Tuesday, June 19, 2007

CAFTA's Upshot More Political Than Economic

By Paul Blustein and Mike Allen
Washington Post Staff Writers

The grand debates about open markets, workers' rights and U.S. interests in the Western Hemisphere don't matter much anymore. Within days, and possibly hours, the Central American Free Trade Agreement is likely to face an exceedingly tight vote in the House, and its fate hangs on issues of less than cosmic import -- such as pockets and linings.

To a handful of Southern Republicans with textile mills in their districts, it is no small matter what sort of fabric is used in the interior portions of garments that would enter the U.S. market duty-free under CAFTA. So the Bush administration essentially promised this week that the fabric in such pockets and linings will be from the United States -- and that pledge won the support for CAFTA of at least five Republican lawmakers in the past two days

Cajoling, deal-cutting and browbeating were always in the cards for CAFTA because it is by far the most controversial trade agreement in years. While Congress easily approved recent pacts eliminating trade barriers between the United States and middle-income countries such as Australia and Singapore, the administration's proposal for a similar deal with six low-wage Latin American nations has drawn overwhelming rejection from House Democrats, mainly on the grounds that labor rights are inadequately protected in those countries. Several dozen Republicans, many of whom face hostility toward free trade in their districts, also are refusing to or are reluctant to cast pro-CAFTA votes.

Administration officials and House Republican leaders are scrambling to ensure that they are at least within striking distance of a one-vote majority when the roll call begins, on the assumption that a number of lawmakers from their party can be persuaded to vote yes if their support is essential. House members said yesterday that some of the incentives for votes are being hidden in huge energy and highway bills now in conference committees and that the full cost of those incentives will not be known until that legislation is later scrutinized.

Asked yesterday whether he had the CAFTA votes, House Speaker J. Dennis Hastert (R-Ill.) said: "Still working on it." But his office and that of House Majority Leader Tom DeLay (R-Tex.) said they plan to start debate on the treaty as soon as tonight, with a vote possibly tomorrow or Friday.

Although opponents hold out hope that they can defeat the treaty, they have increasingly acknowledged in recent days that the determination of the agreement's backers may be too much for them to overcome.

At an anti-CAFTA rally yesterday, Rep. Sherrod Brown (D-Ohio) cited a statement by Rep. Jim Kolbe (R-Ariz.) that the House leadership will "twist some Republican arms until they break in a thousand pieces." Brown also predicted: "This will be a vote in the middle of the night. They'll keep the vote open for several hours, in violation of the rules. If it passes, it will be by fewer than five votes."

Whether that scenario materializes or not, it highlights the stakes in the fight. CAFTA's economic ramifications are minor: The markets of the countries involved -- Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica and the Dominican Republic -- are too small to register more than a blip in the $11 trillion U.S. economy. But the political implications are huge.

A defeat would deal a major setback to President Bush's second-term agenda, exposing him as vulnerable to Republican defections at a time when his political clout has increasingly been called into question. It would also deepen doubts about the ability of DeLay, who has been hobbled by ethics charges, to keep his troops in line.

Congressional rejection of CAFTA could also severely diminish the chances for negotiating much more significant trade deals, in particular the ongoing Doha round of negotiations for a global accord among the World Trade Organization's 148 member countries. Foreign governments would be less willing to offer concessions to Washington if U.S. lawmakers balk at approving a trade pact with six small nations. For that reason, many free-traders are sympathetic with the administration's efforts to corral the last few CAFTA votes.

"These things like the deal on pockets and linings -- it's incredibly petty," said Claude E. Barfield, a trade specialist at the American Enterprise Institute. "But at this point, to have CAFTA go down now would really be a blow psychologically. The world economy would not change, but it would hurt other trade initiatives."

The pro-CAFTA forces hit a snag yesterday when House Democrats blocked a bill that would strengthen monitoring of China's trade practices and allow U.S. companies to seek duties on goods found to be receiving subsidies from the Chinese government. The bill was brought up under special rules that require a two-thirds vote, in accord with a promise by House leaders to Rep. Phil English (R-Pa.) and a few industrial-state allies in exchange for CAFTA support.

House leaders vowed to bring the bill up again today under normal rules.

"I don't think that will slow up the process," said U.S. Trade Representative Rob Portman. But, he said, "it's pretty much member-by-member now. We're building momentum one vote at a time."

CAFTA Reflects Democrats' Shift From Trade Bills

By Jonathan Weisman
Washington Post Staff Writer

Twelve years ago, amid heated rhetoric over job losses and heavy union pressure, the House passed the North American Free Trade Agreement with 102 Democratic votes. This month, as President Bush pushes the far less economically significant Central American Free Trade Agreement, he will be lucky to get more than 10.

A long, slow erosion of Democratic support for trade legislation in the House is turning into a rout, as Democrats who have never voted against trade deals vow to turn their backs on CAFTA. The sea change -- driven by redistricting, mounting partisanship and real questions about the results of a decade's worth of trade liberalization -- is creating a major headache for Bush and Republican leaders as they scramble to salvage their embattled trade agreement. A trade deal that passed the Senate last Thursday, 54 to 45, with 10 Democratic votes, could very well fail in the House this month.

But the Democrats' near-unanimous stand against CAFTA carries long-term risks for a party leadership struggling to regain the appearance of a moderate governing force, some Democrats acknowledge. A swing toward isolationism could reinforce voters' suspicions that the party is beholden to organized labor and is anti-business, while jeopardizing campaign contributions, especially from Wall Street.

Without control of the White House or either chamber of Congress, the "competition for the microphone" has intensified in the party, said Dave McCurdy, a former Democratic congressman from Oklahoma who heads the Electronic Industries Alliance. And the moderates are losing.

"It's difficult for Democrats to get through a message that we're pro-trade when we're voting no," said Rep. Benjamin L. Cardin (D-Md.), who plans to vote against a trade agreement for the first time in his nearly 20 years in the House. "That is a clear risk that we're running, but I don't think we have the opportunity to avoid it."

Cardin and other free-trade Democrats concede that many of the Democratic opponents are motivated by partisan politics: They want to see Bush lose a major legislative initiative or, at the very least, make Republicans from districts hit hard by international trade take a dangerous vote in favor of a deal their constituents oppose. Dozens of Republicans in districts dependent on the textile industry, the sugar growers or small manufacturers have already said they will vote against the bill. House Minority Leader Nancy Pelosi (Calif.) privately warned Democrats last month that a vote for CAFTA is a vote to stay in the minority.

"This is hardball," said Rep. James P. Moran Jr. of Virginia, one of only five Democrats publicly committed to voting for the agreement. "I feel like chopped liver with the [Democratic] caucus."

The four other committed Democrats are Reps. William J. Jefferson (La.), John S. Tanner (Tenn.)., Henry Cuellar (Tex.) and Norman D. Dicks (Wash.).

But a core group of as many as 50 pro-trade Democrats are voting against CAFTA; those lawmakers say the agreement is a step backward on labor standards after years of steady gains under previous trade accords.

They complain that the administration failed to consult them during negotiations, taking their votes for granted. And they say past trade agreements were accompanied by increased support for worker-retraining programs, education efforts and aid to dislocated workers -- support that the president has not provided.

"Free and open trade is an important component to widening the winner's circle for all Americans, but it's not a Johnny One Note part of the puzzle," said Rep. Ellen Tauscher (Calif.), a co-chairman of the centrist New Democrat Coalition, who voted for the most contentious trade bills of the past half-dozen years.

The steady erosion in Democratic support for free-trade deals has been dramatic. NAFTA, negotiated by President George H.W. Bush and pushed to a vote by President Bill Clinton, passed the House 234 to 200, with 102 Democratic votes. Among them were today's House Democratic leadership, Pelosi and Minority Whip Steny H. Hoyer (Md.).

When Clinton pushed permanent normalized trade relations with China in 2000, he secured the support of 73 Democrats, including the party's point man on trade, Rep. Sander M. Levin (Mich.). By 2002, the final vote to grant Bush the ability to negotiate "fast-track" trade deals that cannot be amended by Congress garnered 25 Democrats. The tally on CAFTA, expected after the Fourth of July recess if the White House can find the votes, could yield just 10 Democratic supporters.

The trade deal would create a NAFTA-like free-trade zone between the United States and six countries -- Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua -- that would wipe out most of the quotas and tariffs on imported goods and services. Those countries' economic power is tiny -- their combined gross domestic products are still smaller than the Czech Republic's -- but the deal has provoked big claims from both sides.

Proponents say CAFTA is especially beneficial to the United States, which has already eliminated most trade barriers with the countries. But opponents say the deal steps back from previous commitments to stronger environmental and labor standards, relying instead on existing statutes in CAFTA countries that are modest and weakly enforced.

Some textile firms fear that the deal will afford Chinese textile makers a backdoor avenue to export to the U.S. market duty-free, whereas U.S. sugar growers say even the modest export allowance to Central American sugar growers would undermine the existing price-support system and invite future trade deals to dismantle the system altogether.

Such fears are not new, but the political response to them -- especially from Democrats -- is unprecedented. That has pro-business Democrats worried. During the 1990s, party leaders used pro-trade positions to show moderate voters and business interests they are willing to stand up to their labor union backers and govern from the center, said Marshall Wittmann of the centrist Democratic Leadership Council. For fear of handing their GOP adversaries a short-term victory, he said, they are jeopardizing all that work.

"If the Democrats want to stay competitive on the national political stage, they can't retreat from global engagement," McCurdy agreed.

"I really believe our challenge is to be competitive and win in the world economy, and it's hard to assume national leadership if you have a protectionist bent," said Al From, the Leadership Council's chief executive.

Administration officials are inoculating themselves against Democratic attacks with a letter from former president Jimmy Carter imploring support for CAFTA. "Some improvements could be made in the trade bill, particularly on the labor protection side," Carter wrote, "but, more importantly, our own national security and hemispheric influence will be enhanced" by passage.

Other Democratic supporters include a who's who list from the Clinton administration, including former national security adviser Samuel R. "Sandy" Berger and Cabinet members Warren M. Christopher, Henry G. Cisneros, Dan Glickman, William J. Perry and Donna E. Shalala, not to mention the presidents of the CAFTA countries.

"We have to listen to our neighbors who say this is important to them," Jefferson said. "We've had five presidents come to plead with us to do this for them."

Perhaps more troubling may be the business interests that have promised to withhold support for CAFTA opponents. Two business lobbyists -- one Republican, one Democrat -- said some corporate groups will be sympathetic to the Democrats' position.

In a highly charged partisan atmosphere, Republicans intentionally marginalized free-trade Democrats during negotiations and then presented them with a take-it-or-leave it deal, goading them to oppose it, said the lobbyists, who spoke on the condition of anonymity to avoid harming relationships on Capitol Hill. They contend that the Republicans set the trap into which the New Democrats are walking.

But many other business groups with strong ties to the GOP will see the shift on trade as confirmation of their suspicions about New Democrats' business commitments, the Democratic lobbyist said. What little was left of business contributions to Democrats will dwindle further.

"For some business groups, it's 'Aha. See? I told you,' " he said.

Free trade in 2005: subsidies for the richest, tariffs for the poorest

African sugar workers may be happy with their lot, but the idustry is one of many endangered by Western protectionism

SWEAT trickles down Paulo Zunguze’s face, cutting channels through a cover of charcoal dust. The sugar cane cutter is tired but eager to press on. “It’s good to have a job,” he says with a broad smile. “I came here a year ago because things were not good at my place — no work, no food, only fish to eat sometimes.”

It is early in the day but already the sugar cane fields of the Maragra plantation — the country’s largest — are hot and sultry. Black clouds of smoke from fires burning unwanted foliage drift over the fields as workers move through tall, swaying swaths of ripe green sugar cane, swinging long, wooden-handled metal cutters.

To earn £1.60 a day each, Paulo and five members of his team must clear at least six tonnes. It is seasonal and irregular work but quickly translates into food, basic education and health for families in a country ranked among the five poorest in the world.

“It is hard work but worth it,” Paulo, 24, who used to be a river fisherman, said. “Sugar has changed my life. Now I can pay for many things (which) before I only dreamt of.”

With the support of Western governments, Mozambique rehabilitated its sugar industry at the end of the civil war in 1992. About £190 million was invested in new plants, production and infrastructure.

Today it produces some of the cheapest sugar — between £60 and £80 a tonne. By comparison it costs Europe about £320 to produce one tonne.

Yet Mozambique’s sugar industry is in danger. The reason is the European Union’s highly protectionist Common Agricultural Policy, which hits the country’s sugar producers from three directions simultaneously. The CAP subsidises European producers of the much more costly sugar beet by £550 million a year. Much of this goes to companies such as Tate & Lyle in Britain, which alone is estimated to receive £120 million a year. The CAP places import tariffs of more than 200 per cent on cane products from non-EU countries, making it even more difficult for dirt-poor producers such as Ethiopia, Malawi, Zambia and Mozambique to take advantage of low wage costs.

And the CAP’s price-support system leads to over-production. As a result roughly five million tonnes of European sugar are dumped on the world market annually, driving prices downwards.

“Because of dumping, the weighted average price per tonne on the world market is now below even our cost of production. No one can compete with those prices,” says Tony Currie, a South African manager of the Maragra estate, a joint government-private sector venture of exactly the sort that is recommended by modern development gurus.

The situation may be about to get worse. To head off criticism of the subsidy system, which had gone unreformed for four decades, the EU agreed in 2001 to buy a tiny amount of sugar from the world’s poorest countries at preferential rates.

It said that the system would be reviewed in 2009. The total amount represented only four days of EU consumption but it gave Mozambique and other countries some price security.

Now, under mounting external and internal pressure to cut the costs of the system, the EU wants to slash those prices by about 40 per cent, meaning that countries such as Mozambique will receive even less income from their sugar. Luke Simbane, a team manager at Maragra, said: “They want to change rules which we had no say in making. They want to cut our throats again and make us pay hardest for their reforms. But we are still poor, they are rich.”

Next month’s G8 summit at Gleneagles will discuss ways of helping Africa. It will agree a debt-relief package worth £22 billion, and a new aid package, but one of the biggest obstacles to economic progress in Africa is the protectionism that prevents its farmers selling their products to the West. The United States, which pays millions of dollars to its cotton farmers each year, is as much a culprit as the EU. Rich countries are believed to spend as much as £560 million a day on agricultural subsidies — a huge barrier preventing even the most free-market-orientated developing country from trading its way out of poverty. Across Africa, from Zambia to Mali, it is the same story whether the produce is cotton or rice, tomatoes or fruit.

In Ghana, dumped American rice has had a devastating effect on producers. In markets outside the capital, Accra, local traders sit behind piles of unsold rice, unable to compete with subsidies that give the American farmer back 72 cents for every dollar laid out.

Cotton producers fare even worse across West Africa. Small family farms in Benin, Mali, Burkina Faso, Chad and Togo are unable to compete with $3.2 billion (£1.8 billion) in annual subsidies to American growers, a vast proportion of which goes to 27 plantations in the southern states.

Overall, the charity Oxfam calculates direct losses to West Africa as a result of combined EU and US cotton subsidies at £140 million a year, and accuses industrialised nations that preach free trade of lacking the stomach to take on farm lobbies and the vested interests of the agri-business world.

Amy Barry, of Oxfam, said: “Protectionism is the problem. Aid and debt relief are fine if they are part of a concerted policy with trade reform, otherwise it risks being wasted money. Aid and debt relief can be used to help countries like Mozambique put in the infrastructure to be able to take advantage of improved trade. If you do not manage the world trading system better, you jeopardise all that at a stroke.”

Oxfam estimates that if Africa could boost its share of world trade by 1 per cent it would result in extra funds of about £40 billion annually.

“It is a classic case of the left hand and right hand not working together. What we need is trade not aid,” Mr Currie, of the Maragra estate, said.

For Rabeca Avore Mandleia, 47, a mother of four who lost her husband in the civil war that followed Mozambique’s independence in 1975, life without her job scattering fertiliser on newly planted sugar cane is unimaginable.

“We had nothing for the family before we came here. I am alone now, but all my children go to the school,” she said.

“If sugar goes, we will return to poverty.”

For CAFTA, Party Pressure and Pork

By Jonathan Weisman
Washington Post Staff Writer

Earlier this month, at a closed-door meeting of Democrats, House Minority Leader Nancy Pelosi (Calif.) was blunt: Any Democrat who votes for the Central American Free Trade Agreement will allow an embattled Republican to squirm off the hook and vote no. A vote for CAFTA, she said, was a vote to keep the GOP in the majority.

It was a speech that was tough enough to make the party's free-traders cringe, said Rep. James P. Moran Jr. (D-Va.), but both parties are treating the coming showdown over CAFTA like a political donnybrook. Democratic leaders are leaning hard on members to keep defections to a tiny minority, while the Bush administration considers major concessions on sugar crop subsidies and China trade.

If those don't work, administration officials may have to resort to old-fashioned political pork. "With the Democrats almost united, we have to deal with the most protectionist Republicans in Congress, and that means [dealing with] textiles, sugar and whoever else comes along," said one U.S. trade official, who spoke on condition of anonymity because negotiations are ongoing. "If you take 170 Democrats off the playing field, it means we're going to have to cut some deals."

"An awful lot is stake here, and control of Congress is the grand prize," said Moran, one of only five Democrats who have publicly pledged to vote for the treaty. "The stakes are very, very high."

From an economic standpoint, the Central American Free Trade Agreement appears to be a relatively minor treaty. The accord would extend NAFTA-like trading preferences to El Salvador, Guatemala, Honduras, Nicaragua, Costa Rica and the Dominican Republic, six countries whose combined economies -- at $85 billion in 2003 -- are smaller than the Czech Republic's.

But with a growing backlash against free trade, the treaty has grown in political importance. Republican Rep. Bob Inglis, whose upstate South Carolina district includes much of the nation's decimated textile industry, said he has received more than 1,000 inquiries on CAFTA, making it the hottest issue since he returned to Congress this year.

In past trade agreements, dozens of Democrats have joined Republican majorities to help secure passage. But this time, as few as 10 may vote for it. That means Republicans from hard-hit districts representing textile mills, machine-tool manufacturers and sugar growers will have to vote yes if President Bush is to avoid a major political defeat.

"What's different is how much this has become a party-line issue for the Democrats, which has really raised the pressure on Republicans," said Rep. Peter T. King (R-N.Y.).

Administration officials had hoped to win passage of the treaty before Congress's July 4 recess, but they acknowledge they do not have the votes -- yet. Indeed, Rep. Walter B. Jones Jr. (R-N.C.) said between 20 and 23 House Republicans are solidly against the treaty.

But the White House is working hard to chip away at the opposition on both sides of the aisle. On June 15, in a letter to 14 members of the House Democratic Hispanic Caucus, Commerce Secretary Carlos M. Gutierrez tried to answer concerns over the enforcement of labor laws in the CAFTA countries, offering "a long-term, sustained commitment to labor capacity-building" in Central America as well as an international donors conference before the end of July to win aid to the countries' labor ministries and labor courts.

A U.S. trade official, speaking on condition of anonymity because negotiations are ongoing, said the White House has secured $20 million to beef up enforcement of labor and environmental laws in the CAFTA countries.

Sugar-state lawmakers late last week presented the White House with a series of demands drafted by the sugar industry to assuage concerns that the treaty would undermine the U.S. system of sugar price supports. They include government purchases of surplus U.S. sugar to make up for new imports from Central America and assurances that sugar will be excluded from future trade deals.

And yesterday, Bush invited 14 wavering House members to the White House to listen to their demands. Inglis told Bush he could vote for the treaty only if a separate, binding agreement is reached with each of the signatories to ensure that cheap Chinese textiles could not be brought into Central America, then shipped duty-free to the United States. Rep. Steven C. LaTourette (R-Ohio) said Bush is unlikely to win him over, but he wanted to hear how far the White House is willing to go to force China to float its currency.

Such overtures have some leading Democrats convinced CAFTA will ultimately pass, perhaps by a single vote. Rep. Charles B. Rangel (N.Y.), the ranking Democrat on the House Ways and Means Committee, which has jurisdiction over trade, said he has not been swayed by a personal visit from Secretary of State Condoleezza Rice and an audience with the president. But, he said, others probably will be.

"I always had thought it would be impossible to pass this thing because of the hemorrhaging of Republican votes," he said, "but that was before I saw what they were doing to get Democratic votes. If there's no limit to what they'll pay, they've got to win."

So far, trade officials concede such talks have yielded only limited results. After one conversation with Bush and three with Gutierrez, Rep. Henry Cuellar (D-Tex.) said he has been won over.

"I am interested in doing the right thing, not in making one political party look bad," Cuellar said. "We cannot politicize this type of agreement."

But Democratic leaders aren't about to bend. House Democratic Caucus Chairman Robert Menendez (N.J.) said the White House cannot cut development assistance to Latin America and allow congressional Republicans to pass anti-immigrant measures, such as the recent clampdown on driver's license issuances, then come to Latino lawmakers promising aid in exchange for their votes.

"I make of it all to be hollow promises, too little, too late and, to be honest with you, incredibly offensive," he said.

Central American Labor Pact Stirs Strong Emotions

By Krissah Williams and Paul Blustein
Washington Post Staff Writers

GUATEMALA CITY -- For 18 years, Sara Adela Rosales sat behind a small, black sewing machine in a factory here piecing together pants. Six days a week, she carefully sewed seams and hems and passed the trousers down an assembly line of about 25 other women. The factory she worked for, Automatizaciónes Industriales, then shipped the garments to their clients, mostly U.S. retailers.

Rosales, 62, said she often earned about $150 a month, less than the country's minimum wage, and was sometimes forced to work 12-hour days without full compensation. After losing her job recently, she was left with no savings, hundreds of dollars of unpaid property taxes and no hope of getting out of debt.

"For all the work we did, the salary wasn't fair," Rosales said. "They had us work sometimes into the night if they needed us to increase production. Sometimes they would pay us more, but it is what they wanted to pay. They aren't going to lose [money]. The worker loses."

Complaints by Rosales and other central American workers about abusive labor practices lie at the crux of the debate over the Central American Free Trade Agreement, an accord that would sharply reduce and in many cases eliminate trade barriers between the United States, five Central American countries and the Dominican Republic. While other recently-negotiated trade agreements with countries such as Australia, Singapore and Chile moved smoothly through Congress, CAFTA faces an uphill fight.

Sitting in her sparse cement home in a town on the outskirts of the capital here, Rosales, like many other Central American workers, has found herself intertwined in an intense trade debate with great political implications. CAFTA was negotiated with poor countries that have dismal histories of worker treatment. The pact's critics say it does not sufficiently protect the rights of workers like Rosales and as a result would provide incentives for companies to migrate to countries with the lowest wages and weakest unions. Its backers counter that by giving Central America assured access to U.S. market, workers such as Rosales would be more likely to have jobs. Rosales is also torn.

"There are advantages and disadvantages," she said of her factory job and the trade agreement that could create more such employment. The textile factory she worked for became one of 20 in Guatemala to shut down in recent months. It went broke because it could not compete with factories in other parts of the world where people work equally grueling schedules for even less.

Out of work for nearly six months now, Rosales believes more employment is what her country needs. Working at the factory helped Rosales leave an impoverished country town in the mountains outside of Guatemala City and build a life in a simple home with a corrugated roof, electricity and an eight-inch television in her bedroom. Outside her door are similar square homes with metal doors that belong mostly to others who work in the factories surrounding Villa Nueva, a town with paved streets and fast-food restaurants that grew because of the apparel industry.

Rosales also believes, however, that she and other garment manufacturers should be paid more. The average pay for manufacturing-sector workers in Guatemala was about $244 a month in 2002, according to the International Labor Organization's latest report.

Never before has the United States negotiated a free-trade deal with countries so poor. The nations that have struck free-trade agreements with Washington in recent years come mostly from the "middle income" or wealthy ranks. Even Mexico had income per capita of about $4,200 when NAFTA, the North American Free Trade Agreement, was negotiated in the early 1990s, said Sandra Polaski, a trade specialist at the Carnegie Endowment for International Peace. By contrast, income per capita in Nicaragua is about $400, while the comparable figure in Honduras is about $900, slightly less than levels in El Salvador in Guatemala.

Union leaders and labor activists here say their efforts to organize workers are often thwarted by powerful business owners. Union affiliates are sometimes threatened or fired and have their names placed on blacklists that make it difficult for them to find other jobs.

"The right that seems to be violated most often is the freedom to associate and organize," said Mary Bellman, a Guatemala-based coordinator for Stitch, a women's labor rights organization. "All of the repercussions and the ways companies respond are almost always illegal. The implementation of local labor law is so poor."

The region has a long record of hostility to unions. Last year a U.S. union official organizing workers in El Salvador was killed. No independent trade unions have been registered there in the past four years, said Mark Levinson, chief economist of Unite Here, a union representing U.S. workers in the apparel and other industries. In Guatemala, two collective-bargaining agreements exist in the country's more than 200 textile factories.

The most recent textile factory organizing campaign in Guatemala ended earlier this month after the factory closed. Nobland, a South Korean-owned company that opened here in 2001, cited continuing economic losses for the factory's closure. Leaders of the union at Nobland and labor activists say they believe the goal was to squelch the union.

Vidalia Garcia, secretary general of the union, wiped tears from her red eyes after a distraught worker called her at the union's office earlier this month to tell her the factory was closing. "What are we going to do?" she said softly.

About 350 people lost their jobs, more than 100 of them were union affiliates, she said.

"Here in Guatemala there isn't much work. It's a critical situation. Because we're union members, we're on a blacklist and can't enter other factories," Garcia said. "If you defend your rights, they try to fire you or throw pieces of fabric in your face."

Keith Kim, owner of the factory, said in an e-mail that the union's demands for double-digit salary increases and the letters and e-mails they sent to his customers asking them to stop doing business with him influenced his decision to close Nobland, but the primary cause was lack of profitability.

"Guatemala was just not competitive for our products after the world became quota-free this year," he wrote. "We have been getting less and less work for our factory in Guatemala and finally we did not have any work to put in there."

Stephen Coats, executive director of U.S./Labor Education in the Americas Project, which has a representative in Guatemala, said CAFTA will make it more difficult for the U.S. government to prod the Guatemalan government to investigate closures such as Nobland. Coats's group and others have used current laws governing trade with Central American countries to request that the United States withdraw trade benefits from Guatemala. The Generalized System of Preferences and Caribbean Basin Trade Partnership Act allows the U.S. government to rescind trade benefits from any country that is falling short in meeting its labor commitments. One appeal filed in 1992 prompted the United States to put Guatemala under review because of violence against workers there. That review ended in 1997.

Under CAFTA, the governments of Central America and the Dominican Republic would be required to enforce the labor laws on their books, and if a government is found to be derelict in enforcing its laws, that government could be subject to monetary fines, up to $15 million per violation, with the money used to help address the labor problem in question. The Bush administration contends that these protections go beyond those contained in previous U.S. trade deals with other countries. Administration critics disagree.

The Central American governments have released action plans aimed at improving their labor law enforcement, including blueprints for strengthening their labor ministries and judiciaries. U.S. Trade Representative Rob Portman, in a bid to win over skeptics, pledged in a speech earlier this month that the Bush administration will beef up efforts to help Central American governments meet those goals, and he suggested that an international donor conference should be held in coming weeks to raise money for that purpose.

Beyond the debate about whether CAFTA's labor provisions are tough enough, proponents say the main point is that by generating economic growth, CAFTA will do more for workers in Central America and the Dominican Republic than any law or regulation could achieve. That is because worker rights are more likely to be strengthened when demand for labor is strong, thereby giving workers bargaining power.

Alejandro Ceballos, lawyer for Polar Industries, one of Guatemala's largest textile factories, said CAFTA could be key to his industry's survival. The accord has won the endorsement of key congressional committees, and the White House hopes for a vote before the July 4 recess.

In the first six months of this year, twice as many factories have closed there than closed in all of 2004. They could not survive the competition with China, a low-cost, highly efficient producer, according to Guatemala's apparel industry association. Thousands may have already lost their jobs.

CAFTA is going to force Guatemalan textile companies with poor labor practices "to become formal businesses and to comply with the law and requirements," Ceballos said. "Today, not all of the companies are following the law. But when Wal-Mart comes and demands that they must obey the law, then yes, they'll obey the law."

Blustein reported from Washington. Staff researcher Richard Drezen contributed to this report.

Sunday, June 3, 2007

Currency questions intensify between US and China

In tense negotiations, the administration pushes China to revalue its currency, but some experts doubt the benefits.
| Staff writer of The Christian Science Monitor
Trade agreements require trust - confidence that both sides will live up to the terms of the deals and play fair.

Now, the fabric that holds together the US trading relationship with China is being pulled and stretched. Because of the importance of these two nations, how the tensions play out could affect both the global economy and the climate for expanding trade.

The Bush administration has become increasingly vocal about the differences with China and recently capped some of its apparel imports. Congress is considering a bill to put tariffs on Chinese-made products if China doesn't revalue its currency. Business groups are also lobbying for change, and last week Treasury Secretary John Snow said he expected China will make some change to its currency over the next several months.

But behind the new signs of urgency, economists caution that a revalued yuan is no cure-all for America's wide trade deficit with China. For example, Federal Reserve Chairman Alan Greenspan said last week that the US trade deficit wouldn't come down due to a revaluation, since other countries with low labor costs would make the goods instead.

That apparently has not stopped the administration from pushing ahead. Wednesday, Sen. Charles Schumer (D) of New York, who has sponsored legislation to punish China for currency manipulation, noted at a Monitor breakfast that a high Treasury official told him the legislation was helping in dealing with China.

According to the Tuesday edition of the Financial Times, the US Treasury has informed the Chinese it must revalue its currency by at least 10 percent to defuse tensions with Congress. It also says that the US is using private citizens such as Henry Kissinger and Brent Scowcroft to communicate with the Chinese.

A Treasury spokesman did not return phone calls to the Monitor.

Some international observers question whether private individuals should be used to communicate with the Chinese. "The Treasury secretary is perfectly capable of calling the Chinese," says Robert Hormats, vice chairman of Goldman Sachs International. "I question how appropriate it would be to ask a private individual to suggest what an exchange rate would be."

Dean Baker, co-founder of the Center for Economic and Policy Research in Washington, says the administration is aware of the downside of a rising Chinese currency: Import prices and interest rates may rise. US consumers have benefited from being able to buy lower-cost clothing, electronics, and other goods. At the same time, China is currently investing about $1 billion a day in the US.

"China is handing us hundreds of billions [through their investments in US Treasury securities] to buy their stuff," says Mr. Baker. "At some point they might want to use that money."

If that were to happen, he warns, "It might not be a pretty picture: The housing bubble could burst," because interest rates would be higher.

Still, the business groups that are urging President Bush to act don't want the administration to stop at a currency revaluation (which they think should be as high as 40 percent). They maintain that China's system is opaque, hiding subsidies and loans provided by the Chinese government.

"We need to know what other subsidies the Chinese would increase, even assuming they did revalue upward," says Alan Tonelson, a research fellow at the United States Business and Industry Council in Washington.

If the Chinese do revalue their currency, he thinks the biggest winners will be small and medium-sized US manufacturers, especially in the metal-bending, cutting, and forming industry. "They are able to compete on quality and innovation," he says.

Yet even if China does revalue the yuan, some analysts are not convinced it will make much difference. Jay Edward Simkin, an international economist, thinks if China revalued by 25 percent, Chinese companies would simply accept lower profits to hold on to their market share. Then, he says, they would cut wages or find other ways to cut their costs.

If the Chinese tried to lower labor costs, he envisions the possibility of social unrest that he fears might destabilize the banking system. "We know from many other cases that banking-system crises have deep consequences for the country in which they occur and global impacts," says Mr. Simkin, who produces a report entitled "RiskAlert!" in Nashua, N.H.

If the US is going to force the issue with the Chinese, economist Clyde Prestowitz wonders why the US won't go after Japan, which also intervenes to prevent the yen from rising against the dollar. "Why not Japan? It's the bigger economy," says Mr. Prestowitz, author of the new book, "Three Billion New Capitalists: The Great Shift of Wealth and Power to the East."

To businessman Brett Kingstone, CEO of Super Vision International, the problem isn't the currency, but the violation of intellectual property rights. Mr. Kingstone is author of the book "The Real War Against America," which details how the Chinese allegedly stole his blueprints, chemical formulations, and trade secrets for his fiber-optic business. He has won court judgments against the alleged instigators and obtained court orders seizing Chinese products that use his technology and are shipped to this country.

"I think there's too much attention paid to the currency issue," he says. "It would be immaterial if China does not make significant reforms and eliminate the rampant piracy its been practicing for decades."

Uphill fight for Central American trade deal

Bush is pushing free trade with Central America to stay competitive with China and to spread democracy further.
| Staff writer of The Christian Science Monitor
A decade after the inception of the North American Free Trade Agreement, officials and experts are still debating its merits, even as communities across the country absorb its impact.

Meanwhile, China, which continues to rack up huge trade surpluses with the US, looms on the eastern horizon.

It is in this context that President Bush's initiative for a free-trade accord with Central America and the Caribbean's Dominican Republic (known as CAFTA) continues to flounder - despite the high-profile press from the White House this week to get the signed agreement ratified by Congress.

President Bush was scheduled to greet the presidents of five Central American countries and the Dominican Republic to the White House Thursday, while Deputy Secretary of State Robert Zoellick - the administration's past trade representative - is to give a speech next week echoing his boss, Secretary of State Condoleezza Rice, who recently argued that CAFTA is essential to securing freedom - economic and political - in the region.

The administration's problem is not so much the impact of an accord with six economies that together barely match the economic heft of Pittsburgh. Rather, it's the "bad rep" that trade agreements and the notion of free trade in general have developed as the United States has continued to see a decline in manufacturing jobs and a rise in "offshore outsourcing."

Criticism from both parties

Any hopes of new trade agreements - such as one encompassing the entire Western Hemisphere that the administration had once hoped to conclude this year - are probably doomed until the public, and Congress, are more certain of the benefits.

In the debate over CAFTA and free trade in general, "the two phantoms are the experience with NAFTA and what to do about China," says Jeff Vogt, a senior associate for rights and development at the Washington Office on Latin America. "That's really what's put the spook into" the Congress.

The Democrats, who were mildly supportive of free trade under President Clinton, have increasingly turned against trade agreements in recent years. Some Republicans, too, are showing increased resistance to pressure from traditional Republican free-trade constituencies, citing job losses and inadequate planning for the fallout of trade accords.

Sen. Saxby Chambliss (R) of Georgia, argues in a recent article in The Hill newspaper that while "open trade" can boost the export of US products, it also causes hardships at home - hardships the US hasn't prepared for adequately in the past.

While touting his state as a "crossroads of international trade," he adds that "Georgia was also home to a thriving textile sector that has suffered the costs of free trade...."

Trade promotes democracy

Against such resistance the Bush administration is retooling old arguments while developing new ones. Officials are refashioning the argument that free trade promotes democracy by placing it within the context of President Bush's second-term focus on the global spread of freedom.

Recently Commerce Secretary Carlos Gutierrez claimed that the forces opposing the CAFTA agreement in Central America today are drawn from the same elements that opposed "democracy and freedom" during the war-torn 1980s.

And more than just administration officials are jumping on the trade-promotes-democracy bandwagon. Last month a list of former Democratic administration officials sent a letter to Congress supporting CAFTA's passage as a way to "reinforce democratic processes and rule of law in Central America." The letter also said political trends in the region make passage urgent because "opponents of democracy are increasingly active."

At the same time, US Trade Representative Rob Portman, a former member of Congress from Ohio, argues that CAFTA can actually work as a viable response to the Chinese trade juggernaut by favoring regional textile industries that would enjoy incentives for using American cloth, yarn, and thread.

Of course the administration's argument in favor of CAFTA is not devoid of economic elements. Mr. Portman cites US business organizations that estimate a $1.5 billion jump in farm exports and $1 billion gain in sales of manufactured goods as a result of CAFTA.

But critics say the administration is wrong to suggest that CAFTA will help US industries, in tandem with lower-wage southern neighbors, compete with Chinese garmentmakers, and other exporters.

Portman's argument is "the triumph of hope over experience," says Alan Tonelson, a specialist in trade policy at the US Business and Industry Council in Washington. "That's what we were told NAFTA would do - and what NAFTA failed to do."

How CAFTA could pass

Mr. Tonelson says the problem with US trade policy is not primarily regional trade accords, but the failure to come to grips with countries such as China that have "racked up huge surpluses and can now afford to follow whatever practices they need to to keep their trade growing."

That failure means that an agreement like CAFTA, which the administration wants as much for political as for economic reasons, is going to continue to face stiff opposition in Congress, Tonelson says.

But even some Democrats believe CAFTA can still be passed - a vote is anticipated in the next few weeks - if the White House and Bush personally really lobby for it. Rep. Jim Moran, a Virginia Democrat, supports CAFTA and says putting the accord in the context of making inevitable globalization work for the region is the best way to argue for it.

Cambodia pitches sweat-free wear

As Chinese competition intensifies, Cambodia points to unions, watchdogs to appeal to buyer conscience.
| Correspondent of The Christian Science Monitor
After a quick snip of the scissors and a double-stitch to attach the label, Om Chantoen flings the finished black blouse into a red plastic tray, then fishes another from the stack beside her workbench at a garment factory here.

With overtime, Miss Om brings home $70 a month. She's seen the price tag that goes on these US-bound shirts: $40.

"I used to wonder how people could pay so much for these shirts," she says, laughing at the question. "But I realize the factory has to make a profit."

But keeping Cambodia's garment factories profitable in the face of global competition isn't easy. Oeung Samol, the supervisor at Archid Garment Factory, says orders are down sharply this year and about 100 of 700 workers have been laid off. Like other manufacturers, he blames the downturn on surging Chinese exports following the abolition of a decades-old quota system on Jan 1.

Prodded by domestic textile companies, the European Union has joined the US government in launching an investigation into the sharp rise of garments from China that could trigger import curbs. But analysts say long-term trends in the garment trade favor large producers like China and India, as buyers place bigger orders and demand lower prices.

That leaves small garment producers like Cambodia, which ships most of its output to the US, facing potential ruin, as the industry employs 65 percent of its manufacturing workforce.

But Cambodia may have a trick up its sleeve. In an industry often accused of exploiting sweatshop labor, Cambodia says it offers the opposite: unionized workers paid fairly in safe conditions. Regular inspections by a third-party watchdog keep managers on their toes and give companies with a conscience an incentive to buy Cambodian.

The monitoring is the result of a 1999 US-Cambodia trade deal that rewarded garment exporters who improved labor conditions. It's a model that some say could be adapted by other countries seeking to stay ahead of cutthroat competition under the new trade laws.

"If I was a developing country trying to promote my textile industry, I'd be finding ways to say, 'look, we also have this advantage [of high labor standards].' It's been shown that buyers do respond to this," says Sandra Polanski, a former State Department official who helped negotiate the Cambodia trade pact and now works at the Carnegie Endowment.

Proponents point to a World Bank survey of international buyers in 2004 that ranked Cambodia above its competitors in terms of its treatment of workers. More than 60 percent of companies who sourced Cambodian apparel said compliance with labor standards was of equal or greater importance than price, quality, and speed of delivery.

The reason: 86 percent of the buyers reckoned that labor standards mattered to their customers, underscoring the risk to retailers of being called out by anti-sweatshop activists. Among the brands sourcing Cambodian garments are Gap, H&M, and Levis.

But garment factories here must still compete on price. "You've got to be in the game to play. If you're not price-competitive, then you're not even in the game," says Magdi Amin, a regional private-sector development specialist at the World Bank in Washington.

Wages make up about 15 percent of the cost of Om's $40 shirt. What hobbles small countries are the price of importing cotton and other fabrics and the rickety infrastructure that slows delivery times. China pays higher wages, but has greater productivity as well as faster roads and ports.

Then there's corruption: according to the Garment Manufacturers Association of Cambodia (GMAC), kickbacks to government officials add between 10 and 12 percent to production costs. In response to complaints, the government has begun to cut red tape by reducing the number of approvals needed for exports.

Still, the surge in Chinese exports is beginning to hurt. Since Jan. 1, 12 factories have closed and 24 have suspended operations, says Ken Loo, secretary general of the GMAC. Some foreign investors are switching to China.

The closures have cut about 20,000 jobs and angered unionists who say workers are being denied adequate protection. Last year a prominent union leader, Chea Vichea, was gunned down in public and labor relations are often tense, with almost daily strikes.

The International Labor Organization (ILO), which monitors Cambodia's garment factories, says that while conditions are improving, some factories force workers to do overtime and underpay them. "This is not a workers' paradise. There are still violations - serious violations - of the labor law," says Ros Harvey, chief technical adviser to the ILO.

Some manufacturers remain skeptical as to whether they can leverage Cambodia's record on complying with labor standards. "Most buyers are not willing to pay more for compliance," says Loo. "There's only a select group of buyers that have come out and shown that they are willing to pay more."

On the other hand, 14 new factories have opened this year, and others are adding new lines. Among those keen to buy Cambodian is British chain Marks & Spencer. In April, New Island Co., a Cambodian supplier, opened a $1.5 million factory near Phnom Penh's airport.

The yuan and the restless

Critics say Chinese currency should trade freely but that could have nasty consequences at home.

By Chris Isidore, CNN/Money senior writer

NEW YORK (CNN/Money) - U.S. companies, politicians and other critics of the big trade deficit with China say there's one easy way to fix it -- let the Chinese yuan be free.

The critics say a free-floating yuan would rise at least 20 percent in value, making Chinese exports to the United States more costly, ending what some claim is unfair competition by the Chinese.

The U.S. trade deficit with China jumped 30 percent to $162 billion last year, bigger than the gap with Japan and the nations of OPEC, combined, and just slightly less than the nation's total deficit just six years ago.

Last month, finance ministers from the world's leading economies urged China to let the yuan start trading freely. And lawmakers in Congress, worried about the loss of U.S. jobs, are threatening to slap steep tariffs on Chinese goods unless the country changes its currency policy.

But for Americans, letting the yuan rise could have some very unpopular consequences. Interest rates would probably rise, perhaps steeply, along with oil prices -- and even the trade gap with China could be forced up, at least in the short run.

China is believed to be on the verge of a modest revaluation of the yuan, with experts looking for it to rise as much as 5 percent, perhaps soon. But economists say such a small change will do little to lower the deficit with the world's most populous country.

"It gets more and more out of synch every year," said University of Maryland professor Peter Morici. "It'd really be just a fig leaf. In order for there to be a change in the trade relationship, it has to be a large change right off the bat -- at least 20 percent."

If Chinese officials do give in and let the yuan rise, though, it could be a case of be careful what you wish for.

The downside at home

Right now China is one of the biggest buyers of U.S. government bonds, helping keep U.S. interest rates low. But if the yuan rose, the Chinese would probably cut back on their purchases, driving yields on Treasuries and mortgage-backed securities higher.

Ashraf Laidi, chief currency analyst at MG Financial Group, cited estimates that yields on the benchmark 10-year Treasury note are up to 70 basis points below where they would be without purchases by China and other Asian buyers. There are 100 basis points in 1 percent.

If China were to suddenly to drop its yuan-dollar peg, that means long-term bond rates could rise as much as a full percentage point, Laidi estimated.

Just the possibility of a free-floating yuan could drive up long-term rates, said Sung Won Sohn, CEO of Los Angeles-based Korean bank Hanmi Financial. "They don't have to do anything," he said. "If they just say they are going to buy fewer U.S. Treasuries, they can hurt us badly."

Even advocates of a free-floating yuan agree it will mean higher rates in the United States.

"Mortgage rates are going to go up, the long bond rate is going to go up," said Maryland's Morici, who has long been calling for China to let the yuan rise. "The only question is what is the precipitating event."

Meanwhile, a rising yuan would let China, already a big oil importer, buy even more oil for the same number of yuan, since oil is priced in dollars worldwide -- a move that would put upward pressure on oil prices.

"It is a country interested in growing rapidly, and one of the big bottlenecks in its growth has been energy," said oil analyst Peter Beutel, president of Cameron Hanover. "If it was suddenly trying to buy 1.5 million barrels today, it'd sop up most of the surplus right now."

The job question

Some critics say China's undervalued yuan costs American jobs by making it tougher for U.S. factories to compete.

"Until they start playing by the rules, our manufacturing industry will continue to bleed jobs because of unfair Chinese trade practices," said Sen. Lindsey Graham, a South Carolina Republican pushing a law that would slap 27.5 percent tariffs on Chinese exports if Beijing doesn't revalue the yuan.

But many economists say China would still have a significant cost advantage over U.S. factories, even with a stronger yuan. Many of its government-directed companies could afford lower profits or even losses so as not to lose U.S. sales.

And even a rising yuan probably wouldn't bring jobs back to the United States.

"In my opinion (low-cost production) would shift to elsewhere in Asia, perhaps to Africa," said Joanne Thornton, international trade analyst for Stanford Washington Research Group. "It's hard for me to imagine a situation where ... production that moved overseas would shift back to the United States."

Maryland's Morici said at best a rising yuan might stem further losses of U.S. jobs to competitors overseas. But some higher-end U.S. plants would become competitive with Chinese counterparts again, he added.

And while a stronger yuan is meant to close the U.S.-China trade gap, the immediate impact would probably be the opposite. Some Chinese exports would fetch more dollars while U.S. exports to China, worth $3.3 billion last year, would be worth less.

Change expected to be slow

No one knows exactly what a freely traded yuan would be worth. Morici and others say it should trade at around 5 yuan to a dollar, rather than the current fixed rate of about 8.3. Others say years of pent-up imbalance could result in an even bigger shift.

But even with all the talk of a revalued yuan, few experts expect any change soon.

Laidi at MG Financial Group said there could be a move to a more freely traded yuan by the time the Olympics come to Beijing in 2008. Others think it could be years later.

"I think the Chinese strategy is give as little as possible and take as long as they can" to a free-floating currency, said Hanmi's Sohn.

Imports increasingly burden US economy

The nation's growth rate slowed for the first quarter - and oil prices aren't the only reason.
| Staff writer of The Christian Science Monitor
The nation's insatiable appetite for foreign-made goods has joined energy as a brake on the economy.
n the latest chapter of the trade wars, imports are surging into the US at a record rate. The Bush administration - alarmed at the flood of imports, which includes everything from pillowcases to coils of steel - is looking for ways to help scores of ailing domestic industries.

Congress is pointing fingers at China, which last year had a record trade deficit of $176 billion. Even the giant Japanese auto companies - which only continue to increase their US market share - have become worried, suggesting they might raise prices to help Detroit.

The latest indication of the impact of imports came Thursday when the Commerce Department reported that the nation's gross domestic product rose by an annual rate of 3.1 percent in the first quarter - a figure lower than expected. The nation's enormous trade deficit knocked 1.5 percentage points from the economy's growth.

"The trade deficit is becoming more of a problem - just the sheer magnitude of it. And it is ballooning," says Mark Zandi, chief economist at Economy.com.

The yawning trade deficit wasn't the only thing sapping the economy. In the first quarter, energy prices soared as oil companies struggled to keep up with demand during a cold and wet winter in the Northeast. This meant consumers had to dig deeper into their pockets to fill up their tanks.

"Energy cast a pall over the economy," says Mr. Zandi.

The first-quarter GDP numbers, which will be revised later, may indicate that the soft patch the economy has entered may endure longer. Corporate inventories rose sharply. And as companies try to get inventories in line with sales, they may reduce production.

"It does imply that as inventories rise at a slower pace, that component will be a drag on the economy in the second quarter," says Richard DeKaser, chief economist at National City Corp. in Cleveland. "I will be reducing my estimate for the second quarter by about 0.5 percentage points to about the same vicinity we're in now."

Despite the slowdown in the economy, Federal Reserve watchers don't expect the nation's central bank will hold off on another quarter-point hike in interest rates when it meets early next month. "I think the Fed feels the factors weighing on the economy are transitory," says Mr. DeKaser.

Indeed, energy prices have been changeable recently. Thursday morning, the price of oil dropped $1.61 a barrel on the future markets. It has fallen nearly $6 a barrel in the past week. Gasoline prices have also plunged, falling nearly 8 cents a gallon Thursday morning.

"A slower economy feeds back to the energy markets. If the GDP is weaker, the oil markets may come down," says Michael Swanson, an economist at Wells Fargo Banks in Minneapolis. "What if China's economy cools from 10 percent growth to 7.5 percent growth? Oil could tumble $10 or $15 a barrel."

Lower oil prices would help to bring down the trade deficit in the months ahead. Yet some sectors of the economy will be going through structural changes no matter what happens to the price of oil.

That's definitely happening in the textile and apparel business. Last fall, most quotas came off textiles and apparel. The National Textile Association, based in Boston, reports that in the first three months of this year, imports of pillowcases were up 188 percent over the same time period last year; cotton sheets, 229 percent; and cotton towels, 177 percent. Large domestic mills, such as Springs Industries, Dan River, and WestPoint Stevens, have been closing facilities and laying off workers.

One of those companies that has been hurt by the imports is the Kentucky Derby Hosiery Co., based in Hopkinsville, Ky. Bill Nichol, the CEO, says he's been steadily consolidating his factories, which are based in Virginia and North Carolina, as imports have surged from China.

"We are perpetually shrinking," he says. "For every percentage increase of market share from offshore, there is less produced in the US."

Some of Mr. Nichol's plants are in Mount Airy, N.C. The contraction in the business hurts the city, says Mayor Jack Loftis.

"We have to have a tighter budget," he says, adding, "It also affects our real estate market because people move to where the jobs are."

However, imports also may benefit consumers. At eFashionSolutions, which markets celebrity clothes online, Keith Foy, vice president, says he is seeing better quality garments coming in for the same price. The reception by the consumer, he says, has been positive with sales of such brands as Baby Phat up 74 percent over last year. "A pretty good chunk of the imports are coming from China," he says.

The high tide of Chinese imports is prompting renewed calls for China to revalue its currency. This prospect may be why some importers are stockpiling goods. For example, Nichol estimates the Chinese have already shipped 80 percent of their 2005 quota, with six months still left in the quota year.

"If China revalues, it's certainly long overdue," says Axel Merk, who manages money out of Palo Alto, Calif. "But that means goods will be more expensive for the consumer. Unwinding the trade problems will be painful no matter how you do it."

Tuesday, May 22, 2007

Not your father's China trade

The most populous country in the world is redefining the rules in the global manufacturing game

In the final analysis, it comes down to people, millions and millions of people - 1.3 billion people by the official count, unofficially probably closer to 1.5 billion people. "First and foremost, [China's] huge population changes the fundamental rules," says Ted C. Fishman, the author of "China Inc."

These millions are drawn to factory towns nobody in America has heard of that are larger than Chicago. These towns have become the new Ruhr Valley, the new Pittsburgh-Detroit, soon perhaps the new Silicon Valley. Three shoe factories in the city of Dongguan alone employ a quarter of a million workers.

No industry is safe from the inexorable pressure of these workers - from cheap, simple Christmas-tree ornaments, made by the nimble fingers of thousands of women who haven't the faintest idea what an angel is, to sophisticated electronics components, car parts, and machine tools. Soon Chinese cars will begin to appear in American showrooms (or maybe Wal-Mart).

Of course, to simply say China has a lot of people is to state the obvious. The issue is how China has marshaled this enormous workforce to create the world's fastest-growing economy. This is the subject of Fishman's excellent and very readable new book, which deftly combines anecdotes and analysis to help us understand China's economic miracle.

Basically, the Chinese Communists broke centuries of feudalism to mold this inchoate mass of people into a disciplined workforce. Then the economic reforms set in motion by Deng Xiaoping in 1979 unleashed the pent-up entrepreneurial spirit of the Chinese people, producing a workforce that has become irresistible to the world's manufacturers.

Strangely, the still nominal Communists who run China have succeeded in turning Marxism on its head. Classical Marxism holds that capitalism is the final stage of human development before communism. In China, communism has become the final stage before the full fruition of capitalism.

When Japan Inc. seemed poised to conquer the world, the iconic image of Japan's economic prowess was the fully automated automobile factory, robotic arms looking like arms of a giant praying mantis, sparks flying, not a human anywhere in sight. The iconic image of China Inc. is a row of young women, all wearing identical blue uniforms, hunched over an assembly line in an electronic-components factory, like an endless chorus line. Not a robot in sight.

Who needs robots when every day brings more and more recruits to the labor force from the countryside, more cogs, if you will, in the giant Chinese manufacturing machine, a vast floating population of migrant workers advancing on China's cities that is larger in itself than the entire American workforce? Therein lies the challenge for America and the rest of the world.

In retrospect it was not so difficult for America to meet Japan's challenge. Japan never based its competitive advantage on armies of low-paid workers alone, or its marketing strategy simply on price. Basically, Japan competed by raising standards of quality and productivity.

That gave America an opening for a comeback. Quality can be improved, productivity raised, robots replicated. It mainly took determination and capital. But how, short of annexing Mexico (which would still leave China three times as populous), do you compete with China's endless supply of workers?

Alas, the author offers few answers. China's millions, of course, are a potential market for US and other countries' products, and the number of people with the wherewithal to buy things is large and rapidly growing. But for many US manufacturers, the Chinese market is a double-edged sword, Fishman says.

Any exporter faces the prospect that its technology will be assiduously studied, dissected, and replicated at a much lower cost. This doesn't even take into account outright piracy. As Fishman points out, piracy of computer operating software not only robs Microsoft (which seems strangely tolerant about it) but also gives industries that use computers an advantage across the board.

The term "economic miracle" has been overworked since the end of World War II. First came the "German miracle," then the Japanese miracle, then the Asian Tigers miracle. But the rise of China in the past 20 years has truly been miraculous.

One can cite the usual statistics, such as years of consistent 7 to 9 percent annual growth, but the fundamental fact is that China in recent years has lifted more people out of poverty than has any other country in the world, anytime, anywhere. That, of course, is good news for China. For the rest of the world it is a mixed blessing, posing a supreme challenge for the 21st century.

Todd Crowell is a Seattle-based economics writer with experience in Asia.

US farm trade under pressure

Known as the world's breadbasket, the US now faces rising food imports and competition in export markets.

| Contributor to The Christian Science Monitor
Wander down the aisles of most American grocery stores and you'll find a surprising choice of foods from foreign countries - ripe blackberries from Mexico, capers from Morocco, hearts of palm from Costa Rica, sweet peppers from South Africa. The list goes on.

While all these foreign imports may be a boon for consumers, they're one reason the once-huge US agricultural trade surplus is rapidly deflating. It's down from $9.6 billion just last year to only a projected $1 billion in 2005, raising the possibility of a deficit in the future.

How could the world's breadbasket be staggering when it comes to a traditional strength like the American farm? The question comes at an awkward moment as overall US trade deficits hit record highs of more than $600 billion a year.

The answer is a culinary tale involving changing consumer tastes, expanding global farm output, and the subsidies governments offer a politically sensitive industry.

"We're not doing enough to combat [foreign] protectionism," says Rep. Bob Goodlatte (R) of Virginia, chairman of the House Committee on Agriculture. He says other countries are raising barriers that make it harder for American farmers to sell their products abroad.

At home, American shoppers also share the blame. People enjoy - and buy - lots of foreign foods. "Our economy is growing, incomes are rising," says Parr Rosson, director of the Center for North American Studies at Texas A&M University. "As a consequence our imports have risen ... particularly in fruits and vegetables we like to have fresh year-round."

Last year, $62.3 billion in farm exports left the US, a number forecast to drop to $59 billion in 2005. Conversely, $52.7 billion in imports arrived in 2004 and are predicted to be up to $58 billion this year.

Representative Goodlatte runs through a list of reasons.

First, there are tariffs. The "United States imposes tariffs on food coming to our country that average 12 percent. The worldwide average is 62 percent."

Second, developed countries, particularly Japan and the European Union, subsidize their farmers at far higher levels than America. "Even though our agricultural production is higher and our population is lower, we actually have a trade deficit with Europe in agriculture, in part because of all these tariffs and subsidies," he says.

While subsidies can distort commerce, many experts see trade in general as beneficial. "If we didn't import oil, what do you think we'd be paying for oil today?" asks Mr. Rosson at Texas A&M. "You need to think of imports [as] ... sending a signal to domestic industry they need to compete or become more productive."

One agricultural industry -cheese - has long run an export deficit, but the industry insists it hasn't hurt them. "We have a healthy relationship with [foreign cheese makers].... They are the 'origin' cheeses. They've given the American consumer their palette," says John Umhoefer, executive director of the Wisconsin Cheese Makers Association in Madison.

Still, the rapid decline in the US dollar relative to other currencies should be boosting US exports and dampening imports. Why doesn't that happen? Rosson says, "Companies make deals well in advance ... and as long as that pipeline is full ... it takes [a year to 18 months] for that change to ripple through the system."

Gary Adams, chief economist with the National Cotton Council of America in Memphis, Tenn., offers another take: "As the dollar weakens or depreciates,... that does tend to support our ability to export.... [B]ut one other wrinkle is if China is your destination for your product, then movement of your dollar isn't affecting things so much because China's [currency] is pegged to the US dollar."

The top three destinations for raw US cotton fiber are Mexico, China, and Turkey. The cotton industry has been shipping more and more of its raw fiber out of the country as US mills close.

America's "biggest complaint" is over nontariff trade barriers, Goodlatte says.

The European Union "block[s] some of our major exports on what we think are unscientific and spurious reasons that really you'd have to think of as more protectionist than based on science." Prime examples are genetically modified corn and soybeans, he says.

The farmers' own representatives in Washington - the American Farm Bureau Federation - don't seem as concerned. "The things that we're importing tend not to compete with what [we're] growing in the US," says Megan Provost, trade economist with the federation.

Still, American government policies could add new worries for farms. In addition to its goal of reducing subsidies, especially for rice and cotton, the Bush administration would move $300 million from the US foreign food aid program to the US Agency for International Development. "This would allow USAID to buy food products overseas for foreign aid, rather than from US farmers," according to The Washington Times. Goodlatte says that would breach a "contract" with US farmers. America, with 6 percent of the world's population, some years provides 60 percent of the food aid, he adds.

Behind the 'fair trade' label

by Pieternel Gruppen

The fair trade logo has become an increasingly regular sight on supermarket shelves in recent years, and many customers are now familiar with the concept.

Still, opinions vary about what fair trade really means. Some consumers won't buy their trainers if they're put together by children's hands; others feel coffee farmers should get a fair price for their beans.

Environmental concerns and acceptable working conditions are also commonly associated with fair trade.

Many different definitions and interpretations exist, and there is no general standard to determine how "fairly traded" the T-shirt or coffee pack that you buy really is. It all depends on the definition that producers wish to apply. And often, that definition is not made explicit to consumers. It's because Fair Trade is not a registered brand. And so, consumers may buy a product because they see the words 'fair trade', but there is no guarantee that that it deserves that label.

Setting standards
To ensure that both producers and consumers get a fair deal, several quality mark organisations have sprung up. Chief among them in the Netherlands is the Max Havelaar Foundation, which has set a number of conditions for fair trade.

Manufacturers, for example, will only be granted the use of the Max Havelaar hallmark if they guarantee acceptable working conditions, meet environmental standards and allow their workers to organise themselves. In addition, they have to guarantee a fair price for their products.

"We are supporting the weakest groups in trade," a Max Havelaar spokesman explains. "It's fair because at least they get a price which is covering their own production costs, a sustainable price."

Farmers will receive an additional bonus which they are obliged to invest in social projects, like setting up schools or improving sanitation. So far, Max Havelaar has awarded certificates for bananas, coffee, tea, chocolate, honey, fruit and fruit juices. These commodities are easy to verify because production lines are short, says Joris Oldenziel of the Centre for Research on Multinational Corporations (SOMO).

"For larger commodities, like coffee and bananas, there are quite well-developed systems for checking if the minimum standards are guaranteed. But when it comes, for example, to handicraft, it's a bit more difficult because they work with middlemen and there is no direct contact with the individual craftsmen. So, they still have to develop better methods for monitoring and verifying whether the wages and the prices the craftsmen get for their products are fair, or whether the money stays with the middlemen."

Products that involve a whole string of middlemen are difficult to verify. That does not only apply to handicraft, but also to clothing. A T-shirt goes a long way - from cotton plantation via sewing workshop to wholesalers - before it's finally sold in a fashion shop. Conditions in a clothing factory may meet fair trade standards, but how about the workers harvesting the cotton crop?

At present, fair trade organisations are not equipped to monitor all the steps in the production process. This has prompted a great deal of media criticism in recent years, which in turn has led to moves to make fair trade groups operate more professionally.

SOMO's Joris Oldzenziel says the fair trade movement should at least be credited for putting the issue on the global agenda. He also believes big companies should take over the initiative:

"I think that most people would agree that the fair trade model, as it exists now, will probably not get more than a 10 percent market share. So, what about the other 90 percent?"

Big business
SOMO and other organisations recognise that, ultimately, the fair trade concept won't succeed without the support of big business. And that's where consumers come in, because companies will be more sensitive to the issue when consumer demand picks up.

Delighting in the dollar's decline

Foreign visitors find bargains abound in S.F, other tourist areas

While Federal Reserve Chairman Alan Greenspan is worried about the weak dollar, it has been a boon for foreign visitors and San Francisco's tourism industry.

The precipitous drop of the dollar against the euro and other major currencies has increased the buying power of foreign tourists. Hotels are seeing more overseas guests, and business at shops and restaurants has picked up.

"I'm definitely saving quite a lot," said Richard Smith, a British tourist who's been on a shopping binge during his two- to three-month tour of the United States. "I bought clothes, electronic items and a lot of beer. And I've been on a lot of tours. I'm able to see a lot more (because) the value of the (British) pound to the dollar makes it so cheap.

"I bought four iPods, one laptop, CDs, a CD player, two digital cameras and DVDs. I'm thinking about buying a camcorder. I met a lot of English people in New York and they were shopping in droves."

The weak dollar -- mainly the result of this country's growing budget and trade deficits -- has benefited American exporters, making their goods cheaper abroad. The slippage has been dramatic, with the dollar having lost 4. 3 percent of its value against the euro in the past 12 months, and 34 percent in the past 36 months.

The erosion of the dollar, though, is drawing tourists to this country in growing numbers. "There has been a significant uptick in the U.S. tourism industry because of the dollar's relative weakness to the euro, but the biggest pickup is in New York and southern Florida," said Thomas Callahan, chief executive officer of PKF Consulting, a firm that monitors the hotel and travel industry.

"It's a long way from Europe to San Francisco. We see an increase here, too, but to a lesser degree."

Tourism rebounding

The influx of foreign visitors is welcome news for San Francisco's tourism industry, which has been on the mend after Sept. 11, the SARS outbreak and the Iraq war, which shook air travelers for some time. The most recent data from the city's Convention & Visitors Bureau notes that 14.4 million domestic and international visitors, including Bay Area visitors, spent $6.03 billion in 2003. Of that total, there were 2.15 million foreign visitors who spent more than $536 million.

Although the bureau's 2004 data won't be available for a few months, David Bratton, its research director, said the overseas visitor count should be up significantly over what it was in 2003.

And the weak dollar is a big reason for the rise. "Four or five years ago, one euro was worth 89 cents. Now it's worth $1.30," said Jon Handlery, the owner of the Handlery Union Square hotel.

"It's extremely attractive for Europeans to come here, and the same goes for Australians and New Zealanders." Handlery cited Air New Zealand's direct flights from Auckland to San Francisco that began July 1 as a boost to business.

"And Iceland Air is starting a direct flight in May, which will be good for the Scandinavian market," he said.

San Francisco International Airport said the number of international passengers grew by 14 percent to 6.9 million during the first 11 months of 2004 compared with the same period in 2003.

Niki Leondakis, chief operating officer at Kimpton Hotels, said the group's hotels had seen a 127 percent gain in international tourism in 2004 compared with 2003. The biggest increases were seen in the number of visitors from France, followed by Germany, Britain, Australia and Japan.

"We definitely see an increase," she said. "Our Grand Cafe at the Hotel Monaco (on Geary Street) has seen its late-night business pick up, which the staff attributes to European travelers who are late-night diners.

"As long as the euro is strong, we project this (trend) will continue during 2005 and into 2006."

Occupancy rates up

According to Smith Travel Research, hotel occupancy in the San Francisco- San Mateo area was 68 percent in 2004, compared with 62.8 percent in 2003. At the same time, the average daily room rate edged up to $117.96 in 2004, compared with $116.68 in 2003.

The presence of foreign visitors has also been felt in the Napa Valley. "We have absolutely seen a big increase in our foreign visitors and also in foreign journalists who are writing about us," said Diana Gerlach, hospitality operations manager at Beringer Vineyards. "We see people from India, the Philippines and China."

For Gerlach, that's a welcome change. "Visitor traffic has been soft for the last three, four years, and for U.S. visitors, the trend is still flat," she said.

The weak dollar has made U.S. goods a bargain. "I'm going to buy clothes and maybe a digital camera," said Kuo Hui-yu, who had just arrived from Taiwan for a weeklong stay in San Francisco and plans to shop and sightsee.

"The dollar's exchange rate is quite good for us. It would have influenced us to buy more had we been able to carry more," added Helen Crowe, a British tourist who is passing through San Francisco on part of a four-week world tour.

For some businesses, though, foreign tourists have been hard to come by. That's understandable, because January is traditionally a slow time of the year for the tourism industry. The Blue & Gold Fleet said it doesn't have very many sightseers braving the rain and cold to go on a cruise.

"For us on the boats, the weather is a factor. It's usually up and down this time of year," said Robert Knigge, vice president of sales and marketing for Blue & Gold. "We saw an increase in international travelers of around 10 to 12 percent last year compared with 2003. But this year it has so far been flat compared with last year."

Japantown waiting

Several shopkeepers and restaurant owners in Japantown also said they haven't seen many foreign tourists. They said Japanese tourists travel extensively from late April to early May during "golden week," the festive period of national holidays in which schools, government offices and stores are closed. They also expect business will pick up when overseas tours come through during the summer.

Callahan of PKF Consulting predicted the increased number of international travelers will be visible when the warm weather arrives. "(Europeans ) will typically travel in the summer months, so we will see the real benefit from June to August," he said.

Unfortunately, most foreign visitors are not big spenders. "We mainly see budget-oriented tourists," Callahan said.

Tina Chen, who owns Tina's Jewelry on Powell Street, said that although there have been a lot of overseas tourists at her store, they haven't generated more business. "Eighty percent of the people that came into the store yesterday were foreigners," she said. "But only 20 percent were spending money, and they mostly bought small things.

"Last year, more local people came in, but many have lost their jobs and may not have extra money to buy luxury things. People have champagne taste but only soft-drink money."

Bush opts for costly bash in wartime

FDR scaled back event, but there's no clear precedent

Jubilant Republicans are descending on a nippy Washington for President Bush's second inaugural on Thursday, an affair of celebrations and protest, pomp and a predicted high temperature of 35 degrees.

Beneath the festivities surrounding the 55th presidential inauguration, there is a current of unease. Washington is capital of a nation at war, with 150,000 Americans serving in Iraq and 18,000 in Afghanistan. So far, more than 1,500 military personnel have been killed in the two countries, with more than 10,000 wounded.

Some critics have suggested scaling back Thursday's inaugural, which will cost $40 million in privately raised funds for the parties, parade, dinners and entertainment events. It will cost tens of millions of dollars more in public money for an unprecedented security effort that will involve about 6, 000 people who will cordon off a large chunk of downtown.

"Precedent suggests that inaugural festivities should be muted -- if not canceled -- in wartime,'' Rep. Anthony Weiner, D-New York City, wrote to Bush last week. He suggested putting some of the money toward helping the troops.

Weiner, who is mulling a run for mayor of New York, cited the example of an ailing President Franklin D. Roosevelt, who in January 1945 limited his inaugural celebration in the midst of World War II to a simple ceremony on the White House balcony, followed by a spartan buffet lunch featuring chicken salad, pound cake and coffee.

However, there is no clear precedent for whether wartime inaugurals should be gala or solemn.

In 1865, crowds overran the White House for President Abraham Lincoln's second inauguration as the Civil War was drawing to a close. In 1953, President Dwight D. Eisenhower's first inaugural was the biggest staged up to that time, and President Richard M. Nixon's 1969 and 1973 inaugurals -- held amid the divisive Vietnam War -- weren't scaled down.

"These are sober times. ... The image that is most troubling is of a president in black tie holding a champagne flute at a time when so many soldiers are eating out of a plastic pouch while getting shot at in Iraq," Weiner added.

About 60 protests are planned for the inaugural, representing a variety of anti-war, anti-Bush, anti-capitalist, pro-environment, pro-abortion rights and pro-civil liberties causes. One group sued last week, claiming that the National Park Service is unduly limiting protesters' access to Pennsylvania Avenue, widely known as "America's main street.''

Access to the bleachers set up along Pennsylvania will be restricted to those who have bought tickets from the private Presidential Inaugural Committee, or the committee's guests.

The White House has rejected the idea of truncating the three-day inaugural plans, which call for a patriotic pageant called "American Heroes --

A Salute to Those Who Serve" today at the indoor MCI Center, Washington's downtown arena; a youth concert at the D.C. Armory featuring Hillary Duff; fireworks on Wednesday evening; a two-hour parade on Pennsylvania Avenue after the ceremony on the Capitol's west front at noon Thursday; and nine inaugural balls that evening.

"They're a ceremony of our history. They're a ritual of our government. I think it's really important to have the inauguration every time,'' first lady Laura Bush told a reporters' roundtable in the White House last Friday.

Her view was seconded by 77-year-old Charlie Brotman, who on Thursday will handle the announcing duties at the inaugural parade for the 13th consecutive time. It's an unpaid job that Brotman, former public address announcer for the Washington Senators, said he has gladly undertaken since Eisenhower's second parade in 1957.

"Let's continue our normal lives as best we can,'' said Brotman, who will be stationed atop the reviewing stand erected across Pennsylvania Avenue from the White House. From there, he serves as the president's eyes and ears, alerting the president in his heated reviewing stand to what marching units and floats are coming his way.

"It's just a few hours of entertainment. The war isn't going to stop tomorrow,'' he said.

The entertainment has already started in Washington, and by the time Thursday comes, local hotels will be jammed with an estimated 100,000 visitors.

At Political Americana, a collectibles shop on Pennsylvania, trinkets marking the second inauguration of Bush and Vice President Dick Cheney fill the shelves. There's a $4 "You're Hired'' button featuring Bush and millionaire Donald Trump, star of NBC's reality series "The Apprentice.''

A Navy blue golf towel carrying the inaugural logo sells for $12.99, and a coffee mug bearing the likenesses of the president and vice president goes for the same price.

Bush has told inaugural organizers that he wants Thursday's parade to last no more than two hours, a formidable task because it will feature about 11,000 participants in six dozen military units, color guards, marching bands and floats from around the country spread out over a route of 1.7 miles.

Based on his experience, Brotman is skeptical it can be done. "Two hours? Yeah, I hear that every four years,'' he said.