The Decline of U.S. Export
Competitiveness for Manufactures
And Its Consequences for the
World Economic Order
By Ernest H. Preeg
Senior Advisor for International Trade and Finance
Manufacturers Alliance for Productivity and Innovation
1600 Wilson Blvd, Ste 1100, Arlington, VA 22209 | T 703.841.9000 | F 703.841.9514 | mapi.net
The Decline of U.S. Export Competitiveness for
Manufactures And Its Consequences for the
World Economic Order
Policy Analysis | April 2015
By: Ernest H. Preeg, Ph.D., Senior Advisor for International Trade and Finance
[email protected]
PA-155i
Table of Contents
Introduction
1
Part One: The Decline of U.S. Export Competitiveness for Manufactures
2
The Declining U.S. Share of Global Exports of Manufactures Since 2000
2
Table 1 – Leading Exporters of Manufactures ($billions)
3
Table 2 – The BRICS Disconnect for Trade in Manufactures ($billions, 2013)
4
Table 3 – U.S. Trade in Manufactures by Region
5
The Surging U.S. Trade Deficit in Manufactures Since 2009
6
Table 4 – Trade Balances in Manufactures
7
Table 5 – U.S. Bilateral Trade With China in Manufactures* ($billions)
7
Table 6 – U.S. Trade Balances in Manufactures With Principal EU Members ($billions) 8
Table 7 – U.S. and Chinese Exports of High-Technology Industries ($billions)
9
Table 8 – U.S. and Chinese Trade Balances in High-Technology Industries ($billions)10
The Peaking Out of the U.S. Trade Surplus for Business Services Since 2010
10
Table 9 – Trade in Business Services ($billions)
11
Table 10 – Trade in Computer and Information Services ($billions)
11
A Brave New Trading World for Technology-Intensive Manufactures
12
Part Two: The Game-Changing Consequences for the World Economic Order
14
The Multilateral Economic System in Serious Decline
14
The Dollar Twilight Dilemma
18
A Two-Track Initiative to Restore a Fair and Balanced Multilateral System
22
The Indispensable U.S. Leadership Role
27
About the Author
Copyright © 2015 MAPI All rights reserved.
30
The Decline of U.S. Export Competitiveness for
Manufactures And Its Consequences for the
World Economic Order
Policy Analysis | April 2015
By: Ernest H. Preeg, Ph.D., Senior Advisor for International Trade and Finance
[email protected]
PA-155i
Introduction
Technology-intensive manufactures make up two-thirds or more of global merchandise
exports and are at the center of export competitiveness among the advanced and newly
industrialized economies. The United States was the dominant exporter from the 1940s
through the end of the century, but since 2000 the U.S. share of global exports of manufactures has declined sharply, from 18% in 2000 to 12% in 2013, while the Chinese share almost
quadrupled, from 6% to 23%, and the EU share (in trade with non-members) was down only
slightly, from 21% to 20%.
Even more disturbing for U.S. export competitiveness, the U.S. trade deficit in manufactures
surged by $206 billion from 2009 to 2013, while the EU surplus soared by $300 billion and
the Chinese surplus was up by an amazing $492 billion. In 2014, the U.S. deficit rose by a
further $61 billion, and the five-year increase in the deficit resulted in a net loss of about 1.7
million American manufacturing jobs. Based on early month trade and the strong dollar, the
U.S. deficit is headed toward another large increase in 2015.
This rapid decline in U.S. export competitiveness for manufactures is having game-changing
consequences for the international trade and financial systems. U.S. leadership capability has been reduced for pursuing a more open, non-discriminatory trading system while
trade relationships are shifting from the rules-based multilateral World Trade Organization
(WTO) to a spreading network of preferential bilateral and regional trade agreements. And
the dollarized international financial system of the past seven decades is in transition to
some form of multi–key currency relationship as a growing share of trade is financed in
other currencies and the U.S. official foreign debt of $11 trillion, as a result of protracted
large trade deficits, continues to rise.
This study addresses these issues and is in two parts. Part One traces the radical changes in
the geographic composition of exports of manufactures from 2000 to 2013 and the rapid rise
of the U.S. trade deficit and the Chinese surplus through 2014. For U.S. and China trade, the
10 largest high-technology sectors are examined, with Chinese exports far larger and growing faster. The peaking out of the U.S. trade surplus in business services since 2010 is also
addressed. A net assessment of this radical restructuring of world trade in manufactures since
2000 concludes Part One.
Part Two analyzes the consequences of this radical restructuring of trade in manufactures for
the world economic order and makes proposals to restore a rules-based multilateral policy
framework for fair and balanced trade that will strengthen U.S. export competitiveness and
reduce the trade deficit for manufactures. Issues addressed include the transition away from
the multilateral WTO trading system, IMF obligations related to exchange rate policy, and the
twilight of the dollarized financial system. The point of departure for the multilateral restora-
Copyright © 2015 MAPI All rights reserved.
1
tion proposals is that the trade and financial systems are deeply linked, with exchange rates
now the principal international trade-adjustment policy instrument for maintaining balanced
access to markets, particularly for price-sensitive manufactures.
The proposals are thus on two connected tracks. U.S. actions to restore the IMF obligation not
to manipulate currencies to gain an unfair competitive advantage in trade, most importantly
related to China, would move forward in parallel with negotiation of an open-ended plurilateral free trade agreement (FTA) within the WTO, which would consolidate the spreading
With the sharp decline network of preferential bilateral and regional FTAs into a
broadly based, non-discriminatory trade relationship. Such
in oil and other
an agreement could include over 70% of U.S. manufactured
commodity prices in
exports even if China chose not to be an initial participant.
2014, manufactures
will probably be about
75% of merchandise
exports in 2015
A recurring theme throughout the study is the still indispensable U.S. leadership role for restoring a balanced, multilateral economic system, despite waning political leverage
as a result of the declining U.S. share of global exports. The
other principal key currency participants, China and the EU, are not up to the task, and the
alternative to forceful and effective U.S. leadership is the decline of international policy
management to deal with trade and financial imbalances, and the threatening rise of financial market forces to do the job, which could be highly disruptive to international trade and
investment.
Part One: The Decline of U.S. Export Competitiveness for Manufactures
Total U.S. exports in 2013 were $2,262 billion, of which $1,580 billion, or 70%, was merchandise, and $682 billion, or 30%, was services. The manufacturing sector dominated
merchandise exports, with $1,124 billion, or 71%, while agriculture accounted for $176
billion, or 11%, and fuels for $149 billion, or 9%. With the sharp decline in oil and other
commodity prices in 2014, manufactures will probably be about 75% of merchandise
exports in 2015. For services exports, $171 billion, or 25%, was business services, closely
integrated with manufactures, and the remainder was for travel, transportation, and
other commercial services.
These are the broad dimensions of U.S. exports. Part One of this study is about the decline of
U.S. export competitiveness for the dominant manufacturing sector, and is in four sections.
The first addresses the declining U.S. share of global exports of manufactures from 2000
to 2013 and the second the surging U.S. deficit for manufactures from 2009 to 2014. The
third section presents the peaking out of the U.S. trade surplus in related business services
since 2010, and the fourth provides a summary assessment of the radical changes in trade in
manufactures since 2000.
The Declining U.S. Share of Global Exports of Manufactures Since 2000
Table 1 presents exports of manufactures by the 13 largest exporters of manufactures from
2000 to 2013, which together accounted for $7,807 billion, or 86%, of global exports in
2013. Three overriding relationships tell the extraordinary story of the course of trade in
manufactures over only 13 years.
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2
Table 1 – Leading Exporters of Manufactures ($billions)
World*
China
EU*
United States
Japan
South Korea
Singapore
Mexico
Taiwan
%
2000 2013 Increase
3,534 9,071
157
Canada
220
2,077
844
Switzerland
736
1,772
141
India
650
1,124
73
Thailand
450
626
39
Malaysia
155
481
210
13 Listed
118
288
144
8 Asians
139
285
105
2 West Europeans
141
253
79
3 North Americans
2000
176
74
35
55
81
3,025
1,250
810
965
%
2013 Increase
207
18
201
172
186
431
168
205
139
72
7,807
158
4,218
237
1,973
144
1,616
67
*EU exports to non-members, as also calculated for World, which is used throughout this study
Source(s): WTO, International Trade Statistics
First, all 13 exporters are from three dominant exporting regions: 8 in Asia, 2 in
West Europe, and 3 in North America. Moreover, if other smaller Asian exporters are
included, the 86% of global exports for the three regions would rise to 90%, leaving only
10% of global manufactured exports by the rest of the world—South and Central America,
Africa, the Middle East, and East Europe including Russia. This three-region concentration in export-oriented industrialization since 2000 is, if anything, intensifying, making
the other regions of the world increasingly dependent on exports of fuels, industrial raw
materials, and agricultural commodities, which are vulnerable to disruptive swings in
prices and quantities.
Second, among the three dominant exporting regions, the Asian share has risen sharply
from 2000 to 2013, principally offset by a major decline in the North American share.
As shown in the bottom three lines of the table, exports of the 8 Asians grew by 237%,
to $4,218 billion in 2013, while West European export growth was 144%, to $1,973 billion, and North American export growth lagged far behind at 67%, to $1,616 billion. As a
result, the Asian share of exports by the 13 rose from 41% in 2000 to 54% in 2013, while
the North American share declined from 32% to 21%, and the West European share was
down only slightly, from 27% to 25%. The Asian century is thus already in full bloom for
exports of manufactures, and the rise will be accelerated by the new, Chinese-led Asian
Infrastructure Investment Bank (AIIB).
The third and most politically charged changed relationship is by and among the “Big Three”
exporters—China, the EU, and the United States, whose aggregate share of world manufactured exports rose from 45% in 2000 to 55% in 2013. Most important is the dramatic changing of places among the three, with Chinese export growth of 844%, EU growth of 141%, and
U.S. growth of only 73%, or about half EU growth and less than a tenth of Chinese growth.
As a result, the Chinese share of global exports almost quadrupled, from 6% in 2000 to
23% in 2013, the EU share declined slightly, from 22% to 21%, and the U.S. share declined
sharply, from 18% to 12%. In absolute terms, U.S. exports of $650 billion in 2000 were
almost three times larger than the $220 billion of Chinese exports, while by 2013 Chinese
exports of $2,077 billion were 85% larger than the $1,124 billion of U.S. exports. In 2014,
based on national trade statistics, 1 Chinese exports rose by 6%, to $2,228 billion, while U.S.
1 The WTO multilateral trade data for 2014 will not be available until November 2015. The U.S. and Chinese data are
on a slightly broader definition of manufactures, SITC 5-8, than the WTO definition, which is SITC 5-8 minus two
small sectors of trade that account for about 2% of U.S. manufactured exports.
Copyright © 2015 MAPI All rights reserved.
3
exports grew by only 3%, to $1,388 billion, and during the fourth quarter Chinese exports,
for the first time, more than doubled U.S. exports. 2
These stark trade figures for the dominant manufacturing sector of trade raise a number of
policy issues, principally related to trade relations among advanced and newly industrialized
exporters in the three regions, with a decisive, central role for the Big Three, which is the
principal substance of the second part of this study. Just a couple of comments about trade
with the rest of the world are offered here, as related to Table 1.
The very low 10% share of manufactured exports accounted for by the rest of the world is a complex subject worthy of in-depth investigation. It is largely the result of national economic strategies that do not attract investment in export-competitive manufacturing industries, which for
poorer countries begin with labor-intensive industries, as has recently been happening in Asian
nations such as Bangladesh, Myanmar, and Vietnam. It is also related to the decline of the rulesbased multilateral trading system, whereby the 10% grouping of exporters is largely excluded
from preferential bilateral and regional free trade agreements. Even more important, the mercantilist, undervalued exchange rates of some exporters of manufactures, particularly in Asia,
cannot be matched by the 10%, which, if anything, try to maintain overvalued exchange rates so
as to pay for large imports of manufactures, which at the same time discourages investment in
export-oriented manufacturing industry. A true exchange rate policy conundrum for the 10%.
A special note of striking regional contrast in export competitiveness for manufactures falls
within the much-publicized geopolitical BRICS grouping, as shown in Table 2. China was by
far the number one global exporter of manufactures in 2013, with $2,077 billion of exports
and an unprecedented trade surplus of $942 billion. India has substantial and rapidly growing
manufactured exports, with trade roughly in balance, but is still at only about a tenth of the
Chinese export level. And the other three—Russia, Brazil, and South Africa—are inconsequential exporters, with $101 billion, $85 billion, and $40 billion of exports in 2013, respectively,
and all are in large deficit, with imports more than double exports for Russia and Brazil. EU
manufactured exports in 2013 were 18 times larger than Russian exports, and Mexican exports
were more than three times larger than Brazilian exports. What this means for the policy
analysis in this study is that the BRICS grouping, while an outspoken geopolitical voice, is a
disconnected grouping with little mutual interest for trade strategy related to manufactures,
although individual members China and India will be increasingly important participants in
the trade and financial system in the decade ahead.
Table 2 – The BRICS Disconnect for Trade in Manufactures ($billions, 2013)
China
India
Russia
Brazil
South Africa
Exports
2,077
186
101
85
40
Imports
1,135
181
258
173
65
Balance
+942
+5
-157
-88
-25
Source(s): WTO, International Trade Statistics
Finally, Table 3 presents U.S. exports, imports, and trade balances in manufactures for 2013
by region and principal trading partner, and is thus a bridging table for the discussion in the
2 See Ernest H Preeg, U.S. Trade Deficit in Manufactures in Fourth Quarter and Chinese Surplus Both Surge by 14%
(MAPI Foundation, February 2015).
Copyright © 2015 MAPI All rights reserved.
4
following section of the surging U.S. trade deficit since 2009. It also highlights the highly
disparate regional orientation of U.S. export markets for manufactures as related to the policy
discussion in Part Two.
Table 3 – U.S. Trade in Manufactures by Region
Total
North America
Asia
China
Japan
South Korea
India
West Europe
EU
South and Central America
Brazil
Middle East
Africa
Commonwealth of Independent States
Russia
Exports
1,124
398
295
74
44
31
17
224
202
111
34
61
21
13
9
Imports
1,651
369
838
444
135
57
33
353
321
48
14
27
10
7
6
Balance
-527
+29
-543
-370
-91
-26
-26
-129
-119
+63
+20
+34
+11
+6
+3
Source(s): WTO and U.S. Census Bureau, FT-900
Five salient geographic dimensions of U.S. trade emerge that are fundamental to a U.S. strategy to restore U.S. export competitiveness for manufactures:
(1) The three dominant exporting regions also dominate U.S. manufactured exports. U.S.
manufactured exports to North America, Asia, and West Europe were $917 billion, or
83% of global exports of $1,102 billion;
(2) Among the three regions, North America is well out front as the number one region for
U.S. exports. U.S. exports to North America were $398 billion, compared with $295
billion to Asia and $224 billion to West Europe. North America thus accounted for 35%
of U.S. global exports of manufactures, well ahead of the 26% for Asia and the 20% for
West Europe;
(3) The contrast in the U.S. trade balances among the three regions is even greater than for
exports, and far more consequential for U.S. export competitiveness. The U.S. trade balance with its NAFTA partners was a small surplus of $29 billion, with a moderate surplus with Canada offsetting a smaller deficit with Mexico. Trade with Asia, in stunning
contrast, was in deficit by $543 billion, larger than the $527 billion global deficit, and
the $129 billion deficit with West Europe added substantially to the huge net deficit with
the three regions of $643 billion;
(4) As for bilateral balances, the three largest deficits by far were with China, at $370 billion, the EU, at $119 billion, and Japan, at $91 billion. Together, the deficit for the three
was $580 billion, well above the global deficit of $527 billion. The Chinese deficit alone
equated to 70% of the global U.S. deficit, with imports of $444 billion six times larger
than the $74 billion of U.S. exports to China;
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5
(5) For the rest of the world, beyond the three dominant exporting regions, which accounted
for only 18% of U.S. exports, the United States had a surplus of $113 billion. This reflects
the very large trade deficits in manufactures in these regions, as commented on earlier.
Noteworthy related to the BRICS is that U.S. manufactured exports to Brazil of $34 billion
were only 3% of global exports, and the $9 billion of exports to Russia were less than 1%.
As for the relationship of this regional orientation of U.S. trade in manufactures to the policy
proposals in Part Two, two relationships are of central importance. The first is the severe and
growing deficits for price-sensitive U.S. manufactured exports from exchange rate policies of
others, which centers on China and the EU, which together with the United States also have
the “Big Three” global currencies, and will thus determine the future course of the deeply
troubled international monetary system. And second, the proposal put forward for a plurilateral free trade agreement within the WTO could include 70% or more of U.S. manufactured
exports even if China chose not to be an initial participant. The 35% North American share of
U.S. exports, the 20% West European share, and other free trade agreements in place, as with
South Korea, or being negotiated within the Trans-Pacific Partnership (TPP), including Japan,
would bring the share of U.S. exports to at least 70%, while the 7% share of U.S. exports to
China is relatively small.
This concludes the discussion of the serious decline of the U.S. global share of exports of manufactures from 2000 to 2013, headed to 10% over the next couple of years, and the corresponding extremely large increase in the Chinese share, headed toward 25%. Even more important
for U.S. export competitiveness, however, is the surging U.S. deficit in the sector since 2009.
The Surging U.S. Trade Deficit in Manufactures Since 2009
The most definitive measure of the recent decline in U.S. export competitiveness for manufactures is the surging trade deficit since 2009. The trade balance is the bottom line for the impact
on American production and jobs. Manufactured exports can have imported components and
imports can have previously exported components, but this all nets out in the bottom-line trade
balance. As for the impact on U.S. jobs, estimates range from 4,000 to 10,000 American manufacturing jobs lost for each $1 billion increase in the trade deficit, depending largely on the mix
of industries being examined. The midpoint of 7,000 jobs is used throughout this report as a
reasonable approximation of the job loss from the growing trade deficit.
Table 4 presents the trade balances for manufactures in 2009 and 2013 for the same 13 largest exporters listed in Table 1. The central, overriding development is the huge increases in the
Chinese and EU surpluses, largely offset by the surging U.S. deficit, which together, among
other things, have greatly increased the financial challenge facing the Big Three global currencies. The Chinese surplus soared by $492 billion, to an unprecedented $942 billion in 2013,
the EU surplus was up by $300 billion to $529 billion, and the U.S. deficit, in the other direction, rose by $206 billion, to $527 billion. The next two largest exporters, Japan and South
Korea, had large surpluses of $226 billion and $218 billion in 2013, but their increases from
2009 were much smaller—$48 billion for South Korea and an insignificant $4 billion for
Japan. Of the other listings, the next largest surplus was Taiwan, at $90 billion, up by $22 billion from 2009, while fellow North American Canada had the second largest deficit, at $134
billion, up by $49 billion.
Copyright © 2015 MAPI All rights reserved.
6
Table 4 – Trade Balances in Manufactures
China
EU
United States
Japan
South Korea
Singapore
Mexico
Taiwan
Canada
2009
+450
+229
-321
+222
+137
+36
-16
+68
-85
2013
+942
+529
-527
+226
+218
+60
-17
+90
-134
09-13
+492
+300
-206
+4
+81
+24
-1
+22
-49
2009
+29
-9
+19
+16
Switzerland
India
Thailand
Malaysia
13 Listed
8 Asians
2 West Europeans
3 North Americans
2013
+38
+6
+10
+3
09-13
+9
+15
-9
-13
+775 +1,444
+939 +1,555
+258
+567
-422
-678
+669
+616
+309
-256
Source(s): WTO, International Trade Statistics
In 2014, based on national trade statistics, the Chinese surplus increased by a further $85 billion, to $998 billion, which rounds to an astounding $1 trillion, while the U.S. deficit rose by
$61 billion, to $562 billion. Moreover, based on early month trade and the stronger dollar, the
U.S. deficit is headed for a further large increase in 2015.
The dominance of the growth of the trade imbalances by the Big Three cannot be overemphasized. From 2009 to 2013, the $492 billion increase in the Chinese surplus and the $300 billion increase in the EU surplus, or $792 billion together, accounted for 86% of the $925 billion
surplus increases among the 13 largest exporters. And the $206 billion increase in the U.S.
deficit was 74% of the $278 billion of increased deficits among the 13. Thus, any reversal of
these growing trade imbalances among the major advanced and newly industrialized exporters
will have to center on the Big Three exporters, which also have the three global currencies, a
trade/exchange rate policy linkage that is central to the discussion in Part Two of this study.
Even more politically charged than these extremely large and growing multilateral trade
imbalances, however, is their concentration in the bilateral imbalances among the Big Three,
the surging U.S. bilateral deficits with China and the EU. Tables 5 and 6 present these bilateral
imbalances for years 2009 through 2014, based on U.S. trade statistics. Table 5, for U.S.-China
trade, shows U.S. exports to China up by $37 billion from 2009 to 2014 and imports up by
$167 billion, with a resulting increase in the deficit of $130 billion. The $312 billion bilateral
deficit in 2014 was 66% of the $562 billion global deficit.
Table 5 – U.S. Bilateral Trade With China in Manufactures* ($billions)
Exports
Imports
Trade Balance
2009
45
287
-242
2010
58
354
-296
2011
63
387
-324
2012
65
413
-348
2013
76
427
-351
2014
82
454
-372
09-14
+37
+167
-130
*SITC 5-8
Source(s): U.S. Census Bureau
The 66% Chinese share of the U.S. global deficit is down from 80% in 2009, but this is principally because of the large rise in the EU share of the deficit, from 17% in 2009 to 24% in 2013.
The two deficits together thus remain in the order of 90% of the global U.S. deficit. This rising
U.S. deficit with the EU is presented in Table 6 for the five principal EU trading partners, with
the first four—Germany, France, Italy, and Spain—members of the eurozone, and the fifth,
Copyright © 2015 MAPI All rights reserved.
7
the United Kingdom, not in the eurozone. This currency distinction tells the story of how the
rapidly growing U.S. deficit with the overall EU is related to what, in effect, has been an undervalued euro to the dollar.
Table 6 – U.S. Trade Balances in Manufactures With Principal EU Members ($billions)
Germany
France
Italy
Spain
4 eurozone
United Kingdom
2009
-27
-4
-12
+2
-41
-2
2010
-36
-8
-12
+2
-54
-1
2011
-51
-9
-16
+1
-75
+2
2012
-61
-8
-18
-1
-88
-1
2013
-68
-11
-20
-1
-100
+1
2014
-73
-13
-23
-3
-112
+1
09-14
-46
-9
-11
-5
-71
+3
*SITC 5-8
Source(s): U.S. Census Bureau
All four eurozone members recorded increased U.S. bilateral deficits, totaling $71 billion from
2009 to 2014, but with the $46 billion increase in the deficit with Germany accounting for 65%
of the total. For the others, increased U.S. deficits of $9 billion with France, $11 billion with
Italy, and $5 billion with Spain helped these eurozone economies offset their larger trade deficits with Germany and other northern-tier eurozone members. The net result, however, is that
the entire eurozone is in large current account surplus with the rest of the world, of over 2%
of GDP, largely from its rapidly growing trade surplus in manufactures with the United States.
The U.S. trade balance with the non-eurozone United Kingdom, in contrast, has been balanced
and relatively stable, with a $3 billion rise for the United States to a $1 billion surplus in 2014.
A final vital and decisive dimension of the growing U.S. trade deficit in manufactures is that
most of these industries are technology-intensive. About 70% of U.S. civilian R&D expenditures
and 90% of new patents derive from the manufacturing sector. Top priority for national economic strategies throughout Asia, most importantly by China, Japan, South Korea, and India,
and among EU members, is for high export-oriented growth for these technology-intensive
industries. This involves a range of domestic policies and special importance for an export-oriented trade strategy in view of the very high trade engagement of manufacturing industry.
This international rivalry to be at the forefront of technological innovation and development is
clearly evident in trade terms, and of deepest concern for the United States from the recent rapid
rise of Chinese export competitiveness for high-technology industries. The final two tables of this
section present U.S. and Chinese global trade for the 10 largest high-technology industries in
2009 and 2014, for exports in Table 7, and for the trade balances in Table 8. These 10 industries
accounted for 67% of total U.S. manufactured exports in 2014, and 51% of Chinese exports. If
other, smaller high-technology industries were included, the high-technology shares of exports
would be still higher. It can thus be said that well over two-thirds of U.S. and well over half of
Chinese manufactured exports are now in technology-intensive industries.
The bottom line of Table 7 shows the rapid rise of Chinese exports of these 10 industries,
pulling ever further ahead of U.S. exports. Chinese exports grew from $625 billion in 2009 to
$1,135 billion in 2014, or by 82%, while U.S. exports rose from $525 billion to $769 billion, or
by 46%. The $510 billion increase in Chinese exports thus more than doubled the $244 billion
U.S. increase over the five-year period, resulting in Chinese exports in 2014 48% larger than
U.S. exports.
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8
Table 7 – U.S. and Chinese Exports of High-Technology Industries ($billions)
Medicines and pharmaceutical products
Power generating machinery and equipment
Machinery specialized for particular industries
General industrial machinery and equipment
Office and data processing equipment
Telecommunications and sound recording
Electrical machinery and appliances
Road vehicles
Other transport equipment
Professional and scientific instruments
10-industry total*
2009
U.S. China
44
9
30
19
40
17
49
50
39
147
36
159
85
134
70
29
87
30
45
31
525
625
2014
09-14
U.S. China U.S. China
49
13
+5
+4
44
37
+14
+18
54
40
+14
+23
79
102
+30
+52
50
222
+11
+75
53
280
+17
+121
114
279
+29
+145
132
71
+62
+42
132
32
+45
+2
62
59
+17
+28
769 1,135 +244 +510
*SITC 54, 71-72, 74-79, 87
Source(s): U.S. Census Bureau, FT-900, and China’s Customs Statistics
The full story of the export competitiveness rise for Chinese high-technology industries,
however, is revealed by the performance of the individual industries. The only two industries where the United States maintains a large lead are road vehicles, centered on the deeply
trade-integrated North American automotive industry
The Chinese lead centers within NAFTA dating back to the U.S.-Canada free trade
on the IT industries—
Auto Pact of 1965, and other transport equipment, thanks
office and data
largely to Boeing. The United States also has a lead in
medicines and pharmaceutical products, although the
processing equipment,
telecommunications and trade is relatively smaller.
sound recording, and
electrical machinery and
appliances
The Chinese lead centers on the IT industries—office and
data processing equipment, telecommunications and
sound recording, and electrical machinery and appliances.
Chinese exports for the three industries grew by $341 billion, six times the $57 billion U.S. growth, while Chinese exports in 2014 of $781 billion were
3.6 times larger than the $217 billion of U.S. exports. In the three machinery industries, listed
2 through 4, Chinese exports grew by $93 billion, versus $58 billion for the United States,
shifting from a large $33 billion U.S. lead in 2009 to a $2 billion Chinese lead in 2014. And for
professional and scientific instruments, Chinese export growth converted the $14 billion U.S.
lead in 2009 to a much smaller $3 billion lead in 2014, with five-year growth of $28 billion by
China compared to $17 billion by the United States.
These are the striking figures for the rapidly growing Chinese lead over the United States for
exports of high-technology industries. Unfortunately, the corresponding figures for trade balances in these 10 industries, presented in Table 8, are even more detrimental for U.S. export
competitiveness. For all 10 industries, the United States had a deficit of $131 billion in 2009,
which more than doubled to $289 billion in 2014, while the Chinese surplus of $156 billion in
2009 also more than doubled to $322 billion in 2014.
Copyright © 2015 MAPI All rights reserved.
9
Table 8 – U.S. and Chinese Trade Balances in High-Technology Industries ($billions)
Medicines and pharmaceutical products
Power generating machinery and equipment
Machinery specialized for particular industries
General industrial machinery and equipment
Office and data processing equipment
Telecommunications and sound recording
Electrical machinery and appliances
Road vehicles
Other transport equipment
Professional and scientific instruments
10-industry total*
2009
2014
U.S. China U.S. China
-16
+2
-28
-6
-9
+1
-22
+13
+16
-8
+7
+1
-1
+4
-14
+50
-52
+105
-68
+164
-83
+124
-99
+211
-7
-65
+45
-67
-58
+1
-126
-18
+66
+16
+95
+1
+13
-24
+11
-27
-131 +156 -289 +322
09-14
U.S. China
-12
-8
-13
+12
-9
+9
-13
+46
-16
+59
-16
+87
-38
-2
-68
-19
+29
-15
-2
-3
-158 +166
*SITC 54, 71-72, 74-79, 87
Source(s): U.S. Census Bureau, FT-900, and China’s Customs Statistics
Again looking at the individual industries, the only large increase in the U.S. surplus was for
other transport equipment, up by $29 billion, while for the three IT industries the U.S. deficit
rose by $70 billion and the Chinese surplus surged by $144 billion, and for the three machinery industries the U.S. deficit was up by $35 billion as the Chinese surplus rose by $67 billion.
This concludes the presentation of the sharp decline of the U.S. share of global exports of
manufactures since 2000 and the rapid rise in the trade deficit since 2009. Before moving to
the analysis of why this happened and what should be done to restore a more balanced trade
relationship for the technology-intensive manufacturing sector, a briefer presentation is made
on related trade in business services, which is much smaller than trade in manufactures and
has been subject to unsubstantiated, misleading commentary.
The Peaking Out of the U.S. Trade Surplus for Business Services Since 2010
Trade in manufactures and business services are deeply linked, often within manufacturing
companies. U.S. exports of business services in 2013 of $378 billion were about 30% as large
as manufactured exports, and were in surplus by $44 billion, which amounted to about 8%
of the deficit for manufactures. This surplus has led some observers to project that a rising
U.S. surplus for business services could go a long way toward offsetting the growing deficit for
manufactures. Chinese officials have likewise responded to U.S. complaints about the rising
bilateral deficit for manufactures by saying that this is largely offset by a growing surplus for
business services.
Such optimism, however, is no longer justified, if it ever was.3 Trade statistics for business
services are not as detailed as for manufactures, but the WTO does provide annual statistics
for principal trading nations for three categories of business services: communications, computer and information services, and other business services, the latter including legal, management, R&D, engineering, and other technical services. Exports and trade balances for the
Big Four exporters, which adds India to the Big Three exporters of manufactures, for all three
categories, are presented in Table 9 for 2009 through 2013. The basic picture is that while
3 For a more detailed analysis, see Ernest H. Preeg, U.S. Trade Surplus in Business Services Peaks Out (MAPI Foundation, 2014). The briefer presentation here updates the trade figures through 2013, reinforcing the conclusions in the
earlier analysis.
Copyright © 2015 MAPI All rights reserved.
10
U.S. exports grew steadily over the four years, the trade surplus, after a substantial increase
in 2010, has since leveled off through 2013, while the surpluses of the other three principal
exporters have all grown two to five times faster.
Table 9 – Trade in Business Services ($billions)
Exports
EU
United States
India
China
Trade Balance
EU
United States
India
China
2009
2010
2011
2012
2013
09-13
263
117
64
53
283
137
87
72
335
146
85
72
344
166
94
83
378
171
103
97
+115
+54
+39
+44
+67
+31
+38
+16
+85
+39
+44
+33
+106
+35
+56
+28
+112
+44
+61
+35
+132
+43
+71
+42
+65
+12
+33
+26
Source(s): WTO, International Trade Statistics
U.S. exports rose from $117 billion in 2009 to $171 billion in 2013, or by 46%, Indian exports
were up from $64 billion to $103 billion, or by 61%, and Chinese exports were up from $53 billion to $97 billion, or by 83%. The EU, by far the number one exporter, increased exports to
non-members from $263 billion to $378 billion, or by 44%. The growth pattern of the U.S. trade
surplus is even more decisive in dispelling earlier optimism about offsetting the growing deficit
in manufactures. The U.S. surplus was up by $12 billion over the four years, of which $8 billion
was in 2010. And the other three exporters all registered much larger and sustained growth in
their surpluses over the four years. As a result, from 2010 to 2013, the EU surplus was up by $47
billion, the Indian surplus by $27 billion, the Chinese surplus by $9 billion, and the U.S. surplus
by only $4 billion, or an insignificant 2% of the increased trade deficit for manufactures.
The trade performance of the computer and information services sector, presented in Table 10,
is important as related to the rapidly growing U.S. deficit for IT manufactures, shown earlier in
Table 8, and the central role of IT industries for new technology development and application.
Unfortunately, U.S. exports of computer and information services lag behind the other principal exporters, and the United States runs a growing trade deficit in the sector.
Table 10 – Trade in Computer and Information Services ($billions)
Exports
EU
United States
India
China
Trade Balance
EU
United States
India
China
2009
2010
2011
2012
2013
09-13
42
13
34
7
49
14
41
9
57
16
44
12
56
17
47
14
62
18
50
15
+20
+5
+16
+8
+24
-4
+31
+4
+30
-5
+38
+6
+37
-9
+42
+8
+36
-8
+45
+11
+36
-8
+47
+10
+12
-4
+16
+6
Source(s): WTO, International Trade Statistics
Copyright © 2015 MAPI All rights reserved.
11
U.S. exports grew by only $5 billion from 2009 to 2013, while Indian exports rose by $16 billion, Chinese exports by $8 billion, and front-runner EU exports soared by $20 billion. The
U.S. trade deficit doubled from $4 billion to $8 billion, while the Indian surplus was up by $16
billion, the EU surplus by $12 billion, and the Chinese surplus by $6 billion. Thus, in 2013, the
other three exporters had a combined surplus of $93 billion, while the United States was in
deficit by $8 billion.
This serious weakening of U.S. export competitiveness for IT services, together with the far
larger and growing deficit for IT products, raises questions about the projected impact on U.S.
trade from the U.S.-China agreement at the November 2014 Beijing economic summit to negotiate an expanded, plurilateral trade-liberalizing Information Technology Agreement.
The overall assessment for U.S. trade in business services is thus threatening, with a possible
decline rather than increase in the long-standing trade surplus. This reflects the growing technical capability of Indian and Chinese service providers, and the fact that export competitiveness
in business services, perhaps even more than for manufactures, is highly price-sensitive to the
much lower labor costs of technology-oriented personnel in India and China, many with degrees
from American universities.
*
*
*
A final international commercial account related to U.S. export competitiveness for technology-intensive industries does not involve cross-border trade in goods or services, but
rather cross-border rental of property, namely intellectual property. This is one area where
the United States has maintained a large international surplus, but, as elsewhere, the future
course of this surplus is in doubt. According to WTO statistics on royalties and license fees,
the United States had a surplus of $57 billion in 2009,
The issue of intellectual
but this surplus has risen only slowly since then, to $57
property rights is highly
billion in 2010, $63 billion in 2011, $62 billion in 2012,
complex, largely beyond the and $65 billion in 2013.
realm of trade policy, and
subject to frequent dispute
The issue of intellectual property rights is highly
complex, largely beyond the realm of trade policy,
and subject to frequent dispute, often over cyber warfare and the theft of patents, including
between the United States and China. The substance of this issue extends beyond the scope of
this study, and only two broad conclusions are offered here. First, this subject should receive
high-level, in-depth attention by the U.S. government, as a vital dimension of U.S. export competitiveness for technology-intensive industries, and second, the figures provided above indicate that the large U.S. surplus is vulnerable as others put high priority on increased R&D and
other technology-driven incentives, and engage in violations of intellectual property rights.
A Brave New Trading World for Technology-Intensive Manufactures
This completes the presentation of the radical geographic restructuring of trade in manufactures since 2000, and the consequences for the United States and the global economic system
are far-reaching. Manufactures amounted to 65% of global merchandise exports in 2013, and
with the subsequent sharp decline in oil and other commodity prices, the manufacturing share
will likely rise to at least 70% in 2015. More important, as has been highlighted throughout
Copyright © 2015 MAPI All rights reserved.
12
this presentation, the manufacturing sector is highly technology-intensive, which is central to a
number of national economic strategies, including the objectives of export-oriented growth and
a large trade surplus. In this process, however, the United States has seriously lagged behind,
with an ever-smaller share of global exports and an ever-larger trade deficit. These are the central policy issues addressed in Part Two of this report, and Part One therefore concludes with a
pointed summary assessment of the radical restructuring of trade in manufactures, as presented
in the 10 foregoing tables, as the analytic foundation for discussion of the policy course ahead
for the United States and the global economic system.
A central finding is that manufactured exports are highly concentrated geographically, with
90% of global exports from three regions—Asia, West Europe, and North America—within
which the Big Three exporters are China, the EU, and the United States, whose combined
share of global manufactured exports increased from 45% in 2000 to 54% in 2013.
There has also been a decisive change in global market shares among the three dominant
exporting regions. From 2000 to 2013, the Asian share of exports by the 13 largest exporters surged from 41% to 54%, while the North American share declined sharply from 32%
to 21%, and the West European share was down only slightly, from 27% to 25%. And again,
shares among the Big Three were even more pronounced, centered on the dramatic changing
of places between the two largest exporting nations, with U.S. manufactured exports almost
three times larger than Chinese exports in 2000 shifting to Chinese exports doubling U.S.
exports by 2014.
The most disturbing change and most threatening to the trading system has been the rapid
rise of trade imbalances for manufactures among the Big Three from 2009 to 2013, with the
Chinese surplus up by $492 billion to $942 billion and the EU surplus by $300 billion to $529
billion, while in the other direction the U.S. deficit rose by $206 billion to $527 billion. In
2014, the Chinese surplus rose by a further $85 billion and the U.S. deficit by $61 billion. And
all three imbalances are headed higher in 2015.
Moreover, the soaring U.S. global deficit in manufactures is highly concentrated in the growing bilateral deficits with China and the EU. In 2014, the $372 billion U.S. bilateral deficit
with China amounted to 66% of the global deficit, and the bilateral deficit with the EU brought
the combined deficit to about 90%. U.S. manufactured imports from China in 2014 were 5.5
times larger than U.S. exports to China.
The trade impact of a mercantilist trade strategy for technology-intensive manufacturing
industries is most glaring in the Chinese strategy vis-à-vis the United States since 2009. For
the 10 largest high-technology industries, which account for the majority of manufactured
exports for both countries, Chinese exports grew by $510 billion from 2009 to 2014, while U.S.
exports were up by only $244 billion, or less than half as much. Even more bleak, the Chinese
surplus in these industries rose by $166 billion to $322 billion, while the U.S. deficit surged by
$158 billion to $289 billion. For the three strategic IT industries, Chinese exports in 2014 of
$781 billion were almost four times larger than the $217 billion of U.S. exports, and the $308
billion Chinese surplus compared with a $212 billion U.S. deficit.
As for trade in business services, from 2010 to 2013, the EU surplus was up by $47 billion, the
Indian surplus by $27 billion, the Chinese surplus by $9 billion, and the U.S. surplus by only
$4 billion.
There is finally the precarious and potentially unstable outlook from the structure of trade in
manufactures between the three dominant exporting regions and the rest of the world, which
Copyright © 2015 MAPI All rights reserved.
13
accounts for 10% of global manufactured exports and relies principally on exports of oil and
other commodities that are vulnerable to disruptive swings in prices and quantities.
This is the story of the radical geographic restructuring into a brave new trading world for
technology-intensive manufactures. It clearly raises important policy questions as to how governments should manage the trade policy course ahead, to which this presentation now turns.
Part Two: The Game-Changing Consequences for the World Economic
Order
Part One documented the serious decline of U.S. export competitiveness for the dominant manufacturing sector of trade since 2000, driven by export-oriented economic strategies by principal
competitors in Asia and West Europe. Part Two addresses how this decline in U.S. export competitiveness poses a life-threatening challenge for the multilateral trade and financial systems of
the past seven decades and makes proposals for restoring a more fair and balanced multilateral
policy framework. It begins with a brief history
The dollar was viewed as the only of the multilateral trade and financial systems
currency that would have market adopted at Bretton Woods in 1944, with a focus
confidence in the devastated
on the serious deterioration of both systems
since 2000. It then assesses the likely course
postwar global economy
ahead for the dollarized financial system into
some form of multi–key currency relationship, characterized as the dollar twilight dilemma.
This is followed by policy proposals, which center on ending mercantilist currency manipulation
and consolidating the spreading network of bilateral and regional free trade agreements into an
open-ended plurilateral agreement encompassing the majority of world trade. A recurring theme
is that if the critical decline of the multilateral economic system is to be reversed, strong and
sustained U.S. leadership over the next several years will be indispensable, while absent such
leadership, financial markets are likely to precipitate conflicts among governments that could be
highly disruptive for international trade and investment.
The Multilateral Economic System in Serious Decline
Economic leaders from 44 nations gathered at Bretton Woods, New Hampshire, in July 1944
to replace the rampant currency manipulation and protectionist bilateral trade agreements of
the 1930s—referred to as “beggar-thy-neighbor” policies—with a new multilateral system of
increasingly open and balanced trade with reasonably stable exchange rates. The meeting took
place in the midst of the economic destruction of the Second World War, and the need for a
bold postwar economic recovery plan was paramount in the minds of the delegates.
Leadership for building the new economic system centered on the United States and the United
Kingdom, with roots back to the 1941 Atlantic Charter, when President Roosevelt and Prime
Minister Churchill agreed on postwar goals, including the right of all nations to equal access for
trade and raw materials. There were important differences between the two governments, however, particularly regarding exchange rates and the role of the dollar. The U.S. proposal, which
was basically adopted, was for a dollarized system with other currencies pegged to the dollar on
a relatively rigid basis, requiring approval by the newly created International Monetary Fund for
changes of more than 10%, and with the dollar convertible to gold. All currencies were also to
become convertible on current account. The dollar was viewed as the only currency that would
have market confidence in the devastated postwar global economy, while rigid links to the dol-
Copyright © 2015 MAPI All rights reserved.
14
lar were meant as a deterrent to the widespread competitive devaluations of the 1930s. There
were also commercial benefits for the United States from the dollarized system, however,
which were criticized, particularly by the United Kingdom and France.
The alternative proposal put forward by the UK delegate, John Maynard Keynes, was for an
international currency, the bancor, very large quantities of which were to be allocated to IMF
members to finance postwar trade deficits, principally with the United States. This proposal
was a political non-starter since the proposed $26 billion of bancors, or about $16 trillion in
today’s dollars, would essentially become unconditional loans by the United States to finance
trade deficits by others, which was vehemently opposed by the U.S. Congress. As for the rigid
link of other currencies to the dollar, the highly able U.S. delegate, Harry Dexter White, based
on his Treasury experience of the 1930s, aptly observed: “Given the choice, every country prefers to have its currency undervalued rather than overvalued.”4
And so the dollarized financial system, with other currencies rigidly linked to the dollar,
and the dollar convertible to gold, was created and endured until 1971. Moreover, the U.S.
economic strategy was comprehensive, including a multilateral trading system agreed in
principle at Bretton Woods and launched in 1949 as the General Agreement on Tariffs
and Trade (GATT), which engaged in progressive trade liberalization on a non-discriminatory, most-favored-nation basis, and financial assistance through the newly created
International Bank for Reconstruction and Development, later expanded to become the
World Bank Group, and greatly supplemented by the United States in the immediate postwar years by the Marshall Plan.
This comprehensive U.S. strategy for postwar economic recovery and the creation of a multilateral economic system proved to be an extraordinary success. Despite widespread postwar
pessimism, within 10 years, sustained export-led growth was achieved by the major West
European nations, which formed the free trade European Economic Community in 1957, while
there was a similar robust economic recovery for the war-torn Japanese economy.
In fact, this success story became the cause for the rigidly dollarized Bretton Woods exchange
rate system to be overtaken by events sooner than anticipated in 1944. The European and
Japanese economies, with their exchange rates linked to the dollar, soon shifted from trade
deficits to trade surpluses, mostly at the expense of a growing U. S. trade deficit, which intensified during the 1960s. In effect, the other currencies were increasingly undervalued to the
dollar, while their governments, as had been observed by Harry Dexter White, resisted raising their currencies, and the IMF system lacked obligations for adjustment for undervalued
currencies.
This led to the Triffin Dilemma, discussed in the following section, which resulted in the
United States, in August 1971, ending the dollar link to gold and calling for a transition to
market-based exchange rates in order to achieve prompt and full trade adjustment. To jumpstart this transition, the United States imposed an interim 10% surcharge on imports, which
shocked trading partners and became known as the “Nixon Shock.” The ensuing shift toward
market-based exchange rates led to the adoption in 1978 of a revised IMF Article IV, obligating
4 Ben Steil, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of the New
World Order (Princeton University Press and the Council on Foreign Relations, 2013), p. 33. Harry Dexter White is
best known for his personal tragedy when it was revealed toward the end of the Bretton Woods deliberations that he
was a Soviet intelligence agent. White, however, had been highly respected and was in line to become the first managing director of the IMF when the scandal broke. Indeed, as a historical footnote, if White and successor Americans
had headed the IMF instead of the Europeans who rose to the post-scandal occasion, IMF policy orientation over the
decades would likely have been more favorable to the United States, especially as related to exchange rate policy.
Copyright © 2015 MAPI All rights reserved.
15
members not to manipulate their currencies to gain an unfair competitive advantage in trade,
with currency manipulation defined as protracted, large-scale official purchases of foreign
exchange, which have the direct and immediate effect of holding a currency below its marketbased level.
And thus the second stage of the IMF exchange rate system was launched, with largely market-based exchange rates for major currencies, but still with the dollar playing the central
role as reserve and transaction currency. This system worked reasonably well until about
2000, with trade adjustment responding to very large
There is currently no
market-based changes in exchange rates. From 1971
coherent system for
to the mid-1980s, the Japanese yen rose from 360 to
exchange rate policies and about 100 to the dollar, the Swiss franc did likewise,
no serious discussion in
from 4.3 to 1 to the dollar, and other European curthe IMF about compliance rencies experienced triple-digit appreciation as well.
In systemic terms, economists studied the declining
with IMF exchange rate
need for official reserve holdings with predominantly
obligations
market-based exchange rates, and made proposals for
an orderly decline in excessive official holdings. The call for greatly reduced official reserves,
however, was premature, and was soon overtaken by financial system stage three.
The third stage of the IMF exchange rate system, since about 2000, is largely a misnomer:
there is currently no coherent system for exchange rate policies and no serious discussion in
the IMF about compliance with IMF exchange rate obligations. China and some other newly
industrialized economies, especially in Asia, do not abide by the IMF prohibition on currency
manipulation, while their share of global exports and trade surpluses of price-sensitive manufactures have increased dramatically. The formation of the eurozone monetary union has led to
financial crises within the eurozone and bailouts, including by the IMF, to the point where the
majority of IMF loans are to IMF members that do not have national currencies or exchange
rates. And the United States, still playing its centralized dollar role for reserve currencies,
is in policy denial, most glaringly in the required semiannual reports by the secretary of the
Treasury to the Senate Banking Committee, stating that no IMF member, including China, has
been manipulating its currency in violation of IMF Article IV.
More specifically, recent IMF discussion centers on External Sector Reports by the secretariat
of the international accounts and policies of the largest economies. These reports encompass
a wide range of “norms,” such as appropriate levels of exchange rates, temporary influences,
and the performance of monetary, fiscal, healthcare, and other policies. This procedure has
been appropriately summarized: “Too much judgment makes norm-setting a black box.”5 In
any event, these judgmental deliberations are certainly not going to lead to serious discussion
of currency manipulation in violation of IMF Article IV. In parallel, protracted, large-scale
purchases of foreign currencies continue, including by nations that have current account surpluses and excessively large currency reserves, some of which is conveniently invested abroad
through sovereign wealth funds. And the dollar remains at the center through a passive U.S.
exchange rate policy, making the United States the importer of last resort for the mercantilist
exchange rate strategies of export competitors.
This current international financial non-system is the most threatening to the overall multilateral economic system, as its mercantilist workings lead to unsustainable trade imbalances,
in political as well as commercial terms, most importantly for trade in technology-intensive
5 From a presentation by Joseph Gagnon, “Comments on the IMF’s 2013 External Sector Report,” during a meeting
on this subject at the Peterson Institute, September 27, 2013.
Copyright © 2015 MAPI All rights reserved.
16
manufactures between the United States and China, as explained in Part One. It is also accelerating the transition of dollarized financial markets to some form of multi–key currency
relationship, as addressed in the following section.
The Bretton Woods trading system has also experienced a far-reaching decline away from
the original multilateral structure, but it held together longer than the financial system and
does not currently face a major protectionist reversal from the much lower-level trade barriers achieved on a multilateral basis. The GATT conducted eight “rounds” of trade liberalizing
negotiations beginning in 1949, principally among the industrialized nations. The two most
important rounds were the Kennedy Round, concluded in 1967, with the central undertaking an across-the-board 50% reduction in industrial tariffs, a bold U.S. initiative to reduce
trade diversion from a more inwardly oriented European Community, and the Uruguay Round
agreement of 1991, which included greater participation by the newly industrialized nations
and creation of a more broadly structured and permanent World Trade Organization.
But during the more than 40 years of progressive trade liberalization on a multilateral, nondiscriminatory basis, there was also a second track of selective free trade agreements, as
permitted by GATT Article XXIV. The European Coal and Steel Community was launched in
1951, only six years after WWII, and has since expanded greatly in policy scope and membership as the European Union (EU). The United States and Canada also implemented a free
trade Auto Pact in 1965, which was broadened to a comprehensive U.S.-Canada FTA in 1988,
and extended to include a major newly industrialized country, Mexico, to become the North
American Free Trade Agreement of 1993.6 These two comprehensive regional free trade agreements, however, largely reinforced the momentum toward free trade on a multilateral basis,
which was occasionally discussed.
This multilateral trade-liberalizing course has fundamentally changed since 1991, however,
with the failure of the WTO to continue the process of multilateral trade liberalization during the 14 years of Doha Round negotiations and the wide-ranging proliferation of bilateral
and regional FTAs outside the WTO to the point where most-favored-nation tariffs inscribed
in WTO schedules have largely become least-favored-nation tariffs in practice. This radical
shift away from a trade-liberalizing multilateral trading system is the result of growing differences in trade strategy among the highly diverse trade interests of developing countries
and rigidities within the WTO structure, such as the consensus rule for some agreements
and one vote per member on other decisions where developing countries with a small share
of world trade have a majority of WTO votes. The result has been near-hopeless impasse in
the Doha Round and the growing network of FTAs outside the WTO. Moreover, these FTAs
have been predominantly within and among the three industrialized regions that account for
90% of manufactured exports, while the majority of WTO members within the 10% residual
export grouping are increasingly outsiders to the FTA networks.
More specifically for the 10% grouping, within the Americas, when negotiations for a Free
Trade Area of the Americas (FTAA), from 1994 to 2005, failed, the United States negotiated
bilateral FTAs with like-minded free traders, including Chile, Colombia, and Peru, while
members of the Mercosur grouping, centered on Brazil and Argentina, have become increasingly oriented toward commodity exports and are more protectionist in their trade strategies. Likewise, the Eurasian Economic Union between Russia and some former members of
the Soviet Union has resisted more open trade with the EU and other liberal trade forums.
The adverse results for export competitiveness for manufactures for Brazil and Russia were
presented in Table 2.
6 See Ernest H. Preeg, NAFTA: A 50-Year Success Story for U.S. Manufacturing, (MAPI Foundation, 2014).
Copyright © 2015 MAPI All rights reserved.
17
As for the proliferation of FTAs, it has moved forward on both the bilateral and regional levels.
U.S. FTAs in the Americas have already been noted. The EU, since the end of the Cold War,
has actively negotiated FTAs with Central and East Europeans, in some cases leading to EU
membership. And Asians are pursuing numerous bilateral and sub-regional FTAs, recently
including participation by China and India, which are likely to have substantial preferential
trade-creating results.
And there are now two major regional FTA negotiations underway across the Pacific and the
Atlantic: the Trans-Pacific Partnership negotiations, with participation by NAFTA members,
South American free traders, and some Asians, including Japan, Malaysia, and Vietnam, and
the Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations between the United
States and the EU.
These wide-ranging paths for trade liberalization within preferential FTAs, sweeping aside
multilateral trade liberalization within the WTO, raise the systemic question of whether these
many FTAs should be consolidated into a plurilateral FTA, linked to the WTO, and openended for other WTO members to join. Such an initiative is addressed in the policy proposals
that follow, but is raised here in the context of FTA proliferation to highlight the path-breaking role in this direction being played by South Korea. South Korea has concluded FTAs with
the United States and the EU, and is in the final stages of FTA negotiations with China. Seoul
would therefore be the ideal location for an iniThere are now two major
tial consultative group discussion for launching
regional FTA negotiations
such a plurilateral consolidation of bilateral and
underway across the Pacific and regional FTAs, as proposed below.
the Atlantic: the Trans-Pacific
Partnership (TPP) negotiations,
and the Trans-Atlantic Trade and
Investment Partnership (TTIP)
This concludes the historical account of the
serious decline since 2000 in the multilateral
financial and trading systems created at Bretton
Woods 71 years ago. Before turning to proposals for restoring a more balanced, multilateral system, however, a fundamental shift underway
in financial relations, that will critically influence the international economic course ahead,
needs to be addressed: The transition of the dollarized financial system of the past seven
decades into some form of multi–key currency relationship.
The Dollar Twilight Dilemma
In 1960, Yale Professor Robert Triffin predicted that the exchange rate system adopted at
Bretton Woods of currencies pegged to the dollar and the dollar convertible to gold would
soon end, and this became known as the Triffin Dilemma. It was a dilemma because either
of the two alternative courses ahead—continued large U.S. trade deficits financed by others
in dollars or a substantial devaluation of the dollar to reduce the deficit—would produce the
same fatal result for the dollar peg / gold convertibility system. And this is what happened in
August 1971, as described earlier.
The financial system today, with historic irony, faces a similar dilemma, which can be called
the dollar twilight dilemma. The same two alternative courses lie ahead: continued large U.S.
trade deficits financed by others in dollars or a substantial devaluation of the dollar to reduce
the deficit. The dilemma impact on the financial system this time, however, will be more farreaching and involve transition from the dollarized system of the past seven decades into some
Copyright © 2015 MAPI All rights reserved.
18
form of multi–key currency relationship. And this, in turn, will have greater consequences for
international trade and investment than occurred in the 1970s.
I first presented this looming dollar twilight dilemma in 2013,7 but at that time almost all
financial experts dismissed such an outcome in view of the continued overwhelming role of
the dollar as a transaction and reserve currency.8 Developments have since been moving away
from such a dollar-centric financial relationship, however, and there has been growing interest in where the dollarized system is heading. For example, in the fall 2014 edition of The
International Economy, 24 financial experts were asked whether the dollar will remain the
reserve currency. Most replied that the dollarized system would remain for a long time if not
permanently, with responses such as “The dollar will not be replaced,” “The U.S. dollar is far
from being challenged,” and “I see no shift from the dollar.” Some others, however, saw a likely
transition underway from the dollarized system: “A tectonic shift is beginning,” “The world
is gradually evolving toward a multi-currency system,” and “We could eventually see a global
system with three blocs.”
My response to the question is that transition to a multi–key currency relationship is not
only underway but closer upon us than almost all experts project because analysis of recent
forces in play has not been adequately addressed. The radical restructuring of world trade in
the dominant manufacturing sector presented in Part One is the most important such driving force. The decline of the U.S. share of global exports of manufactures from 18% in 2000
toward 10%, and the almost doubling of the sectoral U.S. deficit since 2009 toward $600
billion, are hard facts pointing to a more imminent dollar transition. The following four interacting forces in play will also influence the path toward a multi–key currency world, but face
uncertainties and are in need of more in-depth analysis:
• the shift from the dollar to other currencies to finance trade;
• the rise of the euro and the Chinese yuan as reserve currencies;
• the rapidly rising official U.S. debt to $18 trillion, of which $11 trillion is held by foreigners, and;
• anticipated actions by the United States to curtail currency manipulation.
The shift from the dollar to other currencies to finance trade. This is the most clear and bestdocumented dimension of the decline of the dollarized financial system. Trade in the European
region is shifting to financing in euros and other European currencies, while the share of
Chinese trade financed in yuan has soared from almost nothing in 2009 to about 25% in
2014. The yuan has risen to become the fifth largest currency for international payments from
number 23 in 2013. In December 2014, 45% of international payments were in dollars, 28%
in euros, 8% in sterling, 3% in yen, and 2% in yuan. Thus less than half of payments are now
financed in dollars and this share will continue to decline.
China has actively promoted this shift to yuan financing through the recent establishment of
a network of clearing banks that makes the yuan convertible for financing trade. Such yuan
financing had been carried out principally through Hong Kong, but in March 2014 the Bank
of England and the People’s Bank of China signed such a clearing account, and eight other
accounts were established in Frankfurt, Luxembourg, Sydney, and elsewhere during the course
7 Ernest H. Preeg, Twilight of the Dollar With Technology-Intensive Manufacturing at Center Stage (MAPI Foundation, 2013) pp. 9-17.
8 “Will the Dollar Remain the Reserve Currency? Is the rising global chorus to replace the dollar a reflection of far
deeper problems in the world financial system?”, The International Economy, Fall 2014, pp. 16-31.
Copyright © 2015 MAPI All rights reserved.
19
of the year. One provision related to the China–South Korea FTA, now in the final stages of
negotiation, is that bilateral trade will be financed in the two currencies of the participants and
no longer in dollars.
A connection of this issue with the trade analysis for manufactures in Part One is the disparity of U.S. export concentration by region, far higher for North America, where trade financing in dollars will remain dominant, and much lower in Europe and Asia. Overall, almost
all predictions are for a continued rise of trade financing in yuan and other currencies and
a corresponding decline in dollar financing of trade. In view of the leading-edge importance
for the dollarized financial system of this shift away from dollar financing of trade, it would
be useful if some organization provided quarterly reports of trade financing by the five major
currencies, broken down by principal regions of trade.
The rise of the euro and the yuan as reserve currencies. This is a less clear dimension of the
dollar twilight dilemma than trade financing because of uncertainties about the course ahead
for the euro and the yuan. Since 2009, the dollar has accounted for a little more than 60%
of total official reserve holdings, the euro about 25%, and the remainder has been scattered
among smaller reserve currencies, with the yuan at less than 1%. The reasons for the uncertainty about the euro and the yuan, however, are entirely different.
The problem with the euro is not its availability as a convertible currency for reserve holdings,
but uncertainty about its future, even its survival, in the face of continued large internal financial and trade imbalances. Each time an internal financial crisis intensifies, as in the current
case of a possible Greek exit from the eurozone, there is a modest shift in reserve holdings out
of euros and into dollars, and then back to the 60/25 relationship when the crisis subsides.
No attempt is made here to predict how and when the uncertainty about the future of the euro
will be resolved. The only conclusions offered are that as long as the uncertainty continues,
the 60/25 dollar/euro relationship is also likely to continue, and if resolution of the internal
eurozone financial crisis is achieved to the satOne provision related to the
isfaction of financial markets, the euro share of
China–South Korea FTA, now in global reserve holdings will rise significantly at the
the final stages of negotiation, expense of the dollar share.
is that bilateral trade will be
financed in the two currencies
of the participants and no
longer in dollars
The outlook for the yuan as a reserve currency is
more important for the course ahead, and while
also fraught with uncertainty, is likely over time
to experience a rise to become one of three principal reserve currencies, together with the dollar and the euro. Chinese policy is to have the
yuan become a major international currency, including as a reserve currency, and the central
barrier to this is the lack of yuan convertibility, which is maintained to prevent a rapid rise
of the exchange rate and a consequent decline in export competitiveness. But small, cautious
steps for convertible yuan financial assets have been taken over the past several years and
market pressures are building for such convertibility to accelerate. The “dim sum bond” market for yuan-denominated debt issues outside of China has soared from $1 billion in 2010 to
$12 billion in 2013. The rapid rise of yuan trade financing facilities has already been noted.
In November 2014, the Shanghai-Hong Kong Stock Connect was launched. It allows offshore
investors to buy $49 billion in mainland stock shares, which is a first step toward opening the
Chinese stock market to global investors. Together, these are still relatively small openings to
currency convertibility, but they point to the direction being pursued by Chinese authorities.
Copyright © 2015 MAPI All rights reserved.
20
As for foreign central bank purchases of yuan assets, the Canadian province of British
Colombia was the first to add a dim sum bond to its reserve holdings in 2013. The UK government issued $1 billion of yuan-denominated bonds in October 2014, and Australia announced
the intent to hold 5% of its reserves in Chinese bonds. These are all small steps, but the growth
could quicken, especially if the Chinese government were to facilitate the acquisition of yuan
bonds or other convertible yuan-denominated financial assets by central banks. Looking
ahead, a decisive point for transition from the dollarized financial system will be when the
share of official reserves in dollars drops from 60% to below 50%.
The rapidly rising U.S. official debt to $18 trillion, of which $11 trillion is to foreigners. The
potential impact of this development on the dollar twilight dilemma has received almost no
attention, but it could be a large, market-driven force for transition out of the dollar. The rise
of total U.S. official debt to $18 trillion is the subject of frequent political discussion. It is
rarely reported, however, that the foreign-owned share of this debt has more than quadrupled
from $2.6 trillion in 2000 to $11 trillion in 2014. About half of this $11 trillion is held by foreign central banks and the remainder by private creditors.
An important link of this surge in foreign official debt to the dollar twilight dilemma is the
negative impact of interest payments on this debt for the U.S. current account deficit. These
interest payments have been relatively small over the past several years because the Treasury
rate has been extremely low, thanks largely to the Fed’s quantitative easing policy, which has
now ended. And again, while increased interest payments from a higher Fed rate on the fiscal
deficit is discussed, little account is taken of the corresponding adverse impact on the current
account deficit, which will be relatively greater, and involves two mutually reinforcing dimensions. A 1% rise in the interest rate paid on the $11 trillion of foreign official debt translates
into a $110 billion increase in the current account deficit, currently about $400 billion per
year, and a 3% rise would almost double the current account deficit to 4% of GDP, excessive by
IMF standards.
As for the two dimensions, they can be referred to as the macro-policy and exchange rate effects.
The macro-policy dimension is simply the anticipated rise in interest payments as the Fed rate
rises in response to higher inflation, and with the end of quantitative easing this is a question
not of whether but of when. A rise in the Fed rate of 2% or more over the next couple of years is
not unreasonable, and as these higher rates are applied for refinancing existing foreign debt and
financing continued large trade deficits, the current account deficit will also rise.
The exchange rate dimension is far more difficult to predict, but it could be more powerful
and pointed in its impact. If financial markets—and central banks—judge that the prolonged
U.S. large trade deficit will likely lead to a substantial decline in the dollar, some holders of the
foreign official debt will shift their dollar holdings to other currency financial assets. And this,
in turn, will lead to an even larger actual decline in the dollar, a still higher Treasury rate, and
a further increase in the current account deficit. A key indicator to watch therefore is the U.S.
current account deficit. If it grows substantially as a result of a further increase in the trade
deficit for manufactures and higher interest payments on the foreign debt, the market signals
to shift out of dollars will also increase.
Anticipated actions by the United States to curtail currency manipulation. This final development relates to market reactions to anticipated U.S. policy actions to curtail currency manipulation. The subject is discussed in the following section, including a proposal for such U.S. action.
It is raised here, however, because market—and central bank—anticipation of a successful U.S.
action, which would mean a substantial rise in the Chinese and some other currencies, and a
Copyright © 2015 MAPI All rights reserved.
21
corresponding decline in the dollar, will motivate yet further shifting out of the dollar into other
currency financial assets, and again a further increase in interest payments on the foreign debt,
with adverse impact on the U.S. current account deficit.
*
*
*
*
This concludes the assessment of the dollar twilight dilemma, or perhaps the Preeg dilemma
for short, based on the outlook for a continued large U.S. trade deficit, centered on the manufacturing sector, leading to a substantial decline of the dollar at some point, with a resulting transition from the dollarized financial system of the past seven decades to some form of
multi–key currency relationship. No precise timetable is attempted for this transition. The
dollar has been rising, which is leading to a larger trade deficit in manufactures, bottoming out
of oil prices and reduced domestic drilling mean a smaller decline in oil imports, and interest
payments on the foreign official debt will rise. As a
The fundamental systemic
result, the current account deficit will grow, perhaps
change will be that the
substantially, over the next couple of years, while
United States will no longer
anticipation of a decline in the dollar will consequently grow, confirming the assessment that the
be the dominant center of
transition to a multi–key currency financial world is
the system, maintaining a
moving at a faster pace than most observers realize.
passive exchange rate policy
and acting as importer of last But the precise time scenario cannot be predicted.
resort for export competitors
engaged in mercantilist
exchange rate policies
The dollar transition also raises a number of policy
questions as to what kind of multi–key currency
relationship will emerge, how it will operate, and
in particular what rules might be adopted to limit
mercantilist exchange rate policies. The fundamental systemic change will be that the United
States will no longer be the dominant center of the system, maintaining a passive exchange
rate policy and acting as importer of last resort for export competitors engaged in mercantilist
exchange rate policies. One approach would be restoration of a rules-based exchange rate system for major currencies, as proposed in the following section. A more threatening alternative
would be even more powerful financial market forces in play, with more autonomous national
exchange rate policies, and a greater threat of currencies wars.
A Two-Track Initiative to Restore a Fair and Balanced Multilateral System
The previous two sections described the serious deterioration of the rules-based multilateral
economic system created at Bretton Woods in 1944, centered on growing trade imbalances in
the dominant manufacturing sector and the transition of the dollarized financial system into
some form of multi–key currency relationship. Current official discussions are not seriously
addressing actions to reduce these imbalances and restore a rules-based multilateral system,
most importantly related to the trade impact of exchange rate policies. Such a restoration
strategy is therefore proposed here to help focus the official minds.
The United States, as explained in the concluding section of this report, will have to play a
strong and sustained leadership role if there is to be such restoration. The U.S. initiative would
thus begin with a comprehensive strategy statement by the president. He or she would state
that the United States is no longer able or willing to sustain extremely large and growing trade
Copyright © 2015 MAPI All rights reserved.
22
deficits in strategic, technology-intensive industries, with consequent large current account
deficits and a further buildup of the $11 trillion official foreign debt. A major reduction if
not elimination of the deficits is needed and will require both a domestic economic agenda
to stimulate technology-oriented job creation and growth and major changes in the international economic system to ensure fair and balanced trade in ever more globalized markets. The
domestic economic agenda is not addressed here, and the following focuses on the trade and
exchange rate policy dimensions of the agenda.
The starting point for the international agenda to restore a rules-based multilateral system is
that exchange rate and trade policies are deeply interrelated and need to be dealt with jointly.
Moreover, since the trade-distorting impact from mercantilist exchange rate policies is currently by far the larger deterrent to fair and balanced trade, while trade barriers are relatively
low among the largest trading nations, the proposed agenda begins with restoration of IMF
and WTO obligations not to pursue such mercantilist exchange rate policies, followed by a
two-stage trade strategy to negotiate an open-ended plurilateral FTA within the WTO, and
concludes with the linkage of exchange rate and trade policy commitments within the restored
multilateral system.
Restoration of IMF and WTO obligations not to pursue mercantilist exchange rate policies. IMF
Article IV obligates members not to manipulate their currencies to gain an unfair competitive
advantage in trade, with manipulation defined as protracted, large-scale official purchases of
foreign exchange that have the direct and immediate effect of lowering the exchange rate below
its market-based level. IMF members are also obligated to maintain convertible currencies, at
least on current account. The WTO, under GATT Article XV, states that members shall not, by
exchange rate actions, frustrate the intent of the agreement, which centers on reciprocal access
to markets for trade.
As recounted earlier, these exchange rate obligations, despite periodic disputes, were generally honored from 1971 to about 2000 by the principal industrialized trading nations, but have
since been greatly violated, most importantly by China. China has purchased about $4 trillion
of foreign exchange over the past dozen years, which is protracted and large scale by any conceivable definition. As a result, China has run a very large current account surplus, centered
on a growing trade surplus in price-sensitive manufactures that reached $1 trillion in 2014,
and holds a greatly excessive level of $4 trillion of foreign currency reserves. Some other Asian
nations, with China their dominant trading partner, have linked their currencies to the yuan,
which has resulted in currency manipulation on their part as well, and growing trade surpluses
in manufactures, particularly with the United States.
The de facto repudiation of IMF Article IV has come from the United States. Twice each year,
over more than 10 years, the secretary of the Treasury, as required, has reported to the Senate
Banking Committee that no nation, including China, has manipulated its currency in violation
of its IMF obligations. In other words, currency manipulation does not exist, and therefore there
is no reason to discuss it in the IMF. This has also created a trade policy conflict between the
president and the Congress. Bipartisan majorities in both houses have pressed the president to
include a provision within the TPP trade agreement prohibiting currency manipulation. But if
the secretary of the Treasury states every six months that currency manipulation does not exist,
how can the trade representative pursue a major provision for such a nonexistent problem?
The obvious U.S. policy response is for the secretary of the Treasury, in his next semiannual
report, to state that China and some others are indeed manipulating their currencies to gain an
unfair competitive advantage in trade, and that such manipulation should stop, or else. This,
Copyright © 2015 MAPI All rights reserved.
23
in fact, almost happened in 2012, when presidential candidate Romney stated that, if elected,
he would declare China a currency manipulator on day one of his presidency, but, of course, he
lost the election.
If the United States does take on the currency manipulation issue, as proposed here, the question is what happens next after the initial accusation, and what is meant by “or else”? This will
depend on how China and others accused of currency manipulation react. There would certainly be bilateral consultations and discussion in the IMF. Perhaps China, taking the United
States seriously and realizing the weakness of its position related to IMF Article IV, would
agree to a prompt and orderly transition to a market-based, convertible currency, free of currency manipulation. Essentially, China would end official foreign currency purchases, at least
as long as it maintains a current account surplus, and make its currency convertible on current
account, which is what the major industrialized trading nations have done since the 1970s.
There are reasons such agreement might emerge. China needs to restructure its economy
away from greatly excessive, environmentally devastating industrial production, driven by a
$1 trillion annual trade surplus in manufactures. And the United States has trade-bargaining
leverage, with imports from China of strategically
If the United States does take
important manufactures five to six times larger
on the currency manipulation
than U.S. exports to China.
issue, as proposed here, the
question is what happens next If, however, early agreement cannot be reached,
after the initial accusation, and the United States would have to take countervailing action, which cannot be proposed in specific
what is meant by “or else”?
terms without knowing the initial Chinese reaction.
There could be an interim surcharge imposed on imports from China, as the United States
did in similar circumstances in August 1971. Since the IMF does not have a dispute settlement
mechanism, the United States, in parallel, could request a WTO dispute panel based on GATT
Article XV obligations, which would follow the same substantive lines as being raised in the
IMF consultations. Additional steps could include counter U.S. purchases of Chinese bonds
and other convertible financial assets to the extent they were available. A more forceful action,
as practiced against currency manipulation during the 1930s, would be some form of import
licensing requirement for currency manipulators, with a set quantity of licenses put up for
auction.
Whatever the U.S. strategy for confronting Chinese and other currency manipulation, it should
be pursued in concert with trading partners also suffering the adverse trade effects from the
manipulation. Certainly NAFTA partners Canada and Mexico would fall in this category, and
the EU should likewise want to restore IMF exchange rate obligations, especially as long as the
United States remained out front in dealing with China. Within Asia, the reactions would be
mixed, but at least some would see the benefits over the longer term of more secure and balanced trade relationships with China and the United States.
In addition to the specific form of currency manipulation contained in IMF Article IV—protracted, large-scale official purchases of foreign exchange—other charges of currency manipulation have been made, including by members of the U.S. Congress, which would need to be
addressed, although a case for violation of existing IMF obligations would generally not be
feasible. For example, when senior officials talk down their currency to gain a competitive
advantage in trade, even when their economy is in sustained large current account surplus,
as has been the recent practice by eurozone leaders, this can be considered unjustified currency manipulation with mercantilist intent. The far more important monetary policy issue of
Copyright © 2015 MAPI All rights reserved.
24
maintaining extremely low if not negative interest rates through quantitative easing and other
measures, which also puts downward pressure on the exchange rate, is far more complex. The
United States led the recent way in this area, a path that is now being followed by the eurozone
and Japan. One distinction that can be raised is that the mercantilist result from such monetary policy is more detrimental for balancing external accounts when the quantitative easer
is in large current account surplus, as is the eurozone, than when done by a nation in large
current account deficit, as was the United States. But this monetary policy relationship to currency manipulation will center on bilateral discussions rather than IMF obligations.
A two-stage trade strategy to negotiate a plurilateral FTA within the WTO. The deterioration of
the multilateral trading system adopted at Bretton Woods, based on the most-favored-nation
principle of progressively lower, non-discriminatory barriers to trade, was addressed earlier
in terms of the proliferation of discriminatory bilateral and regional free trade agreements in
recent years, together with stalemate in WTO multilateral trade liberalization. These FTAs lead
to more open and liberal aggregate trade, but the political orientation of competing economic
blocs poses the threat of more inward-directed regional economic strategies, which could lead
to trade conflict. In any event, the gains from trade for all nations would be increased through
a return to a non-discriminatory multilateral trade relationship among all, or almost all, major
trading nations, as proposed here.
The proposal is for a two-stage process over the next several years to consolidate the many
bilateral and regional FTAs into an open-ended plurilateral FTA within the WTO. Stage one
would be completion of the two major regional FTAs under negotiation—the TPP and the
TTIP—plus any other FTAs that may be concluded, especially within Asia. These two regional
FTAs, in particular, would become comprehensive building blocks for the consolidation of all
FTAs within the plurilateral agreement.
The current outlook for the TPP and the TTIP is not elaborated here. They are in the final
stages of negotiation and will likely reach a decisive conclusion, one way or the other, over the
coming year. The United States should place high priority on their successful conclusion, and
the bipartisan congressional support needed for approval would be greatly strengthened if the
United States, in parallel, took firm action to end mercantilist currency manipulation, centered
on China, as proposed in the previous section. The mutual gains from trade for the United
States from the FTAs could then be more clearly demonstrated, especially in trade with countries with higher levels of protection to begin with, such as Malaysia and Vietnam within the
TPP negotiations.
The stage two consolidation of all FTAs into a plurilateral agreement would be a broadly
defined initiative launched by preparatory discussion within a high-level consultative group.
Such a group could be established in 2015 or 2016, and its conclusions, including a decision to
begin formal negotiations, would probably take at least a year, during which time the outcome
for the regional FTAs and actions to end currency manipulation would become clear. The ideal
location for launching the consultative group, as noted earlier, would be Seoul, South Korea,
in view of South Korea’s FTAs concluded or under negotiation with the United States, the EU,
and China, and the fact that the four of them together account for 60% of global exports of
manufactures.
A big initial question is whether China and India would participate in the consultative group,
and there is good reason to believe that they would. Both have recently become engaged in
FTA negotiations within Asia, so participation in preliminary discussion of a broader, plurilateral FTA should be in their interest. A recent analysis of the mutual benefits of a U.S.-China
Copyright © 2015 MAPI All rights reserved.
25
FTA was favorable for both countries, and the benefits from a broader FTA should be even
more so.9 The linkage of a plurilateral FTA to prohibition of currency manipulation, as discussed below, would likely be opposed by China, but this should not prevent China from
participating in preparatory trade discussions.
The engagement of India in a plurilateral FTA initiative is more promising in view of the economic reforms, including more open trade and investment, being pursued by Prime Minister
Narendra Modi, and the fact that Indian economic growth is now comparable to that of China.
The recent strengthening of U.S.-Indian relations, as declared during President Obama’s
visit to India in January 2015, also demonstrated mutual foreign policy as well as commercial interests in a deepening economic relationship between the two largest democracies.
Indeed, a more immediate trade initiative, which would add greatly to the momentum for
a stage two plurilateral agreement, would be negotiation of a U.S.-India bilateral free trade
agreement over the next couple of years, which should be given serious consideration by both
governments.10
For U.S. manufactured exports, it is important to note that even if China chooses not to be an
initial participant in a plurilateral FTA, at least 70% of U.S. global manufactured exports could
still be to markets open to free trade, as shown in Table
A more immediate trade
3: 35% of U.S. manufactured exports go to NAFTA tradinitiative, which would add ing partners, 20% to West Europe, and another 15% to
greatly to the momentum
South Korea and other actual or potential FTA partners,
for a stage two plurilateral including Japan and other Asians within the TPP. Only
7% of U.S. manufactured exports go to China, although
agreement, would be
27% of imports come from China.
negotiation of a U.S.-
India bilateral free trade
agreement
A plurilateral FTA would be broad in scope, in effect a
trade and investment agreement, although not as comprehensive and detailed as some U.S. bilateral agreements, such as NAFTA and the pending TTIP. But it should eliminate almost all tariffs and
other border restrictions on trade, and include a number of non-tariff barriers. Some of these
issues were discussed by the principal participants in the Doha Round or are contained in
existing plurilateral agreements within the WTO, such as for government procurement, all of
which could be strengthened in a plurilateral FTA.
In systemic terms, the plurilateral agreement would be incorporated in the WTO, with access
to dispute settlement and other procedures within the organization, although with an independent management structure for the implementation and continuing evolution of the plurilateral agreement. Important in this regard would be an open-ended provision to welcome entry
by other WTO members as they saw it in their interest to be inside rather than outside a free
trade agreement accounting for the majority of world trade.
The linkage of exchange rate and trade policy commitments within the multilateral system.
A successful outcome for an initiative to end currency manipulation, centered on the United
States and China, would be the principal linkage between exchange rate and trade policies, but
some explicit commitment within the WTO plurilateral FTA would also be appropriate. The
fact that the IMF does not have a dispute procedure for dealing with violations of IMF obligations related to trade, together with the underlying linkage of trade and exchange rate policies,
9 See C. Fred Bergsten, et al., Bridging the Pacific: Toward Free Trade and Investment between China and the
United States (Peterson Institute for International Economics, 2014).
10 For background and analysis of a U.S.-India FTA, see Ernest H. Preeg, India and China: An Advanced Technology
Race and How the United States Should Respond (MAPI and CSIS, 2008).
Copyright © 2015 MAPI All rights reserved.
26
justifies some form of explicit inclusion in the plurilateral agreement. It could take the form
of a statement of how the policies are deeply related and that GATT Article XV is available to
resolve any dispute that should arise, including as related to IMF obligations. It could also be
emphasized that an undervalued exchange rate has an across-the-board mercantilist impact
on trade, providing increased protection for all imports and a subsidy for all exports. An alternative would be to build a trade/exchange rate dispute procedure within the FTA, although
a more targeted commitment to Article XV obligations would probably be sufficient and
preferable.
*
*
*
This is the proposal for a two-track initiative to restore a fair and balanced multilateral trade
and financial system. It is practical and feasible, although the showdown over currency manipulation with China would likely be the most important international economic issue of dispute
since August 1971, or even greater in view of current Chinese financial policies essentially
operating outside the IMF system of currency convertibility and the prohibition of specifically
defined currency manipulation. The decisive question as to whether such a comprehensive
initiative will be launched over the next couple of years is whether the necessary strong and
sustained leadership will be forthcoming, and the judgment offered here is that this can only
come from the United States.
The Indispensable U.S. Leadership Role
Henry Kissinger’s recent, monumental World Order11 traces the course of nation state relationships as defined and launched by the Treaty of Westphalia in 1648, stressing the importance of
balanced power relationships to maintain a peaceful, rules-based system of sovereign states.
His focus is on political relationships and the tragic wars that occurred when one participant—
France, Germany, the Soviet Union—became overly powerful and felt itself beyond rulesbased, nation state constraints. The Kissinger book, however, treats economic relationships
lightly, and this study therefore constitutes an adjunct work for the economic order as created at Bretton Woods in 1944, a rules-based trade and financial system among nation states,
and their often-troubled power relationships that have intensified since 2000. A parallel can
indeed be drawn that China, with a $1 trillion annual trade surplus in manufactures and $4
trillion in the central bank, now feels itself beyond rules-based IMF financial constraints.
The Kissinger book also stresses the critical role of leadership for maintaining an orderly
nation state system, and is most detailed for the U.S. leadership role during the 20th century
of hot and cold wars: “American leadership has been indispensable, even when it has been
exercised ambivalently.”12 And again, such American leadership has characterized the course
of the Bretton Woods economic system, as recounted here, and it is fitting to conclude this
study with comment on the daunting and indispensable U.S. leadership challenge for the world
economic order in the immediate years ahead.
Restoration of the rules-based trade and financial system will center on the Big Three global
economic powers—the United States, China, and the EU—but the indispensable leadership for
achieving this rests solely with the United States. The other two are currently beset by over11 Henry Kissinger, World Order (Penguin Press, 2014).
12 Kissinger, op. cit., p. 373.
Copyright © 2015 MAPI All rights reserved.
27
riding internal economic interests and lack the forward-looking political cohesion necessary
to confront the serious and possibly fatal challenges facing the world economic order. Chinese
economic strategy is heavily oriented to high export growth and a massive trade surplus for the
technology-intensive manufacturing sector, while the top-priority EU economic challenge is
to resolve financial crises within the eurozone, which benefits from a large trade surplus with
non-members.
This leaves the United States as the only one of the Big Three in a position to provide the necessary forceful and sustained leadership for restoring the rules-based multilateral system. U.S.
leadership, in fact, has been at the forefront for 70 years, from the creation of the multilateral
system at Bretton Woods through the series of trade-liberalizing GATT rounds, the reformulation of exchange rate policy obligations in August 1971, and the more recent proliferation of
bilateral and regional FTAs. But the economic power base for forceful U.S. policy leadership
has substantially diminished since 2000, as presented in Part One, with the U.S. global market
share for the dominant manufacturing sector of trade down toward 10% and the sectoral trade
deficit approaching $600 billion. And this, in turn, is precipitating transition of the dollarized
financial system into some form of multi–key currency relationship.
The conclusion drawn here, however, is that despite this decline in the U.S. relative power position within the economic system, the United States still can and should play the decisive leadership role, in the mutual economic interest of all trading nations, for restoration of a multilateral,
rules-based economic system. Such leadership will require a forward-looking strategy based
on two fundamental economic relationships that have not been part of recent official deliberations. The first is that trade and exchange rate policies are deeply linked substantively and need
to be brought together within the multilateral system. In a world of ever-lower trade barriers,
exchange rates are the principal policy instrument
Despite this decline in the
for achieving fair and balanced trade, particularly
U.S. relative power position
for price-sensitive manufactures. And second, the
within the economic system,
United States is no longer able or willing to sustain
the United States still can
a passive exchange rate policy at the center of a doland should play the decisive
larized financial system, and thus accepting the role
leadership role for restoration of importer of last resort with a very large current
of a multilateral, rules-based
account deficit.
economic system
From these two fundamentally changed relationships, a specific strategy to restore a linked and rules-based multilateral trade and financial
system has been outlined in the previous section. Implementation of such a strategy would
proceed on three distinct tracks with trading partners.
The first track would be to build a consolidated grouping of like-minded advanced and newly
industrialized trading partners in support of the strategy. This should be relatively straightforward given forceful and forward-looking U.S. leadership. Canada and Mexico are in basic
conformity with the strategic objectives within NAFTA, and the EU is essentially in line, albeit
in shorter-term eurozone financial difficulties. Asian reactions would be mixed, but Japan,
South Korea, and some other newly industrialized exporters should see the strategy in their
longer-term interest, especially if the United States confronts China over exchange rate policy.
And some South American and other nations would also prefer to be inside rather than outside
the like-minded grouping.
The second track would be with China, and it would be a showdown between China’s widespread disregard for the Bretton Woods rules-based economic system, most importantly as
Copyright © 2015 MAPI All rights reserved.
28
related to exchange rates, and a restoration coalition led by the United States. It could lead
to impasse and the imposition of interim U.S. sanctions to reduce the huge trade imbalance
in the dominant manufacturing sector of bilateral trade, but more hopefully the two global
economic powers could engage in serious discussion as to how they can collaborate within an
economic order that would result in mutual and balanced benefits for both nations and for the
broader international trading community. The United States, in any event, should make absolutely clear that continuing the current Chinese mercantilist route is no longer acceptable.
The third track would be with the rest of the world, with a wide diversity of economic interests,
from predominantly oil-exporting nations to newly industrialized nations on a more protectionist trade policy course to the large number of least-developed nations that account for a
relatively small share of world trade. The most important member of this grouping is India,
now engaged in a more open trade and investment strategy that should be compatible with the
first track grouping. Other important trading nations, such as Indonesia and Brazil, should
at least engage in serious discussion of joining in the preparatory talks, as well as about the
disadvantages of remaining outside the grouping. In any event, the proposed plurilateral FTA
within the WTO, linked to IMF obligations for exchange rate policy, should be open-ended as
outside nations come to see it in their interest to join. And the least developed should continue
to receive preferential access to markets for their exports as aid programs for job-creating,
export-oriented investment move forward.
*
*
*
This is the broad picture of a U.S. leadership strategy to restore a rules-based multilateral
trade and financial system. To be successful, however, as has been the case for U.S. leadership since Bretton Woods, there would need to be strong bipartisan political support. Certainly
linking together further multilateral trade liberalization with a determined end to Chinese
and other currency manipulation would be a big help for building large bipartisan majorities
of support in the Congress. And at the risk of appearing wildly optimistic, the most important
step to ensure strong U.S. leadership in the critical years ahead would be if both presidential
candidates in 2016 supported restoration of a rules-based trade and financial system as a high
priority, with agreement expressed during the debates.
And to close on a far less optimistic note, what lies ahead in the absence of such U.S. leadership? The current course of growing trade imbalances centered on the strategically important
manufacturing sector, largely without rules to contain mercantilist exchange rate policies, is
headed toward conflict. National economic strategies will likely be more combative rather than
cooperative. Financial markets will gather momentum in judging and acting to anticipate the
next turn of events. And disruption of international trade and investment will almost certainly
be increasingly painful, including for the United States.
Copyright © 2015 MAPI All rights reserved.
29
About the Author
Ernest Preeg holds a Ph.D. in economics from the New School for Social Research. His engagement with international trade began by sailing from ordinary seaman up to chief mate in the
American merchant marine. His government positions included member of the U.S. delegations to the Kennedy and Uruguay Rounds of trade negotiations, Deputy Assistant Secretary
of State for International Finance and Development, Chief Economist at USAID, White House
Executive Director of the Economic Policy Group, and American Ambassador to Haiti. His
books include Traders and Diplomats: An Analysis of the Kennedy Round of Negotiations
under the General Agreement on Tariffs and Trade (The Brookings Institution, 1970);
Economic Blocs and U.S. Foreign Policy (National Planning Association, 1974); Traders in a
Brave New World: The Uruguay Round and the Future of the International Trading System
(University of Chicago Press, 1995); The Emerging Chinese Advanced Technology Superstate
(MAPI and the Hudson Institute, 2005); India and China: An Advanced Technology Race and
How the United States Should Respond (MAPI and CSIS, 2008); and Twilight of the Dollar
with Technology-Intensive Manufacturing at Center Stage (MAPI, 2013).
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Copyright © 2015 MAPI All rights reserved.
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