Two steps forward, one step back on trade

The two steps forward are that the United States and South Korea signed a free trade deal just before the deadline of having it approved under President Bush's Trade Promotion Authority. The New York Times' Choe Sang Hun explains: United States and South Korean negotiators struck the world?s largest bilateral free-trade agreement today, giving the United States a badly needed lift to its foreign trade policy at home and South Korea a chance to reinvigorate its export economy. Negotiators announced the agreement, reached after 10 months of negotiations, just in time to comply with a legislative deadline in the United States, after which President Bush?s ?fast-track? authority to negotiate foreign trade deals without amendments from Congress would expire. ?This is a strong deal for America?s farmers and ranchers who will gain substantial new access to Korea?s large and prosperous market of 48 million people,? Karan Bhatia , the deputy United States trade representative, said in Seoul today. ?Neither side obtained everything it sought,? she added. If ratified, the trade deal will eliminate tariffs on more than 90 percent of the product categories traded between the two countries. South Korea agreed to lift trade barriers to iconic American products like cars and beef, while the United States abandoned a longstanding demand that Seoul eliminate subsidies on South Korean rice.... The breakthrough came when both sides compromised on the most sensitive, deal-breaking issues. Washington dropped its demand that the South Korean government stop protecting its politically powerful rice farmers, and Seoul agreed to resume imports of American beef, halted three years ago over fears of mad cow disease, if, as expected, the World Organization on Animal Health declares United States meat safe in a ruling scheduled in May. South Korea also agreed to phase out the 40 percent tariff on American beef over 15 years. It will remove an 8 percent duty on cars and revise a domestic vehicle tax system that United States officials say discriminates against American cars with bigger engines. The United States will eliminate the 2.5 percent tariff on South Korean cars with engines smaller than 3,000 cubic centimeters, phase out the 25 percent duty on trucks over 10 years, and remove tariffs, which average 8.9 percent, on 61 percent of South Korean textiles. The deal ?will generate export opportunities for U.S. farmers, ranchers, manufacturers, and service suppliers, promote economic growth and the creation of better paying jobs in the United States,? President Bush said in a letter notifying Congress of his intention to sign the accord. President Bush said the trade pact would strengthen ties between the two countries ? an assessment shared by analysts who had repeatedly warned that the alliance, forged during the Korean War, has frayed during the terms of President Bush and President Roh Moo Hyun of South Korea, largely over policy toward North Korea. The deal is the biggest of its kind for the United States since the North American Free Trade Agreement in 1994 with Canada and Mexico. It is Washington?s first bilateral trade pact with a major Asian economy. Studies have estimated that the accord will add $20 billion to bilateral trade, estimated last year at $78 billion. Potential gains to the United States economy range from $17 billion to $43 billion, according to Usha Haley, director of the Global Business Center at the University of New Haven. South Korea?s exports to the United States are expected to rise in the first year by 12 percent, or 5.4 billion.... Consumers in both countries are the deal?s biggest winners. Hyundai cars and Samsung flat-panel TV sets, as well as Korean-made clothing, will become significantly cheaper in the United States. The step back comes from the Bush administration's weekend decision to slap tariffs on Chinese paper. Steven Weisman explains in the NYT: The Bush administration, in a major escalation of trade pressure on China, said Friday that it would reverse more than 20 years of American policy and impose potentially steep tariffs on Chinese manufactured goods on the ground that China is illegally subsidizing some of its exports. The action, announced by Commerce Secretary Carlos M. Gutierrez, signaled a tougher approach to China at a time when the administration?s campaign of quiet diplomacy by Treasury Secretary Henry M. Paulson Jr. has produced few results. The step also reflected the shift in trade politics since Democrats took control of Congress. The widening American trade deficit with China, which reached a record $232.5 billion last year, or about a third of the entire trade gap, has been seized upon by Democrats as a symbol of past policy failures that have led to the loss of hundreds of thousands of jobs. Mr. Gutierrez?s announcement has the immediate effect of imposing duties on two Chinese makers of high-gloss paper, one at 10.9 percent and the other 20.4 percent, calculated by adding up the supposedly illegal subsidies. But trade and industry officials say future actions based on the department?s new policy could lead to duties on imports of Chinese steel, plastics, machinery, textiles and many other products sold in the United States, if as expected those industries seek relief and the department finds that they are harmed by illegal subsidies.[U.S. trade with China far exceeds trade with South Korea. Why is this only a step back compared to KORUS?--ed.] Two reasons. First, much as I despite countervailing duties, this policy shift seems to make sense within the context of what those duties are supposed to accomplish. As Weisman explains: American law allows the United States to impose what are called antidumping duties when imports are sold in the United States at prices below what it costs to produce them. But these antidumping duties tend to be small compared with duties imposed for illegal subsidies when they are employed by trading partners with free market economies. Since the 1980s, the United States has barred antisubsidy duties in Communist or nonmarket economies. The rationale has been that it is impossible to determine what a subsidy is in a state-controlled economy, and that government-run businesses in China did not make marketing decisions based on their subsidies because they were merely told what to do by the authorities. Today, that reasoning is regarded as out-of-date as China has moved from a faltering economy two decades ago to an export superpower with sophisticated marketing and manufacturing techniques and a determination to find jobs for hundreds of millions of poor Chinese. ?The China of today is not the China of years ago,? Mr. Gutierrez said. ?Just as China has evolved, so has the range of our tools to make sure Americans are treated fairly.? Although the tariffs imposed by the decision today are effective immediately, the action is subject to review by the Commerce Department, and a formal decision is due in October. But the administration?s position is not expected to change unless it is ordered to do so by a court or by the World Trade Organization. Second, I'm willing to bet that this case will end the same way the steel case ended. If the complainants are basing their argument on China's currency valuation, then the WTO ain't going to uphold this action. In which case, three years from now, we know how this wll end -- unless it gets settled in the bilateral Strategic Economic Dialogue between now and then. UPDATE: they're not basing it on the currency valuation. Never mind. Meanwhile, Trade Diversion is skeptical of Commerce's ability to assess the magnitude of the direct subsidy.