CHINA-TRADE DEBATERS FAIL TO REMEMBER THE PAST

CHINA-TRADE DEBATERS FAIL TO REMEMBER THE PAST

Did you hear the giant sucking sound as U.S. companies fled below the Rio Grande? Has your life been dramatically improved by a surge in new exports to Mexico?

For virtually all Americans, the answer is no to both questions. In fact, those claims from the debate on the North American Free Trade Agreement in 1992 and 1993 were gross exaggerations.Unfortunately, the upcoming debate on membership for China in the World Trade Organization seems likely to be dominated by the same kind of exaggerations.

Regardless of one's view on the merits of the Nafta, it is impossible to deny that both sides in the debate relied heavily upon half-truths and exaggeration to make their case.

Opponents of the Nafta overlooked the fact that the United States had unilaterally dropped most barriers to Mexican imports. Trade from Mexico to the United States was already mostly free, with the main barrier being tariffs, mostly in the low single digits.

For the most part, the U.S. companies inclined to take advantage of Mexico as a source of cheap labor had already done so. Also, the Mexican economy was quite small - less than one-twentieth the size of the U.S. economy - and had a number of serious infrastructure problems that limited foreign investment. There was little risk of widespread corporate flight south.

Nafta proponents did no better. A favorite tactic was a kind of single-entry accounting that trumpeted the benefits of projected increases in exports while ignoring that imports from Mexico were also projected to rise under credible economic assumptions.

Proponents also pooh-poohed suggestions that the Mexican government would devalue the peso, even though there were good economic reasons to think that Mexico might be forced to do exactly that.

Just months after the trade agreement was approved, the peso crisis did force a massive devaluation of the peso. U.S. exports to Mexico dropped, imports from Mexico rose, and the trade deficit with Mexico ballooned.

Today, the $5.5 billion trade surplus the United States had with Mexico before Nafta has been replaced by a deficit of $16 billion.

One would think that the atrocious rhetorical record in the Nafta debate would have encouraged caution in making claims about the economic impact of trade. Unfortunately, the penchant of parties in trade debates to exaggerate seems to have increased.

Opponents of China's WTO accession are predicting new waves of imports from China displacing U.S. workers. A few sectors, such as textiles and apparel, are likely to face more imports from China. But, as was the case with Mexico under the Nafta, the U.S. market is already largely open.

Proponents are guilty of even more egregious fibs. Economic estimates have been proffered which foresee tens of billions of dollars in increases in U.S. exports to China as a result of WTO accession.

The proponents leave out a few important facts.

First, most of the economic models used to generate those estimates also project even greater increases in China's exports to the United States; net exports, thus, are likely to decline, chiefly owing to the opening of the textile market.

Second, China's record in keeping its commitments is poor. China is not likely to assiduously abide by its WTO promises. Thus, projections are likely to exaggerate real gains.

Finally, again as was the case with the Nafta, the prospect of devaluation looms large.

China has a more consistent record of devaluing its currency to gain trade advantages than Mexico did. Chinese officials have dropped a number of rather direct hints that they plan to devalue the yuan once the WTO accession process is completed.

Hardly a week goes by that the topic is not openly discussed in the Chinese press. Although recent economic events have taken some of the pressure off of Beijing, most observers expect China to devalue the yuan in 2000.

If this comes to pass, the result would be much the same as in the peso crisis. U.S. exports to China will fall, imports from China will rise, and the trade deficit will balloon.

In the wake of the collapse of the WTO ministerial meeting in Seattle last month, many advocates of free trade wondered aloud why the public did not understand the benefits of open markets.

Perhaps the answer is that they have been lied to for so long that they do not listen to any of the claims made by advocates and choose instead to follow their gut instincts.

Advocates of both arguments on the issue of China's WTO accession could make a truthful case for their positions, just as they had the opportunity to do with the North American trade accord.

If they were to hew to the truth this time instead of generating sound bites and exaggerations, the public might take a careful look at the real case for China's membership in the WTO.