The Blog

Free Trade?

The European Union, China, and the trade deficit all loom large.

12:00 AM, Apr 5, 2005 • By IRWIN M. STELZER
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

WHEN PETER MANDELSON slammed the telephone down on Bob Zoellick during a conversation over subsidies received by Airbus, he was applying to the former U.S. trade representative and current State Department number-two the intimidating tactics honed in dealing with Britain's editors and reporters in his previous life as Tony Blair's hit man. If, indeed, that is what happened. Staff at the E.C. trade commissioner's office say it didn't, and that the conversation ended with the simultaneous slamming down of receivers.

Both sides say negotiations will continue. But success is far from assured. America's negotiators are determined to end the European Union's subsidized financing of Boeing's leading competitor by bringing suit at the World Trade Organization, if need be. The Europeans know that, without state aid, Airbus cannot finance the development costs of new aircraft. Burdened with more than double-digit unemployment, they are determined to preserve uneconomic jobs by continuing the subsidies.

Trade tensions are not confined to the aircraft industry. Rob Portman, the Ohio congressman appointed by President Bush to replace Zoellick as USTR, faces a Congress concerned by America's mounting trade deficit, which increased by over 25 percent last year, to $666 billion, and almost 6 percent of GDP. Most experts expect the red ink to increase by $100 billion this year.

Because we have to borrow from overseas to finance our appetite for imports, foreigners now hold 45 percent of all Treasury IOUs, some $2 trillion in Treasury bonds and notes. Which brings us to China.

The increasingly belligerent foreign policy of the Chinese regime, including warnings to Australia about its American alliance, and stepped-up threats to Taiwan, has set nerves jangling in Washington, and focused geopolitical types on an issue that has until now concerned only trade experts. America's trade deficit with China hit $162 billion last year, the largest ever recorded with a single country. As a result, China has vaults filled with America's IOUs.

Since China is willing to spend about $200 billion annually to prevent its currency from rising against the dollar, there is little prospect that the bilateral U.S.-China trade deficit will decline. "Without substantial real appreciation [in the renminbi] versus the dollar," say Goldman Sachs economists, "Chinese goods will continue to . . . fuel large U.S. trade deficits." Experts are guessing that Wal-Mart alone will increase imports by $75 billion over the next five years, many of those goods coming from China.

That's what prompted Secretary of State Condoleezza Rice to use her recent trip to warn the Chinese authorities to act "within the recognized rules of the international economy." Shortly thereafter Zhou Xiaochuan, governor of China's central bank, announced that China has no intention of revaluing its currency to correct bilateral trade imbalances. A quick lesson for the new secretary of State on the limits of American power and her charm offensive.

THE ROW OVER AIRBUS SUBSIDIES, mounting concern over the refusal of China to revalue its currency, and anger over the refusal of the European Union to stimulate growth and suck in more imports are all converging on Portman. Critics of the unreformed European Union note that a 50 percent drop in the dollar relative to the euro has coincided with an increase in the U.S. trade deficit with the E.U.: a falling dollar cannot offset the sluggish demand growth in Europe. And trade union critics of free trade are saying that the crown jewel of the free traders, NAFTA, has produced an annual increase of over $100 billion in the U.S. trade deficit with Canada and Mexico.

Add increased skepticism about the value to America of the Central American Free Trade Agreement (CAFTA), scheduled to be reviewed by Congress this week; the reemergence of the war over E.U. banana tariffs; the threat by the European Union and Canada to impose retaliatory duties on a wide range of American products; and an administration that has chosen to spend its political capital on Social Security reform and the war on terror, and you have an atmosphere that bodes ill for the Doha round of trade-opening talks.

THERE IS WORSE. The Europeans and the developing nations profess horror at the appointment of Paul Wolfowitz to head the World Bank. They say he doesn't know anything about development, but really worry that he knows too much: that loans to undemocratic kleptocracies might fatten Swiss bank accounts, but do little to fatten starving citizens of so-called developing countries.