A Modern Approach to U.S. Trade Policy

Globalization- Weekly Roundup, June 15, 2011

The latest on "the rise of the rest": curbing inflation in India and China, the effort to keep IMF leadership in European hands, business ventures courting Latin American online audiences and Indonesia's globalization vision

There have recently been troublesome indications in some of the world's fastest-growing economies: rising inflation coupled with slowing growth in India and the central bank in China raising the reserve ratio for the 6th time this year to counter its own inflation problems...if there are two stories about it in the New York Times on the same day (the links to which are embedded above) it's probably worth keeping an eye on.

A new development in the race to suceed Dominique Strauss-Kahn as managing director of the IMF has further exemplified the European countries' willingness to try every tool at their disposal to keep management out of the hands of non-Europeans.  With the Bank of Israel governor and India's candidate now both removed from the running and the Mexican candidate as a self-described "long-shot candidate" behind the French favorite, it is likely that their efforts will be successful.

Portada, a leading source for Hispanic marketing and advertising news and resources, published an interesting analysis article on whether it makes sense to invest in ventures targeting global Latin American audiences. (Hint: their short answer is yes.)  For example, the rationale behind many companies' decisions to invest in such firms:

“the Hispanic and Latin American audience online has gotten to critical mass and continues to grow rapidly. It has substantial buying power but is underserved..."- Greg Sands, Managing Director of Sutter Hill Ventures, 2006

And:

...Spain’s Grupo Prisa’s Paul Westhorpe, Managing Director Global Digital Sales & Strategy, assert[ed] that by 2015 Prisa expects 70% of its digital revenues to come from the U.S Hispanic market and Latin America.

The Jakarta Globe wrote a very blunt article on Monday on why the globalization genie can't be put back in the bottle.  Below is the President of Indonesia's statement on how countries should be responding:

...the solution is for business leaders to work with government to  drive growth through innovation and push for greater economic openness.

He also expresses a need for Asian governments not to revert to short-term thinking and protectionist policies.

On modernizing policies to keep up with globalization: women's empowerment, ending protectionism, skill-building and worker protection programs

Arnab Chakraborty with India Blooms reports on U.S. Consul General Elizabeth A. Payne's belief that efforts towards women's empowerment are imperative to keep up with globalization and the challenges it brings.  Below is an excerpt from the article on the main areas of women's empowerment that she believes must be focused on:

...three prime areas demanding immediate attention as they are necessary requisites for empowering women in all spheres of society, namely – education, economic self-sufficiency and political voice.

Continuing the fight against protectionism: a new statement from India's Minister of Labour and Employment on why labor standards are no excuse for enacting protectionist trade policies (as well as India's plans for instituting programs on skill building and protection for workers)

 

China's Currency Conundrum Continues

Martin Wolf in the FT sums up nicely the big problem with China’s currency practices:

At the conclusion of a European Union-China summit in Nanjing last week, Wen Jiabao, the Chinese premier, complained about demands for Beijing to allow its currency to appreciate. He protested that “some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China. This is unfair. Their measures are a restriction on China’s development.” The premier also repeated the traditional mantra: “We will maintain the stability of the renminbi at a reasonable and balanced level.”

We can make four obvious replies to Mr Wen. First, whatever the Chinese may feel, the degree of protectionism directed at their exports has been astonishingly small, given the depth of the recession. Second, the policy of keeping the exchange rate down is equivalent to an export subsidy and tariff, at a uniform rate – in other words, to protectionism. Third, having accumulated $2,273bn in foreign currency reserves by September, China has kept its exchange rate down, to a degree unmatched in world economic history. Finally, China has, as a result, distorted its own economy and that of the rest of the world. Its real exchange rate is, for example, no higher than in early 1998 and has depreciated by 12 per cent over the past seven months, even though China has the world’s fastest-growing economy and largest current account surplus.

Do these policies matter for China and the world? Yes, is the answer. Mark Carney, governor of the Bank of Canada, notes in a recent speech, that “large and unsustainable current account imbalances across major economic areas were integral to the build-up of vulnerabilities in many asset markets. In recent years, the international monetary system failed to promote timely and orderly economic adjustments.”* He is right.

What we are seeing, as Mr Carney points out, is a failure of adjustment to changes in global competitiveness that has unhappy precedents, notably during the 1920s and 1930s, with the rise of the US, and, again, during the 1960s and 1970s, with the rise of Europe and Japan. As he also notes, “China’s integration into the world economy alone represents a much bigger shock to the system than the emergence of the US at the turn of the last century. China’s share of global gross domestic product has increased faster and its economy is much more open.”

Moreover, today, China’s managed exchange rate regime is quite different from those of other big economies, which was not true of the US when it rose to prominence. Thus, China’s managed exchange rate is shifting adjustment pressure on to other countries. This was disruptive before the crisis, but is now worse than that in this post-crisis period: some advanced countries, notably Canada, Japan, and the eurozone, have already seen big appreciations of their currencies. They are not alone.

China’s currency practices are hurting the United States far less than developing nations and the eurozone, amongst others, and the US government knows it. Two things are mind-boggling to me: why other countries don’t stand up to the Chinese more (I’m glad many have avoided the all-too-easy protectionist route, because that could be a disaster, but am not sure the current dialog on rebalancing is going to move the ball enough), but, more importantly, how the Chinese could possibly think that currency manipulation is a good long term strategy. Sure, it helps exports, and the CCCP has basically made a massive political bet on dramatic GDP growth based on exports, but it doesn’t have to be this way. 

For a so-called socialist country, China is barely one at all. The domestic social safety is virtually non-existent, and as badly as the U.S. needs to expand healthcare coverage, China needs to much more. A social safety net would lessen the incredibly high savings rates that Chinese operate with (because they have no choice), in turn giving China’s people a greater ability to consume, a positive outcome for both the Chinese economy and the rest of the world.

In America these days, it’s popular to agonize over the amount of money we owe China. But China is saving because it has to, not because it wants to. As the saying goes, when you owe the bank $100,000, the bank owns you, but when you owe the bank $1.6 trillion, you own the bank. (For more on this, read Christopher Hayes’ recent article in The Nation.)

Two Public Nudges Forward for U.S. Trade Policy

Today saw two nudges forward for U.S. trade policy, which has been at a standstill for quite a while now. First, Senate Finance Committee Chairman Max Baucus delivered a major speech calling for a new U.S. trade policy. From Senator Baucus' speech:

“It’s time for a new blueprint on trade,” said Baucus. “And this blueprint must focus first and foremost on Asia. We must open key Asian markets, and key markets around the world, to U.S. exports. In these difficult economic times, American jobs, American workers and America’s economic growth depend on it more than ever before. ”

Moving Forward with a New Blueprint on Trade

John F. Kennedy said:

“We must trade or fade.” 

When President Kennedy said those words almost 50 years ago, the United States was pulling out of a recession. Even as the engines of growth sputtered back to life, unemployment remained high. In response, the President proposed a bold plan to revive the U.S. economy and put Americans back to work. 

In 1962, President Kennedy proposed domestic stimulus measures, such as tax cuts and more robust unemployment insurance. And President Kennedy also looked outward. He did not react to the difficult economic times by pulling back from a strong trade agenda. Instead, he pushed forward. He believed that export driven growth would utilize idle capacity, help maintain our balance of payments, and build bridges to key allies around the world.

Once again, the economy demands leadership. And the fundamental truth that President Kennedy espoused then holds just as true today. We must trade or fade.

In addition, Ed Luce writes in the FT about the words of Lee Kuan Yew, the former prime minister of Singapore who recently met with President Obama:

“You guys are giving China a free run in Asia,” [Lee] told Fred Bergsten, the director of the Peterson Institute for International Economics. “The vacuum in US policy is enabling the Chinese to make the running.”
...

“It is really important to understand just how badly the US is screwing itself on trade,” said Mr Bergsten. “By having an inactive trade policy, others are rushing to fill the vacuum.”

Mr Obama will have to deal with Beijing’s sensitivities following his recent decision to impose import duties on Chinese tyre imports, in addition to more familiar disputes over China’s lack of protection for intellectual property rights and its allegedly under-valued exchange rate.

But Washington’s lack of leadership will be most keenly felt at Apec at the weekend. “You’ve got Asian countries engaged in negotiations throughout the region and the world – over 16 [trade] negotiations completed,” said Steve Schrage at the Centre For Strategic and International Studies.

“In contrast, you’ve got a United States where there are questions about a jobless recovery, and our free-trade agreement efforts are stalled.”

White House officials have hinted that Mr Obama may be open to such a move which, they say, could help rekindle US economic leadership in Asia.

“Contrary to conventional wisdom we are not inactive,” said a senior official.

One possible silver lining could emerge if Mr Obama puts his weight behind the Transpacific Partnership – a group of small Apec members that hopes to set up open trade in the region.

The theme of the Baucus speech and Lee's warnings are the same: doing nothing means moving backward. A legacy of the Bush years, during which he talked big about trade but produced few results, the standstill on economic liberalization, especially in Asia, will hopefully be reversed quickly, aided by the popularity of President Obama that Luce cites. That said, China is quickly moving to usurp American economic leadership in Asia, and it's clear that America cannot stand by idly. Completing Doha and liberalizing trade in Asia will have to be cornerstones of a 21st century American economic strategy that allows our workers and businesses to compete globally.

Krugman: American Policymakers Must Deal With China's Currency Manipulation

Paul Krugman weighs in on China’s continued policy of devaluing its currency to promote exports:

Senior monetary officials usually talk in code. So when Ben Bernanke, the Federal Reserve chairman, spoke recently about Asia, international imbalances and the financial crisis, he didn’t specifically criticize China’s outrageous currency policy.

But he didn’t have to: everyone got the subtext. China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world — and, in particular, the United States — will do about it.

China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.

So what are we going to do?

U.S. officials have been extremely cautious about confronting the China problem, to such an extent that last week the Treasury Department, while expressing “concerns,” certified in a required report to Congress that China is not — repeat not — manipulating its currency. They’re kidding, right?

The thing is, right now this caution makes little sense. Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard. Under current conditions, this would actually help the U.S. economy by making our exports more competitive.

In fact, some countries, most notably Switzerland, have been trying to support their economies by selling their own currencies on the foreign exchange market. The United States, mainly for diplomatic reasons, can’t do this; but if the Chinese decide to do it on our behalf, we should send them a thank-you note.

The point is that with the world economy still in a precarious state, beggar-thy-neighbor policies by major players can’t be tolerated. Something must be done about China’s currency.

Krugman makes an important point about beggaring thy neighbor policies on the part of major powers being unacceptable. In addition, they generally backfire. In this case, as domestic American frustration over China’s role in the global economy grows, the prospect grows of the American government taking major actions that affect China’s ability to prosper. (Which will in turn likely result in Chinese retaliation.) 

We’ve already seen a small step in this direction with the tire tariff spat, but if Americans begin to feel that China is a bad actor in the global economy – even though, as Krugman writes, most of the jobs impact is still being felt in other poor countries – both the United States and China will have tremendous problems on their hands. For China, modernity and prosperity rests on fully joining the global economic system, which means starting to better play by the rules; American policymakers face the challenge of convincing China of that.

NDN Backgrounder: Ahead of the G-20, the Future of the Global Economy

With the G-20 approaching next week, I'm pleased to present this backgrounder on some of NDN's most important thinking on the changing global economy. We are at a decisive moment in the global economic debate - a truly international recession rife with structural imbalances, climate change, and a U.S. - China trade spat are all likely to be at the top of the agenda. Here are some of our recent thoughts on these and many other important economic issues.

  • The Key to the Fall Debate: Staying Focused on the Economy by Simon Rosenberg, September 3 - Huffington Post. Simon argues that in order for President Obama to reverse his and the Democratic Party's recent decline in public approval, the President must make the struggle of everyday people his primary rhetorical and governing concern.
  • The Fault Lines in the U.S.-China Relationship by Dr. Robert Shapiro, July 30 - Shapiro argues that the divisions between the world's most powerful nation and most important emerging power matter a great deal, and, while they often remain unseen, can flare up at anytime. This relationship, an adversarial symbiosis, will be crucial to the future of global prosperity and security.
  • Trade and Carbon, by Michael Moynihan, July 22 - Moynihan writes that we should be wary of using trade policy as a tool to combat climate change.
  • Shapiro Speaks on G-20, Need for Global Economic Action, April 1 - At an NDN event on "The G-20 and Beyond: Challenges Facing the Global Economy," Shapiro delivered wide-ranging comments on the global Great Recession, its causes, and the global leadership necessary to combat it. The event also featured U.S. Rep. Adam Smith, Foreign Policy magazine Editor-in-Chief Dr. Moisés Naím. 
  • U.S. Rep Adam Smith at The G-20 Summit and Beyond, April 1 - Ahead of the G-20 Summit, Smith, a Congressional leader on trade, terrorism, and international development, speaks on international trade and the need for a globally coordinated development strategy.
  • The Fallout of the Great Recession for Trade by Dr. Robert Shapiro, February 11 - Shapiro argues that the world is currently experiencing the economic symptoms of protectionism without actual protectionist measures being put in place, which could have dangerous consequences for the global economy.
  • Recovery Without E-verify and Buy American by Simon Rosenberg, February 10 - Rosenberg advocates for the removal of "Buy American" and E-verify provisions from the stimulus, provisions that will not stimulate the economy and will do more harm than good. 
Finally, here is the full video of Professor Bhagwati's talk at NDN on the future of the international economy. Well worth the watch:

Ahead of G-20, Bhagwati and Shapiro Discuss Impact of Crisis on Global Trade

Last week, Professor Jagdish Bhagwati joined NDN to discuss the changing global economy. At the G-20 in Pittsburgh next week, sure to be discussed is the impact the Great Recession has had on the international trading system. Here are Bhagwati and Dr. Rob Shapiro discussing that very topic:

According to the Financial Times, the G-20 will also address global economic imbalances (Bhagwati and Shapiro discussed that topic as well), a timely topic in light of the ongoing U.S. - China tire spat. 

Bhagwati Weighs in on Chinese Tires; China Plays U.S. Politics

Last Tuesday, September 8, Professor Jagdish Bhagwati joined us here at NDN and the New Policy Institute to discuss the major international economic challenges facing us in the months since policymakers confronted the worst economic crisis in the modern era. I'll be posting segments of his talk with Globalization Initiative Chair Dr. Robert Shapiro over the next few days, but, in light of the growing U.S. – China trade spat, I wanted to begin with the part of the discussion focusing on rising powers and trade policy.

As you can hear at about 7:40, Bhagwati doesn't think the selective safeguard mechanism was particularly wise to include, but is sympathetic toward the President's desire to act on the provision agreed to by the Chinese. The Chinese retaliation, directed toward American the auto industry and chicken, is certainly unfortunate – hopefully the upcoming G-20 can smooth all this out and prevent a trade war – but it is certainly politically astute. It's hard to imagine a more politically sensitive industry right now than automobiles, and one might notice that the brand new chair of the Senate Agriculture Committee is from Arkansas, the home of Tyson Foods.

TODAY - NDN Kicks Off New Series on the Economy w/ Jagdish Bhagwati, Robert Shapiro

Please join NDN and its affiliate, the New Policy Institute, today at noon for the kick-off a new series of events discussing the challenges facing the American and global economies. The series, coming months after policymakers confronted the most serious global economic crisis of the modern era, will examine domestic and international economic issues with the ultimate aim of envisioning a new economic strategy for the age of globalization. This event comes at a particularly important moment in this conversation as America and an increasingly important group of the world's leading economic powers prepare for the G-20 meeting in Pittsburgh later this month. 

BhagwatiJoining us today will be leading international economist Dr. Jagdish Bhagwati, Senior Fellow for International Economics at the Council on Foreign Relations, the University Professor at Columbia University, special adviser to the UN and the World Trade Organization, and author of In Defense of Globalization and Termites in the Trading System. He, along with NDN Globalization Initiative Chair Dr. Robert Shapiro, will discuss the impact of the Great Recession on international trade and the trading system, the danger of protectionism, and the path forward on the Doha Development Round. Shapiro will open the event with brief remarks and moderate a question and answer period. Both speakers will take questions from the live audience and those watching online.

Tuesday, September 8; light lunch served at 12:00pm
NDN: 729 15th St. NW, First Floor
A live webcast will begin at 12:15 p.m. ET
RSVP | Watch webcast

To learn more about the work of NDN's Globalization Initiative, which seeks to create a 21st century economic strategy for America, visit www.ndn.org. For more on NDN's affiliate, the New Policy Institute, visit www.newpolicyinstitute.org.

For some background material prior to the event, please take a look at:

Moving Toward Progress on Doha

With the G-20 in Pittsburgh just three weeks away and India hosting the world's trade ministers in Delhi, attention has again turned to the Doha Development Round. The New York Times brings good, if not a little skeptical news about the "a breakthrough" and resumption of Doha negotiations:

Trade ministers from around the world said Friday that they would resume negotiations on a stalled free-trade agreement even as it became clear that developing countries and the United States remain far apart on critical issues.

After two days of meetings in the Indian capital about how to restart the trade talks known as the Doha Development Round next year, trade ministers said they were committed to reaching a deal in 2010. But the tenor and substance of their comments suggested that few are willing to soften their stances.

The global economic downturn, which analysts say has led to increased protectionism around the world, was a strong undercurrent to the meeting. While all the delegates said the downturn made reaching a deal imperative, some bluntly said it would be harder now to sell any trade deal back home because political leaders are especially concerned about protecting domestic farmers and businesses.

On the Doha front, the Economist opens fire on bilateral trade agreements, a hallmark of the Bush Administration's approach to trade, and one that is now pervading Asia, as being detrimental to the goal of completing important, multilateral agreements:

Some claim that the tricky issues that stand in the way of a multilateral deal can be more easily resolved when only two countries are sitting at the table. That rarely happens: in the rush to conclude an agreement, such issues are often shelved. India’s deal with ASEAN last year, for instance, put aside the poisonous question of farm trade, which was one of the deal-breakers in the Doha talks last July.

Bilateral agreements, thus, do not, on the whole, serve as stepping stones to a comprehensive global deal. On the contrary, they both distract governments from the multilateral process and offer cover for politicians’ failure to advance it. Moreover, the fear of losing favourable treatment in a bilateral agreement can deter governments from talking tough in multilateral negotiations.

If this topic even vaguely interests you, I'd recommend joining NDN this coming Tuesday as NDN Globalization Initiative Chair Dr. Robert Shapiro hosts a conversation with Professor Jagdish Bhagwati, Senior Fellow for International Economics at the Center on Foreign Relations and economics professor at Columbia University. The two will discuss the impact of the Great Recession on international trade and the trading system, the danger of protection, and the path forward for the Doha Development Round. For more on the event, and to RSVP, click here

TODAY: Kicking Off A New Discussion Series on the Economy with Jagdish Bhagwati and Robert Shapiro

Please join NDN and its affiliate, the New Policy Institute, next Tuesday, September 8 at noon for the kick-off a new series of events discussing the challenges facing the American and global economies. The series, coming months after policymakers confronted the most serious global economic crisis of the modern era, will examine domestic and international economic issues with the ultimate aim of envisioning a new economic strategy for the age of globalization. This event comes at a particularly important moment in this conversation as America and the world's leading economic powers prepare for the G-20 meeting in Pittsburgh later this month. 

BhagwatiJoining us next week will be leading international economist Dr. Jagdish Bhagwati, Senior Fellow for International Economics at the Council on Foreign Relations, the University Professor at Columbia University, special adviser to the UN and the World Trade Organization, and author of In Defense of Globalization and Termites in the Trading System. He, along with NDN Globalization Initiative Chair Dr. Robert Shapiro, will discuss America's international economic policy, the upcoming G-20 Summit, and the future of global economic liberalization. Shapiro will open the event with brief remarks and moderate a question and answer period. Both speakers will take questions both from the live audience and those watching online.

Tuesday, September 8; light lunch served at 12:00pm
NDN: 729 15th St. NW, First Floor
A live webcast will begin at 12:15 p.m. ET
RSVP  |  Watch webcast

Background from Bhagwati and Shapiro:

 

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