President Obama could leave a legacy of disentangling government and industry.
This may sound absurd, given Obama’s evident fondness for bailouts, mandates, regulations, and subsidies. Corporatism has been a theme of the Obama era, from the auto bailouts and the goody-packed stimulus, to Obamacare’s mandates and subsidies.
But in current international trade negotiations, the Obama administration is leading the effort to rein in state-owned enterprises globally. If the administration succeeds, the long-term effects could be dramatic.
Here’s the background: The U.S. is by far the largest economy taking part in negotiating a trade treaty called the Trans-Pacific Partnership. Other countries include India, Japan, Malaysia, Vietnam, the Philippines, Colombia, and Peru.
The heart of the treaty is dismantling trade barriers such as tariffs, thus increasing trade among the parties. On a couple of issues, however, the U.S. is standing pretty far from the other parties.
Egged on by the pharmaceutical and entertainment industries, the Obama administration is demanding the treaty ensconce generous American intellectual property protections into international law. Whether this IP push is really about liberalizing trade or protecting powerful U.S. interests is a question of debate.
The second issue where the U.S. is an outlier: in demanding strict curbs on state-owned enterprises. Other parties to the TPP have government-run airlines, energy companies, and manufacturers, among others. The U.S. is asking them to strip these companies of many of their advantages.
State-owned enterprises distort markets in many ways. For one thing, they can undertake totally unprofitable practices, because they enjoy the backing of the government. For instance, the Obama administration (desperate to protect solar-panel manufacturers in the U.S.) has done trade battle with China’s state-owned manufacturers, whom it has charged with selling solar panels for a loss in order to harm U.S. manufacturers.
Even profitable state-owned enterprises often mess up the playing field. They profit only through government-provided benefits, some measurable, some less measurable. Their borrowing costs are lower than those of private companies, because they borrow with the full faith and credit of their governmental patrons.
Governments often exempt their state-owned companies from the regulations they would apply to private firms. Consider the U.S. Export-Import Bank, which has reported an annual profit consistently for years, solely because it uses an accounting method that ignores market risk. This would be illegal for private companies.
Government-owned companies distort markets, thus lowering global economic efficiency. Typically, these companies actually hurt the economy of their host country — they exist because they benefit the politically connected, or sometimes because they advance their government’s geopolitical goals.
Even if foreign governments inflict most of their damage on their own economies by propping up their SOEs, these entities also harm industries in other countries, such as U.S. solar manufacturers. Governments of harmed industries can respond with a trade-war counterattack — the U.S. did this, imposing tariffs (“countervailing duties,” as they’re called in tradespeak) on Chinese panels — but this just creates a new inefficiency in response to a foreign industry.
The ideal remedy for the distortions of state-owned enterprises is to convince foreign governments to drop their state-owned enterprises. The second-best remedy is to convince them to reduce the subsidies provided to the SOEs. This means ending bailouts and direct subsidies, but also ensuring SOEs don’t get favorable financing and aren’t exempted from regulations.
U.S. negotiators are trying to introduce such disciplines into the TPP. According to the leading industry news sources, the U.S. is pushing hard to make these rules strictly enforceable, thus hamstringing these government-owned companies. This is a big deal for some of the parties to the TPP, such as Malaysia and Vietnam.
It may seem a bit rich for Obama to take aim at state-owned enterprises. After all, the Obama administration has held Fannie Mae and Freddie Mac in government conservatorship for the better part of a decade, actively propped up Chrysler and General Motors, and run the Department of Energy like a state-owned private equity fund. Obama has also beefed up the Export-Import Bank — a state-owned bank, in essence — and used it to give billions to state-owned companies in Asia that buy Boeing, Caterpillar, or General Electric.
But hypocrisy sometimes gets a bad rap — it is often just a spasm of wisdom interrupting a pattern of folly. So it is with Obama’s attack on state-owned enterprises in the TPP.
Alongside the constraints on state-owned enterprises, U.S. negotiators are also demanding new anti-corruption rules. U.S. trade officials see these two provisions as part of a campaign to pull developing Asian economies, such as Vietnam and Malaysia, towards the West and market economies, and away from the cronyist economies of China and Russia.
If the U.S. succeeds in its efforts on state-owned enterprises and public corruption, Obama could end up scoring a real and lasting victory for free enterprise.
Timothy P. Carney, The Washington Examiner’s senior political columnist, can be contacted at [email protected]. His column appears Sunday and Wednesday on washingtonexaminer.com.
