China Poses NAFTA Challenge

LOUIS E.V. NEVAER / Pacific News Service 19dec03

NEW YORK—As the North American Free Trade Agreement commemorates its 10th anniversary this month, the United States, Canada and Mexico are con-fronting an unexpected challenge: China.

All three NAFTA nations lost almost 2 million jobs in the United States and several hundred thousands in each of Canada and Mexico, mostly in manufacturing.

Economists in the United States have debated whether China was to blame for the job loss. "The bulk of the current U.S. manufacturing weakness cannot be attributed to rising imports and outsourcing," economist William Testa, head of region-al programs at the Federal Reserve Bank of Chicago, argued last November. "Manufacturing jobs have grown at a slower pace than jobs in services, largely because productivity gains in manufacturing have exceeded those in most service industries."

This view stands in sharp contrast to the findings, issued two weeks before Testa's report, by the U.S.-China Economic and Security Review Commission. "China's undervalued currency and government investment strategies are having a deleterious effect on the competitiveness of U.S. manufactured goods and contributing to a migration of world manufacturing capacity to China, with a concurrent erosion of the U.S. manufacturing base," the commission concluded.

China "is engaged in manipulating the rate of exchange between its currency and the U.S. dollar to gain an unfair competitive trade advantage," said the commission. Calling for Washington to negotiate with Beijing on revaluing China's currency, the commission warned that should such efforts prove ineffective, "the Congressional leadership should use its legislative powers to force action by the U.S. and Chinese governments to address this unfair and mercantilist trade practice."

For Mexico, the latter view is more persuasive: Mexico's loss of hundreds of thousands of manufacturing jobs can be directly linked to companies shutting "maquiladora" facilities—border assembly plants run by U.S. and global companies—and setting up shop in China. "Apparently the cost factors in China are low enough so that increased transportation is not a knockout feature" for multi-nationals, says Jon Amastae, director of the Inter-American Border Studies pro-gram at the University of Texas-El Paso.

Fearing that a strong Canadian dollar would undermine economic growth, Canadian Labor Congress economist Andrew Jackson argued recently that the Bank of Canada will have to cut interest rates to avoid huge job losses in manufacturing. "Over 15,000 manufacturing jobs disappeared in September (2003)," Jack-son said.

China's fingerprints are everywhere. "In America, people in varying capacities—business, labor, academia, the media, and government—need to better understand the almost tectonic economic forces now shaping the U.S.-China economic relationship," the U.S.-China Economic and Security Review Commission reported. The Commission's conclusion that China is engaged in "mercantilist behavior," including "tax incentives, preferential access to credit, capital, and materials, and investment conditions requiring technology transfers" is confirmed by Mexico's experience.

"Labor costs only represent 10 percent of total costs of exporting companies and of maquiladoras in general," says Mexico City-based economist Roberto Salinas, "so clearly there is something beyond the labor issue that is making China a more attractive investment regime for transnational companies."

When the experiences of manufacturing job loss in the United States, Canada and Mexico is analyzed as a whole, it is clear that:

• China, in violation of both its International Monetary Fund and World Trade Organization obligations, continues to manipulate foreign exchange markets to keep its currency significantly undervalued.
• China subsidizes manufacturers through a wide range of national industrial policies that include unfair tariffs, limits on foreign firms' access to domestic markets, unfair requirements for technology transfer by foreign investors, privileged access to listings on national and international stock markets, tax relief and direct support for research and development from the government budget in excess of allowable limits as defined by the WTO.
• China's undervalued currency and government mercantilism have affected the ability of U.S., Canadian and Mexican manufacturers to compete, resulting in a sustained erosion of the manufacturing base of the NAFTA nations.

Washington, Ottawa and Mexico City must meet this challenge with a single voice. Specifically, the NAFTA nations must:

• Make a determination that China is manipulating its foreign exchange rate, which constitutes an unfair and mercantilist trade practice.
• Identify which of China's industrial policies violate China's WTO obligations.

• Enact uniform legislation that addresses China's de facto government subsidies.

• Demand that China revalue its currency, end all subsidies to its national industries and halt its requirement that foreign companies transfer technology to Chinese subsidiaries.

The economies of the three NAFTA nations have become so integrated that the integrity of North America must be defended in a single voice. The United States, Canada and Mexico must stand united to meet China's challenge.

Louis E.V. Nevaer is author of the forthcoming book, Nafta's Second Decade: Assessing Opportunities in the Mexican and Canadian Markets.