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Bush's CAFTA and China Policies: Linked Only in Ineffectiveness
Alan Tonelson
Saturday, May 28, 2005
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Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).

In recent days, Congress and the public have learned just how stupid the Bush administration thinks they are on trade policy issues. The answer is “Awfully stupid..” The President and his top  advisors clearly believe that some new rhetoric on China’s currency manipulation and a flurry of China-related trade policy measures will defuse Congressional and public anger at their failure to defend domestic industries against predatory Chinese trade practices. And they’re also no doubt confident that their new line on China will help push the deeply unpopular Central America Free Trade Agreement through the House and Senate.

In fact, the White House’s actions since Friday the 13th of May have been so transparently gimmicky that they may have backfired. Despite (or maybe because of) the Treasury Department’s new report criticizing China’s exchange-rate policy in somewhat stronger terms, bills requiring stronger China currency measures keep gathering support in Congress. More and more legislators apparently focused on the administration’s continuing unwillingness to designate China as a currency manipulator, and thus launch negotiations on the matter, as required by U.S. trade law.

Meanwhile, like the quickie lobbying tour by the six CAFTA presidents in early May, the China apparel safeguards just announced by the administration have persuaded no members of Congress to support CAFTA

Give the administration some credit. It finally realized that its do-nothing China policies were failing to placate even the traditionally indifferent Congress anymore. In fact, longtime supporters of giveaway trade policies were turning into China hawks – notably, New York Democratic Senator Charles Schumer, whose China currency bill unilaterally would impose stiff tariffs on Chinese imports if Sino-American negotiations don’t produce a significant revaluation in six months.

The White House also obviously recognized that its inaction on China was undermining the case for CAFTA. Its focus on minuscule Central America was looking increasingly absurd as China kept eating domestic American industry’s lunch in global competition by breaking virtually every provision of domestic and international trade law on the books. So did its claims that production-sharing alone with Central America would save a domestic textile and apparel complex whose predominant problem was China.

Unfortunately, the administration’s insights were entirely political. They revealed no understanding of the real globalization and China problems facing the textile industry, or the U.S. economy as a whole. As a result, the largely empty gestures they have produced aren’t fooling anyone – except maybe a few editorialists in the Big National Media.

A great case in point is the long awaited – and long delayed – Treasury Department report on foreign currency manipulation. Released more than a month late, the report tries to balance two powerful imperatives. On the one hand, it needs to sound concerned about China’s fixed exchange rate, which gives China’s goods artificial price advantages in China and global markets. So Treasury characterizes China’s policies as dangerous for China and for the entire world economy, and says that delays in China’s movement toward market-determined exchange rates are no longer tolerable.

On the other hand, Treasury needs to avoid triggering concrete U.S. responses to China’s currency protectionism, lest the administration antagonize the U.S. multinational companies, whose Chinese export factories benefit from an artificially cheap Chinese currency, and from other Chinese subsidies as well.

Treasury’s solution? In effect, giving China “one last chance.” The report warns that if “substantial” changes are not made, China’s current policies would “likely” fall under Treasury’s technical definition of manipulation. But not only was the warning full of weasel words, it also  raised the question of why the status quo in Chinese currency policies will become manipulation in six months, but is not manipulation today.

Moreover, Treasury is completely misreading China’s intentions – at least in public. Secretary John Snow and colleagues keep harping on the dangers of fixed exchange rates to China’s economy, and these dangers are not trivial. Hence Treasury’s insistence that the Chinese want to change – and at some point will. (Snow’s latest prediction – six months.)

But Treasury has overlooked China’s powerful reasons for keeping its currency cheap. Mainly, China is suffering a jobs crisis. By most estimates, even in the prosperous big cities, unemployment exceeds 20 percent. China’s leaders have rightly viewed this crisis as the greatest threat to regime survival. The only way they know to contain the crisis and at least stabilize unemployment rates is to promote the production of as many goods as possible, and to export the huge surpluses that the Chinese market cannot possibly absorb. The cheaper China’s currency, the more exports China can sell around the world.

Consequently, Treasury’s case for constructively engaging the Chinese and encouraging them to liberalize their exchange-rate policies voluntarily holds no water. As great as the risks of the exchange-rate status quo are for the Chinese, they perceive change to be much riskier. Thus American sanctions are unavoidable, and the sooner they are imposed, the better.

The administration’s new apparel quotas represent another policy ploy that addresses neither the real China trade challenge nor the real textile and CAFTA angles.

Don’t misunderstand me. The quotas are urgently needed to break up the tsunami of shipments from China that immediately followed the abolition of global textile and apparel quotas on Jan. 1. But without much more sweeping changes in U.S. trade policy, these actions won’t even amount to a finger in the dike.

In the first place, apparel quotas can be imposed only until 2008. After that, according to the agreement that permitted China to join the World Trade Organization, it’s back to the post-quota world. As a result, all the forces that persuaded institutions like the WTO and the U.S. International Trade Commission to predict total Chinese and Asian domination of these industries will remain firmly in place.

Second, CAFTA remains full of loopholes that will permit Chinese fabrics and in some cases entire garments to enter the U.S. market through Central America duty free. And the modest remaining tariff walls against non-CAFTA region fabric will be effective only if U.S. trade policy makes two radical departures. Washington will have to establish an effective system of customs enforcement. (If you’re asking, “Using exactly what for money?” your instincts are good.) And U.S. leaders will have to do something to deal with all the predatory trade practices – like currency manipulation –  used by the Chinese and other East Asian textile and apparel exporters for the last decade to protect and expand their U.S. market share despite preferential agreements like CAFTA’s precursors, NAFTA and the Caribbean Basin trade initiative.

Which brings up the third main problem with the Bush safeguards strategy: Why does the White House think America’s trade problems are limited to textiles and apparel? What is the President going to do about all the other industries facing import surges from China, as well as the vast majority of America’s other trade partners that sharply limit their imports of U.S. products and use every policy trick in the book to boost their exports to the United States?

Think this is an overstatement? Let’s look at some other U.S. imports from China recently. From January through December, 2004, measured by not by value but by quantity, just as textile imports are (in order to take into account the cost-depressing massive Chinese dumping), U.S. imports of gaskets, packing, and sealing devices shot up nearly 503 percent. Imports of fluid meters and counting devices jumped by 288 percent. Imports of paper industry machinery surged nearly 247 percent. For fabricated structural metals, the increase was 106.2 percent, and for photographic and photocopying equipment, 84.8 percent. These increases took place, moreover, without the kind of sudden abolition of quotas that are roiling textile and apparel markets.

A gimmick-based China/CAFTA policy may be fine for a President who won’t be facing the voters again. But it will simply burden the economy with higher international deficits and debts, and push it that much closer to insolvency. Perhaps more important, such policies will continue creating “Do Something!” pressures on Republican members of Congress – most of whom will be facing the voters again.

Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).