Friedrich von Blowhard writes:

Dear Blowhards,

I came across a very interesting essay by Robert Cassidy, the former Assistant U.S. Trade Representative for Asia and for China (tip of the hat to Howard Richman at his blog Trade Wars.) Mr. Cassidy was the lead U.S. negotiator for China's 1999 Market Access Agreement that paved the way for China's accession to the World Trade Organization.

Titled "The Failed Expectations of U.S Trade Policy" and appearing in Foreign Policy in Focus (June 4, 2008 edition), Mr. Cassidy’s essay begins with his current unease with his own handiwork:

As the principal 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.

Why didn’t the trade agreements work? Mr. Cassiday concludes that in the Clinton Administration’s haste to get China into the WTO, the 1999 Market Access Agreement didn’t address a number of critical issues. Specifically, he points out that the Clintonistas, um, overlooked the topic of currency manipulation (China deliberately maintains a significantly undervalued currency so as to encourage exports and discourage imports). They also chose to ignore a variety of tax and other internal commercial policies that continue to prevent U.S. exports from penetrating the Chinese market.

According to Mr. Cassidy the power of these factors to distort "free trade" is obvious if you compare our economic relations with China to our economic relations with Canada and Europe:

In order to join the WTO, China made unilateral concessions to reduce and, in some cases, eliminate barriers to entry for U.S. goods and services…U.S. exports to China have increased and, as the U.S. Trade Representative (USTR) 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 U.S. exports of goods to the EU was almost 70% greater than the increase in exports of goods to China [. Likewise, the absolute increase to Canada] 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 U.S. import side, the United States made no concessions to China, yet U.S. imports from China were more than triple the pre-accession levels; to $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.

So it would appear that the formal barriers to free trade that China gave up to get WTO membership had a much lower impact on its trade balance than the informal barriers (currency manipulation and a series of internal barriers to both imports and consumer spending generally) that it kept.

So why were we such, well, for want of a better term, suckers? Mr. Cassidy gives some broad hints:

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 U.S. stock market.

Conversely, it is doubtful that the U.S. economy or its workers are better off. U.S. manufacturing jobs 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 U.S. households has been stable or declining. Only the top quartile of families has seen significant increases in real disposable income.

Gee, the U.S. government was looking out for the welfare of the people who make campaign contributions and not for Joe Sixpack! I'm shocked, simply shocked to see that happen.

What does he recommend for the future? Well, he’s suggesting we might do better to ignore the siren’s song spun by the powers-that-be:

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 trade agreements that will simply result in lost jobs, the next administration needs to also comprehensively address the disparities in international monetary and competition policies that prevent our trade agreement from delivering the results that Main Street was promised and deserves. [Emphasis added.]

Like I said back a few weeks, perhaps it’s time we took a little more nuanced…and a little more hard nosed…look at trade.

Cheers,

Friedrich

How are the gains (spread widely, but shallowly) and the losses (spread narrowly but deeply) from trade any different from the gains and losses from technological innovation?

Except that the Chinese tend to invest most of their money back in the West, allowing for lower interest rates that allowed many of us to purchase homes.

Posted by: Tom West on June 11, 2008 7:59 AM

The main winners and losers of China's policy are internal to China. It favors export industries at the expense of Chinese consumers. This is a bad policy for the Chinese people as a whole because Chinese consumers are really poor, while one would assume the export industries are reasonable successful.

Posted by: Alex J. on June 11, 2008 9:42 AM

Mr. West:

I think you've got it reversed; the gains have been sharp and localized (note Mr. Cassidy's accurate description of the winners as the transnational corporations and financial institutions and, of course, their investors and managers), while the losses have been broad & wide (you did notice about the wage stagnation/or dropping standard of living of the bottom three quartiles of the population, didn't you?) I am not suggesting that trade is everywhere and always a bad thing, just that our current trade regime is clearly designed to serve some of our citizens and not, shall we say, the general interest.

Alex J.:

I'm perfectly happy to let the Chinese distribute their gains internally as it suits them. I'd just like for the citizens of the U.S. to have the right to do likewise. Of course, that would require prying the control of the political steering wheel from the fingers of the current rent-seekers and campaign contributors.

Posted by: Friedrich von Blowhard on June 11, 2008 11:09 AM

By manipulating their currency to encourage exports and discourage imports, China is effectively giving us a discount on all of the products it sells us.

Thought experiment: China pursues a currency-manipulation policy so extreme that their exports are essentially free to North American consumers. Is this bad for us? If not, why is it bad when the currency manipulations give us a steep discount?

If the Chinese government wants to sell us goods at below cost, we should celebrate and profit from their confusion.

Posted by: Zdeno on June 11, 2008 1:05 PM

That's quite a discount! We get cheaper goods (which devalue to zero), while millions of jobs and huge productive assets, like factories, flow out of the country! And the sword of currency revaluation and dumping our US govt bonds can fall anytime the Chinese wish. Man, what a deal! We need huge trade deficits so foreigners can buy up our real estate, natural resources and businesses! It's good when we have less and they have more. Living in a soon-to-be third-world country is fantastic!

Hey, I'll give you all a few guesses as to who funds the econ programs at our fine colleges and universities! Did you guess the same corporations that are profiting from this BS? Good for you, you see the game clearly!

Everybody knows that this situation is terrible and getting worse. And its all sold on the "short-term discounted consumer goods" angle, and not the permanent loss of industry, our land, natural resources, indebtedness, etc.

I've basically concluded that most so-called economists are either brain-washed or outright liars. They call the propaganda program they go through at school an "education". I guess there aren't too many good jobs left in America, except in finance, so they'll do anything they can, including telling a long list of whoppers, to justify their rather useless jobs of bootlicking corporate thievery.

Posted by: BIOH on June 11, 2008 1:44 PM

"The Chinese" don't distribute the gains from trade as it suits "them". Some particular Chinese people with political power use it to enrich themselves at the expense of other particular Chinese people. A side effect of this is that Wal-Mart sells goods made by poor Chinese cheaply to working class Americans at a rate subsidized by the immiseration of rural Chinese peasants.

BIOH, since the Chinese own a large amount of dollar denominated assets, a fall in the dollar would hurt them by reducing what they can get from those assets. Also, a fall in the dollar would make Chinese products more expensive for Americans, and hence less attractive to them.

Posted by: Alex J. on June 11, 2008 3:46 PM

Alex J.

You say:

Some particular Chinese people with political power use it to enrich themselves at the expense of other particular Chinese people.

They are also using the (artificially) cheap labor of their fellow nationals to enrich themselves at the expense of U.S. people. Why should we help them?

You also say:

Also, a fall in the dollar would make Chinese products more expensive for Americans, and hence less attractive to them.

You may not be aware, but the Chinese government spends a very significant chunk of their GDP buying dollars so as to prevent this very outcome. The RMB has appreciated a bit against the dollar, but remarkably little compared to what one would expect given the one-sidedness of our mutual trade. Apparently, for some odd reason, the Chinese think it's more important to have a strong producer sector, even at the cost of a weaker consumer sector. Too bad they're not as "advanced" as we are.

Posted by: Friedrich von Blowhard on June 11, 2008 4:49 PM

Chinese products are already highly expensive.

The Chinese own about 1 trillion dollars of US debt. We pay about 6-7% on that every year to China in interest. That 60 to 70 billion should be added onto the cost of the goods made there as a real expense. And that means that Chinese products are actually over 20% more expensive than labelled. And this figure will grow with time.

Why don't you econ boys figure that into your bogus analysis?

I guess that's the price we pay for so-called "cheap goods"--bogus analyses of how "well-off" we are for getting them, how "inexpensive" they are, a gutting of our manufacturing base, millions out of productive work, lower wages, huge indebtedness, a loss of sovereignty, etc.

Hey, why can't China produce for their own citizens, and the US produce for its own citizens? What a novel idea!

Oh my, I must be foregetting that this neo-mercantilist system is for fattening the wallets of the Big Boys while the regular folks be damned. The bigger the scam, the more salesmaen you need to sell it. And the shinier their shoes need to be. With enough shoe polish, I guess you can sell anything to the gullible.

Posted by: BIOH on June 11, 2008 5:34 PM

BIOH, I think I agree with you, although I'm wondering if you would be for the massive governmental regulation required to force companies to keep their factories in the US. Or if you think there is a better way to do so. I'm genuinely asking, not being snarky.

Posted by: JV on June 11, 2008 6:43 PM

I think you've got it reversed; the gains have been sharp and localized (note Mr. Cassidy's accurate description of the winners as the transnational corporations and financial institutions and, of course, their investors and managers), while the losses have been broad & wide (you did notice about the wage stagnation/or dropping standard of living of the bottom three quartiles of the population, didn't you?)

This does not square with my experience. I'm certain that some companies have done very well, and I'll grant that my income over the last 20 years has not risen spectacularly against inflation. But what has changed is how bloody cheap everything is. When was the last time I mended clothing? Why doesn't my computer cost $5,000 like my first one did? I can afford a LCD screen? When I went camping and finally had to replace a tent, it was less than 1/5th what I had originally paid!

As for owing the Chinese money, the reason that I have a 5.5% mortgage (which I can afford) and not a 9% mortgage (which I can't), is because the Chinese (and lots of other nations) are lending money (mostly at less than 4%).

Look, if unemployment was near historic highs, I'd tend to say there are real problems, but quite frankly, it feels to me that if we suddenly cut off trade, I'd be looking at a 30% decrease in effective salary and a massive increase in my mortgage payments, and the unemployment rate isn't likely to go down much further.

I'm not really certain my circumstances are much different from those not directly affected by trade. If it wasn't for international trade, I'd take a *massive* hit in my lifestyle. and that seems to be case for a lot of people (pretty much anyone who buys stuff or owns a mortgage). Thus I really see the benefits of trade as wide-spread, and no, I don't care if it's made lots of other people millionaires. It's made my middle-of-the-road lifestyle much easier to manage.

I'll freely admit that to those who lost their jobs, that is real pain, but again I don't see how that's any different technological innovation that is a presumed 'good'.

Sorry, but sometimes it really feels the main problem with foreign trade is that it makes foreigners better off. And if we have to make ourselves poorer to keep them poor, so be it.

Posted by: Tom West on June 12, 2008 6:27 AM

And that means that Chinese products are actually over 20% more expensive than labelled. And this figure will grow with time.

Why don't you econ boys figure that into your bogus analysis?

Hold on, you're telling me that if my bank lends me $100K for a mortgage, and then sells me a watch for $20, I'm actually paying $100,020 for the watch? Wow, that is different from the economics that they taught me in school.

Sorry BIOH for the sarcasm, but the money that the Chinese lend us is unrelated to what we buy from them. What I borrow from the bank doesn't make the bank's be considered more expensive. We're not taking loans to buy their goods, we're taking loans to buy houses, business investment, and (mostly) finance government deficits.

That and the Chinese (and the other lenders) are making ridiculously low levels of return on their investment (2.5%-3% is typical) and are losing money hand over fist every time the US dollar devaluates. They might not be doing their citizens any favors, but there sure as heck benefitting us by keeping our interest rates low.

Posted by: Tom West on June 12, 2008 6:37 AM

1) The purpose of the widget industry is the consumption of widgets. It is not the purpose of the widget industry to provide the opportunity for people to slave away running a widget making machine.

2) Why can't the people of Michigan produce cars for the people of Michigan, while the people of Kentucky produce cars for the people of Kentucky?

Posted by: Alex J. on June 12, 2008 11:53 AM

If the Chinese government wants to sell us goods at below cost, we should celebrate and profit from their confusion.

Free lunch, so tasty!

Just got a copy of Gomory and Baumol's Global Trade and Conflicting National Interests, which is of interest apropos this topic. It's conveniently divided into two parts: "National Welfare and Trade in the Modern World" for nonspecialists; and "Further Theory and Extensions" for the geeklier. Looked it up after coming across Gomory's congressional testimony online. Somewhat out of date but food for thought is Fingleton's Unsustainable (which must be the trade paperback versions of In Praise of Hard Industries). Popular style, quick read, lots of cheap used copies available.

Tom West: "...it feels to me that if we suddenly cut off trade...

"Rethinking current trade relations" doesn't mean "cutting off trade".

...but the money that the Chinese lend us is unrelated to what we buy from them.

Really? Apparently I'm as confused as those stupid Chinese.

But I'll own up to being an economic 'tard, never having been able to quite comprehend that "debt is wealth" or the complex perpetual motion mechanics underlying all those "we can consume more than we produce forever" assurances from the wiser and better-informed.

Alex J.: 2) Why can't the people of Michigan produce cars for the people of Michigan, while the people of Kentucky produce cars for the people of Kentucky?

Alex, this is the sort of statement that gets people and certain fields of endeavor tarred with the label "applied autism". Now, you may long for the day when we are all reduced to featureless, cultureless, nationless, interchangeable anomic Friedmanian labor units under the absolute rule of the MNCs (and may your desire never be fulfilled), but surely you recognize that this hasn't been quite achieved.

Posted by: Moira Breen on June 12, 2008 12:30 PM

The purpose of the economics industry is the production of vast amounts of paper filled with worthless jargon and rear-view mirror justifications disguised as a "science".

Why can't the economists get a productive job, like stacking shelves at Walgreen's, instead or writing tripe for the justification of using people like dirt and rapacious greed?

Posted by: BIOH on June 12, 2008 1:05 PM

JV,

Its called tariffs. That's how the US built its great industrial base. And so-called "free trade" is what has destroyed it. All countries who have a significant industrial base invoke measures to protect those industries. That is, if they plan on keeping them.

Tariffs. They serve the same function as having a lock on your front door. Of course, the pupose of the tariff and the lock are the same--keeping what you have safe from thieves.

Posted by: BIOH on June 12, 2008 1:09 PM






Post a comment

Name:


Email Address:


URL:


Comments:


Remember your info?