12% of the seats in the Secretariat, or about 75 people, which would mean that there are at least 3 Chinese in each of the functional divisions excluding the Language Services & Documentation Division - as Chinese is yet an official language in the WTO, it is unlikely that they will work in this devision)
3. Some non-trade-related criterion: however, given that the WTO is a trade body, what is the legitimacy of using non-trade criterion to determine the composition of the Secretariat?

Having excluded all three possibilities, I'm lost. Can anyone enlighten me on this issue?

Monday, 23 November 2009

Zaobao interview on the APEC

I was interviewed in the Lianhe Zaobao, the leading Chinese newspaper in Singapore on the implications of the 2009 APEC Leaders' Declaration in Singapore. The story is reproduced below. You may scroll down for the whole story and an English translation of the article.

My Interview on APEC 2009 in Lianhe Zaobao (Singapore)


Monday, 9 November 2009

Formal ECFA negotiations taking-off?

Eight months ago, I blogged about the proposed ECFA between China and Taiwan. Now it seems that the formal negotiations will finally take off as the researchers from both sides have finished and exchanged the results of their feasibility studies. My take is that the agreement probably will be reached the latest by early 2013, as Hu, who will step down as China's president, will probably want the historical agreement as one of his main legacies (Ma will also probably try to get it done by mid-2012 but he probably will get a second term in the office). 


2009-11-07 09:43 文章来源:商务部新闻办公室
文章类型:原创 内容分类:新闻




The road to free trade: 400th accident missed (or settled?)

The WTO recently issued a press release o celebrate the 400th dispute passing through the gate of centre william rappard. DG Lamy noted that "this is surely a vote of confidence in a system which many consider to be a role model for the peaceful resolution of disputes in other areas of international political or economic relations".  While that may well be the case, one may also argue that had Members really had such confidence in the system, they wouldn't have brought so many disputes in the first place. Another thing worth noting is that the number of disputes have greatly decreased after the first decade, which saw an average of 30 cases brought every year. Does this mean that the system has worked so well in deterring trade disputes from arising in the first place, or that people are losing confidence in the system so that they resort to other means and don't bother to bring cases anymore?

Friday, 6 November 2009

déjà vu: The case on coke and other raw materials

The US, EU and Mexico have requested for the establishment of panel against China's restrictions on certain minerals and other raw materials. One of the items at issue is coke, on which I wrote a paper analyzing another similar complaint against China by the EU a few years ago. The paper could be downloaded free of charge here (of particular relevance are pages 334-348). 

Some key points I made in the paper:
1. Contrary to popular belief, the WTO does not just regulates imports. It also regulates exports;
2. In general, quantitative restrictions (on both imports and exports) are per se illegal in the WTO;
3. However, there are exceptions that the country imposing the restriction could invoke to justify its restrictions;
4. But the country would have to meet stringent requirements in justifying that the measure is necessary, and doesn't constitute unjustifiable or arbitrary discriminations, or is otherwise just protectionism in disguise.

Thursday, 29 October 2009

Two conferences

I will be speaking at two conferences next week. The first is the Asia-Pacific Trade Economists' Conference on Trade-Led Growth in Times of Crisis. Held in Bangkok, this conference is organized by the Asia-Pacific Research and Training Network on Trade (ARTNeT) in collaboration with the WTO, UNCTAD, UNDP and IDRC. The conference will also mark the celebration for the fifth anniversary of the ARTNeT, a research network sponsored by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). Some of the leading trade economists, including Alan Deardorff, Patrick Low, Simon Evenett, Kym Andersen, Patrick Messerlin, KC Fung, and Robert Scollay will be speaking in the conference. As probably the only lawyer among the speakers, I will be presenting my paper on the Trans-Pacific Partnership Agreement (also known as the P4 Agreement).  The Conference brochure is here and the program can be found here. 

The second is a conference on "DSU Reform and Beyond - Enhancing Developing Countries' Capacity to Participate in WTO DSU Proceedings"organized by the ICTSD in Geneva. I will be speaking on the Trade Barrier Investigation mechanism of China.  The agenda can be found here.

Sunday, 18 October 2009

Recent MOFCOM statement on protectionism


2009-10-15 15:57 文章来源:商务部新闻办公室
文章类型:原创 内容分类:新闻




Friday, 16 October 2009

The Monkey Business on Trade and Climate Change

A very colorful statement by Dr. Zhang Xiangchen, current DPR of China
to the WTO. If only every statement in the WTO meetings were so
interesting, then my days at the Secretariat would have been much less


2009-07-14 16:04 文章来源:商务部世贸司
文章类型:原创 内容分类:新闻

Statement on Trade and Climate Change at the CTE Regular Meeting
Dr. ZHANG Xiangchen, DPR of China
10 July 2009

Thank you, Mr. Chairman. On 26 June, the WTO Secretariat and the UNEP
jointly released a Trade and Climate Change Report. I would like to
take this opportunity to make some comments on that report. Since it
is almost impossible not to mention the Bali Action Plan these days
when climate change is at question, please allow me to start by
sharing with you my personal experience with the beautiful Island of

Last month, I went to Bali to attend the Cairns Group Trade Ministers
Meeting as an observer. One evening, I took a walk at the top of a
mountain with my colleague. The view was fantastic, with the sunset,
the wind, the sea tide, and the monkeys jumping around. All of a
sudden, I heard my colleague screaming "MY GLASSES"! There were traces
of claws on his shoulder, glasses on nose gone. Mr. Chairman, you
could imagine how frenzy and yet hopeless we were. But surprisingly,
some local kids managed to exchange the glasses back with some
peanuts. And my colleague hastened to give some dollars to the kids
out of thankfulness.

On the way back to the hotel, we found something odd about the whole
thing. The monkeys took belongings from the visitors; the kids gave
peanuts to the monkeys; the monkeys gave the belongings to the kids;
and the kids returned the belongings to the visitors and got some
rewards. This is an interest chain! Our suspect was confirmed by our
local driver. This interest chain does exist. The monkeys only realize
the correlation between visitors' belongings and peanuts after
repeated hinting and training. As a result, they fill the first and
most critical link in this chain with their agility.

Coming back to the Report of the WTO Secretariat and UNEP, though the
scientific part has been deemed reasonably good, the legal analysis
part has been unfortunately interpreted by the media as "WTO signals
backing for border taxes". A tossed stone raises a thousand ripples.
Drafters of this Report might feel innocent as they seem to have only
tried to explain relevant provisions in the WTO Agreement, such as the
conditions of applying the general exceptions, and there is no
mentioning of backing for border taxes. That being so, they should be
aware that it is beyond the public and media's ability to fully
understand the legal relationship between the general provisions and
the exceptions. One thing is clear to all, though, that any attempt to
levy border taxes comes out for the purposes of restricting the
competitiveness of others instead of fighting climate change. On this
premise, it is impossible for the conditions of applying the
exceptions to be satisfied, such as "no discrimination between
countries where the same conditions prevail". Even President Obama has
said, "At a time when the economy worldwide is still deep in recession
and we've seen a significant drop in global trade, we have to be very
careful about sending any protectionist signals out there". "I am very
mindful of wanting to make sure that there's a level playing field
internationally", "but there may be other ways of doing it than with a
tariff". With this in mind, the international society should express
condemnations with one voice so as to deter others from following
suit. It is only to be expected that the public and media have
suspicions when the focus is placed on exceptions. There are two ways
of interpreting exceptions. One is to say you CAN'T do something
except under very special circumstances. The other is to say you CAN
do something as long as certain conditions are met. The two ways can
make huge differences. I am ignorant of the functions of the
Secretariat, but I do know that trade and climate change is a very
controversial issue. The WTO needs to be very cautious about making
any opinions on it.

Mr. Chairman, current WTO rules is a small cage which is unable to
hold big monkeys such as climate change. The only way out for climate
change and trade measures is first to reach a multilateral agreement
on climate change. This is what DG Lamy has termed as "Copenhagen
first". Then the relationship between climate change and trade
measures could be further clarified under the WTO framework. These
clarifications should still be based on multilateral discussions and
negotiations, and not make way for unilateral measures.

Finally, let me come back to Bali. Our driver was very responsible. He
swayed a bamboo pole in order to prevent the monkeys from approaching
us, in spite that the "Glasses Gate" still took place. But he did his
duty. He didn't act in collusion with the kids. He even reminded us
not to give too much money to the kids since this would encourage the
malconduct. Monkeys are monkeys, wild and difficult to tame, while
people should be clear about their identities and duties.

I thank you for your kind attention.

Wednesday, 7 October 2009



来源:南方都市报 作者:周勇进 时间:2009-3-24 17:31:34














































































自由贸易区:深度开放进行时 2008年11月18日12:09 新华社-�望东方周刊


  建立自贸区如"搞对象",在WTO这个"大池子"里互相认识后,互有好感的转入单独接触,经过一段时间的互相 了解,如果双方都觉得合适,便喜结连理




  "目前已经有一批技术人员赴新西兰就业。而就在协定生效当天,就有一位北京的女大学生获得了假期工作许可。" 商务部国际经贸关系司相关人士告诉本刊记者。


市,人们发现来自智利的葡萄酒越来越多,相比于法国、意大利葡萄酒,智利葡萄酒堪称物美价廉――这得益于中国―智利自 贸区安排……






是一个"全面的高质量的"协定,"新西兰人评价说,这是他们在1983年与澳大利亚签署协定之后20多年来达成的最有 分量的协定"。













  2007年4月,美国宣布与韩国正式达成自由贸易协定,被舆论认为是美国在东亚经济整合圈的边缘上,抢先突破 了一个缺口。

  日本也是如此。近年来,与新加坡、马来西亚、澳大利亚、东盟均建立了自由贸易区,与韩国的自贸区也在谈判当中 。




程碑意义的贸易协定,使中国在自由贸易的奥运会上拿到了第一块重要的个人金牌。中国正在建立自己的双边贸易伙伴俱乐部 。



  有人将结自贸区比喻为"搞对象",在WTO这个"大池子"里互相认识后,相互感兴趣的转入单独接触,经过一段 时间的互相了解,如果双方都觉得合适,便喜结连理。


取舍?商务部副部长易小准曾对谈判对象的选择标准这样定位:战略意义突出、经济互补性强、市场规模大或者资源丰富、推 动和谐发展效果显著。



、冰岛、挪威等国的谈判也在进行中,与印度、哥斯达黎加的自贸区联合研究,即"预谈判"已经完成,与韩国的联合研究也 取得了积极进展。






  15年的艰苦谈判于2001年11月10日结出果实。同时,"挑战和机遇"也被反复讨论,而以开放、接轨促动 国内的改革,是当时人们的一大期许。

  事实是,加入WTO时的热望似乎并未很快落实。多边谈判进展缓慢,双边于是成为自然的选择。隆国强说:"其实 目标是一致的,都是贸易投资自由化。"




只跟谁谈或不跟谁谈。但是如果一开始就选择欧美国家,他们的要求很高,难度会比较大。这有个客观规律在里边,循序渐进 吧!"


Monday, 28 September 2009

"The capitalist cancer of WTO is attacking the lung of Geneva"

The WTO stays in Geneva for now, but isn't it high time for at least one of the Bretton Woods institutions, or any other key global organizations for that matter, to find a new home in Asia given the region's growing importance?

Geneva citizens OK expansion of WTO's lakefront headquarters

Associated Press
09/27/09 10:40 AM EDT

GENEVA — Geneva citizens voted Sunday to approve the expansion of the World Trade Organization's headquarters, despite complaints by some that the project would damage the city's lakeside promenade.

Nearly 62 percent of voters cast ballots in favor of the extension, which is part of the organization's 130 million-franc ($126.6 million) renovation plans. Nearly half of the bill will be funded through interest-free loans that the trade body will have to pay back within 50 years, while the Swiss will pay for the rest.

The plan was supported by the Geneva city and cantonal (state) governments. They argued that a "No" vote in Sunday's referendum would have sent a bad signal to the many international organizations that call the city home and add millions of dollars to the local economy.

The expansion will allow the WTO to move all of its staff to its headquarters at the William Rappard Center, a 1926 building based on a Renaissance Florence villa and overlooking Lake Geneva and the French Alps.

The WTO had been trying to find a solution since space constraints forced it to move more than 100 staff to another building 1 kilometer (less than a mile) away in the center of town. The daily Neue Zuercher Zeitung reported in 2007 that the WTO was threatening to move to Hong Kong, Singapore or another destination if the Swiss refused to meet the organization's demands.

Opposition to the construction was led by members of the city's left-wing parties, who argued that work would harm the parkland around the Rappard building and block citizens from accessing the lake.

"The capitalist cancer of WTO is attacking the lung of Geneva," read one of its slogans.

Geneva beat Bonn, Germany, in a contest for the headquarters of the 1995-created WTO with a package that included tax breaks and privileges like more gas stations with tax-free fuel, and more residence permits for family members of diplomats.

Sunday, 27 September 2009

Carbon and the other C word

According to a recent report published by the LSE, contraception is almost five times cheaper than conventional green technologies as a means of combating climate change. This finding, if indeed true, would put China as the biggest contributor of carbon reduction as the country is, as far as I know, the only country in the world that has enforced a vigorous (some might use the word "harsh") and effective family planning scheme for the past 30 years. On the other hand, the contraception-carbon linkage would put most Western countries and some rich developing countries such as Singapore as the biggest perpetrators of climate change, as these countries have been desperately trying to boost their population growth in recent years. Given the high living standards in these countries, one person born in these countries would on average leave a much larger "carbon footprint" than someone born in a developing country.

According to LSE, the study is based on the principle that 'fewer people will emit fewer tonnes of carbon dioxide'. What a brilliant insight! I'm sure getting rid of human beings altogether would solve not only the carbon problem, but all the problems in the world!

Thursday, 24 September 2009

Of chickens and crabs

As the leading champion of free trade, Singapore doesn't get a lot of coverage in my blog, which is largely devoted to various problematic trade measures. However, last week, Malaysia and Singapore got into a major dispute over where things such as Chili Crab, bak kut teh, laksa and Hainanese chicken rice originated from. Looks like we have a legal battle on geographical indication in the making! Get ready, fellow trade lawyers.

Thursday, 17 September 2009

NYT: Got chicken ...... feet?

Chewy Chicken Feet May Quash a Trade War

Qilai Shen/European Pressphoto Agency

A chicken seller at a market in Shanghai. China has threatened to cut off imports of American chicken in a trade dispute.

Published: September 15, 2009

China is threatening to cut off imports of American chicken, but poultry experts have at least one reason to suspect it may be an empty threat: Many Chinese consumers would miss the scrumptious chicken feet they get from this country.

"We have these jumbo, juicy paws the Chinese really love," said Paul W. Aho, a poultry economist and consultant, "so I don't think they are going to cut us off."

Chicken exports were thrust to the forefront of American-Chinese trade tensions on Sunday when China took steps to retaliate forPresident Obama's decision to levy tariffs on Chinese tires. The Chinese announced that they were considering import taxes on automotive products and chicken meat, a development that some trade experts feared could escalate.

American executives expressed concern about losing what recently has become the largest export market for their chickens, one that is expanding rapidly as the Chinese population grows more prosperous. But the executives also expressed relief that, so far, Chinese importers have told them to keep the feet and wings coming.

"We were told by our customers in China to continue to pack and ship product," said Michael D. Cockrell, chief financial officer of Sanderson Farms, a major poultry producer based in Mississippi. "It gives us a little bit of optimism that we will get over this."

At a time when feed prices are high and domestic chicken sales to restaurants are down because of the recession, the Chinese market is important to the industry. Exports of American poultry totaled $4.34 billion last year. Of that amount, $854.3 million worth of chicken meat (less than 2 percent of total revenue by the American chicken industry) was exported to China and Hong Kong. But industry executives said the exports to China were particularly profitable.

About half of the chicken parts sold to China are wings and feet, which are worth only a few cents a pound in the United States. As delicacies in China, they fetch 60 cents to 80 cents a pound, a price that no other foreign market comes close to matching, according to industry experts.

Mr. Aho said the big chicken feet result from the American preference for white chicken meat. A bird bred for big breasts is necessarily bred to have big, strong feet and legs, he said. The United States is by far the world's leading supplier of king-size chicken feet.

Despite China's fondness for American chicken, the trade has been rife with problems since 2004, when the countries banned each other's poultry products after an outbreak of bird flu. China quickly lifted its ban, but the United States did not, because of continuing concerns about the safety of Chinese chicken.

The Agriculture Department partly rescinded the import ban in 2006 by ruling that China could export cooked poultry meat to the United States as long as it first imported the raw chicken meat from the United States or Canada. But Congress quickly inserted a provision in an appropriations bill that effectively prohibited the import of chickens processed in China, with lawmakers citing unclean conditions.

Rosa L. DeLauro, Democrat of Connecticut Democrat who leads opposition in the House to the imports, said the ban had nothing to do with trade policy. "For me it's about health," she said in an interview.

China appeared to be ready to cut off imports of American chicken products in July, and American poultry producers said the issuance of import permits slowed for a time. But sales have since returned to normal levels.

In an effort to assuage Beijing, American poultry producers have made it clear that they have nothing to do with the Congressional import ban and say they do not fear competing with Chinese canned or frozen chickens.

"We believe in free and open trade and we feel our industry has a lot more to lose by being an obstructionist in trade than in supporting China's position," said James H. Sumner, president of the U.S.A. Poultry and Egg Export Council. "If the product is fully cooked, then that would destroy any possible pathogens plus the product would be subject to further inspection when it enters the United States."

Two weeks ago, Mr. Sumner's group and the National Chicken Council joined other American food organizations in sending a letter to Ron Kirk, the United State trade representative, cautioning that action against Chinese tires could lead to retaliation. "For some, the Chinese market is the difference between profitability and possible bankruptcy," the letter warned.

Now that the Chinese are threatening retaliation, industry officials say they can only hope Chinese taste buds outweigh protectionist impulses.

"It complicates the issue for the Chinese" because of their consumer demand for American chicken parts, said Daniel Griswold, a trade expert at the Cato Institute in Washington. On the other hand, he said the American poultry industry also has a lot to lose, adding, "If we are playing a game of chicken with China we are going to be big losers."

Trade disputes and trade negotiations: which one is harder?

For the past two weeks, I have been training developing country
officials in two different programs: the first is a week-long course
and simulation on dispute settlement in Singapore, the second is
another week-long course in Bangkok on trade negotiation simulation as
part of an APEC-sponsored project. Comparing the two, I found that the
performance is better in the dispute settlement simulation. This is
not because the first group is better qualified than the second group.
Indeed, the background and knowledge of the two groups are quite
comparable. Instead, the difference would be mainly due to the
different nature of the two activities: with dispute settlement, the
participants are only asked to apply pre-existing rules; while with
negotiations, they have to design new rules that reflect their
national interests. While the dispute settlement capacities of many
developing countries have seen considerable improvement over the
years, most of them still lags behind in rule-making activities. I
think one important lesson developing countries have to keep in mind
is that WTO rules are not carved in stone, they are only the way they
are because the countries agreed that way. Any country, including
developing countries, can always change the rule if they can muster
sufficient support.

Tuesday, 15 September 2009

Getting tired of the lies on tires?

2009-09-14 18:05 文章来源:商务部新闻办公室
文章类型:原创 内容分类:新闻




Office of the Press Secretary
For Immediate Release April 2, 2009


ExCel Center
London, United Kingdom

6:44 P.M. (Local)

PRESIDENT OBAMA: Earlier today, we finished a very productive summit that will be, I believe, a turning point in our pursuit of global economic recovery.

We've also rejected the protectionism that could deepen this crisis. History tells us that turning inward can help turn a downturn into a depression. And this cooperation between the world's leading economies signals our support for open markets, as does our multilateral commitment to trade finance that will grow our exports and create new jobs.

Q What concrete items that you got out of this G20 can you tell the American people back home who are hurting, the family struggling, seeing their retirement go down, or worrying about losing their job -- what happened here today that helps that family back home in the heartland?

PRESIDENT OBAMA: Well, as I said before, we've got a global economy, and if we're taking actions in isolation in the United States, but those actions are contradicted overseas, then we're only going to be halfway effective -- maybe not even half.

You've seen, for example, a drastic decline in U.S. exports over the last several months. You look at a company like Caterpillar, in my home state of Illinois, which up until last year was doing extraordinarily well; in fact, export growth was what had sustained it even after the recession had begun. As a consequence of the world recession, as a consequence of the contagion from the financial markets debilitating the economies elsewhere, Caterpillar is now in very bad shape. So if we want to get Caterpillar back on its feet, if we want to get all those export companies back on their feet, so that they are hiring, putting people back to work, putting money in people's pockets, we've got to make sure that the global economy as a whole is successful.

And this document, which affirms the need for all countries to take fiscal responses that increase demand, that encourages the openness of markets, those are all going to be helpful in us being able to fix what ails the economy back home.

Thursday, 10 September 2009

Time for Commercials

The WTO has just released a nicely-made commercial called "The Routes of Trade". This will provide nice instructional material to the students.

What are the main messages? 1. Trade has been around for a long time; 2. Trade is good; 3. WTO is good.

Interesting points in the video: 1. Developing countries are conspicuously featured; 2. The last few lines in the video seems to hint a bigger role for the WTO.  

Wednesday, 9 September 2009

Another WTO case in the making?

Elizabeth Lynch

Elizabeth Lynch

Posted: September 7, 2009 12:24 PM

The U.S. Climate Change Bill: International Trade Implications & China

Health care will not be the only divisive issue on the Senate's calendar when it returns to Congress on September 8. This past June, the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009 (the "Climate Change Bill"). Far-reaching in its impact on the U.S. economy and particularly detrimental to certain energy-intensive sectors, debate in the Senate will become increasingly cantankerous as special interests and certain states lobby for protection.

And while the Bill, through a series of complicated cap-and trade equations and a plethora of subsidies to renewable energy, has the potential to completely alter the domestic market, debate thus far has been about its global impact. With fear that countries like China will not pass legislation to cap their domestic industries' carbon output, the House added two provisions to protect U.S. industries from companies in countries that are not similarly restrained. Out of a 1,400 page bill, these two provisions have become the center of the debate, some calling these provisions much needed protection and others calling them tariffs.

But conspicuously absent from these discussions is an analysis of what is really going on here. How exactly do these provisions work? Will they have the intended effect of maintaining the competitiveness of U.S. industries or are they attempts by certain industries to protect their profits? Will these provisions bring countries like China to the table in Copenhagen or will they ultimately produce a tariff war? Can they withstand a challenge under global trade rules?

To answer these questions, I sat down with Jake Caldwell, director of Policy for Agriculture, Trade & Energy at the Center for American Progress. You can listen to the interview here.

The Trade Provisions

Applicable Only to Energy-Intensive and Trade-Sensitive Industries
In our interview, Jake stressed that the two trade provisions in the Climate Change Bill will only apply to those U.S. industries that are both energy-intensive and trade-sensitive, making these provisions applicable in fact to only about five U.S. industries: ferrous metals (iron and steel), nonferrous metals (aluminum and copper), non-metal minerals (cement and glass), paper and pulp, and basic chemicals (World Resources Institute (WRI) report, p. xvi).

Under the Bill, these industries will initially be given a two-year waiver from compliance to the Bill's cap-and-trade regulations. However, after the two years, these industries can seek protection from foreign competition through the following two trade provisions. 

Provision 1: Recovery of Some Cost of Compliance

The first of these provisions is less controversial. Found in Title IV, Part F, subpart 1 of the Bill, it establishes an emissions allowance rebate program. As Jake explained, this will allow companies in energy-intensive, trade-sensitive manufacturing industries to be compensated in other ways for the cost of complying with the Bill's cap-and-trade program. The rebate program will reduce the threat that these companies will lose business to companies from countries that do not impose equally as rigorous caps on greenhouse gas emissions. The rebate program will be phased out by 2035.

Provision 2: Border Adjustment Measures (a.k.a. Tariffs)
It is the second trade provision, found in Title VI, Part F, subpart 2, that is the most contentious; this is the provision that establishes unilateral border adjustment measures -- a.k.a. tariffs -- on imports from countries that do not have similar emissions reduction policies. Under this provision, if by 2018 there is no international climate change treaty in force, the President, starting in 2020, is required to impose a border adjustment measure on imports from sectors in countries that have not capped their emissions or reduced their energy-intensity to comparable levels. The U.S. importer of the competing foreign product will have to purchase an "international reserve allowance" through a carbon market. This in effect establishes a tariff on imports from that foreign country.

As Jake pointed out, the President can grant a waiver to certain countries if he or she deems that there is an important national economic or environmental reason that takes precedence. But the Presidential waiver is subject to Congressional approval through a joint resolution of Congress. In effect, Congress has to "second" the President's decision, making for a cumbersome procedure. If either house of Congress does not agree with the President's reasoning, the waiver is denied. Given the already politically-sensitive as well as politically-expedient nature of the U.S.-China relationship, it is difficult to imagine that any waiver to a Chinese industry could make its way through Congress without a fight.

Effectiveness of the Trade Provisions

As Jake explained in our interview, the trade provisions were adopted for three reasons: (1) to prevent carbon leakage (the transfer of production and jobs from industries in the U.S. subject to cap-and-trade rules to companies in foreign countries that do not have such rules in place), (2) to keep U.S. manufacturing industries competitive in a potentially unequal carbon-restricted world, and (3) to be used as leverage against other countries that have yet to set emission reduction targets. But will these provisions achieve their stated goals? Or are they protectionist responses to pressure from a few select industries?

Carbon Leakage
If a goal is to prevent carbon leakage and promote emission caps in other countries, the trade provisions, especially the border adjustment provisions, are not tailored narrowly enough to achieve these goals. Congress was largely targeting China with the trade provisions. However, out of the five U.S. industries that would be able to use the tariff provisions (steel, aluminum, chemicals, paper and cement), only one industry imports more than 10% of its product from China: the cement sector (WRI report, p. xviii). For the other industries, the majority of foreign imports are from Canada and other developed nations, many of which already have emissions standards that surpass the U.S'. While there will inevitably be some carbon leakage, it's questionable just how dramatic it will be. Currently, the majority of U.S. imports in these sectors come from countries with less-carbon intense production methods than China or even the U.S. Just because U.S. companies will bare the cost of meeting more rigorous emission standards does not necessarily mean that production will be shifted to countries with less rigorous standards. Currently, China's production of aluminum is carbon-intensive and uses a tremendous amount of energy. However, China's production is more expensive than Canada's or the U.S.' and can barely remain competitive in the global market. Thus, lower carbon emissions and greater energy efficiency do not always equate with higher costs.

Furthermore, if the goal is to prevent carbon leakage, the trade provisions offer no recourse to individual companies from foreign, carbon-heavy countries that are meeting their own private emission caps. For example, Baosteel, China's largest steel producer, is relatively energy-efficient (WRI report, p. 35). However, under the current Climate Change Bill, even though Baosteel may voluntarily subject itself to carbon targets similar to those that will be imposed on steelmakers in the U.S., Baosteel will still be penalized. The Bill's trade provisions evaluate imports on a sector-wide basis and not an individual company one. Arguably, if the goal is to prevent carbon leakage, the U.S. has a better chance of influencing a Chinese company's behavior than an entire sector in China. Thus, the trade provisions should establish a secondary track where certain companies, if they are able to show that they are compliant with U.S. standards, are exempted from the border provisions applied to their country and sector.

Finally, the question remains -- how do you measure the carbon footprint of an imported product? These provisions rely heavily upon the assumptions that monitoring and reporting of greenhouse gas emissions from the country of origin is (a) an easy task and (b) accurate. While these assumptions might hold true in countries like Canada or Japan, for China, where implementation and enforcement on the local level is a perpetual struggle, any form of data collection is a challenge and results are often less than reliable. Thus, in a world where carbon measurement is problematic, the actual ability to implement the trade provisions remains questionable.

As mentioned above, imports from China in the energy-intensive, trade-sensitive industries are very small (14% of cement, 7 % of steel, 3% of aluminum, 4% of paper, and less than 1% of chemicals). These five industries also make up a small portion of the U.S. economy, accounting for 3% of economic output and less than 2% of U.S. employment. While these industries will inevitability be negatively affected by the Climate Change Bill, the impact on the greater U.S. economy is relatively small. Additionally, over-protection of these industries loses sight of the broader U.S. economy and the other goal of the Climate Change Bill: to shift production and jobs to energy-efficient or renewable energy industries.

Furthermore, while the border adjustment measures protect these raw material industries, it potentially could hurt those industries that use the raw materials for production of "downstream" products. For example, the border adjustment measures are only applicable to the importation of sheet steel, and not to products that are made out of steel, like cars or appliances (WRI report, p. 52). U.S. car makers will still have to compete against foreign car manufacturers whose products could contain steel from countries without carbon regulations. Without the benefit of border adjustment measures on cars, U.S. car makers would become less competitive.

Similarly, U.S. chemical manufacturing companies are fairly competitive globally. These companies refine the carbon-intensive, raw material chemicals to make downstream, specialty concoctions (WRI report, p. 52). However, by imposing a border adjustment measure on the raw material chemicals, any of these chemical manufacturing companies who import raw materials, would experience an increase in the cost of production, making their products less competitive abroad. While the border adjustment measures will protect the five energy-intensive, trade-sensitive industries' profits, they could likely hinder the competitiveness of industries that use these raw materials to manufacture downstream products.

The jury is still out on whether border adjustment provisions do in fact bring countries to the table to discuss climate change. The general assumption is that tariff threats rarely cause countries to act, especially countries as large as China. However, after the U.S. backed out of the Kyoto Protocol, the European countries threatened similar types of tariffs, targeted precisely at energy-intensive U.S. industries. Perhaps a mere coincidence, but it's interesting to note that today, the U.S. is now close to passing climate change legislation. Recently, South Korea voluntarily set a 2020 emissions reduction target; the South Korean government cited the fear of border tariffs as a reason to set targets.

But it is still questionable how far the threat of tariffs can go. China has certainly taken notice of the border adjustment provisions in the U.S. Climate Change Bill, but that does not mean it will agree to carbon caps. China's exports to the U.S. that would likely be subject to the tariff provisions accounted for less than 0.2% of economic output in 2005, thus making the U.S.' tariff threats of little consequence to China (WRI report, p. 57). However, of greater consequence to the U.S. and to the rest of the world is if China, the largest emitter of greenhouse gases, walks away from climate change negotiations because it feels as though it needs to "act tough" for its domestic audience. In looking at the current border adjustment provisions in the Bill and the tepid success they have had thus far, the Senate might want to ask itself if the risk is worth it.

Legality of the Trade Provisions

As Jake mentioned, World Trade Organization (WTO) rules require that countries pass nondiscriminatory trade provisions - that the provisions do not discriminate against foreign products in favor of domestic ones. Arguably, the current Bill does discriminate. As discussed earlier, individual companies that could be meeting similar carbon caps will be discriminated against if their home country has not agreed to carbon caps. Without some sort of procedure that exempts foreign firms which individually meet carbon caps from the border tariffs, the current trade provisions may not withstand a WTO challenge.

There will certainly be a Senate showdown over the Climate Change Bill. Already ten Democratic Senators have stated that the trade provisions need to be stronger. But do they really? If your singular goal is to protect 3% of the nation's economic output and 2% of its jobs, then yes, the trade provisions will maintain the status quo, at least for the time being. But if your goal is to increase innovation in new sectors like renewable energy, create clean jobs and limit global climate change, then the trade provisions, as they stand now do not achieve that goal. There is a need to maintain U.S. competitiveness in the five effected industries, but in the current tariff provision, what is being maintained are corporate profits in a few select, and powerful, industries. The Senate needs to take a good hard look at the current trade provisions and question if it is worth it. Perhaps it is time to move away from defensive measures against China and begin to better engage China in agreeing to a climate change treaty. Without China's agreement, any legislation the Senate passes will have negligible effect in limiting climate change.