International Herald Tribune
On trade, the U.S. and China need to go global
TUESDAY, MARCH 28, 2006
HONG KONG With President Hu Jintao due to visit the United States, there is an urgent need for a cease-fire in the war of words between China and the United States over trade.

Here is how to do it in ways that would not only serve both countries' interests but those of global trade.

First, both should agree on the point that trade imbalances are a global issue more than a bilateral one. It makes little sense for the United States to focus on China's currency value and China to berate America for its lack of savings when the imbalance issues are more complicated.

Of course, China's currency is undervalued against the dollar, but no more so than the currencies of most of East Asia - Japan, Taiwan, South Korea, Thailand, Malaysia, etc. These are all countries with which China has large trade deficits.

So no major realignment of the yuan can be expected without a more general alignment such as occurred after the 1985 Plaza Accord. Of course the United States is profligate, but East Asia saves too much for its own - or the rest of the world's - good. So there can be no resolution without movement on all sides.

The focus on bilateral imbalances, with all the nationalistic talk that accompanies it, can be partly blamed on the International Monetary Fund's failure to play the role for which it was intended - avoiding inappropriate exchange rates and achieving equilibrium in payments balances. Instead, it has for years been preoccupied with bailing out middle-ranking countries such as Turkey and Argentina.

Surely it should not be difficult for the United States and China to agree that they both have domestic policy contributions to make to reducing global imbalances - including a mutual need to reduce fossil fuel dependence - while focusing primarily on the global dimensions of the problem.

They might both have to swallow a little pride, but Presidents Hu and George W. Bush should agree to push the imbalance issue on to the international stage where it belongs.

The second subject for agreement is less obvious but could be just as important for global trade harmony. That is a cease-fire in the competition for bilateral free-trade agreements. These are taking energy and political capital away from the World Trade Organization's Doha Round of negotiations at a critical juncture.

Free-trade agreements sound grand to national leaders, but at best are a poor substitute for multilateral agreements. They create a thicket of special favors and country-of-origin rules which are often a nightmare for businesses trying to organize efficient production systems.

At least in Asia, China started the push with its politically driven free- trade pact with the Association of Southeast Asian Nations, forcing Japan and South Korea to promise to follow.

But currently it is the United States that is forcing the pace with negotiations about to start with South Korea, the 10th-biggest U.S. trading partner, and with Malaysia. The carrot is sealing a special trading relationship with the United States before the 2007 deadline for expiry of presidential fast-track negotiating authority.

South Korea wants to get a step ahead of Japan; Malaysia to keep up with Singapore, which already has a free-trade agreement, and Thailand, which is negotiating one.

In practice, the agreements appear more political than economic. Australia signed up despite getting only modest improvements in access for its farm products. Thailand's negotiations are stuck on light trucks as well as agriculture and have become a domestic political issue. South Korea's will no doubt see an outpouring of nationalism from assorted protectionists, from farmers to filmmakers, and even Malaysia is likely to witness significant opposition.

It is abundantly clear that bilateral deals do little for real trade while providing extra opportunities for antiglobalizers, who can link opposition to trade liberalization to opposition to what they claim to be an expansion of U.S. political power and the interests of its multinationals. Free-trade agreements need to be put on the back burner and full attention given to the Doha round.

A cease-fire on free-trade agreements is in the interests of China, America and the righting of global trade imbalances. It would have the added benefit of reducing political competition in East Asia between China, Japan, South Korea and the United States by placing trade competition back where it belongs - within the WTO framework.

The outlook for the Hu visit may seem bleak, but here are two presents the presidents can make to each other and the world.