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Manufacturing is still critical to the economy United States. Clyde Prestowitz, says it's time to start realizing the positive spillovers that manufacturing creates... Read more  

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Stephen Olson at Chinese Development Institute Conference

 

 Clyde Prestowitz giving presentation to CDI...

 

Steve Olson teaching trade negotiations at the Mekong Institute...

 

Stephen Olson to speak at upcoming workshop organized by the International Institute for Trade and Development on 

"Economics of GMS Agricultural trade in goods and services towards the world market"

Chiangmai, Thailand Sep 8-12.

(06/19/05) Clyde Prestowitz quoted in Knight Ridder

(06/19/05) Clyde Prestowitz quoted in Knight Ridder
June 19, 2005
KEVIN G. HALL, Knight Ridder Newspapers

The rapid rise of China as a major actor in the global economy is provoking a reconsideration of whether free trade is still in America's interest.

The rapid rise of China as a major actor in the global economy is provoking a reconsideration of whether free trade is still in America's interest.

For 60 years the United States has promoted free trade as a powerful way to generate prosperity at home and abroad. Trade tripled over the past 40 years as a proportion of the U.S. economy, thanks in part to eight successive global negotiations that opened markets by lowering trade barriers. Now, efforts to expand free trade rules are stalling from Congress to Europe and in an ongoing round of global negotiations.

U.S. policy assumes that free trade benefits all who engage in it. The assumption dates back to1817, when classical economist David Ricardo defined his doctrine of comparative advantage - that when nations specialize in what they do best and most efficiently, each will win by trading with the others.

Today, that concept is being questioned as never before. China's rapid rise is feeding a common fear: that developing nations led by China and India may out-compete the world for high-tech jobs and keep the low-skill, labor-intensive manufacturing jobs they won already. China already is the world's biggest exporter of electronics.

The fear is that China might soon gain advantages of labor, capital and even technology that will allow it to dominate the world economy - and the strategic advantages that go along.

To be sure, smaller nations have raised the same complaint about the United States for years. Could China really displace America?

China has more than 1.3 billion people and a work force of 700 million. Last year's total U.S. work force was 147 million. Thanks to current technological advantages, U.S. workers are far more productive. But China's catching up fast.

China began to introduce market forces into its economy in 1978, though it retained strict authoritarian control over civil society. Since then, its economy has grown by 9.4 percent annually. Its gross domestic product - the broadest measure of goods and services - has soared from $147 billion in 1978 to $1.6 trillion last year. The United States' GDP last year totaled $11.75 trillion - still far ahead.

Want a snapshot of China's rapid growth? Right now, subway systems are being built in 84 Chinese cities.

For a decade now, debate has swirled over whether China - a "socialist market economy," according to its constitution - is a strategic trading partner or a budding rival.

Charlene Barshefsky, who was U.S. trade representative from 1996-2001, believes it's both. Over time, she said, China will evolve from merely adapting technologies from others to developing its own innovations, which will affect the world.

"There is no historic precedent to the rise of a country this vast and this rapid, changing trade and investment flows around the world, with China the hub of Asian manufacture," she said in an interview.

Author Ted Fishman recently documented the challenge in his book "China Inc." He believes China soon will have two distinct economic platforms that will rival the United States. One is low-wage manufacturing. The second will be a high-tech industry that matches the West's in sophistication, and that will drive down wages in other nations as they try to compete.

"It's everything from Christmas ornaments to aerospace. Other economies don't come at us this way," Fishman said in an interview. "That's kind of a unique set of problems. The world has to find an 'out.' We have to figure out how everyone can prosper along with China."

Barshefsky made the same point: "China's rise is not a function of pervasive unfair trade - although trade disputes must be addressed. But resting concerns on claims of unfair trade as the basis of China's rise obscures the real challenge facing the U.S., and that is the utter absence of any focus on our own longer-term competitiveness, formulating and implementing policy measures - from the fiscal, to education, to the state of our scientific infrastructure to business incentives - that answer the challenge of an emergent, vibrant, smart Asia, with China at its center."

Other experts say China trades by rules aimed at building its national power rather than economic exchange.

"What we've been calling free trade is not free trade," said Clyde Prestowitz, a former top trade negotiator in the Reagan administration and author of the new book "Three Billion New Capitalists."

In it, Prestowitz warns that China is building an export-based economy. China's approach mirrors the mercantilist policies of 17th century Europe, when kingdoms tried to minimize imports, maximize exports and strictly administer their domestic economies to develop national wealth and power at rivals' expense.

Last year, the U.S. trade deficit with China was $162 billion.

"I think we have to go through a rethink" of trade policies, Prestowitz said.

China is the world's largest importer of steel, iron ore, copper, tin, other crude commodities and many semi-finished goods. It uses those to build an economy fueled by high-value manufactured exports, building surplus capital in the process.

China is already the world's largest exporter of electronic and information-technology products; it sold $142 billion worth of such goods in 2003, up from $39 billion in 1999.

Meanwhile, the United States borrows deeply from China to sustain its national debt; as of April, China's central bank held $230 billion worth of U.S. Treasury bonds.

Experts may differ on China's threat potential, but no one questions that fear of China is influencing politics here and abroad.

In an effort to reduce China's U.S.-trade surplus, 67 U.S. senators endorse a bipartisan measure by Sen. Charles Schumer, D-N.Y., and Sen. Lindsey Graham, R-S.C., to slap a 27.5 percent tax on all Chinese exports to the United States unless China revalues its currency.

For more information: Details about Sen. Schumer's China legislation can be found at:

http://schumer.senate.gov/SchumerWebsite/pressroom/press-releases/2005/PR41678.China%20Update.051705.html

A rebuttal to Schumer's legislation can be found on the Carnegie Endowment for International Peace Web site at: www.carnegieendowment.org/files/PB39.Keidel.FINAL.pdf

Economist Paul Samuelson's questioning of free trade as a win-win assumption can be found at this Massachusetts Institute of Technology link:

http://econ-www.mit.edu/faculty/download-rp.php?id50

(e-mail: khallkrwashington.com)

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