Tag: world trade organization

Pearlstein Wants Tough Trade Measures Against China…and the U.S.

Steven Pearlstein’s ready for the nuclear option.  With the conviction of a man who knows he won’t be held accountable for the consequences of his prescriptions, Pearlstein says the time has come for action against China.  Hopefully, those whose fingers are actually near the button will recognize Pearlstein’s suggestion for what it is: an outburst of frustration over what he considers China’s insubordination.

In his Washington Post business column yesterday, Pearlstein criticizes U.S. policymakers for blindly adhering to the view that China will inevitably transition to democratic capitalism, while they’ve excused market-distorting protectionism, mercantilism, and state dominance over the economy in China.  Pearlstein writes:

Up to now, a succession of administrations has argued against directly challenging China over its mercantilist policies, figuring it would be more effective in the long run to let the economic relationship grow deeper and give the Chinese the time and respect their culture demands to make the inevitable transition to democratic capitalism.

What we have discovered, however, is that the Chinese don’t view the transition as inevitable and that, in any case, they really aren’t much interested in relationships. If anything, they’ve proven to be relentlessly transactional. And their view of business and economics remains so thoroughly mercantilist that they not only can’t imagine any other way, but assume that everyone else thinks the way they do. To try to convince them otherwise is folly.

Pearlstein’s suggestion that the Chinese “aren’t much interested in relationships” strikes me as frustration over the fact that China is no longer a U.S. supplicant.  Perhaps the truth is that China isn’t much interested in a one-way relationship, where it is expected to meet all U.S. demands, while seeing its own wishes ignored.  Calling them “relentlessly transactional” is accusing them of naivety for missing the bigger picture, which, for Pearlstein, is that the U.S. is still top dog and China ignores that at its peril. 

Pearlstein is not the first columnist to criticize the Chinese government for putting its interests ahead of America’s (or, more accurately, putting what it believes to be its best interests ahead of what U.S. policymakers believe to be in their own interests).  In a recent Cato policy paper titled Manufacturing Discord: Growing Tensions Threaten the U.S.-China Economic Relationship, I was addressing opinion leaders who have staked out positions similar to Pearlstein’s when I wrote:

Lately, the media have spilled lots of ink over the proposition that China has thrived at U.S. expense for too long, and that China’s growing assertiveness signals an urgent need for aggressive U.S. policy changes….

One explanation for the change in tenor is that media pundits, policymakers, and other analysts are viewing the relationship through a prism that has been altered by the fact of a rapidly rising China.  That China emerged from the financial meltdown and subsequent global recession wealthier and on a virtually unchanged high-growth trajectory, while the United States faces slow growth, high unemployment, and a large debt (much of it owned by the Chinese), is breeding anxiety and changing perceptions of the relationship in both countries….

Of course, the U. S. is the larger economy and the chief designer of the still-prevailing global economic architecture.  But the implication that that distinction immunizes the U. S. from costly repercussions if U.S. sanctions were imposed against China is foolish.  But that’s exactly where Pearlstein’s going when he writes:

Getting this economic relationship back into balance is the single biggest challenge to the global economy, not just because of its direct effects on China and the United States, but the indirect effects it has on the rest of the world. The alternative is a return to living beyond our means, a further erosion of our industrial and technological base and a continued loss of ownership of business and financial assets.

By balancing the economic relationship, presumably Pearlstein is speaking about the need to reduce the bilateral trade deficit, which spurs a net outflow of dollars to China, some of which the Chinese lend back to Americans, who in turn can then buy more imports from China, and the cycle continues.  But to tip the scales in favor of the blunt force action he recommends later, Pearlstein characterizes Chinese investment in the United States as living beyond our means, losing ownership of “our” assets, and eroding our industrial and technological base.  That is a paternalistic and inaccurate characterization of the dynamics of capital inflows from China.

First, let’s remember that the Chinese aren’t holding a gun to the heads of the chairs of our congressional appropriations committees demanding that politicians borrow and spend more on senseless programs.  It’s absolutely priceless when spendthrift members of Congress, oblivious to the irony, blame the Chinese for having caused the U.S. financial crisis for providing cheap credit to fuel asset bubbles when it was their own profligacy that brought the Chinese to U.S. debt markets in the first place.  Stop deficit spending and the need to borrow from China (or anywhere else) goes away. 

Likewise, it is a sad commentary on the state of individual responsibility in the U.S. when a prominent business writer thinks the only way to keep consumers from living beyond their means is to deprive their would-be-creditors of capital.  It sounds a bit like the same tactics deployed in the U.S. War on Drugs.  Blame the suppliers.  The fact that U.S. savings rates have been rising for two years suggests that responsible Americans are interested in rebuilding their assets without need of such measures.

There are other destinations for capital inflows from China, which (despite Pearlstein’s disparaging allusions) should be entirely unobjectionable.  Chinese investment in U.S. corporate debt, equities markets, real estate markets, and direct investment in U.S. manufacturing and services industries does not erode our industrial and technological base.  It enhances it.  It does not constitute a loss of ownership of business and financial assets, but rather a mutual exchange of assets at an agreed price.  When Chinese investors compete as buyers in U.S. markets, the value of the assets in those markets rises, which benefits the owners of those assets when there is an exchange.  Chinese purchases of anything American, with the exception of debt, do not constitute claims on the future.  Accordingly, the economic relationship can achieve the much vaunted need for rebalancing without need of attempting to forcefully reduce the trade deficit by restraining imports.

Pearlstein continues:

So if the urgent need is to rebalance the global economy by rebalancing the U.S.-China economic relationship, we are probably going to have to begin this process on our own. And that means establishing some sort of tariff regime that will increase the cost of imports not just from China, but other countries that keep their currencies artificially low, restrict the flow of capital or maintain significant barriers to imports of goods and services. The proceeds of those tariffs should be used to encourage exports in some fashion…

This relationship, however, is one that must be actively managed by the two governments. It should be obvious by now that their government is rather effective at managing their end of things. It should be equally obvious that we cannot continue to rely on free markets to manage our end.

So Pearlstein comes full circle.  He wants the U. S. to impose tariffs on Chinese imports, subsidize U.S. exports, and institute top-down industrial policy.  In other words, he wants the U.S. to be more like China. 

Of course, I would argue, we already have something that encourages exports.  They’re called imports.  Over half of the value of U.S. imports are intermediate goods—capital equipment, components, raw materials—that are used by American-based producers to make goods for their customers in the U. S. and abroad.  Furthermore, foreigners need to be able to sell to Americans if they are going to have the dollars to buy products from Americans.  And finally, if the U.S. implements trade restrictions on China to compel currency revaluation or anything else, retaliation against U.S. exports is a given.

In short, imports are a determinant of exports.  If you impede imports, you impede exports.  So Pearlstein’s idea that we can somehow subsidize exports by taxing and reducing imports is not particularly well-considered.  And though it may be tempting to look at China’s economic success as an endorsement or vindication of industrial policy, it is difficult to discern how much of China’s growth can be attributed to central planning, and how much has happened despite it.  But in the U.S., where one of our unique and core strengths has been the relative dynamism that has produced more inventions, more patents, more actionable industrial ideas, more freeedom, and more wealth than at any other time in any other nation-state in the world, it would be imprudent bordering on reckless to suppress those synergies in the name of industrial policy.

In the end, I rather doubt that Pearlstein is truly on board with the course of action he suggests.  In response to a question presented to him on the Washington Post live web chat yesterday about how the Chinese would react if his proposal were implemented, Pearlstein wrote:

They’d make a huge stink. They’d cancel some contracts. They’d slap on some tariffs of their own. They’d launch an appeal with the World Trade Organization. It would not be costless to us – getting into fights never is. But after a year, once they saw we were serious, they would find a way to begin accomodating [sic] us in significant ways, and if we respond with a positive tit for tat, things could finally improve. They’ve been testing us for years and what they discovered was that we were easy to push around. So guess what – they pushed us around.

I’m willing to chalk up Pearlstein’s diatribe to pent-up frustration.  But let me end with this admonition from that May Cato paper:

 [I]ndignation among media and politicians over China’s aversion to saying “How high?” when the U.S. government says “Jump!” is not a persuasive argument for a more provocative posture.  China is a sovereign nation.  Its government, like the U.S. government, pursues policies that it believes to be in its own interests (although those policies—with respect to both governments—are not always in the best interests of their people).  Realists understand that objectives of the U.S. and Chinese governments will not always be the same, thus U.S. and Chinese policies will not always be congruous.  Accentuating and cultivating the areas of agreement, while resolving or minimizing the differences, is the essence of diplomacy and statecraft.  These tactics must continue to underpin a U.S. policy of engagement with China.

Brazil Caves

Notwithstanding the efforts of four brave congressmen, the belated concession to reality by House Agriculture Committee Chairman Collin Peterson, and the misgivings of trade analysts including myself, it appears that the “temporary” deal struck by Brazil and the United States in April to ward off Brazil’s retaliation for WTO-illegal U.S. cotton supports is here to stay:

The government said a deal agreed between the two countries in April to head off up to $829 million in World Trade Organization-sanctioned retaliation against U.S. goods would stay in place until a new U.S. farm bill is passed [in 2012]…

“Brazil doesn’t rule out taking countermeasures at any moment,” Roberto Azevedo, Brazil’s envoy to the World Trade Organization, told reporters in Brasilia. “It is just a suspension of this right”.

He said Brazil could retaliate at any time if the United States did not uphold the agreement, but added that Brazil had no interest in retaliating.

“This process of negotiation and reform is better than retaliation that doesn’t bring benefits to anyone in Brazil’s private sector.” [Reuters]

You will recall that the deal includes about $147 million worth of taxpayers’ money given to Brazilian cotton farmers in the form of “technical assistance,” just so we can continue our own insane cotton support programs without fear of U.S. exporters (including holders of patents and copyrights) being hit by retaliatory trade barriers and unpunished piracy.

Brazil in some senses has the right idea, of course. They recognize, correctly, that retaliation in the form of increased tariffs on American imports only hurts their own consumers, hence their stated desire for “negotiation and reform” instead of santions.  But they sure do have a lot of faith in the willingness of Congress to enact reform without serious pressure from, among others, aggrieved trade partners.

I hope their faith and saint-like patience is rewarded. In the meantime, we have (at least) two more years of subsidizing Brazilan farmers in addition to our own.

Senate Climate Bill Trade FAIL

The Kerry-Lieberman-Graham (is he still part of these efforts?) climate bill summary has been leaked. I’m sure my colleague Pat Michaels will weigh in on its contents soon, but in the meantime I thought I would comment on the trade-related aspects of the bill, or at least the summary that is now in the public domain.

As Scott Lincicome points out, the drafters have gone to great pains to emphasize that this bill is, like, totally about saving the environment.  (Which, by the way, is a bit of a turnaround). I’ve blogged before about why advocates of “border adjustment measures” need to be careful about the justification they offer.  In short, the World Trade Organization does not look too kindly upon disguised protectionism, and any legal challengers would probably use things like, say, press releases touting the (traditional) protective benefits of carbon tariffs as evidence of U.S. wrongdoing. The House bill fell short in that regard, with lots of talk about equalizing costs etc, and apparently the sponsors of the Senate bill have learned from warnings from trade experts. Not completely, though. Here’s Scott on their efforts to be more careful, and why they fall short:

The bill’s short summary (available here) also follows [a] new “green” road-map…:

In order to protect the environmental goals of the bill, we phase in a WTO-consistent border adjustment mechanism. In the event that no global agreement on climate change is reached, the bill requires imports from countries that have not taken action to limit emissions to pay a comparable amount at the border to avoid carbon leakage and ensure we are able to achieve our environmental objectives.

You couldn’t shoehorn more “environmental” references into this summary if you tried.  Only one small problem: this strictly “environmental” summary falls clearly under the main heading “Expanding America’s Manufacturing Base,” and the long summary of Sections 775-777 above comes under the main heading “Subtitle A - Protecting American Manufacturing Jobs and Preventing Carbon Leakage.”  So did the Senate drafters really just take all that time purging all of the scary “competitiveness” language from their new bill’s carbon tariffs provisions, only to keep them under a legislative subtitle that expressly denotes provisions dealing with domestic industrial competitiveness?

Scott’s right, but I found the heading in the bill’s long summary even more blatant: Title IV, under which the international provisions are explained, is called “Job Protection and Growth”. Call me overly cautious, but I don’t think having the phrase “job protection” as the first words in the title on border measures is a good way to hide your intent from the WTO or, for that matter, your increasingly-fractious trade partners.

Peterson (Finally) Changes His Tune

I’ve written before about Rep. Collin Peterson’s (D, MN) disdain for the World Trade Organization, and its rulings against U.S. farm programs. However, in launching his 2012 Farm Bill listening tour, the Brownfield blog reports that he sees that perhaps some changes might be necessary after all. And, lo and behold, he cites the WTO rulings as the reason:

One of the key issues [in the 2012 Farm Bill] will be what to do about the way that cotton farmers are subsidized. The committee’s chairman, Rep. Collin Peterson, D-Minn., said today that the cotton program will have to be overhauled in the wake of Brazil’s successful challenge to the subsidies at the World Trade Organization. The Obama administration agreed to change the program in a deal to avert retaliation against U.S. exports to Brazil. [link added]

Subsidies for cotton currently mirror those for corn, soybeans, wheat and other commodities, but there’s no reason why they have to be the same for each crop in the future, said Peterson. “In the past we’ve tried to have a one-size-fits-all approach, but maybe that’s not the case in the future. I’m willing to consider that,” he said. “If we don’t address it, we may be back in the soup again with potential retaliation issues.” [emphasis mine]

Finally, the penny drops.

Was Bill Clinton Also an “Extremist” on Trade?

This has not been a good week for the national Democratic Party. Along with losing the Massachusetts Senate seat, the party took another step toward making hostility to trade liberalization a plank of party orthodoxy.

As my Cato colleague Sallie James flagged earlier today, the Democratic Congressional Campaign Committee issued a press release yesterday criticizing a Republican candidate in upstate New York for contributing to the Cato Institute. And, of course, everyone knows that Cato is “a right wing extremist group that has long been a vocal advocate for extremist, unfair trade policies that would allow companies to ship American jobs overseas.”

Among our sins, in the eyes of the DCCC, is that Cato research has supported tariff-reducing trade agreements, such as the North American Free Trade Agreement (NAFTA). Our work has also advocated unilateral trade liberalization—getting rid of self-damaging U.S. trade barriers regardless of what other countries do—which violates the conventional Washington wisdom that we can’t lower our own barriers without demanding “reciprocity” and “a level playing field” from other nations

There is nothing extreme about our work on trade. It fits comfortably within mainstream economics expounded not only by Adam Smith and Milton Freidman but by such liberals as Paul Samuelson and Larry Summers.

In fact, for decades, the Democratic Party embraced lower barriers to trade:

  • In the 1930s and ’40s, President Franklin Roosevelt and his Nobel-Peace-Prize-winning Secretary of State Cordell Hull lead the United States away from the disastrous protectionism of President Hoover and a Republican Congress.
  • Democratic Presidents Kennedy, Johnson, and Carter all supported successful agreements in the General Agreement on Tariffs and Trade to reduce trade barriers at home and abroad.
  • Bill Clinton, the only Democrat to be re-elected president since FDR, persuaded a Democratic Congress to enact NAFTA in 1993 and the Uruguay Round Agreements Act in 1994, which created the World Trade Organization. Clinton also championed permanent normal trade relations with China in 2000, which ushered that nation into the WTO.
  • In the previous Congress, scores of House Democrats co-sponsored “The Affordable Footwear Act,” which would have unilaterally lowered tariffs on imported shoes popular with low-income Americans. Liberal Democrat Earl Blumenauer of Oregon visited the Cato Institute in July 2008 to speak in favor of the bill. (Will he be the next target of a DCCC press release for cavorting with “extremists”?) In the current Congress, a similar bill in the Senate is currently co-sponsored by such prominent Democrats as Dick Durban (Ill.), Chuck Schumer (N.Y.), and Mary Landrieu (La.).

To learn more about why Democrats (and Republicans) should support free trade, I highly recommend two books: Mad about Trade: Why Main Street America Should Embrace Globalization, by yours truly; and Freedom From Want: Liberalism and the Global Economy, by Edward Gresser, a trade expert with the Democratic Leadership Council.

Tuesday Links

  • Afghanistan: A war we cannot afford. “Democrats say raise taxes. Republicans say no worries. The best policy would be to scale back America’s international commitments.”

The Odd Couple

Well, here’s an interesting pair. Today’s Washington Post contains an op-ed on climate change and trade, written jointly by Fred Bergsten, director of the Peterson Institute of International Economics, and Lori Wallach, director of Global Trade Watch at Public Citizen. 

The authors readily admit, quite early in the piece, that they are usually on opposing sides of the trade debate.  The Peterson Institute scholars are well-known and well-respected advocates of freer international trade. Global Trade Watch, and Wallach in particular? Not so much. She has called NAFTA a “disastrous experiment” and has a special section on her website calling on people to Take Action! on trade (example: by hosting a house party to celebrate the tenth anniversary of ” the historic 1999 Seattle protest victory of people power over corporate rule.”)

Yet here they are, claiming to agree on “a suprising number of aspects of the climate change debate and on the related need to overhaul global trade negotiations.” I am still trying to make sense of the op-ed, because it lurches around a bit, and to work out exactly how deep the agreement of these strange bedfellows really is. But for now, let me comment briefly on what I think is the main thrust of their op-ed: a proposal for launching a new round of trade talks.

The authors point out that a new treaty on global warming would “require new trade rules in intellectual property, services, government procurement and product standards.” So, hey, why not combine that into trade talks?The Obama Round (as if Obama-worship has not gone far enough) “would include, as a centerpiece, addressing these potential commercial and climate trade-offs and updating the negotiating agenda.”

That, quite frankly, would be fatal for the World Trade Organization. Developing countries, now in the majority in the WTO, are in general very resistant to the idea of bringing extraneous issues into its agenda (witness constant struggles over linking trade to labor and environment issues, to name just two). More to the point, we already have a round in progress. The Doha round has been struggling over old-fashioned trade concerns like tariffs and subsidies (remember them?)  since launching in 2001. The risks of overburdening the WTO agenda are, in my opinion, far greater than the possible benefits. It’s fairly clear to me why Wallach would advocate a new round full of poison pills, but not so clear why Bergsten would put his name to such a suggestion.

It’s not even clear to me that such an approach would “help the environment.” Why the optimism about the possibility of agreement under the auspices of the WTO when negotiations in forums designed explicitly and solely for the purpose of halting climate change have been unsuccessful?

( Speaking of which, expectations for a breakthrough at the upcoming Copenhagen conference on climate change are being rapidly scaled back, with talk of an “interim” agreement — likely some anodyne political statement — rather than the final deal that environmental groups had hoped for. The international diplomacy circus rolls on, though: conferences are planned for Mexico and South Africa — talk about a carbon footprint! — next year.)

For my take on the climate change and trade debate, the solution to which does not involve launching an Obama Round, see here.