Remarks by Secretary Wilbur L. Ross at the National Press Club Headliners Luncheon

May142018

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Monday, May 14, 2018

Thank you, Andrea, for that kind introduction. It is an honor to be addressing the National Press Club.

When I was a student at Yale, my dream was to be a writer, so I joined a course called Daily Themes which required 1,000 words of fiction by 10 a.m. each morning.

By the second week, I was out of material and dropped out of the course.

As a result, I admire people like you who write professionally every day.

Since we are in the midst of negotiations with China, that will be my main topic.

Let’s begin with two questions.

Does anyone doubt that China’s trade surpluses with us have boosted their economic growth?

Second question: If their surpluses with us have been good for China, how can our trade deficits with them not be bad for us?

I believe that deficits do matter!

But not all trade deficits are the same.

For example, the United States has historically not been self-sufficient in oil, especially before the shale-oil phenomenon.

Therefore, a country supplying our needs should not be criticized for doing so because we otherwise would have to buy oil from someone else.

I call this a "blameless" deficit.

However, trade deficits caused by artificial means --like asymmetrical tariffs, and non-tariff trade barriers -- are NOT blameless.

They are blameful -- and shameful.

 This FIRST CHART I brought with me today shows that in 21 of 23 major product categories, China’s tariffs are far higher than ours.

A similar chart for Europe would show almost the same disparities: they both are far higher than the U.S.

This is not natural comparative advantage.

This is protectionism.

The United States is the most open and the most exploited market in the world.

Both China and Europe eloquently espouse free-trade rhetoric, but -- in actual practice -- are far more protectionist than the United States.

 Our trade policy’s main objective is to make their real-world behavior match their free-trade speeches.

A second objective is to have our trading partners abide by the rules.

A major rationale for admitting China into the World Trade Organization was the expectation that they would abide by these rules.

But they have not.

Instead, of the 424 trade actions the U.S. has in effect against violations of the rules, half are antidumping or countervailing cases against China.

They have subsidized their industrial expansion far in excess of demand.

And have disrupted global markets.

China has forced technology transfers from companies wanting to sell to its vast market, and it has stolen intellectual property.

All of these abuses have been well documented in the media, your media. Not fake news!

A third objective of our trade policy is reforming prior errors made by our government.

Just after World War II, it was U.S. policy to rehabilitate Europe and Asia suffering from the ravages of war.

 At that time, the United States was the unchallenged world economic power and had regular trade surpluses.

We created GATT, which morphed later into the WTO.

We made systematic trade concessions to which we remain bound today, decades later.

The policy error was that we did not time-denominate those concessions, or provide other mechanisms to adjust policy as conditions changed.

Concessions made to China or Europe that might have been totally correct 50 years ago are simply no longer appropriate today.

Yet, we are locked into the present trading system with rules created for a different era.

Despite these blunders, our underlying economic strength enabled us to continue to have trade surpluses into the 1970s.

We are now constrained by two sides of a WTO pincer.

One is the most-favored nation clause, or MFN.

This rule says that we must apply the same tariff to every nation with which we do not have a free trade agreement.

The second one is the so-called “Bound Rate."

This is an upper limit on the tariffs we can charge foreign nations, even with application of MFN.

The combination of MFN and Bound Tariff Rates prevent us from having reciprocal tariffs because, in most cases, our bound rate ceiling is at or near our very low MFN applied rate, while other nations have higher levels of both.

They, therefore, have little incentive to negotiate.

For example, our MFN applied tariff on passenger cars is 2.5 percent, and so is our bound rate.

We are stuck with it.

Europe’s tariff is 10 percent, four times ours.

China is at 25 percent, 10 times our tariffs.

Efforts over the last decade and a half to negotiate broad changes to these tariff rates have failed, in large part because of China’s unwillingness to make concessions commensurate with its significant role in the global economy.

So, China, the world’s largest car market, is effectively closed to our exporters.

This is not fair trade.

This is not free trade!

There is an even more bizarre outcome regarding Mexico.

NAFTA was to become a protective wall around the United States, Canada, and Mexico, for our collective benefit.

But NAFTA did not stop Mexico, which then had high auto tariffs on non-NAFTA countries, from signing a Free Trade Agreement with Europe.

That agreement permits Mexican-produced autos to enter Europe duty-free while auto producers making cars in the United States remain subject to Europe's 10 percent tariff.

Automakers seeking exports to Europe derive several times more benefit from this tariff anomaly than from lower Mexican labor costs when they move a plant to Mexico.

Similar examples abound throughout the world.

In addition to problems with WTO rules, there are problems with the organization’s mindset.

The WTO has 164 members, virtually all of which export products to the United States and want to export more.

Access to the U.S. market is one of their primary benefits of joining the WTO.

And each of those 164 countries has one vote -- equal to that of the United States.

You can only imagine how damaging that is to the United States.

The WTO constantly complains that the increasing number of antidumping and countervailing trade cases brought by member countries indicates growing protectionism.

It apparently does not occur to the WTO leadership that more trade actions are brought because there are more trade violations.

Why does all of this matter?

Because the U.S. trade deficit is the largest in the world.

It is unreasonable for one country to bear the burden of bolstering the economic fortunes of the entire planet.

The United States is one of the least protectionist major countries, and we have the deficits to show for it.

China and Europe are highly protectionist and their positive trade balances with us reflect it.

A few charts will quantify these thoughts.

This SECOND CHART shows the relatively slow growth of China's economy prior to its entry into the WTO.

The black vertical line marks its entry into the WTO in 2001.

Note the remarkable acceleration in growth following their admission into the WTO.

What changed?

Just one thing: China joined the WTO with beneficial terms guaranteeing their access to the tariff anomalies I mentioned earlier.

As shown in the THIRD CHART, even though our total economy was much larger than China’s, their manufacturing output surpassed ours beginning in 2009--2010, and the gap has widened since then.

And as you will see in the following FOURTH CHART, China's massive growth in output following its admission into the WTO has been reflected in the loss of U.S. manufacturing jobs.

It is not just automation that has cost factory jobs: It is also substitution of imports for domestic production.

There are approximately 100 different ways in which China subsidizes its companies, even to the point of fostering continued expansion of unprofitable factories beyond the growth in demand.

The dumping of products in overseas markets at subnormal prices is a significant cause of the recent crises in steel and aluminum. Once again, their behavior is very different from their words.

The FIFTH CHART indicates each time China said it was cutting back on steel. The chart shows their actual output.

We impose duties in response to dumping, but they cleverly avoid our trade action by transshipping products through a third country, or with a slight modification of the product, or other devices.

The steel object I am holding up recently became subject to a 25 percent tariff.

China's response was to add the small flange at one end of the second one.

WTO rules require such specificity in tariffs that this trivial change avoided the original tariff.

You can’t make this stuff up!

This is what happens every day in the real world.

The problem with classic free trade theory is that it does not correspond to reality.

The real world is filled with distortions like the ones I have mentioned.

This explains why the President insisted on a robust trade policy.

In terms of enforcing the rules, the Commerce Department has initiated 75 percent more trade cases than during the comparable period of the last administration.

And we will continue to aggressively pursue violations.

But, because of all the inherent loopholes in the enforcement of trade law, more comprehensive action has become necessary.

Two separate investigations, one on steel and the other on aluminum, have been completed by the Department of Commerce under Section 232 of the Trade Expansion Act of 1962.

And, an investigation under Section 301 of the Trade Act of 1974 has been undertaken by the U.S. Trade Representative against China for intellectual property rights violations.

The steel and aluminum cases are aimed at dealing with today’s problems.

The Section 301 investigation is to protect our future from an already evolving negative trend in technology.

The SIXTH and FINAL CHART shows the intensified trajectory of our trade deficit with China in advanced technology products.

China's announced decision to subsidize a dozen of the most promising technologies to become dominant in them by the year 2025 is a major problem.

We welcome legitimate competition, but we cannot tolerate competition that is based on massive government subsidies and industrial cyber espionage.

Another demonstration of the importance of technology is that the Patent Office, part of the Department of Commerce, will issue its 10 millionth patent in June.

This remarkable accomplishment far exceeds the patent activity of any other country, and demonstrates the importance of intellectual property to the U.S. economy.

Taken together, the 232s and the 301 investigation are bookends around our trade-policy initiatives.

The logic behind them is indisputable.

Both focus on protecting key elements of the economic base that is essential to national security.

But the retaliation lists published by China have created worry about a trade war.

So, let’s analyze how far it might go.

As the President has pointed out, China sells us far more than we sell them.

Given the lopsided balance, they would run out of targets for tariffs much sooner than we would.

Also, their retaliations would negatively impact their own economy as well as ours.

China buys no products from us if they have cheaper alternatives.

Therefore, the tariffs they impose will come at a cost to them.

This would be particularly severe for China in agricultural products.

China has 20 percent of the world’s population but only 11 percent of the arable land.

They cannot feed themselves, so they must import to fill the gap, especially as their diets shift toward more protein content.

Take soybeans as an example.

It is true that China is our largest customer.

But it also is true that Brazil accounts for a bit more than 50 percent of Chinese imports, while we are 30 percent.

 For Brazil to replace us, they would have to increase their exports to China by 60 percent.

But if Brazil could ship that much more at competitive prices they would do so already.

They have not been holding back just to help the United States.

Brazil also has issues with climate and its transportation networks, which limit its ability to export materially more than it already does.

Realistically then, to fill the additional Chinese demand, they would have to divert some soybeans now sold elsewhere.

In return for a higher price to China, they might be willing to disrupt existing customer relationships.

If they did so, the market they had formerly supplied would now open up for U.S. producers.

At the end of the day, it would be, at best, a pyrrhic victory for China.

Remember, food is a much higher percentage of income in China because incomes are so much lower.

Therefore, the pain in China would be widespread.

Against this background, two weeks ago, Treasury Secretary Mnuchin, U.S. Trade Representative Lighthizer, Larry Kudlow, Director of the National Economic Council, Peter Navarro, Assistant to the President for Trade, and I spent two days in China.

We negotiated with a delegation of senior Chinese leaders from its Ministries of Finance and Commerce, and the People's Bank of China, led by Vice Premier Liu He.

Before landing in China, we sent them an extremely detailed list of our needs, and they responded with a similarly detailed, but quite different list of proposals. The gap is wide.

As has been announced, China's Vice Premier will soon come to Washington to follow up on those discussions.

It is difficult to handicap the outcome, but my hope is that the strong personal relationship between President Trump and President Xi will facilitate an agreement, just as it seems to be doing relative to North Korea.

The one sure thing is that President Trump meticulously honors his campaign promises, and key among them is making our trade relations with China much fairer.

Some pundits have said this activity on trade will result in retaliation and undo the benefits of deregulation and the tax cuts.

This is an exaggeration.

 If China retaliates with a 25 percent tariff on $50 billion of our exports, we would lose a major fraction of that volume but not all. For the sake of argument, assume that we lost all of that volume.

The hit would be only $50 billion.

This would be painful to the direct targets, but have less than a three-tenths of one percent impact on our $18 trillion economy, and it would partly be offset by the reduced imports of the goods on which we imposed our original 25 percent tariffs. Some portion of those would be produced domestically.

Also, the President has directed the Agriculture Department to use all of its power to ameliorate the impact on farmers.

The inflationary effects would be even more muted. Replacing $50 billion of Chinese imports with either our own production or imports from elsewhere would likely cost less than the tariff percentage.

But let’s pretend we had to absorb the full 25 percent increase, $12.5 billion.

This is a rounding error, seventy-one thousandths of 1 percent, well within the margin for error of any economic forecast.

Following this same logic, it would take $180 billion of tit for tat to cause a 1 percentage point reduction in GDP.

This is far more than the total of $130 billion in goods we export to them, and some of the food and lots of the technical products would not be readily replaceable.

Therefore, there is no real-world circumstance where China could cut our GDP by that much. We simply don’t export enough to them.

At the $180 billion level, the maximum inflationary impact would be $45 billion or one-quarter of 1 percent of our economy. Given the various offsets, the actual effect of retaliation would be even less than that.

Instead, China could easily reduce our trade deficit by purchasing from us a larger percentage of their existing $1.5 trillion of imports, rather than from existing free-trade partners.

To do so, they might have get around their own trade barriers, both tariff and non-tariff.

The more difficult challenge for them would be the intellectual property area.

They are rapidly ramping up their own R&D, but are still years behind us in semiconductors and other areas.

Respecting our intellectual property would slow, but not stop, their efforts to move their manufacturing up the intellectual value-added scale.

For instance, the Commerce Department’s recent enforcement actions against ZTE, China’s second largest telecom equipment manufacturer, essentially caused them to cease operations.

President Trump tweeted yesterday that we will review that action, but it does demonstrate China’s dependence on U.S. technology.

Given all of these factors, I hope that we can make a fair deal. But if that does not happen, a trade tit-for-tat will not be economically life threatening to the United States.

I look forward to your questions.

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