IBC's Washington Trade Update

Dec. 2011

2011: ACCOMPLISHMENTS IN AN UNEASY YEAR

2011 DRAWS TO A CLOSE UNEASILY: Pivotal issues facing the United States and the world were not resolved, and enormous economic, strategic, and social challenges are left to the New Year. Bringing the most risk and uncertainty is, of course, the continuing financial crisis. Now centered in the Eurozone, economic and financial disorder is worldwide, and the past year made clear it entails broader instability. Releasing a study on growing economic inequality, OECD Director-General Angel Gurria reported, “The social compact is starting to unravel in many countries.” The warning was echoed by WTO Director-General Pascal Lamy, who told his organization's Ministerial Conference, “In the midst of this [global economic] tempest, citizens from across the globe have taken to the streets to demand stability, fairness, accountability.” As 2011 ends, new bouts of social and political unrest have erupted in China, Russia, Iraq, Egypt, Pakistan, and the political situation in North Korea is suddenly uncertain.

But despite the uncertainty and the challenges, significant things did get done over the past 12 months, particularly in trade policy. This final WIBR of the year will review Washington’s budget actions, and then focus on some of the year’s trade policy accomplishments.

CONGRESS, THE ADMINISTRATION, AND THE BUDGET: The divided government in Washington resulting from the November 2010 congressional elections assured that the scale of legislative initiatives the President and Congress enacted in the first year of the Obama presidency – healthcare reform, economic stimulus, Dodd-Frank financial regulation reform – would not be repeated. Yet this Congress did manage to approve, just as deadlines approached, budget-related measures needed to avert a government shutdown and/or serious blows to the credibility of the U.S. financial position.

Keeping Government Running: The previous Congress hadn’t completed its work for funding the federal government for this year, so the current Congress had to keep the government in business through an April deal appropriating money for the remainder of FY11. Congress didn't approve a unified Fiscal Year 2012 Budget Resolution (the House passed its version, the Senate did not) nor pass most of the 12 appropriations bills, but the federal government was kept funded after the October 1 start of the new fiscal year first through a series of Continuing Resolutions and then through an Omnibus Appropriations Bill (the “Megabus,” wrapping together 9 appropriations bills), approved in mid-December just as the last CR ran out. Notably, the Megabus had bipartisan support, and its $1.043 trillion for total discretionary outlays is $7 billion below what was spent in FY11. This was must-pass legislation, and Congress got it done.

Lifting the Debt Limit and Trying to Cut the Deficit: In early August, Congress passed another necessary item – the Budget Control Act, which enabled the federal government debt ceiling to be raised at a critical time (the U.S. was hitting the previous limit). Less successful was the second step of the process set up by the act – charging a congressional “super committee” with cutting at least $1.2 trillion out of the budget over ten years. Failure of the super committee to craft a plan or the Congress to approve it was supposed to force mandatory cuts – sequestration – of this amount beginning in 2013, with half coming from defense. The super committee failed, the victim partisan differences over taxing the rich and cutting entitlements. Thus, while the process enabled Washington to skirt the dangers of major debt ratings downgrades, outright defaults, and government shutdowns, it bequeathed to the coming year the challenge of dealing with sequestration, either by making the requisite defense and discretionary cuts or by changing the law.

Congress is locked in a partisan fight over how to renew the payroll tax cut and unemployment benefits extension enacted last year, and over other measures that may be attached to this legislation (most controversially, forcing a White House decision on approval of a pipeline carrying oil from Canadian tar sands). While this fight suggests how tough it will be for Congress to get anything done in the coming election year, it does not affect the basic functioning of the government.

U.S. TRADE POLICY: Trade policy is one arena that saw significant progress this year. Congress passed the implementation bills for three long-pending Free Trade Agreements - with South Korea, Colombia, and Panama. Important in their own right economically and strategically, their passage also gave momentum to the Obama trade agenda.

Also renewed by Congress were the Generalized System of Preferences program, the Andean Trade Promotion Act, and Trade Adjustment Assistance.

Getting the FTAs done helps to keep the country on track to meet the goals President Barack Obama set two years ago for his National Export Initiative – to double U.S. exports by end-2014 (they are up 25% since the NEI was launched). Other Administration efforts are geared to the same end. The Commerce Department's new Global Buyers Initiative, to attract foreign purchasers who haven't traditionally sourced from U.S. suppliers, has joined its New Market Export Initiative, which seeks new foreign markets for small- and medium-sized businesses that already export, as well as an array of other programs focused around manufacturing and small business, in stepping up government export promotion.

The Export-Import Bank released its 2011 Annual Report in late December which confirmed a third straight record year: over $32 billion in Ex-Im financing, supporting more than $41 billion in U.S. exports. The Bank’s multi-year reauthorization has been delayed until 2012.

China: The Administration is also steering its China policy toward boosting U.S. exports, not seeking confrontation over yuan undervaluation but targeting China's distorting commercial practices. The late-November annual meeting of the U.S.-China Joint Commission on Commerce & Trade led to some cooperative agreements that will be significant if they are actually implemented. However, even in this traditionally rather friendly forum, Commerce Secretary John Bryson publicly warned his

Chinese hosts that U.S. legislators and businessmen “are moving toward a more negative view” of bilateral trade relations. The basis for this rising negativity was laid out in the annual report on China's compliance with its WTO accession obligations released in early-December by U.S. Trade Representative Ron Kirk. It highlights a growing concern: that despite early progress, there is “a troubling trend... toward intensified state intervention... over the last five years.... China seems to be embracing state capitalism more strongly.”

Although China has been a recent bright spot for U.S. exports, its own GDP growth is decelerating – its exports are slowing, its bad loans proliferating – and, denouncing what Beijing claims is a string of U.S. protectionist moves restricting Chinese exports, it has begun hitting back. Among these hits: The Commerce Ministry announced December 14 that it was imposing anti-dumping and countervailing (anti-subsidy) duties on U.S.-made large-engine cars. While little trade is at stake, this largely symbolic move followed a November launching of an unfair trade case probing U.S. government assistance to renewable energy projects, and an announced pull-back of Chinese investment in the U.S. solar industry. The two countries are also challenging each other through the WTO dispute settlement process.

Trans-Pacific Partnership (TPP) – A U.S. Priority Progresses: A way out of such escalating hit-counter-hit trade spats is sought through forging trade agreements that assure market access and reciprocity. Toward this goal, the Obama Administration made strides this past year on its trade agreement priority – the TPP, which could (eventually) become the core for a broader pact including even China. At the November APEC Summit the nine TPP heads-of-state endorsed the broad outline presented by their negotiators, and an early-December mini-round reported further progress. The U.S. presented a major “green” position paper calling for enforceable new commitments on illegal logging, wildlife trade, and fisheries subsidies.

But beyond the new, “21st century” issues the TPP talks aim to encompass, the most important questions lie outside its negotiating agenda: Whether Japan will join and whether President Obama will seek and receive renewal of fast-track trade promotion authority (TPA) from Congress in 2012 (he must have it before the agreement is signed if it is to get fast-track treatment in Congress). The Japan question remains very much up-in-the-air as the weak government in Tokyo must maneuver around farming and small business interests and their political allies who fear the modernization that TPP participation would bring. The U.S. side has made two things clear – both the government and the private sector would warmly welcome Japan, but neither would support weakening the highly ambitious TPP goals just to ease the way for its participation. Bids by Canada and Mexico to join the TPP process are likely to be successful. On TPA, the White House has begun talking with Congress. Though it is considered unlikely it would push for the TPP talks to conclude before November (trade is just never a congenial election-year issue), it is likely to prepare the way for TPA renewal during the year. In so doing, it will have to fight some in its own party. The three 2011 FTA votes prevailed with only a minority of Democratic support in the House.

Europe – Looking to Build Transatlantic Cooperation: The Obama Administration wants to deepen economic ties across the Atlantic as well as the Pacific. The late-November U.S.-EU Summit had an important outcome for trade across the Atlantic: The leaders asked the Trans-Atlantic Economic Council (TEC) to set up a “High-Level Working Group on Trade & Growth” headed by

USTR Kirk and EU Trade Commissioner Karel De Gucht, to “assess options for strengthening the EU-U.S. economic relationship” and examine prospects for negotiating trade and/or regulatory accords. While a full trans-Atlantic FTA will be looked at – in fact, the idea was just endorsed by the Trans-Atlantic Business Dialogue – De Gucht said the outcome might instead be a series of smaller agreements (cutting the remaining tariffs in U.S.-EU trade, harmonizing regulations and standards, freeing trade in specific sectors), thus avoiding still-divisive agricultural issues. Most significant is likely to be a push for freeing trade in services, an idea that is also gaining broader interest among WTO members. Until now, calls for trans-Atlantic free trade have not been promoted officially, as the prospect was seen as a threat to the WTO's Doha Round. Now, though, with Doha lifeless and, really, beyond threat, and with Washington and Brussels sharing a common worry over competition from China (and India), a U.S.-EU FTA is back on the trade menu.

Export Control Reform, Finally: Another (long-languishing) area of trade policy that progressed this year is export control reform, now moving to the implementation phase. As a first step toward a single control list, the Obama Administration published proposed revisions to a number of U.S. Munitions List categories, moving items that no longer warrant control as defense items to the Commerce Control List. Congressional notification is required under the Arms Export Control Act before these rules can be implemented. Also this year, the Export Enforcement Coordination Center opened to improve management of enforcement efforts.

WTO TAKES SOME ACTIONS: The WTO held its 8th Ministerial Conference in mid-December. For all practical purposes, the ministers finally admitted that Doha is dead. They called for exploring new approaches to revive it, but the Chairman's Concluding Statement said bluntly, "It is unlikely that all elements of the Doha Development Round could be concluded simultaneously in the near future,” given members' “significantly different perspectives.” Perhaps most revealing is that the differences getting the ministers' attention were not over the substantive points that have stymied the talks for years, but were differences over process – whether new issues (e.g., food security, climate change, currencies) should be brought into the negotiations or perhaps become the focus of new talks, and whether the round should seek plurilateral agreements not involving the full membership (in particular there is a push for a services plurilateral). The U.S. led developed countries in promoting new issues and plurilateral accords; developing and poor countries still hope for a deal prioritizing their needs. So though not “official,” Doha has failed.

Still, there have been successes: 1) The ministers formally invited Russia to join; when it does so next year, all major economies will be members; 2) they also endorsed a revision of the WTO Government Procurement Agreement, a long-standing plurilateral accord among developed nations which China is seeking to join; and 3) the ministers reaffirmed the importance of the rules-based WTO system and its day-to-day functioning as a restraint on protectionist tendencies. Though the days of comprehensive global trade rounds may be over for now, the WTO still stands as a demonstration of effective international cooperation.

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International Business Government Counselors, Inc. (IBC) is one of the most experienced and prominent international government relations firms in the United States. Clients include major North American, Asian and European multinational companies. For more information, contact James D. Regan, Senior Vice President, jregan@ibgc.com