TPP Talks: State-Owned Enterprise Subsidies Should End – Part Two

by Taras Berezowsky on September 14, 2011

Style:    Category: Global Trade, Manufacturing, Public Policy

Continued from Part One.

In general, it seems that US manufacturing finds itself in a conundrum. A front-page article in the Business section of Sunday’s NY Times explored the issue, with the headline asking, “Is Manufacturing Falling Off the Radar? Author Louis Uchitelle writes that Vermeer Corporation was forced to open a Beijing plant, partnered with the Chinese and took advantage of local support, then hits on the core of the problem when he quotes NAM chairwoman and Vermeer’s chief executive Mary Vermeer Andringa as saying, “If we wanted to stay in the Chinese market, we needed to be there. That was the reality.”

It’s no surprise, then, that manufacturing has fallen from representing as much as 28 percent of overall US GDP in the 1950s to just 11.7 percent last year, according to the Bureau of Economic Analysis. Also, according to the article, “less than 12 percent of the American work force is in manufacturing today, down from 30 percent in the 1970s.” Not only are our workers punching clocks elsewhere (finance, real estate, etc.), but the demand for much of what’s made in America happens to spring from Asia, which underscores Andringa’s rationale for her company’s physical presence there.

The article also features quotes from Dow Chemical‘s CEO Andrew Liveris and the requisite academic/government experts, but overall it seems clear that US companies just can’t compete in foreign markets when those governments give an unfair advantage to their own infrastructure and labor pool rather than favoring US imports. Unless you succeed at playing their own game, like Dow: “Overseas,” Liveris is quoted as saying, “I get tax incentives, and I get incentives to go to certain locations where they offer us utilities, infrastructure and land. I get access to human capital. I get all sorts of support to help train that human capital.”

State-Owned Enterprises Not Acting Commercially: Enough is Enough

That sort of preferential help is exactly what harms US businesses’ ability to compete in their domestic market, according to Tim Brightbill, partner at Wiley Rein and advocate on behalf of the steel industry in international trade negotiations. Before we caught up with him during the latest round of the Trans-Pacific Partnership talks in Chicago, Brightbill told MetalMiner that there’s resurgence in China and in other nations of using state-owned enterprises to seize control of other industries abroad.

“The concern we have is: what happens when state-owned enterprises come abroad, to the US?” said Brightbill. “The SOEs come here, set up a steel mill, produce here, and have to compete here. The difference is they get preferential capital and other government subsidies to set up steel mills.” Even if they don’t get subsidized initially, Brightbill said, they may receive preferential treatment for their operations two years down the road.

Other examples of preferential treatment: these enterprises are less subject to regulation, they’re not traded on stock markets, and their ownership structure may be different, according to Brightbill. This presents a stark difference between a Chinese government-owned steel mill operating in the US, and Dow Chemical plants operating in China. For example, the US government does not give nearly the same help to private businesses abroad, while the Chinese are happy to subsidize not only their own companies, but those who want to operate within their borders and contribute to their local wealth.

That’s why the TPP negotiations geared toward new free trade agreements (FTAs) represent such a critical juncture for this issue; the treatment of SOEs is not something that has been in FTAs before. “The US is very concerned that there are [currently] no laws or mechanisms in place that state-owned enterprises, whether operating at home or abroad, act commercially and don’t subsidize themselves,” Brightbill said. The US government will likely put their proposal forth (in this round or the next) to include explicit language on this issue in the FTAs that come out of the TPP negotiations.

“We would love to ensure that state-owned enterprises are acting based on commercial considerations when they do investment, and that they’re not receiving consideration,” Brightbill said. “That’s the core.”

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