Current and Future Trade Issues and Policies Robert B. Cassidy Senior Advisor International Trade...
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Transcript of Current and Future Trade Issues and Policies Robert B. Cassidy Senior Advisor International Trade...
Current and Future Trade Issues and
PoliciesRobert B. Cassidy
Senior AdvisorInternational Trade and Services
Introduction
» “May You Live in Interesting Times”» Doha Round
» FTAs
» Elephant in the Room
» Legislative Prognosis:»Trade Promotion Authority (Fast Track)
»China
Doha Round
» Launched in November 2001, after failure to launch in Seattle in 1999.
» Comprehensive: 21 issues for negotiations and discussions. Key topics:» Agriculture
» Market access in industrial products
» Implementation of past obligations
» Services
» Trade laws, IPR, capacity building
» Infamous four “Singapore” issues: Investment, environment, competition policy, and trade facilitation
Missed Deadlines -- Cancun
» Failure at Cancun – July 2003:» Four “Singapore Issues”
» Developing countries opposed competition policy, environment and investment, and trade facilitation
» Agriculture: No movement on “Modalities” » Not enough movement by the EU, US, and other rich nations
» U.S. cotton subsidies
» Industrial tariffs: Developing countries unwilling to make concessions unless significant liberalization in agricultural subsidies and market access
» Developing countries now play a major role in the negotiations
Missed Deadlines: Hong Kong, 2005
» Ministers avoided making any commitments until others moved. » EU refused to improve its offer on Agricultural domestic
subsidies and market access unless better market access offers in industrial products
» U.S. prepared to improve its offer if EU and others were prepared to do the same
» U.S. and developing countries believed the EU offer was insufficient and thus did not improve their offers.
» Ministers focused on process rather than substance, pushing deadlines into 2006.
» Substance more difficult to resolve: All the tough issues
July Ministerial Fails
» July Geneva Ministerial failed to set firm modalities (formulas) for negotiating country-specific concessions» US puts improved offer on the table
» EU does not come forward with improved offer
» Developing countries do not improve agricultural market access offer (important to US) or industrial market access offers (important to EU and US)» India, Brazil and China did not improve offers
» China actually arguing for developing countries to match their WTO accession rates
Time Running Out
» Most concede that negotiations are over for the time being.» Trade promotion authority runs out in July 2007.
» Not likely to complete negotiations by that timeframe.
» USTR Schwab has been meeting with leaders in Asia and Latin America to determine whether negotiations can go forward
» A mid-term election in November with likelihood that Democrats will win more seats in House and Senate.
» Will the Administration seek to renew Trade Promotion Authority?» Likely to be a trade bill at least to pass Permanent Normal Trade
Relations status for Vietnam
» Doha Round Failure still leaves FTA negotiations
Ambitious Bilateral FTA Program
» Concluded:» NAFTA
» Israel
» Jordan
» Singapore
» Chile
» Australia
» Morocco
» Central American FTA including the Dominican Republic
» Bahrain
» Oman
» Under Negotiations» Thailand
» South African Customs Union
» Andean Countries: Colombia, Peru and Ecuador
» Malaysia
» South Korea
» Panama
» Over 2/3rds of U.S. exports
» Over 50% of U.S. imports
Regional FTA Negotiations
» The broad regional FTAs have faltered as bilateral negotiations expanded:» The Free Trade Agreement of the Americas (FTAA) is stalled
over Brazil refusal to negotiate an FTA that doesn’t cover agricultural subsidies» U.S. opposes because EU is the major offender
» Asia Pacific Economic Cooperation (APEC) negotiations have stalled over unwillingness to move forward to Free Trade.
» ASEAN initiative and Middle East initiative focus on bilateral FTAs in the region
Waning Support for Trade
» CAFTA passed by 2 votes in the House» Only passed after Ways and Means Chairman Thomas passed
a bill on China, a step he had said he would never take.
» Peru and Colombia FTA legislation will be introduced after the mid-term election. Not clear about the outcome
» Vietnam Permanent Normal Trade legislation will be introduced, probably before the President visits Vietnam for the APEC meetings in November
» Doha failure represent a lack of support for trade liberalization in EU, developing countries and even the United States.
Elephant in the Room: China
» Every country is focused on how to compete with China» Latin America, including Mexico, is loosing markets in the U.S.
to China
» ASEAN members are concerned about the loss of investment to China» China is importing more from Asia and assembling products for
export to the United States
» Canada is loosing manufacturing exports in central Canada to the US; commodity exports to China is the balance
» EU countries along the southern rim face severe competition from China
» U.S. manufacturing has still not replace 2 million jobs lost
What is Driving China’s Trade
» Theories:» WTO accession?
» China’s cheap Labor
» Undervalued Currency
» Out-sourcing – foreign direct investment
» Closed Internal market that fuels exports
WTO Accession
» WTO accession reduced Chinese tariffs and other Chinese barriers
» Trading partners made no concessions since they were already applying their most favored nations treatment to China
» China’s reduction of trade barriers did reduce costs since the duties on inputs were reduced. » A benefit but probably not large enough to account for the major
increases in China’s exports
Cheap Labor
» China’s wage rates have been rising and in some regions, labor, especially skilled labor, is in short supply.» Guangdong has higher wage rates, as does Beijing.
» Chinese and foreign companies frequently have to hire more workers than necessary.
» Other countries probably have lower wage rates now for the manufacturing sector. Vietnam the new target
» Probably not the major reason for the expansion of China’s exports
Undervalued CurrencyEv
» Everyone agrees: China’s currency is undervalued.
» Undervaluation problem began in 1994 when China depreciated the yuan by 50%: Asian Financial Crisis
» U.S. recession and WTO accession exacerbated the disparity
» CCC: Section 301 petition based on violation of a trade agreement: WTO Subsidies Agreement and IMF» Mandatory retaliation
» WTO Dispute Settlement
» Dems in Congress file their own 301
» Dispute: The degree of undervaluation depends on the trade data
Chinese Trade Data Incorrect
Year China Data Partner Data Understatement1999 $27.8 $118.6 $90.82000 $30.4 $147.6 $117.22001 $26.0 $151.2 $125.32002 $31.5 $174.3 $142.82003 $29.7 $201.8 $172.12004 $45.8 $278.6 $232.8
2004 (Jan-Mar) ($3.1) $51.5 $54.62005 (Jan-Mar) $21.0 $81.0 $60.0
China’s Global Trade Surplus (Exports-Imports), Adjusted for Hong Kong Re-Export Trade, 1999 – 2005 YTD
By Source, in Billions of US$
Prepared by Georgetown Economic Services
Chinese Trade Data Incorrect
Country China Data Partner Data UnderstatementCanada $1,187 $13,512 $12,325Japan ($15,946) $15,752 $31,698
European Union (15) $35,232 $81,914 $46,682United States $84,674 $163,553 $78,879
Prepared by Georgetown Economic Services
Comparison of China-Reported Data with Trading Partner Data2004 Bilateral Trade Surplus(+)/Deficit(-)
Million U.S. Dollars
Effects of Undervalued Yuan
» Chinese exports subsidized; imports taxed
» Investment is cheap
» Foreign exchange (F/X) increases
» Money supply increases
» Inflation increases
» Free floating currencies bear the burden of adjustment: euro, Pound, C$
Enormous Increase in FDI
Foreign Direct Investment in China
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
160
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Year
Bil
lio
ns
of
U.S
. D
oll
ars
Total FDI Contracted
Total Utilized FDI
US Share of Total Utilized FDI*
US Share of Total FDI Contracted*
Source: China M inistry of Commerce
* Estimated for 2004
Prepared by Georgetown Economic Services
Foreign Direct Investment Flows to China
Figure 3: FDI Inflows (1995-2004)
0
10 000
20 000
30 000
40 000
50 000
60 000
70 000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: UNCTAD, 2006
US
D M
illi
on
s
China
ASEANTOTALSouth Korea
Taiwan
India
Is the Yuan Properly Valued?
» Consensus that the Yuan is undervalued
» International Organizations (IMF)
» Administration Statements (Bush, Snow, Paulson, others)
» Scholarly Research: including CRS
» Only Dispute: Degree of undervaluation
» 10%-75%, depending on data on exports/imports
» Treasury and IMF: use Chinese data
» CCC, others use trading partner data: reverse engineering
Source Publication Date Percent Undervalued
World Bank PPP Level 2000 75%
Big Mac Index The Economist Apr. 2003 56%
Preeg MAPI Sept. 2002 40%
Yang and Bajeux-Besnainou
Is the Chinese Currency Undervalued?
Nov. 2003 27.99% based on PPP (using 1985 as fixed base year)
Williamson IIE lecture Oct. 2003 Over 25%
Anderson/UBS The Complete RMB Handbook Oct. 2003 Nearly 25% in real terms
Goldstein Testimony to Congress Oct. 2003 15-25%
O’Neill & Wilson Goldman Sachs Rpt. Sept. 2003 10-15%
Bhalla Chinese Mercantilism: Currency Wars and How the
East Was Lost
July 1998 10-15% as of 1998
Estimates of Undervaluation
U.S. Dollar Exchange Rates for Various Asian CurrenciesDaily, July 18th, 2005 - Present
90
92
94
96
98
100
102
104
106
108
Jul.18
Aug.17
Sep.19
Oct.20
Nov.22
Dec.23
Jan.27
Mar.1
Mar.31
May.2
Jun.2
Jul.5
Aug.4
Sep.6
7/18
/200
5 =
100
China
Japan
Malaysia
South Korea
Yuan Revalued
U.S. Dollar Exchange Rate for the YuanDaily, July 18th, 2005 - Present
4.9
5.2
5.5
5.8
6.1
6.4
6.7
7
7.3
7.6
7.9
8.2
8.5
J ul.18
Aug.17
Sep.19
Oct.20
Nov.22
Dec.23
J an.27
Mar.1
Mar.31
May.2
J un.2 J ul. 5
Aug.4
Sep.6
Yu
an p
er U
.S. D
olla
r
HypotheticalYuan per US$*
Actual Yuanper US$
Yuan Revalued
40 Percent Appreciation
* Hypothetical value of the Yuan derived by assuming full 0.3% maximum daily appreciation against the US$, as announced by the People's Bank of China on July 21, 2005.
What Do We Do
» Three approaches:» Jawboning: Treasury approach up to now
» Yuan appreciates by 2.1% in July and further 1.2% since then
» IMF Pressure: IMF sets up medium-term review of global imbalances» All countries’ measures put on the table
» Domestic Legislation
Closed Internal Markets
» What is the one issue I wish I could renegotiate:» Open China to China
» 15-18% to distribute products within China» 4% in OECD
» Keeps China’s economy an export driven economy
Legislative Agenda
» Mid-term elections present uncertainties:» Trade issues not likely to be at center of election debates
» Unclear whether democrats will be able to take control of house and/or senate
» Even if Dems win either or both houses, not necessarily true that trade legislation is dead. Rangel is pro-trade but also support labor and environment issues in trade agreements
» Likely to be a lame duck session. Trade legislation likely to be introduced but unclear what it will include.» Renewal of Generalized system of preferences
» Miscellaneous tariff bill
» Peru/Columbia? TPA authority?
China Legislation
» Senators Schumer and Graham requested that China currency bill be taken up for a vote before adjournment» Promised a vote
» Probably to help Secretary Paulson
» Senator Grassley has currency bill: Doesn’t do much.
» Senators Collins and other may introduce legislation allowing CVD investigations against undervalued currency
» Prognosis: Passing legislation in one house is not sufficient. Allows elected officials to say they did something.