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because the failure of China to move (the exchange rate) is the most assured recipe to get a cycle of U.S. barriers--which we are seeing--and at some point, probably, Chinese counter-retaliation.
Let me ask a specific question about the tech arena. China allows electronics components to be imported duty-free as long as they are eventually exported, a policy that allows U.S.-made computer chips to be brought in, processed and exported back to the U.S. as more finished products like computers. Doesn't a tariff or import surcharge risk triggering Chinese retaliation in the form of import duties that could hurt U.S. tech manufacturing operations and U.S. consumers?
Bergsten: Sure. That is the trade war risk. But as I say, if they maintain an undervalued currency, that's assuring that we are going to put on barriers--as we have been doing--which at some point they may retaliate against also. So it's pick your poison.
How would your proposal handle the complexity of some tech manufacturing operations today. For example, microprocessors might be made almost entirely in the U.S. except for a few final steps, which are done in China. Would such chips be subject to the tariff or surcharge you are talking about?
Bergsten: Well, trade policy is kind of crude. In virtually all cases, we apply the tariff on the full value of the product coming in here regardless of how much value is added abroad. To economists like myself, the logic is that you would apply the tariff only to the value that is added in the exporting country and back out the cost of imported components at least for our own country, but maybe from (third-party) countries as well. But it normally doesn't work that way. There is just no way to figure out objectively how you dissect the product--say how much of it was really value-added in China. And so we apply the tariff to the whole thing. And, yes, in a strange way it's applying a tariff to our own goods which went over there and then came back.
So that is another potential downside.
Bergsten: Oh yeah. That is why you want free trade. You want to eliminate all that kind of distortion. But in a real world where a lot of this stuff is of necessity applied crudely, you do get anomalies like that.
On the face of it, your proposal seems to go against the advice of your colleague Catherine Mann, who argues that global free trade in software and tech services will generate greater demand for workers with IT skills and proficiency in the U.S.
Bergsten: No, no. I totally agree with her. The problem is there is an overriding, hopefully, shorter-term issue. Which is this imbalance in the currencies...Here at the institute, Cathy, I, all of us, everyday are working to move toward global free trade. But the prospects for that get badly distorted and sidetracked when you have these big currency imbalances.
What is your long-term prognosis for how the U.S. tech industry will fare in the face of global competition?
Bergsten: I am basically bullish. But it also really depends on how good a job we do in constantly upgrading our own skill level, our technology, our educational level and training of our workers to be at the cutting edge. What Cathy's work shows is that there is increasing and will be increasing intra-industry trade in high-tech goods, services and software. We will spin off the lower-tech ends of those specialties through the outsourcing that is so famous now. The way we stay ahead of the game is by adding jobs and potential at the high-skill, high-tech end of the spectrum.
But we can only do that if we both produce the technology and produce the people to implement the technology. So far I think we've been pretty good on the technology, but not nearly as good in producing the people necessary to keep it going and to implement it. So that, I think, is the big challenge and the big question as to whether the U.S. can stay ahead of the game.
How do you respond to the devil's advocate position that by sending off the lower-level programming jobs that sends a real bad message to the students thinking about programming as a career because they see these jobs going. And wages haven't been soaring in the tech field in recent years. It seems like there aren't very many economic incentives for people to go into the tech arena. What's your take on that?
Bergsten: Well, I think that is a matter of educating those being educated that there (is), in the same process that spins off the lower-level jobs, a creation of higher-skill, more-challenging, more-interesting, higher-paying technology jobs. But it does require higher skill levels to be able to fill them and employ people creatively in them.
And all those kinds of skills should be gained in the education arena first? I mean, you come out of college right at that high-skill level, is that what you mean?
Bergsten: One thing it means is almost certainly you have to do advanced training. I mean you have to do postgraduate training. You have to do Ph.Ds. You have to do specialized training in various technology fields to be able to move up the skill ladder. I think as a simple generalization, a (bachelors of arts degree) is no longer adequate to fill the jobs that are going to be maintained here in the U.S., unless we cut our wage levels very substantially.
See more CNET content tagged:
tariff, surcharge, exchange rate, China, economist
parties decide to agree to China's decisions. China decrees that
Taiwan is part of China - Taiwan says otherwise - China says it's
war if Taiwan doesn't agree. Ah yws, Once more, the Chinese are
negotiaing. Now, China says that any tariffs are trade war- yet
they cheerfully dump textiles around the world because that's
China's definition of trade.
The Chines Government is managed by pompous paranoia. Their
approach is basically self-destructive, and as the Chinese people
begin to leqrn what life could be, that destructio will rapidly
occur.
But can we wait for natural events?
Anyways, you have to realize that most grown-up Taiwanese people were brought up to hate/dislike the Communist Party of China and that someday we would march into mainland China to liberate the people there from their miseries. But as that possibility becomes more and more remote, the feeling towards China is really mixed (although not everyone realizes it or admits it). Based on my experience though, most of this anti-China feeling with people in Taiwan boils down to the fear of losing what they own and cherish, the fear of dramatic change in lifestyle, the fear that they would lose control of their lives. (Remember all those people in Hong Kong immigrating to other countries or applying for British National Overseas Passports just before the handover to China? Look at where most of them or where their children are today.)
Anyways, back to our topic. This fear is preventing us from trying to negotiate some sort of deal (starting in private) with China that could perhaps involve making Taiwan an autonomous demilitarized zone. (Keep in mind that most successful corporate mergers starts in private confidential talks before making them public at later stages. So why not apply it to governments.)
By the way, did you know that citizen identification cards and passports issued by the Taiwanese government actually says "Republic of China" (note "China" and not "Taiwan")? Did you know that the Taiwanese government held China's permanent seat in the UN Security council since around 1950 until the early 1970s? Anyways, the problem is not as clear cut as you might think it is.
Shawn <-- A Taiwanese.
For too long now, the Chinese have been getting a free ride into this country. That has got to stop. Either we take the small hit now or we take a huge hit a few years down the line. The problem with the latter being that by then, all our economic power will have ended up in the hands of the Chinese.
You can't wholesale export the lower levels of an industry and expect to preserve or cherry-pick the higher levels; there has to be a farm system of sorts to produce the next wave of higher-skilled people. His world view will eventually result in the higher- and highest-skilled positions being filled by -- you guessed it -- the people who acquired all of the lower-level work and became top practitioners.
You don't become a systems architect through classroom training, or a senior project. With all due respect to Joel Spolsky, one summer project isn't going to make someone become a systems architect, although they'd be further along than doing stints in tech support. What I do takes years of development practice as well as classroom time. No school in any nation can produce me in four or eight years of classroom experience. And I'm not even that good.
-Remo
Corporate America is being very easily led by the nose by the Chinese and Indians. The only way it will stop is by the consumer (middle class) losing its buying power (jobs) and triggering a recession that will probably turn into a depression, since most of Europe is all ready in dire straits. The good thing to me is that when I can no longer pay my mortgage, neither will most others.
What we need to do is protect the industries Economists understand, that revolve around manufacturing. The research and development infrastructure associated with those fields can then be rebuilt and preserved in the U.S. This will include some Biotech and nanotechnology, but we should focus more on Chemistry, Material Science, applied Physics, Mechanical engineering and robotics - high tech manufacturing support fields. That is what we should be studying. Computer science will only help implement the modeling needed in these fields.
As well, the wealth from the economic boom in China in recent years have been spread quiet unevenly. For much of the poor people though, I'm not sure whether I would call a switch from working in poor farmland to working in factories that would usually be considered unsafe and unhealthy (pollutants) by US standards as an improvement. I won't be surprised that these people would receive an around 25% wage reduction if the RMB increases by 25%. On the other hand, assuming that the RMB holds its increased value for a while, companies would save money (in terms of RMB) on importing materials and equipment. In the end, even if the RMB keeps on holding its increased value and purchasing power, it is possible that exports from China after the RMB increase may even be cheaper for US consumers in terms of US dollars. Be careful of what you wish for.
As well, the few lucky rich people in China (percentage-wise), may exchange a significant amount of money into US greenbacks, and thus putting downward pressure on the RMB and a pressure to increase value of the USD.
So if in the long run, letting the currency float might make Chinese products more competitive, why doesn't China agree to it? Good question. Keep in mind that during the short term, it may result in a shakeout, of inefficient companies, and putting millions of workers on the street in the near future that might result in a political instability that the Chinese leadership wouldn't want.
Just my 2 cents.
Shawn
So in the end, there is no way that a stronger Chinese currency would increase Chinese share of any value chain unless something else changes.
Plus, I doubt that none of the gain in a stronger Yuan would go to workers (although you are right that most wouldn't). And if that helps address the divide between the rich and poor even a little, that has to be a good thing. I doubt China's poor will accept being kept out of China's new prosperity forever. And the elevation of China's poor would do wonders for the entire world.
This results in a wider selection of lower priced goods than would otherwise be available. Wal*Mart and Target would be forced to increase their prices by the same or greater margin to compensate for the increased cost of goods for everything they sell thats manufactured in China. I don't have hard data, but I'd venture an educated guess that at least 60% of the non-perishable inventory in these stores originates in China. (I say "educated guess" above as I manufacture products in China -- and other parts of Asia -- for resale in the U.S. through these same chains.)
By ignoring the impact to the cost of the products consumers buy every day, the author misleads the reader into thinking that tariffs are a panacea for a problem that is indeed very serious. I plan to have my youngest son learn Mandarin and Cantonese, simply because I believe that the economic powerhouse for the future will be China. America has no God-given grant to be the driver of the world economy, and when you look toward China you can see a country remarkably similar to the U.S. at the start of the industrial revolution (complete with the same issues around labor laws, environment, etc.) I worry that we've become the Europe of the late 19th century, watching the next great superpower erode our economic prowess and fretting over ways to stave off the inevitable shift of power.
I hate to see it happen, but I can't see how a tariff, or even a revaluation of the yuan can do more than apply a temporary fix to a much deeper problem, and the inevitable (from a free market perspective) solution of China becoming the economic "big dog" of the 21st century.
- Free trade should be 50-50
- by Leslie Satenstein June 18, 2005 5:25 AM PDT
- When I worked in Europe a few years back, the definition of free trade was that the imports had no not exceed domestic manufacturing, ie, fifty-fifty. Free trade should allow for exports and imports to match with a 20 percent maximum difference.
- Like this Reply to this comment
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(26 Comments)Trade with China is not trade, it is purely job loss, and with it will go all the technology. Smart engineers and designers are not tied to North America. How soon will China be doing the inventing, the patenting, and the rest. USA, you are becoming a third world country. Wake up.