The odd couple

The little red wagon, that icon of an innocent American childhood, is being outsourced to China – and John Kerry wasted no time in letting the American public know about it.

"Just a couple of days ago,? said the presumed Democratic nominee for the US presidency in an April 4 radio address, "the company that makes the red Radio Flyer wagons our children have played with for generations decided to start building them in China. ?The 87-year-old company will be paying off people who've worked for years at the plant in Chicago and letting another piece of America vanish,? he lamented.

The "jobless recovery? that began in November 2001 has given the Kerry campaign its first major election year rallying point: a cluster of trade-related issues grouped under the rubric of ?the outsourcing crisis.? A CNN/USA Today/Gallup poll taken in March showed that some 58% of Americans think that keeping jobs from going overseas will be "very important? in their voting decision come November, with another 27% calling it "fairly important.? In the minds of many Americans, the prime culprit in all of this is China. Last year, China's trade deficit with the US soared by over 20% to top US$124 billion – the largest imbalance ever with any country. And increasingly, that deficit is coming from not only furniture, toys and textiles, but also from white collar industries such as sophisticated electronics.

In the last six months, a flurry of actions from the US side has kept China trade issues alive. Last November, the American Furniture Manufacturers Committee filed an anti-dumping petition with the International Trade Commission (ITC), seeking duties on wooden bedroom furniture from China. A ruling the same month slapped tariffs on Chinese-made TVs. American garment manufacturers, under intense pressure from low-cost Chinese textiles, successfully lobbied for quota restrictions on knitwear, brassieres and dressing gowns from China in that same month. A proposal currently before Congress with backers on both sides would impose penalty tariffs equivalent to the price advantage enjoyed by China because of what some see as the undervaluation of the renminbi. In mid- March, the AFL-CIO, the most powerful American trade union, filed an unprecedented complaint under Section 301 of the 1974 Trade Act with the United States Trade Representative (USTR) calling for steep tariffs on Chinese goods because of allegedly unfair treatment of Chinese factory workers. With existing quotas on textiles set to expire on January 1 2005, pressure from the beleaguered American garment industry for additional safeguards continues to mount. China trade has become such a hot topic that quotas on Chinese-made bras were actually mentioned on a February episode of the popular NBC White House drama The West Wing.

Kerry and his allies have made political hay on these anxieties, attacking "benedict Arnold CEOs? who off-shore American jobs and taking the Bush administration to task for being too soft on China. There are intellectual-property laws violated all the time, market-access rules that have been violated. And on the currency, ?that is against international trade standards,? said Kerry in March.

Popular prickliness over the outsourcing issue has sent Bush administration officials heading for political cover in recent months. Economist N. Gregory Mankiw, chairman of the president's Council of Economic Advisers, found himself a political pariah after commenting in February that outsourcing would ultimately benefit the American economy. Similar comments by Treasury Secretary John Snow – ?out sourcing is a part of trade,? he said, "and there can't be any doubt about the fact that trade makes the economy stronger? – prompted a firestorm of criticism in late March. Earlier in the month, Anthony F. Raimondo, a Nebraska businessman, had his nomination to the newly-created post of "manufacturing czar? at the Department of Commerce revoked after it was revealed that his company, Behlen Manufacturing of Columbus, Nebraska, owns a factory outside of Beijing and laid off 75 American workers in 2002.

The Bush administration faces a dilemma: it is loath to engage in full-on China bashing or to otherwise backpedal on its commitment to free trade, but nonetheless finds defending free trade – or China, or outsourcing – far too risky politically. "Any serious politician or economist you talk to will tell you that outsourcing is a marginal economic problem, and that in the long run, the incredibly impolitic statement Mankiw made was right,? said Patrick Norton, partner and trade specialist at the US law firm O?Melveny and Myers in Beijing.

Protective tariffs on imports amount, as more candid economists have pointed out, to a regressive tax on the poor. But as one Bush administration official confided in a recent Wall Street Journal editorial, no politician is going to tell a textile worker whose job has just been outsourced to China that "imports allow you to stretch your unemployment check further at Wal-Mart.? He might also take cold comfort in knowing that his home loan is, in all likelihood, backed in part by Chinese holdings of mortgaged- secured Fannie Mae and Freddie Mac bonds – part of China's massive hard currency reserve, which stood at US$403.25 billion dollars at the end of 2003. Beijing now holds over US$120 billion in US Treasury securities, and adds some US$187 million every business day. That's powerful leverage for Beijing.

The White House's approach so far has been a more subtle tack that has won plaudits within the high-tech industries it has chosen to champion, but hasn't necessarily sold voters on its ability to protect American jobs. Taking China to task for tax policies on semiconductors and for pushing encryption systems doesn't have the resonance of the Kerry camp's attacks on the current trade system.

Trade with China has surfaced as an issue in presidential races past, typically pitting the interests of pro-China "big business? against blue collar Americans of the Rust Belt and the South whose jobs are threatened by cheap Chinese labor, but never to the extent seen in the 2004 race. Part of the reason is timing, said Norton. "China really came into the WTO system in the beginning of 2002, and there's been a year or 18 months of lag time where both parties were cutting one another slack. Now you?re seeing things settle down.?

?There are bound to be bumps,? he noted, ?as China enters the world economy, with its size and capabilities – given the adjustments it must go through moving from a closed, semi-autarkic system.?

And for all the election year hype, there are genuine anxieties of a new sort that are being tapped. ?There is a general concern about jobs that's been elevated by election year politics, given the narrowness of electoral majorities in key states,? said Charlie Martin, president of the American Chamber of Commerce, China. "But the concern is real: there is an insecurity among American workers – particularly in white collar fields.?

While India may be grabbing headlines for its robust software and call center outsourcing capabilities, China's own IT sector is ramping up quickly, growing increasingly competitive and assertive. "Blue collar Americans in steel or textiles are used to being under the gun because of foreign competition,? said Norton. ?The significance of this particular problem is that it's affecting a different sector of society – reasonably well educated workers in a sector where we thought we had a comparable advantage.?

Two of the problem areas in US-China trade to which the Bush administration has given priority illustrate the ongoing shift in the trade battleground: first, a long-running dispute over a Chinese tax policy favoring China's domestic semiconductor manufacturers, which the US has said it will bring to the WTO in its first such case against China; and second, China's insistence on vendor compliance with its homegrown wireless local area network (WLAN) encryption standard, WAPI, which industry leader Intel has resisted, with the support of the Bush Administration. The US-China business community, ordinarily critical about most trade actions aimed at China, has closed ranks around both issues.

Beijing currently offers substantial rebates on the 17% Value Added Tax on semiconductors to companies – foreign or Chinese – manufacturing in China, effectively reducing the actual tax to as little as 3%. The rebates are meant to encourage the growth of the domestic semiconductor industry, and to attract the kinds of billion-dollar-plus investments needed to build semiconductor fabs. Bilateral negotiations between Beijing and Washington on the issue had been going on for some time, and the announcement on March 18 of the US decision to take a discrimination case to the WTO – something the US is ordinarily reluctant to do, given the long and drawn-out nature of the process – was unexpected.

"I think MOFCOM [China's Ministry of Commerce] was genuinely surprised by the timing, but they knew that this was coming. One way or another they hadn't been very willing to engage in constructive dialogue on it,? said Martin. "I think China's tax policy is blatantly unfair, and it's time for the two countries to come to grips with it. The issue is catalyzed by the election process, but it's real. It's important not only to look at the particular issue, but at the precedent that it sets. If you allow these subsidies in one area, you will get them in others.?

His sentiments are echoed by Patrick Powers, Director of China Operations for the US-China Business Council: ?This particular issue has been under discussion for a long time, and the US has felt it's not getting forward momentum. It's good for China to go through this process.?

The US is also putting pressure on China to drop its demand that all WLAN devices imported into China after May 31 comply with its WAPI encryption standard – something Intel, maker of the popular Centrino wireless chipset, has said it will be unable to do. In early March, the US sent a letter urging against adopting WAPI signed by USTR Robert Zoellick, Commerce Secretary Donald Evans and Secretary of State Colin Powell. While the two sides continue to consult on the matter, the US has raised the possibility of a second WTO complaint. ?The proposed Chinese regulations may raise additional WTO implications which we are currently investigating,? a US Embassy spokesperson in Beijing said.

WAPI is only the latest of a number of standards that China, unhappy about paying IPR licensing fees, has recently pushed. Beijing actively promotes TD-SCDMA, a domestically- developed standard for third generation (3G) mobile networks, as well as Chinese standards of video compression and high-definition television.

"In the semiconductor issue, there's clearly some legal basis. There is none whatsoever to the AFL-CIO case,? said Gong Jun, partner with Chinese law firm Jun He in Beijing and member of the All China Lawyers Association WTO Special Committee. "It's pure politics. Forcing a foreign government to improve labor protection? That's utter nonsense.?

The petition, filed under amendments to Section 301 of the 1974 Trade Act, specifies that a trading partner's persistent denial of internationally recognized workers? rights – freedom of association, right to collective bargaining, standard minimum wage, hours of work and occupational safety and health – constitutes an unreasonable trade practice. The document, authored by Columbia law professor Mark Barenberg, is a scathing indictment of labor practices in China, and calls for the US to impose tariffs of 10-77% on Chinese goods. "We?re taking this action because of the Chinese government's persistent pattern of violating international standards of workers? rights is inflicting great hardship on working families in both our countries,? said AFLCIO president John Sweeney as the petition was presented to the USTR.

Gong's assessment of the powerful union's petition is shared by American counterparts: "I honestly don't think it was intended as a way to resolve a trade dispute,? said Norton. "It's a platform for the trade unions to publicize their grievances. From a legal perspective, it's highly problematic.? Barenberg, however, denies that the purpose is protectionist: [U]nlike other unfair trade practices enumerated in section 301, the workers? rights provisions are aimed at safeguarding fundamental human rights. That aim cannot be dismissed as 'protectionist.? The goal is to use the enormous economic leverage of the United States to induce positive change in China – to achieve respect for the basic rights of China's factory workers.

Stephen Frost, a research fellow at the City University of Hong Kong's Center for Southeast Asian Studies who co-authored reports on occupational health and safety cited six times in the AFL-CIO petition, doesn't see it that way. "When I read myself cited I get kind of a sinking feeling of yeah, but what I meant was?, It's frustrating to present reports on Chinese working conditions intended to help Chinese workers only to have them used in China bashing that's ultimately detrimental to Chinese workers,? said Frost, who criticizes the report for failing to make adequate mentions of changes to labor conditions in recent years, for overstating the dearth of legal advocacy and rights available to workers, and most importantly for ignoring the perspective of Chinese workers themselves. There's no mention in the report of the impact of (proposed tariffs) on Chinese labor,? said Frost. ?Not a single sentence that flags what the impact would be on China. It makes vague assertions that the effect would be better wages for Chinese workers, and denies that it's about protectionism. Additionally, the report appears in a vacuum. Would the Chinese retaliate? There's no scenario development, which is a standard procedure in something like this.?

Frost pointed out that while workers routinely work hours well in excess of overtime limits specified in Chinese labor law, factories that do abide by overtime restrictions find themselves unable to attract and keep workers. "A woman from a rural township can come to a factory to work, and even if she's underpaid at only 400-500 yuan [US$48-60] per month in Shenzhen she will earn in two months what her entire family makes per annum. These people are victimized, from the perspective of the AFLCIO. But they don't think of themselves as victims. No one talks about what's going on in the minds of the workers – the sense of excitement and adventure. ?You?re an 18-yearold girl and suddenly you get to travel across China to a boom town like Shenzhen, or more recently Dongguan, and there's a real buzz about a place.?

"In the broader perspective, it's a question of whether [the US] should be able to criticize China for doing the same things we did to jump start in the late 19th and early 20th centuries,? said Norton. "If you look at China's wage rates, they're probably grown faster than any country in the history of the world. It's ironic to say that the government is keeping wages down.?

Gong Jun, taking it one step further, thinks the US could learn something from China: "American labor laws and the trade unions behind them are excessive,? he asserted, "and are ultimately damaging American competitiveness in industries from automotive to semiconductors.? Chinese reaction to the latest trade fracas has been surprisingly muted. "Contrary to conventional wisdom, the Chinese leadership is not bewildered by election year politics,? said Patrick Powers of the US China Business Council. "Senior and central level figures are very sharp, and they know what the issues are. A couple months ago it may have been attractive to dismiss some [of the current complaints] as election year issues. In fact, the ones that have been raised [by the administration] – such as WAPI and semiconductors – are real and serious issues.?

They may be hip to the exigencies of American electoral politics, but Chinese trade officials can't be blamed for showing a little indignation. On April 5, the WTO released the 2003 rankings of countries on world trade, and China was listed as the third largest importer after the US and Germany, with imports up 37.1% over 2002 and imports growing faster than exports.

"China has made great strides in opening sectors under its WTO commitments despite domestic pressures as a result of growing unemployment," noted AmCham's Martin. "China has done a very good job in the insurance sector – a very good opening. Recently, there has been much progress in granting of trading rights – in allowing Chinese companies to do import-export business. These are the areas which we have to build on."

Meanwhile, China will likely face a growing number of American anti-dumping complaints as the election approaches. "The rules of the game in anti-dumping investigations are weighted against China," noted Norton. "China gets treated as a non-market economy, so different rules apply. With China, the retail price of an item in Chinese stores doesn't apply in establishing a fair price, but on prices in a third country, usually India. This lets domestic US industry play games with the process and gives incentive to bring cases."

But Chinese industry has lost most antidumping cases simply because it didn't fight them. "The China Trade Association is trying to get companies to organize to fight, but legal costs are too high to make it worth it," said Gong Jun. "Our firm has offered to take cases at cost, but they need US lawyers as well, and that's expensive: markets are too small and margins too thin."

The US is widely expected to invoke special safeguards specifically aimed at Chinese textiles when quotas are officially removed on January 1. "The WTO is essentially meaningless. Parties to it break it in letter and spirit with impunity," said Gong. "Safeguards are necessary politically. China understands this. Both countries are very realistic."

But do they offer any real protection? Not according to Patrick Norton. "With many of these goods, you'll see the same imports entering the US by way of you-name-the-country. In textiles, we have actions against Chinese brassieres when there's not even a company in the US manufacturing brassieres. For that matter, are there any TV manufacturers left in America? Who is it that we're protecting?"

But despite the furious heat, Beijing's real interest in the US presidential election is not related to business issues. "The only issue that matters is Taiwan," Gong said. "On the trade issue, the Chinese leadership has no clear preference between the candidates. The Chinese are pragmatic, and they believe the two parties will behave in fundamentally the same way when it comes to trade ties with China."

Kerry, after all, has a strong free trade voting record. The Massachusetts senator voted for GATT, for NAFTA, for granting of permanent normal trade relations (PNTR) to China, and for China's entry into the WTO. "Every US president from Nixon down to the present has started off badly with China," said Norton, who worked in the State Department before he went into private practice. "They begin with unrealistic, ideologically-driven China policy which within a year or two becomes more realistic. The Democrats and the Republicans are the same way in this. It gets better once the adults get hold of China policy."