Topic: International Economics and Development

U.S. Manufacturing Expands along with China’s Economy

Sen. Charles Schumer (D-N.Y.) renewed his threat this week to demand a vote in the Senate on legislation that would impose steep tariffs on imports from China if the Chinese government does not move promptly to strengthen its currency.

Like many other members of Congress, Schumer believes that China has “manipulated” the value of its currency in a way that makes Chinese goods artificially cheap in the U.S. market while discouraging U.S. exports to China. One result, according to Schumer, has been serious damage to America’s manufacturing base.

Three news items this week, though, should give Congress pause before it slaps tariffs on imports from China:

  • The latest reports from Beijing confirmed that China’s economy continues to grow rapidly. China’s economy reached an annualized growth rate of 11 percent in the second quarter and more than 10 percent for the first half of 2006. 
  • But China’s growth is not coming at the expense of the U.S. economy or U.S. manufacturing. The U.S. Federal Reserve Board of Governors reported this week that U.S. manufacturing output is up 5.7 percent so far in 2006 compared to a year ago. Indeed, according to a recent Cato study, U.S. manufacturing output is up 50 percent in the past 12 years along with our expanding trade with China.
  • The number of Internet users in China has reached 123 million. That gives China the second largest group of users in the world, behind the 200 million users in the United States.

Rapid economic growth in China is not coming at the expense of the U.S. manufacturing sector. But that growth is creating a growing middle class in China that is increasingly engaged not only in the global economy but in the global sharing of ideas.America’s economic relationship with China was the topic of a lively discussion at a Cato policy forum this week. You can view or listen to the event here.

Is That the Best You Can Do?

An update from my blog entry on Friday:  The G8 summit has not given any substantive support to the Doha round of trade talks that I can discern. The best the G8 leaders (minus Russia, who failed to convince the US to sign off on their membership application to the WTO) could do apparently was to issue a statement of encouragement to WTO members to keep negotiating, and a permission slip for the WTO Director-General, Pascal Lamy, to consult with members in the hope of promoting “early agreement” (this coming five years into the launch of the Doha round). The leaders gave Mr Lamy until mid-August to report back on his mission. Note that this call to unblock trade talks was from only developed members of the WTO: Brazil and India, the two most powerful developing members in the WTO, will meet with the G8 today and will no doubt have their own perspective.

The G8 leaders’ statement implied they had come to no agreement as to how to break the current stalemate over trade talks, and provides much less momentum than would have been hoped for. For a group calling for “utmost urgency” in concluding a deal, they sure seem reluctant to do any heavy lifting themselves.

Meanwhile…

Trade junkies will have already read countless articles about the all-but-certain failure of the Doha round of trade talks, so I won’t add to the pile. Nor will I spoil the fun of reading my op-ed in today’s Washington Times (note to the observant: the lede grew stale while the piece awaited publication) on the myriad reasons why failure is such a shame.

But there is more going on in trade circles than the Doha round. Here’s a digest of other developments, some good and some not so good:

  • Firstly, the United States is hoping to conclude a bilateral agreement with Russia on its entry into the WTO, hopefully in time for a great photo opportunity on the margins of the G8 summit in St. Petersburg this weekend. (My colleague Ian Vazquez argues that the summit could in fact yield little else of value.) Of all the countries awaiting WTO accession, Russia is by far the largest and its inclusion would bring 99% of world trade under the WTO’s auspices. Several U.S. business groups have publicly objected to, among other things, Russia’s treatment of intellectual property rights. But surely bringing Russia into the fold, and under the rules, of the WTO would improve the ability of members to ensure Russia’s trade policies are up to scratch.
  • This week in Seoul, the United States and South Korea held the second round of negotiations on a possible free trade agreement (and I use that term very cautiously). Unfortunately, the talks ended early after a dust-up over pharmaceuticals. Before then, the usual South Korean rent-a-crowd of protesters had come out in force against any agreement. One of the main sticking points is agricultural trade, particularly rice, which is highly protected in South Korea.
  • In what may be just a tactical move to scare other WTO negotiators, the EU this week raised the possibility of more preferential trade deals (link requires subscription), with or without a successful conclusion to the Doha round. That is worrisome news. The bigger the players that make these agreements, the larger the damage to the global trading system. Partly in reference to the difficulty of a deal with the United States, a Korean research center has suggested that it would be easier to make a bilateral deal with the EU than with the United States, presumably because such a deal would exclude a large number of agricultural products from liberalization. South Korea and the EU will find a lot of common ground when it comes to protecting agriculture, but an easy agreement does not necessarily a good agreement make.
  • And, on a related and somewhat cheerier note, the WTO members did manage to reach one deal this week as part of the Doha talks: they agreed on disciplines (mainly relating to transparency and early reporting) on preferential deals. Almost all WTO members are parties to one or more preferential deals, but the previous process of approving them has been so jammed that only one of those deals (out of almost 200) has been approved by the WTO. A bit of transparency in this area can only be a good thing, and should limit the damage that low quality, trade distorting preferential agreements can do. Of course, the approval of the new ‘transparency mechanism’ is only provisional and could all come unstuck should the final death knells ring for Doha. Plus ça change

Policy Dreams vs. Government Realities

When I came to Washington in 1990, central planning (“industrial policy”) was all the rage. As the 1990s progressed, the clamor for industrial policy faded, partly because the Japanese and German economies stagnated while the US economy soared.

But in my inbox this morning came news of a new study from the Progressive Policy Institute claiming that “America needs a national comprehensive strategy in order to maintain its preeminence within the world economy.”

Which government would implement this “national comprehensive stategy” I wonder? Surely not the same one that delivers non-stop pork barrel spending, management failure, and corruption year after year, decade after decade.

A Surplus of Benefits from Trade with China

The Chinese government reported on Monday that China’s trade surplus with the rest of the world hit a new monthly record in June [see story] and is on pace to reach $130 billion to $150 billion for all of 2006. The news will fuel demands that China allow the value of its currency to rise in international foreign exchange markets, making exports from China more expensive and imports to China more attractive. China’s currency, the yuan, has only appreciated about 3 percent since July 21, 2005, when its central bank announced that the currency would no longer be tightly pegged to the U.S. dollar.

Unfortunately, the news may also stoke support in Congress for imposing tariffs on imports from China if its government does not move soon to revalue its currency upward by 15 to 40 percent. As I explain in a Cato Trade Briefing Paper [“Who’s Manipulating Whom? China’s Currency and the U.S. Economy”] released today, imposing trade sanctions on China would be a colossal policy blunder.

Imposing tariffs on Chinese imports would be a direct consumer tax on tens of millions of American families. Of the $243 billion in goods we bought from China in 2005, about 80 percent were the type of products we use everyday in our homes and office—shoes, clothing, toys, sporting goods, bicycles, TVs, consumer electronics, and personal and laptop computers. In fact, shipments from China tend to bump up every fall as retailers stock up for the Christmas shopping season. The Grinch who stole Christmas would be delighted if Congress were to impose punitive tariffs on all those Chinese goods entering our country! 

The study found no support for arguments that China’s currency regime and trade with China in general are somehow hurting the U.S. economy or U.S. manufacturing. Rising imports from China have not primarily replaced domestic U.S. production, but rather they have replaced imports from other low-wage countries or from other East Asian countries that have relocated production to China. With the exception of apparel, few U.S. manufacturers compete head to head with products made in China. Overall U.S. manufacturing output is 50 percent higher today than in 1994 when China first pegged its currency to the dollar.

Focusing on the bilateral trade balance with China obscures the very tangible benefits Americans enjoy from our growing commercial ties with the people of China. 

To explore the issue further on the one-year anniversary of China’s currency reforms, Cato will be hosting a Policy Forum on July 19 titled, “U.S.-China Trade, Exchange Rates, and the U.S. Economy.” You can register for the event here.

Bhagwati vs. Bhagwati on Trade Liberalization

Jagdish Bhagwati, one of the world’s finest and most renowned trade economists, gave some of his thoughts on the Doha Round and prospects for trade liberalization in yesterday’s Cato podcast. Professor Bhagwati, who is also on the Board of Advisers of Cato’s Center for Trade Policy Studies, spoke more in depth on the subject at a Cato policy forum last month titled, “U.S. Trade Policy in the Wake of Doha: Why Unilateral Trade Liberalization Makes Sense.”

Unlike most trade policy observers, Bhagwati believes the Doha Round can still succeed. The key to success, he suggests, is for U.S. negotiators to embrace a concept he calls “relaxed reciprocity.”  Rather than seek a highly ambitious outcome by demanding all participants accept maximum “concessions,” U.S. negotiators should improve their own offer while accepting whatever level of reform other countries are willing to undertake.  The logic of this approach rests in the fact that most of the gains from trade liberalization come from opening one’s own market (access to cheaper inputs for business, greater competition and choice, productivity gains, lower prices for consumers), and thus, such reforms are not concessions at all.  Greater export market access for U.S. companies is just the icing on the cake, and the prospect of a lightly frosted cake is no reason to forego the entire dessert. His conclusion, then, is that U.S. negotiators should offer to open the U.S. market as wide as possible and accept minimal openings from abroad for the sake of achieving an agreement.

I concur with Professor Bhagwati that the United States should open its market without the condition that similar measures be undertaken abroad. Admittedly, my opinion is shaped in no small part by the arguments put forth by Bhagwati over the years.  But I think the United States probably has more to gain by doing so unilaterally and not partaking of an agreement that memorializes bold U.S. reform alongside marginal reform abroad. 

Any agreement, regardless of how minimalist foreign reform is, will be an invitation for the United States to bear the brunt of the blame for any adjustment costs or continued economic problems that persist in developing countries (even if those problems have nothing to do with the agreement).  Any agreement, no matter how bold or meager, will subject the United States to claims of arm twisting and bullying, regardless of the merits of those claims.  Such developments are precisely what the United States, with its tattered international reputation and credibility, does not need right now.  The costs of such fallout, although measured differently, could easily surpass any benefits associated with an agreement that requires nothing more than window dressing abroad.

Unless our trade partners are willing to agree to ambitious reform (which will undoubtedly cause adjustment costs but will also undoubtedly help spur economic growth and provide U.S. exporters with better terms) there is little point in the U.S. agreeing to a new deal.  On the contrary, by liberalizing independent of other countries, we reap the benefits of our openness, give the developing world better access, correct the reality and perception that U.S. trade barriers are a cause of developing world poverty, and remove the capacity for the United States to serve as a scapegoat for developing country stagnation.

The determinative calculation is whether the prospective net benefits of the marginal offerings of our trade partners exceed the net benefits of unilaterally liberalizing without any demands on our partners.  Of course that depends on how much reform is ultimately offered up abroad. 

In my view, the benefits from unilateral liberalization in terms of reversing growing hostility toward the United States and softening the ground for international receptivity to U.S. foreign and security policy objectives could be quite significant and could easily exceed the net benefits (marginal export benefits minus the costs of being perceived as an agreement’s strongman) of an agreement based on relaxed reciprocity.

Implicit in Bhagwati’s call for relaxed reciprocity is the idea that an agreement, regardless of the feebleness of the commitments it extracts, is valuable beyond the trade flows it may spur.  Agreements do produce greater certainty and without an agreement, the WTO and the verdicts of its dispute settlement system could lose crediblity among its member states.  After all, a multilateral trade negotiating round has never failed to produce an agreement.

Those are legitimate concerns.  However, I don’t believe U.S. unilateral liberalization would be an end in itself.  I believe such a policy, if commenced by the U.S., would inspire what Professor Bhagwati himself calls “sequential reciprocity.” If U.S. policymakers were to unconditionally open the U.S. market, others would likely follow suit.  Quite frankly, most countries have no choice but to open up well beyond what they are offering in the Doha Round.  In this highly integrated world of just-in-time supply chains, where countries are competing with each other for investment and markets, only the most transparent and efficient ones will succeed.  And it’s not like developing countries don’t know this conclusively.  Many are quite familiar with unilateral liberalization themselves.  In fact, the World Bank reports that between 1983 and 2003, developing countries reduced their weighted-average tariffs by 21 percentage points.  Nearly two-thirds of that reduction was achieved through unilateral reform.

Alas, unilateral liberalization or even relaxed reciprocity is unlikely to be embraced by this or the next Congress.  The concept remains foreign, even preposterous, to U.S. policymakers.  Last week, U.S. Trade Representative Susan Schwab acknowledged that even though imports are good for the economy, the winning formula does not entail convincing decision makers of that truth, but requires that the voices of those who will benefit from enhanced export access drown out the voices of those who will suffer from import competition, and that’s why an all-encompassing, ambitious agreement is the only one that will work politically in the United States.

We have a long way to go to change minds, but here’s the argument in a 24-page nutshell.

Mexican Election Outcomes

Felipe Calderon has officially won Mexico’s presidential election, an outcome that will be challenged in the courts by Andres Manuel Lopez Obrador and in the streets by his supporters.

The election has been a triumph for modernity and democracy. Calderon’s vision of Mexico’s future is a modern one: openness, more competition, and higher growth based on wealth creation. Lopez Obrador’s vision is based on backwardness: more government spending, protection of national industries, and arbitrary rule based on his own notion of “the will of the people.”

The election so far has been a victory for democracy, or perhaps better put, the rule of law. The electoral commission (IFE) has, by all independent accounts, run the elections with the utmost professionalism, transparency, and strict regard to election rules, thus making charges of fraud difficult to sustain. Luis Carlos Ugalde, the head of the IFE, is a sophisticated scholar and public servant and a student of public choice theory who understands well the dynamics of collective decisionmaking and the importance of the rule of law.

In large part because of the IFE’s performance, I expect that the electoral tribunal that will consider Lopez Obrador’s legal challenges will do so fairly and uphold the official outcome. The IFE’s performance and Lopez Obrador’s own antics will also influence the court of public opinion in a way that does not benefit the leftist candidate. Despite all its problems, Mexico really is more modern today than it was 10 or even six years ago. As Mary O’Grady notes in her Wall Street Journal column today, many Mexicans “have moved on” from the way things were done in the past. To add to Lopez Obrador’s difficulties, leading members of his own party, including rival leaders and those elected to governorships and congress, have little interest in seeing an annulment of the election results.

The other headline from the elections is the marginalization at the national level of the PRI party that monopolistically ruled Mexico for 71 years until Vicente Fox’s election in 2000. The PRI received only about 22 percent of the vote — an outcome that was unthinkable as recently as six years ago. The new political landscape — a divided congress reflecting a divided country — means that Calderon will not be able to easily push through the reforms he favors. But he appears to be more politically savvy than President Fox, so the expectations for a growth agenda that Fox promised but did not deliver are running high.