A seeming contradiction? Yes. But Bergsten, director of the Institute for International Economics and a former U.S. Treasury official, says a 50 percent tariff on Chinese products may be required to level the playing field and prevent an outright trade war, where the countries slap duties on each other's products.
A tariff indeed could trigger Chinese retaliation that hurts U.S. tech manufacturing, Bergsten concedes. But he also argues that an undervalued Chinese currency already is harming U.S. producers and fueling calls in the United States for a variety of trade protections.
Bergsten's get-tough stance is part of a debate about how to address a set of trade disputes with China. Perhaps surprisingly, his position echoes that of the AFL-CIO, which backs a bill threatening to impose a 27.5 percent tariff on Chinese products. The union points to a study that showed the growing U.S. trade deficit with China displaced 1.5 million jobs between 1989 and 2003, including more than 46,200 positions in semiconductor manufacturing.
Some tech business leaders, however, favor milder steps than a sweeping tariff.
The controversy fits into a broader discussion about how the United States can maintain its technological leadership in an age of offshore outsourcing and as countries such as China and India play increasingly large roles in technology services and manufacturing.
CNET News.com recently spoke with Bergsten about his tariff proposal and the prospects for the U.S. tech industry.
Q: I have read that you are calling for an import surcharge as high as 50 percent on all Chinese imports. Is that an accurate description of your views?
Bergsten: It has got to be clarified enormously. I am not calling for a surcharge in the abstract. I and my colleagues here have argued for two years...that China needs to revalue its exchange rate by about 25 percent. They have not done that despite increasing pressure of late from the U.S. government. The fact that they are not doing that is adding enormously to international trade imbalances, the U.S. current account deficit, (and) the risk of a "hard landing" of the dollar and the world economy. Therefore, my view is we need to ratchet up the pressure on the Chinese to take action.
What kind of measures?
Bergsten: The first step that I would propose is that we go to the (International Monetary Fund), which has very clear rules against currency manipulation. If that itself doesn't work, then I would go to the World Trade Organization and file a case that China is violating two or three different obligations that are there, which would require them to move their exchange rate and, if not, face trade retaliation.
And if none of that worked, then more in sorrow than in anger the U.S. would have to threaten and implement--if they don't still come along--an import surcharge on all products from China.
Why 50 percent?Bergsten: Why do I say 50 percent? Well, we need a 25 percent change in the currency. An import surcharge applies to only half the trade balance (the imports), so you have to do twice as much, 50 percent. But it's not as if I am suggesting that an import surcharge on China is a good thing or should be done tomorrow. It's at the end of a long series of events that do need to be pursued aggressively in order to get China and the rest of Asia to move their exchange rates.
What would be the effect of what you are calling for on the U.S. tech economy, especially the high-tech industry and high-tech workers?
Bergsten: I haven't done detailed analysis. The whole objective of the exercise is to improve U.S. competitiveness against Chinese products. The way that works of course is that an import barrier would increase the prices of imports from China and therefore make U.S. products more competitive.
Keep in mind that the objective of getting China to move its exchange rate is not only to increase the value of the Chinese exchange rate, but the value of all the Asian exchange rates, because the other Asians are holding their currencies down because China is holding its currency down. If China revalued its currency by 25 percent, which is the proposal, then the other Asians would go up at least halfway. They might go up also 25 percent. So you would have a substantial change in the competitive relationship of products coming from all of Asia--Japan through India--into the U.S. That would improve the competitive position of our domestic industry in every sector including high-tech.
What about the effect on the Chinese tech industry and the tech workers in China?
Bergsten: The objective is to dampen their price competitiveness, which I would argue is artificially subsidized by an undervalued exchange rate. When you maintain an undervalued exchange rate, it's like having an export subsidy and that is artificially improving the competitiveness of Chinese industry and workers.
U.S. labor advocates believe a stiff tariff may be needed to level the playing field with China, given this perceived undervaluation of the yuan. But critics worry about sparking a trade war that could hurt both sides. How do you respond to concerns about a trade war?
Bergsten: I worry about it. That's why I would put it at the end of a list of things I would do. But I almost have the opposite worry. If the Chinese do not move the exchange rate, I think it assures a trade war.
Really?
Bergsten: Yeah. And we're seeing it right now. Every week, more and more products from China are being hit with import barriers.
It is paradoxical to propose an import surcharge to avoid a trade war. But I think something like that is necessary,
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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.