The Evolving Russia - United States Trade Dispute

Apparently, the United States is of two minds when it comes to international trade and the impact of trade agreements including NAFTA and the World Trade Organization as shown on this graphic from the Pew Research Centre:

As well, there is substantial disagreement on the recent increases in tariffs on imported steel and aluminum:

In addition, here's what Donald Trump had to say about the WTO:

All that said, even with America's skepticism about the World Trade Organization, a recent development shows that Washington is not loathe to use the WTO when it comes to a recent request.

Let's take a brief look at the trade in goods between Russia and the United States.  According to the MIT Observatory of Economic Complexity, Russia is the 16th largest economy in the world and the United States is one of the top export destinations for its products as shown here:

...and one of its top import sources:

In 2017, Russia placed number 23 in the United States pantheon of trading nations when ranked by imports as shown here:

Let's look at the trade data for Russia and the United States from the Census Bureau.  Here is a graphic showing the level of American exports to Russia going back to 2000:

...the imports going back to 2000:

...and the trade balance going back to 2000:  

With that data in mind, let's look at a recent trade development between the two nations as shown here:

In early July 2018, Russia introduced measures that would impose additional import duties on certain industrial goods from the United States in retaliation for the American imposition of tariffs on steel and aluminum imports from Russia, a move that was originally intended to punish China.  The additional duties of 25 to 40 percent will apply to imports of equipment for road construction, oil and gas, metal processing and mining as well as imports of fibre optics.  These tariffs are intended to compensate Russia for the estimated $87.6 million worth of damage suffered by Russian companies as a result of the U.S. tariffs on steel and aluminum which will cost Russia's metals exporters $537.6 million according to Russia's Minster of Economic Development, Maxim Oreshkin.

Apparently, Washington takes umbrage over Russia's tariffs for two reasons:

1.)  at the idea that Russia would apply tariffs to certain goods imported from the United States and not from other nations and 

2.) because these duties were higher than the maximum allowed under Russia's terms of membership in the WTO.  

Russia now has 60 days to settle the dispute; if it chooses not to, the matter will go to adjudication.  At this point, the Russians are arguing that within the framework of the WTO, nations are allowed to compensate for damages incurred as a result of "special protective measures" adopted by the United States.

When it comes to international trade, I guess you can have it both ways when you live in Washington.  You can both use and abuse the World Trade Organization at your own convenience.

President Obama, the United States and the Trade Cold War

Updated January 2017

While the world focuses on Donald Trump's abandonment of the Trans-Pacific Partnership, a 2016 editorial in the Washington Post by former President Barack Obama looked at his views on international trade.  In his editorial, Obama clearly states why he feels that the TPP is of critical importance to America's role on the world stage and why the agreement must be implemented.

In case you've forgotten, the TPP is a trade agreement that was signed on February 4, 2016 by 12 Pacific Rim nations which cover roughly 40 percent of global GDP.  The signatories include Canada, Chile, Peru, Mexico, New Zealand, Australia, Singapore, Brunei, Vietnam, Malaysia, Japan and, of course, the United States, the biggest economy in the group.  Other nations have shown interest; South Korea, Taiwan, the Philippines, Thailand, Laos, Indonesia, Cambodia, Bangladesh, Sri Lanka and even India which is not part of the Pacific Rim.   You will notice that China, the world's second largest economy, is missing from the list.  Key to the United States is the elimination of tariffs that other nations have placed on 18000 American goods and almost all farm products.

Additionally, in April 2016, another massive trade deal was being negotiated.  The Regional Comprehensive Economic Partnership (RCEP) includes 16 nations which cover almost 30 percent of global GDP, several of them also being signatories of the TPP.  Nations currently negotiating the RCEP include China, the largest economy in the group, Australia, Cambodia, India, Japan, Laos, Myanmar, the Philippines, Thailand, Brunei, Indonesia, South Korea, Malaysia, New Zealand, Singapore and Vietnam.  Here is an interesting commentary about the RCEP from Australia's Trade Minister:

"RCEP brings together the economic powerhouses in our neighbourhood with China, Japan, Korea, India, New Zealand and the ten Member States of ASEAN. These countries – including the economic giants of the Indo-Pacific region – cover nine of Australia’s top 12 trading partners and almost 30 per cent of global GDP.

The potential of RCEP is staggering. RCEP countries currently account for around 60 per cent of our two-way trade, 70 per cent of our exports and 15 per cent of our two-way investment. RCEP will drive Australian jobs and growth as it creates more opportunities for local businesses to provide goods and services to the region’s rapidly growing middle classes."

That sounds like typical boilerplate political commentary on every trade deal that was ever signed, doesn't it?      

With that background, let's look at some excerpts from President Obama's editorial on America's role in international trade.  All bolds are mine.

"Over the past six years, America’s businesses have created more than 14 million new jobs. To keep this progress going, we need to pursue every avenue of economic growth. Today, some of our greatest economic opportunities abroad are in the Asia-Pacific region, which is on its way to becoming the most populous and lucrative market on the planet. Increasing trade in this area of the world would be a boon to American businesses and American workers, and it would give us a leg up on our economic competitors, including one we hear a lot about on the campaign trail these days: China.

Of course, China’s greatest economic opportunities also lie in its own neighborhood, which is why China is not wasting any time. As we speak, China is negotiating a trade deal that would carve up some of the fastest-growing markets in the world at our expense, putting American jobs, businesses and goods at risk.

This past week, China and 15 other nations met in Australia with a goal of getting their deal, the Regional Comprehensive Economic Partnership, done before the end of this year. That trade deal won’t prevent unfair competition among government-subsidized, state-owned enterprises. It won’t protect a free and open Internet. Nor will it respect intellectual property rights in a way that ensures America’s creators, artists, filmmakers and entrepreneurs get their due. And it certainly won’t enforce high standards for our workers and our environment...

Fortunately, America has a plan of our own that meets each of these goals. As a Pacific power, the United States has pushed to develop a high-standard Trans- Pacific Partnership, a trade deal that puts American workers first and makes sure we write the rules of the road for trade in the 21st century...

I understand the skepticism people have about trade agreements, particularly in communities where the effects of automation and globalization have hit workers and families the hardest. But building walls to isolate ourselves from the global economy would only isolate us from the incredible opportunities it provides. Instead, America should write the rules. America should call the shots. Other countries should play by the rules that America and our partners set, and not the other way around.

That’s what the TPP gives us the power to do. That’s why my administration is working closely with leaders in Congress to secure bipartisan approval for our trade agreement, mindful that the longer we wait, the harder it will be to pass the TPP. The world has changed. The rules are changing with it. The United States, not countries like China, should write them. Let’s seize this opportunity, pass the Trans-Pacific Partnership and make sure America isn’t holding the bag, but holding the pen.

I found Obama's comments on China particularly interesting given that this is what Bill Clinton had to say about China's accession into the World Trade Organization back in 2000: 

Here are some excerpts from his March 2000 letter to Congress regarding the importance of trade with China:

"We give up nothing with this Agreement.  As China enters the WTO, the United States makes no changes in our current market access policies.  We preserve our right to withdraw market access for China in the event of a national security emergency.  We make no changes in laws controlling the export of sensitive technology.  We amend none of our trade laws.  In fact, our protections against unfair trade practices and potential import surges are stronger with the Agreement than without it.

Our choice is clear.  We must enact permanent NTR for China or risk losing the full benefits of the Agreement we negotiated, including broad market access, special import protections, and rights to enforce China's commitments through WTO dispute settlement.  All WTO members, including the United States, pledge to grant one another permanent NTR to enjoy the full benefits in one another's markets.  If the Congress were to fail to pass permanent NTR for China, our Asian, Latin American, Canadian, and European competitors would reap these benefits, but American farmers and other workers and our businesses might well be left behind." (my bold)

We all know how that agreement turned out for those who worked in America's manufacturing sector, don't we:

Let's look at one additional excerpt from the Obama editorial:

"If we don’t get the TPP done, American goods will continue to face high tariffs and other trade barriers in the region. American businesses will lose competitive access to Asian markets, which would mean fewer of the cars our autoworkers manufacture would make it to growing markets, more of our farmers’ and ranchers’ products would run into barriers abroad, and small-business owners hoping to sell their goods abroad would still find themselves ensnared in red tape. If we don’t get the TPP done, employers across America will lose the chance to compete with other countries’ companies on a level playing field. And when American workers and businesses compete on a level playing field, no one can beat us..."

History repeats itself.  It's just the players that change.

An interesting graphic from CNN shows us the looming "trade cold war".  Here's what the global economy looked like in 2008:

Here's what it looked like in 2015:

Here's what it is expected to look like in 2020:

China's power on the world's economic stage is growing by leaps and bounds and, if projections hold, will be by a wide margin the second largest economy in the world, being larger than the next four largest economies in total.

I find it particularly appalling that former president clearly stated that America should dictate the rules governing global trade.   Obviously, the lessons taught by the history of American-led trade deals have gone unheeded.  The haste of the Obama Administration to sign the Trans-Pacific Trade Agreement was being driven by one factor; the pathological need for the United States to beat China at its own game and start a "trade cold war".  The Clinton trade deal with China shows how well that turned out for America.  Apparently, no one in Washington cares.

The Impact of Granting Market Economy Status to China

A recent analysis by Robert Scott and Xiao Jiang at the Economic Policy Institute looks at how Europe's trade relationship with China could change over the coming years as the World Trade Organization considers whether to grant market economy status or MES to China. 

According to the original Protocol of Accession to the World Trade Organization signed by China in December 2001, other member countries were to consider China to be a Non-Market Economy (NME) as shown in Articles 15(a) of the Protocol:

"15.  Price Comparability in Determining Subsidies and Dumping

 Article VI of the GATT 1994, the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 ("Anti-Dumping Agreement") and the SCM Agreement shall apply in proceedings involving imports of Chinese origin into a WTO Member consistent with the following:

         (a) In determining price comparability under Article VI of the GATT 1994 and the Anti‑Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules:

   (i) If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability;

   (ii) The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product.” (my bold)

Looking just a bit further into the Protocol, we find this:

“   (d)  Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member's national law contains market economy criteria as of the date of accession.  In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession.  In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non‑market economy provisions of subparagraph (a) shall no longer apply to that industry or sector.” (my bold)

This means that by December 2016, Canada, Japan, the United States and Europe must present a case for whether or not China has met the criteria as a market economy.  Assuming that either trading partner takes a hardline position on the issue, the stage will be set for China to initiate legal action under the World Trade Organization.

Some WTO members already consider China to be a market economy, however, Europe, Canada and the United States have not yet done so.  While all of this may seem rather academic to most of us, it will have a significant impact on both the European, Canadian and American economies.  

As background, under Article 15 of China's Protocol of Accession to the WTO, other WTO members were to disregard Chinese prices and costs in antidumping cases and were to base the calculation of dumping margins using external surrogate benchmarks.  Since China is a leading target of dumping cases on a worldwide basis, the current NME method is a sore point and has led to a vigorous diplomatic campaign by China with its trade partners.  This campaign led to New Zealand, Singapore, Australia and Malaysia declaring that China met the criteria as a market economy.

Dumping is defined as follows:

"...the export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market. As dumping usually involves substantial export volumes of the product, it often has the effect of endangering the financial viability of manufacturers or producers of the product in the importing nation.
"

Obviously, preventing the occurrence of dumping is very important to the economies of importing nations.

In case you wondered how prevalent it was, here is a table showing the main targets of anti-dumping investigations in 2014:

Here is a table showing the number of anti-dumping investigations against China by a number of OECD nations between 1978 and 2011 and which of those nations have already granted market economy status to China:

As you can see, the greatest number of anti-dumping investigations against China were instigated by the United States (165), India (147) and the European Union (143).  

Why is gaining market economy status so important to China?  With MES status, China could avoid effective enforcement of anti-dumping laws in these and other jurisdictions for two reasons:

1.) anti-dumping investigations would have to presume that prices and costs in China are market determined which would result in much lower or even zero duties in anti-dumping cases.

2.) it would eliminate the threat that duties could be imposed on Chinese products that benefit from depressed or subsidized input costs.  Subsidies of inputs including energy, raw materials, land and the cost of capital are common in China's economy.  These subsidies have led to sustained overproduction in the steel, aluminum, ceramics, motor vehicle parts, paper and paper products, voltaic solar cells and other industries.

Now that we have that background, let's return to the EPI analysis on the impact of granting market economy status on Europe's economy, keeping in mind that there will also likely be a similar impact on both the American and Canadian economies.

Let's start this section by looking at the growing trade deficit between Europe and China between 2000 and 2015:

Between 2000 and 2015, overall European imports from China increased by an annual rate of 11.1 percent.  In 2015, the EU trade deficit with China is expected to hit an all-time peak of €182.8 billion.

According to the analysis, a decision to grant MES status to China would expose industries in Europe, the United States and Canada to a flood of cheap products sourced in China.  Domestic industries would have very little ammunition to protect itself from underpriced manufactured goods.  Here is a table showing how the granting of MES status to China will impact manufacturing imports and Europe's gross domestic product:

Obviously, the granting of MES by Europe would have a significant impact on an already struggling European employment picture as shown on this table which looks at both low and high impact scenarios:

In addition to the 1.745 and 3.49 million jobs at risk, an additional 2.7 million jobs in import-sensitive industries like paper, ceramics, steel and motor vehicle parts would be at risk as shown on this table:

The biggest job loses would be in Germany (between 319,700 and 639,200 jobs) followed by Italy (208,100 to 416,200 jobs), the United Kingdom (between 193,400 and 386,800 jobs) and France (183,300 to 366,800 jobs).  In Italy, this would impact up to 1.9 percent of total employment, in Germany up 1o 1.7 percent of total employment and in the United Kingdom up to 1.4 percent of total employment).

Here is a table showing jobs at risk for all EU members ranked by number of jobs at risk:

While governments love to tout the advantages of trade agreements, this analysis by the Economic Policy Institute shows us that there is a significant downside, particularly when it comes to trade with China.  While this analysis looked at the impact of granting market economy status to China on Europe's economy, it is likely that there will be a similar impact on the economies of Canada and the United States once they grant MES status to China.  This impact will be felt by the already beleaguered manufacturing sectors in both nations.