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Steven Suranovic - The Battle Against China Over Unfair Trade
“The Battle Against China Over Unfair Trade” (2/15/13)
By Win Rutherfurd – Probationary Member
Professor Suranovic contextualized his lecture by explaining that Paul Harvey, an old radio personality, hosted a program in which he recounted a compelling story, but then, when he had apparently finished, would state “wait, here’s the rest of the story,” and offer even more compelling information about the tale. During his lecture, Professor Suranovic emphasized that by stepping back and scrutinizing variables such as data, economic theory, international politics, etc. that the common perceptions of China’s “unfair” trade practices are in fact misperceptions when one considers the rest of the story.
Professor Suranovic began his lecture by offering some personal anecdotes about his time spent in China and general perceptions that continue to percolate within our collective impression of China. Many still associate China with bicycles, maoist dress, and farming. However, the new China is bustling, bright, and urban. In particular, Professor Suranovic noted that a city nearby Hong Kong had been built up from virtually nothing in 30 years and now hosts a population of 10 million. The same tale can be told about much of China’s urban landscape, i.e. the Pudong region of Shanghai. Such large-scale growth and urban planning is truly unparalleled. Professor Suranovic suggested that we should see this growth as an accomplishment rather than engage in China bashing in the United States, a popular activity evident by its prominence during the 2012 presidential campaign.
The force behind the widespread perception that China engages in unfair trading practices, to the United States’ detriment, Professor Suranovic posits, is a combination of business and union interests negatively affected by trade with China who use charges of unfairness as a rhetorical device to convince American voters to support policies that benefit select special interests. This rhetoric reflects partial equilibrium analysis, viewing events through a narrow lens rather than employing a more comprehensive, fuller view.
Unfair trade rhetoric encompasses two overlapping concepts: 1) that China has an unequal competitive advantage (i.e. subsidies, low labor standards, etc.) that creates an unfair advantage 2) China engages in forms of theft, particularly theft of American jobs. Professor Suranovic identified five focal points of unfairness: 1) currency manipulation 2) intellectual property manipulation 3) excessively low priced product dumping 4) government subsidies 5) violations of the WTO agreement.
Concerning currency manipulation, the standard story, virtually an unchallenged assumption within our polity, goes that China’s government keeps the RMB undervalued. This undervaluation makes Chinese goods cheaper, spurring U.S. imports, and makes U.S. exports more expensive and consequently reducing U.S. exports which leads to lost jobs and outsourcing. The rest of the story is that China’s yuan is really not fixed, but has had a crawling value that has been rising since 2005. Moreover, manipulating currency is an activity done by over 100 countries, and provides countries with poor banking structures (like China) a modicum of certainty while reducing the risk of inflation – akin to telling the international market that a nation’s products are on sale. A floating currency may be disastrous for China and Professor Suranovic problematized the view that the Chinese currency is truly undervalued.
In the past few years China’s currency has appreciated by 50%; in 2005 the economist stated that the RMB needed to rise 25-27.5% in value and some legislators even attempted to pass a bill requiring 27.5% tariff against Chinese goods. A widely quoted think tank, Cline and Williamson, noted today that China’s currency is only 7% undervalued. So the situation is not as dire as politicians and pundits make it appear. Virtually every year the IMF predicts the current account surplus with China will rise, but it continues to fall. The rhetoric against China is reminiscent as that against Japan in the 1980s which reveals how problematic these statistics can be. 30 years ago that same think tank argued that Japan’s currency ratio, to be “fair” must be 180-200 Yen/Dollar instead of 260 Yen/Dollar. The current ratio is 78 Yen/Dollar but our trade deficit with Japan continues even though we are now at a more “fair” ratio. Other factors such as the stock market, investor flows, etc. should be considered. Moreover, our worst trade deficit year was during 2005-6 when the economy is booming, therefore, linking trade deficits with China to poor economic performance in the US is spurious. We will only face a long term problem if we do not pay back china in the future. From another perspective, China is in fact lending us money when our currency flows to the Middle Kingdom, because China invests in our Government which the U.S. Government then spends, creating more jobs and spreading wealth amongst Americans. Note, Professor Suranovic spent most of his lecture on this issue.
Concerning China’s infringing on patents, intellectual property rights and the like, it certainly does happen, but it is less clear how much it is costing the US economy. The range predicted is 14.2 to 90 billion dollars a year. This wide range suggests we can’t accurately predict how much the infringing actually affects the US economy, and even these numbers are largely the product of surveys which ask companies to speculate how much they would have earned if China had more stringent intellectual property rights laws in place. Moreover, China’s intellectual property laws are in their infancy, most of them were passed within the last 30 years. We are actually witnessing a potential shift, evident by the number of Chinese filing for patents, that may indicate that China will consider intellectual property rights more seriously in the future. There is still a long way to go, but when one considers the rest of the story, the situation may not be as dire as it is made to appear.
Concerning dumping of Chinese Goods and unfair subsidies, only .03% of Chinese merchandise is actually classified as “unfair trade.” So the effects of dumping is actually not that big in the grand scheme of things. The U.S. actually enjoys a number of unequal advantages in other ways in China, a primitive banking system, lack of transparency, uncertain employment contracts etc. holds the economy back while the U.S. enjoys a high innovative capacity, complex banking, certainty in business transactions, etc. Moreover, the US subsidizes industries we view as important to protect them from harm, i.e. the automobile industry.
Concerning the WTO, China has, or will soon, come in compliance with all the alleged violations they have committed after losing cases in court. China is not alone in violating the WTO agreement. The U.S. has been hit with 38 cases alleging violations since 2002, and the U.S. has lost quite a few of those cases, such as violations for gasoline imports and cotton subsidies. China has even successfully won a case against the U.S. for a WTO violation regarding steel safeguards.
In conclusion, Professor Suranovic made a few points after considering the rest of the story that can best be surmised in bullet point form:
• Measures of unfairness are specious and the rhetoric about unfair trade with China only tells part of the story.
• The economic value of unfair trade is much lower than is commonly believed.
• Unfairness is not one sided and we should look to ourselves before condemning China:
o The U.S. devalues its currency in effect through our own policies and Europe has been flooding the international currency market with euros to depreciate their debt.
o The U.S. is the world’s largest software infringer.
o The U.S. loses WTO cases.
o American firms are regularly charged abroad with dumping.
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