Bush Administration and Chinese Trade.  Early this week the Bush Administration announced that it was going to seek a quota on the amount of Chinese textiles allowed into the United States.  Since then many have asked for a clarification as to what is going on.  Here, in a nutshell, is my take on what is happening:

Back in 2001 when China joined the WTO it agreed that if its imports negatively impacted an industry in a country, that country could limit the amount of the import.  The idea behind such agreements is that they are a way to entice would-be protectionists to reduce their trade barriers. 

Think of it this way; a small, poor country produces personal computers.  The local PC producer is very inefficient and thus needs protection from outside competitors.  This protection, of course, carries a much higher cost than the benefit the protection offers.  The leaders of the small, poor country realize this and decide to do away with the trade barrier.  When this happens the domestic PC producer is going to get over run by the more efficient (import) American PC producers.  Unemployment in the small, poor country will increase as the domestic PC producer goes out of business.  In order to “buy time” and make for a smoother transition, the small poor country is allowed place a limit on the number of PCs coming in from America.  This gives the market in the poor, small country time to absorb the soon to be unemployed PC workers as well as the other resources the PC producer is going to shed.  So that’s the idea and intent behind the quota.

But…this framework has never been used by a rich country, like the U.S., with relatively efficient input markets.  That’s why it is so much of a surprise.  This and the fact that it comes on the heels of the, often discussed, U.S. steel tariffs.

So what to make of this? 

In Defense of the Quotas

    1)   The Chinese imports of bras, dressing gowns, and knit wear have significantly hurt   producers of these goods both in Latin America and the United States.  Since these inputs are produced at state-owned enterprises in China, and the Chinese are holding the value of the currency down, these Chinese goods are being under priced in the U.S. market.  This low market price is unfairly punishing U.S. suppliers of Latin American producers of these items.  Thus, to level the playing field the quota has been imposed.

    2)   The quota is allowed under WTO rules.

    3)   If the Chinese would stop subsidizing their state owned enterprises with free capital, cheap labor and other subsidies the quotas would not be needed and we could have free trade.

    4)    If Congress had approved the President’s suggestion for a worker savings program, American textile workers could have saved money tax free, that could now be used for retraining.  But since this part of the President’s plan was rejected by Congress the quota is the only way to “buy time” for these displaced workers.

    5)    If China floated its currency the prices of these products in the United States would more accurately reflect the resources it takes to produce these goods.  By continuing to hold down the value of its currency the Chinese are forcing the need for these quotas. 

Against the Quotas

1)   The Bush Administration is on the verge of starting a trade war.  Following on the heels of the steel tariff the Bush Administration is demonstrating that it does not believe in free international trade.  By doing so, this could trigger other countries to erect trade barriers in order to “protect” their jobs from American imports.  The last time we saw something like this was in the early 1930’s…look how that turned out:  The Great Depression.

2)   More Anti-Americanism.  These quotas maybe taken by many around the world as another example of the United States attempting to throw its weight around.  Latin America, Africa, Europe, Asia are all suspicious of hypocritical U.S. trade policy as it is.  This could further the cause of the Anti-American crowd around the world.

3)   This after Cancun?  Recently the world trade talks collapsed as the poorer countries of the world ganged up on the rich countries and killed the talks.  Now with the U.S. appearing to be very protectionist this might cause these countries to take even a harder line in any future trade talks.

4)   Risking a huge negative Chinese reaction.  The Chinese government has in the past (it can be argued) tended to overreact to criticism.  Remember how they reacted to the SARS virus?  How are they going to react to what they see as a bold move by the U.S.?  Chinese trade officials suggested just today that certain U.S. products coming into China may face a quota if the Bush Administration does not change its policy.  Is this really the way to get China to reform its economy?

5)   Is all about the electoral college?  Was the real point of this quota to protect jobs in the southern states which are important to President Bush’s re-election campaign?  Should this be called the Carl Rove Quota?

To share your thoughts on this growing controversial issue see my blog at http://brandl.easyjournal.com/

All the best,

MB