The Comparative Advantage A Digest of Global Trade and Investment
In This Issue Chinese Take Out? Food Security and the China Trade
1
Talking Heads
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Trade Promotion Authority: RIP?
3
Global Engagements
3
Legislative Watch
4
Forward Trades
4
Trade in Numbers
5
July 2007
Chinese Take Out? Food Security and the China Trade I think we have reached a point unfortunately where ‘made in China’ is now a warning label in the United States. – U.S. Senator Richard Durbin (D-IL) June 1 Food security problems have impeded Chinese agri-products and food many times in international trade, and damaged our national credibility and image… mass food safety incidents will continue to occur frequently, with the rural food safety situation in particular causing us to not be optimistic...Food safety accidents and individual cases will not only affect the healthy development of the industry but could also impact local economies and social stability. – Sun Xianze, Director, Food Safety Coordination, China State Food and Drug Administration. July 9 The Food and Drug Administration’s decision in late June to bar entry to several Chinese seafood products confirmed the risks involved with the economy’s increasing reliance upon food and consumer products from China. The rising tide of unsafe Chinese products has severely challenged America’s domestic capacity to ensure the security of the nation’s food supply.
Alston & Bird’s Global Business Strategy Practice Washington Office Naotaka Matsukata, Ph.D.* 202.756.5591
[email protected] Eric Shimp* 202.756.3409
[email protected] Yukiko Ko* 202.756.3311
[email protected] * Policy advisor; not an attorney.
The country’s exposure to risks from Chinese imports can be measured in part by understanding how China’s share of U.S. imported foodstuffs has grown with the country’s total trade deficit. Implicit in this relationship is a looming question regarding how America manages the costs and benefits of globalization. Since 2002, the value of Chinese food imports to the United States has increased by 125 percent. Last year, however, Chinese products accounted for 68 percent of recalled or rejected imports to the United States. Safety has clearly not kept pace with growth. Seafood offers a useful microcosm of the China trade and America’s yawning appetite for imports. The National Fisheries Institute, the trade association for the U.S. seafood industry, reckons that 70 percent of the seafood on American tables comes from abroad. In 2003, the U.S. imported $8.6 billion of foreign seafood; by 2006, that figure had grown to $10.2 billion. Imports of Chinese seafood in 2006, meanwhile, had grown to $1.4 billion, supplying fully 10 percent of the nation’s seafood. This advisory is published by Alston & Bird LLP to provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under court rules of certain jurisdictions.
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The new FDA ban on Chinese catfish and eels carries a tacit acknowledgment that the domestic inspection and safety regime has been taxed to the limit by expansive import volumes. In April 2007 alone the Food and Drug Administration rejected some 257 Chinese food shipments for containing banned ingredients and seized more than 1,000 shipments of tainted cosmetics, food supplements and counterfeit medicine from China. This spike in rejections, however, implies a false sense of security; FDA annually inspects 0.7 percent of the food arriving in America’s ports and customs houses. As FDA officials themselves recognize, given the sheer volume of food imports, even doubling the current rate of inspections would be ineffective. The recent FDA enactment of a temporary ban may be indicative of further actions on other tainted products, and appears to be the only surefire, near-term way to ensure public health.
Sweet & Sour Irony Interestingly enough, China has been among the forefront of U.S. trading partners wielding alleged food safety standards for protectionist purposes. China appears to have stretched the application of World Trade Organization standards, banning many U.S. farm exports from entering the Chinese market. China has barred pork and poultry exports over the past two years in a manner inconsistent with international standards; rejected WHOapproved additives in thousands of agricultural commodities; perpetuated a ban on American beef despite U.S. measures against BSE; and requires quarantine inspection permits for the import of most any U.S. agricultural commodity to Chinese shores. The U.S. policy response thus far has not challenged Chinese abuse of WTO principles, but sought, unsuccessfully, to persuade the Chinese to implement standards based on sound scientific and regulatory practices. In the meantime, China appears to wield a capricious and unchecked ability to close its borders to American farm products.
The Politics of Food Safety The belated U.S. government action on Chinese seafood may not stem a barrage of political initiatives seeking to address the public health aspects of the China trade. Sustained media attention to tainted products has renewed a push by consumer groups to end a five-year delay in enforcing mandatory country-of-origin labeling rules created by the 2002 farm bill. Senior Democratic Senators Durbin and Schumer, meanwhile, have launched efforts respectively to boost the FDA’s resources and to create a new “import czar” position within the Department of Commerce to exercise authority over the safety of all imports to the United States. Surprisingly, Washington has yet to see an organized effort among the many groups disadvantaged by the China trade to leverage the food safety issue into a broader assault on Chinese imports. Similarly, the presidential candidates have been slow to capitalize on the seemingly easy political calculus of public health, tainted Chinese imports, and rising protectionism among the general public. Increased attention is probably
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Talking Heads The United States respects the rule of law. We expect our trading partners to do the same. Unlike some other approaches to currency manipulation, this bill is WTOcompliant. It sets consequences for countries that want to access the U.S. market but don’t play fair. We’re not picking a fight with anyone. Today, the problem country is China. Tomorrow, it may be Country X. This enforcement structure could apply to any trading partner with out-of-whack currency. It gives a good chance for selfcorrection before penalties ramp up. It’s a velvet glove with a steel fist inside. – U.S. Senator Charles Grassley (R-IA) announcing Currency Exchange Rate Oversight Reform Act, June 13 l l l
The change we are making is the first major revision in the surveillance framework in some 30 years, and it is the first ever comprehensive policy statement on surveillance. The new decision... gives clear guidance to our members on how they should run their exchange rate policies, on what is acceptable to the international community, and what is not. To three existing principles relating to exchange rate manipulation pursued for certain purposes, and to when and how it is desirable to intervene in the foreign exchange rate markets, the decision adds a fourth principle: “ A member should avoid exchange rate policies that result in external instability”. – Rodrigo Rato, Managing Director, International Monetary Fund, Montreal, June 18 l l l
The revised decision sends a strong message that the IMF will put exchange rate surveillance back at the core of its duties and rigorously implement its rules on exchange rate surveillance going forward. The revised decision also demonstrates that the IMF is serious about reforming itself and enhancing its legitimacy and relevance in today’s global economic and financial system. – U.S. Treasury Secretary Henry Paulson, June 18
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inevitable, however, as the campaigns steer their way toward state fairs and members of Congress return home for the late summer recess. Should new discoveries of tainted Chinese products turn up during Washington’s traditional summer slumber, individual FDA actions will prove insufficient to the task, and we’ll expect the autumn session to bring a raft of new trade legislation aimed at securing the American dinner table.
Trade Promotion Authority: RIP? The president’s “fast track” trade negotiating authority expired July 1, after a five-year run that was equal parts fanfare, contentious debate, partisan rancor, and a notable expansion of liberalized trade with the world. Trade Promotion Authority, as the legislation providing fast-track was called, slid under the waves quietly, its only accompaniment a frankly tired and misleading debate between “free” versus “fair” trade in the nation’s papers. Now that fast-track is gone, its absence will not necessarily be immediately missed. The fact of the matter is that fast-track died well before TPA legislation expired July 1. The 110th Congress set about reclaiming its grant of constitutional authority to negotiate trade agreements back in January, and since then has been engaged in an examination of the nation’s approach to globalization that has been at once necessary and difficult. Necessary due to the fact that, as modern trade agreements have evolved, they have increasingly come to influence sovereign regulatory powers and domestic economic sectors far more than predecessor treaties focused on moving boxes across borders. Difficult because these new “behind-the-border” issues, such as investment, standards and trade related migration are custom-made for protectionist rhetoric and populist policies. The 110th Congress, in the process of reasserting authority over trade, essentially rewrote entire sections of the negotiating mandate for the U.S. Trade Representative before TPA expired, and has intervened in the negotiating process as more of a direct player. While these actions have certainly made many trade partners nervous, they also likely strengthened the USTR’s hand in negotiations toward a new global WTO agreement and invigorated the enforcement of U.S. trade remedy laws. In addition, Congressional activism did not prevent the successful closure of negotiations for a free trade agreement with Korea (KORUS), which will be the most economically significant trade agreement concluded by the United States since the NAFTA in 1992 and the WTO Uruguay Round in 1994. Yet the next step in the process is certain to be a test of the Democratic leadership in the legislature – will this Congress ratify the very agreements it has a hand in negotiating? The critical test will be the KORUS, and on this, Congressional leadership is already struggling. The foreign consequences of a KORUS vote are far greater than the state of U.S. trade with Korea. Key countries China, Japan and India are laboring mightily to hack out preferential trade agreements in East and Southeast Asia, making progress that threatens to leave American exporters and investors at a competitive
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Global Engagements Yukiko Ko, Director of the Global Business Strategy Practice, participated in the 2nd Technical Assistance Seminar on the International Implementation of the APEC Privacy Framework and the APEC Data Privacy Subgroup Meeting in Cairns, Australia from June 25 to 27, 2007.
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disadvantage. If the Congress passes KORUS, expect foreign confidence in the U.S. commitment to the region to soar. If Congress falters, expect Beijing to occupy the vacuum. The Bush Administration has repeatedly risen to the economic challenges in Asia, seeking various new trade and investment agreements across the region to solidify the country’s ability to compete with China and remain engaged with major Asian partners. U.S. Trade Representative Schwab, traveling to Australia during the first week of July to attend the regional APEC forum, broached the possibility of U.S. participation in a regional free trade arrangement. An Asia trade pact is an integrative approach that would put the U.S. economy on solid footing in Asia for the next generation. The ideal first step in that direction is ratification of the KORUS FTA. The next step would be for the United States to engage Japan, its largest partner in Asia, in the meaningful pursuit of a broad, liberalizing economic agreement. Japan has been warming to the idea for the past year. Leading industries have lobbied the Koizumi and Abe governments for real progress on bilateral Japan-U.S. trade. Now, the conclusion of the KORUS FTA has moved the conservative bureaucracy in Tokyo to seek rapid actions to prevent Japan from lagging behind Korea and China on trade. Last month, Prime Minister Abe’s cabinet endorsed the possibility of a U.S.-Japan economic agreement. Congress should recognize the regional politics at play and the opportunities presented by ratification of the KORUS FTA. By passing the Korea agreement, the Democratic leaders can secure long-term strategic value for the U.S. economy that far outweighs the benefits or risks to any single commercial constituency. The prospects of a new open door in Asia should be enticing to business and government alike, the first test is for Congress to get past the threshold.
Forward Trades July 12-13 U.S.-China Economic and Security Review Commission hearings on Chinese proliferation and the U.S. defense industry, Washington July 30-August 3 14th APEC Finance Ministers Meeting, Coolum, Australia August 19-23 8th International Congress on AIDS in AsiaPacific, Sri Lanka August 20-21 President Bush travels to North American Leaders’ Summit, Quebec August 27-28 OECD National Innovation System Review of China, Beijing
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Legislative Watch Currency: There are seven bills now in play that seek to revamp the nation’s laws and policies regarding international exchange rates. The Currency Exchange Rate Oversight Reform Act, S. 1607, is championed by Senators Baucus, Grassley, Schumer and Graham, who seek to move the bill before the Congress recesses in August. Foreign Investment: On June 29 the Senate passed legislation revising the Committee on Foreign Investment in the United States. The House had passed a similar bill in February. Minor differences between the bills and White House support for the reforms indicate straightforward compromise and passage into law.
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Trade in Numbers • 68%:
Chinese share of total U.S. imports recalled in 2006
• 40%: Chinese share of consumer products imported into the U.S. • 60 million: Pet food containers tainted with melamine linked to wheat gluten and rice protein concentrate imported from China • 1.5 million: Recalled Thomas & Friends trains and rail components manufactured in China • 125.9%: Increase in the value of China’s food exports to the United States from 2002 to 2006 • 298: Food shipments from China refused by the FDA from January to April 2007 • 0.7:
Percent of food imports inspected by the FDA
• 2: Chinese State Food & Drug Administration officials sentenced to death for bribery in 2007 • 7: Free trade agreements concluded by Japan (Chile, Brunei, Malaysia, Mexico, Philippines, Thailand, Singapore) • 4: Free trade agreements concluded by Korea (Chile, Singapore, EFTA, US) • $69.4 billion: Value of total trade with Japan to date in 2007 • 7%: Trade with Japan as a percentage of total trade to date in 2007 • $27.2 billion: Value of total trade with South Korea to date in 2007 • 2.9%: Trade with South Korea as a percentage of total trade to date in 2007
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