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The Washington dance on trade

By Peter Morici
web posted February 12, 2007

U.S. Trade Representative Sue Schwab has announced the United States is filing a complaint with the World Trade Organization against China's subsidies aimed at boosting exports and discouraging imports. While this is welcome news, it remains to be seen whether this offers American workers victimized by Chinese mercantilism any real relief.

The subsidies targeted by the Bush Administration include various corporate income, value-added and employment tax exemptions, and low interest loans awarded by China's state-directed banks.

According to Ambassador Schwab, these programs benefit some 60 percent of China's manufactured exports. Hence, it is no coincidence that China accounts for more than a third of the U.S. trade deficit and a larger share than either petroleum or automotive products.

Anyone knowledgeable about the nature and consequences of these subsidies has to wonder: Why it has taken the Bush Administration so long for it to act? Why has it chosen the WTO when quicker forms of relief are available?

Export subsidies are considered among the most egregious violations of WTO rules and carry the harshest penalties. WTO rules permit the United States to impose, unilaterally, countervailing duties on subsidized products from China to neutralize the effects of these practices.

Unfortunately, the Reagan Administration suspended application of U.S. countervailing duty laws on imports from non-market economies in 1984. Much has changed since then, and Russia, China, and other former Communist economies are generally integrated into global markets. Their products should have to compete by the same rules as those, for example, made in Japan or the European Union.

The Bush Administration is only now considering a change in policy but has not yet taken action. It is no coincidence that U.S. multinationals with manufacturing operations in China lobby against taking strong action against Chinese mercantilism.

The history of WTO disputes addressing broad subsidies, like tax holidays and bank credit, indicate the U.S. complaint will likely take years to resolve. China will have many options to reconfigure these practices before ultimately relinquishing them.

Practically speaking, asking the WTO to address Chinese export subsidies instead of applying U.S. countervailing duty laws would be like calling the United Nations to coordinate clean up after Hurricane Katrina instead of dispatching the Federal Emergency Management Administration. However, after five years of bungling issues like nuclear proliferation, global warming and the war in Iraq, none of us should be too surprised by inexplicable behavior at the Bush White House on a foreign policy issue.

Even more problematic, the complaint to the WTO does not mention that China provides subsidies to100 percent of its exports by persistently buying dollars in currency markets to ensure a low value for the yuan against the dollar. This despite the facts that Federal Reserve Chairman Ben Bernanke singled out currency subsidies during his recent trip to China and that China could replace all the tax and credit subsidies cited in the WTO complaint by stepping up its currency market intervention a notch.

In the last Congress, a bipartisan bill sponsored by Duncan Hunter (R-CA) and Tim Ryan (D-OH) was offered that would require the Administration to apply the countervailing duty law to subsidies in non-market economies like China, and specifically enumerates manipulated currencies as actionable under the law. With the Republicans in charge, Hunter-Ryan languished.

Now the Democrats are in control, and we have seen their priorities. The House has already voted on a minimum wage bill, but Hunter-Ryan is not yet on the docket. In Senate hearings, Democrats put Treasury Secretary Henry Paulson on the hot seat on trade with China but have abstained from any substantive measures to force Administration action.

Instead, the Democratic congressional leadership holds hostage renewal of the President's authority to negotiate trade agreements. They want assurances labor and environment standards will be written into these deals. As with subsidies, the United States already has latitude to take action against products made with child workers and in many polluting factories but has chosen not to act. Writing those issues into trade agreements won't help if the person in the White House won't enforce U.S. rights.

The dirty little secret in Washington is that Democrats have lots of corporate friends in Hollywood, who are more interested in intellectual property issues than subsidies that harm U.S. manufacturers, and on Wall Street, who earn big profits from Chinese protectionism.

So far, the Democrats have talked a good game but have offered working Americans no real action on trade issues.

Republicans and Democrats may dance to different tunes but when the music stops, it is still the worker gored by Chinese subsidizes who is left without a chair. ESR

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.


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