Asia Pacific talks not aimed at containing China – U.S. official

Posted on August 9, 2012

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WASHINGTON, Aug 8 (Reuters) – U.S.-led talks on a free trade pact in the Asia Pacific region are not an attempt to economically contain China, a top U.S. trade official said on Wednesday.

“This is absolutely not a negotiation that’s directed at China,” Deputy U.S. Trade Representative Demetrios Marantis said in remarks at the Woodrow Wilson Center for International Scholars.

The United States is hosting the 14th round of talks on the Trans-Pacific Partnership (TPP) in early September. A final agreement is unlikely before the end of 2013.

The Obama administration has billed the proposed pact as part of a U.S. “pivot” toward the fast-growing economies of the Asia-Pacific region.

Marantis said negotiators had made significant progress in the talks, but are beginning to confront the most difficult issues and still have a lot of work to do.

The current talks include the United States, Australia, New Zealand, Peru, Chile, Singapore, Malaysia, Vietnam and Brunei, with Canada and Mexico set to join in coming months.

Some in China see the TPP as a U.S. attempt to rewrite the rules of trade for the region to economically contain China, whose rapid growth continues to rattle many lawmakers and companies in the United States.

Marantis rejected that charge, noting the TPP is open to any of the 21 members of the Asia Pacific Economic Cooperation (APEC) willing to meet high standards envisioned for areas like intellectual property, services, environment and labor.

The integration of Vietnam, Malaysia, Canada and Mexico into the talks since 2009 shows that, he said.

“Our goal is to incorporate as many Asia Pacific members into this that are willing to meet the high standards,” Marantis said.

“Each country has to make that judgment for itself on whether TPP makes sense for it,” Marantis said.

Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics, said the idea the proposed pact could contain China was “laughable” because no trade agreement is capable of that.

Schott also said he thought China could decide in the “medium term” if it wants to join the pact.

China made significant market-opening commitments in 2001 to join the World Trade Organization and has moved toward deeper commitments in bilateral free trade pacts, he said.

TAIWAN BEEF

Meanwhile, Marantis said the United States welcomes recent steps Taiwan has taken to reopen its market to U.S. beef, but is waiting to see how that is implemented before resuming talks to deepen trade ties.

U.S. frustration with Taiwan over beef trade prompted Washington a few years ago to suspend bilateral talks under a Trade and Investment Framework Agreement (TIFA).

Washington will be evaluating over the next several months whether to restart the TIFA talks, Marantis said.

He acknowledged Taiwan’s long-term interest in joining the TPP, but said it was not an issue that current members had to confront yet.

Schott said it was unlikely Taiwan would become a member of the TPP talks because of the political problems that would create with China, which regards Taiwan as part of its territory.

Japan has also been considering joining talks on the TPP.

Edward Lincoln

The Benefits of Chinese FDI

BERKELEY – In a rare act of bipartisanship, the United States Congress recently passed legislation to encourage more inward foreign direct investment. Democrats and Republicans agree that FDI, or “insourcing,” is important to US jobs and competitiveness. They are right.

But, even as they propose new measures to court foreign investors, many members of Congress in both parties harbor deep concerns about FDI from China, on both national-security and economic grounds. These concerns are unwarranted, and discriminatory policies to restrict such investment are ill-advised.

The US government already has adequate controls in place to review and block FDI from all countries, including China, that pose anti-competitive and national-security risks. Investments that clear these controls benefit the US economy in numerous ways and should be welcomed.

Foreign-owned firms in the US account for 5% of private-sector employment, 17% of manufacturing jobs, 21% of exports, 14% of research and development, and 17% of corporate-income taxes. Recognizing FDI’s significant contributions to the US economy, President Barack Obama’s Council on Jobs and Competitiveness endorsed the administration’s new Select USA program to coordinate government-wide efforts to promote it.

To be sure, the US remains the world’s leading destination for FDI, accounting for 15% of global flows. But its share is declining, while China, using both carrots (like tax holidays and special enterprise zones) and sticks (like explicit and implicit local-content requirements) to attract foreign companies, has become the second-largest destination.

China has remained a small source of FDI outflows, but that, too, is changing rapidly. Chinese outward FDI soared from an average of $3 billion per year before 2005 to $60 billion in 2010, catapulting China into the top five sources of FDI on a three-year moving-average basis. Given the size of China’s economy, its growth rate, and the experience of other developing economies, FDI from China is likely to increase by $1-2 trillion by 2020.

An increase in FDI outflows is a priority in China for two reasons. First, China has an understandable interest in diversifying its substantial holdings of foreign-exchange reserves away from low-yielding US Treasuries to real productive assets with higher returns. That is why China established its sovereign-wealth fund, China Investment Corporation, and why CIC decision-makers are seeking more FDI opportunities.

Second, China’s businesses have been encouraged to “go global” and invest abroad to find new markets, secure access to energy and raw materials, and enhance their competitiveness by acquiring new technologies, brands, and management skills. In a recent report, the People’s Bank of China urged Chinese companies to acquire foreign firms as the first stage of a ten-year plan to ease China’s capital-market restrictions – long a goal of US policymakers.

So far, China’s FDI outflows have been concentrated in developing countries and a handful of resource-rich developed countries, including Australia and Canada, and have been aimed at facilitating trade and acquiring access to natural resources. But the patterns and destinations of China’s outward FDI will change as rising wages, an appreciating real exchange rate, and the entry of new suppliers from other emerging countries erode Chinese companies’ competitiveness, motivating them to invest abroad to upgrade their technology and management capabilities, find new growth opportunities, and move up the value chain.

Currently, the US receives only about 2-3% of FDI flows from China. But China’s direct investments in the US have increased rapidly, from less than $1 billion annually in 2003-2008 to more than $5 billion per year in 2010-2011. At least 38 US states now host FDI projects from China, and competition for Chinese investment has intensified as states’ budgets have contracted.

Of course, alongside the potential economic benefits of attracting a much larger share of Chinese FDI, legitimate competitive and national-security concerns do need to be addressed. First, like all mergers and acquisitions involving both domestic and foreign investors, investments in or acquisitions of US companies by Chinese companies, whether state-owned or private, must be evaluated by the US Justice Department for their impact on market competition. Investments with significant anti-competitive effects must be modified or blocked.

Second, the Committee on Foreign Investment in the United States (CFIUS) must screen investments in or acquisitions of US companies by foreign companies, including Chinese companies, for national-security risks. Such screening is a common and justifiable practice around the world. In recent years, CFIUS has defined national security broadly to encompass not only defense activities and dual-use technologies, but also critical infrastructure, including telecommunications, energy, and transport – areas of particular interest to Chinese companies.

Many Chinese investors view the CFIUS screening process as protectionist and targeted at them, but there is no evidence of this. The United Kingdom, Canada, France, and Israel accounted for more than half of all CFIUS cases reviewed in 2008-2010, while China accounted for only about 5%. Only a small fraction of Chinese FDI in the US is subject to CFIUS review, and most of these projects, like most reviewed by CFIUS, are approved, sometimes with mitigation measures. CFIUS does not review greenfield investments, which account for about 50% of Chinese FDI in the US.

But Chinese FDI, especially in sensitive sectors like energy, does often trigger Congressional hearings, ad hoc resolutions, and calls for tougher CFIUS action. As a result of high-profile Congressional opposition, China’s state-owned energy company CNOOC withdrew its bid for Unocal, an American energy company, in 2005, before a CFIUS review that most likely would have cleared the deal on national-security grounds. China still points to this episode as evidence that Chinese FDI is not welcome in the US.

Feeding this perception, some members of Congress are now exhorting CFIUS to block CNOOC’s proposed acquisition of Nexen, a Canadian energy company with holdings in the Gulf of Mexico, until China resolves ongoing disputes with the US over preferential government procurement policies and barriers to FDI by US companies in China. Heeding these calls would be a costly mistake that would undermine the objective, non-discriminatory CFIUS process and encourage Chinese companies to look elsewhere at a time when Chinese FDI is poised to explode and the US economy sorely needs the jobs, capital, and trade benefits that it would bring.

Laura Tyson

America Needs a Business Pivot Toward Asia

Barbara Weisel, Assistant U.S. Trade Representative for Southeast Asia and the Pacific, fourth from right, looks on during a news conference at the Trans-Pacific Partnership Free Trade Agreement talks Tuesday, July 10, 2012, in San Diego.

Much has been made of the Obama administration’s policy “pivot” to Asia, increasing diplomatic outreach, and rebalancing and repositioning of military assets in the Asia-Pacific region. Missing from this shift is a “business pivot”—a more concerted effort to increase trade and investment between America and its allies in the region. This would be good strategy, and good economics too.

So far, Washington appears to be thinking of Southeast Asia—and particularly the problem of growing Chinese assertiveness in the South China Sea—primarily in military terms. In June, U.S. Secretary of Defense Leon Panetta announced plans to base 60% of U.S. naval forces in the Asia-Pacific region by 2020.

Yet adding a pro-growth, pro-business component to U.S. strategy could help Asian countries become stronger, more confident partners. Commercial ties also can help cement friendships. Beijing understands this, which is one reason Chinese companies have been investing heavily in the region.

This would not mean starting from scratch: A significant U.S.-Asia economic and trade foundation exists that can be built on. In Southeast Asia, for example, U.S. exports exceeded $76 billion in 2011. American companies also have invested twice as much in the region as they have in China.

To cite one example, Ford is investing $450 million in a new Thai plant that will employ 2,200. Ford is the second-largest automotive investor in Thailand after Toyota, having pumped in $2.5 billion over the years. Its success in Asia is to the benefit of the United States.

But whereas the Chinese are now actively encouraging greater overseas investment to catch up, Washington has lost focus. America needs more than the occasional trade mission.

The first step in a business pivot needs to be an explicit recommitment to free trade broadly and to free trade agreements (FTAs) specifically. For the past three years, too little has been done to advance a free-trade agenda beyond ratifying—after long delays—agreements initiated by prior U.S. administrations.

In the Asia-Pacific region, the U.S. has free trade agreements with only Australia, Singapore and South Korea. Negotiations continue toward a regional Trans-Pacific Partnership (TPP) multilateral trade agreement. Yet the U.S. commitment to this agreement, while welcome, again predates the present administration.

New initiatives are warranted. Washington could set a firm deadline for concluding TPP talks. Recently the focus seems to be more on expanding the number of participants—Canada and Mexico recently joined, and Japan might—than on concluding negotiations. While businesses would benefit from a deal covering as many countries as possible, the number of countries is irrelevant if expanding participation means there’s no deal at all.

Washington also should look for opportunities to improve trade on a day-to-day basis. Logistics and transport are obvious cases. A low-profile but important move would be to boost negotiations on open skies agreements in Asia. Such deals allow airlines, including freight carriers, greater freedom to set routes and schedules between signatory countries.

As of late 2010, the U.S. had more than 100 open skies partners. Conspicuously missing from the list, however, are several Asian nations. The Philippines and Vietnam each could provide future opportunities for partnership agreements if governments on both sides understand the benefits of greater cooperation and competition, and of encouraging the building of businesses across borders.

Finally, a business pivot should consist not just of actions but also of words. It means ceasing to demonize companies that trade and invest overseas.

It’s difficult to excite business leaders about the prospect of additional trade with Asia if they have to worry about becoming political whipping boys. Partly this would be a matter of politicians exercising some restraint, but partly also a matter of putting some leaders in Washington who understand the strategic and economic importance of trade with and investment in Asia and are willing to help businesses make that case at home and push for expanded opportunities abroad.

Unfortunately, there’s hardly anyone in Washington right now making the case that protectionism hurts both the U.S. economy and American interests abroad. And no one is positioned to communicate with the business community on how best to expand commercial ties in Asia.

A central benefit of peace and stability in Southeast Asia—which is a goal of the U.S. administration’s strategic pivot—would be to open the way for greater commercial opportunities on both sides of the Pacific. It’s time for Washington to understand that trade and economic ties can be part of the means to a strategic solution in the region, and not just the ends.

Curtis Chin

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Posted in: Politics