Thursday, March 18, 2004

So, a reporter asked me a bunch of questions about recent US-China trade disputes. Here are my best response on a fly:

Earlier this week, the AFL-CIO asked the administration to look into China's labor practices. It seems they are pitching this as a trade issue, basically claiming that shoddy pay and conditions for Chinese workers amount to an illegal trade practice. Is such a claim valid, and why or why not?

The claim is is justified, although complete rectification of the situation is probably not going to help US manufacturing a great deal. There are two issues embedded within the low wage story. The first issue is out-right exploitation of peasant workers through locking them up and paying them lower wages than promised. Even die-hard neo-liberal economists would say this is a bad thing. The second issue is paying them wages even below the local minimum wage level. Most economists would say that we should press China to fix the first problem, but not the second, which is just labor market equilibrium wages. But even if the Chinese government enforces some sort of minimum wage, it wouldn't really help the US. Currently, minimum wage is set by the local government, and the range I think fluctuates between 400 USD and 700 USD a year (I would check on this figure). A reasonable minimum wage would be 666 USD a year, since this is the GDP per capita for Western China, the poorest region. Clearly, even if this was enforced ( I highly doubt that it can be), only a few very labor intensive industries would leave China for an even poorer country like Vietnam. The US would gain almost nothing.

Secondly, it appears the U.S. is set to file its first complaint against China under WTO rules, claiming that foreign semiconductors don't have fair market access since they are charged a higher VAT than Chinese ones.
Any thoughts on the validity of this claim?

Again, this claim is justified, if the story I read on the WSJ is true. China is currently giving higher VAT rebates to Chinese chip makers than foreign chip makers, which is equivalent to charging foreign makers higher taxes. In this case, pressing China to lower taxes on chip import would probably help the US economy somewhat, but would especially help Taiwan. In the medium to long run, however, rectifying this problem would only slow down the flow of the semiconductor industry to China. Already, US and Taiwanese firms are planning several multi-billion dollar production facilities in China. the motivation is not just China's low wages and increasingly modern infrastructure, but also that China will become the world's largest market for chips soon. However, as China increases the semiconductor market size, US vigilence in pressing for fair trade will probably allow the US to capture a larger share of the growing pie.

Finally, there is a new group calling itself the Fair Currency Alliance that says it may file a complaint with the administration claiming that China's currency regime amounts to a trade barrier. Any legs to this one?
Why or why not?

The currency issue is a bit tricky, and is really a political issue. For years, many Latin American countries have kept their currencies artificially high for a variety of reasons, and the US never complained that these countries were violating the laws of economic. Until as recently as 2000, the RMB was over-valued, as the prevalence of the black market shows. Despite that, FDI to China has grown at a fast pace since the early 90s. Companies don't relocate on the basis of a few dollars difference in costs, but because China has wage level that is 1/8 that of the US. While it is true that the RMB is under-valued now, things can change next year. China's trade deficit or trouble with financial reform can cause the RMB to plunge in the black market again. China has learned a very smart lesson in not allowing its currency be at the mercy of the volatile international market. For a developing country, keeping currency stabililty is infinitely more important than a few thousand jobs in the US.

In general, do you think all these complaints are timed for the election campaign? Sino-U.S. ties have been on the upswing, but will Bush step up anti-China rhetoric in the run-up to November? Are these issues that would have come up anyway but are given more prominence because of the election?

Yes, the democrats are definitely heating things up for Bush, and I will bet that if Kerry wins, he will only be marginally tougher on the Chinese. Bush was actually pretty tough in some respect, going as far as slapping on steel tariffs. The problem is that if we want to take massive unilateral action against the Chinese, we will essentially undermine the WTO, which would probably be bad. Both parties, but especially the Republicans, are actually trapped in the bind because the political economy has changed. Many of the "domestic firms" actually produce over 50% of their goods abroad in places like China. they complain about china more to placate their remaining domestic workers than anything. Other big companies are dependent on the china market (catepillar, Boeing). retailers rely on cheap Chinese import for profit.
So, there is actually a huge business constituency out there lobbying for the status quo. Granted, they don't make a lot of noise for political reason, but you can be sure that they are having some serious chats with Congressmen when they hand over their checks.

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