The following letter to the editor was published on the Herald Journal site here.

To the editor:

In a recent Reuters article, “Does corporate America kowtow to China?” (4/27/2011), a startling number was revealed: Since 2001, and concurrent with China’s entry into the World Trade Organization, 40 percent of U.S. manufacturing plants with 250 or more employees have been closed.

It’s a truly amazing number - a number that is made all the more extraordinary by the fact that very few in positions of leadership in America today seem to care about the fact that since 2001, 40 percent of U.S. manufacturing plants with 250 or more employees have been closed.

Since 1994 and the passage of NAFTA, and in conjunction with the remainder of our wildly moronic trade concessions - including our entry into the World Trade Organization and our granting Permanent Most Favored Nation Status to the People’s Republic of China - America has racked up $7 trillion in goods and services trade deficits. We’ve lost millions of jobs. We’ve closed more than 46,000 manufacturing facilities. And we’ve dealt a crushing blow to innovation and to our leadership in key industries.

Additionally, we are actually moving down in the sector of high-value-added industries. And most importantly, we have imperiled our national security, as communist China’s industrial capacity, research capabilities, technology transfers and outright thefts, and her spending efficiencies will soon leave us at a decided disadvantage.

America is being wonderfully played by ideologues who continue to embrace that which for us is proving to be a bankrupting philosophy - “Free Trade” as it is currently practiced and codified under U.S. law and international agreements. These agreements have always been written as to disadvantage American production and send it abroad. That we continue blind adherence to these one-sided treaties is imperiling our nation - as a nation that does not produce more than it consumes will eventually lose its economy and thus its power. To say otherwise is pure nonsense. Look around you.

At this point in our history, America needs to begin a serious debate as to the course of our future. Those leaders who continue to champion the decline of production in America and its concentration in the far East should be forced to show, empirically, how this has benefited the United States. If no true benefit can be shown - then we need to change the rules, take back our production and rebuild our capacity.

Doing so would bring about an expansion, the likes of which would be unprecedented in our history. To stay our current course will lead only to more contraction, more dissention and more hollowing out of our already weakened economy.

Arthur Taylor
Hyde Park

The following article appeared at Drovers Cattle Network here.

A World Trade Organization panel has issued a preliminary ruling on the case that Canada and Mexico filed against the U.S. country-of-origin-labeling law, charging that the mandatory rule violates WTO trade standards.

Specifically, the WTO ruling upholds that requirements tied to U.S. mandatory COOL violate provisions of WTO’s agreement on Technical Barriers to Trade or TBT. The WTO panel also ruled that the mandatory COOL requirements to not meet the United States’ stated objective that the labeling law informs and helps U.S. consumers make purchasing decisions regarding the origin of meat, produce and other products covered by the labeling law.

COOL started out as a voluntary labeling program in the Farm Security and Rural Investment Act of 2002—also known as the 2002 Farm Bill. It had specified that COOL would include pork, beef, lamb, fish, perishable agricultural products and peanuts, and that it would become a mandatory requirement by Sept. 30, 2004.

However, opposition mounted by numerous agricultural groups, including the National Cattlemen’s Beef Association and the National Pork Producers Council, as well as from packers, processors and retailers. COOL opponents’ argued that the program costs would far outweigh the benefits, which were not well determined, and that the marketplace and consumers should drive the need for such programs. Also, the consensus was that the effort driving COOL smacked of protectionism.

The mandatory version of COOL went into effect on March 19, 2009. Six months later, Canada filed a complaint with WTO, and Mexico quickly followed suit. The two countries’ trade officials argued that U.S. mandatory COOL amounted to an illegal, non-tariff trade barrier, and treated U.S. products more favorably than those from Canada and Mexico.

The WTO’s preliminary ruling was actually issued May 20, and there will now be a 30-days comment period. WTO officials have indicated that a final, public ruling will likely come sometime in September. The U.S. government will have two months to decide whether to appeal the WTO’s decision. As NPPC officials point out, such WTO decisions are typically appealed.

Long term, if the WTO ruling stands, the United States will have to dissolve mandatory COOL or risk trade retaliations from Mexico and Canada, both of which are major U.S. trading partners.

The following article appeared in the Daily Media Report of the American Iron and Steel Institute on May 25, 2011.

GENEVA — China has appealed against the World Trade Organization’s rejection of its complaint over punitive US tariffs on Chinese tire imports, the trade body said Tuesday.

“On 24 May 2011, China notified the Dispute Settlement Body of its decision to appeal the panel report in dispute case DS399, ‘US — Measures Affecting Imports of Certain Passenger Vehicle and Light Truck Tires from China’,” the WTO said on its website.

Beijing lost its case against Washington in December, when the WTO cleared the United States for invoking a safeguard clause in 2009 in the Asian giant’s WTO accession agreement to impose punitive duties on Chinese tires over three years.

WTO arbitrators ruled that China “failed to establish prima facie that the tires measure exceeds the period of time necessary to prevent or remedy the market disruption.”

The tire dispute ignited the first trade spat of US President Barack Obama’s presidency with the Asian giant, with warnings that a rise in Chinese-made tires had cost more than 5,000 US jobs.

The United States can file a counter-appeal within 10 days.

The following article by Joseph J. Schatz appeared on May 24, 2011 in CQ Today Online News.

Trade Adjustment Assistance, a popular worker retraining program, has long been a staple of free-trade debates on Capitol Hill — a sweetener for lawmakers wary of the effect of trade deals on their constituents and a way to deal with a changing global economy.

But in a twist, the program has become the latest bump in the march to final action on the George W. Bush-era trade deals with South Korea, Colombia and Panama.

In a letter to President Obama earlier this week, 41 Senate Democrats supported the Obama administration’s demand that Republicans agree to a deal on renewing expired benefits for workers before it sends the three trade agreements to Congress for approval. But anti-spending conservatives, who also have some ideological qualms about targeting certain workers for assistance, do not appear ready to back off from their opposition to the program, which they have marked as part of their larger attack on the size of the federal budget.

The dynamic is particularly acute in the House. Top Republicans who have long supported the program, such as Ways and Means Chairman Dave Camp of Michigan, now face the challenge of writing a new bill that would win the support of lawmakers affiliated with the tea party movement.

The Trade Adjustment Assistance (TAA) program provides benefits to workers who are laid off or see their hours reduced because of foreign competition, and it has received bipartisan support for decades. It is a priority for organized labor, which generally opposes trade deals. Reauthorizing the program — including a 2009 expansion — over 10 years would cost $7.2 billion, according to the White House.

Challenge for Camp

The White House’s line in the sand, announced May 16, may have made Camp’s job a bit harder because it issues a challenge to House Republican conservatives already suspicious about the sincerity of the administration’s commitment to getting the trade deals done. Republicans are expected to provide the majority of the votes to get the trade deals through the House; support for free trade is more bipartisan in the Senate.

Camp — who represents a district that continues to report unemployment in the double digits — supported the 2009 expansion of the TAA program, enacted as part of the economic stimulus law (PL 111-5). Even so, he ended up joining all of his Republican colleagues in voting against the stimulus.

But when he tried to move legislation in February renewing the benefits added in 2009, Camp’s effort ran aground before a vote even occurred. It was quashed by concerns from conservatives, mainly those on the Republican Study Committee.

Camp is taking a diplomatic stance for now, listing the assistance among several other trade policy priorities.

“Chairman Camp wants to see all three trade agreements readied for congressional consideration by July 1 to increase U.S. exports, create much-needed jobs, and prevent the U.S. from losing more market share to our competitors abroad,” said a Ways and Means spokesman. “Chairman Camp looks forward to continuing to work to find a bipartisan path forward in the House and Senate to advance the other elements of the U.S. trade agenda, among them our preferences programs, Trade Adjustment Assistance, WTO accessions and ongoing and new trade negotiations.”

Camp and other trade advocates may seek to modify the 2009 benefits to find a deal.

The biggest problem for conservatives appears to be how the stimulus package significantly expanded the size of a health care tax credit for displaced workers, originally created in a 2002 trade law (PL 107-210), despite concerns from some Republicans such as Sen. Orrin G. Hatch of Utah, now the ranking member on the Finance Committee.
“In many respects, some of it is just a boondoggle to the unions,” Hatch said in an interview. “The question is how much: If it’s a legitimate thing that is backed up by good economics . . . that’s another matter.”

Less controversially, the stimulus also expanded the overall program to cover workers in the service sector.

Democratic Pressure

House Democrats, many of whom oppose President Obama’s efforts to advance the trade agreements with South Korea, Panama and Colombia, are applauding his firmer line on the TAA program. Democrats are under concerted pressure from labor unions to oppose the Colombia pact, but unions are splintered on the Korea deal. The Panama agreement is considered less controversial.

Democrats point out that the health credit, coverage of service workers and other expanded benefits were enacted with the support of key Republicans. And they are highlighting that service workers seeking TAA benefits are now being denied them, since the program expired in February.

Hatch said that the dispute is politically tricky for Rust Belt Republicans, including Camp and House Speaker John A. Boehner, whose constituents include many laid-off manufacturing workers. “Camp comes from Michigan, Boehner is from Ohio — those are big union states,” he said, adding that Camp’s job “has been made quite difficult.”
In the Senate, the 41 Democrats who wrote to Obama said that although they had differing views on the trade deals, they agreed on the need to insist on a long-term reauthorization of the TAA benefits.

Approval of the three trade pacts “will be challenging to secure because it requires significant bipartisan commitments in both chambers of Congress to vote in favor of a TAA extension. The challenge is worth it,” the senators wrote. “We agree with you that strengthening the safety net for the middle class by extending TAA should be a prerequisite for the consideration of new trade agreements.”

Business groups want the 2009 benefits renewed, and view the TAA disagreement as another round of posturing in the effort to get the three trade agreements to the finish line.

They are working to get the dispute resolved and are pointing to strong support from governors.

On May 23, the governors of 23 states, plus Puerto Rico and Guam, wrote a letter to Obama and congressional leaders in which they pushed for action on the three trade pacts and Trade Adjustment Assistance, and for a renewal of fast-track trade negotiation authority.

The following article by Gilbert B. Kaplan and John C. Taylor appeared at the New America Foundation site here.

Exporters of goods from the United States face an enormous disadvantage every time a U.S. product leaves our shores. There is no rebate of the income tax paid with respect to that product, and as such the embedded costs of the export include a tax cost. The exact amount of that cost can vary, but it can be high given that the current U.S. corporate income tax rate is 35%. This contrasts dramatically with exporters of goods from almost every other country in the world, who receive a rebate of their Value-Added Taxes (“VAT”) upon export.

The main reason the U.S. cannot rebate income taxes upon export is because of a provision in the General Agreement on Tariffs and Trade (the “GATT”) which was later incorporated in the WTO. This provision makes the rebate or non-collection of income tax from exporters a prohibited “export subsidy.” In contrast, the rebate of a VAT upon export is permitted by the WTO agreements. In WTO parlance, VAT is an “indirect tax,” and the non-excessive rebate of an indirect tax is not an export subsidy. The rebate of a direct tax such as an income tax, however, is considered to be an export subsidy. It is prohibited, and subject to a variety of WTO offsets and penalties.

The economic effect of this divergence is enormous. It means, for example, that when a U.S. pipe company ships a ton of pipe to Europe it gets no tax rebate. In order to be profitable, the U.S. company must price its pipe at a level sufficient to pay the tax on the income generated from the sale. In contrast, when a Brazilian pipe company sells the same ton of pipe to Europe it is granted a 17% rebate upon export of that pipe as it leaves Brazil. It can therefore be sold at a much more competitive price in the EU (or any other export destination, including the United States), undercutting U.S. manufacturers.

In response to this problem, two major solutions have been offered. First, it has been proposed that the United States should change from an income tax to a VAT system. Currently this is not politically feasible.

The other potential solution is to change the WTO agreements to allow the rebate of income taxes upon export by all producers. But because the United States has the tax system in the world that suffers most heavily from this trade burden, it is very unlikely that the rest of the international community will join in agreeing to this change. The issue has been raised repeatedly over decades in the GATT, and now in the WTO, but it appears to be essentially a dead letter in the Geneva WTO negotiations.

Yet the impact of this unfairness continues to be enormous. U.S. products do not get a tax rebate on export and are thus much less competitive in foreign markets. Moreover, U.S. products can be subject to the VAT in foreign export markets, so they are essentially double taxed, once in the U.S. (with the income tax) and once abroad (with the foreign VAT). This has made it essentially impossible for anything but the most competitive U.S. products to sell in export markets. Products which are fantastic and for which there are few or no competitors-such as sophisticated semiconductors or state of the art agricultural machines from U.S. heavy equipment makers-have a chance to sell abroad. But the average U.S. product cannot overcome the price disadvantage caused by the tax incidence differences, and a commodity product made in the U.S. has almost no hope of doing so at all.

This has resulted in day-to-day disadvantages for U.S. exporters, and has hastened the migration of manufacturing out of the U.S. to foreign locations.

This paper proposes a solution to this problem which has the potential to make U.S. exporters of goods much more price competitive, and thus help to revive the U.S. manufacturing sector. Our proposal is that the United States create VAT Trade Zones, where manufacturers could choose to locate and, in these Trade Zones, would be required to pay a value-added tax in lieu of income tax. In order to simplify the tax accounting treatment for companies who use such zones, one requirement would be that the plant would have to be within its own corporation. This corporation could be a member or “affiliate” of a large U.S. corporate group of companies whose main locus was outside the zone. The rules to establish what income derives from the plant and thus would not be subject to income tax have been fairly well established under U.S. tax law, and could be applied to companies in the zone.

Within the zone, the corporation would be required to pay a U.S. VAT, which would be established as part of this proposal. The exact rate of tax would be determined to equalize the tax effect versus the payment of income tax, but preliminary estimates are that a 5-10% VAT, which is actually lower than the VAT in many other countries, would be close to the right level.

The proposal would not be budget neutral, because if the manufacturer elected to export product from the zone, the company would have the VAT rebated, as is the rule in substantially every other trading nation. But, as a result of the fact that the tax being rebated is a VAT tax, and not an income tax, such rebates would not be inconsistent with the WTO, would not be a prohibited subsidy, and would not be subject to WTO penalties. Certain other requirements would have to be met to ensure WTO consistency, such as non-discrimination as to foreign-owned companies, actual tax neutrality between the VAT and the income tax, and general availability of these VAT Trade Zones across companies and industry sectors, but these objectives could be accomplished.

The U.S. could also consider offering other assistance to companies located in such zones, similar to the incentives offered in special industrial zones in other countries.  While the lure of such zones in other countries is often superior industrial infrastructure and tax breaks, many also offer streamlined regulatory processes with “one stop” administrative offices.  Others offer assistance with worker training and have dedicated funds to assist with research and product marketing through loans or grants.  Some zones in China even offer “seed money” for recent college graduates to start entrepreneurial endeavors.  One indirect benefit from the location of manufacturing enterprises in such zones could be clustering, which leads to increased innovation and closer cooperation between input suppliers and downstream manufacturers.

Once this program went into effect it might ease the transition to a more broadly applied VAT. But even if that broader VAT were established, the other Trade Zone benefits described above could still remain in effect, such as those relating to streamlined administration, research grant money, and, perhaps most importantly, clustering of manufacturing plants.

The question then becomes, why would this VAT Trade Zone system be easier to implement than adoption of a VAT across the entire economy? There are several reasons.

First, this proposal would create U.S. jobs. Rather than making things off shore because of the advantages accruing to countries using a VAT tax and rebating it, manufacturers would be drawn to the United States because of these VAT Trade Zones that would offer similar tax benefits.

Second, the concern about the regressivity of the tax would be lessened as it would only apply to a small segment of the economy.

Next, the administrability of this program could be eased by the fact that the United States already has a Foreign Trade Zone Program where certain trade and customs benefits are provided to users. As such, there is already a mechanism for setting up trade zones (though such zones have no VAT or other tax elements) and that mechanism could be extended into this program.

And finally, this proposal would encourage    U.S. exports, a goal which is almost universally supported politically. In fact, President Obama has set a goal of doubling exports over a five year period. Nothing could more fully accelerate progress toward that goal than the immediate enactment of this program.

The issue of the revenue impact would certainly have to be considered. However, it is worth noting that the United States has one of the highest corporate income tax rates in the world, and there have been strong calls to lower that rate. Even President Obama has indicated a willingness to consider reductions in the corporate income tax rates. Our proposal, rather than lowering the corporate tax rate overall, would be to enact this VAT Trade Zone Program and provide the benefits of tax rebates to manufacturers who create or preserve U.S. plants and jobs through increased exports.

We therefore urge the Administration and the Congress to pass immediate legislation to create the American Manufacturing VAT Trade Zone Program, (the AMVATTZ Program, as we call it) and proceed to unleash the export power and imagination of U.S. manufacturers.

Gilbert B. Kaplan is an International Trade Partner at King & Spalding law firm in Washington, D.C. He formerly served as Deputy Assistant and Acting Assistant Secretary at the U.S. Department of Commerce. J.D. Harvard Law School., A. B. Harvard College.

John C. Taylor is an International Tax Partner at King & Spalding in London.  He previously was a partner at the London office of one of the “Magic Circle” firms. LL.M. in Taxation New York University School of Law, J.D. University of Tennessee, B.S. University of Tennessee.

The following article by Mark Drajem appeared on Bloomberg here.

The Doha round of World Trade Organization negotiations needs a new approach after a decade of unsuccessful attempts to bridge gaps among 153 nations, U.S. Trade Representative Ron Kirk said.

“We needed a reality check of how wide the differences are,” Kirk said in an interview at a meeting of the Asia- Pacific Economic Cooperation group in Big Sky, Montana. “We’ve at least reached the conclusion that we can’t keep doing what we’ve been doing.”

Addressing the meeting of 21 trade ministers from Asian and Latin American nations yesterday, Kirk said there were “three possible paths: keep doing what we have been doing, give up or start thinking of something different that will lead us in a better direction.”

Kirk’s assessment was the most emphatic statement from President Barack Obama’s administration that the long-running talks are foundering. Outside analysts such as former U.S. Trade Representative Susan Schwab have called the negotiations “doomed.”

“You can’t fault him for stating the obvious,” said Jake Colvin, vice president for global trade issues at the National Foreign Trade Council in Washington. “I doubt the United States or our trading partners are going to give up on the negotiations, but it’s difficult to see how continuing to bang their heads against the same wall is going to push the negotiations over the finish line.”

Recognizing a Problem

Kirk said negotiators hadn’t worked out how ministers planned to rework the negotiations, or in what way the U.S., the world’s largest economy and biggest trading nation, would push for changes.

“The beginning of fixing a problem is recognizing that you have a problem,” Kirk said.

None of the other members of APEC released their statements from the closed-door meeting yesterday. Pascal Lamy, director general of the World Trade Organization, the Geneva-based trade arbiter, declined to comment after the meeting.

The comments from Kirk will be followed today by a more general statement from all the APEC ministers, which may depart from the group’s continued stance in previous years of championing the Doha Round.

Six months ago at a meeting in Japan, the APEC trade ministers pledged their “unwavering determination” to the current agenda for the talks.

Kirk’s comments on the WTO talks contrasted with the assessment from the U.S. and eight other Pacific Rim nations negotiating the Trans-Pacific Partnership free-trade agreement. Ministers from those nations met yesterday and said they would try to reach the “broad outlines” of a regional pact before leaders from APEC meet in Hawaii in November.

Doha Agenda

The Doha Round of talks, which began in Doha, Qatar, in 2001, has three primary areas of negotiation — agriculture, industrial goods and services — as well as a mix of items such as duty-free entry for goods from the poorest nations, measures to speed the flow of goods across borders and cuts in fishery subsidies.

The initial impasse in the talks was over agriculture subsidies in rich nations. In recent years, the primary discussions have been over U.S. and European Union demands that India, China and Brazil reduce tariffs on industrial goods.

Schwab, writing in the publication Foreign Affairs last month, proposed scrapping the Doha talks while harvesting parts of the packages, such as reductions in fishing subsidies, duty- free entry for goods from the poorest nations and cuts in tariffs on environmental goods.

The following Reuters article appeared in the American Iron and Steel Institute‘s Daily Media Report.

WASHINGTON - Congressional Republicans on Monday urged the Obama administration to hold China’s feet to the fire over currency and industrial policies they said are hurting American companies.

“The U.S.-China relationship is critically important. But much work needs to be done to strengthen that relationship and improve U.S. market access into China,” Republican members of the House of Representatives Ways and Means Committee said.

They put their message in a letter to U.S. Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton, who hosted Chinese officials beginning on Monday two days of high-level talks on economic and geopolitical concerns.

The annual U.S.-China Strategic and Economic Dialogue follows Chinese President Hu Jintao’s visit in January to the United States and another high-level forum in December known as the U.S.-China Joint Commission on Commerce and Trade.

During both the Hu visit and the JCCT meeting, “China made encouraging commitments. However, those commitments can be deemed meaningful only if they result in improved market access for U.S. companies, as measured by sales, jobs and exports,” the Republican lawmakers wrote.

They urged President Barack Obama’s administration to push China to follow through on Hu’s promise to ‘de-link’ government procurement and indigenous innovation policies that could shut foreign firms out of China’s huge public sector.

“Now is time to provide more clarity how they are going to implement that very high-profile pledge with a timeline for doing so,” said John Frisbie, president of the U.S.-China Business Council, in a separate interview.

“That’s something we should expect at this meeting and I would hate to think that we wouldn’t see that,” Frisbie said.

The lawmakers also complained that China’s “currency misalignment continues to be a serious problem,” driven in large part by China’s refusal to open its capital market.

“China must let the RMB (renminbi) appreciate and move toward allowing market supply and demand to determine the value of its currency,” they said.

The Republicans, who won control of the House in last November’s election, steered clear of threatening legislation to force China to revalue its yuan, or renminbi, currency.

But in the Democrat-controlled Senate, Senator Sherrod Brown said he believed legislation was needed to stop “China’s unfair currency manipulation.”

“The Chinese government has taken small steps to allow the yuan to appreciate, but it is not enough,” the Ohio Democrat said, echoing the view last week of Senator Charles Schumer, the Senate’s third-ranking Democrat.

House Republicans also pressed for faster results on China’s promise to fight software piracy by increasing the use of legitimate software by government agencies.

“We are concerned that U.S. companies have not yet seen a meaningful increase in sales” of legal software in the Chinese market, they said.

The lawmakers criticized China’s use of “WTO-inconsistent subsidies” and regulatory practices that they said give Chinese companies an unfair advantage over foreign firms.

They also accused Beijing of misusing its anti-dumping laws “to retaliate against U.S. companies,” and of throwing up food safety barriers to keep out U.S. farm exports.

The Republicans took aim at Chinese restrictions on rare earth exports and called on Beijing to do more to help bring world trade talks to a successful conclusion.

The following article appeared in the Daily Media Report of the American Iron and Steel Institute.

Washington, D.C. – American Iron and Steel Institute (AISI) President and CEO Thomas J. Gibson issued the following statement following the conclusion of the third U.S.-China Strategic and Economic Dialogue.

“As the third U.S.-China Strategic and Economic Dialogue concludes, the U.S. steel industry strongly supports the Administration’s call to China to open up its markets to U.S. exports and put an end to its industrial policies that discriminate against U.S. and other countries’ products both in China and in third country markets.  Our government approved China’s entry into the World Trade Organization based on promises China made to open its domestic market. Instead, what we have seen in recent years has been a pushback against reform, a growing role for state-owned and state-supported enterprises, and continued Chinese government manipulation of its currency to promote Chinese exports.  It’s time for China to comply fully with its WTO obligations.  We urge the Administration to continue to press China to abandon its protectionist policies that disadvantage U.S. manufacturing companies, employees and communities.

To achieve open and free trade, China should end its import barriers on industrial goods, export restrictions on raw materials, limits on foreign investment, state subsidies to its manufacturing industries and undervaluation of its currency.  The U.S. Government must also ensure that U.S. companies have the ability to obtain relief from the injurious effects of Chinese trade and industrial policies.  We therefore urge the Congress to pass legislation to ensure that U.S. customs officials will act to stop efforts by unscrupulous traders to evade U.S. trade law orders through customs fraud, transshipment and other forms of illegal evasion.  In addition, Congress should enact currency reform legislation to give U.S. manufacturers a remedy against the injurious effects of Chinese currency manipulation.”

AISI’s member companies represent approximately 80 percent of both U.S. and North American steel capacity.  For more news about steel and its applications, view AISI’s Web site at www.steel.org.

China is the world’s largest agricultural economy, and it is the world’s second largest importer, and fourth-largest exporter, of agricultural goods.  While many of China’s agricultural policies are designed chiefly to meet domestic goals such as food security and the improvement of rural incomes, China’s policies also aim to improve the competitiveness of its agricultural sector by raising productivity, enhancing technological capabilities, and moving its industry up the value chain.  Indeed, Chinese government payments to Chinese farmers (including central, provincial, and local payments) are now estimated to exceed central government payments to farmers in the United States.  The rapid rise in China’s expenditures on agricultural support since 2004 is slated to continue under its recently adopted 12th Five-Year Plan for the 2011 – 2016 period.

In a new report, China’s Support Programs for Agriculture under the 12th Five-Year Plan, the Law Offices of Stewart and Stewart analyzes the implications of the new 12th Five-Year Plan for China’s support system for its agricultural producers.  Terence Stewart, the firm’s managing partner, notes that the report reviews steps taken to implement China’s last five-year plan by increasing support to China’s farmers and agricultural producers.  It provides breakouts of China’s agricultural spending in recent years and its budget for 2011, as well as detailed trade data for China’s agricultural imports and exports.  The report reviews key elements of China’s agricultural support system, including targets for increased grain production, subsidies for the purchase of agricultural machinery and inputs, restrictions on exports of fertilizer and other agricultural items, rural credit services, programs to improve distribution, processing, and logistics in the food system, and government support for the modernization and industrialization of China’s agricultural sector.  Elizabeth Drake, a partner in the firm, has confirmed that the report also reviews China’s WTO obligations regarding agriculture, including its commitment to terminate export subsidies, provide only de minimis levels of domestic producer support, and eliminate restrictions on exports.  The report reveals that China may be falling short of these commitments in a number of areas.

The Stewart and Stewart report is a timely and informative resource for industry, producers, and other stakeholders interested in learning more about China’s agricultural support policies.  For more information on the report, send an email to the following address: [email protected] .

With a 50-year tradition of excellence, Stewart and Stewart helps clients prevail in a complex and ever-changing global marketplace by providing innovative solutions to the challenges of international trade.

The following blog post by Travis McArthur appeared on Eyes on Trade, Public Citizen’s blog on globalization and trade here.

Earlier this week, the USDA released a report attempting to estimate the effects of the Korea, Colombia, and Panama FTAs upon U.S. agricultural trade. It also examined possible effects of the ASEAN-China and ASEAN-Australia-New Zealand FTAs upon the U.S.

Unfortunately, the USDA estimated the effects through a computable general equilibrium (CGE) model, which has a shoddy track record, to say the least. A 1999 U.S. International Trade Commission (USITC) study on the likely effects of China’s tariff offer for WTO accession used a CGE model to estimate that the U.S. trade deficit with China would increase by only $1 billion dollars due to China’s accession. In reality, the trade deficit with China skyrocketed by $167 billion between 2001 and 2008.

Similar studies on NAFTA were also way off the mark. An economist at the Federal Reserve concluded that a CGE-based study of NAFTA underestimated NAFTA’s impact upon U.S. imports by ten times the actual effect of NAFTA. He concluded his study with a recommendation: “If a modeling approach is not capable of reproducing what has happened, we should discard it.”

Not accounting for currency manipulation is a chief problem of CGE models, as Rob Scott at the Economic Policy Institute has demonstrated. The USDA’s report even acknowledges the devastating effect currency devaluation can have upon U.S. agricultural exports:

In 1997, U.S. apple exports to Southeast Asia peaked at 150,000 tons, just as the Asian financial crisis struck. The crisis led to sharp devaluations of Southeast Asian currencies that raised the prices of imported apples and income losses that further discouraged apple buying, triggering a dramatic decrease in U.S. apple exports to the region.

As we discuss in a factsheet, Korea is only one of three countries to have ever been placed on the Treasury Department’s list of currency manipulators, having repeatedly manipulated its currency in the past. The Korea FTA contains no prohibition against currency manipulation, so the Korean government could effectively negate the tariff cuts mandated under the FTA through currency manipulation. Despite the long history of Korea manipulating its currency, the USDA’s estimates do not attempt to account for the very real possibility of another devaluation, even though they could have done so through estimating alternative scenarios.

Given that fair trade opponents have touted beef as a major winner in the Korea FTA, a close examination of the USDA’s beef assumptions is warranted. The USDA assumes a very optimistic scenario for beef like the 2007 USITC study, although it is slightly less optimistic. (Who knows? Maybe the next study will have realistic expectations.) The 2007 USITC study assumed that U.S. beef exports would be unimpeded by current Korean regulations prohibiting the import of U.S. beef from cattle older than 30 months and it set the initial beef export level in the model at $1.1 billion, even though actual U.S. beef exports to Korea were tiny at the time the study was conducted. This USDA study assumes that the initial beef export level is $701 million. Actual 2010 U.S. beef exports to Korea amounted to about $350 million, far off the level of these optimistic scenarios. The initial level of exports is one of the primary determinants of the results of the CGE model, and higher initial exports result in greater predicted exports from tariff reductions. With the slightly lower initial beef export assumption, the USDA report projected increased beef exports to Korea of $563 million, compared to the USITC’s projection of $628-1,792 million greater beef exports. Realistic beef export data would result in even lower projected gains.

Finally, even though the report is some fifty pages, the USDA is highly stingy with its presentation of results. It presents the projections on the bilateral changes in trade flows with Korea and Colombia under the FTAs, but not how the FTAs will affect overall U.S. trade with the world. (The projected impact upon overall U.S. trade can be quite different from the bilateral results due to the trade diversion effects of bilateral trade pacts.) The decision to exclude the global results is especially puzzling given that the report focused on the effects of trade diversion in its assessment of the ASEAN-China and ASEAN-Australia-New Zealand FTAs.

It is likely that leaving the global results out of the report conceals the fact that the overall trade balance in several agricultural sectors is expected to worsen under the FTAs. The 2007 USITC report on the Korea FTA, which used the same model as the USDA study, did report both bilateral and global changes and found that several sectors expected to have improved bilateral trade balances would have worsening balances with the world, such as wheat, oilseeds, and miscellaneous crops. The global trade balance is what matters since it indicates the total effect of goods exiting and entering the U.S. upon farmers’ livelihoods. Thus, this USDA report does not contain sufficient information on projected imports and exports to evaluate the effect of the FTAs on U.S. farmers, even in terms of its own flawed CGE model.

In sum, at first glance this report projects significant gains for agriculture from the Korea, Colombia, and Panama FTAs, but a close examination reveals that methodological flaws render the report unreliable. Instead of these predicted gains, we could see a repeat of the NAFTA experience in which U.S. exports of beef and pork to Mexico in the first three years of NAFTA were 13 and 20 percent lower, respectively, than beef and pork exports in the three years before NAFTA was enacted, partly due to currency devaluation.