Transcript Slide 1

Current and Future Trade
Issues and Policies
Robert B. Cassidy
Senior Advisor
International 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
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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
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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,
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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
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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
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Concluded:
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NAFTA
Israel
Jordan
Singapore
Chile
Australia
Morocco
Central American FTA
including the Dominican
Republic
Bahrain
Oman
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Under Negotiations
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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
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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.
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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.
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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
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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
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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
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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
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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
China’s Global Trade Surplus (Exports-Imports),
Adjusted for Hong Kong Re-Export Trade, 1999 – 2005 YTD
By Source, in Billions of US$
Year
1999
2000
2001
2002
2003
2004
2004 (Jan-Mar)
2005 (Jan-Mar)
China Data
$27.8
$30.4
$26.0
$31.5
$29.7
$45.8
($3.1)
$21.0
Partner Data
$118.6
$147.6
$151.2
$174.3
$201.8
$278.6
$51.5
$81.0
Prepared by Georgetown Economic Services
Understatement
$90.8
$117.2
$125.3
$142.8
$172.1
$232.8
$54.6
$60.0
Chinese Trade Data Incorrect
Comparison of China-Reported Data with Trading Partner Data
2004 Bilateral Trade Surplus(+)/Deficit(-)
Million U.S. Dollars
Country
Canada
Japan
European Union (15)
United States
China Data
$1,187
($15,946)
$35,232
$84,674
Partner Data
$13,512
$15,752
$81,914
$163,553
Prepared by Georgetown Economic Services
Understatement
$12,325
$31,698
$46,682
$78,879
Effects of Undervalued Yuan
» Chinese exports subsidized; imports taxed
» Investment is cheap
» Foreign exchange (F/X) increases
» Money supply increases
» Inflation increases
» Free floating currencies bear the burden of adjustment:
euro, Pound, C$
Enormous Increase in FDI
Foreign Direct Investment in China
160
150
140
Billions of U.S. Dollars
130
120
110
100
Total FDI Contracted
90
Total Utilized FDI
80
US Share of Total Utilized FDI*
70
US Share of Total FDI Contracted*
60
50
40
* Estimated for 2004
30
Source: China M inistry of Commerce
20
10
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Year
Prepared by Georgetown Economic Services
Foreign Direct Investment Flows to China
Figure 3: FDI Inflows (1995-2004)
70 000
60 000
50 000
USD Millions
China
40 000
ASEAN
TOTAL
South Korea
30 000
Taiwan
India
20 000
10 000
0
1995
Source: UNCTAD, 2006
1996
1997
1998
1999
2000
2001
2002
2003
2004
Is the Yuan Properly Valued?
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Consensus that the Yuan is undervalued
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International Organizations (IMF)
Administration Statements (Bush, Snow, Paulson, others)
Scholarly Research: including CRS
Only Dispute: Degree of undervaluation
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10%-75%, depending on data on exports/imports
Treasury and IMF: use Chinese data
CCC, others use trading partner data: reverse engineering
Estimates of Undervaluation
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 BajeuxBesnainou
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
U.S. Dollar Exchange Rates for Various Asian Currencies
Daily, July 18th, 2005 - Present
Jul. Aug. Sep. Oct. Nov. Dec. Jan. Mar. Mar. May. Jun. Jul. Aug. Sep.
18
17 19 20
22 23
27
1
31
2
2
5
4
6
90
92
7/18/2005 = 100
94
China
96
Japan
98
100
Malaysia
102
South Korea
104
106
108
Yuan
Revalued
U.S. Dollar Exchange Rate for the Yuan
Daily, July 18th, 2005 - Present
Jul. Aug. Sep. Oct. Nov. Dec. Jan. M ar. M ar. M ay. Jun.
Aug. Sep.
18
17
19
20
22
23
27
1
31
2
2 Jul. 5 4
6
Yuan per U.S. Dollar
4.9
5.2
5.5
5.8
6.1
6.4
6.7
7
7.3
7.6
Yuan
Revalued
40 Percent
Appreciation
Hypothetical
Yuan per US$*
Actual Yuan
per US$
7.9
8.2
8.5
* 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
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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
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allowing CVD investigations against undervalued currency
Prognosis: Passing legislation in one house is not
sufficient. Allows elected officials to say they did
something.