STIFLING THE ECONOMY, ONE ARGUMENT AT A TIME / THE NEW YORK TIMES OP EDITORIAL ( VERY HIGHLY RECOMMENDED READING )

March 22, 2010

Op-Ed Contributor

Stifling the Economy, One Argument at a Time

By ROBERT E. LIGHTHIZER

FRUSTRATED with years of delay and stonewalling, 130 members of Congress last week urged the Obama administration to punish China for manipulating the value of its currency to the detriment of American exports. But this issue does not stand alone; it is part of the larger, murkier world of international trade policy, centered on the Doha round of World Trade Organization negotiations. These talks, which began in 2001, long ago became a quagmire. It’s time to admit the global economy has passed them by and pull the plug on them.

The trade talks, which never had more than modest support from American businesses, were intended not just to lower barriers to trade, but particularly to “ensure that developing countries, and especially the least-developed among them, secure a share in the growth of world trade commensurate with the needs of their economic development.” Given that Western countries had enjoyed significant economic growth in the 1980s and 1990s, helping poorer states seemed like a noble goal.

There was never much reason to believe that the Doha round would really help United States workers and businesses. American farmers in particular dislike the negotiators’ focus on reducing or eliminating their government subsidies — given the limited gains they would see in real foreign-market access.

Global trade officials claimed that Doha could be used to further open developing markets like China and India to American manufacturers, but — as the National Association of Manufacturers has pointed out for years — such countries have refused to put on the table any significant market-opening offers. Finally, efforts to use the Doha round to improve export opportunities for American service providers have also gone nowhere.

As trade ministers have chattered on for nearly a decade, the world has changed. The notion that we should adjust global trading rules to help the rest of the world compete with the West has become outdated.

Since 2001, the West has suffered its worst economic crisis since the Great Depression. In the United States, we have seen our financial services sector — which accounted for 40 percent of American corporate profits in 2007 — implode. Since the start of these talks, we have run up a cumulative trade deficit with China of more than $1.5 trillion, and have lost some four million manufacturing jobs.

Meanwhile, the World Bank projects that developing countries will enjoy 5.2 percent growth in 2010 and 5.8 percent growth in 2011 — while “high income” countries will experience growth rates of only 1.8 percent in 2010 and 2.3 percent in 2011. Under these circumstances, why would we continue with the same tired agenda for trade negotiations? It is like trying to improve standard-definition TV in the world of high-def.

Unfortunately, President Obama is reading from the same nine-year-old talking points as the trade bureaucrats. On March 11, in comments echoing part of his State of the Union address, he re-committed his administration to working “towards an ambitious and balanced Doha agreement.” That is a mistake. The president should push for a new United States trade agenda suitable for a world in which the Western countries are losing ground while “developing” countries like China, Brazil and India are surging.

Any serious multilateral trade talks should address four main topics:

THE UNITED STATES-CHINA TRADE BALANCE Our trade deficit with China grew from $103 billion in 2002 (the first full year after China joined the W.T.O.) to $268 billion in 2008 — an increase of 160 percent in only seven years. Although the recession has forced American consumers to reduce their purchases of Chinese imports, our 2009 trade deficit with China was still almost $227 billion. This imbalance has become a symbol of American decline and poisoned many Americans’ view of free trade. By some estimates, China’s aggressive exports and reluctance on imports could lower global world production by 1.4 percent and cost Americans 1.4 million jobs.

CURRENCY MANIPULATION China has stockpiled some $2.4 trillion in foreign currency reserves in its determination to keep the yuan from rising — as market forces would normally require — and maintain its trade advantage. No wonder almost a third of the House demanded last week that the Obama administration take some action. Many experts believe that the artificially low interest rates caused by Chinese currency manipulation contributed directly to the real estate bubbles in the West that exploded with such disastrous results.

UNFAIR TAX RULES The United States relies primarily on income taxes to pay for government services, while most of our trading partners depend on value-added taxes on purchases. Under current W.T.O. rules, countries with value-added taxes are allowed to give tax rebates to their companies on exported goods, and to impose those taxes on imports. Companies in nations with income taxes, however, are not allowed similar treatment. Thus an American product shipped to France is effectively taxed twice, while a French product can be sent here effectively tax-free. The consequences are serious: a 2004 analysis concluded that this practice cost American exporters more than $100 billion per year.

REGULATORY DISPARITIES Foreign companies often benefit from relatively weak labor and environmental rules that enable them to operate with significantly lower costs than their United States competitors. This leaves American manufacturers with three options: lose market share, cut profit margins or move abroad. Indeed, one of the main concerns about proposed climate change legislation is that such laws would result in significant carbon “leakage,” as carbon-emitting manufacturers flee to countries with lower standards. If we want an efficient global market, we should be more serious about making sure companies in all nations play by the same rules.

Ending the Doha round will not be easy. Many trade bureaucrats, both here and abroad, will cling to the mantra that doing so would hurt free trade. But Americans would be receptive to an argument focused on their concerns: in a 2008 Rasmussen poll, 73 percent of respondents said that a free-trade agreement had had a negative effect on their families, while only 14 percent said they had benefited from such an agreement. And while other countries would undoubtedly resist changing a global trading system that puts Americans at a severe disadvantage, we have enormous leverage, in the form of the world’s largest market. We should use that leverage.

Finally, what do we have to lose? The Doha talks are never going to significantly help Americans anyway. One benefit of the recession and the pause in the Doha talks is that President Obama has a rare opportunity to re-focus our trade agenda. He should take it.

Robert E. Lighthizer, a lawyer, was a deputy trade representative in the Reagan administration.

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