Don't Be a Trade Patsy

TW: Free trade is a good thing. Free trade helps grow the economic pie for everyone. But Americans have this naive view that we exist in a world of free trade. Free trade is no longer about tariffs and other explicit trade barriers. It is about currency valuations, domestic subsidies, domestic credit policies and a host of more esoteric measures.

Many pundits (conservatives especially) immediately squawk if the U.S. government initiates an explicit trade barrier (i.e. the "buy American provision in the original stimulus bill) but our international competitors are aggressively implementing their own measures.

One of my greatest worries is that governments will slide into very aggressive anti-free trade measures. These things become prisoner's dilemmas very quickly (i.e. if you create barriers then I must as well otherwise you benefit at my expense).

But understand the trade deficit with China will not come down without their explicit participation. Americans working harder will not be enough. Americans saving more will help much though.

From Business Week:
"...Beijing has recently introduced a host of policies aimed at boosting exports while making it harder for foreign companies to sell in the mainland. China has renewed steps that keep its currency undervalued against the dollar, reinstated tax breaks on exports, and told government entities to buy Chinese products. With efforts to boost domestic consumption flagging, Beijing remains reliant on the "narcotic" of export-led growth, says former U.S. Trade Representative Susan C. Schwab. "Accumulating surpluses makes [China] feel strong and powerful."

On June 23, Washington filed a complaint with the World Trade Organization alleging that Beijing has reserved key raw materials such as magnesium and zinc for its own companies. U.S. and European experts say that gives Chinese industry an advantage over foreign manufacturers who need those materials too.

...The U.S. may have a more solid case regarding Chinese efforts to restrict sales of scarce minerals. The fact that Chinese companies can buy these materials while foreigners can't violates WTO rules, U.S. and European experts say. There is a good chance Beijing will back down on this issue "because they don't have a leg to stand on," says Lardy.

Whether or not Beijing is within its rights, the appearance of protectionism is likely to fuel pressure for retaliation. Before 2007, China enjoyed trade surpluses with the U.S. but had a deficit with other countries. By last year, China's surplus with the entire world had passed $400 billion, notes University of Maryland Robert H. Smith School of Business economist Peter Morici. And with the yuan still undervalued against the dollar by at least 20%, the U.S. deficit could start ballooning when Americans start buying again. "We cannot grow with the kind of trade deficit we have with China," Morici predicts. "And we'll continue to have that trade deficit as long as China keeps changing the rules." The policy dilemma for Washington, meanwhile, will only grow more wrenching."
http://www.businessweek.com/magazine/content/09_27/b4138000378178.htm