September 11, 2003
by Irwin Stelzer
America has China in its sights. Fortunately, it's a trade war and not a shooting war that is about to erupt. The Chinese rebuffed Treasury Secretary John Snow's efforts to get them to increase the value of their currency relative to the dollar. After the secretary's visit to China, a spokesman for that country's central bank announced, "We will keep the Yuan stable according to the current policy." That means that the Chinese currency will remain pegged to the dollar for the foreseeable future, and at an artificial rate that gives Chinese exporters a significant advantage over American firms in both U.S. and overseas markets.
The Chinese did agree to use the flood of dollars they are accumulating to accelerate their purchases of U.S. Treasury bonds. Although that concession will stimulate growth here by keeping interest rates down, it has done nothing to calm textile firms, furniture manufacturers, auto parts makers, and trade unions who know that the trade deficit with China is over $100 billion annually and rising (and that China has replaced Japan as the country that runs the largest trade surplus with America). Several of these companies have formed The Coalition for a Sound Dollar, and are threatening to file a complaint with the World Trade Organization, relying on a provision that prevents countries from influencing exchange rates so as to "frustrate the intent" of WTO trade agreements. Meanwhile, Senators Chuck Schumer, Elizabeth Dole, and Lindsey Graham are preparing a bill to offset the undervalued Chinese currency by imposing a 27.5 percent tariff on all imports from that country.
It matters little to these firms and workers that American companies with substantial investments in China are benefiting from its undervalued currency, which gives them an edge in international markets. Or that consumers are feasting on low-priced, made-in-China goods. Wal-Mart accounts for a full 10 percent of the overall trade deficit with China.
But consumers are not as organized or as vocal as workers—read, voters—who feel they have been displaced by Chinese manufacturers that underpay their workers, undervalue their currency, provide subsidies to exporters in key industries, and flood markets with goods incorporating stolen American intellectual property. So the several candidates for the Democratic presidential nomination are claiming that they will put an end to such "unfair" trade. Congressman Richard Gephardt can legitimately claim to have voted against all trade-opening legislation during his almost three decades in congress, and other candidates are now abjectly apologizing for earlier votes in support of the North American Free Trade Agreement (NAFTA) and promising from here on in to protect American workers from competition from China, Japan, Mexico, and other countries.
This would be bad enough, were it not for other pressures on the world trading system. As usual, the European Union has chosen to throw a spanner in the works in advance of key meetings of the 146 members of the WTO, which meetings begin in Cancun tomorrow. Several spanners, in fact. The European Union insists on continuing to subsidize its relatively rich farmers to the disadvantage of developing countries that rely heavily on their farming industries for hard currency earnings. The Washington-based International Food Policy Research Institute estimates that elimination of rich countries' agriculture protectionism would result in a tripling of developing countries' exports to about $60 billion per year. Brazil's ambassador to the WTO, Luiz Felipe Seixas de Correa, speaking for a group of twenty very angry developing countries, says that the draft to be put before the Cancun meeting "Has to be fundamentally changed. Otherwise, it will fail."
Tell that to the French, who dominate EU trade policy. When the European Commission proposed that in the future any subsidies to farmers should not be based on how much they produce, Franz-Josef Feiter, head of the Committee of Agricultural Organizations in the European Union, said, "We don't want to get checks simply because we live somewhere remote and are nice people [sic]." The betting is that the French will prove as cooperative with American efforts to free trade in agricultural products as they have been with efforts to free Iraq.
To make matters worse, the European Union is demanding that a global register be set up to limit the use of regional names to some 41 wines, cheeses, and other products associated with specific regions. California winemakers would no longer be permitted to call their products Chablis, Canadian meat producers would not be allowed to label their products Parma ham, and cheese makers, including those in Denmark, would be prohibited from calling any of their products "feta"—the Greeks having threatened to veto any agreement unless it covers feta and ouzo liquor. Fortunately, the Italians did not succeed in barring restaurants around the world that are not owned by Italians from calling themselves Italian restaurants.
A record number of other disputes remain to be resolved. The United States, Canada, and Argentina are objecting to EU restrictions on the importation of genetically modified foods; Australia, Thailand, and Brazil are protesting the European Union's protection of its sugar growers; the Philippines are unhappy about Australia's rules requiring the quarantine of fresh fruit and vegetables.
Despite all of this, U.S. Trade Representative Bob Zoellick, who has succeeded in cobbling together an agreement to make cheaper drugs available to poor countries, remains optimistic that the current round of negotiations will continue the opening of trade that has contributed so much to global prosperity since the end of World War II. He may be right. But it is certain that the date originally set for signing a deal, December 2004, will not be met. After all, for that deadline to hold, President Bush would have to make freer trade a cornerstone of his efforts to win reelection in November. Not likely, even if the unemployment rate does turn down by then.
This article appeared in London’s Sunday Times on September 7, 2003.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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