Geez, Even Reaganites Want to Bash China

♠ Posted by Emmanuel in , at 3/23/2010 12:13:00 AM
It may be a sign of the times when old Reagan administration hands anxiously await their turn to cast stones at China. To be sure, Reagan wasn't as much a pro-trade stalwart as many remember him to be. Still, by current standards, Obamanite dithering on trade contrasts sharply with the Reaganite example. I thus read with great interest Robert Lighthizer pillorying both the WTO Doha Development Agenda and China for not granting, get this, enough concessions to make a deal "good enough" for American interests. Since when did the world's most powerful nation start grovelling about the unfairness of the trading system it created? The larger answer, of course, is "lost hegemony," but I will save that for another time.

Whatever happened to good ol' "comparative advantage"? I honestly can't tell this Republican from your standard-issue Democrat when it comes to trade. Here are the main points from Lighthizer's NYT op-ed:
As trade ministers have chattered on for nearly a decade, the world has changed. The notion that we should adjust global trading rules to help the rest of the world compete with the West has become outdated. Since 2001, the West has suffered its worst economic crisis since the Great Depression. In the United States, we have seen our financial services sector — which accounted for 40 percent of American corporate profits in 2007 — implode. Since the start of these talks, we have run up a cumulative trade deficit with China of more than $1.5 trillion, and have lost some four million manufacturing jobs.

Meanwhile, the World Bank projects that developing countries will enjoy 5.2 percent growth in 2010 and 5.8 percent growth in 2011 — while “high income” countries will experience growth rates of only 1.8 percent in 2010 and 2.3 percent in 2011. Under these circumstances, why would we continue with the same tired agenda for trade negotiations? It is like trying to improve standard-definition TV in the world of high-def.

Unfortunately, President Obama is reading from the same nine-year-old talking points as the trade bureaucrats. On March 11, in comments echoing part of his State of the Union address, he re-committed his administration to working “towards an ambitious and balanced Doha agreement.” That is a mistake. The president should push for a new United States trade agenda suitable for a world in which the Western countries are losing ground while “developing” countries like China, Brazil and India are surging.

Any serious multilateral trade talks should address four main topics:

THE UNITED STATES-CHINA TRADE BALANCE Our trade deficit with China grew from $103 billion in 2002 (the first full year after China joined the W.T.O.) to $268 billion in 2008 — an increase of 160 percent in only seven years. Although the recession has forced American consumers to reduce their purchases of Chinese imports, our 2009 trade deficit with China was still almost $227 billion. This imbalance has become a symbol of American decline and poisoned many Americans’ view of free trade. By some estimates, China’s aggressive exports and reluctance on imports could lower global world production by 1.4 percent and cost Americans 1.4 million jobs.

CURRENCY MANIPULATION China has stockpiled some $2.4 trillion in foreign currency reserves in its determination to keep the yuan from rising — as market forces would normally require — and maintain its trade advantage. No wonder almost a third of the House demanded last week that the Obama administration take some action. Many experts believe that the artificially low interest rates caused by Chinese currency manipulation contributed directly to the real estate bubbles in the West that exploded with such disastrous results.

UNFAIR TAX RULES The United States relies primarily on income taxes to pay for government services, while most of our trading partners depend on value-added taxes on purchases. Under current W.T.O. rules, countries with value-added taxes are allowed to give tax rebates to their companies on exported goods, and to impose those taxes on imports. Companies in nations with income taxes, however, are not allowed similar treatment. Thus an American product shipped to France is effectively taxed twice, while a French product can be sent here effectively tax-free. The consequences are serious: a 2004 analysis concluded that this practice cost American exporters more than $100 billion per year.

REGULATORY DISPARITIES Foreign companies often benefit from relatively weak labor and environmental rules that enable them to operate with significantly lower costs than their United States competitors. This leaves American manufacturers with three options: lose market share, cut profit margins or move abroad. Indeed, one of the main concerns about proposed climate change legislation is that such laws would result in significant carbon “leakage,” as carbon-emitting manufacturers flee to countries with lower standards. If we want an efficient global market, we should be more serious about making sure companies in all nations play by the same rules.

Ending the Doha round will not be easy. Many trade bureaucrats, both here and abroad, will cling to the mantra that doing so would hurt free trade. But Americans would be receptive to an argument focused on their concerns: in a 2008 Rasmussen poll, 73 percent of respondents said that a free-trade agreement had had a negative effect on their families, while only 14 percent said they had benefited from such an agreement. And while other countries would undoubtedly resist changing a global trading system that puts Americans at a severe disadvantage, we have enormous leverage, in the form of the world’s largest market. We should use that leverage.

Finally, what do we have to lose? The Doha talks are never going to significantly help Americans anyway. One benefit of the recession and the pause in the Doha talks is that President Obama has a rare opportunity to re-focus our trade agenda. He should take it.
There are many readily identifiable flaws here, not the least cloaking the use of "enormous leverage" in the guise of multilateralism. Moreover, Lighthizer doesn't seem to have any qualms about introducing backdoor protectionism in the form of labour and environmental standards Democrats are so fond of into multilateral fora. If labour and environmental standards were the same in the rest of the world as the US, then wouldn't much of it be "developed" in the first place?

Once more, my final say is this: Many Americans like Lighthizer think they can cow the rest of the world into accepting US wishes. On the other hand, many developing countries are tired of high-handed American rhetoric on matters of economic governance when the US is such a dreadful example replete with double standards. Plus, who in their right mind would like to be just like America--a has-been nation whose better days are well behind it? My guess is that US power is sufficiently reduced as to make it more likely that any American attempt to force its will onto others will just reveal the emperor's new clothes.

I guess there's only one way to find out who rules the roost in the world economy, and on that the protectionists and I probably agree. It's always struck me as odd that the USA #1 blogging crowd led by Drezner doesn't want this to happen, but still. Whether it's the US or China that casts the first stone, it doesn't really matter as global economic imbalances will more likely be forced into an overdue reckoning by a short, sharp, shock than a continuation of the present situation where we all pretend everything is hunky-dory when it clearly isn't. As before, just cut the crap and start fighting already. If it requires whipping guys like Lighthizer into a frenzy, then so be it.

UPDATE: Lighthizer's profile may shed light on the turn he's taken since the days of Reagan as he's been a trade lawyer representing any number of trade-phobic interests. Still, I believe that sentiment Stateside is definitely souring:
Robert E. Lighthizer is the leader of the firm’s International Trade Department. He divides his time between traditional trade litigation, policy advice and legislative initiatives. His clients include large U.S. corporations and coalitions. He represents heavy manufacturing, agricultural and high-tech companies, as well as financial services institutions. He has been lead counsel in scores of antidumping and countervailing duty cases during the past several years and is currently active in numerous pending cases and administrative reviews. In recent years he also has focused on market-opening trade actions on behalf of U.S. companies seeking access to foreign markets. He is equally at ease devising strategies for and dealing with executive departments and congressional committees.