Failed expectations in US trade policy
By Robert Cassidy
As the principal United States negotiator for the landmark market access
agreement that led to China's accession to the World Trade Organization (WTO),
I have reflected on whether the agreements we negotiated really lived up to our
expectations. A sober reflection has led me to conclude that those trade
agreements did not.
We failed to address the underlying fundamental market distortions that skew
the benefits toward the few while leaving the rest of the economy less well
off. As global US financier George Soros, in a Bloomberg News interview on the
financial crisis, recently said, "... the system, as it currently operates, is
built on false premises." The premise on which our trade agreements are
negotiated is at best flawed, if not broken.
The next administration has
to take a hard look at the trade agreements
currently on the table - especially with South
Korea - and ask: Who benefits? The answers should
lead to a fundamental reassessment of what needs
to be included in those trade agreements so that
the benefits flow to broader and more equitable
segments of the economy.
China's agreement to enter the WTO is a perfect example of failed expectations.
To join the WTO, China made unilateral concessions to reduce and, in some
cases, eliminate barriers to entry for US goods and services. While no one
claimed that the bilateral deficit would be reduced, claims were made that US
exports of goods to China would increase, thus creating jobs in the
higher-paying export sector.
US exports to China have increased and, as the US Trade Representative often
emphasizes, at a higher rate than to any other country. But such claims distort
the real truth that exports grew faster because they grew from a very low
level. In absolute terms, the increase in US exports of goods to the European
Union was almost 70% greater than the increase in exports of goods to China and
to Canada the increase was 40% more than to China. Neither of those trading
partners made any trade concessions to the United States during this period.
Conversely, on the US import side, the United States made no concessions to
China, yet US imports from China were more than triple the pre-accession
levels; to US$321 billion in 2007, almost matching imports from the entire
European Union. In contrast, increases in imports from Canada, our largest
trading partner, rose by $82 billion and imports from the EU increased by $134
billion.
Who benefits?
The beneficiaries of the agreement with China fall into two groups:
multinational companies that moved to China and the financial institutions that
financed those investments, trade flows and deficits. Foreign direct investment
(FDI) in China accelerated at a time when such investment to other parts of
Asia was declining and, in 2001, even matched FDI to the United States.
Sourcing from China, whether from direct investment or through licensing
arrangements, has allowed companies to cut costs and increase profits, as
reflected in increased corporate profits and the surge in the US stock market.
Conversely, it is doubtful that the US economy or its workers are better off.
US manufacturing jobs have declined by more than 2.5 million since China joined
the WTO in 2001. While services jobs increased during this period, with the
exception of telecommunications, non-tradable jobs accounted for the most
significant portion of that increase. Wages have been stagnant and real
disposable income for three-quarters of US households has been stable or
declining. Only the top quartile of families has seen significant increases in
real disposable income.
The beneficiaries of these trade agreements try to divert attention by arguing
that our trade in services has increased or that our competitiveness has
declined. Those arguments are simply diversions because they don't explain why
our exports of goods to countries that made no concessions increased more than
our exports to China, which made significant tariff and non-tariff concessions.
Such arguments also fail to explain why our imports of goods from China
increased more than our imports from other major trading partners. Is there any
wonder that the people on Main Street think that trade agreements do not work?
Were this simply a problem with our bilateral trade relationship with China,
policy makers could focus on resolving that dysfunctional relationship.
However, the problem extends to nearly all trade agreements since they are
based on the flawed premise that free trade benefits the economy. The premise
is flawed and broken since free trade does not exist in a "free market" petri
dish where all other factors are neutral.
Using China as an example once again, proponents of the free trade model argue
that China has a competitive advantage in wage rates that makes it ideal as the
global manufacturing center that it has become. A closer examination, however,
reveals that China has adopted an export-led development strategy, the
centerpiece of which is a currency that is undervalued by 20-80%, with the
consensus leaning toward 40%.
Thus China's wages, in US dollar terms, are 40% cheaper than they would have
been if the currency were allowed to freely float. Similarly, foreign investors
receive a 40% subsidy to develop operations in China. To add insult to injury,
our exports are taxed at an additional effective 40% rate.
While China has been appreciating its currency, it has a long way to go to
bring it to equilibrium levels. In addition, China's internal barriers to trade
not only restrict US exports but also restrict China's market to Chinese
producers, thus reducing the size of the domestic economy. It's no wonder that,
until the last few months, our imports from China continued to accelerate, jobs
continued to move overseas, and our exports to China consisted primarily of raw
materials. The weakened US dollar has only recently had a positive impact on US
imports. Europe, Canada, and other countries with freely floating exchange
rates face comparable trends in their trade relationship with China.
Similar arguments can be made for our "free-trade" agreements (FTAs). For
example, Canada fosters oligopolies, and in some provinces monopolies, that
restrict both foreign trade and internal trade. Like China, South Korea, which
recently concluded its FTA with the United States, has notoriously undervalued
its currency, as automakers will attest. In addition, most countries have
value-added taxes that are rebated on their exports to the United States, while
our exports receive no such treatment because our federal tax system relies on
income and corporate taxes.
While these restrictive policies have little or no effect on our free trade
agreements with many of the smaller economies, they do have a significant
negative impact on our agreements with the larger economies. While focus has
been placed on labor and environmental standards, until and unless we are able
also to incorporate factors such as currency undervaluation and the lack of
competition policy into our trade policy, the premise of "free trade" will fail
to deliver its promises, whether delivered by Democrats, Republicans, or both.
With the current financial and recessionary crisis, many "traditionalist"
thinkers will likely pull out the old premises, arguing to conclude the Doha
Round and pass legislation enacting recently signed free-trade agreements as a
means of alleviating the crisis.
Once again, multinational companies and financial institutions and their
think-tanks will lead the charge since they would be the primary beneficiaries.
Before we blindly accept FTAs that will simply result in lost jobs, the next
administration needs also to address comprehensively the disparities in
international monetary and competition policies that prevent our trade
agreement from delivering the results that Main Street was promised and
deserves.
Robert Cassidy is the former assistant US Trade Representative for Asia
and for China and was the lead negotiator for China's 1999 Market Access
Agreement that paved the way for China's accession to the World Trade
Organization.
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