Tag: south korea

Finally, a Breakthrough on the Colombia Trade Agreement

To no great surprise, the Obama administration announced today that it has cut a deal with the government of Colombia to address concerns about labor protections and to finally move toward enacting the long-stalled free-trade agreement between our two countries. This is welcome news for trade expansion and for strengthening our ties to a key Latin American ally.

Colombian President Juan Manuel Santos is expected to arrive later this week in Washington to cement the deal. In exchange for the agreement, Colombia has reportedly agreed to expand its efforts to protect union members from violence and to more vigorously prosecute those responsible.

As my Cato colleague Juan Carlos Hidalgo and I documented in a Cato study earlier this year, concerns about labor protections were never a valid reason for holding up this agreement. The overall murder rate in Colombia has declined dramatically in the past decade, and the murder rate against members of labor unions has declined even more rapidly. A union member in Colombia today is one-sixth as likely to be a victim of homicide as a fellow citizen who does not belong to a union. Meanwhile, the Colombia government has increased convictions for homicides against union members by eight-fold in the past three years.

As Democratic Senators John Kerry and Max Baucus pointed out in an op-ed this week that endorsed the agreement, the International Labor Organization has certified that Colombia is complying with its international labor agreements.

The obstacle of labor violence was just a political smokescreen that had been raised by labor-union leaders in the United States looking for any shred of an argument to oppose the agreement. Even the agreement announced this week is not going to win over the AFL-CIO. The Colombia government could have raised a hundred murdered union members from the dead, and organized labor in American would still chant that not enough was being done.

The breakthrough this week clears the path for Congress to approve, by what I predict will be comfortable bipartisan majorities, the pending trade agreements with Colombia, Panama, and South Korea.

Who Should Defuse the Korean Bomb?

Fear of war has become a new constant for the Korean peninsula.  On Monday South Korea initiated a military exercise in the Yellow Sea and North Korea threatened to retaliate.  Seoul went ahead without any response from the North, but the region retains the feel of a bomb with an unstable fuse.

In the short term Washington has no choice but to uphold its alliance obligations to the South.  However, Pyongyang’s increasingly erratic behavior offers a dramatic reminder of the most important cost of the unilateral security guarantee:  the threat of war.

The alliance was created at a different time in a different world—1953, after the conclusion of a war which had devastated the peninsula.  Only U.S. military support preserved South Korea’s independence.  Since then the South has developed economically and is well able to protect itself.  The U.S. should begin turning over defense responsibilities to Seoul, with an expeditious withdrawal of all American troops.  The defense treaty, with America’s promise to forever guard the South, irrespective of circumstance, should be turned into a framework for future cooperation in cases of mutual interest.

The U.S. no longer can afford to maintain Cold War alliances as if the Cold War still existed.  Commitments like that to South Korea are expensive, since they drive America’s military budget.  More important, as we see in Northeast Asia, alliances also increase the possibility of war for the U.S.  It is time to update America’s military commitments to reflect today’s world.

Lies, Damned Lies, and Trade Statistics

If you want to understand how global integration and cross-border investment have left U.S. trade policy in need of a new purpose, check out today’s Wall Street Journal article about the Apple iPhone’s complex production-supply chain.  (And then see this analysis for more depth and detail.) The story is both testament to the benefits of globalization and the latest indictment of a decrepit international trade flow accounting system that nourishes misleading trade skeptics and misinforms policy.

Following in the footsteps of a groundbreaking and widely-cited 2007 UC-Irvine study, which disaggregated the components of a Chinese-assembled Apple iPod and assigned its constituent value to the companies and countries responsible for their production, two researchers at the Asian Development Bank Institute applied a similar analysis to the Apple iPhone. Like the UC-Irvine iPod study before it, the ADBI analysis found that just a tiny fraction of the cost of producing the iPhone is Chinese value-added. The only Chinese input is labor, which is used to assemble the components manufactured in other countries. The value of that labor accounts for $6.50 or 3.6 percent of the total cost of $178.96 to produce an iPhone (about the same percentage as the iPod). The other 96.4 percent of that total is the cost of components produced (and the labor and overhead employed to produce those components) in Japan, Germany, South Korea, the United States, and several other countries. This breakdown is very similar to that found for the iPod in 2007, and the punch lines are identical.

While firms in Japan and Germany account for the most expensive parts (and quite obviously benefit from the advent of the iPhone), most of the value of the iPhone (like the iPod) accrues to Apple, which reaps the lion’s share of the approximately 100 percent markup. When iPhones sell for $399 in the United States, the difference between that retail price and the $178.96 cost of production goes to retailers, distributors, marketers, other firms in the supply chain, and to Apple, which distributes some earnings to its shareholders and retains some for research and development, supporting engineering and design jobs higher up the value chain so that the virtuous circle can continue.

Rather than appreciate how this complementary process harnesses the benefits of our globalized division of labor, some begrudge iPod and iPhone sales in the United States for adding to the bilateral trade deficit. Technically, for every $399 iPhone sold in the United States, the U.S. bilateral trade deficit with China increases by $178.96. Even though only $6.50 of that iPhone is Chinese value, under our antiquated, pre-globalization, method of tallying a nation’s imports and exports, the entire $178.96 is chalked up as an import from China because that was the product’s final point of assembly. According to the authors of the ADBI study, iPhones added $1.9 billion to the politically volatile U.S. trade deficit with China in 2009. Alas, this is the basis of the claim—popular among the most shameless trade critics—that America has a “high-tech” trade deficit with China.

Should we lament a trade deficit in iPhones or any other products assembled abroad, particularly when those products comprise U.S. value-added and support high-paying U.S. jobs? I think not.  As I wrote last year:

U.S. factories and workers are more likely to be collaborating with Chinese factories and workers in production of the same goods than they are to be competing directly. The proliferation of vertical integration (whereby the production process is carved up and each function performed where it is most efficient to perform that function) and transnational supply chains has joined higher value-added U.S. manufacturing, design, and R&D activities with lower-value manufacturing and assembly operations in China. The old factory floor has broken through its walls and now spans oceans and borders. Though the focus is typically on American workers who are displaced by competition from China, legions of American workers and their factories, offices, and laboratories would be idled without access to complementary Chinese workers in Chinese factories. Without access to lower-cost labor in places like Shenzhen, countless ideas hatched in U.S. laboratories—which became viable commercial products that support hundreds of thousands of jobs in engineering, design, marketing, logistics, retailing, finance, accounting, and manufacturing—might never have made it beyond conception because the costs of production would have been deemed prohibitive for mass consumption. Just imagine if all of the components in the Apple iPod had to be manufactured and assembled in the United States. Instead of $150 per unit, the cost of production might be multiple times that amount.

Consider how many fewer iPods Apple would have sold; how many fewer jobs iPod production, distribution, and sales would have supported supported; how much lower Apple’s profits (and those of the entities in its supply chains) would have been; how much lower Apple’s research and development expenditures would have been; how much smaller the markets for music and video downloads, car accessories, jogging accessories, and docking stations would be; how many fewer jobs those industries would support; and the lower profits those industries would generate. Now multiply that process by the hundreds of other similarly ubiquitous devices and gadgets: computers, Blu-Ray devices, and every other product that is designed in the United States and assembled in China from components made in the United States and elsewhere.

The Atlantic’s James Fallows characterizes the complementarity of U.S. and Chinese production sharing as following the shape of a “Smiley Curve” plotted on a chart where the production process from start to finish is measured along the horizontal axis and the value of each stage of production is measured on the vertical axis. U.S. value-added comes at the early stages—in branding, product conception, engineering, and design. Chinese value-added operations occupy the middle stages—some engineering, some manufacturing and assembly, primarily. And more U.S. value-added occurs at the end stages in logistics, retailing, and after-market servicing. Under this typical production arrangement, collaboration, not competition, is what links U.S. and Chinese workers.

The proliferation of cross border investment and global production-supply chains is a major reason the world averted a global trade war of 1930s proportions during and in the wake of the recession, as described in this paper; it explains why Chinese currency appreciation between 2005 and 2008 did not reduce the U.S. trade deficit with China during that period, and why Yuan appreciation, alone, going forward will have no discernible impact on the deficit in this paper; and, it explains why the world should rejoice in China’s becoming the world’s largest exporter in 2009, in this oped.

Global integration requires new thinking about trade statistics, which should be reported on a constituent value-added basis, if at all.  It also requires that trade policy get with the times and consist of goals that are not mired in the old  “Us” versus “Them” way of thinking.  Relying on old-fashioned trade statistics for 21st century policy decisions is a recipe for disaster.

Are Tea Partiers Anti-trade?

Where will the new Tea-Party-backed members of Congress come down on trade issues, such as the newly revised trade agreement with South Korea or the next farm bill?

Those elected to the House are the biggest question marks because very few of them have had to think much about trade, never mind actually cast a vote on it. In an op-ed in the Philadelphia Inquirer this week, I try to discern what direction the new members will take the generally pro-trade Republican Party, and which direction they should take it in light of the movement’s free-market, limited-government principles.

For my full take, see “Are Tea Partiers Anti-trade?”

Promoting Free Trade—Sort Of

The U.S. and South Korean governments have agreed to changes in the free trade agreement negotiated by the Bush administration. The president rightly lauded the FTA as a good deal for Americans:

“This agreement shows the U.S. is willing to lead and compete in the global economy,” the president told reporters at the White House, calling it a triumph for American workers in fields from farming to aerospace.”

Approving the FTA has taken on added urgency after the European Union negotiated a similar accord with the South. Once that agreement takes effect, Europeans would have better access than Americans to the world’s 13th largest economy. Protectionism is always foolish, but especially so when one’s competitors are promoting open markets.

The accord also offers important geopolitical benefits. With much nervousness in the U.S. and throughout East Asia over an increasingly assertive China, Washington should work to break down barriers to Americans trading with China’s neighbors. Already Koreans do more business with China than the U.S. While the FTA won’t reduce the appeal of products from next door China in South Korea, it will allow American producers to compete more freely in that market.

The president deserves credit for pushing the agreement forward, but he also needlessly held up ratification by two years. Moreover, his “fix” punishes American consumers. As the official government fact sheet explains:

Car Tariff Elimination: The 2007 agreement would have immediately eliminated U.S. tariffs on an estimated 90 percent of Korea’s auto exports, with remaining tariffs phased out by the third year of implementation. The 2010 supplemental agreement keeps the 2.5 percent U.S. tariff in place until the fifth year. At the same time, Korea will immediately cut its tariff on U.S. auto imports in half (from 8 percent to 4 percent), and fully eliminate that tariff in the fifth year.

Truck Tariff Elimination: The 2007 agreement would have required the United States to start reducing its tariff on Korean trucks immediately and phase it out by the agreement’s tenth year. The 2010 supplemental agreement allows the United States to maintain its 25 percent truck tariff until the eighth year and then phase it out by the tenth year – but holds Korea to its original commitment to eliminate its 10 percent tariff on U.S. trucks immediately.

That is, the Obama administration forced a delay in the reduction of U.S. auto tariffs. This obviously hurts Korean exporters, but the highest price will be paid by American consumers. The provision is simply a special interest payoff to the auto industry, which already has benefited from a big federal financial bail-out. So much for bringing “change” to Washington.

Free trade is good for Americans. That means bringing down foreign trade barriers. It also means bringing down U.S. trade barriers.

Beijing Key in Controlling North Korea’s Recklessness

Shortly after unveiling a new uranium enrichment facility, North Korea has shelled a disputed island held by the Republic of Korea.  A score of South Koreans reportedly were killed or wounded.

These two steps underscore the North’s reputation for recklessness.  Unfortunately, there is no easy solution: serious military retaliation risks full-scale war, while intensified sanctions will have no impact without China’s support.

Instead, the U.S. should join with the ROK in an intensive diplomatic offensive in Beijing.  So far China has assumed that the Korean status quo is to its advantage.  However, Washington and Seoul should point out that Beijing has much to lose if things go badly in North Korea.

The North is about to embark on a potentially uncertain leadership transition.  North Koreans remain impoverished; indeed, malnutrition reportedly is spreading.  With the regime apparently determined to press ahead with its nuclear program while committing regular acts of war against the South, the entire peninsula could go up in flames.  China would be burned, along with the rest of North Korea’s neighbors.

The U.S. also should inform Beijing that Washington might choose not to remain in the middle if the North continues its nuclear program.  Given the choice of forever guaranteeing South Korean and Japanese security against an irresponsible North Korea, or allowing those nations to decide on their own defense, including possible acquisition of nuclear weapons, the U.S. would seriously consider the latter.  Then China would have to deal with the consequences.

Beijing’s best option would be to join with the U.S. and South Korea in offering a package deal for denuclearization, backed by effective sanctions, meaning the cut-off of Chinese food and energy assistance.  Otherwise, Beijing might find itself sharing in a future North Korean nightmare.

President Obama Represents UAW Rather Than U.S. in Korea Trade Talks

This has been a tough month so far for President Obama and his policies.

After the “shellacking” that he, his party, and his domestic policies suffered at the hands of American voters last week, his international economic policies were no more popular among his counterparts at the G20 summit this week in Seoul, South Korea.

Even the sympathetic editors at the New York Times declared in a front-page (print edition) headline this morning: “Obama’s Economic View Is Rejected on World Stage: China, Britain and Germany Challenge U.S.—Trade Talks with Seoul Fail, Too.”

The other leaders at the summit were right to reject the president’s demands that China be singled out for its currency policies, as I’ve written before, and the South Korean government was right to reject his demands for changes in the U.S.-Korea trade agreement that has been waiting for more than three years for congressional approval.

Although not perfect, the U.S.-Korea agreement is a solid step forward. As my Cato colleague Doug Bandow wrote in a recent study, the agreement would sharply reduce trade barriers between our two nations while deepening our commercial and security ties with a key democratic ally in the Asian Pacific.

The Koreans rightly refused to substantially alter the sections of the agreement relating to automobiles. The agreement would eliminate tariffs on all automobile trade between the two countries. Ford, Chrysler, and the United Auto Workers union oppose the deal, claiming that it does not address non-tariff barriers that allegedly hinder U.S. exports to the Korean market.

As I posted in this space a few days ago, there are perfectly normal market reasons why Americans buy a lot more Korean cars than vice versa. The real agenda of Ford, Chrysler, and the UAW is not to gain greater access to the Korean market, but to prevent any greater access of their Korean competitors to the U.S. market.

The talks in Seoul this week reportedly foundered on the specific U.S. demand that Korea relax its emission and mileage standards so that U.S. automakers can more easily modify their cars for the Korean market. How ironic. It has become part of the Democratic mantra on trade that agreements must strengthen the environmental and labor standards of our trading partners. Yet here U.S. negotiators were strong-arming the Korean government to weaken its own standards while the Obama administration seeks to impose higher mileage and emission standards on cars sold in the United States.

There is still time to save the U.S.-Korea agreement and to present it to the potentially more trade-friendly Congress that will convene in January. But for now, President Obama has chosen to serve the narrow interests of two domestic automakers and their union rather than the overall economic and strategic interests of the American people.