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Thursday, November 28, 2002

Free Trade and the Doha Round

Two articles raise to-the-point questions about the current state of 'free-trade' thinking. The first, in this weeks Economist, congratulates the Bush administration for proposing the elimination of global tariffs on industrial and consumer goods by 2015 in an attempt to revive the stalled Doha round of world trade talks. However, what it gives with one hand it takes back with the other. As it notes caustically "agriculture is the single most important issue in the Doha talks—without a deal which involves the rich countries cutting back sharply the subsidies they pay to farmers, developing countries will not sign up to any overall agreement. America’s proposal to abolish export subsidies came after the farm bill was signed and drew attention to the gap between what America says and what it actually does"

AMERICAN presidents like to think big, and George Bush is no exception. Mr Bush has now given his backing to a new proposal which would mean the abolition of all tariffs on industrial and consumer goods by 2015. And by all tariffs Mr Bush means all—not just in America, but around the world. The aim is to inject new life into the Doha round of world trade negotiations. The World Trade Organisation’s (WTO) director-general, Supachai Panitchpakdi, said on November 25th that slow progress was putting the talks at risk.

Yet the boldness of the latest proposal, which follows an equally ambitious American plan to eliminate agricultural export subsidies, is enough to make many of America’s closest industrial partners pale. The European Commission's initial reaction was cautious and even Mr Supachai has said the plan would not be at the top of his agenda. America is not proposing unilateral reductions, after all—the commitment to reduce and then abolish tariffs involves all 144 WTO members. And developing countries, whose tariffs tend to be much higher than those of rich countries, and which would therefore have to make much bigger tariff reductions, are more likely to see America’s plan as brazen hypocrisy on Mr Bush’s part.The plan’s simplicity certainly helps America in its effort to recapture the moral high ground on trade. By 2010, there would be no tariffs above 8% on a wide range of goods, and the tariffs would disappear altogether by 2015. Tariffs currently below 5% would go by 2010. In some industrial sectors, including chemicals, paper and construction equipment, tariffs would go even more rapidly.
Source: The Economist

Meantime Brad de Long draws our attention to the growing disenchantment with China in some American policy circles. as he warns us: "Here is another thing that makes me want to bang my head against the wall":

Surging China imports devastate U.S. industries: Trade deficits usually shrink during an economic downturn, but China's unfair trade practices have caused the U.S.-China deficit to soar despite the U.S. recession of the past two years. Between 1989 and 2001, though U.S. exports to China more than tripled, imports from China increased eightfold, causing a whopping twelvefold surge in the U.S-China trade deficit. So far this year (through September, the latest month for which data are available), the deficit has continued to grow and is projected to reach $100 billion, an all-time record.

The U.S.-China trade relationship is of growing importance to overall U.S. trade. Exports to China grew from 1.6 percent of total exports in 1989 to 2.6 percent in 2001. Imports from China now comprise 9 percent of all U.S. imports, up from 2.5 percent in 1989. China alone now accounts for more than one-fifth of the total U.S. trade deficit.

Contrary to promises by business and government leaders that increased trade would benefit workers on both sides of the Pacific, the opposite is actually occurring. China's export industries are associated with gross violations of human rights, including forced labor, and even while China's economy is growing and becoming more productive, minimum wages are stagnant or decreasing in major manufacturing centers. Meanwhile, in the U.S., growing trade deficits are resulting in closed factories and lost jobs in every industry and state. Between 1992 and 1999, growing U.S. trade deficits with China eliminated more than 683,000 jobs in the U.S. economy; EPI economists forecast the loss of an additional 872,000 U.S. jobs due to surging trade deficits with China by 2010.
Source: Economic Policy Institute

As Brad asks, do they really want to claim that all of the $100 billion paid by Americans to buy Chinese-manufactured goods goes straight into the pockets of the plutocrats of the Chinese Communist Party, and that none of it leaks out and raises urban Chinese median standards of living? And do they really want to claim that U.S. workers real earnings aren't boosted by their ability to benefit from China's comparative advantage in light manufacturing--that their families aren't better off because of their increased ability to buy Chinese-made goods whenever they decide that such goods give more value for money? Of course what about China's apparent growing comparative advantage in high-tech and engineering design? This problem is only just begining. I cannot help feeling that growing protectionism will, in the last analysis be what poses the biggest threat to growing global living standards.

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