2012 GOP Platform on Trade: the Good, the Bad, and the Really Ugly

The Republican Party has released its 2012 Platform, and it's pretty much what you'd expect given the past few months of campaign and congressional rhetoric: it mostly supports free trade, yet does so in a mercantilist way and contains some pretty harsh - and indeed protectionist - words for today's trade bogeyman, China.  In fact, the platform seems like it was almost entirely lifted from Gov. Mitt Romney's 2011 economic plan, for the better and the worse.  Although there are various trade-related elements throughout the platform, the main "international trade" section can be found on pages 6-7 and I'll focus on it tonight:

International Trade:
More American Jobs, Higher Wages, and A Better Standard of Living

International trade is crucial for our economy. It means more American jobs, higher wages, and a better standard of living. Every $1 billion in additional U.S. exports means another 5,000 jobs here at home. The Free Trade Agreements negotiated with friendly democracies since President Reagan’s trailblazing pact with Israel in 1985 facilitated the creation of nearly ten million jobs supported by our exports. That record makes all the more deplorable the current Administration’s slowness in completing agreements begun by its predecessor and its failure to pursue any new trade agreements with friendly nations.

This worldwide explosion of trade has had a downside, however, as some governments have used a variety of unfair means to limit American access to their markets while stealing our designs, patents, brands, know-how, and technology—the “intellectual property” that drives innovation. The chief offender is China, which has built up its economy in part by piggybacking onto Western technological advances, manipulates its currency to the disadvantage of American exporters, excludes American products from government purchases, subsidizes Chinese companies to give them a commercial advantage, and invents regulations and standards designed to keep out foreign competition. The current Administration’s way of dealing with all these violations of world trade standards has been a virtual surrender.

Republicans understand that you can succeed in a negotiation only if you are willing to walk away from it. Thus, a Republican President will insist on full parity in trade with China and stand ready to impose countervailing duties if China fails to amend its currency policies. Commercial discrimination will be met in kind. Counterfeit goods will be aggressively kept out of the country. Victimized private firms will be encouraged to raise claims in both U.S. courts and at the World Trade Organization. Punitive measures will be imposed on foreign firms that misappropriate American technology and intellectual property. Until China abides by the WTO’s Government Procurement Agreement, the United States government will end procurement of Chinese goods and services.

Because American workers have shown that, on a truly level playing field, they can surpass the competition in international trade, we call for the restoration of presidential Trade Promotion Authority. It will ensure up or down votes in Congress on any new trade agreements, without meddling by special interests. A Republican President will complete negotiations for a Trans-Pacific Partnership to open rapidly developing Asian markets to U.S. products. Beyond that, we envision a worldwide multilateral agreement among nations committed to the principles of open markets, what has been called a “Reagan Economic Zone,” in which free trade will truly be fair trade for all concerned.

I've been over most of these ideas before, so there's no need to get long-winded tonight.  Instead, here's a quick summary of the good, the bad and the ugly in the GOP platform's international trade section:

The Good. The platform expresses unequivocal support for international trade and free trade agreements.  Especially noteworthy is (i) formal party support for the Trans-Pacific Partnership - something we've suspected but not really heard from the GOP's top dogs; and (ii) a loud call for restoration of Trade Promotion Authority - an absolutely critical legal tool for the President's ability to effectively negotiate new trade deals.  Although I'll start complaining in just a second, the GOP's embrace of international trade is definitely a good thing, especially given the economic anxiety out there right now and the strong anti-outsourcing and anti-trade stuff we've been hearing from most Democrats.  Maybe the Dem Platform will surprise us and not contain similar protectionist positions this time around, but until then, the GOP remains the better party when it comes to public support for good trade policy.

The Bad.  The platform continues the failed approach of selling free trade through a single-minded focus on exports and reciprocal trade (i.e., only opening our market if others open theirs).  As I've repeatedly discussed, this strategy is not only economically ignorant, but it also undermines public support for free trade by reinforcing the erroneous notion that imports - and by extension the US trade deficit - are somehow bad for the US economy.  The platform also errs in its support for Romney's "Reagan Economic Zone" - a silly idea from a practical perspective (I've yet to read serious, apolitical trade policy expert express even lukewarm support) and one that implicitly abandons the existing multilateral negotiating framework at the WTO.  That, in my opinion, is a serious mistake - the WTO is and will remain the only real mechanism for broadbased, multilateral trade liberalization, and any alternatives are dangerous non-starters.  The GOP certainly isn't abandoning the WTO altogether - the text above promotes the use of WTO dispute settlement, and the platform on page 49 supports Permanent Normal Trade Relations with Russia in order to reap the benefits of Russia's WTO accession - but the Reagan Zone strongly implies that the GOP no longer sees multilateral negotiations through the WTO as viable.  And that, in my opinion, is a mistake, regardless of the big mess that is the Doha Round.

The Ugly.  I guess it shouldn't be a surprise, but it's really a shame that America's "free market" party has warmly embraced Romney's zealous contempt for all things China trade-related.  This includes support for (i) countervailing duties on Chinese imports due to currency manipulation; (ii) mysterious "punitive measures" on foreign firms found engaging in IPR theft; and (iii) support for a "Buy AmericanAnything-But-Chinese" procurement policy.  Leaving aside for the moment the fact that each of these proposals raises serious legal and practical concerns (see, e.g., here on currency; there's not really a vehicle under US law for the second; and the third could violate WTO rules if it singled out China), there are much bigger problems with such talk: 

• First, the scary chest-thumping overshadows far more legitimate gripes about bad Chinese trade policies (like subsidies and IPR enforcement).  When you're screaming about attacking imports and investment, people tend not to notice your more subtle gripes about real problems in the Chinese market. 

• Second, and more importantly, these proposals expressly condone self-destructive retaliatory protectionism that defies economic sense and free market principles.  As I've repeatedly warned, there is absolutely no reason why such "logic" couldn't be applied to other "offending" countries, and the protectionist slope is very, very slippery.  Saying "we only meant it for China" is likely not going to serve as an adequate defense when the well-funded protectionists come knocking on the White House door.  And, by empowering these anti-trade forces, such proposals also won't help improve tepid American support for free trade.  In short, Pandora's Box has been opened, and it remains to be seen whether Republicans can control the nastiness inside.  The Democrats - who once supported things like NAFTA, China trade and the WTO (see, e.g., Bill Clinton) - sure couldn't.

Granted, each of the GOP's China trade proposals allows for ample wiggle-room, and it's very likely that a President Romney would pursue a much less aggressive approach (indeed, the platform later on page 49 states that the GOP "welcome[s] the increase in trade and education alliances with the U.S. and the opening of Chinese markets to American companies").  Regardless, "Commercial discrimination will be met in kind" is a recipe for heightened protectionism and possibly a trade war, not a responsible, economically and legally sound policy from the supposed "adult in the room" on US international trade policy and politics.  And the sign that such rhetoric - in GOP's defining policy document, no less - sends to the rest of the world is nothing short of embarrassing.  The only bright side for Republicans, I guess, is that the Democrats' platform promises to be even worse.

Hooray, lesser of two evils!

More to come, I'm sure.

US Politicians' Unfortunate Ignorance of Global Services Trade

The US manufacturing sector has long been a focus of many statewide and national political campaigns, as well as elected officials' trade and fiscal policies.  As I noted a few months ago, many campaigning politicians' obsession with the American manufacturing sector - particularly their belief that it's in desperate need of government support - is completely wrongheaded.  But even if it were true that US manufacturers are struggling mightily in today's global economy, that still wouldn't explain why, particularly when it comes to trade, our politicians don't also obsess over US services and foreign barriers to them.

In fact, for many campaigning pols and elected officials, it's as if the services sector doesn't even exist.  For example, GOP presidential candidate Rick Santorum's fiscal plan involves massive tax cut and other subsidies for domestic manufacturers, but doesn't once mention the services sector.  And, as I've lamented repeatedly on this blog, US and other negotiators in the WTO's Doha round prioritized agriculture and industrial market access, while services liberalization was an afterthought to be negotiated only after modalities in the "important" sectors were resolved.

This obsession might make sense for politicians and trade negotiators in certain developing economies, but it's a huge mistake for their US counterparts.  A cool new book from Georgetown's J. Bradford Jensen entitled Global Trade in Services: Fear, Facts, and Offshoring makes this point clear, showing that the US services sector is globally dominant and that global trade in services provides far more and better opportunities for assisting the American economy's resurgence.  It also demonstrates that fears about outsourcing in the services sector are totally overstated.  I recently attended a presentation by Jensen on his book, and he was kind enough to share some of those materials with me.

Key findings from the book include:

• The service sector is a large and growing contributor to the US economy, employing a majority of American workers. The business service sector (which includes, among many others, information, financial, scientific, and managerial services) alone accounts for 25 percent of employment in the United States—more than twice as many jobs as the manufacturing sector. Employment in the business service sector increased almost 30 percent over the past decade, while manufacturing employment decreased by over 20 percent.

• The popular perception that most service jobs are “bad jobs with low wages” is wrong. In fact, the business service sector pays significantly higher wages and salaries on average than the manufacturing sector. Average annual wages in business services are more than 22 percent higher than average wages in manufacturing.

• Trade in services is growing, both imports and exports, and the share of employment in tradable services activities is large, potentially exposing a large share of the US workforce to foreign competition. Service exports have expanded dramatically over the past decade, doubling over the past decade. And although service imports have also increased significantly over the same period, the United States consistently runs a trade surplus in services—in contrast to its sizable trade deficit in goods.

• Many service activities—engineering and architecture services, project management services, movie and music recording production, software production, and research and development services, to cite a few examples—appear to be “traded” within the United States and thus are at least potentially tradable internationally. Approximately 14 percent of the US workforce is in service industries that this book classifies as tradable. In contrast, only about 10 percent of the workforce is in the entire manufacturing sector. When workers in tradable occupations (such as computer programmers in the banking industry, or medical transcriptionists in the health care industry) within nontradable industries are included, the share of the workforce in tradable service activities is even higher.

• Even though these jobs pay high wages, they are not likely to be lost to low-wage countries. Indeed, precisely because they are high-skill, high-wage jobs, they are jobs that the United States is likely to retain and that can support exports. The United States has comparative advantage in high-skill, high-wage manufacturing activities.

• The United States has comparative advantage in services and has been successful in exporting services. Indeed, the nation consistently runs a trade surplus in services. But US service firms’ participation in the international economy lags that of US manufacturing firms: a far smaller share of service output than of manufacturing output is traded. Thus, there seems to be considerable opportunity for US firms and workers from increased service trade.

The implications of Jensen's findings are clear:

Although the United States has comparative advantage in services, turning that advantage into real economic benefits for US firms and workers is not automatic. A number of large and fast-growing economies around the world are less open to service trade than the United States. Liberalizing service trade with these countries is sure to be difficult, because it means not just reducing tariffs and other border controls as was the case with trade in manufactures, but instead fighting through a tangle of regulations, licensing requirements, and other barriers well within countries’ borders. But the historic opportunity that increased service trade represents, in particular because of the coming infrastructure boom—over $20 trillion by some estimates—in the developing world, well justifies the effort required. Other developed economies also have comparative advantage in services and would be natural partners with the United States in persuading the large, fast-growing countries with high service barriers to liberalize.

Based on his findings, Jensen makes several good, basic recommendations for US trade policy:

The United States, working through the General Agreement on Trade in Services (GATS), should join with other developed countries in pushing for further liberalization of business services, to ensure that US service firms and workers have the opportunity to compete in the coming infrastructure boom.

The United States, again in cooperation with other developed countries, should strongly encourage large and fast-growing countries to sign on to the WTO government procurement agreement.

The United States should make access to a good primary, secondary, and postsecondary education a high national priority.

He then concludes that "the United States should embrace trade in services and pursue liberalization in the services sector aggressively. Both the United States and the world have much to gain and little to lose."

But, hey, maybe you refuse to take the statements above at face value and instead remain committed to our politicians' manufacturing obsession.  Well, fortunately for you, Jensen sent me several great graphics from his presentation, and I've uploaded them here.  Below are a few of my favorites.

First, the importance - in terms of size and earnings - of services to the US economy:

Next, proof that the United States' comparative advantages lie in high-end manufacturing and, you guessed it, services:

Next, the immense advantages of tradable services in terms of earnings, education and quantity:

Finally, a review of just how high are global barriers to trade in services and the most-restrictive countries:

And yet our political class obsesses over manufacturing and constantly frets about global impediments to American goods exports.  Utterly nonsensical, wouldn't you say?

I Swear, I Had Nothing To Do With This...

On Monday night, I recommended that, given President Obama's depressing timidity on US trade policy, WTO Members should "formulate appropriate contingency plans, such as putting the [Doha] Round on ice until, oh I don't know, 2013 when the White House will (hopefully) be occupied by someone more amenable to free trade."  Well, less than a day later, it became crystal clear that pretty much everyone in Geneva, except the Obama administration of course, agrees with me (emphasis mine):

The likelihood of the Doha round of world trade talks being declared dead this year rose on Tuesday when it became clear that even a partial deal would not be possible.  The talks, named after the Qatari capital in which they were launched in 2001, have drifted further towards oblivion in advance of a twice-yearly meeting of ministers this December.

Pascal Lamy, the World Trade Organisation’s director-general, told negotiators in Geneva on Tuesday that the WTO’s negotiating function was “in paralysis”. He urged member countries to use the December meeting to have a broad conversation about the future of Doha rather than try to make concrete progress.

Negotiators have tried to rescue a minuscule part of the talks by proposing a stand-alone “early harvest” package to be agreed in December which would extend market access to some of the world’s poorest countries and reduce cotton subsidies – a subject of particular interest to a group of west African nations.

But the US said on Tuesday that such an agreement would not be possible because of the refusal of other governments to accept other elements in the package....

Michael Punke, the US ambassador to the WTO, said on Tuesday that the stand-alone deal was impossible. “It has become clear to us and to many others that a so-called early harvest package is not happening and is not going to happen,” he said. “As we feared, participants have proven much more comfortable in talking about what others can give than in talking about what they can contribute themselves.”

A deal to give the least-developed countries (LDCs) completely free access to rich nations’ markets and reduce cotton subsidies would require difficult commitments by Washington. The US has already failed to reform its generous payments to politically powerful cotton farmers, despite having had them declared illegal by the WTO, and a deal for the LDCs would cut across the existing US scheme to give preferential access to all African countries.

Yi Xiaozhun, the Chinese ambassador, took implied aim at the US, saying that the insistence on bringing in new issues was crippling discussions. “The intention of various members to put on their own demands . . . would finally kill the core package that the LDCs really need,” said Mr Yi.

The Doha round has made no significant progress since a ministerial meeting collapsed in mid-2008 in Geneva. An increasing number of officials admit privately that the round will never conclude, but as yet no government has publicly declared it over.

We all see what's going on here, right?  Any deal on cotton and LDCs - relatively minor issues that almost all WTO Members support - would require legislative changes to US laws and, of course, the expense of political capital by the already-campaigning White House to get that done.  As I said on Monday, the President's unwillingness to spend such capital on trade issues is well-documented at this point.  Indeed, when it comes to our WTO-illegal cotton subsidies, the Obama administration is so utterly unwilling to take some political lumps and pursue necessary reforms that it's resorted to bribing Brazilian cotton farmers (with taxpayer dollars, of course) instead of modifying the offending programs.

And let's please not kid ourselves here and blame Congress for the Administration's political pusillanimity on these trade issues - the House voted to terminate the Brazilian payoffs just last month, and both the Republican-controlled House and Democrat-controlled Senate recently showed a willingness to address US preference programs by attaching them (rightly or not) to the US-Colombia FTA implementing legislation.  So if the White House really wanted to get a cotton/LDC package through Congress, it could very likely do so.

But that would require, you know, political courage and effort - something sorely lacking these days over at 1600 Pennsylvania Avenue (and not just on trade).

So, given these sad facts, what does USTR do in Geneva?  They submarine the December deal by making other demands that many nations adamantly oppose.  Who knows whether they did this to try to buy off domestic opposition to the cotton/LDC package or to just kill the chances of a final deal, but the result of their demands was the same in either case: inevitable failure.

Again.

Yes, other Members like the EU also have made additional demands, but do you really think that they would maintain their positions if the United States expressed robust support for the basic LDC/cotton package?  I sure don't.  Indeed, as Phil Levy and I argued last December, bold US leadership could have realistically secured a robust Doha package in 2011.  Certainly it could get this feeble package across the finish line.

And yet, here we are.  Sigh.

So, once again, American political cowardice has helped scuttle an important trade liberalization initiative.  And, once again, supporters of robust American free trade policy are reminded that we, like the WTO negotiators in Geneva, should just pack it all in until 2013 (hopefully).

Any optimism before that time would just be foolish.

Why the Doha Round Is in Deep Trouble

Apologies for the blog silence over the last week or so; I was travelling for work and had nary a free second to post.  (I trust you survived without me.)  And since the US FTA debacle remains at basically the same place where I left it (i.e., a frustrating, painful and unnecessary stalemate created by the White House), I want to stop obsessing about turn away from the FTAs tonight and look at another depressing trade issue: the sorry state of the WTO's Doha Round of multilateral trade negotiations.

Columbia University's Jagdsish Bhagwati has a typically excellent op-ed in yesterday's NYT (h/t Steve Craven) on this very issue.  He laments, rightly I think, the bipartisan lack of support for the Doha Round, despite the fact that it has "far greater potential to create prosperity and help working Americans" than the pending FTAs that are currently sucking the life out of the US trade policy debate.  Bhagwati argues that the round deserves our attention and strongest efforts, and his reasoning is clear and pretty irrefutable:

Bilateral trade agreements are not the same as free trade. Yes, they liberalize trade for the parties involved, but outsiders then face a handicap. The discrimination comes in the form of barriers like tariffs and antidumping charges, which countries impose on imports that they believe are priced artificially low.

When the United States negotiates bilateral deals with other countries, the unbalanced nature of the one-on-one negotiations also opens the way for all manner of lobbies to ram their self-serving demands into the agreements.

For example, when Washington negotiated free trade deals with Chile and Singapore, Wall Street lobbied to curtail those countries’ right to impose restrictions on capital flows at times of crisis — even though the International Monetary Fund now admits that such restrictions often make sense. Business lobbies have also pressed for excessively favorable treatment on intellectual property rights.

American labor unions have learned these same tricks, urging Democratic legislators and administrations to block bilateral trade deals unless their demands for labor protections are met, as they did with the three long-delayed agreements now pending.

But larger countries with more clout, like India and Brazil, will allow no such provisions. They correctly see these labor provisions as a form of anticompetitive protectionism. And they point out that it takes chutzpah for the United States to argue for labor rights abroad that often exceed those at home.

Moreover, when powerful business and labor interests can extract concessions in those bilateral deals, they have no reason to support a multilateral trade agenda. Mr. Obama’s trade representative, Ron Kirk, points out that business leaders press bilateral trade deals, not the Doha round. The proponents of bilateral deals always complain that multilateralism is too slow. This surely confuses cause and effect....

The failure of Doha would cause immeasurable harm. It would undermine the credibility of the W.T.O. and its progress in promoting multilateral trade liberalization, and it would begin to erode the binding dispute settlement mechanism, an achievement unparalleled in other international institutions.

The value of that mechanism was demonstrated just this month, when a W.T.O. panel ruled for the United States and the European Union in a case challenging China’s restrictions on exports of industrial raw materials.

Bhagwati then offers a four-point roadmap for concluding the Doha Round.  It relies on one man - President Barack Obama - to "set our trade policy in the right direction" and get the Round across the finish line:

First, Mr. Obama needs to bring the business lobbies on board....

Next, the canard that Doha offers little gain for the United States must be put to rest....

President Obama must persuade labor unions, core Democratic constituents, that they are wrong to buy into the fear-mongering that says trade with poor countries produces poverty in rich countries....

The president should ask Democrats and Republicans to immediately add the Doha round, as it has been negotiated over 10 years, into the same all-or-nothing package as the three bilateral deals. Such a bold gesture has a precedent. After sitting on the fence his first year in office, President Bill Clinton embraced the cause of trade, despite the political costs, and fought fiercely, and against great odds, for the Uruguay round. Mr. Obama should do no less.

The specifics of Bhagwati's recipe for Doha success are different from those that Phil Levy and I set forth in an IBD op-ed last December, but the overall point of each piece is identical: Doha is extremely important, and its fate rests in the President's hands alone.

Unfortunately, as Levy and I noted last year, the political and economic conditions for White House leadership on Doha were much better back then than they are now, and, of course, the Obama administration did absolutely nothing to advance the Round since that time.  Nothing.  So, while I applaud Bhagwati's analysis and efforts, I think he's absolutely kidding himself if he really thinks that this already-campaigning President will wake up tomorrow and start vigorously defending the Doha Round and spending significant political capital convincing US businesses and, more importantly, American labor unions(!) that multilateral trade liberalization is an important and worthwhile endeavor.  Indeed, the current FTA impasse is a crystal clear reminder of President Obama's abject refusal to take on US labor unions in order to promote an American free trade agenda.  So why would he and his political team do it with a much larger (and more economically significant) trade agreement?

Quick (and obvious) answer: they wouldn't, and thus, the Doha Round remains in deep, deep trouble for the foreseeable future.

The sooner we all realize this sad fact, the faster we can formulate appropriate contingency plans, such as putting the Round on ice until, oh I don't know, 2013 when the White House will (hopefully) be occupied by someone more amenable to free trade.

It certainly couldn't get any worse.

Horribly Misplaced China Priorities, Ctd.

From Steve Craven comes more evidence today that the Mainstream Media are finally catching on to the fact that the US government's obsession with China's currency is really misguided.  On monday, the WSJ's Peter Stein saw the light, and today the NYT's David Leonhardt does the same:

When China’s president, Hu Jintao, visits here next week, the exchange rate between Chinese and American currency will inevitably become a big topic of conversation....

Yet the focus on the currency has nonetheless become excessive. The truth is that the exchange rate is not the main problem for American companies hoping to sell more products in China and, in the process, create more jobs in this country. The exchange rate does not need to be the focus of next week’s meetings.

For the United States, the No. 1 problem with China’s economy is probably intellectual property theft. Technology companies, for example, continue to notice Chinese government agencies downloading software updates for programs they have never bought, at least not legally.

No wonder China has become the world’s second-largest market for computer hardware sales — but is only the eighth-largest for software sales.

Next on the list, say people who work in China or do business there, is the myriad protectionist barriers China has put up. These barriers make this country’s recent efforts at “buy American” protectionism look minor league. In some cases, Beijing has insisted that products sold in China must not only be made there but be conceived and designed there. The policy goes by the name “indigenous innovation.”...

Arthur Kroeber, a Beijing-based consultant and editor of the China Economic Quarterly, goes so far as to call the currency discussion a distraction. “What exactly there is to be gained by quibbling over a point or two in the annual appreciation rate,” Mr. Kroeber says, “is beyond me.”

Be sure to read the whole thing.  I don't agree with everything in there (especially on the value of congressional attacks on China's currency policies or of "Buy American" legislation), but it's an informed and fair-minded piece.  And it provides further proof that, the more that people really look at US-China trade issues, the more they see that currency is a red herring that diverts finite government resources from far more important US-China trade issues, like market access and IPR.

And speaking of that red herring, it appears that, just as predicted, inflation is doing to the real value of China's currency (and thus Chinese exports) what the Chinese government's interventions are trying to prevent via the nominal exchange rate:

When garment buyers from New York show up next month at China’s annual trade shows to bargain over next autumn’s fashions, many will face sticker shock.

“They’re going to go home with 35 percent less product than for the same dollars as last year,” particularly for fur coats and cotton sportswear, said Bennett Model, chief executive of Cassin, a Manhattan-based line of designer clothing. “The consumer will definitely see the price rise.”

Inflation has arrived in China. And after Tuesday’s release of crucial financial statistics by China’s central bank, few economists expect Beijing officials to be able to tame rising prices any time soon....

Higher global commodity prices, as well as rising wages in China, play roles in the increasing cost of Chinese goods. But economists say the main reason for the inflation now is China’s foreign exchange reserves, which surged by a record amount in the fourth quarter....

[T]hat cheap currency policy seems to be reaching its limits. The extra renminbi are feeding inflation. That is starting to undermine exporters’ price competitiveness — just as a stronger renminbi would do if Beijing was not intervening to begin with.

Money supply figures for December, which the central bank released on Tuesday, showed that cash and bank deposits were increasing at a rate twice as fast as even China’s soaring economy. Ever more renminbi are available to buy goods and services.

Victor Fung, the group chairman of Li & Fung in Hong Kong, a 35,000-employee trading company that supplies most of the world’s big retailers with Asian goods, said that contracts signed late last year would produce a jump of 10 to 20 percent in the import prices of consumer goods arriving at American ports by the second quarter of this year.

“By the middle of this year, you’ll see considerable diversion of trade away from China,” which will start to bring down the United States trade deficit with China, Mr. Fung said in an interview.

But there are only limited alternatives to China as a supplier of cheap goods. As American retail chains scramble to shift orders to other countries like Bangladesh and the Philippines, they are finding that inflation is emerging as an issue across much of Asia.

What is more, the far smaller factories in other Asian countries have little capacity to absorb the huge orders that Chinese factories routinely handle, corporate executives and economists said....

Hu Xingdou, an economist at the Beijing Institute of Technology, said that a more accurate gauge of inflation would show consumer prices rising 10 percent a year. The National Bureau of Statistics has said it is actively studying ways to improve the consumer price index.

Inflation in China is not just the result of China’s currency market intervention, although Mr. Hu and other economists describe it as the biggest single cause. Another cause is aggressive lending by Chinese banks, despite repeated demands by regulators to slow things down.

Rising prices for exports are also caused by wage increases for Chinese blue-collar workers, whose pay has been climbing as much as 15 percent a year. Those workers have more clout than they once did because the supply of factory labor from rural areas, which once seemed inexhaustible, is starting to dry up — a result of three decades of China’s “one child” policy of family planning, as well as a big expansion in university enrollment.

And globally, strong demand from consumers in China and other emerging economies is pushing up not only gasoline prices, but also the prices of cashmere, rabbit fur, cotton, copper and many other commodities....

The effect of higher prices in China on broad measures of American inflation is far from clear. The rule of thumb for many consumer products, from shoes to garments to toys, is that the import price is only a quarter to two-fifths of the final retail price, which also includes transportation within the United States and the wages, rent, electricity bills and other costs incurred by stores.

After showing little change for nearly two years, import prices for goods arriving from China at American docks rose from September to November at a rate equivalent to an annual rise of 3.6 percent....

Mr. Model of Cassin, who is visiting Beijing this week from his company headquarters just off Seventh Avenue, said that the world had changed and that Chinese manufacturers were now more interested in catering to their domestic market than in offering rock-bottom prices to big American companies.

“All of a sudden, they’re more interested in selling domestically,” he said. “The American wholesaler will fight them on $5. The domestic retailer doesn’t care as much.”

The Economist has more on this very interesting issue here, and let's please not forget that all of these changes are happening without self-defeating American protectionism.  In short, basic economics is doing what aggressive American unilateralism can't - and should never try to - do, and it's doing it pretty quickly at this point.  Or put another way: contrary to the doomsaying "experts" like Paul Krugman, doing nothing re: China's currency is working out just fine, thankyouverymuch.

The media are starting to understand these facts.  Better late than never.  The big question is whether our politicians will ever catch on and ditch the currency obsession for a smarter China trade policy. 

Speaking of which, the Australian reports that - hey look at that! - the WTO's Doha Round talks have been resuscitated and that completion in 2011 is a real possibility that will depend entirely on the leadership of the US, China, India and Brazil:

Ten years later, and having been revived twice after collapsing under a mountain of disagreements, the round continues to limp along under the guidance of singleminded Director-General Pascal Lamy, who is resolutely determined to extract an agreement from the WTO's 153 members.

Lamy, a former European Union trade commissioner and French political adviser who succeeded Supachai Panitchpakdi in 2005, told The Australian in Sydney that the leaders of the G20 agreed in Seoul in October that 2011 presented "a window of opportunity" to conclude the round. "I have been saying since July 2008 that 80 per cent of the deal is already on the table. The question is how to get the remaining 20 per cent done," Mr Lamy said.

This is up to the US, China, India and Brazil, who must resolve their differences to close the gap. "The US wants the emerging countries to pay a bit more than what is on the table in a number of areas. China, Brazil and India are saying maybe (we can do more), but we also need to see the price that the US is willing to pay for that," he said.

Intensive negotiations to bridge the final gap started in September and hopefully in the next few months, it will be possible to draw up a new global trade agreement. Other trade developments this year, such as the 10th anniversary of China's accession, and the entry this year of Russia into the WTO, may act as an impetus to wind up the decade-long, sometimes fractious Doha negotiations.

Some of us have been trying to spread the word on the Doha Round, and the desperate need for US leadership, for a while now.  Lamy's comments and more stories like this one will certainly help with that. 

But is President Obama listening?

The US Government's Horribly Misplaced China Trade Priorities

It's no secret that the US Congress and many in the Obama administration have been somewhat obsessed with US-China trade over the last few years, and considering that China is a rising economic power and one of the United States' largest trading partners, a certain amount of US government attention is arguably warranted.  However, two recent columns from the Wall Street Journal shine a really bright and depressing light on just how misplaced Congress' (and the US government's more generally) priorities have been, and continue to be, with respect to US-China trade policy.

First, the WSJ's Peter Stein explains how the recent good news that two big US investment banks have gained new access to the Chinese market is not nearly as good as it could have, or should have, been:

On Friday, Chinese regulators confirmed that J.P. Morgan Chase & Co. and Morgan Stanley have both been given the green light to set up shop in China's domestic securities market.

Like other investment banks looking to enter the China market, neither can look forward to an awful lot for now. They're both restricted to 33% ownership of a joint venture with a local partner. They can underwrite stocks and bonds, but they won't have the licenses to trade those securities in the secondary market. Even UBS AG, whose UBS Securities is the most active foreign underwriter in China, made a net profit in 2009 of only around 109.2 million yuan ($16.5 million), according to publicly available data.

Foreign banks in general have struggled to build meaningful businesses in China. But the rules that hold back investment banks from doing more China business are unusually strict. Commercial lenders, by contrast, can set up banks in China that they own entirely, avoiding the perennial risk that their relationship with a joint-venture partner sours. In the asset-management industry, foreign investors can own 49% of a joint venture, giving them a bigger slice of the profits. The Street may have only itself to blame.

Foreign investment banks just weren't that into China, or at least its domestic stock market, back when China was negotiating admission to the World Trade Organization in the years before a deal was reached in 2001, says Zili Shao, chairman and chief executive of China for J.P. Morgan. As a lawyer, Mr. Shao worked on setting up China ventures for Goldman Sachs Group Inc., UBS and CLSA Asia-Pacific Markets, a unit of the French bank Crédit Agricole SA.

At the time, China's financial sector was a mess, and its stock market was a far cry from the major force that it is today. With plenty of market opportunities elsewhere, the need to press for access to China might not have ranked as a top priority at the banks. "That was a major underestimation," says Mr. Shao.

David Strongin, managing director of the Securities Industry and Financial Markets Association, says, "We vigorously and aggressively pursued opening China's market." But rules on foreign participation in China's securities industry were among the last unresolved issues blocking China's entry into the WTO, he adds, "so all leverage to negotiate was gone." He describes the current restrictions as "a huge impediment to competing in China."...

Today, says Mr. Shao, there's no discussion taking place about changing the status quo. In Washington, he says, the goal of boosting U.S. access to China's markets has taken a back seat to political pressure for China to revalue its currency. "There is a lot of debate about the currency," he says, "but no one is arguing for greater market access."

Speaking of currency, it's one of the topics in a great new WSJ editorial which explains just how little all that American political effort on China's currency - and the US-China trade balance - could end up getting us.  In the process, the piece hits on a lot of the issues that I've been discussing over the last year or so like China currency, global supply chains, import benefits, trade diversion, the trade deficit, and, of course, really stupid congressional rhetoric:

No sooner has a new Congress arrived in Washington than the anti-China-trade rhetoric has started anew. Senator Charles Schumer, whose Democrats still control his chamber, has said he plans to re-introduce legislation to punish China for its "currency manipulation." Tim Murphy, a Pennsylvania Republican, may push similar legislation he co-sponsored in the past, Reuters reports....

Leaders face many decisions on how best to put the American economy back on a growth track. To the extent that Congressional protectionists will present Chinese exporters as a threat to American prosperity despite all the other more pressing problems America faces, the argument over China's exchange-rate policy is a distraction the economy can't afford.

How much of a distraction is suggested by a paper out last month from the Asian Development Bank Institute. Economists Yuqing Xing and Neal Detert examined the supply chain of the iPhone to reach a surprising conclusion: Technically, the iPhone contributes to America's trade deficit with China.

The basic explanation is that data on bilateral trade are calculated assuming that the entire value of a traded good is created in the exporting country. If that ever made sense, it certainly doesn't in a global economy marked by increasingly complex supply chains.

In the case of the iPhone, Messrs. Xing and Detert note that the device was invented in America by an American company, Apple. The components are manufactured, either inside or out of China, by companies based in several other countries. The only part of the entire process that is unambiguously "Chinese" is the final assembly—a process that, in the estimation of Messrs. Xing and Detert, adds only $6.50 to the $178.96 wholesale value of an iPhone.

Yet that entire $178.96 value ends up attributed to China in the calculation of trade statistics. As a consequence, the iPhone contributed nearly $1 billion to China's bilateral trade surplus with America in 2008, and nearly $2 billion in 2009, the authors of this study conclude. If the trade data had been based solely on the $6.50 cost of assembling each unit, the iPhone would have added only $34 million and $73 million in those years, respectively, to China's surplus.

The ADBI study ought to be required reading on Capitol Hill. Most importantly, it raises the question of how much anyone really knows about what America's trade with China is. Critics of trade data, including us, have long asserted that bilateral statistics are misleading at best. As the bilateral trade deficit with China grew, deficits with South Korea, Taiwan and Singapore declined, confirming that China's comparative advantage lies in the assembly into finished products of components manufactured around the region, due to its low-wage, low-skilled labor....

Crucially, the trade data also miss the broader economic impact of "imports" like the iPhone. The benefits are clear and large, though hard to quantify precisely. First there are the gains to Apple itself. The ADBI study examines only the composition of the $178.96 manufacturing cost of the iPhone. The handsets typically retail for as much as 50% to 100% more than that. The difference consists of the value of Apple's intellectual property in having invented the iPhone, and also the value of marketing in persuading consumers to buy the hot new thing.

The ADBI study doesn't break down that figure, but others have performed similar research in the past. Economists at the Personal Computing Industry Center attempted in 2007 to estimate who profits from the iPod and how. They estimated that for an iPod retailing for $299, retailer and distributor margins account for $75 and Apple's own margin accounted for $80. In other words, more than half the retail price accrued to American companies—and their employees and shareholders—in some form.

None of these studies accounts for another huge way such imports drive growth by spurring innovative new businesses. Telecom companies like AT&T and, now, Verizon have profited by being able to offer data services to iPhone-toting consumers. Countless programmers around the world are now devising applications for the iPhone and iPad, which offer many businesses a convenient new way to reach potential customers.

All of which illustrates the basic truth that trade has always benefited the American economy. Congress can't afford to forget that, no matter how much Members would like to scapegoat Chinese factories for Washington's own policy mistakes.

So rather than launching a trade war with China over $6.50, here's a better agenda for the 112th Congress: Focus on policies that will help Americans and U.S. companies better capitalize on a global economy. That includes better tax policies to reward investment and entrepreneurship; environmental regulation that does not discourage manufacturing in America when it would make business sense; health-care policies that don't deter hiring; and free trade to let Americans import goods like iPhones that will spur new growth.

Like I said, great stuff.   And when you combine the two WSJ pieces, one very important thing becomes crystal clear: the United States government is totally wasting its time on meaningless issues like the trade balance and China's currency and totally ignoring far more important (and valuable) issues like access to China's market, particularly for globally-dominant American service providers.  In short, we're so irrationally focused on a measly $6.50 that we're letting billions of dollars slip out the back door.  Ugh.

One point of contention, however: contrary to Stein's assertions' the United States government does have a huge chance to quickly improve its companies' access to China's relatively closed services market, as well as many other developing countries' goods and services markets around the world: the WTO's Doha Round of multilateral trade negotiations.  Indeed, several studies (like this one) have shown that an ambitious Doha Round agreement on services could  improve global welfare by well over a trillion - with a "T" - dollars, with much of that going to US services companies and their employees.  And, as Phil Levy and I recently noted, there is a very real and immediate opportunity to complete the Doha Round in 2011.

Of course, Levy and I also noted that the fate of the Round rests squarely on the shoulders of President Obama and the US Congress - particularly in their ability to craft a bold offer on agricultural subsidies and industrial market access and convince (or push) other WTO Members to do the same.  Such a plan, however, requires a ton of effort and even more political will, and although the US government has (perhaps) hinted that it's getting serious about Doha, it's still futzing around with silly distractions like China's currency and the bilateral trade balance.  Those in Congress, it seems, are far more worried about $6.50 than they are those untold billions.

Obama, however, need not be so distracted, and next week's meetings with Chinese President Hu Jintao provide the President with the perfect opportunity to prove that he's above the nonsensical nincompoopery of self-interested politicos like Chuck Schumer and is instead ready to lead on trade.  At the meeting, Obama can show Hu that the US is deadly serious about the Doha Round, and that China should be too.  There's no time to waste, and the stakes are just too high to focus on anything else.

Especially a Senator from New York and $6.50.

New IBD Op-ed: For Obama, Free Trade Is Key To Success

The great folks at the Investor's Business Daily have just published a new op-ed by me and AEI's Phil Levy.   In it, we argue that President Obama has a fantastic opportunity to do what only a few months ago seemed utterly unthinkable: to finish the WTO's Doha Round by the end of 2011.

Don't laugh!  If Obama takes our advice and puts forth a serious US proposal, combined with a little leadership and diplomacy, he could actually pull it off.  

Granted, that's a rather big "if," but still, the time is right to finally - finally! - conclude the Doha Round.  And the United States needs to go big or go home.  Period.

Here are a few snippets from the new piece:

The last two years of Doha Round stagnation have proved that U.S. leadership is essential. The president could provide that with an ambitious proposal to reduce agricultural subsidies....

The move would be timely. The G-20 leaders in Seoul, South Korea, and the APEC leaders in Yokohama, Japan, recently called for a Doha "end game" in 2011 and publicly directed their trade negotiators to re-engage in across-the-board negotiations to conclude the round.

The WTO's director general, Pascal Lamy, just offered an intensified work plan, endorsed by almost all 153 WTO members, that would complete the round by December 2011....

But a bold proposal alone would not suffice.

There is no possibility of selling a Doha deal on Capitol Hill without new access to the major emerging markets. India and China's reluctance to offer such access helped crash the talks in 2008.

The U.S. therefore needs a developing country partner with heft and influence....

Intrigued?  Good.  Now go read the whole thing here.  C'mon, you know you want to.