Business Beyond the Reef

We looked yesterday at China’s trade Superbowl playbook laid out by Third Way in its new study, China’s Trade Barrier Playbook: Why America Needs a New Game Plan. Continuing their Superbowl analogy, today we’ll look at how Third Way thinks America’s coaches should respond to China’s plays.

Here is Washington’s “new” playbook:

#1 – Appeal to the Commissioner: Aggressively use the WTO disputes process. President Obama must have read an advance copy of the Third Way report because he said much the same thing when he proposed a new Trade Enforcement Unit in the State of the Union address. Both ignore the fact that Washington has a whole passle of trade enforcement units. The United States has relied on this staple play for 65 years now. It works pretty well.

#2 – Build a stronger league: Work with other trading partners. Third Way wants Washington to conclude and implement the Trans Pacific Partnership quickly. OK. More important may be their plea for Congress to give the Administration new trade promotion authority (the current euphemism for voting up or down on trade agreements, no amendments). Good luck.

#3 – Put points on the board: Use a “Rules Plus” approach to achieve results. This one is less than clear. Third Way seems to say that Washington should unilaterally establish performance goals for China on trade restrictions and intellectual property enforcement. Good luck with that. Not sure how they think that will improve relations, but perhaps good relations isn’t their goal.

#4 – Choose the right formation: Pursue an array of results-oriented dialogue. Third Way appears to say that we should pare down the number of trade issues we raise with Beijing to reduce any scope for China to pick the low-hanging fruit and delay on the really important problems. There is also an assumption that current dialogs with China are somehow skewed in favor of China. Not sure about this.

#5 – Change the rulebook: Write new rules for current and emerging issues. Use the WTO to develop new international rules on state-owned-enterprises (SOEs) and currency manipulation. Easy to say, but any such rules could easily come back to bite you. Not to mention that currency manipulation is a question for the IMF, outside the WTO’s purview. This approach could take the rest of our lives to negotiate.

#6 – Spend more on our players: Spend wisely on new trade resources. Provide more China-specific funding for federal agencies to work on enforcement of American rights or promotion of U.S. products in China. Hard to disagree.

#7 – Promote benefits of sportsmanship: Focus on what’s important to China. Convince Beijing that it is in China’s long-term interest to play according to the WTO’s rules.

China’s leaders have … recently announced that they intend to use the WTO process to maintain China’s exports in the face of trade barriers imposed by other countries. The United States should certainly encourage China to bring its legitimate trade complaints to the WTO. But we should also stress the benefits to China of assuming a greater leadership role in the WTO. The power of China’s example in eliminating its own trade barriers, as well as a more constructive role for China in global trade negotiations, would do much to bolster the system of open trade that has helped China perhaps more than any other nation over the last decade.

Hardly a new playbook for Washington. For the most part it is decent advice to continue doing what we are doing, though it is odd that the President’s proposal for a new trade ministry isn’t mentioned.

We don’t know how the China-United States Superbowl comes out, You see, the game never ends and it is not a zero-sum game. The football analogy can only be stretched so far.

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.

Tom Friedman’s latest op-ed piece in the New York Times, “Made in the World”, raises the possibility, but we have a long way to go before mercantilism disappears from national trade policies. A fascinating piece (including Fidel Castro’s accurate portrayal of our Republican primary debates), Friedman correctly points out the chasm in world view seen by politicians, on one hand, and multinational businesspeople on the other.

Victor Fung, the chairman of Li & Fung, one of Hong Kong’s oldest textile manufacturers, remarked to me last year that for many years his company operated on the rule: “You sourced in Asia, and you sold in America and Europe.” Now, said Fung, the rule is: “ ‘Source everywhere, manufacture everywhere, sell everywhere.’ The whole notion of an ‘export’ is really disappearing.”

Fung encapsulates the modern business view: you do business when, where and how makes practical sense. Very few nations or their politicians have glommed onto this because, says Friedman, their viewpoint is constricted to doing their best for only one specific geographic part of the world. In management terms, this inevitably leads to “sub-optimizing” – gains (profits, returns, however defined) for one unit or country, probably at the expense of others and the whole world.

A few, very few, politicians and countries see the folly of their approach. They cling to mercantilism because it is a simple concept, easily grasped by pols and voters in search of easy decisions. Though the elements have been around for millennia, mercantilism was first articulated in the late 1600s in disputes over the operations of the East India Company.

Mercantilist theory was simplicity itself: a nation’s wealth was measured by the amount of gold and silver it possessed.
- William J. Bernstein, A Splendid Exchange

Decisions on trade became easy. Boost exports, restrict imports, restrict the flow of capital. Trade policy for fun and profit. Now we can get back to important stuff, said the politicians. That is why countries fund export promotion agencies, but rarely encourage import promotion. Political leaders view trade as a zero-sum game in which increasing imports means that somebody else wins at our expense. They don’t realize that they could be telling their constituents that imports lower prices, thus helping everyday people balance their budgets and live better.

The multinational viewpoint is gaining strength. I recall conversations with the head of Austria’s commercial service (I was commercial minister at the American Embassy in Vienna, with a mercantilist mandate from Washington) in which we informally agreed to help each other promote trade in all directions. It had to be informal because our political masters would not have approved. But our mutual feeling was that trade in one direction inevitably leads to trade in the other direction, or with third parties – and that all this trade leads to investment for all concerned. This grows the pie all countries are seeking to divide. It’s not a zero-sum game. The mercantilists had it wrong all along.