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.