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Uncertainty Surrounds the New US Trade Enforcement Unit

Feb 03 , 2012

In his January 24 State of the Union address, President Barack Obama announced plans to create a trade enforcement unit to investigate unfair trading practices by other countries, prevent counterfeit or unsafe goods from entering the U.S., and ensure that no foreign company has an advantage over American manufacturing when it comes to accessing financing or entering new markets. But many questions confront this new unit.

Although the President did not confine the activities of the trade enforcement unit to China alone (he specifically mentioned Russia in his remarks), Beijing is clearly the primary focus. Secretary of the Treasury Timothy Geithner kept the pressure up on January 27 at the World Economic Forum in Davos by commenting that Chinese trade practices—including subsidies for state-owned enterprises and distorted prices for energy, capital and land—have been “damaging” to the PRC’s trade partners.

The formation of this unit, which the Administration can establish through executive decree, is part of a broader effort to reorganize trade-related executive branch departments. The latter plan, which Washington policymakers have been considering for the past fifteen years, requires congressional approval and has already launched a debate over the wisdom of creating another Homeland Security-size operation that potentially limits the authority of the U.S. Trade Representative.

The first major decisions that will have to be made for the new unit include selecting a leader and deciding whether the unit will be asked to come up with new remedies to deal with unfair trade practices. If the unit is going to have real impact for the President's trade agenda, it should be coordinated by and run through—if not directly managed by—the White House. This would suggest oversight by the National Economic Council, perhaps at the deputy level. But given everything that the NEC deputy has on his plate, it seems likely that if the NEC were involved, it would be at a lower, less policy-influential level.

Given the magnitude of the challenges the U.S. faces in just dealing with China—an estimated $300 billion trade deficit for 2011, the freezing out of American companies as China identifies national champions and promotes indigenous innovation, the growing sale of counterfeit goods over the internet (not a Chinese problem alone), the focus on exchange rates which appear to distort prices in China’s favor and limitations on American service, especially financial, providers—the Administration is going to have to throw considerable monetary and personnel resources into making the trade unit effective. There has not yet been an announcement about the unit’s resources, but if it is supported simply reprioritizing the activities of personnel in government offices, with no real increase in resource strength or greater cross-agency coordination, the trade enforcement unit is going to lack real heft. Worse yet, the administration effort could be perceived as more of the same, just dressed up differently.

A second problem in making inroads on the trade enforcement side is just how aggressively American business is going to be in bringing cases and requests for action to the unit’s attention. Although the business community has been more vocal the last two years about the downturn in the foreign business climate in China, most American companies are still reasonably profitable and not interested in jeopardizing access and future opportunities. For example, the labor community was behind the legal complaints filed in defense of GPX tires; the tire makers who had already moved their production lines outside the U.S. showed no interest in trying to reclaim losses. Aside from companies involved in media-related activities, who profit from press, cultural, social and Internet-driven products, are other American firms prepared to go full bore and work with the trade unit against Chinese predatory practices? The unit’s effectiveness will be dictated in part by whether the business community sees it adding anything other than symbolic or political value.

Third, a trade enforcement unit is by its very nature adversarial. It searches out problems, in addition to those brought to its attention. If past Chinese practice is any predictor of future behavior, we can expect the Chinese to create a trade enforcement unit of their own, and to respond in kind to any remedial actions launched by the U.S. If the unit were to act aggressively, as it might to show itself as a bona fide organization, we would likely see an increase in retaliatory actions. Not exactly a trade war, which neither side wants, but certainly the creation of an atmosphere of uncertainty that will harm businesses caught up in the crossfire. Cooperation and problem solving on international trade issues, iffy in the best of times, could become even rarer if the U.S. and China create dueling trade units.

Finally, it is unclear where the trade unit fits into the Administration’s proclaimed policy of bringing jobs back to America by revitalizing our manufacturing base. American workers are efficient and can compete with any other workers in the world, but is business prepared to let them do so when the costs of production overseas are lower and the end results are an increase in profits and shareholder value? Enforcing trade rights and making profits can work in tandem but are often at odds.

Congress, the business community and other countries will be watching closely to see whether the trade unit is a serious effort or whether it has been created primarily to inoculate the President from hyperbolic election year criticism that he is failing American businesses and American labor. Trade experts will be watching to see if the actions of the trade unit underpin or undermine the ongoing discussions on trade issues like those occurring throughthe Strategic and Economic Dialogue and the Joint Commission on Commerce and Trade.

Robert Goldberg is a Principal at the Scowcroft Group, providing strategic advice on the Asia Pacific area. He previously spent 30 years as a U.S. diplomat, retiring in January 2011 following an 18-month assignment as Deputy Chief of Mission at the U.S. Embassy in Beijing

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