Monday, April 2, 2007

previous entry | main | next entry | TrackBack (0)

Two steps forward, one step back on trade

The two steps forward are that the United States and South Korea signed a free trade deal just before the deadline of having it approved under President Bush's Trade Promotion Authority. The New York Times' Choe Sang Hun explains:

United States and South Korean negotiators struck the world’s largest bilateral free-trade agreement today, giving the United States a badly needed lift to its foreign trade policy at home and South Korea a chance to reinvigorate its export economy.

Negotiators announced the agreement, reached after 10 months of negotiations, just in time to comply with a legislative deadline in the United States, after which President Bush’s “fast-track” authority to negotiate foreign trade deals without amendments from Congress would expire.

“This is a strong deal for America’s farmers and ranchers who will gain substantial new access to Korea’s large and prosperous market of 48 million people,” Karan Bhatia , the deputy United States trade representative, said in Seoul today.

“Neither side obtained everything it sought,” she added.

If ratified, the trade deal will eliminate tariffs on more than 90 percent of the product categories traded between the two countries. South Korea agreed to lift trade barriers to iconic American products like cars and beef, while the United States abandoned a longstanding demand that Seoul eliminate subsidies on South Korean rice....

The breakthrough came when both sides compromised on the most sensitive, deal-breaking issues. Washington dropped its demand that the South Korean government stop protecting its politically powerful rice farmers, and Seoul agreed to resume imports of American beef, halted three years ago over fears of mad cow disease, if, as expected, the World Organization on Animal Health declares United States meat safe in a ruling scheduled in May.

South Korea also agreed to phase out the 40 percent tariff on American beef over 15 years. It will remove an 8 percent duty on cars and revise a domestic vehicle tax system that United States officials say discriminates against American cars with bigger engines.

The United States will eliminate the 2.5 percent tariff on South Korean cars with engines smaller than 3,000 cubic centimeters, phase out the 25 percent duty on trucks over 10 years, and remove tariffs, which average 8.9 percent, on 61 percent of South Korean textiles.

The deal “will generate export opportunities for U.S. farmers, ranchers, manufacturers, and service suppliers, promote economic growth and the creation of better paying jobs in the United States,” President Bush said in a letter notifying Congress of his intention to sign the accord.

President Bush said the trade pact would strengthen ties between the two countries — an assessment shared by analysts who had repeatedly warned that the alliance, forged during the Korean War, has frayed during the terms of President Bush and President Roh Moo Hyun of South Korea, largely over policy toward North Korea.

The deal is the biggest of its kind for the United States since the North American Free Trade Agreement in 1994 with Canada and Mexico. It is Washington’s first bilateral trade pact with a major Asian economy.

Studies have estimated that the accord will add $20 billion to bilateral trade, estimated last year at $78 billion. Potential gains to the United States economy range from $17 billion to $43 billion, according to Usha Haley, director of the Global Business Center at the University of New Haven. South Korea’s exports to the United States are expected to rise in the first year by 12 percent, or 5.4 billion....

Consumers in both countries are the deal’s biggest winners. Hyundai cars and Samsung flat-panel TV sets, as well as Korean-made clothing, will become significantly cheaper in the United States.

The step back comes from the Bush administration's weekend decision to slap tariffs on Chinese paper. Steven Weisman explains in the NYT:
The Bush administration, in a major escalation of trade pressure on China, said Friday that it would reverse more than 20 years of American policy and impose potentially steep tariffs on Chinese manufactured goods on the ground that China is illegally subsidizing some of its exports.

The action, announced by Commerce Secretary Carlos M. Gutierrez, signaled a tougher approach to China at a time when the administration’s campaign of quiet diplomacy by Treasury Secretary Henry M. Paulson Jr. has produced few results.

The step also reflected the shift in trade politics since Democrats took control of Congress. The widening American trade deficit with China, which reached a record $232.5 billion last year, or about a third of the entire trade gap, has been seized upon by Democrats as a symbol of past policy failures that have led to the loss of hundreds of thousands of jobs.

Mr. Gutierrez’s announcement has the immediate effect of imposing duties on two Chinese makers of high-gloss paper, one at 10.9 percent and the other 20.4 percent, calculated by adding up the supposedly illegal subsidies.

But trade and industry officials say future actions based on the department’s new policy could lead to duties on imports of Chinese steel, plastics, machinery, textiles and many other products sold in the United States, if as expected those industries seek relief and the department finds that they are harmed by illegal subsidies.

[U.S. trade with China far exceeds trade with South Korea. Why is this only a step back compared to KORUS?--ed.] Two reasons. First, much as I despite countervailing duties, this policy shift seems to make sense within the context of what those duties are supposed to accomplish. As Weisman explains:
American law allows the United States to impose what are called antidumping duties when imports are sold in the United States at prices below what it costs to produce them.

But these antidumping duties tend to be small compared with duties imposed for illegal subsidies when they are employed by trading partners with free market economies. Since the 1980s, the United States has barred antisubsidy duties in Communist or nonmarket economies.

The rationale has been that it is impossible to determine what a subsidy is in a state-controlled economy, and that government-run businesses in China did not make marketing decisions based on their subsidies because they were merely told what to do by the authorities.

Today, that reasoning is regarded as out-of-date as China has moved from a faltering economy two decades ago to an export superpower with sophisticated marketing and manufacturing techniques and a determination to find jobs for hundreds of millions of poor Chinese.

“The China of today is not the China of years ago,” Mr. Gutierrez said. “Just as China has evolved, so has the range of our tools to make sure Americans are treated fairly.”

Although the tariffs imposed by the decision today are effective immediately, the action is subject to review by the Commerce Department, and a formal decision is due in October. But the administration’s position is not expected to change unless it is ordered to do so by a court or by the World Trade Organization.

Second, I'm willing to bet that this case will end the same way the steel case ended. If the complainants are basing their argument on China's currency valuation, then the WTO ain't going to uphold this action. In which case, three years from now, we know how this wll end -- unless it gets settled in the bilateral Strategic Economic Dialogue between now and then.

UPDATE: they're not basing it on the currency valuation. Never mind. Meanwhile, Trade Diversion is skeptical of Commerce's ability to assess the magnitude of the direct subsidy.

posted by Dan on 04.02.07 at 12:40 PM



Thanks for following up on these stories. I have two questions/comments:

On CORUS, I was wondering how likely it is to go though smooth ratification in Congress. There are currently two other FTAs that their ratification is delayed (Peru and Colombia) by the Democrats. Is CORUS different from these other agreements in terms of domestic opposition to the deal?

On China, the NYT article that you quote mentions that according to American officials these duties are unrelated to currency valuation. How easy would it be for China to challenge these duties in the WTO on this basis? Also, if you think this policy shift makes sense, why is this a step in the wrong direction?

posted by: YZH on 04.02.07 at 12:40 PM [permalink]

Bush took the measures on paper to look tough and to try to diffuse some political heat.

Bush will not take tough measures against China, his corporate owners won't let him.

This is like Bush's phony program to look tough on illegal immigration - just political butt covering.

posted by: save_the_rustbelt on 04.02.07 at 12:40 PM [permalink]

Why isn't the US-SK FTA also a step backward? I think Bhagwati has this issue pegged correctly. Bilateral FTAs mostly just manage trade and make multilateral trade opening more difficult.

posted by: ross on 04.02.07 at 12:40 PM [permalink]

The administration's view, defined by Robert Zoellick when he was USTR and maintained through Portman's and Schwab's tenures in the position, is that bilateral trade deals are what you go for when multilateral deals aren't available. That's pretty much been the case with the Doha round -- not that, in theory, bilateral deals couldn't wreck multi-lateral negotiations, but the ones negotiated in the last six year really can't be blamed for Doha slow progress.

posted by: Zathras on 04.02.07 at 12:40 PM [permalink]

Perhaps the bilateral FTAs did not take away resources that would have been put to better work on multilateral trade matters. But that is only one dimension of the problem with bilateral FTAs. They also entrench interests in countries that negotiate advantageous positions against multilateral openings that focus on the same economic activities. Perhaps I am biased by my own East Asia focus, but by and large these agreement appear to manage rather than free trade (see Japan, which refers to them as EPAs Economic Partnership Agreements, rather than FTAs). I can understand why in some contexts, especially given political considerations, FTAs may be embraced. But I don't buy the argument that they are a second best track towards free trade. I suspect time will reveal that FTAs harm prospects for free trade far more than help.

posted by: ross on 04.02.07 at 12:40 PM [permalink]

See also:

posted by: ross on 04.02.07 at 12:40 PM [permalink]

I also thought at first that the CVD might be part of a yuan revaluation push, but it doesn't look that way. Based on NewPage testimony before Congress in January, the complaint was based on a narrower beef about preferential and concessionary loan treatment of the Chinese pulp and paper industry by government-run banks. I think we're looking more at an American effort to use CVD rulers as a crowbar to remove Chinese trade barriers, in a managed trade process similar to what we tried (rather unsuccessfully) with Japan when their trade surplus was considered the biggest threat to our way of life. Another interesting note is that it looks like the Strategic Economic Dialogue and China trade policy in general are being run by Henry Paulson and Treasury, and Commerce will appear primarily in a supporting role. I blog the issue at China Matters (

posted by: China Hand on 04.02.07 at 12:40 PM [permalink]

Post a Comment:


Email Address:



Remember your info?