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The U.S. trade deficit: Made in China? Chad P. Bown, Meredith A.…
Tags: account balance, bown, comparative advantage, current account, daisuke, dollar value, goods merchandise, gross domestic product, international markets, mcculloch, merchandise trade balance, nakajima, national trade policies, policy barriers, tangible goods, tariffs quotas, trade deficit, trade disputes, world trade organization, world trade organization wto,Pages: 17
Language: english
Created: Tue Nov 1 14:16:57 2005
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The U.S. trade deficit: Made in China?
Chad P. Bown, Meredith A. Crowley, Rachel McCulloch, and Daisuke J. Nakajima
Introduction and summary will mean less production and fewer jobs in the United
Most economists and policymakers agree that open States. A large and persistent trade deficit may also
international markets create important mutual benefits be worrisome to the extent that it increases U.S. reli-
for the United States and its trading partners. By encour- ance on international borrowing--the sale abroad of
aging countries to focus on the activities in which they U.S. bonds and other securities.
have a comparative advantage, the free international Overall U.S. performance in trade is most frequent-
exchange of goods and services allows all countries ly reported and publicized as the trade balance, or more
to raise their living standards. Accordingly, the United specifically as the merchandise trade balance. This
States played a central role in the establishment in number, released monthly by the U.S. Department of
1995 of the World Trade Organization (WTO), which Commerce, is the difference between the dollar value
now sets the ground rules for national trade policies of all U.S. exports of tangible goods (merchandise)
worldwide and helps resolve trade disputes among its and the dollar value of all U.S. imports of tangible goods.
members.1 Within the WTO framework, U.S. officials Broader measures include the balance on goods and
have worked to eliminate remaining tariffs, quotas, services trade and the current account balance.3 Fig-
and other policy barriers to trade. At the same time, ure 1 illustrates the recent increase in the merchandise
they have also negotiated agreements that further en- trade deficit as a share of gross domestic product
courage trade flows with particular partners, such as (GDP). In 2004, the U.S. merchandise trade deficit
the North American Free Trade Agreement (NAFTA) topped $665 billion or 5.6 percent of GDP.4 This def-
with Canada and Mexico. icit set a new record, and most analysts are forecast-
Ongoing global trade liberalization has contrib- ing an even larger trade gap in 2005.
uted to a major expansion of both exports and imports The overall trade balance can be expressed as the
for the United States and most other countries. How- sum of the bilateral trade balances added up over all
ever, freeing trade from policy restrictions does not en- trading partners or, alternatively, as the sum of the in-
sure that trade among nations will be balanced, either dustry-level trade balances added up over all industries.
overall or with any particular trading partner. Aggre- In a trading system with many countries and many
gate trade deficits or surpluses reflect underlying goods, there is no theoretical reason to expect trade
macroeconomic conditions in each country. In some to be balanced with any particular partner or in any
countries, such as China in recent years, exports have
grown faster than imports, resulting in an overall trade
surplus. In other countries, including the United States, Chad P. Bown is an associate professor in the Department
of Economics and International Business School, Brandeis
imports have grown faster than exports, resulting in University, and a nonresident fellow of the Brookings
an overall trade deficit.2 Moreover, China has emerged Institution. Meredith A. Crowley is an economist at the
as a major source of U.S. imports, leading to a wide- Federal Reserve Bank of Chicago. Rachel McCulloch is
the Rosen Family Professor of International Finance at
spread view that the record overall U.S. trade deficits Brandeis University. Daisuke J. Nakajima is an associate
of recent years are "made in China." A large and per- economist at the Federal Reserve Bank of Chicago. The
sistent trade imbalance may raise policy concerns be- authors thank Stephen Cecchetti, Rashmi Shankar, Blake
LeBaron, Michael Kouparitsas, and Craig Furfine for
cause of its perceived links to domestic production and helpful comments and suggestions.
employment--specifically, the fear that more imports
2 4Q/2005, Economic Perspectives
FIGURE 1 that a reduction in the U.S. trade deficit
U.S. merchandise trade deficit, percent of GDP
with China will translate into a similar re-
duction in the nation's overall trade deficit.
percent The purpose of this article is to examine
7 the bilateral trade relationship with China,
particularly the likely consequences of
6
instituting measures intended to limit
5 U.S. imports from China. Our appraisal
of recent and prospective U.S. trade policy
4 focuses on textiles and apparel, sectors
where the growth of imports from China
3
has been especially prominent. We also
2 consider the role that yuan appreciation
might play in shrinking the bilateral and
1 overall trade deficits.
0 We begin our analysis by examining
1980 '84 '88 '92 '96 2000 '04
the macroeconomic factors that shape the
trade balance. The U.S. merchandise trade
Source: U.S. Bureau of Economic Analysis.
deficit is necessarily equal in size to the
difference between the nation's total do-
mestic goods production and its total ex-
particular product category. Even when a country's penditure on goods. Sectoral trade policies, such as
trade is balanced overall, it will usually show surpluses recent measures to limit certain apparel imports from
with some partners and deficits with others, and like- China, can change the composition of U.S. trade by
wise surpluses in some industries and deficits in others. shifting U.S. import demand toward other foreign sup-
These partner-specific and sector-specific balances are pliers or substitute products. However, reduction of
determined by factors such as comparative advantage, the overall trade deficit will occur only to the extent
input prices, exchange rates, and trade policies. None- that total U.S. production rises or total U.S. expendi-
theless, bilateral and sectoral imbalances do sometimes ture falls; neither is a probable outcome of targeted
become a focus of attention, especially when the over- trade policies affecting only selected trading partners
all imbalance is large. This, in turn, may give rise to and products. Yuan appreciation might likewise
policies that focus on specific partners or
traded products rather than on the macro-
economic conditions that underlie the over- FIGURE 2
all imbalance. For the United States in
Bilateral deficits on U.S. trade with China, Japan,
2005, this has meant a focus on China and all other countries, percent of GDP
and textiles.
The U.S. merchandise trade deficit percent
with China alone accounted for about $162 6
China
billion in 2004, or nearly one-quarter of Japan
5
the total U.S. trade deficit, up from a neg- All other countries
ligible share in the mid-1980s.5 Figure 2 4
highlights the growing contribution of
China to the overall deficit and the declin- 3
ing contribution of Japan over the same
2
period. Coming at the same time as record
overall trade deficits, the rapidly growing 1
bilateral trade deficit with China has
prompted calls for new barriers to U.S. 0
imports from China and pressure on
-1
China to allow further appreciation of the
6
1980 '83 '86 '89 '92 '95 '98 2001 '04
yuan. Measures directed specifically at
Source: U.S. Bureau of Economic Analysis.
China often reflect an implicit assumption
Federal Reserve Bank of Chicago 3
change the composition of U.S. trade by shifting U.S. on goods reveals an important relationship between
demand toward alternative suppliers. Again, the overall the overall trade balance and macroeconomic condi-
trade gap can change only to the extent that changes tions. For each category of goods at the industry or sub-
in the international value of the dollar result in more industry level, U.S. net exports (exports minus imports)
U.S. production or less U.S. expenditure. However, must equal total domestic production of such goods
an appreciation of the yuan against the dollar that is minus total domestic expenditure for such goods.7
not fully anticipated by market participants would Summing over all categories of goods, this implies that
likely be associated with an unexpected reduction in the nation's merchandise trade balance must equal the
the rate of accumulation of U.S. dollar-denominated difference between total goods production and total
assets by the Chinese. This, in turn, could cause an goods expenditure. The overall trade deficit thus re-
unexpected increase in U.S. interest rates. Because flects macroeconomic conditions and can change only
higher interest rates tend to reduce U.S. expenditure, to the extent that those macroeconomic conditions
yuan appreciation could reduce the overall U.S. trade change. Although sectoral policies, such as tariffs and
gap as well as the size of the bilateral deficit with quotas, can have important effects on the trade balances
China. Although it is too soon to evaluate the full con- of particular industries or with particular trading partners,
sequences of China's new exchange rate policy, one these policies can reduce the overall trade deficit only
immediate effect of the small appreciation announced to the extent that they affect macroeconomic conditions,
on July 21, 2005, has been to change expectations-- that is, to the extent that they increase total domestic
most market participants now see further appreciation production or reduce total domestic expenditure.8
as likely. The merchandise trade balance reflects only trans-
In the second part of this article, we take a closer actions involving tangible goods, which account for a
look at current and prospective U.S. trade policies to- declining share of total U.S. production and expendi-
ward China. In the 1980s, U.S. policymakers took steps ture. To link the nation's overall income and expendi-
to limit surging imports from Japan (see box 1). Now ture to its international position, we use the current
they seem inclined to take similar steps to reduce U.S. account, which includes not only transactions involving
imports from China. Although sector-specific measures tangible goods but also trade in services, net foreign
cannot have an important effect on the overall U.S. income, and unilateral transfers. In macroeconomic
trade imbalance, they may have a significant impact terms, the current account deficit is equal to the differ-
on trade flows at the industry level, including U.S. ence between the nation's total income and its expen-
and Chinese trade with other nations. Past experience diture on consumption and domestic investment or,
with U.S. policies targeting specific foreign suppliers, equivalently, to the gap between the nation's total
such as Japan and Korea, suggests that restrictions on (public and private) savings and its total domestic
U.S. imports from China are more likely to divert U.S. (public and private) investment spending.
demand toward other low-cost foreign suppliers than The counterpart to the current account balance is
toward domestic import-competing industries (Moore, the financial account balance, which records net U.S.
1996; Prusa, 2001; Bown, 2004). Such restrictions spending for foreign assets (U.S. capital outflows) and
may also affect the flow of Chinese exports toward foreign spending for U.S. assets (U.S. capital inflows).
other potential markets (Bown and Crowley, 2005b), The U.S. financial account surplus, roughly equal in
perhaps causing other importing countries to impose size but opposite in sign to the current account deficit,
their own trade barriers on the same types of products. is loosely interpreted as indicating U.S. net borrowing
Indeed, research suggests that the probable result of from the rest of the world--the borrowing needed to
selective trade policies is the reduction of national and cover the gap between U.S. spending and receipts as
world well-being without a significant effect on the recorded in the current account.9 The large U.S. cur-
overall trade balance. rent account deficit and the large increase in U.S. bor-
rowing from the rest of the world are therefore two
External imbalances and domestic sides of the same coin.
macroeconomic fundamentals While reports in the popular press often portray
We have noted that the overall trade balance can the trade and current account deficits as alarming de-
be expressed as the sum of the bilateral trade balances velopments, economic theory shows that a trade or cur-
added up over all trading partners or as the sum of the rent account deficit (or surplus) is inherently neither bad
industry-level trade balances added up over all indus- nor good in itself.10 Whether a deficit should be seen as
tries. However, an alternative approach comparing do- a problem depends on a country's present and future cir-
mestic production of goods and domestic expenditure cumstances. The deficit is a benign development only
4 4Q/2005, Economic Perspectives
FIGURE 3 However, empirical analysis reveals no
Components of the U.S. current account,
causal link from trade deficits to macro-
percent of GDP economic performance or job creation.12
percent Why focus on China?
Why
2
Analysts estimate that the U.S. cur-
1 rent account deficit, now 6 percent of
GDP, would need to drop to 23 percent
0
of GDP in order to achieve long-run sus-
-1 tainability (Kouparitsas, 2005; Roubini
and Setser, 2004).13 Thus, without reduc-
-2
tions in other bilateral imbalances, sus-
-3 tainability could not be achieved even if
the U.S.China trade deficit dropped to
-4
zero. Furthermore, unless accompanied
-5 by changes in overall macroeconomic
conditions in the United States, any re-
-6
1980 '84 '88 '92 '96 2000 '04 duction in the U.S. deficit on trade with
Merchandise trade Unilateral transfers China, whether achieved through trade
Service trade Current account policy or yuan appreciation, would cause
Net foreign income
corresponding increases in other bilateral
Source: U.S. Bureau of Economic Analysis. deficits, as U.S. demand for products
previously purchased from China was
diverted to other foreign suppliers. Thus,
the effect on overall trade and current ac-
as long as the required level of borrowing is reasonable, count balances would likely be minimal. So why em-
given the country's economic prospects and the inter- phasize the role of China?
est rate on borrowed funds. Thus, policymakers may To begin with, China currently has the largest bi-
become concerned if the current account deficit grows lateral trade surplus with the United States; relative
sufficiently large.11 to the size of China's economy, the surplus is even
Although rapid growth of the merchandise trade larger.14 And China's bilateral surplus is also among
deficit underlies recent growth of the U.S. current ac- the fastest growing. To the extent U.S. policymakers
count deficit (see figure 3), the current account deficit believe that bilateral balances with other regions will
and the trade deficit differ in terms of public response not be affected, they may see policies aimed at China
and the political fallout. The two main issues raised as the most efficient way to make progress in bringing
by the large and persistent U.S. current account deficit down the overall deficits. Moreover, most researchers
are sustainability and intergenerational equity. The believe that China has kept the value of its currency
sustainability issue concerns the prospect for financ- artificially cheap, thus implicitly subsidizing its exports
ing an ever-growing current account deficit--how long and taxing its imports.15 This view is bolstered by
lenders abroad will continue to supply capital to the China's large accumulation of official U.S. dollar re-
United States on the same terms, and what will happen serves. China's unwillingness to allow the yuan to appre-
if and when they stop. Intergenerational equity con- ciate has, in turn, made other Pacific Rim countries
cerns implications for the well-being of future U.S. reluctant to allow their own currencies to appreciate,
citizens. A current account deficit (financial account lest export sales be lost to Chinese rivals. Following
surplus) means that a country is borrowing more from China's recent announcement of its new exchange rate
residents of other countries than it is lending to them. regime, Malaysia responded by shifting its own cur-
The nation's increasing indebtedness to the rest of the rency regime from a dollar peg to a basket peg. How-
world may be viewed as placing an unfair burden on ever, given the very small initial change in the yuan's
future generations. In contrast, concerns about the trade value, most countries in the region have adopted a
deficit focus on its implications for overall macroeco- wait-and-see attitude.
nomic performance, as well as for employment and At the sectoral level, many of China's exports to
output in particular "trade-sensitive" manufacturing the United States compete with domestic manufactur-
industries, such as steel, autos, textiles, and apparel. ing industries already facing stiff competition from other
Federal Reserve Bank of Chicago 5
BOX 1
Is China the new Japan?
Rapid export-led growth and escalating rhetoric: The Perhaps the most important difference is that Japan's
basics of today's U.S.China confrontation over trade total labor force limited the growth of its economy and
and currency misalignment closely resemble those of its exports. In the 1980s, Japan was already near full
the U.S.Japan trade conflict in the 1980s. Just as today, employment. In contrast, China is only in the early
many U.S. officials seized upon the large and growing stages of mobilizing its huge labor supply. Many un-
bilateral trade deficit with Japan as a "smoking gun"-- employed and underemployed workers, including those
seemingly incontrovertible evidence that America's displaced through the restructuring of agriculture and
problems were rooted in trade and currency practices state-owned enterprises, have yet to be drawn into the
abroad (McCulloch, 1988). In some specifics, the two more market-oriented and efficient parts of the Chinese
situations are strikingly similar. Just as today, the United economy. Thus, China's rapid growth has the potential
States in the 1980s was running not only a large bilateral to continue for decades. If the current growth rate were
trade deficit with Japan but also large overall trade and to be maintained, China could overtake the United
current account deficits. Also similar to the recent States as the world's largest economy--and most
situation with China, Japan in the 1980s prevented its important market--within a few decades.
currency, the yen, from appreciating relative to the Do the consequences of the intense U.S. policy
U.S. dollar through massive official purchases of U.S. focus on Japan in the 1980s shed any light on the cur-
securities, thus allowing the United States to finance rent situation with respect to China? The results of
a large and growing U.S. fiscal deficit without driving U.S. efforts included a substantial appreciation of
up U.S. interest rates. Mann (2005) describes the recent the Japanese yen relative to the dollar beginning in
U.S. relationship with China (and other surplus nations) February 1985 and bilateral trade agreements for
as one of co-dependency; China's willingness to add automobiles, semiconductors, agriculture, and other
to its already huge stock of official U.S. dollar assets sectors in which U.S. negotiators sought to restrict
has provided the United States with cheap financing imports from Japan or increase U.S. exports to Japan.
and thereby, to some extent, sustained the high level Although it is not possible to identify specific causal
of U.S. expenditure. links to subsequent developments, some of these de-
The similarities extend beyond macroeconomic velopments are worth noting in connection with
roots. In both Japan and China, government subsidies recent U.S. policy initiatives toward China.
to export industries played at least a supporting role First, these measures did not close the bilateral
in export success. Moreover, both countries' exports trade gap. Japan continued to maintain a substantial
were subjected to country-specific U.S. trade policies-- surplus on trade with the United States as well as a
policies benefiting established U.S. trading partners global trade surplus despite bilateral trade measures
as well as, and sometimes more than, competing do- and yen appreciation. As figure 2 (p. 3) shows, the
mestic firms. Beginning in 1981, a voluntary restraint U.S. bilateral imbalance on trade with Japan has only
agreement limited Japan's fast-growing exports of autos recently been eclipsed in size by the record deficit on
to the United States. Today bilateral actions limit China's trade with China. Yet, Japan's continuing surpluses on
fast-growing exports of textiles and apparel to the trade did not translate into continuing vigorous growth
U.S. market, and Chinese exporters in a number of of the Japanese economy. Perhaps as a consequence
other industries face high U.S. antidumping duties. of macroeconomic policies aimed at countering the
However, there are also notable differences be- effects of the strong yen, Japan's economic growth
tween the two situations. In the 1980s, Japan's over- slowed to a crawl during the "lost decade" of the 1990s
all imports, and especially imports of intermediate (Bergsten, Ito, and Noland, 2001); meanwhile, the
goods, were low compared with other industrialized United States experienced vigorous growth but also
economies. In contrast, China's overall imports are a rising trade deficit.
large and growing; China's goods production is highly Effects at the sectoral level are also instructive.
integrated with the world economy. While Japan in Faced with negotiated limits on the volume of U.S.
the 1980s ran a sizeable overall trade surplus as well auto imports from Japan, Japanese producers upgraded
as a large bilateral surplus on trade with the United the quality and price of cars destined for the U.S. mar-
States, the rapid growth of China's imports has meant ket (Feenstra, 1988). U.S. auto imports from Europe
that its overall trade surplus, though recently trending and later Korea surged, while many Japanese compa-
upward, is much smaller than its bilateral surplus on nies established U.S. production facilities. Japan's
trade with the United States. Moreover, where multi- Toyota now rivals General Motors and Ford in U.S. sales
national corporations had little success in penetrating and far exceeds them in profitability. Autos and auto
Japan in the 1980s, China has become an important parts still dominate Japan's exports to the United States.
magnet for foreign direct investment and ranked first
among developing host countries in 2004. By most mea- 1
Other things being equal, larger countries tend to have a lower
sures, China can be considered a very open economy-- ratio of trade to GDP; likewise, developing countries tend to
even more so given its size and level of development.1 have a lower ratio of trade to GDP.
6 4Q/2005, Economic Perspectives
FIGURE 4 period of potentially discriminatory treat-
Major U.S. imports from China, by sector,
ment by other WTO members. Moreover,
percent of total imports from China China has not been included in recent U.S.
efforts to negotiate preferential trade agree-
percent ments. Therefore, Chinese exports must
30
compete in the U.S. market with goods
from an increasing number of countries
25
that face lower trade barriers.
U.S. officials may also be looking
20
ahead to competition with China in other
sectors. Despite the recent emphasis on tex-
15
tiles and apparel, where U.S. imports from
China soared in early 2005 following the
10
elimination of U.S. quotas on these prod-
ucts, Chinese competition in other manu-
5
facturing industries has been growing even
more rapidly (see figure 5). As with tex-
0
1989 '92 '95 '98 2001 '04 tiles and apparel, to a large extent these
Chinese gains have come at the cost of tra-
Apparel & textiles Machinery
Electronics Misc. manufacturing ditional exporters. The depreciation of the
U.S. dollar relative to the euro and the
Source: U.S. International Trade Commission.
Canadian dollar has reinforced this trend
by redirecting U.S. import demand toward
China, Japan, and other East Asian export-
foreign suppliers. Foremost among these industries ers. Moreover, Chinese producers have proved to be
are apparel and textiles, sectors with significant pro- adept at producing increasingly sophisticated products.16
tection from competing imports. Although apparel Chinese auto parts are already entering the U.S. mar-
and textiles together now account for a low share ket in substantial quantities; imports of Chinese-built
(9 percent in 2004) of total U.S. imports from China, vehicles are expected as early as 2007 (Power, 2005).
and that share has been declining (see
figure 4), China's role at the industry lev-
el is significant and growing. China is FIGURE 5
currently the largest foreign supplier, ac- U.S. imports from China, by sector,
counting for about one-fifth of total U.S. percent of total imports
imports. Also, Chinese exports of textile percent
and apparel products to the United States 45
have continued to grow as a share of total 40
U.S. imports at the industry level (figures
35
5 and 6) and as a share of U.S. domestic
consumption (figure 7). 30
As we document below, U.S. trade 25
policy since the 1990s has imposed great-
20
er restrictions on imports from China than
on those originating elsewhere. Moreover, 15
as a new entrant to world markets, China 10
has been at a disadvantage in contesting
5
U.S. trade policies that limit its exports.
0
Before its accession to the WTO in 2001,
1989 '92 '95 '98 2001 '04
China could not bring trade disputes un-
der WTO rules and had no formal role in Apparel & textiles Misc. manufacturing
Electronics Telecom
multilateral negotiations. Even though Machinery
China is now in the WTO, the terms of
Source: U.S. International Trade Commission.
its accession allow for a long transitional
Federal Reserve Bank of Chicago 7
FIGURE 6 trading partners but also to affect U.S.
Major suppliers of U.S. textile and
macroeconomic conditions and thus the
apparel imports, percent of total textile overall size of the trade and current ac-
and apparel imports count deficits.
percent U.S. trade policy toward apparel
20 and textile imports from China
18
U.S. bilateral agreements with China
16 as well as the terms of China's WTO ac-
14 cession provide for special safeguards
12 aimed at Chinese exports of apparel and
textiles. Until its ten-year phaseout was
10
completed on January 1, 2005, the inter-
8
national Multi-Fiber Arrangement (MFA)
6 set a quantitative limit on each country's
4 exports of each individual textile and ap-
2 parel product to each importing country.
0
During the phaseout, China made impor-
1989 '92 '95 '98 2001 '04 tant gains in the U.S. market at the expense
China Hong Kong of other developing countries, as well as
EU12 Korea at the expense of U.S. domestic produc-
Mexico Taiwan tion (see figures 5 and 6); imports from
Notes: Standard International Trade Classification (SITC) codes 26 (textile fibers), China surged in the early months of 2005.
65 (textile yarn, fabrics, and made-up articles), and 84 (articles of apparel and
clothing accessories). The European Union 12 (EU12) comprises Belgium, Denmark, New restrictions on U.S. imports from
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, China thus enjoy the support not only
Spain, and the United Kingdom.
Source: U.S. International Trade Commission. of competing domestic producers, but
also of established foreign suppliers in
Asia, the Caribbean and Central America,
These factors have combined to pro- and Africa.
duce growing support both from within
the United States and from established
U.S. trading partners for new action to FIGURE 7
limit China's access to U.S. markets. So U.S. imports of textiles and apparel, percent of
far, pressure on China has been focused total domestic consumption of textiles and apparel
primarily in two areas: exports of apparel percent
and the yuandollar exchange rate. But 50
industry-specific measures are unlikely
to have a noticeable effect on the overall
45
U.S. trade deficit. Reducing U.S. imports
of apparel through measures targeted
only at China would mainly divert U.S. 40
import demand toward other foreign sup-
pliers, thus restoring some of the sales 35
these countries have recently lost to their
Chinese competitors. Although overall
30
U.S. well-being would likely decline as
American consumers face higher prices,
some benefits would be reaped by rival 25
1997 '98 '99 2000 '01 '02 '03 '04
producers abroad and perhaps also some
producers in the United States. In con- Note: Standard International Trade Classification (SITC) codes 26 (textile fibers),
65 (textile yarn, fabrics, and made-up articles), and 84 (articles of apparel and
trast, as we discuss later, a significant re- clothing accessories).
Source: Shipments data from U.S. Census Bureau; imports and exports data
alignment of the yuan has the potential from U.S. International Trade Commission.
not only to reallocate U.S. imports among
8 4Q/2005, Economic Perspectives
Recent U.S. efforts to limit apparel and textile im- products and begun to enjoy the most favored nation
ports from China are the latest manifestation of a long (MFN) status afforded to all WTO members,18 other
tradition in U.S. trade policy. Textile imports from developing-country exporters have become active, first
Japan had already begun to threaten U.S. producers in urging a delay in full elimination of the MFA and
before World War II, and the United States responded more recently in attempting to maintain established
by implementing Japan-specific trade restrictions. In markets in the United States.
1956, the United States negotiated a voluntary export Exports from China have made substantial inroads
restraint on Japanese cotton textile products, resulting in the U.S. market despite China-specific import bar-
in an increase in U.S. imports from other suppliers and riers. However, the effect of these barriers can be seen
of other fibers. International efforts to control this di- by comparing China's 2003 share in total U.S. imports
version of trade started with the Short-Term and Long- of textiles and clothing with China's share in Austra-
Term Cotton Textile Arrangements (196173) and lia and Japan, countries at a similar stage of develop-
eventually culminated in the Multi-Fiber Arrangement, ment to the United States. These countries offer a useful
which regulated most world trade in textile products comparison because, unlike other industrialized coun-
from 1974 until the end of 1994. These various arrange- tries, Australia and Japan were not using country-spe-
ments meant that international trade in textile products cific quotas to restrict textile and apparel imports in
was highly distorted. The system was perceived to be 2003.19 Although both countries applied tariffs to im-
inefficient and unfair. This contrasted sharply with ports of textiles and apparel, import tariffs still allowed
international trade in other manufactured goods, which lower-cost producers, such as China, to capture larger
had been governed since 1947 by rules established under shares of their import markets. Indeed, as table 1 in-
the General Agreement on Tariffs and Trade (GATT). dicates, in 2003 China accounted for a significantly
Lengthy international negotiations completed in smaller share of total imports in the United States than
1994 established the World Trade Organization, which in the two other markets. Neither country offers an ideal
replaced the General Agreement on Tariffs and Trade.17 comparison with the United States because of their great-
At the same time, negotiators agreed to bring trade in er geographical proximity to China. Still, if Chinese
textile products gradually into conformity with the firms' penetration of the Australian and Japanese im-
GATT/WTO system's basic rules. From 1995 until the port markets is roughly indicative of China's compara-
end of 2004, trade in textiles and clothing was to be tive advantage in textile and clothing production, Chinese
covered by the Agreement on Textiles and Clothing exporters have the potential to achieve a substantial
(ATC), which gradually phased out the MFA's system further increase in their U.S. market share. As in the
of quantitative restrictions. When the ATC was being past, this gain in market share would likely come at
negotiated, the idea of scrapping the MFA enjoyed strong least in part at the expense of other exporters.
support from developing countries, which included Competing exporters can maintain their established
many countries with established or potential compar- shares in the U.S. market by arranging to receive lower
ative advantage in these products; the apparel sector tariffs on their exports of textiles and clothing than those
in particular has long been the first step on the road applied to exports from China. This can be achieved
to industrial development. Elimination of all quanti- in at least two different ways. The first is by negoti-
tative restrictions on trade in apparel and textiles, thus ating a preferential trade agreement with the United
bringing these products under standard GATT/WTO States in which each party agrees to give preferential
rules, was expected to provide significant benefits to market access to the other, usually along with other
developing countries. In fact, the agreement to phase concessions. This type of preferential treatment gives
out the MFA was widely viewed as a key element in some exporters to the U.S. market an advantage in
the negotiations, a long-awaited change valuable enough competition with Chinese exporters. As table 2 shows,
to induce developing countries to accept new rules the United States has recently concluded such negoti-
on services and a more stringent system to protect in- ations with countries in the Andean region (ATPDEA),
tellectual property rights. Central America (CAFTADR), Cambodia, Bahrain,
In the early 1990s, when developing country ne- and Morocco. The table also indicates that most of
gotiators "won" ultimate elimination of the MFA, they these countries may have been motivated to negotiate
did not anticipate the rapid pace of China's integra- such an agreement at least partly because a substan-
tion into the global economy and its acceptance in 2001 tial fraction of their exports to the United States is in
as a member of the WTO. As China has emerged as the textiles and clothing, sectors in which they face in-
most important exporter of many apparel and textile creased competition from China for the U.S. market.
Federal Reserve Bank of Chicago 9
TABLE 1 and apparel safeguard. Instead,
U.S., Australian, and Japanese imports of textiles and apparel, 2003
the entire process is carried out
internally by the OTEXA in the
Share of Share of Share of U.S. Department of Commerce.
of U.S. Australia's Japan's
Because the OTEXA mandate
Exporting country market market market
(percent of total textile and apparel imports)
is specifically to assist domestic
textile and apparel producers, the
China 17.4 49.9 71.7 OTEXA's decisions may err on
Mexico 9.9 0.3 0.1
EU12 6.0 9.5 9.1 the side of protection by giving
Hong Kong 4.5 2.1 0.3 little weight to the costs imposed
India 4.3 3.6 1.1 on domestic consumers of the af-
Canada 4.1 0.4 0.1
fected products.
Korea 3.5 2.7 2.6
Taiwan 2.9 2.6 1.4 The China-specific textile
Pakistan 2.7 2.3 0.3 and apparel safeguard provision
New Zealand 0.1 6.9 0.1 administered by the OTEXA is
U.S. 3.8 2.7
Others 44.6 15.9 10.4
due to expire in 2014. However,
the U.S. antidumping law can
Notes: Standard International Trade Classification (SITC) codes 26 (textile fibers), also be used to impose country-
65 (textile yarn, fabrics, and made-up articles), and 84 (articles of apparel and clothing
accessories). The European Union 12 (EU12) comprises Belgium, Denmark, France, Germany, specific protection. Traditionally,
Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom. there has been no need to deal
Source: Organization for Economic Cooperation and Development.
with imports of apparel and tex-
tiles through antidumping, since
imports were already being man-
China-specific import barriers aged through the MFA, the WTO Agreement on Tex-
A second way other foreign suppliers can face tiles and Clothing, and, most recently, the China-specific
lower tariff rates in the U.S. market than their Chinese textile and apparel safeguard. But in other industries,
competitors is if the U.S. government raises trade bar- the application of U.S. antidumping duties has had a
riers against Chinese producers alone. There are several disproportionate effect on imports from China.21 Evi-
trade policies, all consistent with WTO rules, through dence from table 4 indicates how producers in other
which this is possible: antidumping duties, the standard industries have managed to use the antidumping pro-
safeguard, the China safeguard, and the China-specific visions to gain an advantage over Chinese exporters
20
textile and apparel safeguard. For textiles and apparel, through imposition of country-specific protection.
the most frequently used policy has been the China- Over the past 15 years, China has been investigated
specific textile and apparel safeguard, which is admin- more often and has faced antidumping duties on more
istered by the Office of Textiles and Apparel (OTEXA) products than any other country.22
in the U.S. Department of Commerce. Table 3 indicates Antidumping duties are designed to restrict imports
a number of investigations of Chinese exports of var- of products supplied to the U.S. market at a price be-
ious textile and apparel products undertaken by the low their cost of production or below the price the same
OTEXA in 2004. Domestic textile and apparel produc- firms charge in a foreign market. Most economists be-
ers in the United States are not the only potential bene- lieve antidumping duties are usually harmful to over-
ficiaries from imposition of safeguards on imports from all national well-being. Nonetheless, such duties often
China. Because producers in other developing countries find political support because they can be used to limit
may have higher costs than their Chinese counterparts the competitive pressure in high-cost domestic industries
and yet still enjoy a large cost advantage relative to from low-cost foreign competitors. Table 4 lists the aver-
U.S. producers, gains to these other foreign suppliers age antidumping duty imposed on each of the top ten
may be even greater than gains to U.S. producers. country targets of U.S. antidumping actions after affirma-
A particular concern regarding the OTEXA pro- tive investigations. The table indicates that the typical
cess is its lack of transparency. In contrast to the ad- antidumping duty imposed on Chinese firms is much
ministration of other U.S. trade remedies, including higher than the duty facing firms from other countries.
antidumping, the standard safeguard, and the China Thus, if an exporter in another country is confronted with
safeguard, the quasi-judicial and independent U.S. a U.S. antidumping measure at the same time as a
International Trade Commission plays no role in re- Chinese exporter, what matters is the size of its duty rel-
viewing applications for the China-specific textile ative to that levied on a lower-cost supplier in China.23
10 4Q/2005, Economic Perspectives
TABLE 2
Textile and apparel exports to the U.S., 2003, by U.S. PTA partners and China
Textiles and apparel as Textiles and apparel as
Country percent of total exports to U.S. percent of total imports by U.S.
Andean Trade Promotion and Drug Eradication Act
(ATPDEA) countries
Colombia 8.61 0.66
Bolivia 18.53 0.04
Peru 21.48 0.62
Ecuador 0.74 0.02
Central AmericanDominican Republic Free Trade
Agreement (CAFTADR) countries
Dominican Republic 48.23 2.58
El Salvador 86.90 2.11
Honduras 77.78 3.10
Nicaragua 62.98 0.58
Guatemala 60.55 2.15
Costa Rica 17.84 0.72
Cambodia 99.12 1.51
Morocco 19.49 0.09
Bahrain 49.64 0.23
China 9.80 17.87
Notes: PTA indicates preferential trade agreement. North American Industry Classification System (NAICS) product categories
313 (textile mills), 314 (textile product mills), and 315 (apparel manufacturing).
Source: U.S. International Trade Commission.
The higher average duty for Chinese exporters countries so as to generate high cost estimates and
reflects the methodology that the U.S. Department of thus maximize the benefit to the petitioning domestic
Commerce uses to compute the dumping margin, which is industry and also to exporters in other countries.
the estimated difference between a product's sale price
and its "fair value" (Blonigen,
2003). Commerce Department TABLE 3
officials are permitted to choose
China textile safeguard investigations by the United States, 2004
among alternative methods of
calculating the dumping margin, OTEXA category Product under investigation
but in the case of China, it is
349/649 Brassieres and other body supporting garments
typically the difference between
350/650 Dressing gowns and robes
the price charged by Chinese
222 Knit fabric
exporters in the U.S. market and
447 Wool trousers
an estimate of the Chinese firm's
620 Other synthetic filament fabric
cost of production. However,
301 Combed cotton yarn
because of China's non-market-
352/652 Cotton and man-made fiber underwear
economy (NME) status and re-
338/339 Men's & boys' and women's & girls' cotton knit shirts
sulting claims that input prices and blouses
do not reflect true costs, the 340/640 Men's & boys' cotton and man-made fiber shirts, not knit
Commerce Department frequent- 638/639 Men's & boys' and women's & girls' man-made fiber
ly uses input prices from "proxy" knit shirts and blouses
countries with similar character- 647/648 Men's & boys' and women's & girls' man-made fiber
trousers
istics to estimate the Chinese
347/348 Men's & boys' and women's & girls' cotton trousers
firms' costs. The Commerce De-
partment is able to use discre- Note: Requests for China textile safeguard action between October 8 and December 1, 2004.
tion in the choice of comparison Source: U.S. Department of Commerce, Office of Textiles and Apparel (OTEXA),
countries; officials can pick 2004, http://otexa.ita.doc.gov/chinare1dec1.pdf.
Federal Reserve Bank of Chicago 11
TABLE 4
U.S. antidumping actions against trading partners most frequently investigated, 19902003
Number of Number of Mean duty, Rank among
antidumping investigations conditional on duties Percent of total U.S. imports
Country investigations resulting in duties imposed, percent U.S. imports sources, 1996
1. China 91 61 127.02 3.5 8
2. Japan 53 33 68.44 14.0 2
3. Korea 39 20 16.65 2.7 10
4. Taiwan 30 15 20.46 3.7 7
5. Mexico 26 11 41.18 10.0 3
6. Germany 26 10 37.60 4.9 4
7. India 25 11 52.89 0.8