(Reprinted from HKCER Letters, Vol. 27, March-July 1994)
Trade Policy and Asia under the Clinton Administration: An Insider's View
My talk today is on U.S. trade policy towards Asia under the Clinton administration. I served in the U.S. President's Council of Economic Advisors from January 1992 to June 1993, spanning the end of the Bush era and the beginning of the Clinton Administration. The Council of Economic Advisors (CEA) is part of the Executive Office of the President in the U.S. government. It is a very small advisory council, and its power depends on the close or not-so-close relationship between the chairperson and the President himself. Much of our policy stance is supposedly derived purely from economic considerations alone. This makes us different from other agencies such as the Department of Commerce, which operates under a mandate to promote American business, possibly even at the expense of American consumers. We, nominally at least, have no client other than the President himself. Later on I might speak briefly about the institutional changes that Clinton himself instituted with regard to trade policy formation, and how they have affected the CEA as well other agencies.
The Ultimate Goal
To understand Clinton's trade policies towards Asia, I think we have to go back to the February 1993 speech that he gave at the American University in Washington, D.C. That major speech spelled out the principles and philosophy of his domestic as well as international agenda. It reflected positions that were not only for public consumption, or for the media; it reflected the true position of the administration as well. The main theme of the speech was Clinton's belief that the mandate of his administration was to create and expand the economy with an abundance of high-wage, high-skill, high-tech jobs. Such a statement could be quite controversial among economists. It is hard to define what high-tech jobs are, but I am going to leave that for now. Thus, a high-tech, high-wage economy is what the Clinton administration is trying to achieve.
There are two convictions that lie behind that idea. The first is the belief that the American economy has suffered an overall decline in real wages since perhaps the early 1970s. At the upper end, professional, high-skill workers have been gaining ground, but at the lower end, real wages have stagnated and even declined. Overall, there seems to be a trend, according to Clintonites, that real wages in the economy as a whole are declining. Secondly, the Clinton administration has accepted the fact that, in spite of the U.S. economy's large size, it had, by the 1990s, become a genuinely open economy. We may, and some of us in the U.S. still do, think about the 1950s as America's golden age, when external economic events had very little bearing on the performance of the economy. But the Clinton administration believe those days are absolutely gone. In order to achieve the goal of creating a high-wage, high-skill economy, we have to deal with international events in a systematic way.
A lot of the domestic policies that the administration proposes actually have an undertone of international implications. For example, cutting the budget deficit surely has implications for domestic consumption, the reduction of the real interest rate and the cost of capital, and the release of national saving to the private sector, but more importantly it is a policy to improve the global competitiveness of the U.S. economy. As another example, take the Clinton administration's early attempt in terms of its budget to increase spending on infrastructure. The underlying theme again is that by increasing spending on infrastructure, Clinton hopes to increase productivity in the U.S. and thus its global competitiveness. Again, the aim is to create a high-wage, high-skill economy. Even remote things such as getting health care cost under control, or welfare reforms which increase incentives for workers as well as mothers on welfare to get back into the work force, contribute to this underlying idea of creating and maintaining a high-wage economy.
Trade with Asia
How does international trade fit in? Given the desire to reverse the decline in the overall standard of living in the U.S., as well as the fact that the U.S. is an open economy, international trade policy in general, and that towards Asia in particular, are extensions of or complements to those domestic policies put in place to realize the fundamental goal.
A study by the U.S. Trade Representative initiated under the Bush administration concluded that jobs related to exports in the U.S. pay about 17 percent higher than other jobs in general, and compare even more favorably to those in import-competing sectors. This conclusion is perhaps not too surprising, given the components of capital and high-tech goods in U.S. exports and import-related industries such as textiles, garments, and footwear. This study is also used as a guide to think about how to increase jobs in the export sector, and in this regard, there is special importance attached to Asia. Despite our problems with Japan, and the media attention paid to the bilateral trade relationship, Japan is still the United States' second largest trading partner, just behind Canada. Trans-Pacific trade between the U.S. and Asia has already exceeded that of trans-Atlantic trade. This is a fact to which the administration must pay attention.
Non-Japan Asia, particularly China, and the China-Hong Kong-Taiwan region, has in recent years been a source of high growth in the world, including exports from the U.S. Despite a recent slowdown, I think China is still expected to grow at around 9 percent per year. China has been an engine of growth for a lot of items that the U.S. is concerned about in terms of its decline. For example, in the debates about the renewal of Most Favoured Nation (MFN) status of China in both the Bush and Clinton eras, the major players in terms of lobbying for MFN renewal included McDonnell Douglas and Boeing, and in fact the whole aerospace industry. McDonnell Douglas had presented us with numbers showing that their only foreign sales in 1992 were to China. Without those, sooner or later they will go out of business. This is an especially powerful argument for MFN renewal within the Administration. If there is such a thing as high-wage, high-skill industry, it is aircraft manufacturing. It is the typical high-wage industry that we need to support. The U.S. is under increasing pressure from Europe in terms of competition from the airbus, and the only bright spot is in Asia.
There are less philosophical characteristics, of Clinton's trade policy in general as well as that towards Asia. One is that Clintonites dislike labels. They particularly dislike the dichotomy between what the media, and maybe even economists, want to portray different schools vis-a-vis trade. We are typically asked if we are free traders or protectionists. Clintonites think these are misleading and useless labels. They claim they do not really care what they are called as long as their goal is furthered, and that goal is to create a high-wage, high-skill economy. Sometimes people are confused as to whether the administration is restricting trade or whether they are furthering the goal of free trade. Clinton would say that since exports in general provide the desired types of jobs, we need an open trading system. So we will support multilateral efforts to open trade, such as the Uruguay Round. We will also support regional initiatives to open trade such as NAFTA and APEC, as well as bilateral initiatives such as talks with Japan to open up the Japanese market. We will even support, and in fact, we will insist on unilateral measures that open trade.
At the beginning of the administration, we typically received a lot of calls, especially from the Japanese embassy, asking us what was going on within the administration regarding trade. Why were they talking on one hand about supporting Uruguay Round and NAFTA, and on the other hand about using 301 and anti-dumping? To Clintonites, these are all consistent. They are all different ways to solve the same problems. Sometimes we joke that Clinton and Deng Xiaoping have something in common: It does not really matter what works ,as long as it furthers the goal.
Also, as pragmatists, Clintonites do not want to engage in long, process-oriented, never-ending negotiations. They see these as the failure of the Bush administration that let a lot of trading partners get away with continued pointless talking. Rather, as is well known now, Clintonites want targets, they want specific ratios. Their model is the U.S.-Japan semi-conductor agreement, with specific percentages of foreign markets. Internally they say that when we pursue a trade policy, we want to know which sector, which industry, or even which company or what set of families will benefit -- and how much -- from what is done. We have to be able to point to that in order to evaluate the success of our trade policies.
Another important aspect of the Clinton administration's trade policy is that it is to some extent the first genuine post-Cold War administration, even though the Cold War ended during the Bush era. To Clintonites it means the end of all the previous strategic military thinking that hampered the U.S. in terms of trade. In the past, when the U.S. had to contain communism, it was willing to sacrifice trade interests in order to achieve diplomatic-military goals. But now the buzzword is re-balancing, or what we internally call reverse discrimination. Security in the past was often measured in terms of military security, but now it is measured in terms of economic security, how to maintain a viable competitive economy. There are also implications for strategic thinking, strategic not in terms of military but in terms of economics, and that translates partly to the enthusiastic support for APEC. The idea is that Asia, perhaps in particular non-Japan Asia, is the future for all the high-wage jobs for the U.S. It is very dangerous to leave non-Japan Asia to be dominated by Japan or maybe even Europe. It is absolutely necessary that if there is any regional organization or regional framework of trade that the U.S. plays a role and is not excluded.
So there is a genuine shift towards Asia, but there are contending schools of thought within the administration about what it means to be paying more attention to Asia. There is one school that still thinks Asia is Japan-Asia, which means if you want to deal with Asia, you first have to deal with Japan. The other school, which I think is more sophisticated, realizes the heterogeneity of Asia. In particular, they think the China region including Hong Kong and Taiwan has future potential even beyond that of Japan. It is not quite decided which school of thought will win out, even though my feeling is that judging from some of the speeches that he has made, Clinton does realize that China and other parts of Asia are different from Japan.
In any event, I think one point that people in the Clinton Administration do agree on vis-a-vis China is that it is an economy in transition. It is important to set the terms with China now, before it becomes a full-blown competitor in the economic area. That is why we will continue to see a lot of hawkish stances, such as that on the 301 issue and on China re-joining the GATT. The idea is to make sure that before China enters the world market in an even more pronounced way, the U.S. has already set up the groundwork for how it wants to deal with China, so that in the future, the terms cannot be changed easily. The Clinton administration feels that in the case of Japan, the terms were not set properly at the beginning, which was understandable because of the Cold War. We had to make concessions to Japan in the past, and now it is very difficult to return to what we call a more balanced trading relationship.
In terms of institutions, the creation of the National Economic Council (NEC) within the White House under the Clinton administration has many implications, both in terms of substance as well as process. To illustrate, let me go back to the traditional way of setting trade policies during the Bush era -- and my understanding is that there had been a long tradition in trade policy making within the U.S. government, which normally started as a working committee with varying membership. But for trade-related issues, one could count on the three economic-oriented agencies: the Council of Economic Advisors, the Office of Management on Budget (OMB), and the Treasury. Of course, one could have the trade representative who typically chaired the committee; the Commerce Department which represented the interests of American business, the Labor Department which represented American labor interests; the Justice Department which was concerned with competition-related issues; and the State Department which was concerned with maintaining diplomatic relationships with foreign countries. The Defense Department sometimes came in, depending on the particular products concerned, and the Agriculture Department too, depending on the issues. So these were basically the core group within any trade-related issues in terms of decision making.
Policy making began with a working level committee drawing up lists of countries as to which ones should be priority foreign countries, and which were on the watch list. In general, there were a lot of disputes. Issues that could not be resolved would be brought to the Trade Policy Staff Committee (TPSC) which was of higher level. The disagreement would be resolved there, and normally there was formal voting, each agency having one vote. Again, there could be some remaining issues that got kicked up to the Trade Policy Review Group (TPRG). The TPRG was at the Assistant Secretary or Under-secretary level. If things could not be resolved they would be brought within the White House at the cabinet rank, where the cabinet members would decide on the issues and give particular recommendations to the President. I go through this elaboration to highlight two points. The first is when one talks about the U.S. executive branch, one is actually talking about many different agencies with many different views, and this was particularly the case before the Clinton era.
If I were to model this process in an abstract way, one feature that definitely has to be included would be internal bargaining among agencies and coalitions formed among agencies. If I wanted my vote to count, what I would normally do would be to call the Treasury, the OMB, and the State Department, and ask if they were ready to support a particular position in advance, before voting, so that there was a bloc of votes on a particular position before the meeting. Similarly the U.S. trade representative, the Commerce Department and the Labor Department typically formed a bloc.
The end result of that internal bargaining was that extreme positions tended to be weeded out. The Commerce Department, with the mandate to protect American business interests, was going to say any tariff was a good tariff, any retaliation that protected our industries was good protection. As for economic-oriented agencies, the Treasury had some mandate in terms of the banking sector, the financial sector, exchange rates etc. The OMB, CEA, and State Department tended to vote together and we would say, particularly under the Bush era, any protection was bad, any exemption that restricted business coming to the U.S. was bad. What you did was to start with an extreme position and end up with some middle ground. So this process tended to weed out extreme positions: You did not end up with complete free trade in a lot of cases, but nor did you did end up with very high or very hawkish stances on trade, either.
Secondly, the political element did not enter the process until perhaps in the TPRG, and might be even postponed until the cabinet rank in the White House. By political I mean election concerns and the worry about election results. There was lobbying by all groups -- business, retailers, foreign governments, and so on. In discussions all the way up to the assistant secretary or secretary level, people did not typically say, "Look, if we do this, we may jeopardize the President's election," or, "This would have political implications."
The new institutions under Clinton are different. Because of the creation of the NEC, a lot of the meetings, even lower-level meetings, are now held within the White House under the chairmanship of the NEC. The TPSC and TPRG are still used but to a much lesser extent. Among Clintonites the buzzword is consensus. There is much less formal voting on particular issues. They view the process during the Bush era to have been too fragmentary, and sometimes when some agencies lost a particular policy fight, they deliberately leaked the outcome and results to the media. My understanding is this is very typical in Washington, not just in the Bush era. My sense is that this whole process -- that is, bringing the meetings very early into the White House, and stressing too much, I think, the consensus view -- tends to make the outcome more extreme. We no longer have that balancing by different agencies. This can also be partly explained by the appointments that the President himself made. For example, CEA is now headed by Laura Tyson. At least when I was there, she was very hawkish in trade, whereas when Michael Boskin was the chairperson of CEA in the Bush era, I did not really have to consult him before we went to meetings. I knew how to vote because every time, it was free trade. With Laura, it is different.
So basically, it is my view that trade policy becomes more hawkish partly because of the process, and it can become more political because it now emphasizes White House decision making very early. Let me summarize and open up some questions. I think there is a definite shift in terms of trade policy of the new administration towards Asia. I am not sure that it is at the expense of Europe. I think the traditional viewpoint within the administration is, in the past we paid attention almost exclusively to Europe and we neglected Asia. So what we are doing now is bringing Asia back. But we are not necessarily diminishing the absolute level of European concern.
Basically, Asia, particularly non-Japan Asia, is viewed as potential for large markets that can support high-wage jobs. There are some background voices within the administration suggesting that in the long run, China is going to be the main economic competitor to the U.S., but these are faint voices at this stage. Right now China is still viewed as a growing market and as something beneficial. The administration supports APEC, firstly because it is a vehicle that I think the administration wants to use to liberalize trade, so that again there will be more export-related jobs. Secondly, the U.S. does not want to be excluded since, in the administration's view, that would allow Japan to dominate Asia. For the current administration, the focus is on re-balancing, not only vis-a-vis Japan, but also vis-a-vis other countries in Asia. Also, the U.S. wants to set the terms right from the beginning so that when China becomes a full-fledged trading partner in the international community, there will already be a framework that they feel is beneficial to their domestic economy.
Future U.S.-Asia Trade Issues
Looming on the horizon, regarding Asia in particular, I think there will be more competition-related trade policies. The Clinton administration is going to put the extra-territorial application of their domestic anti-trust laws to more significant use. This actually started in the Bush era. In the past, unless one could demonstrate that U.S. domestic consumers had been hurt, anti-trust laws could not be used. But under the Bush Attorney General, we interpreted that if American producers, including exporters, were hurt, but consumers were not, one could still use the domestic U.S. anti-trust laws. Of course, there are a lot of problems in terms of sovereignty, in terms of whether you can actually enforce the laws, and things like that, on this issue. Nevertheless, I can see that, partly because, as overt trade barriers are coming down, both now and in the future, there will be a lot of trade friction and complaints about business practices abroad that the business sector could bring to the administration. The notable case is obviously that of the well-known Japanese kereitsu, the industrial groups which have links amongst themselves as well as with the main banks and the distribution network. A long-standing complaint has been that the Japanese authorities are lax in enforcing their own anti-trust laws, and the lack of enforcement translates into restrictions of foreign imports, particularly U.S. imports. If the U.S. cannot use other means to open up the market in Japan and other countries in Asia, they are going to attempt to use some of the new tools, what we consider domestic anti-trust laws applied abroad.
Now let me mention other issues that may come up with regard to trade policy. The first is the environmental concern. Since the process has become more political, it is much easier now for environmental organizations to sit at the table. The process of starting basically at the White House means that environmentalists can come into the White House at a much earlier stage. In the past, sometimes you could bypass them and tell them, look, you guys are too late, we have already made a decision. Now this is no longer the case. The second issue is labor standards. I think that the administration believes international differences in labor standards could, in some instances, create an unjust advantage for some countries in terms of their global competitiveness. So in terms of future U.S.-Asia trade problems, I see competition-related policies, the environment, and labor standards as probably some of the most talked-about issues.
Finally, let me say a few words on the issue of technology transfer, which I think is of great interest to a lot of Asian countries, Korea in particular. The administration, I think, is quite split on this issue. On one hand, you have business-lobbying that resulted in an increased relaxation of export of high-tech goods. In the past, because of the Cold War, a lot of the high-tech military-related products were banned from export. The U.S. business community has been successful in relaxing those regulations, allowing some of the exports to go abroad and to Asia. Again, there are voices within the administration that say non-Japan Asia is going to be our main economic competitor in the future, and maybe we should think about not allowing a free flow of technology to Asia to slow down the inevitable -- that one day the high-tech jobs are going to be competed away by the high-growth Asian economies.
Dr. Kwok-chiu Fung is an Associate Professor of Economics at the University of California, Santa Cruz, and a Visiting Scholar at Stanford University. He served as Senior Staff Economist for International Trade in the U.S. President's Council of Economic Advisers in both the Bush and Clinton administrations. The above is an edited version of his talk during his recent visit to the Hong Kong Centre for Economic Research.