Trade At A Crossroads

INDUSTRY LOBBYISTS and the White House have begun a campaign to persuade a skeptical Democratic-led Congress to extend a law that gives President George W. Bush authority to negotiate new international trade agreements. Chemical manufacturers and other U.S. businesses warn that failure to renew the Administration's trade promotion authority (TPA), which expires on June 30, could undermine global trade talks and weaken U.S. exports.

"Trade promotion authority is essential for the continued participation of the U.S. in trade negotiations around the world," says American Chemistry Council (ACC) President Jack N. Gerard. "We cannot expect to see market-opening trade deals that support U.S. exporters without the extension of TPA."

The law, which dates back to the Nixon Administration, enables the President to negotiate trade agreements with foreign governments that Congress must either approve or reject as a package, without making any changes. Under special "fast track" procedures, Congress also must vote on the agreements within 90 days after they are submitted by the White House.

"TPA is the key to negotiating international trade agreements," says John Engler, president of the National Association of Manufacturers (NAM). "Other nations will not negotiate with us without assurances that any agreement will be subject to an up or down vote in Congress."

Many Democrats, particularly in the House of Representatives, opposed TPA when it was last reauthorized five years ago. The Trade Act of 2002 narrowly passed the House by a vote of 215-212, with the support of 190 Republicans and only 25 Democrats after a bitter partisan fight. Since then, the White House has used TPA to win approval of trade deals with Australia, Singapore, Chile, the Dominican Republic and five Central American countries, Morocco, Bahrain, and Oman.

Some of those agreements passed with substantial bipartisan support, but others were opposed by nearly all House Democrats. The 217-215 House vote on the Central America Free Trade Agreement (CAFTA) in 2005, for example, showed how tough it has become to get a trade deal through Congress.

With the U.S. running record trade deficits and facing intense competition from rapidly growing China and India, global trade tensions have intensified. Democrats blame Bush's free trade policies for contributing to the trade deficit, costing U.S. manufacturing jobs, and exposing American workers to unfair competition from low-wage countries.

But the chemical industry, which shipped $119.5 billion worth of products abroad in 2005, depends heavily on trade and ranks as the nation's largest exporter. One-quarter of the industry's 870,000 jobs depends on international trade. "Those numbers alone show why trade is so important to this industry and why access to new foreign markets is increasingly essential for our continued expansion and competitiveness," says Sushan Demirjian, director of international trade for ACC.

Chemical manufacturing has also become highly globalized. "U.S. chemical companies are operating all over the world. The success of their business depends on their ability to export not only from the U.S. to other markets but also between markets where they operate," Demirjian points out. "So if they have facilities in South America and they are exporting to Asia, all of that trade matters to the chemical industry, whether or not the goods are actually leaving U.S. territory."

BUSINESS LEADERS want at least a one-year extension of TPA to allow the U.S. to wrap up the World Trade Organization's (WTO) Doha Round of multilateral trade talks and to conclude several negotiations on bilateral free trade agreements. "Without TPA, it will be nearly impossible to get these and other important market-opening agreements to Congress," says Engler. "It is essential that TPA is extended to allow the U.S. to continue aggressively knocking down foreign barriers to U.S. exports."

Trade analysts say it is unclear what the expiration of TPA would mean for the Doha Round negotiations, which have been stalled since last July. The talks, launched in 2001 in the Qatari capital, aim to remove barriers to global trade but have been deadlocked over agricultural disputes. ACC and several of its global chemical industry counterparts have called for the elimination of all tariffs on chemicals as an outcome of the Doha Round, which is expected to shape the direction of world trade for the next 10 to 20 years.

In the previous Uruguay Round of trade negotiations, which lasted from 1986 to 1994, a large number of countries agreed to harmonize their chemical tariffs at 6.5% or below. As a result, global chemical trade has nearly doubled over the past dozen years. But although chemical tariffs have been reduced, the volume of trade is so high that the amount of tariffs collected is still enormous.

Demirjian points out that intracompany transfers—the practice of one facility shipping its product to another facility of the same company—account for 35% of total global trade in chemicals. "Since a great deal of chemical trade between the U.S. and the European Union is intracompany, it's our companies that are paying those tariffs," she says. "So for that reason, the nuisance factor of paying a lot of small tariffs, we'd like to see the tariffs eliminated."

At the same time, the ACC official notes, some developing nations in Asia and Latin America that did not participate in the chemical tariff harmonization agreement are growing markets for U.S. and other chemical exporters. "Their tariffs haven't come down even to the harmonized level and remain quite high," Demirjian says. "We'd like to use this round to wipe those tariffs off once and for all."

THE U.S. just reached a deal to cut tariffs and remove trade barriers with South Korea and is negotiating free trade agreements with Malaysia and the United Arab Emirates. In addition, separate bilateral pacts with Colombia, Panama, and Peru are pending before Congress. "Our negotiators have found that the countries with which they have negotiated free trade agreements are also very effective partners in multilateral and regional trade processes. So there's a real benefit to expanding and liberating trade regardless of which products are affected," Demirjian remarks.

If ratified, she says, the deal with South Korea would be the first trade pact reached since the North American Free Trade Agreement (NAFTA) took effect in 1994, which involves a significant amount of chemical trade. South Korea, already the seventh largest U.S. trading partner, with two-way traffic exceeding $77 billion in 2006, is a participant in the chemical tariff harmonization agreement. "Their tariffs are already low, but obviously, the elimination of tariffs on chemicals would be better," Demirjian says.

Although the chemical industry "supports any activity that frees trade in the world," the ACC official notes that "individual bilateral agreements don't have as large an impact as eliminating tariffs on a worldwide basis, which is why we are focusing on a multilateral WTO agreement." Reaching a broad, comprehensive accord within the 150-member-nation global trade body "eliminates the need to keep track of dozens and dozens of free trade agreements and their terms," she notes, because the rules would apply to every country.

Demirjian says Democratic leaders "really haven't focused yet on how they are going to handle" TPA renewal. "Nobody has talked about writing a new piece of legislation or extending the current TPA." She notes that Senate Finance Committee Chairman Max Baucus (D-Mont.) and House Ways & Means Committee Chairman Charles B. Rangel (D-N.Y.) have signaled a willingness to try to find compromises with the White House that would allow its trade agenda to move forward on Capitol Hill.

Baucus opened a trade policy hearing on March 9 by stressing the need to remain engaged in global trade talks. "By lowering trade barriers abroad, we develop new export opportunities. We can create jobs and further economic growth here at home," Baucus said. "We cannot sit on the sidelines while our trading partners open critical export markets without us. We cannot trail behind the forces of globalization."

Baucus indicated that he favors renewal of TPA but wants the Administration to include provisions in future trade agreements to protect workers' rights and the environment. This position is consistent with that of many Democrats, who see trade pacts as a vehicle to raise labor and environmental standards. Many Republicans, however, fear other countries will lose interest in trade deals with the U.S. if they have too many conditions attached.

If Congress doesn't extend TPA, Baucus fears, the EU and other competitors could gain an advantage over the U.S. in negotiations with China, India, and other growing markets. Even so, an increasing number of his Democratic colleagues say they will try to deny Bush the right to negotiate new trade deals.

"Years of job-killing trade agreements are taking their toll on workers and small business owners alike," freshman Sen. Sherrod Brown (D-Ohio) remarked at a March 7 news conference. "It's clear this Administration has little desire to change direction, so it's up to Congress to chart a new course for the future of U.S. trade." Brown, who led House Democratic opposition to CAFTA two years ago, strongly advocated an antitrade platform last fall in his successful campaign to unseat Republican Sen. Mike DeWine.

Environmental activists and labor unions are also urging Democratic leaders to kill TPA. "There is no way to 'fix' fast track," states a March 29 letter to House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry Reid (D-Nev.) from a coalition of labor, human rights, and other groups. "Congress needs a new mechanism to authorize the executive branch to conduct negotiations that give Congress a steering wheel and, when necessary, a brake, on the negotiation process."

In light of Democratic victories in the November congressional elections and mindful of polls showing that many Americans equate globalization with job insecurity, the Administration's top trade official has called for bipartisan cooperation. "My hand is outstretched to any and all members of Congress," U.S. Trade Representative Susan C. Schwab said in a recent speech at the U.S Chamber of Commerce. "It's really easy to demagogue against trade," she noted, adding that some members of both political parties advocate protectionism and economic isolationism. "The good news is that leaders and people in responsible positions in both parties know better."

In testimony before several congressional committees this year, Schwab has touted the benefits of expanded trade, noting that U.S. exports are booming, the economy is growing, and unemployment is low. She has cautioned that without the ability to forge new market-opening agreements, the U.S. would lose its competitive edge as other countries continue to negotiate and make deals. "The U.S. needs to be in the game with trade promotion authority in hand, not on the sidelines," Schwab told lawmakers.

THE ADMINISTRATION faces other obstacles to TPA renewal, including demands by both Democrats and Republicans that it take a more aggressive stance and confront China on trade and currency issues. The Commerce Department reported in February that the overall U.S. trade deficit rose 6.5% to a record $763.6 billion last year, with one-third of that imbalance reflecting a $232.5 billion deficit with China, the highest ever recorded with a single country.

Critics are pressing for Beijing to ease controls on its currency, the yuan, which they claim is intentionally undervalued, thereby making China's exports unfairly inexpensive. Michael E. Campbell, chairman, president, and chief executive officer of Arch Chemicals, told the Senate Banking Committee on Jan. 31 that China needs to allow greater movement in its currency or risk a possible backlash that could damage the global economy. "China has spent $1 trillion to keep the yuan from rising, leading to a tremendous distortion of trade and of China's economy," Campbell testified. "China needs to allow significant appreciation of its currency with the ultimate goal of seeing it float freely in open currency markets."

About a dozen bills have been introduced in Congress that would take punitive steps to force changes in China's trade practices, including measures that would penalize the communist government for its alleged currency manipulation, slap high tariffs on subsidized Chinese goods, and revoke Beijing's permanent normal trade relations status, granted in 2000 as part of its accession to WTO.

"Right now, China gets to have it both ways," says Rep. Artur Davis (D-Ala.), who is sponsoring legislation (H.R. 1229) that would allow the Commerce Department to impose countervailing duties on low-priced imports from state-run, nonmarket economies, such as China. "They are dramatically underpricing their products and selling them in the U.S. while limiting our ability to gain a larger market share for certain products in their country," Davis remarks. "It's time to work toward a trade policy that is based on trust, fairness, and future prosperity for both countries. This legislation gets us closer to that goal."

In response to growing congressional demands that the White House take a tougher line with Beijing, the Administration filed a complaint in February with WTO over China's alleged use of illegal subsidies. By encouraging Chinese exports and discouraging imports, China's export subsidies "are so trade-distorting that WTO rules prohibit them outright," Schwab asserted at a briefing with reporters.

NAM, which is the nation's largest industrial trade association, strongly supports the Administration's case against the Asian power. "When China joined WTO it made a firm commitment to eliminate all of its prohibited import and export subsidies, not just eventually, but 'upon accession' to the organization in 2001," Engler says. "The U.S. has shown five years of patience, but time has run out. These WTO-illegal subsidies have no legitimate role in world trade."

Demirjian says the chemical industry has a mixed view of China, which at the end of 2005 was the third largest producer of chemicals in the world, behind the U.S. and Japan, as well as the third largest market for chemicals. "We can't take a position on the currency issue because some parts of our industry depend a great deal on China's economy, whether it's customers in China, their own production in China, or the role of China in the Asian market," she says.

"It's not like we're an industry that only sits within U.S. borders, unlike some of the more import-sensitive industries in the U.S. that are calling for currency revaluation or a flat tariff on Chinese imports, which is actually WTO-illegal," Demirjian says. Many chemical manufacturers are ambivalent about the currency issue, according to the ACC official, because the impact of a revaluation isn't clear. "What would that do to markets around the world? Nobody can say for sure."

Due to its heavy demand for chemicals, China is a fast-growing market for U.S. and other chemical exporters, but it's by no means enormous. The U.S. shipped $5.3 billion worth of chemical products to China in 2006. By comparison, U.S. chemical exports to Canada totaled $21 billion last year. "As manufacturing in China continues to grow, exports to China will also continue to grow," Demirjian says.

MEANWHILE, efforts by U.S. lawmakers to force China's hand on its currency and other trade practices may be merely symbolic. "My impression is that they introduced these bills so that U.S. officials can go to China and say, 'We have a problem in Washington. We have congressmen who want to slap tariffs on you, so you have to come up with a solution,' " Demirjian says. "Of course, the Administration would probably veto those bills. But it's just part of the full range of options that the government has to deal with China."

Most of the difficulty U.S. chemical companies have had in trying to export to or manufacture in China relate mainly to that country's evolving chemicals registration process. To join WTO, China had to completely overhaul its laws and regulations. "It's been very time-consuming and expensive for companies that want to introduce new chemicals into the Chinese market," Demirjian says. "The registration process involves testing that needs to be done in Chinese laboratories. Going through that process has been very cumbersome."

Behind the scenes, the Commerce Department has quietly set up consultations between regulatory authorities in China and staff at the Environmental Protection Agency. "China's chemical regulators are not adverse to help and feedback," Demirjian remarks. "It's just that they are creating a whole new regulatory system, and there are compliance issues and other things that need to be worked out."

Although these bilateral exchanges "are not as flashy as threatening the Chinese with a punitive tariff, hopefully they are laying the groundwork for a system in China that works for the long run," she adds. Though incremental in nature, such diplomatic initiatives are more likely to have a positive impact on the ability of the U.S. to conduct business with China, Demirjian says. "Other industries and sectors that have had similar exchanges have found that they are much more useful than members of Congress railing against China's practices," she observes.

Despite the growing frustration over China's alleged abuses, the looming fight over extending the President's ability to negotiate major trade deals is likely to be the most significant trade decision Congress will make in 2007. If TPA is allowed to lapse, "all bets are off" on the prospects for concluding the Doha Round talks, Demirjian says. "Once that June 30 deadline passes, our negotiators would be out there with nothing backing them up. There would be no way to ensure their partners that what they are negotiating isn't going to be rewritten by Congress when they bring the agreement home," she says.

When lawmakers authorize the President to negotiate trade deals—a power the Constitution explicitly grants to Congress—the legislation "always includes a tremendous amount of detail about what the specific negotiating objectives should be. So it's not a blank check," the ACC official notes. "We would be breaking new ground in that we haven't had to conclude a major trade agreement without TPA in the past."