Should the Next U.S. President Adopt a Tougher Stance on Trade Policy with China?

April 4, 2008 • Commentary
This article appeared on Cato​.org on April 4, 2008.

The U.S.-China trade relationship, one of the world’s largest, is a flashpoint for concern over the U.S. trade deficit, China’s currency valuation, and Chinese intellectual property regulation. This relationship is under especially keen scrutiny as the 2008 presidential campaign heats up in the United States, with Democratic front‐​runners favoring punitive duties against China if it does not act to revalue its currency. Robert E. Scott, senior international economist at the Economic Policy Institute, and Daniel J. Ikenson, associate director of the Cato Institute’s Center for Trade Policy Studies, debate whether the next U.S. president should get tougher with China on trade.

Weigh in on this debate hosted by the Council on Foreign Relations by emailing the editors at letters@​cfr.​org. To view other online debates click here.

April 4, 2008(Most Recent)

Daniel J. Ikenson

Space constraints preclude my rebutting each ad hoc, amorphous assertion made in Rob’s last post, but I want to address some of the most outlandish.

If the current trading system encourages a race to the bottom, how does one explain the large and increasing foreign direct investment flows into the United States? Why is ThyssenKrupp building a $3.7 billion green field steel production facility in Alabama? Why do foreign nameplate automakers continue to invest in U.S. manufacturing? Why do the 5.1 million Americans employed by U.S. subsidiaries of foreign‐​owned companies earn on average 32 percent higher wages than workers at U.S.-owned companies?

Because there is no race to the bottom, that’s why. There is a race to the top‐​for skilled workers, for access to production facilities closer to markets, for investment in countries where the rule of law is clear and abided, where there is greater certainty to the business climate, where the specter of asset expropriation is negligible, where physical and administrative infrastructure is in good shape, and so on. Seems odd how the same sirens who decry the race to the bottom spend the rest of their day opposing foreign direct investment in the United States.

Are we to believe that America’s elites are behind Walmart’s success? Seems to me Walmart and other retailers have been a conduit of the benefits of trade, allowing ordinary Americans to tap into the division of labor, extend their budgets, and increase their families’ access to clothing, food, and other everyday products. And American manufacturers and their workers are the beneficiaries of huge increases in exports to China‐​our fastest growing large export market since 2001. Beyond question, vast swaths of Americans and Chinese are benefitting from the expanding trade relationship.

With respect to U.S.-China trade, the next president should continue the tradition of this administration, which is to engage in quiet dialogue where there are issues to resolve and to resort to the WTO dispute settlement system when the facts support doing so.

As he or she reflects on the bilateral trade dialogue of the recent past, the next president should recognize that it has been more a litany of U.S. gripes than a dialogue, and that the time has come to start considering carrots to accompany the sticks. The next president should grant China market economy treatment in antidumping cases. While such a reform would take very little out of petitioning industries’ hides, the gesture would win vast sums of goodwill from the Chinese, which will be needed to resolve more important issues going forward.

April 3, 2008

Robert E. Scott

If four low‐​wage workers are riding an elevator, the door opens, and Bill Gates gets on, everyone on that elevator becomes, on average, a billionaire. The economic benefits of U.S.-China trade, like the average net worth on that elevator, look good until you consider their distribution.

The gains from trade between the United States and China have flowed to a very small segment of both countries’ elites. The gap between the value of what U.S. workers produce and what they receive has widened dramatically, partly because deregulated trade has suppressed the real wages of all non‐​college educated workers (about 70 percent of the labor force). Between 1980 and 2005, U.S. productivity rose 71 percent while real compensation (including benefits) of non‐​supervisory workers rose just 4 percent. This measure includes all the benefits of globalization received by these workers. Most of the benefits of growth since 1980 have been captured by the top 10 percent, especially the top 1 percent, of U.S. workers. The problem is not trade, per se, but the current trading system which has encouraged a race‐​to‐​the bottom in wages and labor standards.

The systematic suppression of workers’ rights has reduced Chinese wages by 47 percent to 85 percent according to a recent labor‐​rights petition, and the problems are worsening. Occupational illness and injury rates have never been higher in Chinese manufacturing. Workers are frequently forced to go unpaid, and their complaints and protests are often met with violent government responses.

Fueling China’s vast trade surplus with the United States is its very high savings rates, nearing 50 percent of GDP in recent years. Conventional wisdom is that Chinese workers save excessively because China’s pension and public health systems are so poor. However, household savings recently declined to 16 percent of GDP. Business savings, on the other hand have soared to nearly 24 percent of GDP and government savings exceeded 10 percent according to the IMF.

Thus, globalization’s benefits in China are reaped by an elite cadre who own and operate private and public enterprises. Their savings are piling up in the net worth of the rapidly expanding business empires under their control.

Getting tough with China about international trade and labor rights violations would help workers in both countries. The Bush administration has rejected two labor rights petitions submitted by the AFL-CIO and U.S. Representatives Ben Cardin and Chris Smith, and workers in both countries have suffered as a result.

China needs more spending on infrastructure, environmental clean‐​up, and public health and other social services. It needs fundamental improvements in labor rights and enforcement, which will raise wages, increase private consumption and reduce China’s need to export. These win‐​win policies can help workers in the United States, China and all our trading partners.

April 2, 2008

Daniel J. Ikenson

The only substantive point of agreement between Rob and me about China is that it makes for a nice wedding gift.

To embrace Rob’s perspective, one must assume away the reality of how the economy actually works and how it is structured. If the U.S. economy comprised only producers who were self‐​sufficient for their material inputs and who had no interest in selling products abroad, Rob’s prescriptions, which subordinate the multitude of individual U.S. economic interests to manufacturers’ interests, might garner some sympathy. But it is fantasy to characterize international trade as a contest between “our” producers and “their” producers. Not only has that line been blurred (thankfully) by foreign direct investment, cross‐​ownership, equity tie‐​ins, and transnational supply chains, but the fact is that the economy is composed of consumers, retailers, importers, shippers, designers, engineers, marketers, financiers, and producers who have great stakes in an open world economy, and who would be hurt by Rob’s proposals.

The currency issue is far more complicated‐​and far less insidious‐​than Rob implies. Is a more‐​weakened dollar what America really needs as prices for essentials like oil and food continue to rise? Do we really want China to have 40 percent more spending power on account of Yuan appreciation when China’s growing demand with a lower‐​valued currency explains much of the world’s commodity price increases? Other countries are looking for ways to bolster their citizens’ purchasing power by suspending tariffs and other import restraints, yet Rob thinks it’s wise to reduce Americans’ purchasing power by rendering dollars worth less.

I strongly disagree with Rob’s assertion that the trade deficits are a major cause of the loss of 3.4 million jobs. Manufacturing jobs are in decline worldwide, even in perennial trade surplus countries like Japan and Germany, as well as in China.

It is worth noting that between 2001 (Rob’s demarcation) and 2007, the increasing bilateral trade deficit has been accompanied by a 20 percent increase in real GDP, a 15 percent increase in manufacturing output, and the creation of 9.1 million net new jobs.

With respect to trade remedies, let’s summon the violins! Out of 263 U.S. anti‐​dumping and countervailing duty orders, there are 62 (24 percent) in place against Chinese imports. And the extremely prosperous U.S. steel industry‐​the victim in Rob’s last post‐​accounts for 126 of the 263‐​nearly half!

Rob’s prescriptions are not only unnecessary; they are particularly ill‐​suited for the twenty‐​first century global economy.

April 1, 2008

Robert E. Scott

I’m glad that Dan thinks we need to get tough with China. We have ignored these problems for far too long. China provides vast and extensive subsidies to businesses making goods for export in many industries, artificially reducing the cost of their products. The U.S. government needs to develop new policies and institutions to enforce our fair trade laws and to ensure that the system delivers broadly shared benefits to U.S. workers and businesses producing goods and services in the United States.

A recent study by Prof. Usha Haley at the University of New Haven estimated that energy subsidies to the Chinese steel industry alone exceeded $27 billion between 2000 and mid‐​2007. China went from being a net steel importer a few years ago to the world’s largest steel producer and exporter. China’s share of U.S. steel imports increased six‐​fold.

Energy subsidies are rampant in China, and yet the U.S. Commerce Department refused to authorize countervailing duties in recent trade complaints involving tires and coated paper imports, both energy intensive products. U.S. trade laws need to be toughened in this area to ensure that systematic subsidies that benefit all exporters are countervailed.

Beginning in 2001 with their tenth five‐​year plan, China targeted the auto and parts industries for rapid growth, and they have poured subsidies into this industry. U.S. auto parts imports soared from $1 billion in 2001 to $7 billion in 2007, resulting in massive layoffs and plant closures. These cases illustrate two key weaknesses in the U.S. trade policy enforcement system.

First, our system depends on manufacturing firms and agricultural producers to initiate the vast majority of all U.S. unfair trade complaints. The system makes it hard for them to win cases until they are on their last legs so many cases are never filed. The U.S. government has the right to initiate complaints, but rarely does. Second, only the USTR, which is part of the President’s Executive Office, has the right to file trade complaints with the WTO. It often fails to do so for political reasons. For example, the big‐​three U.S. auto companies benefit from subsidized Chinese auto parts imports, and the USTR has refused to bring a WTO complaint until 2006, five years too late.

Congress should create an independent government agency with the resources and authority to file fair trade cases in the United States and at the WTO. We must insist that Chinese producers compete on a level playing field, and if we do, U.S. workers and businesses can win.

March 31, 2008

Daniel. J. Ikenson

If a tougher stance means using the WTO Dispute Settlement Body [DSB] more systematically to achieve greater Chinese compliance with the vast obligations to which China agreed upon joining the WTO in 2001, the answer is “yes.” If it means supporting or encouraging provocative legislation or taking unilateral administrative actions to compel or punish China in a manner that would violate our own WTO obligations or would benefit a few litigious industries at the expense of broader economic interests, the answer is “no.”

In 2006, the USTR (Office of the United States Trade Representative) published its “Top‐​to‐​Bottom Review” of U.S.-China trade relations, in which it proclaimed the beginning of a new phase in the relationship, stating, effectively, that the honeymoon period (of reform implementation) was over and foreshadowing greater resort to the WTO dispute settlement system to achieve further compliance.

One month after publication of that report, USTR filed a WTO complaint alleging that certain Chinese policies discriminate against imported automobile parts. Very recently, the dispute panel established to hear that case ruled in favor of the United States.

Before the auto parts case, only one complaint about Chinese practices had been lodged with the DSB. It concerned a value‐​added tax on integrated circuits that was allegedly applied in full to imports only. During the consultation phase of the dispute (and without need of formal adjudication), the Chinese agreed to change their practice and the dispute was resolved.

In 2007, the USTR filed three WTO cases against China. The first involved certain tax provisions that allegedly amounted to subsidization of Chinese exporters. In response to the allegations, China changed its tax rebate practices (although the dispute is not completely resolved yet). The second concerned enforcement of intellectual property rights. The third concerned alleged barriers facing foreign traders and distributors of copyrighted materials like books, videos, and DVDs. A dispute panel was recently composed for the IP case, and the distribution barriers case is still in the consultations phase. Earlier this month, USTR brought a sixth case, alleging discrimination against U.S. providers of financial services information in China.

Since the USTR’s 2006 review, five cases have been filed with positive outcomes achieved in two (the others are pending). It is important to recognize that our trade relationship with China is mutually beneficial, and that unnecessary provocation could open a Pandora’s Box of economic problems. There is no good reason to jettison a process that is working.

March 31, 2008

Robert E. Scott

China is a protectionist state that has used all of its powers and resources to build an artificially competitive export powerhouse. The United States is the most important market for its exports. Growing U.S. trade deficits with China and other countries are a major cause of the loss of 3.4 million U.S. manufacturing jobs since 2001, when China entered the WTO. China’s export‐​led growth strategy is also very costly for its people.

We have been down this road before, and know how to deal with such situations. Two decades ago, Japan built an export powerhouse behind an artificially cheap currency and protected home markets. This continued until 1985, when it began to threaten the stability of the world financial system. The problem then, as now, was the U.S. trade deficit.

The Reagan administration, much like the current White House, doggedly ignored the over‐​valued dollar through its first term while millions of jobs disappeared and thousands of factories closed. Finally, Congress acted and passed a measure (HR 3035) which hit countries like Japan, Brazil, and Korea, that maintained large U.S. trade surpluses, with a 25 percent tariff.

In a complete about‐​face, Treasury Secretary James Baker then negotiated the Plaza Accord with the G-5 (Japan, Germany, France and the U.K.), on September 22, 1985. The next day, the Federal Reserve and Central banks in Japan and Europe executed coordinated currency interventions that began to drive the dollar down. The dollar continued to fall until the Louvre Accord 16 months later, which stabilized its level again. The dollar fell 29 percent to 46 percent against the G-5 currencies in this period.

The U.S. never imposed a tariff in the Plaza era‐​HR 3035 never even became law. The mere threat, combined with concerns about a potential financial crisis, were enough to get the deal done.

China has invested over $1.5 trillion in foreign exchange reserves in order to keep the yuan artificially cheap. Economists estimate than its currency, too, needs to rise by about 40 percent. Other Asian export economies, such as Japan, are following similar strategies and also need to revalue, but they can’t do it alone. While the dollar has fallen sharply against the euro and other freely traded currencies over the past five years, it has barely budged against the yuan and yen. But this won’t happen until we get tough with Beijing. We need to put some backbone in our trade policy to get multilateral currency talks started now.

About the Author