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Does US pay too high a cost for free trade in TPP pact?

Does US pay too high a cost for free trade in TPP pact?

WASHINGTON: Free trade is an American mantra. The Obama administration’s commitment to winning “fast-track” status for its cherished Trans-Pacific Partnership (TPP) trade agreement is part of that tradition. But growing evidence shows that granting full trading privileges to low-income countries on the make is usually costly to the United States.

The United States has been in lengthy negotiations with 11 nations around the Pacific Rim, including Australia, Chile, Japan, Singapore and Malaysia. After years of talks, the partners now seem close to an agreement.

That is one reason for the unusual congressional alliance of left-wing Demo­crats like Senator Elizabeth Warren — a Democrat from Massa­chusetts (D-Mass) — with Tea Party Republicans like Rep­resentative Walter Jones (Republican-N.C.) lined up against the trade initiative. Policy-wonk Tea Party fellow travellers, including Representative Paul Ryan (R-Wis.) and Senator Ted Cruz (R-Texas), support the deal — as do many mainstream economists.

Economists cite the great advantage of free trade as a basic doctrine of classical economics. If trading partners concentrate on what they do best, the argument goes, both partners end up better off.

The United States debunked that theory in the 19th century. It sold commodities like iron and cotton to Europe while building high tariff walls to protect its own “infant industries.” By the 1890s, the United States had surpassed Britain in most advanced industries. It was an easy target, because London was dogmatically committed to pure free trade.

Recent research helps distinguish between trade and offshoring patterns that have the mutual benefits — and those that don’t. When the trade or offshoring partner is another high-income country, US wages tend to increase. But when it’s with low-income countries, US wages decline, particularly for unskilled or medium-skilled workers.

These wage effects are not just in manufacturing, but in the same job categories of other industries. Manufacturing generally has higher pay scales than services. Yet as increased imports and offshoring put pressure on manufacturing jobs, there is a domino effect as displaced workers move into lower-paid services. Wages shrink across the board.

The pressure for lower wages when importing from low-income nations has a far greater effect than repercussions from offshoring. It is most striking when China is the partner. For every 10 per cent increase in Chinese imports, US wages across the affected jobs fell by 6.6pc. In almost all cases, the wage reductions hit low-wage workers hardest, particularly non-high school graduates.

US manufacturing employment reached its peak in the late 1970s, and has been generally declining since. There is a clear break in 2000, however, the year China joined the World Trade Organisa­tion and began a concentrated, and catastrophic, drive on US product markets.

From 2000 through 2009, the United States lost roughly 6 million factory jobs, or about a third of the total in 2000. There has been a recent modest recovery, 850,000 manufacturing jobs added since 2010 — but too little for much satisfaction.

China’s destructive brand of competition is especially grating. Consider the example of Nucor Corp., one of the world’s most efficient steelmakers. Nucor uses only 0.4 hours of labour to make a ton of steel, says Dan DiMicco, former chief executive, or about $8 to $10 in wages. It relies mostly on scrap steel for its raw material, while China uses iron ore, which is more expensive, and its shipping cost to the United States is about $40 a ton.

Even if Chinese labour were free, DiMicco maintains in his new book, “American Made: Why Making Things Will Return Us to Greatness,” there is no way the Chinese steel producers could undersell Nucor in its home market. Yet, over much of the past year, low-cost Chinese steel has flooded US markets, which, DiMicco says, is clear evidence of illegal “dumping.” Beijing, of course, says it complies with all fair trade rules.

But China plays by different rules. Its powerful manufacturing enterprises are largely state-owned, and blessed with a host of subsidies, including Party-determined prices for financings, land purchases, taxes and fuel.

Worse than that, in recent years, the Chinese government has been pressuring European and US companies to transfer proprietary technologies as a condition of winning major contracts.

A prime example may be the partnership between the state-owned Comm­ercial Aircraft Corporation of China and a consortium of seven US aerospace companies, led by Boeing Company and Gen­eral Electric, to build a jumbo jet competitor. All the companies are contributing substantial proprietary technologies to China. GE’s avionics, one of its crown jewels, are a key part of the deal. Advan­ced avionics, however, are also of keen int­erest to the Chinese military. GE insists it can prevent any technology leakages to the military, and swears that any evidence to the contrary means termination of the entire project. Sure.

Published in Dawn, April 12th, 2015

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