In a 137-page and 150-exhibit petition filed with the U.S. Trade Representative (USTR) in March, attorneys and consultants for five large U.S. labor unions allege that the “Government of China” engages in “unfair trade practices” that precipitated the relative demise of America’s shipbuilding industry since 2000 and prevent its recovery. It was filed under Sections 301 and 302 of the Trade Act of 1974, which empowers U.S. economic entities to petition USTR to investigate and rectify non competitive foreign business practices and policies.
Although its economic claims are nonsensical, the petition does have a valid legal basis. Most importantly, it will have strong political support, so its nostrums, including a port levy on Chinese-built ships, may prevail in a US election year. The short- and long-run economic effects of the port levy on China, however, can only be stated in general terms until the details are determined.
The petition does not claim that China has broken any international laws or treaties. Rather, it rests on a part of U.S. trade law that considers “unreasonable” the policy of any foreign government that is “unfair and inequitable.” Such policies include “export targeting,” which U.S. law defines as “any government plan or scheme consisting of a combination of coordinated actions (whether carried out severally or jointly) that are bestowed on a specific enterprise, industry, or group thereof, the effect of which is to assist the enterprise, industry, or group to become more competitive in the export of a class or kind of merchandise.”
Like the legal concept of “export targeting,” the petition contains little economic merit. The complaints amount to no more than admissions of Sino superiority in shipbuilding. They focus on Chinese government investment in the sector rather than U.S. disinvestment in maritime industries, due, in large part, to the actions of the complainants themselves, which raise U.S. labor costs above competitive levels.
The petition complains of practices also employed by the US government. For example, it notes that “the China Export-Import Bank has provided tens of billions of dollars in loans to support the construction of thousands of vessels in China for export to foreign owners,” without also noting that the United States government has employed an Export-Import Bank since 1934. According to the U.S. House of Representatives, “The Export-Import Bank of the United States (Ex-Im) opens up international markets to U.S. businesses by financing and insuring the sale of U.S. exports when private sector financing is prohibitively expensive or simply not available.”
The petition also claims that “China has given its domestic shipbuilding unfair advantages by mandating the purchase and use of Chinese ships by Chinese state-owned shipping enterprises and state-owned oil companies.” Yet it calls for the strengthening of the Jones Act, also known as the Merchant Marine Act of 1920, which protects the domestic U.S. shipping industry from foreign competition. Almost 50 countries enforce similar “cabotage” laws.
The biggest flaw in the petition may be that it doesn’t recognize that the “Government of China” is merely the agent of the Chinese Communist Party (CCP), the largest and most powerful de facto corporate conglomerate the world has ever seen. The many Chinese state-owned enterprises (SEOs) are best understood not as corporations aided by the Chinese government but as de facto subsidiaries of the CCP’s conglomerate.
Unlike most conglomerates, the CCP is not publicly traded, but rather has taken the form of a private equity venture, with rents accruing to party members. It behaves, however, as many international corporate conglomerates, from the Dutch East Indies Company to 3M, have for centuries by strategically expanding the geographical and industrial scope of its business activities.
For example, the “CCP Inc.” shifts resources between its many units to leverage emerging international opportunities. Its Belt and Road and Maritime Silk Road initiatives differ from the activities of Western multinational corporations, many of which were government subsidized, only in scale. Like other conglomerates, the CCP favors trade between its subsidiaries, a conventional and rational business practice the petition derides as “discrimination against non-Chinese producers and operators.”
The petitioners also lament many discrete facts, like the production of 70 percent of the world’s cargo cranes by a Chinese SOE. Without evidence of coerced sales, all that means is that the Chinese must produce cargo cranes with the best combination of quality and price. It should be thanked for the same reasons that consumers thanked Standard Oil for supplying the world with inexpensive oil. The petition itself notes that China has decreased the global price of commercial vessels, which of course is a problem only for less efficient competitors, like U.S. shipbuilders. Its claim that “non-market acts and policies” allow China to underprice competitors remains completely unsupported.
British shipbuilders made similar complaints about the Japanese ship industry in the 1970s and 1980s. Then and now, such complaints display a profound ignorance of the workings of the free enterprise system, whereby any economic entity, including sovereign governments, remain free to invest in whatever industries they like, while also bearing the costs of overinvestment, as Japan did for several decades after its acclaimed “economic miracle” ended in the 1990s.
The petition also raises the specter of compromised U.S. national security. It remains unclear, however, why peacetime ownership of ports and ships matter in wartime. In both world wars, for example, the U.S. government nationalized the physical and financial assets of enemy combatants in areas within its control, turned their administration over to the Alien Property Custodian, and utilized them in the war effort. Similarly, U.S. corporations could buy relatively inexpensive Chinese cargo ships in peacetime but deploy them on behalf of the U.S. military if called upon to do so. Steel, after all, owes allegiance to no country. (Computer chips might, but the petition makes no such claim.)
U.S. corporations buy so few Chinese ships that the petition does not call for higher tariffs on Chinese-built ships. Tariff revenues would simply accrue to the U.S. Treasury anyway. Instead, the petitioners want much more direct aid, in the form of the USTR charging Chinese-built ships (regardless of flag) a port fee dedicated to a U.S. Commercial Shipbuilding Revitalization Fund “to help the domestic industry and its workers compete.” Such protectionist measures, however, cannot increase competitiveness because they allow uncompetitive businesses and their unionized workers to continue to conduct business as usual rather than make the difficult choices necessary to increase productivity.
The next step in the process is for the USTR to consult with the Chinese government and to hold a public hearing on the petition. Written comments must be submitted by 22 May, a week before the scheduled start of the public hearing in Washington DC. A week after the hearing ends, post hearing rebuttal comments fall due. After that, USTR will likely make policy recommendations to POTUS.
Section 301 has long been a matter of controversy between the US and the World Trade Organization (WTO). In 2020, the US formally questioned the legality of the WTO’s dispute settlement system, particularly its Appellate Body. To move the dispute to the WTO likely would delay any policy implementation for years, so POTUS might act unilaterally in this matter.
As this is an election year, POTUS may use the USTR’s recommendations to try to garner votes. As discussed elsewhere, US politicians have increasingly jettisoned free trade for protectionist policies in the hopes of alleviating the nation’s looming fiscal crisis by taxing foreign firms, especially Chinese ones, to the limited extent possible. A secondary goal is to appear “tough on China,” even if the main effect of a policy is to tax U.S. consumers to subsidize special interests, like unions, sympathetic to the political party currently in power.
Judging the precise effects of the proposed port fee is impossible before USTR and POTUS agree on the specifics. The petitioners want the port fee to be a tonnage duty so that bigger Chinese-built ships pay more, but they do not specify if they want the per-ton fee to increase with ship size. If the last ton costs as much as the first, the port fee will not distort the size of Chinese-built ships docking in the US. If the per ton fee increases steeply, however, smaller ships will be favored.
The petitioners also want the fee to decrease with the age of the ship, which will encourage keeping older, less energy-efficient, and more accident-prone ships to remain in service. Environmental groups will likely oppose that part of the proposal and prevail.
The precise definition of Chinese-built will also be important. If ships built in a foreign country by a Chinese SOE will not be subject to the fee, it will encourage the globalization of Chinese-owned shipbuilders.
The petitioners also want the fee to increase regularly until China’s shipbuilding dominance ends, but they do not specify rates or intervals. They suggest $1 million per ship per clearance as a hypothetical but it is unclear if they see that as a starting or ending figure.
To the extent that the fee becomes high and is binding, the Chinese will have an incentive to hide their ownership of shipbuilders in other countries through complex and opaque chains of shell corporations, secret ownership stakes, or convertible debt financing. Such tactics can be difficult to detect or police.
If the regulations and their enforcement are tight enough, the biggest winners from the proposed port duty in the long term may well be Japanese and South Korean shipbuilders, not the much less competitive American ones. The petition suggests that those countries too might be guilty of “export targeting” but slapping duties on America’s most important allies in any future war ith China will be a much harder sell politically.
Moreover, the more countries whose ships are subject to a port fee the more the fee will fall on U.S. consumers in the form of higher prices for imports. Ostensibly, the first reaction to a port fee on Chinese-built ships will be to not use those ships, however defined, in international trade to the U.S. That could reduce future demand for Chinese-built ships, lowering the quantity sold at any given price.
If ships built in Japan, South Korea, and elsewhere were subject to the port levy, however, shippers would have no choice but to pay the port fee and there would be no reason to prefer non-Chinese-built ships. The port fee would then be similar to a tariff, but one based on the tonnage (and potentially age) of the ship rather than the value of the goods aboard. The cost, in other words, would be largely or wholly passed on to American consumers and become just another example of special interest legislation that aids the few by placing a small and difficult to detect tax on the many. The petition recognizes this, but trivializes it by estimating the cost at half a cent per pair of blue jeans. A fee of $1 million per vessel, however, would generate billions of dollars in revenue, which is billions of dollars per year diverted from the pockets of the Americans wearing those blue jeans to uncompetitive U.S. shipbuilders, employees, and unions.
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