According to the Associated Press, the U.S. government is trying to determine if Chinese officials covertly hacked into a Commerce Department laptop computer brought to Beijing during a recent trip by Commerce Secretary Carlos Gutierrez.  The AP report notes that “Surreptitious copying is believed to have occurred when a laptop was left unattended during Gutierrez’s trip to Beijing for trade talks in December.”

The Commerce Department would not comment on the story because the alleged incident is under investigation.  But it’s not hard to believe the story’s plausibility, given well-documented accounts of surveillance and spying by the Chinese on American visitors.

Incidents like these offer a good insight into why the Chinese have proven so intransigent during recent trade talks.  Their “close scrutiny” of U.S. officials has given them plenty of advance notice/warning on Washington’s internal talking points.

Politeness is not working when it comes to dealing with Beijing.  If the laptop incident proves to be true, it will merely offer further proof that China doesn’t play by the rules.

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  The Financial Times noted yesterday that China is entering a new phase in its status as a manufacturing powerhouse.  In the minds of most of us, “Made in China” labels refer almost entirely to T-shirts and toys.  But Beijing has been transitioning beyond low-cost production and into the development of new, higher end consumer goods, including computers and electronic equipment.

China’s annual GDP growth has been running from 3-10% higher than the U.S. for the past 15 years.  In the same time, their share of the global manufacturing output has also risen, jumping from a miniscule 2% in 1990 to roughly 15% today.  By contrast, the U.S., Japan, and Germany have all steadily lost marketshare since 2000.

One could say that China has been hard at work in that time, running their productive engine at full steam.  The result?  Enough capital accrued to move into the higher-end research and development needed to put them at the vanguard of 21st Century manufacturing.  The Financial Times estimates that in 2007 alone, China was responsible for nearly 50% of worldwide “Computers and office equipment” production.

As the Financial Times sees it, “China is now going through a more subtle phase. It is becoming a giant test bed for manufacturing ideas, building on its existing strengths in low-cost production by using the efforts of engineers and developers not just in China but from around the world.”

The irony is that, with China now a first class manufacturing power, it remains an enigma, with widespread policy and development challenges.  But even more baffling is how the Chinese, who wish to be recognized as a great industrial nation, can continue to play the role of class cut-up when confronted with the set of trading rules by which they and other industrialized nations play the game.  It begins to seem more disingenuous when China continues its cumbersome policy of currency manipulation despite calls from the World Trade Organization (WTO) to cease and desist. 

There’s only so long that China can play the development card while simultaneously cornering the market on iPods and laptops.  The rules of trade exist for a reason.  At some point, someone’s going to send Beijing to the principal’s office.

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  According to Women’s Wear Daily, China’s deputy minister of commerce, Qiu Hong, told a WTO session that trade protectionism is on the rise.  If such problems continue to mount, the Chinese believe it could adversely affect the global economy.

In other news, Women’s Wear Daily also reported today that in 2007, China was once again the main source of counterfeit goods seized in the EU, comprising nearly 60 percent of all fake goods. 

Last week, the WTO urged China to stop undervaluing its currency, while the USTR joined calls for China to end export restrictions that are causing “significant distortions to trade.”

No word yet if Qiu Hong sees the irony in his recent complaints about protectionism.
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ManufactureThis is having a chuckle today.  According to the Office of the U.S. Trade Representative (USTR) a bill currently working its way through the Senate might be too helpful, and thus could get the USTR “bogged down” in its work.

  Specifically, Senate Finance Committee Chairman Max Baucus has co-sponsored a bill (S. 1919, the Trade Enforcement Act of 2007) aimed at strengthening a variety of U.S. trade remedies and creating a chief trade enforcer to oversee WTO rulings.  At a committee hearing yesterday, USTR general counsel Warren Maruyama rejected the bill noting that “Sometimes if you get too many tools or too much process you can get bogged down.”

Bogged down?  The Bush administration has overseen a threefold increase in the U.S. trade deficit with China on its watch (from $83 billion in 2001, to $256 billion in 2007) and has presided over a near doubling of the overall trade deficit, to a walloping $709 billion in 2007.  While some of that increase comes from inevitable global developments and increased dependence on foreign oil, there’s almost no one who wouldn’t recognize predatory foreign practices as a prime culprit.  As such, it would seem that USTR cold use all the help it can get.

Take China.  As ManufactureThis noted yesterday, the Treasury Department remains concerned about China’s deliberately undervalued currency.  And even the USTR readily admits to other serious trade problems with Beijing, including piracy and intellectual property theft.

So, if these varied practices are continuing to hurt U.S. manufacturing, why not welcome any and all possible tools?

Interestingly, one of the witnesses at yesterday’s hearing was TradeWins’ John Magnus, a co-author AAM’s recent ‘Enforcing the Rules’ report.  In his prepared statement, Magnus noted that “America’s global diplomatic and financial strategies are going to have to make more and more space for…energetic trade enforcement.”

Whether S. 1919 successfully makes its way through the Senate remains to be seen, but with 3.5 million manufacturing workers idled since 2000, it’s clear that U.S. trade policy needs a re-write.  Simply put, current policy isn’t working, and the USTR should cheerfully admit that they can use an extra hand. 

The logical option would be for both the House and Senate to pass strong trade enforcement legislation by the end of 2008 that provides for:
-strong remedies to address China’s illegal currency manipulation;
-strengthening of U.S. trade laws to ensure that American workers and producers have the same opportunity to compete in the global marketplace as their overseas competitors;
-reform of tax, energy, and health care policies to make sure that manufacturing can fairly compete.
-new standards and enforcement to ensure that imported goods are safe for U.S. consumers.

Both USTR and Congress must get on the ball.  Too many U.S. jobs are hanging in the balance.

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Bloomberg News’ Mark Drajem reported yesterday that the World Trade Organization (WTO) is urging China to revalue its currency, the Yuan.  The WTO’s comments join steady calls from the EU, Japan, and concerned U.S. legislators to end the manipulation of its currency that has seen China devalue the Yuan by as much as 40%.

  Specifically, the WTO report noted that “A more flexible exchange rate regime could enable China to operate a more independent monetary policy, which would be better suited to ensuring a low and stable rate of inflation.”

What’s interesting to note is that essentially the entire world is concerned with China’s currency practices.  Everyone that is except some U.S. lawmakers and the Bush administration.  Even though China has been rigging its currency exchange rates since 1994, and has continued to do so despite promises to the contrary when joining the WTO in 2001, the Bush administration has steadfastly refused to take concerted action.

As ManufactureThis noted last week, the Treasury Department once again refused to characterize China’s currency practices as outright “manipulation,” thus avoiding any effective action to rectify the problem.  Treasury Secretary Henry Paulson has frequently suggested that China should raise the value of its currency, and has praised any incremental steps in this regard.  But he has refrained from taking any serious action.

The end result is simply “chit-chat diplomacy”—a nod, a wink, a smile…and no effective change in the status quo.

Next month, a delegation from Beijing will meet in Annapolis with U.S. officials for negotiations in the latest semi-annual Strategic Economic Dialogue (SED).  As with previous SED’s, little of substance will be accomplished.  In the interim, the U.S. continues to shed good-paying jobs due to China’s mercantilism.

  The China issue will be of significant note come the fall presidential election.  Hopefully all of the candidates will be talking about this, and will express their desire to stand up to Beijing.

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  In 2007, total trade between the U.S. and China reached nearly $400 billion, according to Commerce Department figures.  That’s a huge amount of money, and it makes for one of the United States’ largest foreign trade accounts.  That most of the traffic (83%) flows one way, though, and accounts for the largest bilateral deficit in U.S. history ($256 billion), is also fairly well known.

But a recent study by the General Accounting Office (GAO) reveals a rather muddy picture of the logistics and procedures involved in U.S. trade with the People’s Republic.  A just-released GAO report suggests that the Office of the U.S. Trade Representative (USTR) has not adequately analyzed and categorized the scope of issues involved in policing and tracking whether or not Beijing is playing fair with its trade practices.

It may not be entirely surprising if China’s system of trade regulations is more than a bit insular or opaque.  The country regularly steals intellectual property, while using subsidies, dumping, and currency manipulation to further its trade advantage.

  Unfortunately, the USTR may not be noting all of the subtle minutiae involved in monitoring China.  The GAO believes that the “USTR’s annual reports to Congress do not have the systematic analysis needed to clearly understand China’s compliance situation.”  More specifically, the GAO wants to know if China is living up to its obligations since joining the WTO.  In order to do so, the USTR needs to “clearly and systematically identify the number, type, and disposition of the trade issues it is pursuing with China and report this and more useful trend information in its annual China trade compliance report to Congress.”

The USTR takes a generally sunny view of U.S. trade with China.  In its 2006 report to Congress, it noted that “China has taken significant and often impressive steps to reform its economy since acceding to the WTO. During this period, China has repealed, revised or enacted more than one thousand laws, regulations and other measures in an effort to bring its trading system into basic compliance with WTO standards.”

The trouble, however, rests with what USTR itself admits in the report as the “inherent constraints presented by the sheer volume and complexity of the required changes to China’s trade regime and transparency obstacles.”

With GAO’s prodding, though, it’s hoped that the USTR will transition from “narrative reports” to more thorough and specifically concrete analyses.  Without clear examples of China’s transgressions or improvements, GAO believes it is hard for Congress to get a full and accurate picture of what Beijing is or isn’t doing to follow world trade law.

With hundreds of billions of dollars at stake, and millions of U.S. jobs threatened by China’s predatory practices, there is an urgency to presenting a full and valid audit of trade with China.  Additionally, a thorough review may help to boost the number of trade violations that are successfully prosecuted.  As GAO noted in its report, USTR’s resolution of trade compliance disputes has dropped from 50% in 2003 to 30% in 2007—an unfortunate laxity that can only signal apathy on the matter to Beijing.

The USTR operates out of the Executive Office of the President, so it will be interesting to see if the next administration will be more aggressive in policing matters with China.

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  Yesterday, the Financial Times quoted John McCain as warning that a Clinton or Obama administration would mean “more federal regulation, more government control of the economy, and more government spending.”  He also worried that a Democratic administration would follow the wrong path on trade policy by, as the Times put it, “exploiting public resentment of foreign trade rather than focusing on how to make the U.S. more competitive.”

According to the Financial Times, McCain did acknowledge that “more must be done to help people who lost jobs because of globalization” and that he “promised more rigorous enforcement of trade agreements to protect U.S. interests.”

But in such points we begin to see some of the hypocrisy of Sen. McCain’s overall position on trade.

If indeed Sen. McCain favored rigorous enforcement of trade agreements, he would no doubt start by addressing culprit number one—the regime in China that brazenly flaunts world trade law for its own gain.  When entering the WTO in December 2001, China foreswore the very lucrative (and illegal) practice of currency manipulation.  And yet Beijing continues to undervalue its currency by as much as 40%.  Unfortunately, John McCain is one of a handful of Senators who has steadfastly refused to take action on the currency issue.

Wantonly violating world trade law for one’s own gain is a clearly protectionist act.  Or, conversely, it is a rather egregious swipe at free trade.  And so it’s hard to see how Sen. McCain can favor open markets while simultaneously supporting Beijing’s one-sided policies.

But that’s not the only contradiction in the McCain bag.  There’s a strange irony in Sen. McCain warning about Democratic imprudence with money while pursuing exactly the policies that have led to a $711 billion trade deficit in 2007.  More than a third of that shortfall, $256 billion, comes just from a mushrooming bilateral deficit with China.

U.S. manufacturers are put at a consistent disadvantage when countries like China utilize dumping, subsidies, and currency manipulation to undercut them.  The most unfortunate result is 3.5 million lost U.S. manufacturing jobs since 2000.  No doubt these displaced workers are feeling the pinch in their wallets, and McCain’s talk of low taxes will be of relatively little comfort until they again find good-paying jobs.

Far better would be for Sen. McCain to adopt a long-range plan that encompasses modernization of American manufacturing while addressing the cheating of countries like China that is displacing U.S. workers in the first place.

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  In today’s Wall Street Journal, reporter Bob Davis notes the efforts that AAM has made to press presidential candidates on unbalanced trade with China.  Davis mentions AAM’s Town Hall meetings, which pushed voters to ask the various candidates tough questions regarding China’s continued cheating on trade agreements.

AAM pressed the ‘China Cheats’ issue throughout the recent primaries in such industrial states as Ohio, Pennsylvania, and Indiana.  And after feeling the heat from voters, the candidates responded, with both Sens. Obama and Clinton making strong statements in favor of concerted action on China. 

At an April 14 candidate forum sponsored by AAM, Sen. Clinton was asked if she would cite China for currency manipulation.  In response, she said, “I certainly intend to do so.”

Likewise, at the same April 14 forum, Sen. Obama said, “China must stop manipulating its currency because it’s not fair to American manufacturers, it’s not fair to you, and we are going to change it when I am President.”

With both candidates stepping up their rhetoric, advocates of U.S. manufacturing are hopeful that a shift in policy may occur.  However, Davis suggests in his Wall Street Journal piece that a President Obama might not follow through with the forceful action on which he campaigned.  As Davis noted: “Since at least John F. Kennedy, presidential candidates have campaigned as tough on trade and then governed as free traders. Some business leaders are expecting the same if Barack Obama makes it to the White House…Don’t count on it.”

This morning, Bloomberg News’ Mark Drajem pondered a similar scenario: “The presidential candidates’ rhetoric in recent weeks signals that a tougher U.S. policy toward China may be in store under a new administration. History suggests otherwise.”

Exactly what, then, might a Clinton or Obama administration offer for a U.S. industrial sector that has seen 3.5 million manufacturing workers laid-off since 2000?  Drajem notes that both Bill Clinton and the current President Bush were critical of Beijing when campaigning, and “promised a harder line.”  But both backed off after “confronting the realities of governing, which today include China’s role as the second-largest foreign owner of U.S. debt…and as a central partner in efforts to contain North Korean nuclear ambitions.”

While it’s true that China helps to finance U.S. debt, and holds roughly $500 billion in U.S. Treasury securities, China also relies on the U.S. to serve as its chief export market.  Drajem points out that in 2007, China surpassed Canada to become the largest exporter to the U.S., selling $322 billion in goods.  With the threat of labor strikes and civil unrest ever-present throughout China, officials in Beijing are under constant pressure to ensure that manufacturing jobs keep pace with a restive population.

  Noting this economic interdependency, one could ask why U.S. officials so greatly fear upsetting the Chinese apple cart.  Being the market of last resort, and China’s top customer, gives the democratic United States of America some interesting and forceful leverage over a repressive regime.

The heavy question, then, is whether the president elected in November 2008 will choose to use that leverage, or to maintain a status quo that has led to a continuing erosion of the U.S. industrial base?

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Marketplace Radio’s John Dimsdale ran a piece yesterday that noted the resurgence of the steel industry, with rising prices helping both domestic and international steel companies to renewed profits.  Dimsdale noted that a “cheap dollar and overseas demand are pumping new life into an old, domestic industry.”

  It’s only recently, though, that the steel industry has seen a turnaround from all its difficulties.  Dimsdale interviewed AAM director Scott Paul, who noted that there’s been roughly “18 months of prosperity for steel, but that comes on the back of about three decades of bloodletting.”

U.S. steel manufacturers have seen rough times in the past two decades, in large part because of subsidized competition from overseas.  China has boosted steel production exponentially in recent years, in large part due to energy subsidies for its steel producers. 

And while U.S. steel producers may continue to earn profits in the near future, Scott Paul remarked to Dimsdale that competition from China is also growing: “China has brought on about 400 million metric tons of new steel capacity just over the last couple of years. And if there is a worldwide economic downturn and demand in China and other countries decreases, we’re gonna see a glut of overcapacity.”

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  In its latest semi-annual report to Congress, the U.S. Treasury Department has again declined to cite China for currency manipulation.  This despite worldwide calls, led by the EU and Japan, for China to revalue it currency, the Yuan.

In response, AAM Executive Director Scott Paul offered the following statement regarding Treasury Secretary Paulson’s decision yesterday:

“This is a deeply disappointing decision, one that indicates the Treasury Department has no intention of insisting that China honor its commitments to the global rules of finance and trade.  The yuan remains about forty percent undervalued.  As a result, America racks up an enormous bilateral trade deficit with China, and our manufacturers and workers suffer.  We aren’t asking for special protection.  We’re merely asking our own government to enforce the rules of trade and finance and ensure that we have a fair opportunity to compete in the global marketplace.  China’s government continues to cheat, and we continue to pay the price.” 

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