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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.

(04/22/10) Prestowitz Testimony Before Senate Economic Policy Subcommittee


April 22, 2010 Thursday





SEN. BROWN: Clyde Prestowitz has played key roles in achieving congressional passage of NAFTA and shaping the final (inaudible) of the Uruguay rounds, as well as providing an intellectual basis for current U.S. trade policies and was the lead negotiator, as most of you know, for the Commerce Department in the Reagan years and our -- and our China -- Japan negotiations.

He is -- I just finished, over the weekend, reading the galleys of his new book which is his coming out, "The Betrayal of American Prosperity," and his role in how America can address these issues.

Nicholas Lardy, senior fellow for the Peterson Institute for International Economics, was a senior fellow at Brookings for about a decade and the director of the Henry Jackson School of International Studies; prior to that at the University of Washington. His writings I have been a fan of for many years and learned a great deal about trade and economic policy.

Charles Blum's executive director of the Fair Currency Coalition for 30 years, focused on trade and manufacturing, while serving in various capacities in government and the private sector, and has been a -- a very important advocate for -- as part of the domestic manufacturing group and part of the National Association of Manufacturers and all that he's done that way that have been so important to us.

Daniel Ikenson's the associate director of Cato's Institute for Trade Policy Studies. Cato is a -- as you know, speaks articulately and forcefully and on behalf of issues that -- that are important in this country and -- and have a perspective that is important for all of us to address also. So Mr. Ikenson, welcome to you.

And I'll start -- if Mr. Prestowitz would do his testimony, and as I said, I will ask him a couple questions and then move to the rest of the panel. Thank you.

PRESTOWITZ: Thank you very much, Mr. Chairman. I appreciate your courtesy.

First, I think it's important to recognize that, in the tensions between the U.S. and China trade deficit, the nature of the trade between the U.S. and China, questions of employment, unemployment, currency is only one factor. There are a number of other factors, savings and investment, consumption policies, economic growth and so forth.

So currency is only one factor, but it is an important factor. And as Senator Graham said, there's no doubt that China is managing its currency to maintain it at an undervalued rate. And the evidence of that is the daily intervention by China in currency markets and the huge accumulation of -- of dollar reserves by China.

You have my written testimony. I wanted to hit just four quick points. One of them is the argument that's often heard that the exchange rate doesn't matter, the argument being that even if China revalued, it wouldn't make any difference in the U.S. trade deficit or U.S. employment, and moreover, that the driver of these imbalances is not the exchange rate but it's consumption and investment and savings.

Two points there. One is that the equation that calculates the impacts of these factors is a mathematical identity. And so by definition in a mathematical identity, the action in the action in an equation can be either way.

So of course savings and investment has an impact, but so also do currency rates. And in this case we know that the currency rates are being distorted -- again, not the only influence but a very important influence.

Second point is, when we say it doesn't matter, that's almost like saying prices don't matter. And if prices don't matter, then I'm not sure economics matters. The point is that there are, of course, a number of factors that determine trade balances, but certainly the rate of currency is one of them.

It's often said that between 2005 and 2008 China did allow its currency to float up about 20 percent and yet the U.S. trade deficit increased. And this is cited as evidence that the currency rate doesn't have any effect.

But one has to remember two things -- three things. One is that this was a period of a bubble in the United States, enormous growth in U.S. demand. One has to ask the question, if they hadn't allowed the currency to float up, would the deficit have been bigger?

And the final point, I think, is that, while China's currency appreciated nominally by 20 percent, in fact, because its rate of productivity growth was very high, the appreciation in real terms was actually less. In fact, it may even have depreciated in real terms over that period of time. So just to make the point that currency rates do matter and we shouldn't ignore them.

The second point is that, while we talk about this issue in terms of deficits, imbalances and particularly unemployment in the U.S., I think there's another very important element, perhaps more important, that we don't discuss very much. And that is the distortion of trade.

In other words, we could have a situation, as we do with Saudi Arabia, where we have a huge trade deficit with Saudi Arabia. But our trade with Saudi Arabia is not being distorted. What we make in the United States, what we sell and export is not being distorted by our trade deficit with Saudi Arabia.

On the other hand, in our trade with countries that -- and China's not the only one. Let's keep this in mind. In our trade with countries that do manage their currencies to be undervalued, it changes the structure of our trade.

And in a way, that's more important than the question of -- of deficits and employment, because while other factors impact deficits and employment, the structure of the trade is very much impacted by the currency rates.

The third point I'd like to make is that, in this discussion, we are frequently warned that -- that any effort by the U.S. to -- to offset the impact of the currency distortions would be protectionist and would risk setting off a trade war. I think it's important for us to -- to understand that when countries manage their exchange rates to be undervalued as a matter of policy, that is a protectionist policy.

And so in this -- in this debate or in this confrontation, it's not the United States that's being protectionist. We're already in a situation in which others are being protectionist.

The last point I would make is this. China has said, and understandably, that its -- it manages its exchange rate in the interest of its economy. It has unemployment. It has huge structural problems. It's a country that needs to have rapid growth. We want it to have rapid growth. We want it to be successful.

And China has said, you know, look, we're not doing this to hurt you guys. We're doing this because this is in the best interest of our economy. And I think we can understand that. I think that sometimes, rather than pointing the finger at China, we should take a similar position, namely that, OK, we understand you have unemployment. We understand you need to hit growth targets.

We have unemployment, too. We -- we have growth targets we need to hit as well, and therefore we need to manage our currency in the best interest of our economy. We can do that. We have countervailing duty laws. There are clauses in the WTO that suggests that currency manipulation is really illegal under WTO rules.

We have balance of payments issues that could be adduced to justify measures by the U.S. to counter the impact of currency management. I think particularly our countervailing duty laws and the ability of the secretary of Commerce to self-initiate countervailing duty cases is something that -- that should be pursued more aggressively than it has been.

But my point is that, rather than constantly beating up on China, perhaps we should be looking to our own interests and thinking about what we can do to protect our interests.

The final point I would make is that, in the debate about competitiveness and the question of what's causing the decline of U.S. competitiveness, certainly China's currency policies are one factor that contributes to -- to a decline in U.S. competitiveness. But we shouldn't forget that there are many factors that we contribute ourselves.

We are low savers. We do have a de facto industrial policy that makes no sense. And so, as well as dealing with the currency issue, we should be dealing with that in the context of a broad strategy to revitalize the U.S. productive base. Thank you.

BROWN: Thank you, Mr. Prestowitz, and I'll ask a couple questions and then move on to Mr. Lardy.

This week, Brazil and India joined the call for China to appreciate its currency. Since those are two countries that are part of the developing emerging economy BRIC group, Brazil, Russia, India and China, what -- what does this suggest to you that -- that they have made that call?

And what opportunities does it present to us to -- to work with them rather than trying to address this unilaterally?

PRESTOWITZ: Well, I think it's very important that they made that call because what it tells us is that, while we tend to think of this question in bilateral terms, in fact, China's policies are having a negative impact on many countries. And that suggests that it should be possible to address this in a multilateral setting in a multilateral framework rather than just a U.S. beating up on China framework.

And so I think that the administration would be well advised to try to rally support from others who are being negatively impacted.

BROWN: In your book you mentioned -- thank you for that -- you talked about U.S. companies. I mean, the -- the framework I often heard in my time in the House working on trade issues, that -- that trade brings democracy and is -- that the wealthier a country gets, the more it interacts with Western democratic countries like ours, the more democratic it becomes and the more it shares our values.

You -- you point out in your book and other times I've -- I've heard you that in fact U.S. companies sometimes prefer manufacturing and development and location of plants, if you will, in countries that are less than democratic, in countries that are authoritarian.

How do we -- if that in fact is true, and I -- I think it is, too, but if that fact is true, how do -- how do we change that direction a little bit so that it's -- it's not more of a pull to do business in China for an American company because of the authoritarian structure that might -- might make their lives a little bit easier?

PRESTOWITZ: Yes. Well, I think it's -- as you've said, we're in a situation in which global companies are major political players in -- in Washington, D.C. and in other democratic capitals. In authoritarian capitals, they're supplicants just like everybody else. And so the balance of influence is kind of asymmetric.

But more than that, I think the -- a major issue that needs to be discussed in tandem with the currency question is the question of investment incentives. Because, right now, if you look at the structure, the dynamics of the global economy, all of the incentives are really such as to move the production of tradable goods and the provision of tradable services out of the U.S.

And what are those dynamics and those incentives? Well, one of them is currency. The currency's being undervalued in a number of countries, China lead among them, but not the only one.

The second one is financial investment incentives. Put your factory in my country and we'll give you the land. We'll give you the infrastructure. We'll put in a capital grant. You won't pay taxes for 30 years. So on a $5 billion or $6 billion investment, those incentives can amount to as much as half of the capital invested, and they -- they -- what they serve to do is to distort the actual market dynamics.

So, for example, you can produce widgets more economically in the U.S., let's say, than in China on a normal operating cost basis. But if the capital is subsidized, then you move that production to China. And so the -- the location of production is not being determined by market forces. It's being determined by capital investment incentives.

This is something that -- that the U.S. does at the state level, but the states don't have many chips to play with in the U.S. We don't do it at the federal level. I think we should. I think we should have a fund. My proposal is that we propose globally to negotiate an agreement like we have in the WTO on export subsidies.

We did -- we negotiated -- we proposed and negotiated disciplines on the use of investment incentives, but at the same time while negotiating that we create a fund that would match the incentives of others to offset that distortion of -- of the market forces.

BROWN: Thank you, Mr. Prestowitz. Thank you for joining us.

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