current and future trade issues and policies robert b. cassidy senior advisor international trade...
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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.