Business Beyond the Reef

That is the way it is presented in a new study published by the usually left-centrist think tank, Third Way: “China’s Trade Barrier Playbook: Why America Needs a New Game Plan“. Their analogy is that China has a marvelous playbook that keeps America’s exporters from scoring.

… we crack open China’s trade playbook and detail some of its key tactics. We focus especially on the unfair strategies that China uses to limit American exports and investments—strategies that prevent our companies and workers from scoring new business and good jobs. We argue that, if America is to achieve a fairer and more beneficial trading relationship with China, we can’t simply game plan for one or two plays. Instead, America must update our own trade game plan so that we have a full array of strong and smart tactics to counter China’s stingy defense and assure that American companies and workers get the full benefits of China’s WTO membership.

Here are China’s best plays:

#1 – Lockout the players: Keeping American exporters and investors on the sidelines. Using arcane, impenetrable rules and extensive “studies” to keep foreign investors out of lucrative fields in China and hinder efforts to sell foreign goods and services in China.

#2 – Take performance enhancers: Pumping up China’s domestic companies. China’s vast array of subsidies and export restrictions, few of which have been reported to the World Trade Organization by Beijing. Third Way cites Washington’s 2011 complaint in Geneva about some 200 problematic Chinese subsidies. [China's typical approach on such things is to do what it wishes, see if anybody complains, then look innocent and say "Oh, is there a problem with that?".]

#3 – Exploit homefield advantage: China as owner, player . . . and referee. Ah, the problem of dealing with state-owned enterprises (SOEs). China isn’t alone in this, but, by owning SOEs, Beijing and its provinces become both a business operator and the regulator for that same business. How do you say “conflict of interest” in Mandarin?

#4 – Change the rules: Imposing China’s “homegrown” standards. China is a master, though not alone, at using locally-produced product standards to put competitors at a disadvantage.

#5 – Steal the play: “Absorbing” American ideas. Lackluster enforcement of intellectual property rules and officially-sanctioned theft of trade secrets through policies such “indigenous innovation” requirements.

U.S. business executives have likened China’s indigenous innovation policies to “the Borg in ‘Star Trek,’ an enormous organic machine assimilating everything in its path, in this case the inventions of other nations.”

#6 – Hide the ball: China’s hidden rules. Lack of transparency in rules and regulations, and unannounced, unpredictable, unpublished changes in those rules.

#7 – Change the play: Switching up China’s trade barriers. If foreigners glom onto one trade barrier, change the barrier to gain more time to protect the Chinese market.

#8 – Bend the rules: Searching for holes in China’s trade obligations. Making it a national policy to see how far WTO obligations can be pushed or obviated. Virtually all countries do this, even the United States. I know that’s a shock. But Beijing seems to do it more assiduously than most.

#9 – Run out the clock: Foot dragging on WTO obligations. Beijing has presented a master class in how to delay implementation of its WTO obligations. The usual tactic is to agree to an obligation, then do nothing until someone complains in Geneva, then delay talking about it and use WTO procedures to string things out for a few more years. Then, you fix the original problem, but also change the play and start the process again. [I find it hard to come down too hard here. After all, Washington and Brussels are also masters at this game.]

Now that Third Way has published China’s gameplan, how do they think the American coaches should respond? Tune in for the second half tomorrow.

Americans lose sight of the fact that they are not the only ones who experience problems in trade with China. Yes, there have been articles about how Africans are getting suspicious of how Chinese firms operate in their countries, but we often ignore the old-fashioned trade disputes with China that mount up around the world.

The World Trade organization lists 23 cases that have been brought to Geneva against China. True, the United States has initiated a dozen of those, but we are not alone in our frustration with China’s trade practices. The European Union has filed suit against China five times. Mexico has launched three cases against China. Canada has brought two more. And even Guatemala has gone to Geneva about Chinese agricultural subsidies.

The European Union is stepping it up a notch, apparently furious about lack of equal access to Chinese government procurement markets. The EU’s trade commissioner (Brussels’ chief trade negotiator) Karel de Gucht gave an interview Monday in which he expressed more than just irritation at EU companies being cut out of Chinese government procurements.

My colleague, internal market commissioner Michel Barnier, and I are preparing a draft law on public markets so that we can respond if the Chinese continue to deny European companies access to certain segments of the market.
- Karel de Gucht

The draft should be ready for publication in March and is intended to give Brussels the ability to close off equivalent parts of EU procurements to competition from Chinese companies. Kind of like the old “mirror image” proposals in Canada and the United States for trade laws directed at Japanese competition. (Canada actually did it, slowing processing of Japanese vehicles at Canadian ports to take just as long as clearance of Canadian-origin vehicles in Japan.) De Gucht criticized China for “nationalist commercial practices“, “massive subsidies” and “monopolistic access to raw materials“. Sounds almost like a Republican primary debate.

All of this makes it very difficult to do business there.
- Karel de Gucht

Journalists in Hawaii live for the moments when Governor Neil Abercrombie goes “off script”. An intelligent man, the former college professor has a propensity for off the cuff remarks about things he doesn’t know much about. The nation’s least popular state governor often provokes hilarity and amusement.

Governor Abercrombie went off the reservation Monday when he delivered his annual “State of the State” address to the Hawaii Legislature. While discussing energy issues, he suddenly departed from his text to blame Singaporean speculators for Hawaii’s problems.

We are totally in the hands of oil speculators in Singapore.
- Hawaii Governor Neil Abercrombie

Rather than the usual giggles, the crowd responded with a collective “hunh?”.

There is a lot that’s just wrong here. First is the assumption that anybody in Singapore controls energy prices in Hawaii. Yes, Singapore is a sort of headquarters for oil companies in S.E. Asia, but I’ve worked with these folks and they don’t sit around discussing how to hurt Hawaii. Second, as Honolulu Civil Beat points out, Singapore doesn’t have a futures market in oil so any speculation isn’t happening there. Third is Abercrombie’s implicit assumption that speculation must, by its nature, be bad – an assumption made by politicians and beleaguered CEOs worldwide. Have you noticed, though, that politicians blame speculators when prices rise, but CEOs blame speculators when prices go down?

Fact is, “speculator” is merely a derogatory term for somebody who buys and sells stocks, bonds or commodities and doesn’t intend to hold them for a long time. They provide a lot of the liquidity that allows markets to function efficiently. Some bet that prices will go up, others make the opposite wager, and they often offset each other. If you sell stock in an oil company, there is a good chance that you sold it to one of those evil speculators. And what does that make you?

The price of oil in Hawaii was once driven by supply from the mainland United States, but not so much anymore. We always compare our gasoline prices to the mainland and we usually run about a dollar a gallon more than most Americans pay. Many in Hawaii haven’t noticed yet, but our oil prices now are more dependent on demand in Asia. Economic growth in China has driven the price up, but our local price surged when Japan shut down most of its nuclear reactors following the Fukushima disasters last year. That’s where the blame lies for our spiking electricity bills, but somebody on his staff needs to tell the governor.