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Can Charles Rangel fix U.S. trade policy?

By Peter Morici
web posted May 7, 2007

The Bush Administration and the House Ways and Means Committee Chairman Charles Rangel appear close to an agreement to strengthen the labor rights provisions in pending free trade pacts with Panama and Peru. The prospect that such provisions could be generalized to all trade agreements is scaring the pants off unions and business lobbies alike. Their angst is unfortunate, because stronger labor safeguards will neither fix what really bothers organized labor about free trade nor harm American commercial interests.

The Democratic leadership is generally pro-free trade, but a deal is necessary to get new trade pacts through Congress. Many newly-elected House Democrats received significant campaign support from organized labor, and for years, unions have urged that trade agreements better safeguard worker rights. Now unions are getting their wish but slowly realizing it won't do them too much good.

Virtually all members of the World Trade Organization have adopted the eight core International Labor Organization conventions that prohibit exploitive child labor, forced labor, repression of unions, and discrimination in employment.

The most a free trade agreement or new WTO rules could do is permit the United States to exclude imports made by workers denied these rights. However, the scope of trade potentially affected would not be large, because the ILO applies these standards flexibly, according to each country's level of economic development.

It is not acceptable for 14 year olds to work full time in the United States but it is in Pakistan, and more rigorously enforcing ILO standards won't raise the minimum wage in developing countries. Hence, incorporating labor standards in trade agreements won't save U.S. workers from competing with cheap labor from China or anyplace else, or restore lost union membership.

U.S. businesses fear international standards, applied through trade agreements, could negate U.S. laws regulating their workplaces. However, compared to the ILO core standards, U.S. Department of Labor regulations are strenuous, and American employers abiding by those regulations have more to fear from an invasion of Martians than an ILO inspector.

The important foreign trade practices shutting U.S. factories and costing union jobs are already addressed by World Trade Organization rules, but the U.S. government does not effectively assert American rights to combat their harmful consequences.

At the top of the list are artificially undervalued currencies that make products in China, India and other Asian countries falsely inexpensive when sold in U.S. markets. In 2006, China and India dumped more than $280 billion worth of yuan and rupee into international currency markets to keep down the values of those currencies. That created subsidies on exports to the United States averaging about 24 percent.

Throughout Asia, exports to the United States benefit from various export tax rebates, low interest loans, industrial development grants, and technology extorted on the cheap by foreign governments from companies like Microsoft and General Motors.

Whatever monetary gains businesses in developing countries obtain from compromising workers rights, those could never equal the harm imposed on U.S. workers and businesses by currency manipulation, other subsidies and technology extortion.

U.S. countervailing duty (CVD) laws permit businesses to petition the Commerce Department for import duties that precisely offset the benefits bestowed by foreign government subsidies. However, since 1983, the United States has not applied countervailing duties on subsidies paid by governments in non-market economies, including China. In a recent case on coated paper from China, the Commerce Department indicated it will likely abandon that policy but the outcome is less than certain.

Moreover, although Federal Reserve Chairman Ben Bernanke has labeled Chinese currency manipulation an export subsidy, the Bush Administration has refused to apply the countervailing duty laws to these largest of all subsidies regardless of what country applies them.

For Congressman Rangel, the deal on labor standards is a first small step toward closing divisions within his own party on trade and forging a more bipartisan approach to trade policy. Watching him work gives me new respect for his skills and dedication, but let's hope his colleagues address the truly salient issues.

In 2007, the Ways and Means Committee will be considering various changes to strengthen U.S. trade laws that defend against foreign subsidies, as well as other unfair trade practices such as dumping products in the United States at prices below their cost of production.

Hopefully, the Committee will find ways to patch the important loopholes, including currency manipulation, and give American workers a fair shake at competing in global markets. ESR

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

 

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