James Bacchus, “A Trade War With Zero Currency”

A Trade War With Zero Currency, Wall Street Journal
July 12, 2010
James Bacchus

In the past, U.S. congressional threats to slap tariffs on Chinese imports in retaliation for the perceived trade effects of Chinese currency practices were only threats. Now, for the first time, there is a real chance these threats could lead to action.

That’s because the debate in America is changing. Mainstream politicians, the media and even businesspeople are starting to call for action against Beijing. Earlier this month, Andy Grove, former chairman and chief executive of Intel, said the U.S. should “levy an extra tax on the product of offshored labor. If the result is a trade war, treat it like other trade wars—fight to win.” He is far from alone in urging such action.

Thus, there’s growing support in Washington for punitive legislation sponsored by Senator Charles Schumer. The New York Democrat wants to change U.S. law to permit additional tariffs to be applied to Chinese imports to offset the “subsidy” provided by the yuan’s alleged undervaluation. The level of those tariffs could exceed many billions of dollars annually.

Evidently, Senator Schumer has been persuaded that this action would somehow be consistent with U.S. obligations to China under the international rules on which both countries have agreed as members of the World Trade Organization. It is not at all clear that it would be.

Chinese currency practices benefit Chinese producers generally. To fit the definition of a “subsidy” under WTO rules, a governmental action must take the form of a “financial contribution” that, unless conditioned on exports or on the use of domestic over imported goods, must also be “specific” to “certain enterprises.” Successfully defending the notion that Chinese currency practices meet this definition would be difficult, to say the least, in WTO dispute settlement, where there is no precedent for such an assertion or such a ruling.

But given that America is in the middle of a “jobless” recovery, where five unemployed Americans are still seeking work for every one job available, such a move could prove popular. Few members of Congress seeking re-election in November are likely to be dissuaded from voting for such legislation because it may be inconsistent with international law. They would only see the immediate political benefit.

Nor are they likely to be deterred by the possibility of losing a WTO case to China a year or two from now. By that point, they would already be re-elected. Never mind the extensive and expensive trade sanctions that could later be applied lawfully by China if the U.S. lost at the WTO and refused to comply with the verdict.

To his credit, President Barack Obama has refrained from indulging in inflammatory rhetoric or taking precipitous action on the currency issue. Last week, Treasury Secretary Timothy Geithner declined to name China a currency manipulator under U.S. law. Clearly, the Obama administration continues to prefer quiet diplomacy to confrontation as the best course for resolving the currency dispute.

The Chinese government no doubt wants to defuse the situation, too. On the eve of last month’s Group of 20 meeting, Beijing announced it would drop the yuan’s peg to the dollar and let the value of its currency rise. This cooled the heat on China at the summit in Toronto, but it unfortunately didn’t lower the rising political temperature in Washington.

That’s partly because China simultaneously assured its own exporters that the value of the yuan will rise only gradually. Since the announcement, the yuan-dollar exchange rate has hardly budged. Mr. Geithner recently noted he would track “how far and how fast” the value of the yuan rises.

Despite his best intentions, Mr. Obama may not have the votes in Congress to stop the Schumer bill. Many Americans believe the yuan’s weakness makes Chinese exports to the U.S. cheaper and U.S. exports to China more expensive, robbing America of millions of jobs and contributing to America’s large trade deficit with China. It would be hard for the president to veto such a popular piece of legislation in the midst of an election campaign when his party’s continuing control of Congress is in dire jeopardy.

Both sides must act to calm these tensions before the world’s most important trade partners become embroiled in a mutually self-defeating trade conflict. The Schumer bill, if enacted, would thwart ongoing efforts in both countries to sustain the fragile global economic recovery and create more jobs and more prosperity in America and China alike. Whatever the pressures politically, America’s best interest economically is in keeping America open to growing and mutually beneficial two-way trade with China.

For its part, China can stop relying on cheap exports for growth, and start relying on spending by Chinese consumers in its rapidly developing economy. China could also reconsider “indigenous innovation” and other short-sighted, protectionist policies that make U.S. and other trade partners and investors fear that China is retreating from liberalization. Above all, the farther and faster the yuan rises against the dollar, the sooner and more significant the easing of trade tensions.

These actions would do much to help President Obama and others in the U.S. who are trying hard to stop the tariff-rattling and bring the two countries back from the brink of a destructive trade war. It’s in everyone’s interests that they succeed.

Mr. Bacchus is a former chairman of the World Trade Organization’s Appellate Body, congressman and U.S. trade negotiator. He is currently a partner at Greenberg Traurig in Washington.

Zhong Shan, “U.S.-China Trade Is Win-Win Game”

U.S.-China Trade Is Win-Win Game, Wall Street Journal
Zhong Shan
March 26, 2010

A sound and stable China-U.S. economic and trade relationship is more important than ever.

China-U.S. trade and economic cooperation has generated huge and real benefits for the United States, while China has been gaining a lot from it as well. In 2009 China jumped to become the third biggest market for U.S. exports. American companies have cumulatively invested over $62.2 billion in 58,000 projects in China and reaped bumper harvests. Their profits in China amounted to nearly $8 billion in 2008 alone.

Since the outbreak of the international financial crisis, China has been supporting the efforts of the American people to tackle the crisis. On the one hand, China has increased imports from the U.S. While overall U.S. exports dropped 17.9% in 2009, exports to China hardly decreased. Many U.S. manufacturing firms have found comfort in the Chinese market as a shelter against the global financial storm.

On the other hand, good value-for-money, labor-intensive goods imported from China have helped keep the cost of living down for Americans even when they become increasingly cash-strapped. Without consumer goods from China, the U.S. price index would go up an extra two percentage points every year.

How should we approach the trade deficit, a heated topic in the China-U.S. trade and economic relationship and an issue closely tied to many others?

To start with, Chinese and U.S. interests in bilateral trade are roughly balanced. China-U.S. trade and economic relations include services and investment as well as goods. From 2004 to 2008, the U.S. surplus in services with China grew by a phenomenal 35.4% annually, dwarfing the growth in China’s surplus in goods with the U.S.

In 2008, the total sales of American goods in the Chinese market, including goods exported from the U.S. to China, amounted to $224.7 billion, close to the value of goods China exported to the U.S. in 2008, which stood at $252.3. The two countries were almost balanced in terms of sales after adjustment for value-adding freight and insurance fees.

Next, the renminbi exchange rate is not the key to addressing China-U.S. trade imbalance. From 2005 to 2008, the renminbi appreciated by 21% against the dollar but China’s trade surplus with the U.S. increased by 20.8% annually. Since 2009 the renminbi exchange rate has remained basically stable, but China’s surplus with the U.S. has fallen by 16.1%.

Globally speaking, this is not an exceptional case. In 2009 the dollar depreciated against the euro, the Japanese yen and the South Korea won, which did not bring about fundamental changes in the trade between the U.S. and these countries. As a matter of fact, only a basically stable renminbi and dollar are conducive to the overall interest of the international community.

Finally, China always upholds and seeks balanced trade. The U.S. should vigorously expand exports to China. Only balanced China-U.S. trade could bring about sustained development, mutual benefits, and a win-win relationship. The achievement of this goal rests not with restricting China’s exports to the U.S. but with increasing U.S. exports to China. We hope that the U.S., while implementing its strategy to boost exports, can scrap the Cold War mentality, relax its export control against China, and expand the export of competitive products to China.

Where should China-U.S. trade and economic relations go from here?

First, we should refrain from politicizing economic and trade issues. We should vigorously oppose trade protectionism, and give full play to the platforms of the China-U.S. Strategic and Economic Dialogue and the Joint Commission on Commerce and Trade. We hope that the U.S. can recognize China’s market-economy status as soon as possible and include export-controls revision in the priority action plan of the U.S. National Export Initiative.

Second, we should expand the convergence of our interests in economic and trade cooperation. The two economies are highly complementary with huge potentials. At present, both are restructuring their industries and therefore their growth potential. We should give full play to our respective advantages in capital, technology and markets, and actively explore cooperation in trade in services, low-carbon economy and high-tech products.

Third, we should enhance trade and investment facilitation. The Chinese government will adhere to the opening-up policy as one of its basic state policies, and continuously improve policy transparency and trade and investment facilitation.

The government protects the legitimate rights and interests of foreign investors in accordance with laws. We hope that the U.S. will ease irrational restrictions on Chinese companies’ investment in the U.S., and facilitate the movement of businesspeople between the two countries.

Fourth, we should promote the multilateral trading system. China and the U.S. should jointly push for a substantive progress in the Doha Round talks, and lock in the agreed outcomes from previous negotiations.

As Wen Jiabao, the Chinese premier, recently reiterated, it is always better to have a dialogue than a confrontation, cooperation than containment, and a partnership than a rivalry. As long as we approach the China-U.S. commercial relationship in a responsible manner we will definitely be able to make it more stable and sound.

Mr. Zhong is vice minister of commerce of the People’s Republic of China.

Robert J. Samuelson, “Obama’s Tire Tariff: Bad Policy, Right Message”

September 21, 2009

For years, American presidents have faced a China conundrum: How to deal with a country that practices predatory trade without unleashing global protectionism? President Obama’s recent decision to slap high tariffs on Chinese tire imports for three years, starting at 35 percent and dropping to 25 percent in the final year, reflects the dilemma. To do nothing about China’s trade policies is to encourage more of the same. But to attack them too aggressively might undermine U.S.-China cooperation on other issues (from North Korea to financial regulation) and risk a wider trade war.

The $16 billion wholesale tire market seems an unlikely flash point. It’s true that from 2004 to 2008 Chinese imports rose from 3 percent to 11 percent of U.S. consumption (all imports accounted for 42 percent). The Chinese tires undercut prices of comparable U.S. tires by about 19 percent, reports the U.S. International Trade Commission (ITC). Over the same period, four U.S. tire plants shut, and employment dropped by almost 5,200. Three more factories, with an estimated 3,000 workers, could go by year’s end, leaving 25 plants and about 28,000 workers. Still, cheap imports aren’t the industry’s only problem. The recession, depressed vehicle sales and less driving have also hurt.

At best, high tariffs might stabilize employment. Critics plausibly argue that the loss of Chinese tires will stimulate imports from other countries (Indonesia, Mexico) or increase production from underutilized U.S. factories without more hiring. Higher tire prices might dampen other consumer spending. The net effect on the economy, though small, is unclear.

Understandably, the Chinese reacted harshly. The tariffs were imposed under an obscure provision of U.S. trade law allowing complaints against Chinese imports that “cause or threaten to cause market disruption.” The legal standard for this, as determined by the ITC, is lax, but the president must approve final tariffs. President Bush said no four times. Now that Obama has said yes, China must fear more cases, involving steel, clothes, shoes and who knows what else. To deter more restrictions, China has threatened legal action against allegedly underpriced imports of U.S. auto parts and chickens.

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The First U.S.-China Strategic and Economic Dialogue Economic Track Joint Fact Sheet

The First U.S.-China Strategic and Economic Dialogue Economic Track Joint Fact Sheet

As special representatives of President Barack H. Obama and President Hu Jintao, U.S. Treasury Secretary Timothy Geithner and Chinese Vice Premier Wang Qishan concluded the first meeting of the Economic Track under the U.S.-China Strategic and Economic Dialogue in Washington today.

On the U.S. side, they were joined by the following Cabinet members and other senior officials:

• Secretary of Agriculture Thomas Vilsack
• Secretary of Labor Hilda Solis
• Secretary of Transportation Raymond LaHood
• Chair of the Council of Economic Advisors Christina Romer
• Director of Office of Management and Budget Peter Orszag
• U.S. Trade Representative Ronald Kirk
• Director of the National Economic Council and Assistant to the President for Economic Policy Lawrence Summers
• Chairman of the Federal Reserve Ben Bernanke
• Chair of the Federal Deposit Insurance Corporation Sheila Bair
• Chairman of the Securities and Exchange Commission Mary Schapiro
• Chairman of Commodity Futures Trading Commission Gary Gensler
• Chairman and President of the Export-Import Bank Fred Hochberg

On the Chinese side, they were joined by the following Ministers and other senior officials:

• Minister of Finance Xie Xuren
• Governor of the People’s Bank of China Zhou Xiaochuan
• Chairman of the China Banking Regulatory Commission Liu Mingkang
• Chairman of the China Securities Regulatory Commission Chairman Shang Fulin
• Chinese Ambassador to the United States Zhou Wenzhong
• Deputy Secretary-General of the State Council Bi Jingquan
• Vice Minister of Foreign Affairs He Yafei
• Vice Minister of the National Development and Reform Commission Zhang Xiaoqiang
• Vice Minister of Human Resources and Social Security Wang Xiaochu
• Vice Minister of Transport Weng Mengyong
• Vice Minister of Agriculture Niu Dun
• Vice Minister of Commerce Ma Xiuhong
• Vice Minister of Health Yin Li
• Vice Chairman of the China Insurance Regulatory Commission Li Kemu
• President of the Export-Import Bank of China Li Ruogu

I. Sustainable and Balanced Economic Growth

The United States and China have responded to the global economic crisis with comprehensive stimulus measures that have played a critical role in boosting confidence and supporting global demand, and will respectively take measures to promote balanced and sustainable economic growth in our domestic economies both to ensure a strong recovery from the international financial crisis and to bring about more balanced and sustainable global economic growth after a global recovery is firmly established. To this end, both countries will enhance communication and the exchange of information regarding macro-economic policy, and will work together to pursue policies of adjusting domestic demand and relative prices to lead to more sustainable and balanced trade and growth. Both sides will also pursue forward-looking monetary policies with due regard for the ramifications of those policies for the international economy. In addition, they will encourage new approaches to infrastructure financing to assist with economic recovery.

The United States will take measures to increase national saving as a share of GDP. The U.S. household saving rate has already risen sharply as a result of the crisis, contributing to a significant decline in the U.S. current account deficit, and the United States will adopt policies that will continue to encourage household saving. The United States will also reform its health care system with the aim of controlling rising health care costs for businesses and government while assuring high-quality, affordable health care for all Americans, and is committed to reducing the federal budget deficit relative to GDP to a sustainable level by 2013.

China will continue to implement structural and macroeconomic policies to stimulate domestic demand and increase the contribution of consumption to GDP growth. China will further enhance access in its service market and expand areas and channels for non-government investment, with a view to expedite the development of its services industry and increase the share of services in GDP. China will also deepen social safety net reform, including strengthening its basic old-age insurance system and enterprise annuities.

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Timothy Geithner’s Strategic and Economic Dialogue Closing Statement

Treasury Secretary Timothy F. Geithner’s Strategic and Economic Dialogue Closing Statement

Today, we concluded the first meeting of the Strategic and Economic Dialogue launched by President Obama and President Hu.  I want to thank Vice Premier Wang, who led a high level delegation from across China’s government, as well as the twelve U.S. cabinet Secretaries and heads of financial and regulatory authorities who participated in a series of thoughtful and candid discussions over the past two days.

In the wake of a severe global financial crisis, we agreed it is vitally important for China and the United States to see through their commitments to repair the financial system and lay the foundation for recovery.  At the G-20 Leaders meeting in London, we joined together to restore global confidence.  The forceful policy responses by China and the United States have helped pull the global financial system back from the edge of failure and provided support for demand at a critical time.

Recognizing that cooperation between China and the United States will remain vital not only to the well being of our two nations but also the health of the global economy, we agreed to undertake policies to bring about sustainable, balanced global growth once economic recovery is firmly in place.  To that end, we laid out a framework for cooperation in four key areas:

First, we will undertake macroeconomic and structural policies to ensure a more sustainable and balanced trajectory of global growth.

In the United States, the current account has fallen and private savings rates have risen to historical average levels, and we will take steps to sustain and reinforce these trends.  President Obama has committed to lowering the federal deficit to sustainable levels once recovery is firmly established.  The Administration is committed to investments in energy, education and health care that will rebuild the American economy on a firmer foundation going forward.

China will rebalance towards domestic demand-led growth and increase the share of consumption in GDP.  Policies to enable adjustment of demand and relative prices will lead to more balanced trade and growth.  Greater development of China’s services sector and the shift away from dependence on exports and heavy industry will have a powerful effect not only on rebalancing but also supporting the transition to a green economy.

Second, we will work to build more resilient and market-oriented financial and regulatory systems.  Although our challenges in financial reform may be very different, success on our respective reform agendas will be integral to achieving more stable and balanced growth globally.

In the United States, we will take actions to greatly strengthen financial system regulation, including higher capital requirements more broadly applied, robust consolidated supervision of the largest and most interconnected financial firms, and creation of an oversight council charged with monitoring emerging risks.

China has indicated its intention to move forward on financial sector reform to better allocate credit to domestic demand.  China will liberalize interest rates over time and promote development of new consumer finance products.  China will also open new opportunities for foreign participation in the financial services sector, including allowing foreign banks to underwrite bonds in China’s rapidly growing bond market.

Third, we reaffirmed our commitment to open and rules-based trade and investment.  We renewed our commitment to avoid protectionist measures and to bring about a successful conclusion of the Doha Round.  China and the United States committed to treating firms with foreign ownership operating in our markets exactly as we do domestically-owned firms when it comes to government procurement of goods.  We agreed to work together to facilitate China’s accession to the WTO Government Procurement Agreement.  And China will increase the dollar threshold for foreign direct investments that must obtain central government approval.

Fourth and finally, the United States and China recognized the critical role of the international financial institutions in preventing and responding to crisis and ensuring balanced global growth.  The global economy has fundamentally changed since the historic gathering at Bretton Woods and so too must the global architecture that bears its name.  We committed to work together to ensure the international financial institutions have the requisite resources and tools to address today’s challenges.  We will work together to ensure China’s full engagement and representation in the design of key multilateral agreements and groupings, such as the G20, the Financial Stability Board, and the international financial institutions.

We look forward to deepening this framework for cooperation as we prepare for the upcoming G20 leaders meeting in Pittsburgh and broadening it through additional important bilateral dialogues during the next year.

I want to again thank all of my colleagues, American and Chinese, for their candor and engagement over the past two days.  I want to express special gratitude to Vice Premier Wang for his inspired and determined efforts to make this Dialogue a success.

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http://www.ustreas.gov/press/releases/tg239.htm

Bruce Stokes, “A New American Trade Consensus”

A New American Trade Consensus

By Bruce Stokes, New America Foundation

http://www.newamerica.net/publications/policy/new_american_trade_policy

May 4, 2009

The 2008 presidential election was not about globalization or U.S. trade policy. However, the challenges facing the administration of President Barack Obama-the financial crisis, the lengthening and deepening recession-are inextricably bound up with America’s trading relationships. A “business as usual” trade policy will not deliver the economic changes that President Obama has promised the public, nor restore Americans’ faith in their country’s engagement with the global economy.

The United States needs a trade policy that is avowedly self-interested and results oriented to help mitigate the global current account imbalances that were one of the principal underlying causes of the financial crisis. It needs a trade policy that puts a new emphasis on bolstering American manufacturing to insure that the United States produces more of what it consumes in the future, to reduce trade imbalances, and to sustain the American standard of living. And it needs a trade policy that is based on values and standards that connect with the needs and aspirations of the American people.

The trade policy President Obama inherited has lost legitimacy. The economic benefits of trade have been oversold and the costs ignored. It is little wonder that the public is increasingly skeptical of the advantages of trade and trade agreements, and that the business community sees most trade negotiations as irrelevant to its needs.

The current economic crisis is a painful reminder that trade policy has consequences. While many economists discount the trade imbalances of individual countries, when national trade deficits and surpluses are allowed to grow too large they can destabilize the world economy, as the need to recycle funds between creditors and debtors leads to riskier and riskier financial practices. Moreover, the offshoring of U.S. manufacturing, while a boon to consumers, has resulted in too few Americans earning too little and producing too little of what we consume, which has aggravated the country’s current account deficit.

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