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Don’t Give Him What He Wants

Beware Obama’s trade deals.

Jan 27, 2014, Vol. 19, No. 19 • By IRWIN M. STELZER
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That is the lesser of the objections to a new set of deals. The larger problem is that the international exchange of goods and services—world trade—is occurring in markets so distorted by the world’s major exporter that it is impossible to predict the consequence of any agreement. China is not included in the proposed Trans-Pacific Partnership, but as the world’s biggest trader in goods—it overtook the United States last year in what the Financial Times calls “a shift in power away from the U.S.”—it affects the trade patterns of all the parties to the potential agreements. For example, German machinery manufacturers who want access to China’s market must turn over their intellectual property to Chinese state-owned enterprises, which after an initial period reach a scale that enables them to compete not only with German, but with American manufacturers.

In effect, if these deals are struck, American manufacturers will find themselves competing even more fiercely with exporters whose terms of trade are set in a market dominated by a currency manipulator that subsidizes its inefficient state-owned enterprises, protects key markets from American competition, and—how to put this—steals intellectual property. Despite recent increases in the value of the yuan, it remains undervalued, distorting world trade flows, and forcing Korea and Japan to follow suit, to howls of pain from Detroit automakers who believe such manipulation is artificially constraining sales of made-in-America autos. Yet the president is fiercely opposed to any move by Congress to make an end to currency manipulation “a principal negotiating objective” of our trade negotiators.

There is worse. Even in the absence of the distorting effect of China’s key role in shaping international markets, even if freer trade would increase the size of the global economic pie as its advocates confidently contend, it would have a malign effect on the distribution of income in the United States. Both parties have made their sympathy for “the hardpressed middle class” clear. Democrats are -translating that into an attack on increasing inequality of income, never mind that data relating to consumption, which reflects progressive taxation of “the rich” and benefits paid to lower earners, rather than pretax incomes, call such rising inequality into question. Multimillion-dollar bonuses for failed bankers combined with high unemployment and static pay checks for middle-income workers are undermining faith in market capitalism, and promoting the notion that the macroeconomic cards are stacked against the struggling residents of the middle class and, worse, sawing off the rungs on the income ladder that provided upward mobility for future generations. 

The two culprits are monetary policy—tipped in favor of those holding the shares, property, and other assets the value of which Fed zero-interest monetary policy aims to increase at the expense of savers—and trade policy. America is the largest market in the world, by far. Closing it to Chinese goods might raise prices in Walmart a bit, but would surely lower China’s economic growth rate to regime-threatening levels. Yet we consistently allow China to undervalue its currency so that equally efficient American firms, makers of textiles, shoes, and electronics, among other goods, cannot compete. Yes, we sell things to China, but far fewer than they sell here: China recently announced that its 2013 trade surplus was up 12.8 percent over 2012, and was the largest in dollar terms since 2008, with sales here the principal driver. Meanwhile, China maintains restrictions estimated by the Council on Foreign Relations to be equivalent to a 66 percent tariff on U.S. exports of business services. 

The goods we sell to China are mostly high-value items made by higher-paid, skilled American workers. And even those U.S. exporters are living on borrowed time, as China will allow their goods into its country only if accompanied by technology transfers that will soon permit China to become self-sufficient in and major exporters of those products, a process accelerated by the regime’s insistence that its state-owned enterprises purchase enough homemade products to enable China to achieve economies of scale.

Meanwhile, the stuff we buy from China was once made by lower-paid workers here, working hard so that they or their children might join the ranks of the middle class rather than the jobs queue on which they find themselves. Many workers hurt by imports have played the game the way we have asked them to—worked hard, devoted decades to their employers, paid their taxes. Suddenly, the world changes, and through no fault of their own they find themselves unable to compete with the more than one billion low-paid workers that globalization introduced into the world’s labor markets.

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