Tag: bilateral trade

China Bill All about Saving Lawmakers’ Jobs

The House is expected to vote today on a bill that would allow U.S. companies to petition the Commerce Department for protective tariffs against imports from countries with “misaligned currencies.” Everybody knows the bill is aimed squarely at China.

Advocates of the legislation say it is about jobs, and they are partly right. The bill is about saving the jobs of incumbent lawmakers who are desperate to appear tough on China trade, which they blame for the loss of U.S. manufacturing jobs.

As my colleague Dan Ikenson and I have argued at length, in blog posts, op-eds, and longer studies,

Let’s hope cooler, wiser heads in the Senate and the White House save us from this election-season folly.

A Trade Proposal Unworthy of an Economist

Just when you have a pretty good sense of who is dishing protectionist nonsense and from where, along comes Robert Aliber, who – according to the byline of his commentary in yesterday’s Financial Times – is professor emeritus of international economics and finance at the University of Chicago.  Et tu, Chicago?

Aliber considers the US-China trade imbalance unsustainable and, because the Chinese government continues to prevent the value of its currency from rising sufficiently, proposes that the United States impose an across-the-board duty of 10 percent on all Chinese imports, which (after 6 months) would ratchet up 1 percentage point per month every month until the Chinese trade surplus with the United States declines to $5 billion per month. 

We’ve heard this tune before – but from politicians who are presumably far less adept at economics than a University of Chicago economics professor ought to be.  Yet, even Chuck Schumer ultimately acknowledged the banality of his (and Lindsey Graham’s) thrice-introduced legislation to impose a 27.5 percent tariff on Chinese imports as a proxy and incentive for renminbi appreciation.

If Aliber limited his argument to the assertions that the bilateral imbalance is unsustainable and that the Chinese government should allow the value of the renminbi to be determined by supply and demand, I’d have much less to quibble with.  I’d still be plenty skeptical that bilateral trade accounting tells us anything meaningful in this age of cross-border investment and transnational production and supply chains.  I’d still break from the implication that balanced trade should be an objective of policy or that it is more important than economic growth. And I’d still remain unconvinced that an increase in the value of the renminbi alone would have much of an impact on bilateral trade flows.  But I’d agree that a market-determined exchange rate would increase the likelihood that investment, consumption, and production decisions would better reflect underlying conditions in labor, financial, and goods markets, and in that regard would be a more useful guidepost for informed decisionmaking.

But Aliber’s proposal – and the numerous fallacies upon which it is predicated – goes well beyond that point, and appears to be the product of something like acute tunnel vision.  He is so fixated on the bilateral trade account that nothing else – including the impact of his proposal on the economy broadly – commands his attention. 

Aliber utters all of the classic fallacies about the insidious impact of China’s currency on U.S. manufacturing; the leverage and sway China allegedly holds over U.S. policymakers, as our banker of last resort; and, how China caused our trade deficit by purchasing U.S. securities.  I disagree with all of those assertions, vehemently, and have explained why in various places, but I want to focus presently on his proposal, which is one of the worst ideas in circulation.

Consider this passage, which Aliber apparently considers evidence of the cleverness of his plan (but really exposes its inanity):

Because many Chinese exports contain large amouts of embedded imports, the 10 per cent import tariff in effect is a tax of more than 30 per cent on Chinese value added. With electronics and other high-tech exports, where the import content may be 70 or 80 percent of their value, the  10 per cent tariff might be equivalent to a tax of 60 or 80 per cent on Chinese content.

Neat.  But isn’t the fact that Chinese exports contain so much import content enough to soundly reject Aliber’s plan in the first place?  Has he forgotten that we don’t import dangling Chinese value added?  What we import are products, some of which comprise 20 percent Chinese value added, some 80 percent, and according to the most recent research, an average of about 50 percent Chinese value added.  And what does that mean?

It means that on average 50 percent of the value of components, raw materials, and labor embedded in the typical cargo container from China unloaded in Long Beach, California is other countries’ value added.  It means that slapping a duty on imports from China is the same as restricting imports from countries indiscriminately (I know, non-discrimination is what the GATT/WTO rules are all about, but you get my point). It means restricting our own exports to China, which are embedded in the “high-tech” products that we import from China. (High tech is in quotes because the category consists mostly of computers and electronics, like cell phones and iPods, but protectionists like to exaggerate the security angle of our alleged trade follies by pointing to a bilateral deficit in “high tech,” even though Chinese value-added in those goods is well below average, and our imports of them support high-paying U.S. jobs). 

Having obviously not read my new paper, Aliber still sees global commerce as a competition between “Us” and “Them.”  He writes: “It should not take long for the Chinese to learn that they are much more dependent on access to the US market than Americans are dependent on Chinese goods,” and goes on to say that Americans can make those product here or buy them elsewhere.  Of course we could get them elsewhere, but the fact that we prefer to get them from China means that there would be costs associated with switching sources. 

Aliber is a fixed-pie-kinda-guy who fails to recognize the enormous wealth that has been generated by the elimination of political, trade, communications, and transportation barriers, and the highly stratified division of labor this barrier erosion unleashed.  He fails to recognize that Chinese labor and American labor are more often complementary than competing, and that the factory floor has broken through its walls and now spans oceans and borders. 

Imposing 10 percent duties on products invented and designed in the United States, consisting of components produced in Japan, Singapore, Thailand, and the United States,  consuming Australian minerals in the production process and Chinese labor in the assembly process is akin to taking a sledge hammer to a random station along a traditional production-assembly line.  It impedes the production process and raises the cost of bringing products to consumers, inflicting damage that is felt at all nodes in the design/production/assembly/supply chain, including those in the United States.

It means making it more difficult to support higher value-added U.S. manufacturing and service activities because with uncertain or compromised access to lower cost component production and assembly operations in China, it will be more difficult for ideas hatched in American labs to come to fruition in the form of the next gadget or convenience or life-saving device.

China’s position as the final point of assembly in so many different supply chains, as evidenced by the fact that 50 percent of the value of its exports to the United States consists of Chinese material, labor, and overhead, means that the impact of currency appreciation on the bilateral trade account is uncertain.  A stronger renminbi vis-a-vis the dollar means that Americans should pay more for imports from China, but a stronger renminbi also means that Chinese-based producers/assemblers will pay less for imported raw materials and components, lowering their cost of production/assembly.  That cost savings should enable Chinese exporters to lower their prices to American consumers, possibly compensating entirely for the higher renminbi-dollar exchange rate.

Of course, there are plenty of other reasons to eschew Aliber’s proposal, not the least of which is the fact that it certainly would be found WTO-illegal and would invite discrimination against U.S. exporters.  Considering that increased U.S. exports – and not just reduced imports – can help reduce the bilateral deficit, it is curious that Aliber would propose a remedy that would likely curtail U.S. exports.  It would also raise costs throughout the supply chain directly, and by introducing enormous uncertainty into the trading system.

Now that he’s seen the light, maybe Chuck Schumer should give Aliber a call.

Is Buying an iPod Un-American?

We own three iPods at my house, including a recently purchased iPod Touch. Since many of the iPod parts are made abroad, is my family guilty of allowing our consumer spending to “leak” abroad, depriving the American economy of the consumer stimulus we are told it so desperately needs? If you believe the “Buy American” lectures and legislation coming out of Washington, the answer must be yes.

Our friends at ReasonTV have just posted a brilliant video short, “Is Your iPod Unpatriotic?” With government requiring its contractors to buy American-made steel, iron, and manufactured products, is it only a matter of time before the iPod—“Assembled in China,” of all places—comes under scrutiny? You can view the video here:

In my upcoming Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, I talk about how American companies are moving to the upper regions of the “smiley curve.” The smiley curve is a way of thinking about global supply chains where Americans reap the most value at the beginning and the end of the production process while China and other low-wage countries perform the low-value assembly in the middle. In the book, I hold up our family’s iPods as an example of the unappreciated benefits of a more globalized American economy:

The lesson of the smiley curve was brought home to me after a recent Christmas when I was admiring my two teen-age sons’ new iPod Nanos. Inscribed on the back was the telling label, “Designed by Apple in California. Assembled in China.” To the skeptics of trade, an imported Nano only adds to our disturbingly large bilateral trade deficit with China in “advanced technology products,” but here in the palm of a teenager’s hand was a perfect symbol of the win-win nature of our trade with China.

Assembling iPods obviously creates jobs for Chinese workers, jobs that probably pay higher-than-average wages in that country even though they labor in the lowest regions of the smiley curve. But Americans benefit even more from the deal. A team of economists from the Paul Merage School of Business at the University of California-Irvine applied the smiley curve to a typical $299 iPod and found just what you might suspect: Americans reap most of the value from its production. Although assembled in China, an American company supplies the processing chips, a Korean company the memory chip, and Japanese companies the hard drive and display screen. According to the authors, “The value added to the product through assembly in China is probably a few dollars at most.”

The biggest winner? Apple and its distributors. Standing atop the value chain, Apple reaps $80 in profit for each unit sold—an amount higher than the cost of any single component. Its distributors, on the opposite high end of the smiley curve, make another $75. And of course, American owners of the more than 100 million iPods sold since 2001—my teen-age sons included—pocket far more enjoyment from the devices than the Chinese workers who assembled them.

To learn a whole lot more about how American middle-class families benefit from trade and globalization, you can now pre-order the book at Amazon.com.

Springtime for U.S. Trade Policy?

In a Cato paper to be released on April 28 (here’s a link to related policy forum), Scott Lincicome and I explain how President Obama can help restore the pro-trade consensus in America. “How?” is one question, but a skeptic might also ask: Why would the president want to do that given his anti-trade campaign rhetoric and the preferences of many fellow Democrats in Congress for a moratorium on trade liberalization and a focus on enforcement?

The answer is quite simple: we believe the president understands the importance of both trade and U.S. trade leadership to the broader objectives of economic growth and good will among nations.  Since he is inevitably going to alienate some of the constituencies who helped get him elected by embracing trade openness, he could be forgiven for his perceived apostasy if he can articulate his rationale convincingly.

The most comprehensive and convincing articulation would begin with the moral case for free trade: that every American has the right to transact with whomever he chooses, regardless of the nationality or location of the other party.  Voluntary exchange between consenting parties is inherently fair, while government coercion in that process on behalf of some citizens at the expense of others is inherently unfair, inefficient, and subversive of the rule of law. We are not holding our breath that this president will make this principled case for free trade.  But his articulation of other pro-trade arguments, after so many years of hyperbole, myth-making and fear-mongering from his colleagues on Capitol Hill, could go a long way toward correcting and reversing Americans’ artificially-induced aversion to trade.

Why are we so sure that President Obama is going to embrace trade openness? Well, we’re not so sure, but it’s more than a hunch. Here are two broad reasons:

First, like all presidents in the modern era, Obama takes a national perspective on economic matters, and not a local or regional perspective, as most members of Congress do. Unlike a candidate or a member of the opposition party in Congress who is free to criticize the incumbent administration’s policy errors without having to seriously consider the pros and cons of the alternatives, the president has to concern himself with the consequences of policy changes. It’s potentially his mess to clean up. As a senator and presidential candidate, Obama promised to aggressively pursue remedies to China’s alleged currency manipulation. As president, Obama declined to act accordingly when given the explicit opportunity, knowing that provocation in that regard would inject more uncertainty into financial markets and could spark retaliation. A protectionist measure that briefly benefits producers in Illinois (which is why a Senator Obama might support it) could have consequences that penalize an array of interests across the country (which is why a President Obama might oppose it).

Second, President Obama—like all Democratic and Republican presidents in the post-WWII era—sees trade policy as a tool of foreign policy. And from his early trips abroad, Obama has learned that to many countries around the world, U.S. trade policy is the most consequential aspect of U.S. foreign policy. So a president who appears determined to repair the damage caused by eight years of unilateralist foreign policy can only embrace trade openness.

In our paper, Scott and I present several other reasons why we are “audaciously hopeful” that the president will help restore the pro-trade consensus. But some nascent support for our audacity can be found in the following examples:

1. President Obama spoke out against the protectionist Buy American provisions in the original “stimulus” package, and Congress subsequently removed its most egregiously protectionist aspects.

2. The president has encouraged Congress to resolve the Mexican trucking ban and bring the United States into compliance with its NAFTA commitments.

3. The Obama Treasury declined to label China a currency manipulator in its first semi-annual report on the topic

4. The president informed Mexican president Calderon last week that he did not think NAFTA would need to be reopened—contrary to his campaign rhetoric.

5. The president said as much to Canadian PM Stephen Harper back in February.

6. There are increasing signs of interest and promise from the White House and Congress that the long-frozen bilateral trade agreements with Colombia, Panama, and South Korea could start moving soon.

The pro-trade environment is not certain, and it could be fleeting, but there’s a case to be made that it’s not as dire as some predicted it would be. If the president intends to facilitate a liberal trade agenda, he should start laying the groundwork with strong pro-trade arguments now.

The Chinese Currency Issue Is No Longer

In its first statutory, semi-annual report on foreign currency practices, the Obama Treasury Department refrained from designating China a “currency manipulator,” further affirming the view that an aggressive, sticks-only approach to the bilateral trade relationship advocated (mostly) by campaigning politicians is simply untenable. After serving more than 5 years as a great source of bilateral trade tension, the Chinese currency issue is dead.

Senator Obama and presidential candidate Obama both talked tough about Chinese currency practices, identifying an undervalued yuan as a source of unfairness to U.S. producers and an important cause of the bilateral trade imbalance. Treasury Secretary-designate Geithner, during his confirmation hearing in January, reiterated President Obama’s commitment to dealing with the issue before the Senate Finance Committee:

President Obama - backed by the conclusions of a broad range of economists – believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices. While in the U.S. Senate he cosponsored tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles.

Those who relied on hyped-up media accounts of Geithner’s testimony, which generally homed in on the terms “aggressively,” “tough,” and “enforcement” in the above passage to imply that Obama would take action against China on this matter, are probably utterly surprised that Treasury balked yesterday. But those who read the rest of Geithner’s response to the question may have noticed this broad canvas for inaction:

The question is how and when to broach the subject in order to do more good than harm. The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.

Those last two sentences of Geithner’s response contained the answer—nearly three months beforehand—to the question of whether Treasury would label China a manipulator. And, taken in its entirety, the response is a perfect summation of the distinctions between criticizing policy as a challenger and being responsible for policy as the guy in charge. You can talk tough as a challenger because you don’t have to account for the consequences of your actions. But when you are responsible for the consequences of potentially incendiary policy changes, circumspection is a rediscovered virtue.

As President Obama knows by now, the consequences of simply labeling China a “currency manipulator” (let alone attempting to do something remedial about it) would undermine broader U.S.-China relations, invite recriminations, inspire potentially adverse policy changes in China, and would inject heaps of uncertainty into global currency and financial markets. Besides, as yesterday’s Treasury report concludes, the yuan continues to appreciate against the dollar, the government’s accumulation of foreign reserves has decelerated, and policies are in place to encourage greater domestic consumption in China and to reduce the economy’s reliance on exports.

I remain hopeful that this distinction between Obama the president and Obama the candidate will become and remain evident in U.S. trade policy more broadly.