WA China Watch Digest Special!

Interview: Bill Abnett on whether China is killing US in trade

Bill AbnettBy Wen Liu   Apr. 8, 2016

We’ve heard so many times from Republican presidential candidate Donald Trump that “China is killing us,” that China trade is “not free trade; it's stupid trade,” etc. Even though Census Bureau figure for U.S. merchandise trade deficit with China in 2015 was $365.7 billion, not $500 billion as Trump would say, it was still at a record high. So is China trade killing the U.S.? How should we view the huge U.S. trade deficit with China? Or job losses attributed to Chinese imports? And, as we are in an election year, would a Trump or Hillary presidency affect Washington state’s trade with China or Asia? To help us understand these and more is Bill Abnett, Senior Advisor to The National Bureau of Asian Research, chief China trade negotiator under President Ronald Reagan, and past executive director of the Washington State China Relations Council.

WCWD: When you worked in the office of the United States Trade Representative in the mid to late 1980s under President Reagan, the U.S. almost had no trade deficit with China. The first significant deficit began probably in 1985, as recorded by the Census Bureau, at $6 million, with exports to China at $3.8557 billion and imports from China at 3.8617 billion. Fast forward to 2015, U.S. trade deficit with China hit a record high at $365.7 billion, with exports decreased $7.5 billion to $116.2 billion and imports increased $15.1 billion to $481.9 billion. Why the ever greater, and persistent growth of, deficit?

Bill Abnett: There are many reasons for this. First adherence to “free trade” policies—as opposed to “protectionist” ones. The Reagan Administration was a fundamentally free trade administration. At base, “free traders” distrust government interference in the international trade arena. “Free trade occurs when the government does not limit or subsidize either imports or exports—meaning that Americans can spend their dollars on goods and services regardless of where they are from and engage without restriction in voluntary, mutually beneficial transactions, both as buyers and sellers, with people in other countries.”1

Second, current trade data contain several flaws and shortcomings that distort the nature of our trade deficits with all countries. “The way trade is almost always measured gives full credit to the country that sends the final shipment.”2 American corporations produce commodity parts in various countries, and then send those parts to China for assembly. For example, the total value of a computer or a “smart phone” assembled in China counts as a total Chinese export—“although typically, the only part of the computer trade process that occurs in China is the manual assembly of the parts. The value added to China’s economy is tiny, as are the workers’ salaries. Yet China gets credit for the entire process in the trade accounts, and its export figures are very high.”3

Third, current trade data measures goods, NOT services (e.g., legal services, postal and courier services, tourism services, etc.). The U.S. has a large trade surplus in services4, but world trade statistics to date haven’t yet developed a way to measure trade in services.5 To date, all trade data on services are estimates.

WCWD: Republican presidential candidate Donald Trump said that we don’t beat China, or Japan, or Mexico, in trade and that China is killing us. But some say that trade deficits can be good or bad, depending on circumstances. Others say that trade deficits can signal America’s economic health. Still others quote President Reagan that trade deficits show that the U.S. economy is strong and the American people have money to spend. Where are you on trade deficits as a whole and U.S. trade deficit with China in particular?

Bill Abnett: Objectively, I believe that trade deficits are not meaningful economic indicators. But trade deficits—especially bilateral trade deficits can be very explosively subjective political catalysts. My job at USTR was to expand opportunities for U.S. exports in the China market—not to close down China’s exports to the U.S. market. Trade policy to rectify “unfair trade practices” should focus on the practices, themselves, not on the size of the bilateral trade deficit. Unfortunately, a large bilateral trade deficit is a convenient political scapegoat.

WCWD: Not just the deficits, the benefits of the whole China trade are now questioned. The recent study published by the National Bureau of Economic Research “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade,” for instance, found that the adjustment was remarkably slow, with wages and labor-force participation rates depressed and unemployment rates elevated a full decade after the China trade shock began. In a related study, the authors pointed out that the Chinese import competition from 1999 to 2011 was responsible for 2.0-2.4 million job losses. These studies seem to justify the anger of voters, especially Trump supporters. So for someone who worked to promote trade with China on both the national and the state level, what would you say about these findings?

Chart 1Bill Abnett: This chart6 is fact NOT fiction:

The official U.S. Government’s (USG) Bureau of Labor Statistics (Summary Table A) reports that (as of March, 2016—the most recent official USG data available) over 93 MILLION Americans were “Not in labor force” (the lowest since the US economic malaise under President Jimmy Carter in the late 1970s). Where did they all go? To claim that they were “Victims of outsourcing?” is absurd. Clearly, America’s unemployment situation is far more complicated than outsourcing. But trade is a convenient target of demagoguery.

Nevertheless, there are some policy choices that would make American corporations more competitive with foreign corporations. Foremost, is reducing America’s ridiculously high corporate business tax (third highest in the world, exceeded only by Chad and the United Arab Emirates. The worldwide average top corporate income tax rate is 22.6 percent)7.

WCWD: Donald Trump has also said repeatedly in debates or at campaign rallies that America’s trade deals were badly negotiated, or negotiated by stupid people. As president, he said, he would get the nation’s top business leaders - not diplomats - to negotiate for the country. How would you respond to that, as a former diplomat and trade negotiator?

Bill Abnett: Strictly speaking, I would agree with Trump that professional negotiators (a la those in his Art of the Deal) make better commercial negotiators than diplomats do. But, alas, trade deals are only one part of foreign policy. My biggest frustration as a trade negotiator with the Chinese side was that USTR—a “black hat” agency—had to compromise with such “white hat” agencies as the Department of State, and the National Security Council. State considered its main mission as maintaining or improving relations with foreign countries, while defending U.S. interests. Trump has never had to compromise with State, the NSC, the WTO, the UN, etc. It’s so easy to say “China is Killing Us” during a presidential campaign. Do you remember Bill Clinton’s “Butchers of Beijing” anti-China diatribes during the 1992 campaign?

By far, the best guide to negotiating with the Chinese is Dick Solomon’s RAND corporation monograph Chinese Political Negotiating Behavior, 1967-1984.8 Should be required reading for the Trump Campaign.

WCWD: In all this back and forth on U.S. trade with China, Washington state seems to be an exception, with its Boeing dominated exports, even with a surplus. In the early 1990s, when you were the executive director at the Washington State China Relations Council, the state’s exports to China were under $2 billion. In 2014, it was over $20 billion. Why do you think Washington is doing well, and do you think it would continue to do well under a new president, with China slowing and with many in Washington state looking to more opportunities with the Trans-Pacific Partnership which both Donald Trump and Hillary Clinton are critical of?

Bill Abnett: As it was back in my day, Washington state is positioned superbly for trade with China. Terrific port services, a talented and experienced international trade workforce, close physical proximity to China, extraordinarily intimate political ties to China, outstanding congruence of our state’s export commodities with China’s import requirements—coupled with impressive local, state, and federal government support for Washington State’s exports to China.

But the bloom might be off the rose, politically. Washington state overwhelmingly voted for Bernie Sanders (a vehemently anti-free trade advocate) in the recent Democratic primary election. Recently, Bernie has made a number of glaring anti-free trade statements, including, “I do not believe in unfettered free trade. I believe in fair trade which works for the middle class and working families, not just large multinational corporations... what the function of NAFTA, CAFTA, PNTR with China, and the TPP is, it's to say to American workers, hey, you are now competing against people in Vietnam who make 56 cents an hour minimum wage."9

Hillary Clinton, once an early supporter of TPP, has flip-flopped on the issue; Trump is not exactly a “panda hugger,” and Ted Cruz has remarked: “I opposed TPP and have always opposed TPP. Free trade, when we open up foreign markets, helps Americans. But we're getting killed in international trade right now. We're driving jobs overseas.”10 Fortunately, campaign statements are often ignored, when those statements collide with reality.

Chart 2Support for free trade--among Americans—appears to be on the decline.11 The United States desperately needs a convincing and articulate free trade supporter who can make the case for free trade plainly and persuasively. America hasn’t had such a spokesman since Ronald Reagan.

Notes

1 The Heritage Foundation, “Freedom to Trade: A Guide for Policymakers,” October 20, 2015, online, at here:

2The Heritage Foundation, “Trade Freedom: How Imports Support U.S. Jobs,” (PDF) September 11, 2012, online, at here:

3 The Heritage Foundation, “Freedom to Trade: A Guide for Policymakers,” October 20, 2015, op cit.

4 The United States Office of the Trade Representative (USTR) estimates that America’s services trade surplus with China in 2015 was $28.1 Billion. 2016 National Trade Estimate (NTE), p. 81. Available online, at here:

5 See for example, The World Trade Organization (WTO), Trade in Services: The most dynamic segment of international trade, (PDF) available online, at here:

6 The Heritage Foundation, “Trade Freedom: How Imports Support U.S. Jobs,” (PDF) September 11, 2012, op cit, p. 4.

7 KPMG, Corporate tax rates table online, at here:

8 Available online as PDF, at here:

9 See, for example, “On the Issues: Bernie Sanders on Free Trade,” available online, at here:

10 “On the Issues: Ted Cruz on Free Trade,” available online, at here:

11 “Republicans, especially Trump supporters, see free trade deals as bad for U.S.,” available online, at here:

(For more information about Bill Abnett, go to WA China Hands. For more information on major events in Washington state-China relations, go to WA China Chronicle.)