Crude tools cloud US-China trade
rows By Benjamin A Shobert
Something has to be done to balance the
United States' trade problem with China. Or, at
least, that is the belief that is animating much
of the political discourse taking place in
Washington DC.
This very specific
objective is front and center in the minds of US
politicians as they rush towards the upcoming
general elections in November. The problem is that
the specific nature of their concern is poorly
matched to the more general means by which they
believe this can be accomplished.
Answers
vary from the more subtle and nuanced (elevating
certain trade concerns in the contexts of the
Strategic Economic Dialogue, US Trade
Representative or even World Trade Organization
meetings), to the more unsophisticated and
inflammatory ("Fair
Currency" reform legislation, import duties and
tariffs).
What they share is the idea that
American policy makers have done too little and
been too subtle, in their engagement with the
Chinese. The net effect of this, at least
according to them, is that the US has lost more
jobs than it otherwise would have. As they see it,
had Washington taken a more assertive view of the
need to protect certain industries, and thereby
the workers within them, the jobs crisis the US is
currently in the midst of would not be as severe.
This was very much the topic of Thursday's
hearings held by the congressionally appointed
US-China Economic & Security Review Commission
(USCC). As one commissioner shared during the day
of testimony, the general feeling in Washington is
that America was either too trusting or had
planned too poorly for the potential downside
risks inherent in globalization.
While the
focus of Thursday's testimony was on China, it was
difficult not to walk away from the day's hearing
without a growing sense that the critique of
US-China trade is inevitably bound to become
something more significant; namely, a critique of
globalization in general.
Where in advance
of the 2008 financial crisis many in Washington
had general concerns about how globalization might
negatively impact American workers, the aftermath
of 2008 has intensified this criticism.
It
has also made it easier for traditional critics of
globalization to move the focus of the
conversation from China alone and to broader
questions about whether globalization can be
trusted to be good for more than the
multinationals themselves.
Concerns about
China specifically are not new and may be
manageable; concerns about globalization in
general have the potential to very quickly and
quite negatively change American willingness to
view international trade as mutually beneficial.
As Thursday's testimony made clear, these
concerns are now front of mind for those in
congress and increasingly, in popular culture as
well.
Advocates of what Harvard economics
professor Dani Rodrik has called "deep
globalization" believe that open borders are
always good for individuals, companies, and
countries. Those who believe this often point
towards the actual value of domestic content
versus important content when trade imbalances are
calculated and discussed.
In their mind,
trade imbalance discussions too easily overlook
the actual imported content - and what this
imported content says about the poor high
technology manufacturing capabilities - for
countries like China. The classic example of this
is Apple's line of devices.
While most
traditional export calculations calculate the
total value of this exported product from China,
others believe the value to China is more
accurately captured after subtracting those
components in the Apple devices that must be
imported from other countries into China.
Dr Shang Wei, N T Wang Professor of
Chinese Business and Economy, Columbia University,
made this point during his Thursday testimony. He
shared that, "Chinese exports usually rely on a
very high content of imported components."
As he made clear, even in what he called
"sophisticated sectors" like high technology
manufacturing, Chinese companies were "more likely
to have a falling content ... looking ahead, their
share could actually go down."
Wei pointed
out that "Bi-lateral trade balances can be
misleading ... [because] China is the final
assembler of international production ... as a
result the Chinese trade surplus measured in true
value added terms would be 40-50% lower than when
they are measured by official data."
Disputes over how to calculate the best
ways to calculate the export value of what China
manufactures is unlikely to move the conversation
in either direction. Yet, in its own way, this
much more sophisticated defense of globalization
is a symptom of how defenders of globalization are
having to adjust their tactics in order to
continue advocating for the good that
globalization has done.
Judith Dean,
Professor of International Economics at Brandeis
University, testified on Thursday that in her
opinion, it was too easy to overlook the value of
keeping borders open and recognizing the good
globalization has done. She said that "if the
value in the production process increases as
[products] transfer across borders numerous times
and that each time value changes, this reinforces
the idea of the importance of keeping markets open
... there is a lot of evidence to show that having
trade barriers actually magnifies costs as
products cross borders."
Surprisingly for
some who may believe this holds most for low-value
goods, Dean stated that "in very R&D [research
and development] intensive production where the
innovation is new, the multinationals tend to do
the majority of it themselves ... very little will
be done in a country where IP or quality control
is weak ... this may be an incentive for China to
improve its IPR where multinationals find it an
acceptable place to do more."
Yingying Xu,
economist and council director with the
Manufacturers Alliance for Productivity and
Innovation (MAPI) agreed, and added that
"value-added analysis provides a more accurate
assessment of bilateral trade and the real impact
of currency reforms". Xu also believes that what
China is attempting to do, by moving up the value
chain, is not really that surprising.
She
added "it is one challenge developing countries
have to face when living standards are improving
in China, but labor and land is getting more
expensive ... the cost of economic development is
a factor and that all has to be taken into account
when calculating the total cost of production ...
since 2006 the Chinese government has been raising
their R&D expenditures because of this."
Frustrations over these more technical
defenses of globalization were obvious through
Thursday's hearing. Commissioner Michael Wessel
sounded this note when he added that he was "a
little troubled that our panelists seem to be of
one view and that none of us can discuss with you
the more technical issues ... we are in a jobs and
economic crisis here in the US ... the
implications of what you are talking about are not
esoteric, they go to the core of where the jobs
are and what this all means to the US and what our
trade policy needs to be on a go forward basis."
Pointing back to the idea that
globalization would ultimately be good for the US
worker because it would be good for US companies,
Dean responded that "what I find really exciting
about this global supply chain trade is that
companies get involved because it is better for
them - it is more efficient for them to produce in
this way - American companies engaged in this
[globalization process] way do better."
As
Dean sees it, the trade between jobs and
globalization "is not an either/or, it is a
both/and ... the American company strengthens its
part of what it does well here ... it is not a
win/lose, it is a win/win."
Additionally,
Dean believes that globalization has allowed some
companies and even whole industries to stay US
owned. She shared "if some industries were to
produce the entire good here it would mean the
firm is no longer profitable, but if it can shave
off parts that are not profitable, it can survive
and find new markets."
Many of these new
markets, as Dean well knows, happen to be those in
emerging economies who now have a middle class
that can buy these goods. Absent the first step of
helping them grow an industrial base through the
transfer of low-technology manufacturing, this
opportunity to sell into China would never have
presented itself.
Prior to the 2008
financial crisis, the need to resort to these more
sophisticated defenses of globalization would have
likely been limited to academic settings. Their
presence today in both popular culture and retail
politics suggests how sensitive and insecure
Americans feel about their future and the role
they have to play in the current century.
Unless this insecurity is quickly
remedied, America may well find itself eager to
pursue policies that a decade ago would have been
widely understood to be economically
counterproductive and inconsistent with
long-standing free-market values.
How
ironic and tragic that America could well be the
one to pull down the system of globalization when
so much of it has been built around American
ideas.
Benjamin A Shobert is the
Managing Director of Rubicon Strategy Group, a
consulting firm specialized in strategy analysis
for companies looking to enter emerging economies.
He is the author of the upcoming book Blame
China and can be followed at
www.CrossTheRubiconBlog.com.
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