Brad Setser

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More trade with Central America, less with China?

by Brad Setser
July 29, 2005

Is that the deal that brought wavering Republicans from textile states on board?  We will see.

But the House speaker, J. Dennis Hastert, told him they needed his vote anyway. If he switched from "nay" to "aye," Mr. Hayes recounted, Mr. Hastert promised to push for whatever steps he felt were necessary to restrict imports of Chinese clothing, which has been flooding into the United States in recent months.

… The restrictions Mr. Hastert promised could come soon. Within the next 10 days, the Bush administration is expected to rule on whether to impose import quotas on Chinese sweaters, wool trousers, bras and other goods.  Mr. Hastert "said to me, 'If you vote with me, we'll do everything we need to do in your district to help with jobs,' " Mr. Hayes recalled.

On its oped page, the New York Times makes the classic political economy point that consumers are underrepresented in trade policy debates, and policy debates more generally.

That certainly would be the case if the price US consumers "paid" for more trade with say El Salvador was less trade with China.  The last minute haggling over the Central American Free Trade Agreement did not help US consumers.   And that probably is true with the deals done to help gain Congressional approval of other (small) regional trade deals.

But if you look at observed outcomes more broadly, I am not sure the "consumers are systematically under-represented" thesis holds true.

[note: edited for clarity]

After all, the US imports far more than its exports – which is hardly what you would expect if US-based producers dominated trade policy, or economic policy making more generally.  Alan Greenspan is no enemy of the American consumer.  

And that is true in an even more extreme form if you look at US trade with China.  2004 exports (goods) were about $35b while imports were around $195b.   Exports may rise a bit this year, but not by much.  Imports are on track to reach $250 b or so.    The obvious winner in this trade?  The American consumer.

I increasingly think the "classic" models of the political economy of trade taught in standard economics textbooks (and in political science courses) need to be modified to account for a world where US firms no longer necessarily produce goods in the US, and US retailers often market goods produced outside the US.

Consumers may be a diffuse interest that is hard to mobilize, but Walmart is not. 

And US firms certainly produce more in the Chinese market for sale in the US than they produce in the US for sale to China – and no doubt make more money using China as base for serving the US customer than selling US goods to China.  

And those firms are an organized, important lobby.

There is enough political support in the US for "consumer" interests from the firms making money selling foreign goods to US consumers to make this a viable equilibrium, at least for now.   I though would argue that like the Bretton Woods two system itself, the current political economic equilibrium that makes the large US bilateral trade deficit with China politically viable looks increasingly unsustainable.  

There is a reason why restrictions on Chinese exports were needed to "free" trade with Central America.   Ronald McKinnon may not like it, but more exchange rate adjustment almost certainly necessary to sustain – politically – open markets for Chinese goods.

10 Comments

  • Posted by progrolib

    If Hastert delivers on this promise to retain high tariffs on Chinese textiles, the Jacob Viner comment about trade diversion applies to CAFTA. As far as McKinnon’s comments, they are odd for many reasons. The Chinese have not abandoned fixed exchange rates. Chinese monetary growth has been very high and might stay vigorous even if the yuan is moderately revalued. Chinese inflation numbers may appear low but are they reliable indicators? While it is true that a revaluation would tend to lower net export demand, China does not strike me as suffering the Keynesian problem of insufficiency of aggregate demand

  • Posted by sun bin

    question:
    1. Can “Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua” together’s total labor force make a dent on that of Guangdong alone?
    2. Why is restriction on any particular country’s product , e.g., China (and unrestricting on another, e.g., Guatemala) better for US consumer? or to US as a country? economically or politically? — I can understand the case for Mexico (NAFTA), because arguably that may help to alleviate the border pressure on the SW (and is there more reasons?).

  • Posted by brad

    sun bin — you are right. if the “deal” is less trade with China in return for more with central america, the US consumer lost out. i hope I made that clear, but will edit.

    more generally though, i find it hard to square “producers” dominate US trade policy argument with current pattern of US trade with China, which clearly benefits consumer rather than domestic producer interests.

  • Posted by sunbin

    (for the sake of argument only)

    I think the argument that corporations are louder than consumer can be make if one assume there are 3 groups of interests, the Walmarts, the Producers, and the Consumers.
    The first 2 are corporation, they both have louder voice.

    Now instead of voting 1 vs 2+3 on certain issue group 3 was powerless in most issues (except if in the case of gasoline tax, where they would vote against whoever that support it)

    Meanwhile Boeing is joining hand with Walmart is the some trade issue to muddle things out more…
    But this is how the American democracy operates, I do not know if there is better solution to it. Maybe, we can tax the lobby/contribution, and use this fund to set up a consumer lobby group?

  • Posted by sunbin

    (for the sake of argument only)

    I think the argument that corporations are louder than consumer can be made if one assumes there are (should be) 3 groups of interests, the Walmarts, the Producers, and the Consumers.
    The first 2 are corporations, they both have louder voice.

    Now instead of voting 1 vs 2+3 on certain issue, group 3 was powerless in most cases(except if in the case of gasoline tax, where they would vote against whoever that support it – in which lobby group influence is powerless)

    Meanwhile Boeing is joining hand with Walmart in some trade issue to muddle things more…
    But this is how the American democracy operates, I do not know if there is better solution to it. Maybe, we can tax the lobby/contribution from corporations, and use this fund to set up a consumer lobby group?

  • Posted by brad

    I would say there are four sets of firms, and for the sake of argument, consumers and workers:

    1) export producers who use US labor — benefit from new markets for goods abroad. With China, Boeing and GE (aircraft engines/ gas turbines/ civilian nuclear plants at some point perhaps)
    2) import competing industries who use US labor — think legacy textiles manufacturers, US auto firms producing for the US market, furniture manufacturers, etc (this oversimplifies, since us auto firms for example have chinese operations that produce for china), etc.
    3) firms that have outsourced production/ supply chains to asia but sell under their own brand. PC “brands” to a degree, certainly for mother boards even if not for the entire PC (tho there is no doubt us content in the intel processor and the software too). GE’s “clock radio”/ small home appliance business, etc.
    4) Walmart/ big retailers with everyday low prices strategies.

    The big changes over time in trade politics i would argue is that big retailers are now more powerful than a group of small retailers, politically speaking — and that there are more US firms that produce goods abroad — global sourcing at all, so group 3 is bigger. both stregthen the hand of “consumer” interests indirectly, without backing worker interests.

    Workers are represented by one and two (i.e. traditionally split), classic trade “linkages” have focused on brining export industries to bear to offset the pressure from importing competing sectors. On China, one — exporters using US labor — is particularly weak b/c China does not import much from the US.

    This leaves out workers in say housing who benefit from Chinese demand for US debt. They are big winners right now — and they clearly don’t lobby on this issue.

    I find it hard to argue tho that over time the coalition of 1 3 and 4 has not dominated the political debate over Chinese trade, at least when you look at the actual votes, not the noise. MFN renewal. WTO accession. Import restrictions are going up now, but not enough to slow the overall expansion of Chinese imports — etc.

  • Posted by Stormy

    I was trying to post the following—had problems. Then I read Brad’s, which is much more complete. Nonetheless, I thought I would post this anyway.

    An easier division might be:

    American Producers: Home and Abroad
    American Labor
    American Consumer

    (There are other categories we might add: Distribution chains, for example—excellent to have abroad if the product is actually originating from the U.S.)

    Often we see some firms pitted against others because of where they produce…or assemble…the goods, in short where they go for labor.

    The crux of the matter is that in some sense the American consumer is often on both sides of the argument. As consumer, he is attracted to the low prices from abroad; as part of the labor force, he has to make a living. If we have a recession, the consumer/laborer is going to find himself in a double-bind.

    Nonetheless, a very interesting post. And an excellent way of starting to look at our problems.

  • Posted by sun bin

    On the China issue, perhaps you are right, though it is possible that the balance was so tilted that the results would have been the same even without the votes of the average consumers and small retailers.

    I was thinking about the consumer interests in general. e.g. Drug price (vs parallel import from Canada, or less pro-pharmaco policies), and healthcare costs. It looks like US patients are subsidizing those in Canada and France without a proper counter-balance to pharma lobby group, not necessarily the best allocation of investment in R&D for US.

    I think American democracy is functioning well in the macro-view (1st order) with noises from lobby groups (2nd order), and also 3rd order noise as you stated. Since at the lobby group level there is not neccesarily a good representation of the social strata (is this true?), is there a way to balance it (lobby tax to redistribute clout?),
    or is this a good idea at all? — maybe the downside outweights of such intervention the merit, because the process of which lobby group to subsidize and how to run these conter-balancing groups present complicated problems to solve.

  • Posted by Movie Guy

    (Cough. With spelling corrections…)

    CAFTA-DR

    Central America Free Trade Agreement – Dominican Republic

    Specifics:

    1. CAFTA Home Page – Office of the United States Trade Representative (USTR)

    http://www.ustr.gov/Trade_Agreements/Bilateral/CAFTA/Section_Index.html

    2. CAFTA Briefing Book

    http://www.ustr.gov/Trade_Agreements/Bilateral/CAFTA/Briefing_Book/Section_Index.html

    3. CAFTA-DR Final Presentations to the U.S. Congress

    http://www.ustr.gov/Trade_Agreements/Bilateral/CAFTA/Transmittal/Section_Index.html

    4. CAFTA-DR Final Text

    http://www.ustr.gov/Trade_Agreements/Bilateral/CAFTA/CAFTA-DR_Final_Texts/Section_Index.html

    —-

    An Independent CAFTA Assessment – Washington Office on Latin America (WOLA)

    http://www.wola.org/economic/cafta.htm

    —-

    Personally, I found the USTR CAFTA Briefing Book, and WOLA CAFTA assessment to be the best reads.

    WOLA has undertaken quite a bit of research on CAFTA. The presentation is polished, but to the point. And, obviously, WOLA is quick to point out all of the negatives of the CAFTA-DR trade agreement. Many other sources offer negative presentations, but I picked this one for posting as its material organization and presentation was fairly good. Perhaps others will identify better sources of information.

    USTR, to its credit, does an excellent job organizing and presenting the positive benefits picture of CAFTA-DR. There is an abundance of background information made available. You may note, as well, that other bilateral trade agreements between the United States and other nations are available for review on the USTR CAFTA home page.

    My opinion? Tough call.

    It appears that American interests gained over Central American interests, unless the majority of U.S. product cost savings flow to their Central American domestic consumers. Not sure how the governmental revenue flows will look when this takes place. I would expect that increased sales would offset the tariff losses if volumes increase sufficiently, but we’re talking about poor nations.

    Prior to approving CAFTA, roughly 80% of goods imported from Central America were not subject to import tariffs, according to USTR’s presentation.

    One issue of concern for the citizens of Central America will be the increased costs of pharmaceutical products from American firms. The pharmaceutical lobby was out in full force prior to the passage of CAFTA.

    And the American sugar lobby was out in force again. As evidenced.

    Still reading… and learning.

    Hope this subject bounces up later on. American trade policies and agreements deserve a closer look.

    Thanks for this post, Brad.

  • Posted by Moonzie

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