Straight talk from Clinton's trade negotiator

It is rare when a government official actually blames himself for his mistakes. That straight talk occurred in the June 4 issue of Foreign Policy in Focus when Robert Cassidy, President Clinton's Assistant U.S. Trade Representative for Asia and China, took himself to task for the trade agreement he negotiated with China. He began:

As the principal negotiator for the landmark market access agreement that led to China's accession to the World Trade Organization (WTO), I have reflected on whether the agreements we negotiated really lived up to our expectations. A sober reflection has led me to conclude that those trade agreements did not.

Cassidy notes that only two groups benefited from our trade agreement with China: "multinational companies that moved to China and the financial institutions that financed those investments, trade flows, and deficits." The American economy and the American worker were the big losers with up to 2.5 million manufacturing jobs lost.

Here is his passage in which he explains why his "free trade" recipe was flawed, even though he succeeded in reducing Chinese tariffs:

China has adopted an export-led development strategy [italics ours], the centerpiece of which is a currency that is undervalued by 20-80%, with the consensus leaning toward 40%. Thus China's wages, in U.S. dollar terms, are 40% cheaper than they would have been if the currency were allowed to freely float. Similarly, foreign investors receive a 40% subsidy to develop operations in China. To add insult to injury, our exports are taxed at an additional effective 40% rate.

We would use the less-charitable term mercantilism to describe what Cassidy calls China's "export-led development strategy." The goal of a mercantilist strategy is not only to maximize exports, but also to minimize imports in order to steal industry from one's trading partners.

If you add the two manipulations mentioned by Cassidy together, the approximately 40% added by Chinese tariffs and value-added taxes and the approximately 40% added by Chinese currency manipulations, you find that American exports face the equivalent of an 80% tariff when being sold in China while Chinese exports to the United States face no tariff and get a 40% currency-manipulation subsidy from the Chinese government. With our trade deficit with China rising from $229 billion in 2006 to $252 billion in 2007, is it any wonder that American manufacturers are laying off workers?

Even though International Monetary Fund rules prohibit currency manipulations, neither the Clinton nor the Bush Administration has ever objected. In fact, the Bush Administration just told an incredulous Congress that China is not manipulating its currency! Is it possible that they have not noticed the approximately $1.3 trillion (9% of our GDP) that we owe to the Chinese government as a byproduct of their "nonexistent" currency manipulations?

Neither candidate for President has, thus far, announced plans to deal with Chinese mercantilism. Instead, both candidates get kudos from the Main Stream Media for engaging in "straight talk." Here are quotes from Senator Obama's usual recitation on trade:

"Now if we're honest with ourselves, we'll acknowledge that we can't stop globalization in its tracks...." "I believe in trade. I think all countries can prosper." "To win, we have to understand some hard realities. Not every job that's left is coming back, and if somebody tells you they are, they're not telling you the truth."

Similarly, in January Senator McCain told Republican primary voters in Michigan that their "jobs aren't coming back."  In April, he stood before a shuttered Youngstown Ohio factory and asked voters to reject the "siren song of protectionism." However, on May 27 he correctly identified Chinese practices as "mercantilist" when he and Senator Lieberman wrote:

China's rapid military modernization, mercantilist economic practices [italics ours], lack of political freedom and close relations with regimes like Sudan and Burma undermine the very international system on which its rise depends.

When Obama and McCain tell American workers that their good-paying manufacturing jobs are not coming back, they are not telling the whole truth. Why not give workers the real straight talk -- that their jobs will continue to disappear in part because the United States government has decided to let China and other mercantilist governments steal them.

Senators Obama and McCain seem to think that there are only two choices: (1) free trade or (2) protectionism. But there is a third choice that combats mercantilism without losing the efficiency that comes from globalization. In our 2008 book, we call that third choice balanced free trade.  Just as the mercantilist countries have been intentionally increasing their trade surpluses with the United States, they can intentionally reduce them. If they don't do so voluntarily, then we would force the issue by using Import Certificates, a strategy that was initially proposed by Warren Buffett.

The Presidential election will likely be decided by voters in the industrial states. These voters demonstrated in the primaries that they don't trust Senator Obama on the trade issue. Senator McCain took a major step forward when he identified the Chinese practices as "mercantilist." The candidate who comes up with a credible plan for combating that mercantilism will win Ohio, Michigan, Pennsylvania and the presidency.

The three Dr. Richmans represent three generations of social scientists from the same family and are co-authors of the 2008 book, Trading Away Our Future, published by
Ideal Taxes Association.