July 11-15, 2018

Overview of Trade Issues
Across the Pacific Rim

Eric Miller

President
Rideau Potomac Strategy Group

In 2017, US trade with PacRim countries amounted to $361,198,400 in exports and $791,727,600 in imports. Asia has become a central part of US economic policy. Eric Miller, President of Rideau Potomac Strategy Group, provided an overview of the changing landscape of trade in Asia. He examined the impacts on US trade and on the States’ economies of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and of the tariffs recently imposed by the US and China.

China-US Trade Balance

China's economy has been one of the world's fastest-growing with annual growth rates consistently above 6%. In 2005, the US economy was 5 to 7 times larger than that of China. By 2018, it was only 1.6 times larger. By 2029, China should surpass the US. China is the world’s largest trading nation and the largest exporter and second-largest importer of goods. Its strategy is to maintain export-led growth, which aids it in generating jobs and enables it to keep its large population productively engaged.

The US imports consumer electronics, clothing, and machinery from China. As much as 80% of luggage and 70% of clothing sold in the US is manufactured in China. Many additional imports are from US manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the US, they are considered imports. The availability of Chinese products led to price decreases in the 1980s. However, by 2000, 5 to 7 million jobs had disappeared from the US and moved to China and other countries, which could manufacture goods at a lower cost.

A 2016 study correlated import competition from China with political polarization in the US. When people lose jobs and experience economic insecurity that they attribute to foreign competition, they vote at extremes. When there is economic stability and sufficient middle class jobs, there is a more centralized political situation.

In 2017, the US exported only $130.4 billion of goods to China in total, while imports from China were $506 billion. The US trade deficit with China was $375 billion in 2017. China’s central bank accumulates excess USD from Chinese exporters and invests them in US treasury bonds, which is considered the safest investment; thus, China is the largest lender to the US government.  As of May 2018, the US debt to China was $1.18 trillion or 19% of the total public debt owned by foreign countries.

US-China Trade War?

As a one-party state, China has great latitude to exert controls to protect the economy. China’s economic practices, such as assistance to state-owned enterprises, investment restrictions on foreign firms, forced technology transfer, industrial policy, and theft of intellectual property, have attracted criticism from the Trump administration, which imposed tariffs as a “corrective policy” to create “a level playing field.” Others perceived the tariffs as a contributor to increased political tension and a stimulus for a trade war.

This year, the US imposed a 25% tariff on $50 billion in Chinese goods, including agricultural and industrial machinery. The action provoked an immediate response from Beijing, which said it would place its own tariffs on $50 billion worth of American goods, including beef, poultry, tobacco and cars. The Administration is threatening a 10% tariff on an additional $200 billion in Chinese goods, and President Trump has indicated he is willing to put tariffs on all $505 billion of Chinese goods the US imports.

Chinese Economic Strategies

China wants to dominate global trade. Institutions such as the China Technology Enterprise (CTE) and the Asia Infrastructure Investment Bank, an Asian version of the International Monetary Fund, are seeking to achieve this, while also attracting trading partners and markets for Chinese industrial products. For example, Chinese donations to Jamaica paved the way for the Chinese to build a mega-port there, using Chinese engineering, steel, and other products.

Made in China 2025

“Made in China 2025” is a strategy for dominating high-tech, high profit industries, such as aerospace, automobiles, information technology, and robotics. And China is willing to use unfair trade tactics such as unfair competition, tariffs, and intellectual property theft to have the plan succeed. In an attempt to derail this strategy, threatened US tariffs are focused on industrial sectors that relate to the “Made in China 2025” plan.

One Belt, One Road

In China’s economic strategy called “One Belt, One Road,” the "Belt" recreates the old Silk Road land route connecting Asia and Europe, and the "Road” is a route through various oceans. This massive trade and infrastructure project links China to dozens of economies across Asia, Europe, Africa, and Oceania. China is spending roughly $150 billion a year in the 70 countries that have engaged, including India, Pakistan, Poland, Turkey, New Zealand, and Russia. These massive projects such as ports, railroads, subways, and pipelines, create a ready market for Chinese engineering, raw and manufactured materials, and workers, and potentially pave the way for political payback.

The “One Belt, One Road,” strategy comes at a time when US withdrawal from the Tran-Pacific Partnership (TPP) has fueled lack of confidence in the US commitment to the regions. The TPP was seen as a core economic plan to maintain regional stability, and the US withdrawal triggered fears of US disengagement in Asia, especially for countries such as Japan and Vietnam, where China is a nearby threat. US actions are causing its Asian allies to worry, while the Chinese are proffering tantalizing offers and creating new markets.

The Future

There are fundamental differences in global trade principles between the US and Asian countries. The US embraces transparency, open procurement policies, and fair market principles. China and Korea don’t adhere to these principles and take a pragmatic approach. Today, countries can get funding from many sources. The challenge for the US is to rethink its financial strategies and develop new funding structures that both abide by market principles and meet the needs of its trading partners.

Discussion

Sen. Jonathan Dismang (AR): To what extent should the States allow Chinese Foreign Direct Investment (FDI)?  We have offers from Chinese apparel manufacturers and technology companies to make investments in our state that could bring jobs. What are the opportunities and risks with Chinese FDI?

Mr. Miller: Different investment bring different opportunities and challenges. FDI can have positive or negative effects. China is now buying up small start-up US technology companies. It remains to be seen what the effects will be on local jobs and economies.

Sen. Charles Schneider (IA): What are the characteristics of China’s financing strategies?

Mr. Miller: Chinese finance is murky, there are complex flows away from banks, loans that are not booked, a lack of transparency. There are numerous mechanisms for funding and reasons to fund. But the basic motivation behind the “One Belt, One Road” brand is about extending Beijing’s power into western China and moving more people into western China and northern India. There are strategic reasons behind Chinese investments. For example, Sri Lanka paid for a deep-water port that was built by China; but then gave China a 99-year lease. Not surprisingly, the port is perfect for Chinese naval vessels.

Tom Finneran (Moderator): Do people in the US recognize that prices are going up because of the tariffs the US has imposed on China?

Mr. Miller: It takes about 3 months for tariffs to have a downstream effect on consumer prices.  If tariffs are imposed this Fall on $200 billion worth of imports from China, the price increases on consumer goods will show up in winter. By that time, people may not connect price increases with trade policy.

Prices on additional products will be increased due to retaliatory tariffs; for example, the steel and aluminum markets are already facing retaliatory tariffs and a legal challenge at the World Trade Organization.

If the Trump Administration imposes the threatened 20-25% tariff on auto imports, this could provoke significant retaliatory tariffs and have disastrous effects on US employment. Auto parts cross many international boundaries as cars are assembled. Tariffs will make cars unaffordable. Countries that would be affected by US tariffs are looking for “coordinated retaliatory tariffs.”

Retaliatory tariffs can raise prices and have disastrous effects on US employment.

Sen. John Cullerton (IL): What specific advice would you give to President Trump about how to deal with China?

Mr. Miller: We need to mobilize our allies and create a coordinated plan with Europe and our other allies to fight against China’s unscrupulous trade practices. We need to have documented evidence, data depicting China’s violations such as intellectual property (IP) theft.  If we have evidence of a specific company using pirated IP, we can block their use of that IP in products sold in the USD or block their access to capital.

This is a generational issue because we have never seen a rival like China before. What are the institutions we need to address these issues, what new structures are needed to serve as effective guard rails to ensure principled global trade?  “The best general is one who wins without having to fight.” If the US ignores China, China will expand its control and create tribute states like Cambodia, or Jamaica. We need to have a generational strategy to deal with China effectively.

Sen. Robert Stivers (KY): If tariffs bring the steel and auto industries back to the US, our own people can have jobs. The products may cost more, but people will be employed.

Mr. Miller: Even with tariffs, Turkish steel, for example, can absorb the tariff and still be price competitive because production is so cheap. The question is “Are Americans willing to pay more for ‘Made in America’ products in order to get more jobs?”

We also have to consider how manufacturing works today. A process that employed 1000 people in 1950, today employs only 180 people because technology has advanced. Automation is changing the number and nature of jobs available in different industries. The US needs to know what kinds of jobs can be created, how many jobs, and provide the education needed to have skilled workers who can fill those jobs.

There are certain industries where we agree to pay more for “Made in the US,” for example, defense and coastal shipping industries, where there is a security factor to consider.

Sen. Kevin Grantham (CO): What about exports such as natural gas, coal, methane. If we get pipeline transportation in place, will tariffs affect these businesses?

Mr. Miller: The US tariffs imposed on July 6 led to Chinese retaliatory tariffs focused on crude oil and coal. If we have a goal to get cleaner US coal into Indonesia to offset the GHG emissions from dirty Chinese coal, we need to create public-private partnerships to open these markets. Tariffs do not create new markets.

Sen. Eli Bebout (WY): There are so many rules and regulations in the US that add about $1 trillion in costs to US products. In contrast, the Chinese have no rules. It takes 10 years to get an approval in the US, whereas the Chinese can get approvals in months. We cannot compete on the basis of those differences.

Mr. Miller: It is ridiculous for approvals to take years. We need tighter timeframes. It would make sense to use reference points based on established products to accelerate the time to market of a new product. The mechanics of regulations should be revised using process engineering to chart a reasonable approval pathway. President Trump wants to drop all regulations but this could lead to a lot of resistance from advocacy groups.

Sen. Peter Courtney (OR): If the idea is to get more jobs back in the US, we have to consider the workers. There are high personnel costs for US workers who expect a certain standard of living. They want family leave, minimum wage, health care. US workers will not tolerate the conditions that workers in other countries accept.

Mr. Miller: Populism arises from anxiety about the future. The US Presidential elections showed that many Americans are angry and want drastic change. The new global economy has benefited many, but many feel that they have been left behind – losing their livelihoods and income to companies abroad. But what are the solutions? Are tariffs going to help solve the problem?

Before NAFTA, 50% of clothing sold in the US was made in the US. Today it is 5%. But little has been done to help these displaced workers. We need to build a workforce that is adaptable and resilient to rapidly changing global markets. How should we deal with those people who are experiencing the downside of globalization? We need to rethink federal policies that would develop more internationally competitive industries and improve the overall American economy.

Speaker Biography

Eric Miller

Eric Miller is President of Rideau Potomac Strategy Group, a cross-border consultancy that advises clients on government affairs, trade issues, technology challenges and geopolitical developments.

He previously served as Vice President of Policy, North America and Cybersecurity at the Business Council of Canada, which represents the CEOs of the 150 largest companies in Canada. He was also responsible for leading its work in the United States and Latin America and on border/supply chain issues, transportation policy, and anti-corruption rules. He led the Council’s policy work on cybersecurity, technology and telecom issues.

Before joining the Council in 2013, Mr. Miller represented Industry Canada at the Canadian Embassy in Washington, DC. He was responsible for advising senior Canadian officials on U.S. economic, political, and technology issues. He served as a member of the Canadian negotiating teams that designed Canada’s 2009 investments in the restructuring of the Chrysler and General Motors and the 2011 Canada-U.S. Beyond the Border Action Plan.

Mr. Miller has extensive international experience, having advised 40 governments in Latin America, the Caribbean, and Asia-Pacific on trade and economic policies. He worked for 8 years in the Integration and Trade Division of the Inter-American Development Bank and served as a USAID Chief of Party in Panama. Mr. Miller has testified before the U.S. Congress and the Canadian Parliament.

Separately, Mr. Miller is Chair of the Cybersecurity Advisory Board of Ridge Canada Cyber Solutions Inc., a leading provider of cyber insurance solutions and cyber advisory services.

China is the world’s largest trading nation and the largest exporter and second-largest importer of goods.

As of May 2018, the US debt to China was $1.18 trillion or 19% of the total public debt owned by foreign countries.

US actions are causing its Asian allies to worry, while the Chinese are proffering tantalizing offers and creating new markets.

Sen. Jonathan Dismang (AR)

The challenge for the US is to rethink its financial strategies and develop new funding structures that both abide by market principles and meet the needs of its trading partners.

Sen. Charles Schneider (IA)

Tom Finneran (Moderator)

Sen. John Cullerton (IL)

Sen. Robert Stivers (KY)

Sen. Kevin Grantham (CO)

Sen. Eli Bebout (WY)

Sen. Peter Courtney (OR)

Retaliatory tariffs can raise prices and have disastrous effects on US employment.

This is a generational issue because we have never seen a rival like China before.

The US needs to know what kinds of jobs can be created, how many jobs, and provide the education needed to have skilled workers who can fill those jobs.

We need to build a workforce that is adaptable and resilient to rapidly changing global markets. How should we deal with those people who are experiencing the downside of globalization?

Eric Miller

CONTACT

Senate Presidents’ Forum

579 Broadway

Hastings-on-Hudson, NY 10706

 

Tel: 914-693-1818

Copyright © 2018 Senate Presidents' Forum. All rights reserved.

July 11-15, 2018

Overview of Trade Issues
Across the Pacific Rim

Eric Miller

President
Rideau Potomac Strategy Group

In 2017, US trade with PacRim countries amounted to $361,198,400 in exports and $791,727,600 in imports. Asia has become a central part of US economic policy. Eric Miller, President of Rideau Potomac Strategy Group, provided an overview of the changing landscape of trade in Asia. He examined the impacts on US trade and on the States’ economies of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and of the tariffs recently imposed by the US and China.

China-US Trade Balance

China's economy has been one of the world's fastest-growing with annual growth rates consistently above 6%. In 2005, the US economy was 5 to 7 times larger than that of China. By 2018, it was only 1.6 times larger. By 2029, China should surpass the US. China is the world’s largest trading nation and the largest exporter and second-largest importer of goods. Its strategy is to maintain export-led growth, which aids it in generating jobs and enables it to keep its large population productively engaged.

China is the world’s largest trading nation and the largest exporter and second-largest importer of goods.

The US imports consumer electronics, clothing, and machinery from China. As much as 80% of luggage and 70% of clothing sold in the US is manufactured in China. Many additional imports are from US manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the US, they are considered imports. The availability of Chinese products led to price decreases in the 1980s. However, by 2000, 5 to 7 million jobs had disappeared from the US and moved to China and other countries, which could manufacture goods at a lower cost.

A 2016 study correlated import competition from China with political polarization in the US. When people lose jobs and experience economic insecurity that they attribute to foreign competition, they vote at extremes. When there is economic stability and sufficient middle class jobs, there is a more centralized political situation.

In 2017, the US exported only $130.4 billion of goods to China in total, while imports from China were $506 billion. The US trade deficit with China was $375 billion in 2017. China’s central bank accumulates excess USD from Chinese exporters and invests them in US treasury bonds, which is considered the safest investment; thus, China is the largest lender to the US government.  As of May 2018, the US debt to China was $1.18 trillion or 19% of the total public debt owned by foreign countries.

As of May 2018, the US debt to China was $1.18 trillion or 19% of the total public debt owned by foreign countries.

US-China Trade War?

As a one-party state, China has great latitude to exert controls to protect the economy. China’s economic practices, such as assistance to state-owned enterprises, investment restrictions on foreign firms, forced technology transfer, industrial policy, and theft of intellectual property, have attracted criticism from the Trump administration, which imposed tariffs as a “corrective policy” to create “a level playing field.” Others perceived the tariffs as a contributor to increased political tension and a stimulus for a trade war.

This year, the US imposed a 25% tariff on $50 billion in Chinese goods, including agricultural and industrial machinery. The action provoked an immediate response from Beijing, which said it would place its own tariffs on $50 billion worth of American goods, including beef, poultry, tobacco and cars. The Administration is threatening a 10% tariff on an additional $200 billion in Chinese goods, and President Trump has indicated he is willing to put tariffs on all $505 billion of Chinese goods the US imports.

Chinese Economic Strategies

China wants to dominate global trade. Institutions such as the China Technology Enterprise (CTE) and the Asia Infrastructure Investment Bank, an Asian version of the International Monetary Fund, are seeking to achieve this, while also attracting trading partners and markets for Chinese industrial products. For example, Chinese donations to Jamaica paved the way for the Chinese to build a mega-port there, using Chinese engineering, steel, and other products.

Made in China 2025

“Made in China 2025” is a strategy for dominating high-tech, high profit industries, such as aerospace, automobiles, information technology, and robotics. And China is willing to use unfair trade tactics such as unfair competition, tariffs, and intellectual property theft to have the plan succeed. In an attempt to derail this strategy, threatened US tariffs are focused on industrial sectors that relate to the “Made in China 2025” plan.

One Belt, One Road

In China’s economic strategy called “One Belt, One Road,” the "Belt" recreates the old Silk Road land route connecting Asia and Europe, and the "Road” is a route through various oceans. This massive trade and infrastructure project links China to dozens of economies across Asia, Europe, Africa, and Oceania. China is spending roughly $150 billion a year in the 70 countries that have engaged, including India, Pakistan, Poland, Turkey, New Zealand, and Russia. These massive projects such as ports, railroads, subways, and pipelines, create a ready market for Chinese engineering, raw and manufactured materials, and workers, and potentially pave the way for political payback.

US actions are causing its Asian allies to worry, while the Chinese are proffering tantalizing offers and creating new markets.

The “One Belt, One Road,” strategy comes at a time when US withdrawal from the Tran-Pacific Partnership (TPP) has fueled lack of confidence in the US commitment to the regions. The TPP was seen as a core economic plan to maintain regional stability, and the US withdrawal triggered fears of US disengagement in Asia, especially for countries such as Japan and Vietnam, where China is a nearby threat. US actions are causing its Asian allies to worry, while the Chinese are proffering tantalizing offers and creating new markets.

The Future

There are fundamental differences in global trade principles between the US and Asian countries. The US embraces transparency, open procurement policies, and fair market principles. China and Korea don’t adhere to these principles and take a pragmatic approach. Today, countries can get funding from many sources. The challenge for the US is to rethink its financial strategies and develop new funding structures that both abide by market principles and meet the needs of its trading partners.

The challenge for the US is to rethink its financial strategies and develop new funding structures that both abide by market principles and meet the needs of its trading partners.

Discussion

Sen. Jonathan Dismang (AR): To what extent should the States allow Chinese Foreign Direct Investment (FDI)?  We have offers from Chinese apparel manufacturers and technology companies to make investments in our state that could bring jobs. What are the opportunities and risks with Chinese FDI?

Mr. Miller: Different investment bring different opportunities and challenges. FDI can have positive or negative effects. China is now buying up small start-up US technology companies. It remains to be seen what the effects will be on local jobs and economies.

Sen. Charles Schneider (IA): What are the characteristics of China’s financing strategies?

Mr. Miller: Chinese finance is murky, there are complex flows away from banks, loans that are not booked, a lack of transparency. There are numerous mechanisms for funding and reasons to fund. But the basic motivation behind the “One Belt, One Road” brand is about extending Beijing’s power into western China and moving more people into western China and northern India. There are strategic reasons behind Chinese investments. For example, Sri Lanka paid for a deep-water port that was built by China; but then gave China a 99-year lease. Not surprisingly, the port is perfect for Chinese naval vessels.

Tom Finneran (Moderator): Do people in the US recognize that prices are going up because of the tariffs the US has imposed on China?

Mr. Miller: It takes about 3 months for tariffs to have a downstream effect on consumer prices.  If tariffs are imposed this Fall on $200 billion worth of imports from China, the price increases on consumer goods will show up in winter. By that time, people may not connect price increases with trade policy.

Prices on additional products will be increased due to retaliatory tariffs; for example, the steel and aluminum markets are already facing retaliatory tariffs and a legal challenge at the World Trade Organization.

If the Trump Administration imposes the threatened 20-25% tariff on auto imports, this could provoke significant retaliatory tariffs and have disastrous effects on US employment. Auto parts cross many international boundaries as cars are assembled. Tariffs will make cars unaffordable. Countries that would be affected by US tariffs are looking for “coordinated retaliatory tariffs.”

Retaliatory tariffs can raise prices and have disastrous effects on US employment.

Retaliatory tariffs can raise prices and have disastrous effects on US employment.

Sen. John Cullerton (IL): What specific advice would you give to President Trump about how to deal with China?

Mr. Miller: We need to mobilize our allies and create a coordinated plan with Europe and our other allies to fight against China’s unscrupulous trade practices. We need to have documented evidence, data depicting China’s violations such as intellectual property (IP) theft.  If we have evidence of a specific company using pirated IP, we can block their use of that IP in products sold in the USD or block their access to capital.

This is a generational issue because we have never seen a rival like China before. What are the institutions we need to address these issues, what new structures are needed to serve as effective guard rails to ensure principled global trade?  “The best general is one who wins without having to fight.” If the US ignores China, China will expand its control and create tribute states like Cambodia, or Jamaica. We need to have a generational strategy to deal with China effectively.

This is a generational issue because we have never seen a rival like China before.

Sen. Robert Stivers (KY): If tariffs bring the steel and auto industries back to the US, our own people can have jobs. The products may cost more, but people will be employed.

Mr. Miller: Even with tariffs, Turkish steel, for example, can absorb the tariff and still be price competitive because production is so cheap. The question is “Are Americans willing to pay more for ‘Made in America’ products in order to get more jobs?”

We also have to consider how manufacturing works today. A process that employed 1000 people in 1950, today employs only 180 people because technology has advanced. Automation is changing the number and nature of jobs available in different industries. The US needs to know what kinds of jobs can be created, how many jobs, and provide the education needed to have skilled workers who can fill those jobs.

The US needs to know what kinds of jobs can be created, how many jobs, and provide the education needed to have skilled workers who can fill those jobs.

There are certain industries where we agree to pay more for “Made in the US,” for example, defense and coastal shipping industries, where there is a security factor to consider.

Sen. Kevin Grantham (CO): What about exports such as natural gas, coal, methane. If we get pipeline transportation in place, will tariffs affect these businesses?

Mr. Miller: The US tariffs imposed on July 6 led to Chinese retaliatory tariffs focused on crude oil and coal. If we have a goal to get cleaner US coal into Indonesia to offset the GHG emissions from dirty Chinese coal, we need to create public-private partnerships to open these markets. Tariffs do not create new markets.

Sen. Eli Bebout (WY): There are so many rules and regulations in the US that add about $1 trillion in costs to US products. In contrast, the Chinese have no rules. It takes 10 years to get an approval in the US, whereas the Chinese can get approvals in months. We cannot compete on the basis of those differences.

Mr. Miller: It is ridiculous for approvals to take years. We need tighter timeframes. It would make sense to use reference points based on established products to accelerate the time to market of a new product. The mechanics of regulations should be revised using process engineering to chart a reasonable approval pathway. President Trump wants to drop all regulations but this could lead to a lot of resistance from advocacy groups.

Sen. Peter Courtney (OR): If the idea is to get more jobs back in the US, we have to consider the workers. There are high personnel costs for US workers who expect a certain standard of living. They want family leave, minimum wage, health care. US workers will not tolerate the conditions that workers in other countries accept.

Mr. Miller: Populism arises from anxiety about the future. The US Presidential elections showed that many Americans are angry and want drastic change. The new global economy has benefited many, but many feel that they have been left behind – losing their livelihoods and income to companies abroad. But what are the solutions? Are tariffs going to help solve the problem?

Before NAFTA, 50% of clothing sold in the US was made in the US. Today it is 5%. But little has been done to help these displaced workers. We need to build a workforce that is adaptable and resilient to rapidly changing global markets. How should we deal with those people who are experiencing the downside of globalization? We need to rethink federal policies that would develop more internationally competitive industries and improve the overall American economy.

We need to build a workforce that is adaptable and resilient to rapidly changing global markets. How should we deal with those people who are experiencing the downside of globalization?

Speaker Biography

Eric Miller

Eric Miller is President of Rideau Potomac Strategy Group, a cross-border consultancy that advises clients on government affairs, trade issues, technology challenges and geopolitical developments.

He previously served as Vice President of Policy, North America and Cybersecurity at the Business Council of Canada, which represents the CEOs of the 150 largest companies in Canada. He was also responsible for leading its work in the United States and Latin America and on border/supply chain issues, transportation policy, and anti-corruption rules. He led the Council’s policy work on cybersecurity, technology and telecom issues.

Before joining the Council in 2013, Mr. Miller represented Industry Canada at the Canadian Embassy in Washington, DC. He was responsible for advising senior Canadian officials on U.S. economic, political, and technology issues. He served as a member of the Canadian negotiating teams that designed Canada’s 2009 investments in the restructuring of the Chrysler and General Motors and the 2011 Canada-U.S. Beyond the Border Action Plan.

Mr. Miller has extensive international experience, having advised 40 governments in Latin America, the Caribbean, and Asia-Pacific on trade and economic policies. He worked for 8 years in the Integration and Trade Division of the Inter-American Development Bank and served as a USAID Chief of Party in Panama. Mr. Miller has testified before the U.S. Congress and the Canadian Parliament.

Separately, Mr. Miller is Chair of the Cybersecurity Advisory Board of Ridge Canada Cyber Solutions Inc., a leading provider of cyber insurance solutions and cyber advisory services.

July 11-15, 2018

Overview of Trade Issues
Across the Pacific Rim

Eric Miller

President
Rideau Potomac Strategy Group

In 2017, US trade with PacRim countries amounted to $361,198,400 in exports and $791,727,600 in imports. Asia has become a central part of US economic policy. Eric Miller, President of Rideau Potomac Strategy Group, provided an overview of the changing landscape of trade in Asia. He examined the impacts on US trade and on the States’ economies of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and of the tariffs recently imposed by the US and China.

China-US Trade Balance

China's economy has been one of the world's fastest-growing with annual growth rates consistently above 6%. In 2005, the US economy was 5 to 7 times larger than that of China. By 2018, it was only 1.6 times larger. By 2029, China should surpass the US. China is the world’s largest trading nation and the largest exporter and second-largest importer of goods. Its strategy is to maintain export-led growth, which aids it in generating jobs and enables it to keep its large population productively engaged.

China is the world’s largest trading nation and the largest exporter and second-largest importer of goods.

The US imports consumer electronics, clothing, and machinery from China. As much as 80% of luggage and 70% of clothing sold in the US is manufactured in China. Many additional imports are from US manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the US, they are considered imports. The availability of Chinese products led to price decreases in the 1980s. However, by 2000, 5 to 7 million jobs had disappeared from the US and moved to China and other countries, which could manufacture goods at a lower cost.

A 2016 study correlated import competition from China with political polarization in the US. When people lose jobs and experience economic insecurity that they attribute to foreign competition, they vote at extremes. When there is economic stability and sufficient middle class jobs, there is a more centralized political situation.

In 2017, the US exported only $130.4 billion of goods to China in total, while imports from China were $506 billion. The US trade deficit with China was $375 billion in 2017. China’s central bank accumulates excess USD from Chinese exporters and invests them in US treasury bonds, which is considered the safest investment; thus, China is the largest lender to the US government.  As of May 2018, the US debt to China was $1.18 trillion or 19% of the total public debt owned by foreign countries.

As of May 2018, the US debt to China was $1.18 trillion or 19% of the total public debt owned by foreign countries.

US-China Trade War?

As a one-party state, China has great latitude to exert controls to protect the economy. China’s economic practices, such as assistance to state-owned enterprises, investment restrictions on foreign firms, forced technology transfer, industrial policy, and theft of intellectual property, have attracted criticism from the Trump administration, which imposed tariffs as a “corrective policy” to create “a level playing field.” Others perceived the tariffs as a contributor to increased political tension and a stimulus for a trade war.

This year, the US imposed a 25% tariff on $50 billion in Chinese goods, including agricultural and industrial machinery. The action provoked an immediate response from Beijing, which said it would place its own tariffs on $50 billion worth of American goods, including beef, poultry, tobacco and cars. The Administration is threatening a 10% tariff on an additional $200 billion in Chinese goods, and President Trump has indicated he is willing to put tariffs on all $505 billion of Chinese goods the US imports.

Chinese Economic Strategies

China wants to dominate global trade. Institutions such as the China Technology Enterprise (CTE) and the Asia Infrastructure Investment Bank, an Asian version of the International Monetary Fund, are seeking to achieve this, while also attracting trading partners and markets for Chinese industrial products. For example, Chinese donations to Jamaica paved the way for the Chinese to build a mega-port there, using Chinese engineering, steel, and other products.

Made in China 2025

“Made in China 2025” is a strategy for dominating high-tech, high profit industries, such as aerospace, automobiles, information technology, and robotics. And China is willing to use unfair trade tactics such as unfair competition, tariffs, and intellectual property theft to have the plan succeed. In an attempt to derail this strategy, threatened US tariffs are focused on industrial sectors that relate to the “Made in China 2025” plan.

One Belt, One Road

In China’s economic strategy called “One Belt, One Road,” the "Belt" recreates the old Silk Road land route connecting Asia and Europe, and the "Road” is a route through various oceans. This massive trade and infrastructure project links China to dozens of economies across Asia, Europe, Africa, and Oceania. China is spending roughly $150 billion a year in the 70 countries that have engaged, including India, Pakistan, Poland, Turkey, New Zealand, and Russia. These massive projects such as ports, railroads, subways, and pipelines, create a ready market for Chinese engineering, raw and manufactured materials, and workers, and potentially pave the way for political payback.

US actions are causing its Asian allies to worry, while the Chinese are proffering tantalizing offers and creating new markets.

The “One Belt, One Road,” strategy comes at a time when US withdrawal from the Tran-Pacific Partnership (TPP) has fueled lack of confidence in the US commitment to the regions. The TPP was seen as a core economic plan to maintain regional stability, and the US withdrawal triggered fears of US disengagement in Asia, especially for countries such as Japan and Vietnam, where China is a nearby threat. US actions are causing its Asian allies to worry, while the Chinese are proffering tantalizing offers and creating new markets.

The Future

There are fundamental differences in global trade principles between the US and Asian countries. The US embraces transparency, open procurement policies, and fair market principles. China and Korea don’t adhere to these principles and take a pragmatic approach. Today, countries can get funding from many sources. The challenge for the US is to rethink its financial strategies and develop new funding structures that both abide by market principles and meet the needs of its trading partners.

The challenge for the US is to rethink its financial strategies and develop new funding structures that both abide by market principles and meet the needs of its trading partners.

Discussion

Sen. Jonathan Dismang (AR): To what extent should the States allow Chinese Foreign Direct Investment (FDI)?  We have offers from Chinese apparel manufacturers and technology companies to make investments in our state that could bring jobs. What are the opportunities and risks with Chinese FDI?

Mr. Miller: Different investment bring different opportunities and challenges. FDI can have positive or negative effects. China is now buying up small start-up US technology companies. It remains to be seen what the effects will be on local jobs and economies.

Sen. Charles Schneider (IA): What are the characteristics of China’s financing strategies?

Mr. Miller: Chinese finance is murky, there are complex flows away from banks, loans that are not booked, a lack of transparency. There are numerous mechanisms for funding and reasons to fund. But the basic motivation behind the “One Belt, One Road” brand is about extending Beijing’s power into western China and moving more people into western China and northern India. There are strategic reasons behind Chinese investments. For example, Sri Lanka paid for a deep-water port that was built by China; but then gave China a 99-year lease. Not surprisingly, the port is perfect for Chinese naval vessels.

Tom Finneran (Moderator): Do people in the US recognize that prices are going up because of the tariffs the US has imposed on China?

Mr. Miller: It takes about 3 months for tariffs to have a downstream effect on consumer prices.  If tariffs are imposed this Fall on $200 billion worth of imports from China, the price increases on consumer goods will show up in winter. By that time, people may not connect price increases with trade policy.

Prices on additional products will be increased due to retaliatory tariffs; for example, the steel and aluminum markets are already facing retaliatory tariffs and a legal challenge at the World Trade Organization.

If the Trump Administration imposes the threatened 20-25% tariff on auto imports, this could provoke significant retaliatory tariffs and have disastrous effects on US employment. Auto parts cross many international boundaries as cars are assembled. Tariffs will make cars unaffordable. Countries that would be affected by US tariffs are looking for “coordinated retaliatory tariffs.”

Retaliatory tariffs can raise prices and have disastrous effects on US employment.

Retaliatory tariffs can raise prices and have disastrous effects on US employment.

Sen. John Cullerton (IL): What specific advice would you give to President Trump about how to deal with China?

Mr. Miller: We need to mobilize our allies and create a coordinated plan with Europe and our other allies to fight against China’s unscrupulous trade practices. We need to have documented evidence, data depicting China’s violations such as intellectual property (IP) theft.  If we have evidence of a specific company using pirated IP, we can block their use of that IP in products sold in the USD or block their access to capital.

This is a generational issue because we have never seen a rival like China before. What are the institutions we need to address these issues, what new structures are needed to serve as effective guard rails to ensure principled global trade?  “The best general is one who wins without having to fight.” If the US ignores China, China will expand its control and create tribute states like Cambodia, or Jamaica. We need to have a generational strategy to deal with China effectively.

This is a generational issue because we have never seen a rival like China before.

Sen. Robert Stivers (KY): If tariffs bring the steel and auto industries back to the US, our own people can have jobs. The products may cost more, but people will be employed.

Mr. Miller: Even with tariffs, Turkish steel, for example, can absorb the tariff and still be price competitive because production is so cheap. The question is “Are Americans willing to pay more for ‘Made in America’ products in order to get more jobs?”

We also have to consider how manufacturing works today. A process that employed 1000 people in 1950, today employs only 180 people because technology has advanced. Automation is changing the number and nature of jobs available in different industries. The US needs to know what kinds of jobs can be created, how many jobs, and provide the education needed to have skilled workers who can fill those jobs.

The US needs to know what kinds of jobs can be created, how many jobs, and provide the education needed to have skilled workers who can fill those jobs.

There are certain industries where we agree to pay more for “Made in the US,” for example, defense and coastal shipping industries, where there is a security factor to consider.

Sen. Kevin Grantham (CO): What about exports such as natural gas, coal, methane. If we get pipeline transportation in place, will tariffs affect these businesses?

Mr. Miller: The US tariffs imposed on July 6 led to Chinese retaliatory tariffs focused on crude oil and coal. If we have a goal to get cleaner US coal into Indonesia to offset the GHG emissions from dirty Chinese coal, we need to create public-private partnerships to open these markets. Tariffs do not create new markets.

Sen. Eli Bebout (WY): There are so many rules and regulations in the US that add about $1 trillion in costs to US products. In contrast, the Chinese have no rules. It takes 10 years to get an approval in the US, whereas the Chinese can get approvals in months. We cannot compete on the basis of those differences.

Mr. Miller: It is ridiculous for approvals to take years. We need tighter timeframes. It would make sense to use reference points based on established products to accelerate the time to market of a new product. The mechanics of regulations should be revised using process engineering to chart a reasonable approval pathway. President Trump wants to drop all regulations but this could lead to a lot of resistance from advocacy groups.

Sen. Peter Courtney (OR): If the idea is to get more jobs back in the US, we have to consider the workers. There are high personnel costs for US workers who expect a certain standard of living. They want family leave, minimum wage, health care. US workers will not tolerate the conditions that workers in other countries accept.

Mr. Miller: Populism arises from anxiety about the future. The US Presidential elections showed that many Americans are angry and want drastic change. The new global economy has benefited many, but many feel that they have been left behind – losing their livelihoods and income to companies abroad. But what are the solutions? Are tariffs going to help solve the problem?

Before NAFTA, 50% of clothing sold in the US was made in the US. Today it is 5%. But little has been done to help these displaced workers. We need to build a workforce that is adaptable and resilient to rapidly changing global markets. How should we deal with those people who are experiencing the downside of globalization? We need to rethink federal policies that would develop more internationally competitive industries and improve the overall American economy.

We need to build a workforce that is adaptable and resilient to rapidly changing global markets. How should we deal with those people who are experiencing the downside of globalization?

Speaker Biography

Eric Miller

Eric Miller is President of Rideau Potomac Strategy Group, a cross-border consultancy that advises clients on government affairs, trade issues, technology challenges and geopolitical developments.

He previously served as Vice President of Policy, North America and Cybersecurity at the Business Council of Canada, which represents the CEOs of the 150 largest companies in Canada. He was also responsible for leading its work in the United States and Latin America and on border/supply chain issues, transportation policy, and anti-corruption rules. He led the Council’s policy work on cybersecurity, technology and telecom issues.

Before joining the Council in 2013, Mr. Miller represented Industry Canada at the Canadian Embassy in Washington, DC. He was responsible for advising senior Canadian officials on U.S. economic, political, and technology issues. He served as a member of the Canadian negotiating teams that designed Canada’s 2009 investments in the restructuring of the Chrysler and General Motors and the 2011 Canada-U.S. Beyond the Border Action Plan.

Mr. Miller has extensive international experience, having advised 40 governments in Latin America, the Caribbean, and Asia-Pacific on trade and economic policies. He worked for 8 years in the Integration and Trade Division of the Inter-American Development Bank and served as a USAID Chief of Party in Panama. Mr. Miller has testified before the U.S. Congress and the Canadian Parliament.

Separately, Mr. Miller is Chair of the Cybersecurity Advisory Board of Ridge Canada Cyber Solutions Inc., a leading provider of cyber insurance solutions and cyber advisory services.