Here is a good article on the Free Trade situation
Free-Trade Free-Fall
With a dicey economy and an approaching election, free-trade policies are on the chopping block.
by Irwin M. Stelzer, a director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.
FREE TRADE and free elections do not always coexist peacefully. In an economy in which workers find jobs hard to come by, employers find their pricing power sapped by foreign competition, and the 2004 election campaign is on fast-forward, free trade is likely to find itself among the badly wounded.
When the gaggle of Democratic candidates appeared before the AFL-CIO trade union conference last week, vying for the dollars and foot soldiers so important in the primary campaign, most promised to veto any new free trade agreements. In a display of protectionism red in tooth and claw, the steelworkers' union declared that President Bush's 30 percent tariff on imported steel does not satisfy their appetite for protection: They denounced Bush and promised to back any more protectionist Democrat in the general election.
Meanwhile, the president's economic team was touring the nation's hinterland to announce that the economy is a coiled spring, about to unleash a full-blown recovery on the nation. Treasury secretary John Snow, Commerce secretary Don Evans, and Labor secretary Elaine Chao picked their venues carefully, holding their meet-the-citizen sessions in the plants of some of America's most successful companies, such as motorcycle maker Harley-Davidson. The famous motorcycle maker was on the verge of bankruptcy before it won tariff protection in the 1980s. Today the company is happily profitable and a major exporter of heavy bikes to Japan. That should give free traders something to think about!
Imagine the surprise of the Bush team when most of the questions were about the flight of jobs to China. When the Bush administration persuaded China to institute the reforms necessary to secure membership in the World Trade Organization, and enter the globalized trading system, it was thinking in terms of the vast potential market for American goods. Now that the annual trade deficit with China is running at $100 billion, almost twice as high as the deficit with Japan, Republicans and Democrats are vying to persuade voters that they are the ones who will be the hard men in meeting this latest "yellow peril." So we will soon see a new Office of China Compliance at the Commerce Department.
The dirty little secret is that many of America's major corporations, among them General Motors, have invested heavily in China, are prospering mightily there, and prefer the status quo to the revaluation that is high on the agenda of smaller textile, toy, and clothing companies. But the corporate giants are keeping a low profile so as not to be pilloried for defending a system that most Americans think is costing us jobs and experts know is resulting in widespread theft of intellectual property.
It is certainly true that China is subsidizing its exports by keeping state-owned factories in business and, more important, by pegging its currency, the renminbi, to the dollar. So when the dollar fell, making imports from most countries more expensive in the United States, and exports of made-in-America goods and services cheaper, China was unaffected: Its currency moved downward with the dollar. Experts estimate that if the Chinese authorities ended the dollar peg, the renminbi would appreciate by anywhere from 10 percent to 40 percent. But more than a minor revaluation is unlikely: The Chinese leadership believes it cannot survive the collapse in employment that would follow a major fall in exports.
The problem for the Bush administration is that trade with China is not an issue that can be treated in isolation. For one thing, China is the only country with the power to bring North Korea to the table to negotiate the surrender of its nuclear ambitions. In this light, Bush has to consider whether it would be sensible to forfeit Chinese goodwill in order to protect American producers of textiles and toys from Chinese competition.
Second, the administration knows that it must produce a growing economy by the first quarter of next year if it is to be assured victory in the November 2004 elections. One thing that can derail the recovery now underway is a further and rapid rise in interest rates. Here, China has an important role to play. The $120 billion it has piled up from the trade deficit is being used to buy Treasury notes and bonds. So the Chinese send us goods, we send them dollars, they return the dollars, in exchange for which we send them our Treasury's IOUs. That keeps the price of U.S. debt securities up and, the flip side, interest rates down. If the Chinese authorities get cranky and stop buying Treasury notes, or, worse still, start dumping their pile of such securities, soaring interest rates could wreck the market for new homes, end the refinancing of mortgages that has put billions into consumers' hands, discourage new business investment, and produce the voter nervousness that gave the elder Bush a short White House lease.
But even if Bush concentrates on the trade statistics alone, he will have some difficulty deciding what to do. Much of what America imports from China is produced in plants owned by U.S. companies. And some of the products shipped from China are partially manufactured in other Asian countries and merely finished in--and shipped from--China.
In this, as in other matters involving trade, the relatively few who are hurt by imports know who they are, and organize to make their voices heard in Washington, while the millions of consumers who benefit from cheaper sneakers, T-shirts, autos, and other products--10 percent of the trade deficit is accounted for by the $10 billion worth of Chinese goods bought by Wal-Mart--don't recognize the relationship between free trade and their ability to get more bang for their bucks. If the president is not to deviate further from his free-trade philosophy, he will have to hold off the few, who will be angry, in the interests of the many, who will neither know nor appreciate his efforts on their behalf.
That's a lot to ask of a politician.
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