Wednesday, June 4, 2008

Robert Cassidy: The trade agreement with China that I negotiated for President Clinton has failed

Writing today in Foreign Policy in Focus, Robert Cassidy, Assistant U.S. Trade Representative for Asia and for China for the Clinton administration, takes himself to task for the trade agreement with China that he negotiated. Here is how he begins:

As the principal negotiator for the landmark market access agreement that led to China’s accession to the World Trade Organization (WTO), I have reflected on whether the agreements we negotiated really lived up to our expectations. A sober reflection has led me to conclude that those trade agreements did not.

We failed to address the underlying fundamental market distortions that skew the benefits toward the few while leaving the rest of the economy less well off. As George Soros, in a Bloomberg News interview on the financial crisis, recently said, “…the system, as it currently operates, is built on false premises.” The premise on which our trade agreements are negotiated is at best flawed, if not broken.

And here is a key paragraph in which he explains why the trade agreement with China failed:

Using China as an example once again, proponents of the free trade model argue that China has a competitive advantage in wage rates that makes it ideal as the global manufacturing center that it has become. A closer examination, however, reveals that China has adopted an export-led development strategy, the centerpiece of which is a currency that is undervalued by 20-80%, with the consensus leaning toward 40%. Thus China’s wages, in U.S. dollar terms, are 40% cheaper than they would have been if the currency were allowed to freely float. Similarly, foreign investors receive a 40% subsidy to develop operations in China. To add insult to injury, our exports are taxed at an additional effective 40% rate....

I would use a less-charitable term than Cassidy. He describes China's strategy as an "export-led development strategy." I would describe it as a "mercantilist strategy." The goal of an export-led strategy would be to encourage exports and imports in order to build trade with the rest of the world. The goal of China's mercantilist strategy is to export without importing. The facts that Cassidy recites support the mercantilist interpretation. China's goal is not just to expand its exports, it is using tariffs, non-tariff barriers, and currency manipulations in order to minimize its imports. It has already built up over a trillion dollars as a byproduct of currency manipulations whose goal is to keep trade imbalanced.

Even so, the entire piece is revolutionary. At last we have a member of the establishment admitting that he has been wrong all along on the China trade question. The only problem is that he does not have any solutions. He just thinks that the problem could be solved through better trade negotiations. Indeed our trade negotiations have been disastrous, but it will take more than better negotiations of trade agreements to solve the problems we are in.

The United States must insist that all of the mercantilist countries balance their trade with us over the next five years. If they don't comply voluntarily, we need to impose Import Certificates, tied to their imports from us, to balance that trade assuredly over that period.

The main objection to Import Certificates comes from those who are worried that they might throw a wrench into the many trade agreements that we have negotiated over the past years. There is plenty of room in those agreements to justify Import Certificates. Furthermore, as Cassidy demonstrates in this article, those agreements are not even worth the paper used to print them.

Follow the following link to read the entire commentary:

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