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On challenging China with a tariff

Economist Fred Bergsten concedes that a surcharge on Chinese goods could hurt the U.S. tech industry, but would level the playing field.

Economist Fred Bergsten is a self-proclaimed free trader who thinks a trade barrier may be needed when it comes to China.

A seeming contradiction? Yes. But Bergsten, director of the Institute for International Economics and a former U.S. Treasury official, says a 50 percent tariff on Chinese products may be required to level the playing field and prevent an outright trade war, where the countries slap duties on each other's products.

A tariff indeed could trigger Chinese retaliation that hurts U.S. tech manufacturing, Bergsten concedes. But he also argues that an undervalued Chinese currency already is harming U.S. producers and fueling calls in the United States for a variety of trade protections.

Bergsten's get-tough stance is part of a debate about how to address a set of trade disputes with China. Perhaps surprisingly, his position echoes that of the AFL-CIO, which backs a bill threatening to impose a 27.5 percent tariff on Chinese products. The union points to a study that showed the growing U.S. trade deficit with China displaced 1.5 million jobs between 1989 and 2003, including more than 46,200 positions in semiconductor manufacturing.

Some tech business leaders, however, favor milder steps than a sweeping tariff.

The controversy fits into a broader discussion about how the United States can maintain its technological leadership in an age of offshore outsourcing and as countries such as China and play increasingly large roles in technology services and manufacturing.

CNET recently spoke with Bergsten about his tariff proposal and the prospects for the U.S. tech industry.

Q: I have read that you are calling for an import surcharge as high as 50 percent on all Chinese imports. Is that an accurate description of your views?
Bergsten: It has got to be clarified enormously. I am not calling for a surcharge in the abstract. I and my colleagues here have argued for two years...that China needs to revalue its exchange rate by about 25 percent. They have not done that despite increasing pressure of late from the U.S. government. The fact that they are not doing that is adding enormously to international trade imbalances, the U.S. current account deficit, (and) the risk of a "hard landing" of the dollar and the world economy. Therefore, my view is we need to ratchet up the pressure on the Chinese to take action.

If the Chinese do not move the exchange rate, I think it assures a trade war.

What kind of measures?
Bergsten: The first step that I would propose is that we go to the (International Monetary Fund), which has very clear rules against currency manipulation. If that itself doesn't work, then I would go to the World Trade Organization and file a case that China is violating two or three different obligations that are there, which would require them to move their exchange rate and, if not, face trade retaliation.

And if none of that worked, then more in sorrow than in anger the U.S. would have to threaten and implement--if they don't still come along--an import surcharge on all products from China.

Why 50 percent?
Bergsten: Why do I say 50 percent? Well, we need a 25 percent change in the currency. An import surcharge applies to only half the trade balance (the imports), so you have to do twice as much, 50 percent. But it's not as if I am suggesting that an import surcharge on China is a good thing or should be done tomorrow. It's at the end of a long series of events that do need to be pursued aggressively in order to get China and the rest of Asia to move their exchange rates.

What would be the effect of what you are calling for on the U.S. tech economy, especially the high-tech industry and high-tech workers?
Bergsten: I haven't done detailed analysis. The whole objective of the exercise is to improve U.S. competitiveness against Chinese products. The way that works of course is that an import barrier would increase the prices of imports from China and therefore make U.S. products more competitive.

Keep in mind that the objective of getting China to move its exchange rate is not only to increase the value of the Chinese exchange rate, but the value of all the Asian exchange rates, because the other Asians are holding their currencies down because China is holding its currency down. If China revalued its currency by 25 percent, which is the proposal, then the other Asians would go up at least halfway. They might go up also 25 percent. So you would have a substantial change in the competitive relationship of products coming from all of Asia--Japan through India--into the U.S. That would improve the competitive position of our domestic industry in every sector including high-tech.

What about the effect on the Chinese tech industry and the tech workers in China?
Bergsten: The objective is to dampen their price competitiveness, which I would argue is artificially subsidized by an undervalued exchange rate. When you maintain an undervalued exchange rate, it's like having an export subsidy and that is artificially improving the competitiveness of Chinese industry and workers.

U.S. labor advocates believe a stiff tariff may be needed to level the playing field with China, given this perceived undervaluation of the yuan. But critics worry about sparking a trade war that could hurt both sides. How do you respond to concerns about a trade war?
Bergsten: I worry about it. That's why I would put it at the end of a list of things I would do. But I almost have the opposite worry. If the Chinese do not move the exchange rate, I think it assures a trade war.

Bergsten: Yeah. And we're seeing it right now. Every week, more and more products from China are being hit with import barriers.

It is paradoxical to propose an import surcharge to avoid a trade war. But I think something like that is necessary, because the failure of China to move (the exchange rate) is the most assured recipe to get a cycle of U.S. barriers--which we are seeing--and at some point, probably, Chinese counter-retaliation.

Let me ask a specific question about the tech arena. China allows electronics components to be imported duty-free as long as they are eventually exported, a policy that allows U.S.-made computer chips to be brought in, processed and exported back to the U.S. as more finished products like computers. Doesn't a tariff or import surcharge risk triggering Chinese retaliation in the form of import duties that could hurt U.S. tech manufacturing operations and U.S. consumers?
Bergsten: Sure. That is the trade war risk. But as I say, if they maintain an undervalued currency, that's assuring that we are going to put on barriers--as we have been doing--which at some point they may retaliate against also. So it's pick your poison.

How would your proposal handle the complexity of some tech manufacturing operations today. For example, microprocessors might be made almost entirely in the U.S. except for a few final steps, which are done in China. Would such chips be subject to the tariff or surcharge you are talking about?
Bergsten: Well, trade policy is kind of crude. In virtually all cases, we apply the tariff on the full value of the product coming in here regardless of how much value is added abroad. To economists like myself, the logic is that you would apply the tariff only to the value that is added in the exporting country and back out the cost of imported components at least for our own country, but maybe from (third-party) countries as well. But it normally doesn't work that way. There is just no way to figure out objectively how you dissect the product--say how much of it was really value-added in China. And so we apply the tariff to the whole thing. And, yes, in a strange way it's applying a tariff to our own goods which went over there and then came back.

A (BA) is no longer adequate to fill the jobs that are going to be maintained here in the U.S., unless we cut our wage levels very substantially.

So that is another potential downside.
Bergsten: Oh yeah. That is why you want free trade. You want to eliminate all that kind of distortion. But in a real world where a lot of this stuff is of necessity applied crudely, you do get anomalies like that.

On the face of it, your proposal seems to go against the advice of your colleague Catherine Mann, who argues that global free trade in software and tech services will generate greater demand for workers with IT skills and proficiency in the U.S.
Bergsten: No, no. I totally agree with her. The problem is there is an overriding, hopefully, shorter-term issue. Which is this imbalance in the currencies...Here at the institute, Cathy, I, all of us, everyday are working to move toward global free trade. But the prospects for that get badly distorted and sidetracked when you have these big currency imbalances.

What is your long-term prognosis for how the U.S. tech industry will fare in the face of global competition?
Bergsten: I am basically bullish. But it also really depends on how good a job we do in constantly upgrading our own skill level, our technology, our educational level and training of our workers to be at the cutting edge. What Cathy's work shows is that there is increasing and will be increasing intra-industry trade in high-tech goods, services and software. We will spin off the lower-tech ends of those specialties through the outsourcing that is so famous now. The way we stay ahead of the game is by adding jobs and potential at the high-skill, high-tech end of the spectrum.

But we can only do that if we both produce the technology and produce the people to implement the technology. So far I think we've been pretty good on the technology, but not nearly as good in producing the people necessary to keep it going and to implement it. So that, I think, is the big challenge and the big question as to whether the U.S. can stay ahead of the game.

How do you respond to the devil's advocate position that by sending off the lower-level programming jobs that sends a real bad message to the students thinking about programming as a career because they see these jobs going. And wages haven't been soaring in the tech field in recent years. It seems like there aren't very many economic incentives for people to go into the tech arena. What's your take on that?
Bergsten: Well, I think that is a matter of educating those being educated that there (is), in the same process that spins off the lower-level jobs, a creation of higher-skill, more-challenging, more-interesting, higher-paying technology jobs. But it does require higher skill levels to be able to fill them and employ people creatively in them.

And all those kinds of skills should be gained in the education arena first? I mean, you come out of college right at that high-skill level, is that what you mean?
Bergsten: One thing it means is almost certainly you have to do advanced training. I mean you have to do postgraduate training. You have to do Ph.Ds. You have to do specialized training in various technology fields to be able to move up the skill ladder. I think as a simple generalization, a (bachelors of arts degree) is no longer adequate to fill the jobs that are going to be maintained here in the U.S., unless we cut our wage levels very substantially.