Industryweek 2351 0219

Free Trade: Is it Time for a New Game Plan?

June 18, 2012
As the nation's trade deficit grows in the face of rising exports, critics say it's time for the U.S. to take a tougher stance on China and other trade- rule violators.

In a speech at the second Conference on the Renaissance of American Manufacturing March 27 in Washington, Gordon Brinser, the president of SolarWorld Industries America, posed this question:

"How can the United States continue to benefit from an open global marketplace as the vastly different system of state-sponsored capitalism in China emerges as an economic power and increasingly targets our strategic industries?"

For SolarWorld, the question is not academic. The company is embroiled in a major trade dispute with China. SolarWorld is pitted not only against Chinese competitors but an array of U.S.-based interests that benefit from cheap Chinese products and accuse SolarWorld of standing in the way of increased adoption of solar products.

SolarWorld's Gordon Brinser says U.S. government should bring trade cases for companies that are "too small or injured to afford them."

Brinser said it was time for the United States to adopt a "new game plan" for trade in the face of China's economic model "designed to gut and own our key industries."

Brinser did not paint a picture of U.S. defeat in the global trade wars, echoing Clint Eastwood's Super Bowl ad line that it was "half time," but he is clearly worried by what he sees. And he is not alone.

The last time the United States had a positive trade balance in goods was in 1975. In 2011, the deficit grew to $726 billion. And for the first quarter of 2012, the trade imbalance was ahead of last year, at $193 billion compared to $179 billion in 2011.

The trade deficit in goods is rising despite the positive news that exports are growing. That is in line with President Obama's 2010 National Export Initiative, which seeks to double U.S. exports over five years. A recent White House statement boasted that "U.S. exports over the past 12 months are higher than any previous 12-month period in history, reaching $2.15 trillion, over 36% above the level of exports in 2009. This record-breaking level of exports supported 9.7 million exports-related jobs in 2011, an increase of 1.2 million exports-related jobs since 2009."

But critics of U.S. trade policy say increases in exports do little good if imports are rising even faster. Michael Stumo, CEO of the Coalition for a Prosperous America, points out that exports almost doubled from 2002 to 2007 during the George W. Bush ?administration.

"At the end of the five-year period of nearly doubling exports, we had the biggest trade deficit in the history of the United States and the history of the world. So net exports is the issue, not gross exports," Stumo asserts.

When manufacturers express concerns about international trade, it usually takes little time before fingers are pointed at China. In 2011, the United States suffered a $295.5 billion trade deficit with China. Oil imports and Chinese goods make up the vast majority of the United States' overall trade deficit, which reached $558 billion last year.

"China's economic policies -- subsidies, state-owned enterprises, intellectual property theft, forced technology transfer, currency manipulation -- are now the single largest impediment to job growth in America," complains Scott Paul, president of the Alliance for American Manufacturing.

The principal reason we have a trade deficit, says NAM's Frank Vargo, is that the U.S. dollar "has been overvalued too often. It is
appropriately valued against most currencies right now."

Trade experts estimate that each billion dollars of the trade deficit costs the United States thousands of jobs. In a study released last September, the Economic Policy Institute charged that the U.S. had lost 2.8 million jobs, mostly in manufacturing, as a result of the trade deficit with China since that country entered the World Trade Organization in 2001. The study found that the computer and electronic parts industry was hit hardest, losing 909,400 jobs.

While U.S. exports are growing, the types of products being exported worry observers such as Paul.

"We have been exporting some very high-tech things like aerospace, but five of the top 11 fastest-growing exports to China are commodities -- scrap metal, scrap paper, unprocessed oil seeds like soybeans," he points out. "There is not a lot of job creation in that for the United States."

Whose Solar World?

Of growing concern to trade experts is that the United States is seeing its dominance in high-tech products whittled away. China in 2010 supplied 7.51% of America's consumption of high-tech manufactured products, according to the U.S. Business and Industry Council, a group representing small and midsized manufacturers. While that is not huge in itself, it represents a 19% increase from 2009 and nearly twelve-fold growth since 1997.

The trade surplus U.S. solar manufacturers had with China disappeared in 2011, according to a report from the Coalition for American Solar Manufacturing. After enjoying a surplus of $250 million to $540 million in 2010, the industry faced an estimated $1.6 billion trade deficit in 2011.

SolarWorld's Brinser, who chairs the coalition, says China has targeted solar panels as an industry it wants to dominate and is using an array of tools to gain market dominance.

"The Chinese government is the largest shareholder in the country's 150 biggest companies and finances them with its state-owned banks. It uses state-owned enterprises to provide cut-rate raw materials and manufacturing equipment," said Brinser. "It writes no-bid contracts for individual producers. It bars foreign access to its own market and subsidies. Any company desperate enough to outsource even one production step to Chinese plants puts its intellectual property at risk."

In October 2011, SolarWorld and six other solar manufacturers filed anti-dumping and countervailing duty petitions with the Commerce Department and the International Trade Commission. In the petitions, the companies claimed that Chinese manufacturers were using government subsidies to sell solar cells and panels in the United States at below-market costs, seeking to drive down costs to the point where they would drive out U.S. manufacturers and take control of the market.

On March 17, the Commerce Department issued a preliminary finding that Chinese firms were dumping solar cells and panels. Commerce imposed tariffs ranging from 31% to nearly 250%.

"Commerce's ruling in the SolarWorld case is a bellwether decision," said Steve Ostrenga, CEO of Helios, one of the solar firms bringing the complaint. "It underscores the importance of domestic manufacturing to the U.S. economy and will help determine whether the country will be a global competitor in clean technologies or outsource them to China. It is also critically important for thousands of U.S. workers."

Not all of the solar industry in the United States was celebrating, however. The Coalition for Affordable Solar Energy, a trade group made up of installers, manufacturers, materials suppliers and others, called the ruling an attack on free trade that would drive up solar electricity prices.

"The vast majority of the 100,000 jobs in the American solar industry are in sales, marketing, design, installation, engineering construction and maintenance of solar projects," CASE stated in reaction to the Commerce finding. "These jobs depend on affordably-priced solar panels, and companies would have to lay off workers if solar panel prices rise as a result of this investigation."

Tore Torvund, CEO of REC Silicon, called the decision "short-sighted in the extreme" and a "severe setback for President Obama's clean energy program with its goal of expanding the use of solar and other renewables." He also expressed concern that China would "retaliate with their own tariffs on polysilicon exports from U.S. producers such as REC Silicon."

Supporters of the decision, though, say the United States must take a tougher line on enforcement if it is to protect U.S. interests.

"I hear this a lot from businesses. We're worried about getting tougher because we could be retaliated against," says AAM's Paul. "If you have that attitude against any kind of bullying, ultimately you are going to get more bullying."

Free Trade Agreements

Approximately 72,000, or one-third of, U.S. manufacturing firms export their products. Trade experts such as Charles Skuba, a professor at Georgetown University's McDonough School of Business, believe that U.S. manufacturers are still adjusting to a global economy after decades in which they could build healthy businesses without exporting.

"The global marketplace has been radically changed in my lifetime," says Skuba, who served as a trade official in the first Bush administration. "The imperative for U.S. companies is that they need to look overseas to sell their products. This is a requirement for competition in the future for small and large companies alike."

A major tool in that process, says Skuba, are free- trade agreements. He says they have been wrongly blamed for problems that "competition in a more open world economy brings."

Congress recently approved free-trade agreements with Korea and Columbia, and Panama. The Korea FTA is the most important, with the administration expecting that it will increase annual U.S. exports by up to $11 billion annually and support 70,000 or more American jobs.

In the four years it took to get the Korean FTA signed, says Skuba, the U.S. paid a huge penalty. Citing ITA figures of $10 billion to $12 billion in additional annual exports lost through the delay, he says the United States "lost that opportunity to sell $40 billion to $50 billion worth of U.S. goods just to Korea."

Indeed, the United States should be ramping up its efforts to pass free trade agreements, says Frank Vargo, vice president for international economic development at the National Association of Manufacturers. Vargo points to data that the U.S. is a net exporter of manufactured goods to the 14 countries with which it previously had bilateral trade agreements, while it runs a huge deficit with other major trading partners, particularly China.

The United States should pursue FTAs with the European Union, Brazil and India, says Vargo. NAM has estimated that additional agreements with major trading partners could add $100 billion in exports annually.

AAM's Paul cautions that FTAs are "not a panacea." He points to NAFTA, which he says "has succeeded in regionalizing supply chains, particularly in the auto sector, but it was designed as a competitive hedge against Asia. It hasn't been that."

Paul says the United States will not have an FTA with China. The only way to correct the trade imbalance with China, he says, is through enforcing trade agreements.

"There is only so much money and political capital that you can expend on trade," says Paul. "It is a bigger value to get China to play by the rules. It's a $295 billion deficit. If you shrink it down, that is potentially millions of jobs in the United States. There is no other FTA that could have that kind of impact."

While the Obama administration has beefed up enforcement of trade laws through a new Interagency Trade Enforcement Unit, critics such as Clyde Prestowitz, president of the Economic Strategy Institute, say the administration continues to be too soft on China. In a recent column for Foreign Policy, he said the Treasury Department had failed again to label China as a currency manipulator.

"Treasury Secretary Tim Geithner has regularly said that China is intervening in currency markets and that it needs to allow its currency to appreciate. He thus knows full well that China is manipulating its currency," Prestowitz wrote. "But he won't make an official complaint because he fears a backlash from China."

Better Days Ahead?

While he acknowledges a host of issues impeding U.S. exports such as non-tariff barriers, inadequate protection of intellectual property in China and underfunded export promotion programs, Vargo says one of the biggest problems for U.S. exports has been an overvalued dollar.

"Every time the dollar gets overvalued, we lose market share," he says. "The U.S. had 14% of world exports of manufactured goods in the year 2000. Now it is 8% to 9%. If we had not lost that market share, we would not have a manufactured goods trade deficit. We would be exporting $500 billion more than we are."

Vargo endorses a May study by Boston Consulting Group that projects substantial growth in U.S. manufacturing in three to five years as wages rise rapidly in China and close the gap between U.S. and Chinese labor rates. Citing wage increases in China of 15% to 20% a year, a slowly appreciating yuan and higher shipping costs, Vargo notes, "Going out 20 years, people say China is really going to dominate. I don't believe that at all."

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