1. Current and Future Trade Issues and Policies Robert B. Cassidy Senior Advisor International Trade and Services

2. Introduction » “May You Live in Interesting Times” » Doha Round » FTAs » Elephant in the Room » Legislative Prognosis: » Trade Promotion Authority (Fast Track) » China

3. Doha Round » Launched in November 2001, after failure to launch in Seattle in 1999. » Comprehensive: 21 issues for negotiations and discussions. Key topics: » Agriculture » Market access in industrial products » Implementation of past obligations » Services » Trade laws, IPR, capacity building » Infamous four “Singapore” issues: Investment, environment, competition policy, and trade facilitation

4. Missed Deadlines -- Cancun » Failure at Cancun – July 2003: » Four “Singapore Issues” » Developing countries opposed competition policy, environment and investment, and trade facilitation » Agriculture: No movement on “Modalities” » Not enough movement by the EU, US, and other rich nations » U.S. cotton subsidies » Industrial tariffs: Developing countries unwilling to make concessions unless significant liberalization in agricultural subsidies and market access » Developing countries now play a major role in the negotiations

5. Missed Deadlines: Hong Kong, 2005 » Ministers avoided making any commitments until others moved. » EU refused to improve its offer on Agricultural domestic subsidies and market access unless better market access offers in industrial products » U.S. prepared to improve its offer if EU and others were prepared to do the same » U.S. and developing countries believed the EU offer was insufficient and thus did not improve their offers. » Ministers focused on process rather than substance, pushing deadlines into 2006. » Substance more difficult to resolve: All the tough issues

6. July Ministerial Fails » July Geneva Ministerial failed to set firm modalities (formulas) for negotiating country-specific concessions » US puts improved offer on the table » EU does not come forward with improved offer » Developing countries do not improve agricultural market access offer (important to US) or industrial market access offers (important to EU and US) » India, Brazil and China did not improve offers » China actually arguing for developing countries to match their WTO accession rates

7. Time Running Out » Most concede that negotiations are over for the time being. » Trade promotion authority runs out in July 2007. » Not likely to complete negotiations by that timeframe. » USTR Schwab has been meeting with leaders in Asia and Latin America to determine whether negotiations can go forward » A mid-term election in November with likelihood that Democrats will win more seats in House and Senate. » Will the Administration seek to renew Trade Promotion Authority? » Likely to be a trade bill at least to pass Permanent Normal Trade Relations status for Vietnam » Doha Round Failure still leaves FTA negotiations

8. Ambitious Bilateral FTA Program » Concluded: » NAFTA » Israel » Jordan » Singapore » Chile » Australia » Morocco » Central American FTA including the Dominican Republic » Bahrain » Oman » Under Negotiations » Thailand » South African Customs Union » Andean Countries: Colombia, Peru and Ecuador » Malaysia » South Korea » Panama » Over 2/3rds of U.S. exports » Over 50% of U.S. imports

9. Regional FTA Negotiations » The broad regional FTAs have faltered as bilateral negotiations expanded: » The Free Trade Agreement of the Americas (FTAA) is stalled over Brazil refusal to negotiate an FTA that doesn’t cover agricultural subsidies » U.S. opposes because EU is the major offender » Asia Pacific Economic Cooperation (APEC) negotiations have stalled over unwillingness to move forward to Free Trade. » ASEAN initiative and Middle East initiative focus on bilateral FTAs in the region

10. Waning Support for Trade » CAFTA passed by 2 votes in the House » Only passed after Ways and Means Chairman Thomas passed a bill on China, a step he had said he would never take. » Peru and Colombia FTA legislation will be introduced after the mid-term election. Not clear about the outcome » Vietnam Permanent Normal Trade legislation will be introduced, probably before the President visits Vietnam for the APEC meetings in November » Doha failure represent a lack of support for trade liberalization in EU, developing countries and even the United States.

11. Elephant in the Room: China » Every country is focused on how to compete with China » Latin America, including Mexico, is loosing markets in the U.S. to China » ASEAN members are concerned about the loss of investment to China » China is importing more from Asia and assembling products for export to the United States » Canada is loosing manufacturing exports in central Canada to the US; commodity exports to China is the balance » EU countries along the southern rim face severe competition from China » U.S. manufacturing has still not replace 2 million jobs lost

12. What is Driving China’s Trade » Theories: » WTO accession? » China’s cheap Labor » Undervalued Currency » Out-sourcing – foreign direct investment » Closed Internal market that fuels exports

13. WTO Accession » WTO accession reduced Chinese tariffs and other Chinese barriers » Trading partners made no concessions since they were already applying their most favored nations treatment to China » China’s reduction of trade barriers did reduce costs since the duties on inputs were reduced. » A benefit but probably not large enough to account for the major increases in China’s exports

14. Cheap Labor » China’s wage rates have been rising and in some regions, labor, especially skilled labor, is in short supply. » Guangdong has higher wage rates, as does Beijing. » Chinese and foreign companies frequently have to hire more workers than necessary. » Other countries probably have lower wage rates now for the manufacturing sector. Vietnam the new target » Probably not the major reason for the expansion of China’s exports

15. Undervalued CurrencyEv » Everyone agrees: China’s currency is undervalued. » Undervaluation problem began in 1994 when China depreciated the yuan by 50%: Asian Financial Crisis » U.S. recession and WTO accession exacerbated the disparity » CCC: Section 301 petition based on violation of a trade agreement: WTO Subsidies Agreement and IMF » Mandatory retaliation » WTO Dispute Settlement » Dems in Congress file their own 301 » Dispute: The degree of undervaluation depends on the trade data

16. Chinese Trade Data Incorrect

18. Effects of Undervalued Yuan » Chinese exports subsidized; imports taxed » Investment is cheap » Foreign exchange (F/X) increases » Money supply increases » Inflation increases » Free floating currencies bear the burden of adjustment: euro, Pound, C$

19. Enormous Increase in FDI

20. Foreign Direct Investment Flows to China

21. Is the Yuan Properly Valued? » Consensus that the Yuan is undervalued » International Organizations (IMF) » Administration Statements (Bush, Snow, Paulson, others) » Scholarly Research: including CRS » Only Dispute: Degree of undervaluation » 10%-75%, depending on data on exports/imports » Treasury and IMF: use Chinese data » CCC, others use trading partner data: reverse engineering

22. SourcePublicationDatePercent Undervalued World BankPPP Level200075% Big Mac IndexThe EconomistApr. 200356% PreegMAPISept. 200240% Yang and Bajeux- Besnainou Is the Chinese Currency Undervalued? Nov. 200327.99% based on PPP (using 1985 as fixed base year) WilliamsonIIE lectureOct. 2003Over 25% Anderson/UBSThe Complete RMB HandbookOct. 2003Nearly 25% in real terms GoldsteinTestimony to CongressOct. 200315-25% O ’ Neill & Wilson Goldman Sachs Rpt.Sept. 200310-15% BhallaChinese Mercantilism: Currency Wars and How the East Was Lost July 199810-15% as of 1998 Estimates of Undervaluation

25. What Do We Do » Three approaches: » Jawboning: Treasury approach up to now » Yuan appreciates by 2.1% in July and further 1.2% since then » IMF Pressure: IMF sets up medium-term review of global imbalances » All countries’ measures put on the table » Domestic Legislation

26. Closed Internal Markets » What is the one issue I wish I could renegotiate: » Open China to China » 15-18% to distribute products within China » 4% in OECD » Keeps China’s economy an export driven economy

27. Legislative Agenda » Mid-term elections present uncertainties: » Trade issues not likely to be at center of election debates » Unclear whether democrats will be able to take control of house and/or senate » Even if Dems win either or both houses, not necessarily true that trade legislation is dead. Rangel is pro-trade but also support labor and environment issues in trade agreements » Likely to be a lame duck session. Trade legislation likely to be introduced but unclear what it will include. » Renewal of Generalized system of preferences » Miscellaneous tariff bill » Peru/Columbia? TPA authority?

28. China Legislation » Senators Schumer and Graham requested that China currency bill be taken up for a vote before adjournment » Promised a vote » Probably to help Secretary Paulson » Senator Grassley has currency bill: Doesn’t do much. » Senators Collins and other may introduce legislation allowing CVD investigations against undervalued currency » Prognosis: Passing legislation in one house is not sufficient. Allows elected officials to say they did something.