Tag Archives: trade

Free Trade, Neo-Mercantilism, and the “Rules” of International Trade

President Obama shakes hands in the Oval Office with Xi Jinping, the current Vice President (and presumptive next President) of China.

President Obama welcomed Xi Jinping, China’s “president in waiting,” to the White House this week for a high profile visit.  Obama warned the visiting leader that China must play by the rules of international trade, a comment reflecting American concerns about Chinese currency manipulation, intellectual property transgressions, and other barriers to free trade.  But economic analyst Clyde Prestowitz questions the wisdom of Obama’s “lecture” in his latest blog post:

“It sounded right and fair and slightly tough as it was carefully crafted to do by top White House political advisers, and the president may even believe it. But he shouldn’t have said it.”

Why shouldn’t Obama have criticized China for not playing by the rules?  Prestowitz argues that there are no universally agreed upon rules for international trade; rather, there are (at least) two different games being played simultaneously, by different actors, with different sets of rules.  Some states embrace economic liberalism, or free-market capitalism, which emphasizes comparative advantage, free trade, and limited government intervention in economic affairs.  Others–particularly those who are not benefiting from the trend toward greater globalization and free trade–favor mercantilist policies, which emphasize national wealth and the protection of domestic industries from foreign competition through tariffs and other trade barriers.  Prestowitz spells out which parts of the world are playing each game: 

“The global economy is, in fact, sharply divided between those who are playing the free trade game and those who are playing some form of mercantilism. Of course, there is a spectrum of attitudes and policies, but roughly speaking the Anglo/American countries, North America, and parts of Europe are playing free trade. Most of Asia, much of South America, the Middle East, Germany and parts of Europe are playing neo-mercantilism. It’s like watching tennis players trying to play a game with football players. It doesn’t work, and insisting on playing by the rules doesn’t help, because both sets of teams are playing by the rules — of their game.”

What do you think?  Are America and Europe really playing by their own rules of free trade?  Is free trade or mercantilism (or some combination of the two) a better approach for achieving prosperity?  Does America have the right to tell China how to play the game of international trade?

Doha is Dead….Long Live Doha?

Dani Rodrick has an interesting discussion of the World Trade Organization and the Doha Round at his blog this week. Citing comments by Martin Wolf, Rodrick argues that the Doha Round of trade talks is dead, and that continuing to push the round is doing more harm than good. According to Wolf,

Doha was essentially a political response to 9/11. I supported it then because it indicated the global will to co-operate and sustain globalisation. Its chance of completion was in the first few years. Once the political reasons weakened, as they did, after Iraq and then the obvious fact that globalisation was ongoing, the will to complete this round disappeared. Today, no top-level politician would now use his or her desperately limited political capital to complete this round, which they see (rightly) as a low-level priority. After all, are we really living in an era of collapsing trade? Is protectionism rampant? Given the shocks of the last few years, it is almost astonishingly absent.
Then people will say that the WTO will collapse if we don’t keep on doing rounds. I think that’s absurd. Do we think the legal system will collapse if we don’t go on writing more laws? At some point, we were bound to get to the point when a round failed. At some point, we would have to declare an end to rounds. Before 9/11, I thought we were already there. After 9/11, I thought it made sense to have one more go. I was wrong. Doha is weakening the WTO, not strengthening it.
So what now? Make the WTO work in a world without rounds, that’s what. Move on. This is over.

I think that both Rodrick and Wolf are correct in their assessment of the future of Doha. Doha is dead. It’s basically been so since the round was launched in 2001. The inability of contracting parties to arrive at agreement on a number of issues, most notably liberalization of agricultural trade, meant that it was unlike to ever be successful.

But the importance of Doha went far beyond the continued liberalization of international trade. Doha was both the first round launched under the auspices of the World Trade Organization as well as the first concerted effort to address the intersection of trade and development. Doha undertook an ambitious agenda—based in part on the standoff in Seattle in 1999—to address a series of issues with key implications for development in the global south: essential medicines, agricultural trade, trade in services, and special and differential treatment, among others. The collapse of Doha signals to the developing world—as if a new signal were necessary—that the rules of the international trade system are stacked against them, that their interests are not taken seriously in international talks. The WTO can certainly continue in its current form. But the cynicism of the developing countries will rightly be directed towards the organization.

The Future of U.S-China Relations

President Obama and Chinese Premier Hu Jintao

President Obama and Chinese Premier Hu Jintao

While most of the (political) world was transfixed on the spectacle of the health care summit yesterday, the U.S.-China Economic and Security Review Commission was holding hearings on the current and future status of U.S.-China relations. The hearings, which interestingly included testimony from two of my favorite bloggers, Daniel Drezner and Simon Johnson, as well as about a half-dozen other experts, provides a compelling analysis of the challenge of U.S. debt for China.

The basic issue under consideration was the degree to which China, which boasts a massive currency reserve held mostly in U.S. dollars, could leverage its fiscal resources into achievements in its other foreign policy goals. China currently holds at least $755 billion in U.S. Treasury Securities as part of its estimated $2.5 to $3 trillion in dollar-denominated assets. This massive financial reserve was garnered primarily as a result of China running massive trade surpluses with the United States. Ironically, however, those trade surpluses led to a situation of mutual dependence, in which the United States depended on China’s willingness to buy U.S. Treasury certificates and other dollar-denominated assets in order to finance its large trade deficits, which in turn allowed China to continue to increase its exports to the United States.

So what of the future? Sino-American relations have suffered some setbacks in recent months, as witnessed by the Google-China incident, the Obama administration’s decision to move forward on arms sales to Taiwan and meet with the Dalai Lama, the inability of the two countries to negotiate a meaningful outcome at the Copenhagen summit, various bilateral trade disputes, and continued and repeated rumblings in the United States regarding the perceived overvaluation of the Chinese renminbi.

In his testimony, Drezner argued that despite the widespread rumblings about the threat posed by China’s massive trade surpluses, it has generally been unable to covert its massive financial wealth into other foreign policy goals. With the notable exception of a couple of very minor cases (for example, using the promise of aid and assisting in the financing of government debt to Costa Rica in exchange for switching its diplomatic recognition from Taipei to Beijing), the Chinese government has been limited in its ability to use financial resources to achieve other foreign policy aims. The fungability [glossary] of financial power in the international arena is, in this respect, limited.

What’s more, while the Chinese government has expressed a desire to move away from the dollar as the de facto international reserve currency, the feasibility of most alternatives remains limited. China could push harder, but such a strategy would entail considerable costs for the Chinese government and economy, not the least of which includes a devaluation of its $3 trillion in dollar-denominated assets. As a result, it appears the U.S. and China remain in an uneasy situation of mutual dependency, each expressing dissatisfaction with the current political and economic arrangements, but each equally unable to move away from them.

The Declining Dollar and the Rise of American Jobs

Blogging over at The Daily Beast, Simon Johnson offers an interesting take on the recent but steady decline in the value of the U.S. dollar. Gold prices reached record levels yesterday, as the U.S. dollar continued its six month decline against most major international currencies. The dollar is currently trading at near-record lows against the euro and the yen. And according to a story by Robert Fisk in Tuesday’s Independent,

Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

This comes on the heels of discussions within the Chinese government to diversify its currency reserves, potentially replacing the dollar as the global reserve currency with a basket of currencies.

If true, such moves could have dramatic implications for the U.S. economy. The dollar has been the de facto reserve currency for the world since the end of World War II. And oil is the most widely traded commodity in the world, and the global oil trade provides a significant level of demand for U.S. dollars.

Most economists suggest that a shift will occur, but that it will be a gradual change rather than a sudden shift. Indeed, as former U.S. Trade Representative and current President of the World Bank, Robert Zoellick conceded ahead of World Bank meetings in Istanbul last week, “One of the legacies of this crisis may be a recognition of changed economic power relations.”

Still, Simon Johnson suggests that the current decline in the value of the dollar may not be anything to worry about. Indeed, he suggests that it may be part of a deliberate strategy by the Obama administration to improve the economic outlook in the United States ahead of 2010 Congressional elections. A weak dollar has historically been viewed as good for manufacturing but bad for the financial sector. Given that inflation is a major concern currently, the reason for a strong dollar appear less compelling. Johnson writes,

think what a weaker dollar does for the industrial heartland, where so many congressional seats will be in play and where today it’s easier to export or compete against imports because the same dollar costs convert into fewer euros, yen, or renminbi (this is what a “weaker” dollar means—foreigners can more easily afford our goods and their stuff is more expensive to us). If the dollar stays weak or declines further, our car companies, machinery makers, and turbine blade manufacturers will soon be rehiring and we’ll finally get some job growth as part of our sputtering economic recovery.

Certainly a new spin on an old debate.