Thanks to some intelligent and aggressive decisions by the U.S. Export-Import Bank and the leading industrialized nations, 150 new locomotives in Pakistan will be labelled “Made in the U.S.A” rather than “Made in China.”
Pakistan wanted to go with General Electric Co., instead of a Chinese competitor, even though the Chinese railcars were 30 to 50 per cent cheaper. But there was one big caveat: Pakistan was only willing to give GE its business if the U.S. could match the financing terms China offered.
The U.S., like most of the world’s major economic powers, is a member of the organisation for Economic Cooperation and Development. Among other things, the OECD prohibits member countries from using excessively generous financing terms to help companies win international bids. The rules are intended to encourage fair global trade, allowing corporations, rather than countries, to compete against one another to offer the best products at the lowest prices.
Member countries continue to subsidise and protect certain industries, but the OECD rules go a long way toward supporting open international trade, improving living standards around the world as a result.
But rules can only level the playing field if everyone plays by the same ones. Despite the fact that it is the world’s largest exporter and has the world’s second-largest economy, China insists that it is not yet “developed” and should not be held to OECD standards.
The result is that the OECD limitations put companies from member countries at a disadvantage when they compete with Chinese rivals. No enterprise can realistically be expected to compete with an entire country, or with an opposing bidder that has more or less free access to a national treasury.
The sensible thing to do, then, is to play by China’s rules until it is willing to play by ours.
This is what happened with the Pakistani locomotive contract. When Pakistan raised the issue of financing, the Export-Import Bank agreed to match China’s terms, even though that meant making an offer that OECD standards ordinarily would have prohibited. The OECD gave its blessing.
In the process, the Ex-Im Bank managed to make up for the mistake it made last summer when it almost blocked a $600 million trade deal, on which nearly 1,000 American jobs depended, over trumped-up environmental concerns. Ex-Im Bank Chairman Fred Hochberg said, in an interview about the locomotive financing, “This says: We’re not going to sit idly by and let you buy business. We will compete and make sure you stand toe to toe with American companies and American workers.”
Without OECD approval, however, the deal would have gone up in smoke. My guess is that, if another OECD country had also been competing for the contract, the organisation would have held all the member countries to its usual standards, allowing China to grab the advantage.
As long as emerging economic forces, including India and Brazil as well as China, are able to use their “developing” status to enable their companies to undercut foreign competition, they will have little incentive to join the OECD club. The OECD ought to allow all member countries in direct competition with these non-member countries to match their terms. Until the Chinese government steps back and lets its companies fight on their own, other governments, including Uncle Sam, will have to step up.
Without its outsider advantage, joining the organisation would benefit China itself as much as it would benefit current members, and rules of fairness could once again prevail.
But for the U.S., this strategy poses a sensitive problem, given that we currently owe China about $900 billion. If we start using that borrowed money to take business away from Chinese companies, China’s government will be a lot less eager to hand over any more cash. This is just one of many reasons why we need to bring our national spending back in line with what we can actually afford.
The road to integrating new economic powers into trade agreements among established developed nations will be a long one, but the Ex-Im Bank and the OECD’s decisions represent an important early victory. Eswar Prasad, a professor of trade policy at Cornell University and former head of the International Monetary Fund’s China division, told The Wall Street Journal, “Anytime the U.S. wins a trade case…it opens the door for other countries.” It’s time now for the rest of the world to step through that open door.
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.