by Christophe Beaudouin
CONTENTS OF THE STUDY
PART I: EUROPE IS ONE OF THE WORLD'S LEAST PROTECTED TRADE BLOCS
I – Average customs duties little higher than elsewhere (p. 2)
II – Case study: USA more resistant than Europe to Chinese textile imports (p. 3)
PART II: USA AND CHINA TOP THE ECONOMIC PATRIOTISM LEAGUE
I – ‘America first': overtly aggressive patriotism (p. 4)
A – A policy of support for struggling sectors of industry (p. 5)
1) The air transport market
2) The steel market
3) Agricultural produce markets
4) The timber market
B – An arsenal of legislation underpinning protectionism (p. 5)
1) The main trade acts
2) Chapter 11 of the US Bankruptcy Code
3) The Sarbanes-Oxley Act
4) Insurance rules
5) The imperatives of ‘national security'
II – Chinese patriotism: protectionism in different forms (p. 8)
1) Exchange and currency controls and a strategic policy that support Chinese markets
2) The ‘Chinese preference' in awarding contracts
3) The ‘Chinese preference' as expressed in laws and regulations
4) Beijing's promotion of oligopolies and the ban on foreign control of certain industries
PART I: EUROPE IS ONE OF THE WORLD'S LEAST PROTECTED TRADE BLOCS
Is Europe really an economic fortress refusing to ‘play the game' of globalisation and impenetrable to developing countries? Recent work by the Centre d'études perspectives et d'informations internationales (CEPII) on the impact of trade deregulation suggests that the answer is no.
1) Average customs duties little higher than elsewhere
The European Union applies an average rate of customs duty of 3.1% which is higher than that applied by the USA (2.1%), but lower than the Japanese or Canadian rates (3.9% and 3.4% respectively) or the world average (5.6%).
While the EU rate of duty on agricultural produce (17.9%) is higher than the US rate (5%), it is lower than the rates applied by many emerging countries (India's rate, for example, is almost 60%) and lower too than the world average for such produce (19.1%).
In the manufacturing sector Europe's levels of customs duty are among the lowest in the world. The USA and Canada are, for example, more protectionist than Europe with regard to textile imports (their rates of duty being 9.4% and 10.8% respectively, compared with Europe's 5.7%).
Emerging countries also apply much higher rates of duty on manufactured goods (the rate in India is 30% and in Brazil it is 11.4%, compared with an EU rate of 2%).
Analysis of the rates of duty payable on imports reveals that Europe is more open than the USA, or any other developed country, to goods exported by the world's poorest countries (the least advanced countries or LACs): the average EU rate applied here is 0.8%, compared with a US rate of 5.1% (the global average rate of duty applied to products from the LACs is 4.9%).
The reason for this situation is the ‘Everything but arms' initiative, under which the LACs can export to EU countries without being subject to customs duty or quotas. The USA, by contrast, applies high rates of duty to labour-intensive products (in which the LACs specialise to a greater extent than other countries).
The EU's use of preferential trade arrangements for the poorest countries results in a high level of discrimination between trading partners.
Considered in their entirety, the CEPII figures for tariffs actually applied afford a general insight into the interests being defended by the different parties in current trade negotiations:
1) the European Union has defensive interests in the agriculture sector – although it remains the world's number one importer of agricultural produce – whereas its interests in manufactured goods are aggressive;
2) the emerging countries have aggressive interests in agriculture and Europe is naturally a target market, but their interests in manufactured goods are defensive;
3) US interests are less clear-cut: America is not as defensive as Europe on agricultural produce but – like the emerging countries in this respect – it is more defensive on manufactured goods.
The CEPII findings (quoted in the French Senate report) also show:
1) that Europe imposes lower rates of duty than North America on exports from the South (virtually no customs duty is imposed on LAC products thanks to the ‘Everything but arms' initiative) and Europe is a more important market for the developing countries than the USA and Japan combined: 70% of European imports come from developing countries;
2) that unlike the USA and Japan, Europe makes very little protectionist use of environmental measures. Environmental measures are potentially applicable to 88% of products internationally traded. Countries may be tempted to use them in a protectionist way to safeguard local producers. The number of products affected by such measures in Europe, however, is one third that of the corresponding figure in the USA or Japan (environmental restrictions apply to three out of four products entering the Japanese market).
2) Case study: USA more resistant than Europe to Chinese textile imports
In the space of three months from the January 2005 abolition of quotas under the international Multifibre Agreement (MFA) Europe experienced a tidal wave of Chinese imports. Whatever the EU's ultimate response, a large section of Europe's textile industry will be wiped out. It should be recalled that 2004 saw the loss of 165 000 jobs in the European textile industry and more than 10 000 companies went bankrupt.
Eurostat figures show that the trade imbalance has been growing for years.
The EU offers China a market ripe for full-scale invasion because Chinese manufacturers are not subject to the wages, social security and environmental obligations with which their European counterparts must comply. China can sell what it pleases to the EU – from socks to computers and DVD players – including millions of counterfeit products, ‘Swiss' watches among them. The real EU trade deficit is probably more than EUR 100 billion.
The contrast with American protectionism here could not be clearer: according to the Chinese General Administration of Customs, in March 2006, a year and a half after termination of the MFA, China was exporting 20% more textiles to the USA and 33.2% more to Europe than it had done the previous year, the value of the exports being USD 1.32 billion and USD 1.44 billion respectively.
PART II: USA AND CHINA TOP THE ECONOMIC PATRIOTISM LEAGUE
I – ‘America first': overtly aggressive patriotism
There has been no lessening of ‘isolationism' – translating in many cases into protectionism – either in American public opinion or in Congress, where ‘America first' is still a popular slogan. A more liberal approach tends to tempt only the executive arm of government: the Presidency, the Treasury and the State Department. Members of Congress, because of the way they are elected, are more open to the influence of pressure groups whereas the executive is more sensitive to the international repercussions of its commercial policy, to the importance of observing international agreements and to its credibility worldwide. Professor Jean-Marc Siroën has commented that the Republican Party is concerned with affirming US sovereignty while the Democrats want to prevent unfair trade practices. Trade deregulation and the ratification of free-trade agreements are ultimately rendered acceptable to the United States because it legislates unilaterally in these areas.
A - A policy of support for struggling sectors of industry
1) The air transport market – a sector in which safety has always been the first casualty in times of financial difficulty – typically illustrates US protectionism. According to former British Airways director general Rod Eddington, American airlines soaked up USD 15-20 billion in public subsidies and guaranteed loans over four years. ‘[They are] operating in protected markets. […] They are hoovering up public funds and they still can't make a profit,' he said, referring to Delta Air Lines and Northwest Airlines, which were also benefiting from protection under Chapter 11 of the US Bankruptcy Code (see below).
2) The case of the steel market has attracted much publicity. In the 25 years up to 2002, when George Bush announced a 30% surcharge on imports of foreign steel products under the Trade Act (see ‘An arsenal of legislation' below), US steel companies had received approximately USD 17 billion in subsidies. The main union in the sector, the USWA (representing 600 000 steelworkers) negotiated a very favourable sickness and retirement insurance scheme, and its benefits are considered as ‘legacy' costs not amenable to reduction because the employees of the biggest steel companies cannot be deprived of them. All takeovers or mergers must accommodate this social cost which is a heavy burden on profitability. National Steel and US Steel, for example, agreed to merge only on condition that the Federal Government would foot the bill for all pension and social security costs for the 8 400 employees of the group in Indiana and their families.
3) Agricultural markets in the USA, as indeed in Japan and Europe, have not been outdone. According to OXFAM, American cotton producers received more than USD 18 billion in subsidies between 1999 and 2005, representing an 86% rate of subsidisation. The French Senate report concluded that virtually all the criticisms which NGOs like OXFAM make of the CAP could equally well be levelled at American agricultural policy. It explained the fact that the CAP was taking most of the fire as an effect of ‘economic diplomacy'.
4) The timber market has been an ongoing bone of contention between the USA and Canada. Since 2002, Canadian construction timber exported to the USA has been subject to heavy tariffs on entering the country. Washington accuses Ottawa of dumping, while the Canadians denounce US protectionism. Negotiations between the two countries have reached stalemate following a number of contradictory rulings by the WTO and the disputes settlement panel of the North American Free Trade Agreement (NAFTA), which includes both the countries concerned as well as Mexico.
B - An arsenal of legislation underpinning protectionism
1) Two major trade laws mark the establishment and the reinforcement of the US legislative arsenal, namely the Trade Act of 1974 and the Omnibus Trade and Competitiveness Act of 1988. Under these acts, American industries in competition with cheaper foreign products can relatively easily initiate procedures to have tariffs or quotas imposed at the border or to subsidise domestic production.
The best known provision here is Section 301 of the Trade Act of 1974 which introduced a number of tests of fairness applicable to all the trading partners of the United States. US companies which believe they have been burdened or restricted by foreign subsidisation of production or exports or by dumping, or which consider themselves unfairly excluded from foreign markets may complain to the US Trade Representative. If, after an investigation, the US International Trade Commission considers that there is a ‘threat of prejudice' to an American industry, retaliatory action may be taken through the imposition of compensatory duties or antidumping taxes on the foreign products.
Section 203 of the same Trade Act of 1974 is a further legal basis for interventionism in the interests of protecting markets. The US President used this provision in 2002 to impose additional tariffs ranging from 8% to 30% on steel as well as a steel-import licensing system. The President justified recourse to Section 203 on the basis that world economic conditions (i.e. exchange rates) had changed and that substantial imports of low-priced steel were harming the American steel industry. His decision provoked an outcry in a world more accustomed to US lectures about the importance of free trade, and some commentators denounced what they called ‘capitalism of connivance' – alluding to friends of the President who benefited from the decision. Europe retaliated by imposing additional duties on imported US products (textiles, fruit and vegetables and shoes, worth a total of USD 2.2 billion). In July 2003 the WTO found that the American additional tariffs were in breach of its rules.
2) The notorious Chapter 11 of the US Bankruptcy Code provides for a very favourable system of dealing with loss-making American companies and thus indirectly protects whole sectors of industry from ‘free trade-ism'. Under the legislation such companies can continue trading while restructuring: they can keep all their assets, contest their creditors' demands, delay repaying debt and even unilaterally reduce the volume of their debt. The following have ‘benefited' from these provisions:
- airlines including Continental Airlines, America West, United Airlines (UAL), US Airways and, at the end of 2005, Delta Airlines (a partner of Air France) and Northwest Airlines, ranked third and fourth respectively among US air carriers;
- energy broker Enron (!);
- the WorldCom telecommunications group (in the biggest bankruptcy in US history);
- retail group Kmart;
- 31 steel companies including most recently National Steel.
3) American protectionism was recently strengthened by a further major piece of legislation, the Sarbanes-Oxley Act, passed in 2003 in the wake of the Enron scandal. This law requires all companies listed on the US Stock Exchange to submit to the Securities and Exchange Commission (SEC, the stock exchange watchdog) accounts personally certified by their directors and to conduct regular audits. In an article under the headline ‘The world finds it's too hard to do business with the US', the UK daily The Independent estimated the cost to companies of the new requirements at a minimum of USD 1 million per year. Such was the burden imposed on the 1 300 European groups with interests in the USA (the annual cost of compliance for BP was reportedly USD 100 million) that many decided to drop their American shareholders, delisting on Wall Street and retrenching to the London Stock Exchange. Similarly, a US Council on Foreign Relations report entitled ‘Building a Transatlantic Securities Market' took the view that the Sarbanes-Oxley Act was a tool of American protectionism which inflated trading costs for American investors now forced to buy and sell shares in companies listed abroad.
4) Insurance is another protected sector, thanks to new rules requiring foreign-owned reinsurers to deposit large sums in a trust fund to compensate US partners should they fail: the rules drew the ire of Lloyd's of London chairman Lord Levene, who called them ‘discriminatory and totally unacceptable' (The Independent, 26 February 2006).
5) Since the attacks on 11 September 2001, ‘national security' has become a further core argument for American protectionism, although it is used in many cases to stem the wave of acquisitions by China or the United Arab Emirates of large US companies.
- All takeovers of American companies are subject to approval by the Committee on Foreign Investment in the United States, headed by the Secretary of State for the Treasury, which is required to determine whether the sale of a company to a foreign owner ‘poses a threat to national security':
* weapons technology is obviously a prime focus of concern;
* oil is another, as in June 2005 the Government blocked an attempt by the Chinese company CNOOC to acquire UNOCAL, America's seventh largest oil company.
- Members of Congress have been calling for a complete rethink of the approval process for foreign investments following the rumpus over Dubai Ports (DP) World, a United Arab Emirates-based investment company, gaining control of America's seven biggest ports. In the end, DP World told the Senate that it would delegate management of its American ports to ‘an American entity' for the sake of friendship between the United States and the United Arab Emirates.
- On 7 March, a bill was tabled in Congress seeking to prevent any infrastructure designated as ‘critical' by the Departments of Defence and Homeland Security from being controlled by a foreign-owned or foreign-managed company. ‘To those who say my views smack of protectionism, I say America is worth protecting,' proclaimed Duncan Hunter, Republican chairman of the House Armed Services Committee and author of the bill. All companies that run ‘critical infrastructure' – ports, airports and power stations – must be American-managed.
II – Chinese patriotism: protectionism in different forms
1) Exchange and currency controls and a strategic policy that support Chinese markets
- China is not a country in which investments are made lightly. The Government keeps a tight rein on the situation through one of the world's strictest systems of exchange and capital controls. Washington is currently demanding that Beijing review its exchange policy. Unlike many Latin American and former Soviet-bloc countries, where capital and exchange controls are flouted, violating such controls in China has been described as ‘virtually a capital offence'.
- China also keeps its own currency at a low value in order to boost exports artificially, although a mini-revaluation of the yuan was recently undertaken (2% against the US dollar) as a gesture of good faith to the world.
- Military and strategic policy is another tool of the Chinese economy. In the field of energy policy, China (like the USA and Japan) ‘conducts a very specific policy of acquiring resources and securing lines of supply, including by military means'. China is in the process of building up its navy, with 5 000 tankers capable of operating beyond its territorial waters in order to secure strategic sea routes. It is important to remember that China and India (with 3 billion consumers responsible for 15% of world energy consumption) have natural resources requirements that double every five years in line with growth.
2) The ‘Chinese preference' in awarding contracts
China's economic patriotism is also apparent in the way that nationally owned companies are accorded dominance in many markets, as demonstrated by the examples below.
- In 2004 the city of Beijing cancelled a contract worth EUR 2.6 million with Microsoft, in response to pressure from central government which wanted local software companies to have priority.
- The Ministry of Transport rejected French, German and Japanese projects for a 1 300 km high-speed train link between Beijing and Shanghai. The Chinese railway industry was preferred over the TGV.
- The Government has just extended by six months the deadline for selecting a supplier of third-generation nuclear reactors, and it looks likely that the French AREVA group will miss out on what has been called the ‘nuclear contract of the century'.
3) The ‘Chinese preference' as expressed in laws and regulations
- China's fiscal legislation can be a further source of irritation to foreign investors when it is used as an indirect form of subsidy for certain types of product.
* The row about VAT (at 17%) on integrated circuits is an example. Chinese integrated-circuit manufacturers – unlike their foreign counterparts selling to the Chinese market – benefit from partial reimbursement of VAT. After the USA, the EU, Japan and Mexico complained to the WTO about this practice, China agreed to compromise.
* Another tax-related case taken to the WTO in March 2006 by the USA, the EU and Canada concerned ‘excessive' rates of customs duty imposed by Beijing on vehicle parts. If 60% of the components of a vehicle manufactured in China are imported, they are subject to customs duty at 28%, equivalent to the rate for a new foreign car. If the vehicles manufactured in China require only 10% of their components to be imported, the import tariff will be just 10%. Although Volkswagen and General Motors build cars in China without needing to import components, Washington and Brussels are challenging the Chinese rule on principle.
- Regulation of the Chinese healthcare system constitutes another non-tariff barrier to free trade. When the system was reformed in 2002, China virtually closed the pharmaceutical products market by imposing a price ceiling on many medicines. As a result prices have fallen by between 3% and 80%, pushing some 40 foreign pharmaceutical companies out of the market. The case has been referred to the WTO.
- Other foreign products have suffered through China's lax attitude to the observance of intellectual property rights. Counterfeiting is widespread, penalising in particular foreign textile manufacturers, and foreign software companies have been similarly hit by pirate products. According to Business Software Alliance, 92% of all Chinese computers use pirate software, much to the chagrin of Microsoft.
4) Beijing's promotion of oligopolies and the ban on foreign control of certain industries
The steel sector is a case in point here. China, which consumes a quarter of the world's steel output, is apparently about to become a net steel exporter. Over recent years Beijing has been urging steel companies to merge or simply to close. As a result, since 2005, China's 800 steel producers have consolidated, following the decision of the second largest company in the sector (Shanghai Angang) and the fifth largest (Bengang) to merge, creating the Anben Iron and Steel Group with an annual output of 300 million tonnes – equal to that of the biggest producer, the Baosteel Group.
At the same time the Government has prohibited foreign control of local steel companies, a worrying development for groups like Mittal and Arcelor which are currently stepping up their investment in China.
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On this side of the Atlantic, although the European Union has manifestly failed to create prosperity or to produce anything like a common economic and industrial policy, the European Commission continues to rebuke Spain, Poland, Germany and particularly France for recent bouts of ‘economic patriotism'.
The complaints from Brussels sound increasingly anachronistic as Europeans watching developments in America and Asia see the USA acting to protect its companies and ports from Arab and Chinese takeover bids, and China pulling out all the stops to promote its own national champions.
Many commentators are questioning the shockwave effect of growing US protectionism, which has the potential to upset and indeed undermine ‘globalisation' within the space of a few years.
Christophe BEAUDOUIN
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