Commentary | Economic Growth

Problems in China trade deal require additional protections—Viewpoints | EPI

Opinion pieces and speeches by EPI staff and associates.


Problems in China trade deal require additional protections

by Jeff Faux

The debate in Congress over the granting of permanent normal trade relations with China is not a fight between free traders and protectionists. It is a debate over who gets protected by the rules of the new global marketplace.

The proposed pact with China contains several hundred pages, including detailed U.S.-style protections for American multinational investors looking to take advantage of Chinese labor that is cheap because workers lack basic human rights. The objective for American business is not the Chinese domestic market, but rather the business-friendly environment for investing in production for export to the United States, guaranteed by the bloody hand of a government whose treatment of its own people, even according to the U.S. State Department, deteriorated further last year.

We’ve been here before. Almost seven years ago, the Clinton administration used the same arguments to sell Congress the North America Free Trade Agreement (NAFTA). NAFTA, it claimed, would allow U.S. business to sell more cars and other manufactured goods to a rapidly expanding Mexican middle class. As a result, U.S. exports would rise faster than imports, creating a net increase in good jobs here.

Pleas to include enforceable labor rights in the treaty were rejected as unnecessary. Warnings that NAFTA was more of an investor protection agreement than a trade deal were dismissed as reflecting an ignorance of Economics 101.

The rest is history. Factories making autos and parts, computers, television sets, textiles and telecommunications equipment closed in every section of the United States. The American owners, whose investments were now protected by international treaty, set up facilities south of the border to export back to the United States. Investors in these factories were further aided by a sudden drop in the value of the peso, against which NAFTA offered no protection. This made Mexican imports even cheaper, and U.S. exports more expensive. A small surplus with Mexico turned into a $23 billion deficit.

U.S. workers lost more than a half million jobs. If they found others, they suffered substantial pay losses. Real wages in Mexico dropped 25 percent below their 1993 level, and the rate of extreme poverty (living below $2.80 a day) rose sharply to 38 percent of the population. The U.S.-Mexico border, where most of the new production is naturally located, is an environmental nightmare.

If Congress ratifies the China deal, we can expect a similar result – with perhaps an even greater impact. The Chinese government is even more oppressive of human and worker rights than is the Mexican government. Moreover, it has already given signals that it will not respect the agreement it just negotiated with the United States. While U.S. officials have been telling farmers that the Chinese have agreed to import 7.3 million tons of American wheat, the chief Chinese trade negotiator told a Hong Kong newspaper that it is a “complete misunderstanding” to actually expect the grain to enter China.

Even the administration’s own International Trade Commission estimates that we will see a substantial rise in U.S. multinational investment in China, with whom we already have a trade deficit of $70 billion. Economist James Burke has estimated that for every 10 percent increase in U.S. companies’ direct investment in China, U.S. imports from China rise about 7.5 percent and exports to China drop about 2 percent.

The administration contends that any increase in imports from China will come at the expense of other Asian countries, not U.S. producers. Similarly, we were assured that under NAFTA, Mexican imports would substitute for those from China. In fact, while imports from Mexico rose 175 percent, imports from China rose 160 percent.

None of this suggests that we should not trade with China or any other country. But once burned, twice shy. This proposed pact with China should be rejected, and a new deal negotiated that includes protections for workers and the environment, not just protections for investors.


Jeff Faux is president of the Economic Policy Institute in Washington, D.C.

See related work on Economic Growth