Looks like we're headed for another, repetitive round of U.S.-China bickering over Chinese exports. The U.S. trade deficit with China in June rose to $26 billion, the widest gap in nearly two years. Meanwhile, the reform of China's currency regime, announced by Beijing in June, has proven to be not much of a reform at all, since the value of the yuan against the greenback has barely budged since then. Lawmakers in Washington are sure to renew their calls for punitive action against China.
But Washington is focused on the wrong issues in regard to U.S. trade with China, and for that matter, the rest of Asia. American policymakers should be much more worried about getting left out of the Asian trade story, and the potentially dangerous consequences that would have for the future of the U.S. economy.
What do I mean? Asia is becoming much more economically integrated and intra-Asia trade is growing rapidly. Part of this is just a natural process "“ as the region gets wealthier, its firms are finding more and more customers at home. But the integration is also part of an active policy on the part of Asia's leadership. The continent is being bound together by a strong spirit of free trade.
You can see that by the explosion of FTAs inked by Asian countries. According to Ganeshan Wignaraja, an economist at the Asian Development Bank in Manila, who studiously follows issues regarding economic integration in the region, the number of free-trade agreements (FTAs) signed by Asian countries has grown from just three in 2000 to 60 as of July. Nineteen of those FTAs are among just 16 Asian economies. That means Asian countries are increasingly opening markets and dropping tariffs for goods made within the region, and for those countries outside of Asia smart enough to get in on the action.
And where's the U.S. in all of this free trade frenzy? Almost nowhere. According to Wignaraja, a mere two of those 60 FTAs involve the U.S., and only one has been put into effect -- with miniscule Singapore. The other FTA, with South Korea, was signed way back in 2007 but never enacted.
What gives? Sentiment in Washington towards trade has just turned too sour. Last month, more than 100 Democrats in Congress expressed their concern about the Korea FTA to President Obama. The agreement, they said, was "job-killing." That statement is typical of what appears to be a widely held attitude in Washington that trade is bad for the U.S. economy.
But here's what will really be "job-killing." If the U.S. doesn't jump in on the Asian FTA game, it'll find itself sitting on the bench watching everyone else scoring points. American companies will find their products will be less competitive than others in key Asian markets, because they'll face higher tariffs than their competitors from countries that have been wise enough to sign FTAs with Asian countries. That will cost the U.S. exports to Asia, and that will truly be bad for American jobs. After all, Asia is becoming the fastest-growing market for everything, industrial and consumer products alike. If you're not competitive in Asia, you're in trouble, and bringing down trade barriers with South Korea and other Asian nations will only improve the chances those emerging Asian companies and consumers will Buy American.
Granted, getting a good trade deal done is difficult. Some Washington lawmakers have (probably legitimate) concerns that the Korea FTA as it currently stands doesn't go far enough to ensure market access for American cars and beef. But these are specifics that can be worked out, perhaps over time. In the meantime, America's overall market position in Asia is falling victim to the interests of a select few.
Asian leaders are keenly aware of the need to pursue trade agreements with their neighbors, and they're willing to take political risks to get them done. Take Ma Ying-jeou, the president of Taiwan, for example. In June, his government inked an FTA with China. This trade pact was highly controversial in Taiwan. Many Taiwan residents fear too much integration with China will lead to the loss of their sovereignty, and protestors hit the streets to try to block the deal. But Ma stood firm "“ because he knows the dangers of not signing the FTA. China and the 10-member Association of Southeast Asian Nations (ASEAN) launched their FTA earlier this year, meaning Taiwan's competitors in the region would have gotten better access to the all-important China market if Ma had bowed to political opposition. Fortunately for Taiwan's future, he didn't. Research from the Peterson Institute for International Economics figured that the Taiwan-China trade agreement would increase Taiwan's 2020 GDP by about 4.5% from the current trend line.
The White House and Congress need to show similar guts. Standing by while others gain an advantage in the world's fastest growing markets is not the way to strengthen the U.S. recovery or create jobs for Americans. Asia's growth story is one not to be missed. But right now, Washington is reading the wrong page.
you're right...now how does that get communicated outside your blog?
There seems to be a fundamental belief among some groups, that what is good for consumers is bad for the workers. Thus, machines, which increase efficiency, replace workers. Increased productivity? Requires fewer workers. Increased imports? Replaces workers.
We should be aware that virtually everything these folks oppose actually benefits consumers. If we import something, it's because that something is better and/or cheaper than something made here.
The Luddite agenda lives on.
Rodger Malcolm Mitchell
The problem that you have is that we can not compete with $.60 cents per hour wages. We can not compete at any level and if nothing its done, this will destroy our economy as already has...We can not afford to have trade deficits for ever!!!
joe455,
The "we cannot compete" excuse has been used for many years. The Luddites said workers cannot compete with machines. Now, supposedly, we can't compete with 3rd world nations.
So what is the option? Should Americans pay higher prices rather than import?
And, what is the reason we cannot have trade deficits, forever? Do you think it's possible for America to run out of dollars?
The world's balance of trade is exactly $0. If one nation runs a surplus, another must run a deficit. Is "beggar thy neighbor" a good economic philosophy?
Rodger Malcolm Mitchell
The general thesis of this article is all good and right, but the FTA with South Korea is the wrong place to start, because the Korean economy is the most mercantile in the world, bar none. No foreign country has had any luck prying open its market, with FTA or without. The Korean simply put up non-tariff barriers like strangely unique safety regulations that foreign manufacturers find too confusing or too costly to follow. They are not shy about violating the spirit of the rules and then arguing endlessly over the words. Try Japan, China, Taiwan or ASEAN, anyone but South Korea.
quite true.
Mr. Schuman is right to bring up the case of Taiwan in addressing the US role in Asian economic integration. The Economic Cooperation Framework Agreement (ECFA) recently signed between Taiwan and China gives a vast swath of Taiwanese products tariff-free access to the increasingly crucial mainland Chinese market. This move is certain to increase cooperation between the two sides in areas such as the high-tech industry, as well as increase Taiwan's international competitiveness overall.
Nonetheless, US-Taiwan Trade and Investment Framework Agreement (TIFA) talks have been stalled for three years on the particulars of the beef trade, similar to the US-Korea FTA. All this, in spite of the fact that Taiwan is the tenth largest trading partner of the US and that US firms have US$20 billion invested in Taiwan.
As Daniel Rosen of the Peterson Institute for International Economics has commented, the Taiwan-China ECFA opens the door for other trade agreements for Taiwan, and many expected the US to be most eager to pursue an FTA; however, this has not been the case. Now is the time for the US to take action if it wants to be an influential force in these developments. After all, processes of Asian economic integration are already taking place, one way or the other.
Mr. Schuman,
As usual, your post informs and illuminates.
The US does not seem to have a solution for its trade deficit with China. If coercing China to strengthen its currency fails to work, what else would?
The signing of ECFA between China and Taiwan is more a political move than economic concern, it is not in the same dimension as TIFA.
People in Washington one day will get out of bed and find that the world is no longer Washington-centric.
Like a Like a professional football team playing a team from a small high school, the Peoples Republic of China's economy is out performing every economy in the western world. Because it owns its central bank, its issuing debt-free currency, and its lending currency thorough government-owned banks, China is having great economic success without creating a burdensome national debt. With massive government funding, it can dominate in energy research, construction and manufacturing.
On the other hand, a privately owned monetary system like the Federal Reserve is a parasitic drag on economic development. Debt-based currency is economically inefficient, because interest is a nonproductive expense, not suppling material nor providing labor. The payments on long-term debts often double the cost of large scale projects. Even in the case of a thirty-year home mortgage, the cost of interest is often greater than the cost of constructing the houses. In an evolutionary sense, the western model of privately owned central banks, with its debt-based currency systems is clearly inferior to the government-owned banking systems issuing debt-free currency.
The repeated need for an extraneous stimulus, desperately needed to revive a sick economy, is a symptom of a fundamental structural defect in our monetary system. In the long haul, after much unnecessary suffering, the government model will replace the privately owned central bank model.
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