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

This article appeared on Cato.org on April 4, 2008.
Share

The U.S.-China trade relationship, one of theworld's largest, is a flashpoint for concern over the U.S. tradedeficit, China's currency valuation, and Chineseintellectual property regulation. This relationship is underespecially keen scrutiny as the 2008 presidential campaign heats upin the United States, with Democratic front-runners favoringpunitive duties against China if it does not act to revalue itscurrency. Robert E.Scott, senior international economist at the Economic PolicyInstitute, and Daniel J. Ikenson,associate director of the Cato Institute's Center for TradePolicy Studies, debate whether the next U.S. president should gettougher with China on trade.

Weigh in on this debate hosted by the Council onForeign Relations by emailing the editors at letters@cfr.org. To view other onlinedebates click here.


April 4, 2008(Most Recent)

Daniel J. Ikenson

Space constraints preclude my rebutting each ad hoc, amorphousassertion made in Rob's last post, but I want to addresssome of the most outlandish.

If the current trading system encourages a race to the bottom,how does one explain the large and increasing foreign directinvestment flows into the United States? Why is ThyssenKruppbuilding a $3.7 billion green field steel production facility inAlabama? Why do foreign nameplate automakers continue toinvest in U.S. manufacturing? Why do the 5.1 millionAmericans employed by U.S. subsidiaries of foreign-owned companiesearn on average 32 percent higher wages than workers at U.S.-ownedcompanies?

Because there is no race to the bottom, that'swhy. There is a race to the top-for skilled workers,for access to production facilities closer to markets, forinvestment in countries where the rule of law is clear and abided,where there is greater certainty to the business climate, where thespecter of asset expropriation is negligible, where physical andadministrative infrastructure is in good shape, and so on.Seems odd how the same sirens who decry the race to the bottomspend the rest of their day opposing foreign direct investment inthe United States.

Are we to believe that America's elites are behindWalmart's success? Seems to me Walmart and otherretailers have been a conduit of the benefits of trade, allowingordinary Americans to tap into the division of labor, extend theirbudgets, and increase their families' access to clothing,food, and other everyday products. And Americanmanufacturers and their workers are the beneficiaries of hugeincreases in exports to China-our fastest growing largeexport market since 2001. Beyond question, vast swaths ofAmericans and Chinese are benefitting from the expanding traderelationship.

With respect to U.S.-China trade, the next president shouldcontinue the tradition of this administration, which is to engagein quiet dialogue where there are issues to resolve and to resortto the WTO dispute settlement system when the facts support doingso.

As he or she reflects on the bilateral trade dialogue of therecent past, the next president should recognize that it has beenmore a litany of U.S. gripes than a dialogue, and that the time hascome to start considering carrots to accompany the sticks.The next president should grant China market economy treatment inantidumping cases. While such a reform would take verylittle out of petitioning industries' hides, the gesturewould win vast sums of goodwill from the Chinese, which will beneeded 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, onaverage, a billionaire. The economic benefits of U.S.-China trade,like the average net worth on that elevator, look good until youconsider their distribution.

The gains from trade between the United States and China haveflowed to a very small segment of both countries'elites. The gap between the value of what U.S. workersproduce and what they receive has widened dramatically, partlybecause deregulated trade has suppressed the realwages of all non-college educated workers (about 70 percent ofthe labor force). Between 1980 and 2005, U.S. productivityrose 71 percent while real compensation (including benefits) ofnon-supervisory workers rose just 4 percent. Thismeasure includes all the benefits of globalization received bythese workers. Most of the benefits of growth since 1980 have beencaptured by the top 10 percent, especially the top 1 percent, ofU.S. workers. The problem is not trade, per se, but thecurrent trading system which has encouraged a race-to-the bottom inwages and labor standards.

The systematic suppression of workers' rights has reducedChinese wages by 47 percent to 85 percent according to a recentlabor-rights petition, and the problems are worsening.Occupational illness and injury rates have never been higher inChinese manufacturing. Workers are frequently forced to gounpaid, and their complaints and protests are often met withviolent government responses.

Fueling China's vast trade surplus with the United Statesis its very high savings rates, nearing 50 percent of GDP in recentyears. Conventional wisdom is that Chinese workers saveexcessively because China's pension and public healthsystems are so poor. However, household savings recentlydeclined to 16 percent of GDP. Business savings, on theother hand have soared to nearly 24 percent of GDP and governmentsavings exceeded 10 percent according to the IMF.

Thus, globalization's benefits in China are reaped by anelite cadre who own and operate private and publicenterprises. Their savings are piling up in the net worth ofthe rapidly expanding business empires under their control.

Getting tough with China about international trade and laborrights violations would help workers in both countries. TheBush administration has rejected two labor rights petitionssubmitted by the AFL-CIO and U.S. Representatives Ben Cardin andChris Smith, and workers in both countries have suffered as aresult.

China needs more spending on infrastructure, environmentalclean-up, and public health and other social services. It needsfundamental improvements in labor rights and enforcement, whichwill raise wages, increase private consumption and reduceChina's need to export. These win-win policies canhelp workers in the United States, China and all our tradingpartners.


April 2, 2008

Daniel J. Ikenson

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

To embrace Rob's perspective, one must assume away thereality of how the economy actually works and how it isstructured. If the U.S. economy comprised only producers whowere self-sufficient for their material inputs and who had nointerest in selling products abroad, Rob's prescriptions,which subordinate the multitude of individual U.S. economicinterests to manufacturers' interests, might garner somesympathy. But it is fantasy to characterize internationaltrade as a contest between "our" producers and"their" producers. Not only has that line beenblurred (thankfully) by foreign direct investment, cross-ownership,equity tie-ins, and transnational supply chains, but the fact isthat the economy is composed of consumers, retailers, importers,shippers, designers, engineers, marketers, financiers, andproducers who have great stakes in an open world economy, and whowould be hurt by Rob's proposals.

The currency issue is far more complicated-and far lessinsidious-than Rob implies. Is a more-weakened dollar whatAmerica really needs as prices for essentials like oil and foodcontinue to rise? Do we really want China to have 40 percent morespending power on account of Yuan appreciation when China'sgrowing demand with a lower-valued currency explains much of theworld's commodity price increases? Other countriesare looking for ways to bolster their citizens' purchasingpower by suspending tariffs and other import restraints, yet Robthinks it's wise to reduce Americans' purchasingpower by rendering dollars worth less.

I strongly disagree with Rob's assertion that the tradedeficits are a major cause of the loss of 3.4 million jobs.Manufacturing jobs are in decline worldwide, even in perennialtrade surplus countries like Japan and Germany, as well as inChina.

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

With respect to trade remedies, let's summon theviolins! Out of 263 U.S. anti-dumping and countervailingduty orders, there are 62 (24 percent) in place against Chineseimports. And the extremely prosperous U.S. steelindustry-the victim in Rob's lastpost-accounts for 126 of the 263-nearly half!

Rob's prescriptions are not only unnecessary; they areparticularly ill-suited for the twenty-first century globaleconomy.


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. Chinaprovides vast and extensive subsidies to businesses making goodsfor export in many industries, artificially reducing the cost oftheir products. The U.S. government needs to develop new policiesand institutions to enforce our fair trade laws and to ensure thatthe system delivers broadly shared benefits to U.S. workers andbusinesses producing goods and services in the UnitedStates.

A recent study by Prof. Usha Haley at the University of New Havenestimated that energy subsidies to the Chinese steel industry aloneexceeded $27 billion between 2000 and mid-2007. China wentfrom being a net steel importer a few years ago to theworld'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. CommerceDepartment refused to authorize countervailing duties in recenttrade complaints involving tires and coated paper imports, bothenergy intensive products. U.S. trade laws need to be toughened inthis area to ensure that systematic subsidies that benefitall exporters are countervailed.

Beginning in 2001 with their tenth five-year plan, Chinatargeted the auto and parts industries for rapid growth, and theyhave poured subsidies into this industry. U.S. auto parts importssoared from $1 billion in 2001 to $7 billion in 2007, resulting inmassive layoffs and plant closures. These cases illustratetwo key weaknesses in the U.S. trade policy enforcementsystem.

First, our system depends on manufacturing firms andagricultural producers to initiate the vast majority of all U.S.unfair trade complaints. The system makes it hard for them to wincases until they are on their last legs so many cases are neverfiled. The U.S. government has the right to initiatecomplaints, but rarely does. Second, only the USTR, which ispart of the President's Executive Office, has the right tofile trade complaints with the WTO. It often fails to do so forpolitical reasons. For example, the big-three U.S. auto companiesbenefit from subsidized Chinese auto parts imports, and the USTRhas refused to bring a WTO complaint until 2006, five years toolate.

Congress should create an independent government agency with theresources and authority to file fair trade cases in the UnitedStates and at the WTO. We must insist that Chinese producerscompete on a level playing field, and if we do, U.S. workers andbusinesses 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 compliancewith the vast obligations to which China agreed upon joining theWTO in 2001, the answer is "yes." If it meanssupporting or encouraging provocative legislation or takingunilateral administrative actions to compel or punish China in amanner that would violate our own WTO obligations or would benefita few litigious industries at the expense of broader economicinterests, the answer is "no."

In 2006, the USTR (Office of the United States TradeRepresentative) published its "Top-to-Bottom Review"of U.S.-China trade relations, in which it proclaimed the beginningof a new phase in the relationship, stating, effectively, that thehoneymoon period (of reform implementation) was over andforeshadowing greater resort to the WTO dispute settlement systemto achieve further compliance.

One month after publication of that report, USTR filed a WTOcomplaint alleging that certain Chinese policies discriminateagainst imported automobile parts. Very recently, thedispute panel established to hear that case ruled in favor of theUnited States.

Before the auto parts case, only one complaint about Chinesepractices had been lodged with the DSB. It concerned a value-addedtax on integrated circuits that was allegedly applied in full toimports only. During the consultation phase of the dispute(and without need of formal adjudication), the Chinese agreed tochange their practice and the dispute was resolved.

In 2007, the USTR filed three WTO cases against China. The firstinvolved certain tax provisions that allegedly amounted tosubsidization of Chinese exporters. In response to theallegations, China changed its tax rebate practices (although thedispute is not completely resolved yet). The secondconcerned enforcement of intellectual property rights. The thirdconcerned alleged barriers facing foreign traders and distributorsof copyrighted materials like books, videos, and DVDs. Adispute panel was recently composed for the IP case, and thedistribution barriers case is still in the consultationsphase. Earlier this month, USTR brought a sixth case,alleging discrimination against U.S. providers of financialservices information in China.

Since the USTR's 2006 review, five cases have been filedwith positive outcomes achieved in two (the others are pending). Itis important to recognize that our trade relationship with China ismutually beneficial, and that unnecessary provocation could open aPandora's Box of economic problems. There is no goodreason to jettison a process that is working.


March 31, 2008

Robert E. Scott

China is a protectionist state that has used all of its powersand resources to build an artificially competitive exportpowerhouse. The United States is the most important marketfor its exports. Growing U.S. trade deficits with China and othercountries are a major cause of the loss of 3.4 million U.S.manufacturing jobs since 2001, when China entered theWTO. China's export-led growth strategy is alsovery costly for its people.

We have been down this road before, and know how to deal withsuch situations. Two decades ago, Japan built an export powerhousebehind an artificially cheap currency and protected homemarkets. This continued until 1985, when it began tothreaten the stability of the world financial system. The problemthen, as now, was theU.S. trade deficit.

The Reagan administration, much like the current White House,doggedly ignored the over-valued dollar through its first termwhile millions of jobs disappeared and thousands of factoriesclosed. Finally, Congress acted and passed a measure (HR3035) which hit countries like Japan, Brazil, and Korea, thatmaintained large U.S. trade surpluses, with a 25 percenttariff.

In a complete about-face, Treasury Secretary James Baker thennegotiated the Plaza Accord with the G-5 (Japan, Germany, Franceand the U.K.), on September 22, 1985. The next day, the FederalReserve and Central banks in Japan and Europe executed coordinatedcurrency interventions that began to drive the dollar down.The dollar continued to fall until the Louvre Accord 16 monthslater, which stabilized its level again. The dollar fell 29percent to 46 percent against the G-5 currencies in thisperiod.

The U.S. never imposed a tariff in the Plaza era-HR 3035never even became law. The mere threat, combined withconcerns about a potential financial crisis, were enough to get thedeal done.

China has invested over $1.5 trillion in foreign exchangereserves in order to keep the yuan artificially cheap.Economists estimate than its currency, too, needs to rise by about40 percent. Other Asian export economies, such as Japan, arefollowing similar strategies and also need to revalue, but theycan't do it alone. While the dollar has fallen sharplyagainst the euro and other freely traded currencies over the pastfive years, it has barely budged against the yuanand yen. But this won't happen until we gettough with Beijing. We need to put some backbone in our tradepolicy to get multilateral currency talks started now.