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Tuesday, May 31, 2005

Bashing China won't cut the U.S. deficit


The end of the 30-year-old Multi-Fiber Arrangement's textile quota system on Jan. 1 has resulted in a surge of Chinese exports and increased American pressure on China to revalue its currency amid accusations that Beijing is responsible for America's trade deficit by "manipulating" its currency.

Just how this "manipulation" has been achieved when the exchange rate has remained unchanged for a decade is not explained.

On May 20, Federal Reserve Chairman Alan Greenspan said in New York that revaluation of the Chinese yuan would not necessarily help to reduce the American trade deficit. "Indeed, it's probably quite unlikely," he said.

This, Greenspan explained, is because American companies are likely to turn to other countries, such as Thailand or Malaysia, for goods rather than to domestic U.S. producers. "So," he said, "essentially what we will find is we're importing from a different area, but we will be importing the same goods."

The same thing is likely to happen with textile quotas. If textiles cannot be imported from China, American importers will turn to other low-cost countries like India. They are unlikely to turn to higher-cost producers in the U.S.

Indeed, as Pietra Rivoli of Georgetown University's McDonough School of Business wrote recently, trade protection is "the enemy rather than the savior of the U.S. and European textile industries." She explained that the quota system, which was first imposed on Japan, "hastened the movement of the industry to locations such as Hong Kong" and when quotas were imposed on Hong Kong, "production again shifted in response, this time to countries such as the Philippines and Sri Lanka." In this way, quotas not only failed to keep production in rich countries, they "accelerated rather than slowed the globalization of the industry."

Similarly, quotas forced developing countries to move up the value chain, thus competing directly with American producers. Nonetheless, American politicians are bashing China and calling for penalties to be meted out unless Beijing revalues its currency.

The New York Times commented on the situation in an April 21 editorial: "This is protectionism raising its ugly head. . . . Worse, it's based on a misunderstanding of both China's financial situation and the cause of American economic woes.

"America's lack of savings -- by the government and by individuals -- is the biggest contributor to global imbalance, making it necessary to 'import' billions of dollars of foreign capital daily to cover our budget and trade deficits," the editorial said.

On May 18 the Bush administration, bowing to pressure from manufacturers, announced new limits on imports of clothing from China, covering such categories as trousers, underwear, shirts and yarn. It is allowed to do this because, when Beijing joined the World Trade Organization, it agreed to accept a "special safeguard" allowing its trading partners to impose quotas on China until the end of 2008 in case of market disruption, even though quotas against all other countries would have ended.

The U.S. government asserted that shipments of clothing and textiles from China were up 54 percent in the first three months of this year compared with the same period last year.

EU Trade Commissioner Peter Mandelson said May 20 at the World Economic Forum in Jordan that the European Union does not want to restore quotas, but he called on Beijing to take steps to manage a slower transition to open markets.

Laura d'Andrea Tyson, President Bill Clinton's national economic adviser, in an article earlier this month in Business Week headlined "Stop Scapegoating China -- Before It's Too Late," said that "blaming China for the plight of American workers, while predictable, is wrongheaded. And adopting protectionist policies against China is downright dangerous."

She offered a prescription for both the U.S. and China: "Instead of China-bashing," she said, "Congress should make tough political choices on revenues and spending to contain the fiscal deficit and stimulate household saving."

At the same time, "Beijing should reduce or eliminate some implicit and explicit export subsidies, including value-added tax rebates for imported equipment and components, discounts on land for export facilities and tax preferences for foreign investors."

Finally, there is also something the man or woman-in-the-street in both countries can do. Americans, she said, "must increase household savings" while Chinese "must foster more consumption" to reduce the country's reliance on exports for growth.

That is good advice indeed.

Frank Ching is a Hong Kong-based commentator.


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