Author Article List

Chinese Currency Adjustment Is No Cure for U.S. Trade Deficit

Published on Saturday, July 01, 2006

In May, the U.S. Department of the Treasury issued its much anticipated, semiannual Report to the Congress on International Economic and Exchange Rate Policies. The report’s key conclusion, that China is not a currency manipulator, was met with incredulity on the part of a number of members of Congress, some who suggested that the Treasury’s inaction would move them closer to enacting provocative legislation to compel China to allow the yuan to rise.

To them, it’s simple. China’s currency is purposely undervalued to encourage Chinese exports and discourage imports. Such “manipulation” explains much of the bilateral trade deficit, which is costing U.S. jobs. Thus, appreciation of the yuan is a matter of such urgency that any adverse consequences of compelling that outcome would be trivial by comparison.

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Four Goals for Susan Schwab, the New U.S. Trade Representative

Published on Saturday, July 01, 2006

Susan Schwab began work recently as U.S. Trade Representative (USTR) at a difficult time for free trade. Free traders have promised results for decades, and an honest assessment says they were right. Globalization is enhancing prosperity everywhere, and lowering trade barriers promotes broad prosperity for the poor and rich alike.

But reality and perceptions are far apart in Washington, making the free trade argument tougher than ever. After months of delay, the Senate finally approved Schwab, just as souring economies in Europe may offer yet another obstacle to further trade liberalization.

A Smart Choice

President Bush made a smart pick in Schwab. She is a tough and knowledgeable negotiator, having spent a lifetime working on trade issues in government, academia and private business. An Assistant Secretary of Commerce in the first Bush presidency, Schwab most recently managed European Union and World Trade Organization (WTO) relations as Deputy USTR. She will certainly need that experience to drive the Bush Administration’s free trade agenda.

Schwab was confirmed as USTR in early June by a Senate that is in one of its most protectionist moods of the last 20 years. Support for lower trade barriers—a cornerstone of American freedom and prosperity—has been eroding for the better part of a decade. This is largely due to hysteria over outsourcing, concerns about foreign investment in the United States, and the powerful influence of agricultural and industrial interests.

The net impact hasn’t slowed the USTR’s ambitious agenda, but it has quieted the bully pulpit and diminished America’s ability to push the current WTO round ahead. Farm subsidies remain high globally, while major tariff increases are lurking in the Senate. Two free trade agreements (FTAs) currently before Congress (and another four in the works) will have to be passed by mid-March of 2007, at the absolute latest, if they are to be passed at all. The elevation of Schwab may give America’s foreign economic efforts a much-needed shot in the arm.

As USTR, Susan Schwab must pursue four goals:

1. Don’t let Doha become the walking undead.

The Doha round of WTO trade negotiations is the USTR’s biggest challenge and opportunity, and achieving global consensus will undoubtedly be tougher than ever before.

Some say, “Doha is dead,” but that’s wishful thinking. In fact, the global trade talks risk becoming undead—going through the motions, with no genuine progress. The best solution is to reach an agreement under the auspices of the WTO. The second best solution is to reach agreement with a broad group of nations that excludes those who favor delay and inaction. A deal must be concluded by the end of 2006 so that President Bush can present the bill to Congress before his legal authority expires. The worst possible outcome would be, as Rep. Bill Thomas (R-CA) of the Ways and Means Committee said, for America to “just walk away.”

Schwab must focus on reducing EU and U.S. farm subsidies to jumpstart G-20 interest in Doha. The developing world will open its markets to American service-sector and manufacturing firms, but the U.S. needs to take the first step.

2. Emphasize the importance of global prosperity to the war on terrorism.

Winning the debate at home requires a message that links free trade to the defeat of terrorism. The instinct of terrorists is to resist openness, modernization and all aspects of globalization. Framing the debate in these terms helps voters understand why a vote for trade protectionism is a vote for homeland insecurity. With the argument presented that way, very few politicians would be willing to take the moral low ground, especially relating to bilateral trade opportunities in the Middle East.

3. Push property rights, not exchange rates.

Schwab, along with her Treasury and Commerce colleagues, must resist pressure to rattle sabers on foreign exchange rates, particularly on China’s currency. America can become more competitive and out-produce its rivals without resorting to legislative gimmicks. Artificially lowering the yuan exchange rate will not necessarily improve American trade. What matters more for fair trade is the enforcement of intellectual property rights in China and elsewhere, which should be a diplomatic priority.

4. Advance bilateral FTAs—and get them passed.

FTAs with Oman and Peru, along with Vietnam’s WTO accession, await congressional approval. FTAs with South Korea, Panama, Columbia, and Malaysia are still being negotiated. The dilemma now is how to get them through Congress—put them all up at once or push a few at a time? In an election year, it may be best to give Congress one big push; going through every individual bill one at a time may tax Members’ time and attention.

The free trade road may be rockier than ever, but there are actually many roads to freer trade. Multilateral, bilateral and unilateral trade action are all ways to improve America’s prosperity and security. Schwab has the experience, smarts and tenacity to make the passage, and she deserves the full, vocal support of Congress, Wall Street and the White House.

Effective Immigration Reform: Trade Liberalization South of the Border

Published on Monday, May 01, 2006

U.S. lawmakers have put off immigration reform for a decade because nobody could agree on how best to regulate the flow. They still can’t, as Washington’s recent scramble to craft a fix attests. But the stark disparity between job opportunities and living standards in America and many poor countries has resulted in such an influx of undocumented aliens (now between 10 million and 12 million, with more than half from Mexico) that Congress and the White House must act.

Helping Citizens at Home

Success in controlling this tide certainly requires better border security, stronger workplace enforcement, and a practical guest-worker process to match prospective laborers with legitimate employment. Yet there’s an equally important—but neglected—need. Developing countries must do more to provide employment opportunities and access to social mobility for citizens at home.

The Case of Mexico

For Mexico, sound fiscal policies including NAFTA and institutional reforms have kept lots of potential migrants from leaving. The bad news is that job growth south of the border hasn’t been fast enough to absorb all the new entrants into the labor force.

Mexican Interior Secretary Carlos Abascal Carranza came to Washington recently with an economic progress report. That is a welcome change from the rhetoric that President Vicente Fox has spouted for the past five years: constant reminders that Mexico should have the right to export its surplus workers to the U.S.

Fox’s first Foreign Secretary, Jorge Castañeda, pushed that absurd message without regard for America’s sovereignty or Americans’ sensitivities. No country exists to take on the problems of others. But internal conditions can have consequences that extend across borders. So it should come as no shock that the U.S. has an interest in Mexico’s economic policies and performance.

Mexico’s Economy Has Improved

Mexico’s economy has improved under Fox. From 2000 to 2005, annual inflation declined by two-thirds, foreign investment grew 74%, and the public deficit dropped to zero. Meanwhile, real wages rose 7%, the sum of Mexicans living under one poverty index fell 23%, 6 million scholarships now help keep more poor children in classrooms through high school, and nearly 577,000 jobs were created in 2005.

Still, almost a million youths enter the Mexican labor force each year; a half million new jobs are simply not enough. Mexico’s minimum wage is $4.50 per day, vs. the minimum $5.15 per hour stateside. And while more Mexican children are attending school, the system is still centralized under an inefficient national ministry and subject to periodic strikes.

Other Countries Are Worse Off

Other developing countries in our hemisphere are in even worse shape. Guatemala and Honduras report poverty rates of close to 75%. In South America’s Andean ridge, from Venezuela to Bolivia, the poor constitute more than half of the population. Except in Colombia, a developing trend is to consolidate power within populist presidencies, ignore the rule of law, and put business under government’s thumb.

The result? Blocked from social mobility at home, Peruvian entrepreneurs already are choosing the U.S. as a haven for business startups. Ecuadorians are stowing away in shipping containers to get to the U.S. or Europe, while one of Venezuela’s most popular Web sites continues to be www.mequieroir.com (“I Want to Leave”).

We Must Encourage Liberalization

Backsliding toward statist economies will only will make matters worse, forcing more workers to migrate. That’s why the U.S. must urge its hemispheric neighbors to liberalize economies, cut regulations and allow prosperity to spread more broadly across their citizenry. Mexico has gone partway. Fox’s four-year-old Rapid Business Start-Up System cut red tape for licensing some small firms from 50 days to just 24 hours. But inefficient state monopolies, high taxes, massive bureaucracy, and a rigid labor code still restrict job growth.

Policymakers Should Not Retreat from Free Market Principles.

U.S. officials should remind candidates for the Mexican presidency and congress this year that any retreat from free-market reforms will limit opportunities for Mexican workers at home and create friction between our nations. Beyond that, U.S. lawmakers should resist the temptation to adopt “silver bullet” reforms like building a border fence or embracing a guest-worker program. While these two tacks may be part of a solution, they alone are not enough. To reduce unauthorized immigration, U.S. policies also must seek reforms abroad.

Free Trade Not Secure: Congress and Others Continue To Debate Its Value

Published on Monday, May 01, 2006

For over 50 years, the U.S. and the world have reaped the economic benefits of gradual liberalization in trade and investment. Recognizing the benefits of open trade, the U.S. government has been a leading advocate of trade liberalization. Today however, the place of free trade in American policymaking is far from secure.

Rising protectionist sentiment in the wake of the aborted United Arab Emirates ports deal, concern about the U.S.-China economic relationship, and frustration over the pace of global trade talks are combining to threaten further trade liberalization, both in America and around the world.

Resisting Protectionsim

In the coming months, Congress must steel itself against protectionism. It should objectively debate and then approve free trade agreements with Oman and Peru, continue to support U.S. leadership and negotiations for new bilateral agreements and in the World Trade Organization (WTO) Doha Round, and resist the temptation of reactionary protectionism. Members of Congress who talk about punitive tariffs or restrictive investment measures without actually intending to enact them still inflame public opinion.

Congress should spend more time recognizing the prosperity that exists in America due to free trade and pushing for further trade reforms.

Opportunity and More Opportunity

As U.S. Ambassador Portman recently said, “We all must fight the protectionist forces with the facts, which show that benefits from trade are substantial. Today, the $12 trillion U.S. economy is bolstered by free trade, a pillar of America’s vitality. American exports support one in five U.S. manufacturing jobs. Jobs directly linked to the export of goods pay 13 to 18 percent more than other U.S. jobs. Moreover, agricultural exports hit a record high in 2005 and now account for 926,000 jobs.

In Colorado, international trade supports one of every 20 private-sector jobs and more than 20 percent of manufacturing jobs. South Carolina benefits from having one of every 10 private sector jobs and more than 25 percent of manufacturing jobs supported by trade. State by state, across the nation, international trade promotes opportunity.

Trade Is a Driving Force

Because today’s global economy offers unparalleled opportunities for the U.S., it is in America’s economic interest to continue to expand trade by lowering barriers to trade in goods and services. Freer trade policies have created a level of competition in today’s open market that leads to innovation and better products, higher-paying jobs, new markets, and increased savings and investment. Small businesses, a critical component of the U.S. economy, create two out of every three new jobs and account for about a quarter of America’s exports.

Trade has been a driving force behind America’s high living standards and promises even more if trade barriers can be broken down further. Gary Clyde Hufbauer of the Institute for International Economics estimates that trade liberalization over the last 50 years has brought an additional $10,000 per year to the typical American household. If all trade barriers were eliminated and global trade and investment became truly free, Hufbauer estimates that American households would gain an additional $5,000 per year.

According to a University of Michigan study, if today’s international trade barriers were reduced by just a third, the average American family of four would enjoy $2,500 per year in additional income.

The Result: A Higher Standard of Living

Freer trade enables more goods and services to reach American consumers at lower prices, giving families more income to save or spend on other goods and services. Moreover, the benefits of free trade extend well beyond American households. Free trade helps spread freedom globally, reinforces the rule of law, and fosters economic development in poor countries. A Center for Global Development study determined that a successful conclusion to the Doha Round would result in an additional $200 billion flowing to developing nations, reducing poverty and economic hardship. The national debate over trade-related issues too often ignores these important benefits.

More generally, economic freedom leads to higher standards of living. According to The Heritage Foundation/Wall Street Journal Index of Economic Freedom, countries with freer trade policies experience higher per-capita economic growth than countries that maintain trade barriers. Countries that opened their trade policies between 1995 and 2004 saw their per capita gross domestic product (GDP) grow at an average compound rate of 2.5 percent. Countries whose trade policies were unchanged experienced an average compound growth rate of 2.1 percent. Finally, countries that increased their barriers to trade managed only a 1.8 percent average compound growth rate.

Still, the Debate Continues

Despite more than five decades of evidence demonstrating the benefits of liberalizing trade, the impact of international trade and open markets on the U.S. economy remains a contentious issue. Fortunately, in past battles, free trade won the day, providing greater economic opportunity to Americans and allowing the U.S. to maintain its role as a leader in the international economic community.

Defending free trade and fighting for new trade agreements are central tasks for Congress this year. Expanding global trade is one of the keys to building a stronger economy at home and promoting better relationships abroad. Trade is one of keys to American prosperity.