Political Economist

Senate Finance Committee Testimony on US TRADE POLICY: THE CHINA QUESTON Jagdish Bhagwati University Professor, Economics and Law

Let me begin by saying how honored I am to have been invited to appear before your Committee, Senator Baucus. I have long been familiar with the leadership you have provided on trade issues in the Senate over many years, enabling the United States to be the major player in the liberalization of world trade that has brought so many indisputable benefits to us and to many nations around the world.

You have asked me to address the question of China and what it implies for US trade policy. China, of course, has long been an important source of controversy for US trade policymakers. The debates over whether to grant it MFN status were followed by whether, and on what conditions, it should be admitted to the WTO (World Trade Organization). I recall how USTR Charlene Barshefsky arrived from Beijing with an agreement on the terms of Chinese entry into the

WTO just in time in Seattle in November 1999 for the WTO meeting which blew up in the face of President Clinton and the rest of us, postponing by two years to 2001 the start of the Doha Round of multilateral trade negotiations.

Many were certain that the focus on China had detracted from the US preparations and preparedness over the Seattle meeting, illustrating tangentially how multilateral trade liberalization is often handicapped, not advanced, by distractions over bilateral and plurilateral (i.e. with members exceeding two but less than all nations) trade negotiations.

Today, the issue of China is even more prominently at the center of a major debate over US trade policy. But the stakes in this debate are higher as the China question now is part of a substantive debate, especially after the last election, over the question whether further freeing of trade or a retreat (however slow) into de facto protectionism makes sense for the United States. More precisely, the China question is one of two issues today that must be addressed regarding our trade policy. So, let me say a few words about the other issue, and then turn more bodily to the China question which you are addressing today.

I: Inclusion of Labor and (Domestic) Environmental Standards in Trade Treaties: Case of “Export Protectionism”

The first relates to the fact that the New Democrats have been elected, with a Democratic majority, in the last Congressional election with promises to require labor and (domestic) environmental standards as central features of trade treaties. While there are groups that want to spread higher standards because of altruism and sympathy, the motivation that prompts the demands for inclusion of labour standards elsewhere as preconditions for trade liberalization by the United States --- these demands come from AFL-CIO and the new Democrats are reflecting for political convenience these demands while some share the AFL-CIO viewpoints independently of voting considerations, for sure --- is quite simply self-interest and fear.

The demands that labor and environmental standards, for example, must be demanded from others with low standards because otherwise free trade would be “unfair” have long been exposed as unpersuasive. Let me state here just a few of the counter-arguments against such demands: systematic analysis of the different rationales proposed for them is available in many other places and needs to be consulted for a fuller understanding of the protectionist dangers we currently

face.

First, if these demands take the common form that others must have similar “burdens” as our producers do, it is easy to see that standards, theirs and ours, are generally speaking different for perfectly legitimate reasons and that our objecting to others’ standards is as right or wrong as their objecting to ours.

Would we then let others exclude our exports simply because our standards are lower than those of Europe, even Canada’s, in many areas? In case one doubts that US standards are lower, just think of the obvious examples. Almost alone in the world, we allow capital punishment, including the capital punishment of juveniles. Or take the several international reports on the state of our prisons, and our widespread use of prison labour to produce goods for sale by firms who are not required to pay minimum wage payments and offer labour protections. Then again, on the right to unionize, the Human Rights Watch (with whom I work on 1 I, among many others, have written extensively on why the attempts to include labor and domestic environmental standards in trade treaties are misguided. Especially, exactly ten years ago, I and the late Professor Robert Hudec produced two substantial volumes on the subject; see Bhagwati and Hudec (eds), Fair Trade and Harmonization: Prerequisites for Free Trade?, MIT Press: Cambridge, Mass., 1996. I have also written extensively on the subject in the American Journal of International Law, in my Testimony to this Committee on the FTA with Jordan, and in many op ed articles in The Financial Times etc. I have not seen any persuasive response to my criticisms. My sense is that the AFL-CIO is no longer interested in arguments (where they cannot win) and have decided to go exclusively to the political route. Given their substantial resources, evidently, it is a smart strategy for them to substitute financial for human capital!

the Academic Advisory Committee on Asia) has produced a detailed analysis which concludes that this right is effectively denied to “millions” in the US, largely (but not exclusively) because the right to strike has been crippled by the Taft-Hartley provisions. Indeed, many abroad find it very hard to believe that, with little more than 10% of our labor force unionized, and with wide appreciation of the legislated difficulties faced by unions in organizing labor, we can claim that we have the higher moral ground in these matters. At a time when the Bush administration’s unilateralism has provoked serious anti- Americanism, the self-righteous tone of our labor and environmental lobbies and the dissonance between our postures and our own practice are also not likely to make the United States any more likeable to the world.

Second, and equally important, our attempts at imposing such standards on the developing countries will not succeed with the larger and economically more important developing countries such as India and Brazil. These countries are fully democratic; they are neither more dictatorships nor violators of human rights than we are. In fact, India is a splendid democracy which has managed to manage multi-religiosity, multi-ethnicity and diversity within a democratic framework. Its unions are also free; and its environmental movement is strong. As for Brazil, President Lula has risen from the ranks of the trade union movement and has better credentials as a trade unionist than even John Sweeney! Yet, both India and Brazil strongly reject the inclusion of labor and environmental standards in trade treaties. In fact, India just recently told the EU that they could not have an FTA with it unless if non-trade issues were mixed up with it, causing EU to go back to the bargaining table; and the same can be confidently expected to be the case with the US. It is also noteworthy that no trade treaty purely among developing countries has these extraneous non-trade issues within it: it is a characteristic of bilateral trade treaties that hegemonic powers, with their lobbies, impose on lesser countries in one-on-one, unevenly-matched bargains. If the new Democrats want to go down this route, they face the prospect of confining their trade liberalization to weak, ineffectual nations which will roll over when faced with such demands.

Some liberalization indeed!

Third, key political leaders in the US, until recently, were cognizant of the fact that it was more efficient to pursue labor agendas in the ILO and trade issues in the WTO and in other trade treaties and institutions. Senator Patrick Daniel Moynihan frequently wrote to me agreeing with this position, including sending me for my files a memo to this effect, based on an op ed of mine, signed by POUTS as “seen”.

It has become fashionable for some commentators such as the political science Professor Mac Destler and the journalist Mr. Bruce Stokes to say that the US has become less protectionist in recent years. This is seriously wrong. Yes, we probably have less sectoral, import protection. But the protectionism we now face is across-the-board, export protectionism. The attempts at raising labor and domestic environmental standards as preconditions for trade liberalization are transparent attempts by a terrified labor movement, and sympathetic media personalities like Lou Dobbs, to raise the cost of production of rivals in the poor countries so that the force of competition is moderated. Imagine a beast charging at you: you can either catch it by the horn (i.e. conventional import protectionism) or reach behind it, catch it by the tail and break the charge (i.e. export protectionism). The forced raising of standards in the poor countries desirous of trading with us is “export protectionism”: It is insidious because it is not transparent to the general public as such and partly because it can be successfully disguised as altruism and empathy for the people in the poor countries. It is also invidious because it is not confined to specific sectors but cuts across many sectors, indeed wherever the imposition of such standards by de facto exercise of political power manages to raise the cost of production of rival firms abroad.

It is a dangerous protectionist beast that the new Democrats, and several compliant Republicans who would rather advance business deals than stand for any principles, are therefore turning loose on the trade arena. But the other major threat comes form China today. Part of it is from China’s low standards on human, and hence labor, rights and so what I have argued above holds. Since such diametrically opposed recommendations are not uncommon in macroeconomics, and even the proponents of Chinese Renminbi revaluation divide into many camps on the extent of the desirable revaluation.