On challenging China with a tariff
Published: 15 Jun 2005 14:55 BST
Economist Fred Bergsten is a self-proclaimed free trader who thinks a trade barrier may be needed when it comes to China. A seeming contradiction? Yes. But Bergsten, director of the Institute for International Economics and a former US Treasury official, says a 50 percent tariff on Chinese products may be required to level the playing field and prevent an outright trade war, where the countries slap duties on each other's products.
A tariff indeed could trigger Chinese retaliation that hurts US tech manufacturing, Bergsten concedes. But he also argues that an undervalued Chinese currency already is harming US producers and fueling calls in the United States for a variety of trade protections.
Bergsten's get-tough stance is part of a debate about how to address a set of trade disputes with China. Perhaps surprisingly, his position echoes that of the AFL-CIO, which backs a bill threatening to impose a 27.5 percent tariff on Chinese products. The union points to a study that showed the growing US trade deficit with China displaced 1.5 million jobs between 1989 and 2003, including more than 46,200 positions in semiconductor manufacturing.
Some tech business leaders, however, favour milder steps than a sweeping tariff.
The controversy fits into a broader discussion about how the United States can maintain its technological leadership in an age of offshore outsourcing and as countries such as China and India play increasingly large roles in technology services and manufacturing.
Bergsten recently spoke about his tariff proposal and the prospects for the US tech industry.
Q: I have read that you are calling for an import surcharge as high as 50 percent on all Chinese imports. Is that an accurate description of your views?
Bergsten: It has got to be clarified enormously. I am not calling for a surcharge in the abstract. I and my colleagues here have argued for two years...that China needs to revalue its exchange rate by about 25 percent. They have not done that despite increasing pressure of late from the US government. The fact that they are not doing that is adding enormously to international trade imbalances, the US current account deficit, (and) the risk of a 'hard landing' of the dollar and the world economy. Therefore, my view is we need to ratchet up the pressure on the Chinese to take action.
If the Chinese do not move the exchange rate, I think it assures a trade war. What kind of measures?
Bergsten: The first step that I would propose is that we go to the (International Monetary Fund), which has very clear rules against currency manipulation. If that itself doesn't work, then I would go to the World Trade Organization and file a case that China is violating two or three different obligations that are there, which would require them to move their exchange rate and, if not, face trade retaliation.
And if none of that worked, then more in sorrow than in anger the US would have to threaten and implement -- if they don't still come along -- an import surcharge on all products from China.
Why 50 percent?
Bergsten: Why do I say 50 percent? Well, we need a 25 percent change in the currency. An import surcharge applies to only half the trade balance (the imports), so you have to do twice as much, 50 percent. But it's not as if I am suggesting that an import surcharge on China is a good thing or should be done tomorrow. It's at the end of a long series of events that do need to be pursued aggressively in order to get China and the rest of Asia to move their exchange rates.
What would be the effect of what you are calling for on the US tech economy, especially the high-tech industry and high-tech workers?
Bergsten: I haven't done detailed analysis. The whole objective of the exercise is to improve US competitiveness against Chinese products. The way that works of course is that an import barrier would increase the prices of imports from China and therefore make US products more competitive.
Keep in mind that the objective of getting China to move its exchange rate is not only to increase the value of the Chinese exchange rate, but the value of all the Asian exchange rates, because the other Asians are holding their currencies down because China is holding its currency down. If China revalued its currency by 25 percent, which is the proposal, then the other Asians would go up at least halfway. They might go up also 25 percent. So you would have a substantial change in the competitive relationship of products coming from all of Asia -- Japan through India -- into the US. That would improve the competitive position of our domestic industry in every sector including high-tech.
What about the effect on the Chinese tech industry and the tech workers in China?
Bergsten: The objective is to dampen their price competitiveness, which I would argue is artificially subsidised by an undervalued exchange rate. When you maintain an undervalued exchange rate, it's like having an export subsidy and that is artificially improving the competitiveness of Chinese industry and workers.
U.S. labour advocates believe a stiff tariff may be needed to level the playing field with China, given this perceived undervaluation of the yuan. But critics worry about sparking a trade war that could hurt both sides. How do you respond to concerns about a trade war?
Bergsten: I worry about it. That's why I would put it at the end of a list of things I would do. But I almost have the opposite worry. If the Chinese do not move the exchange rate, I think it assures a trade war.
Really?
Bergsten: Yeah. And we're seeing it right now. Every week, more and more products from China are being hit with import barriers.
It is paradoxical to propose an import surcharge to avoid a trade war. But I think something like that is necessary, because the failure of China to move (the exchange rate) is the most assured recipe to get a cycle of U.S. barriers -- which we are seeing -- and at some point, probably, Chinese counter-retaliation.
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