The third quarter of this year may have been good for the American economy, with a gross domestic product growth rate of 7.2 per cent and with manufacturing indices and productivity figures also perking up. But the administration in the United States of America faces economic problems. For years, the US current-account deficits have been financed through foreign savings, and there are signs that foreigners are no longer interested in dollar assets. To ensure US competitiveness and employment, the US government has adopted a two-pronged approach. First, allow the dollar to drop, and second, turn protectionist. The vaunted bilateral free-trade agreements with some Latin American countries are unlikely to be passed by congress. Multilaterally, US steel tariffs have been declared illegal by a World Trade Organization panel. WTO’s dispute resolution mechanism may be an improvement on the general agreement on tariffs and trade’s, but it still has gaps.
No collective retaliation is contemplated. For instance, a policy may be found illegal by a WTO panel, but the offending country has no compulsion to phase it out. At worst, the trading partner can take retaliatory action. Under pressure, Mr George Bush has shown some inclination to phase out illegal steel tariffs. Instead, there is talk of a restructuring programme through 2004 and 2005, to enable domestic producers to adjust. Beyond December 15, the European Union has threatened retaliatory action. This augurs ill for world trade. The EU can at least visualize retaliatory action. When the US flouted the WTO ruling on the shrimps-turtle dispute, India had no such easy retaliatory option. India may face a protectionist backlash, thanks to software exports and outsourcing, but the American bugbear is primarily China, blamed for loss of manufacturing jobs. After complaining legitimately about the yuan’s exchange rate, the US has finally taken action. Anti-dumping duties against Chinese televisions may well be warranted. However, safeguard quotas against Chinese exports of textiles and garments are inexplicable. In terms of China’s accession to the WTO, these safeguard quotas can be imposed and peg import growth at no more than 7.5 per cent.
Chinese exports of textiles and garments to the US are significant and no doubt contribute to the bilateral US trade deficit. However, the three items chosen for safeguard quotas (bras, dressing gowns and knitted fabrics) account for around 5 per cent of Chinese exports of textiles and garments to the US, and the US does not even make bras. (It only makes some accessories, subsequently incorporated into bra-making in South America.) Safeguard action is thus driven by a desire to show that something is being done about China, rather than a genuine import surge. Signs of global economic recovery are still fragile. The greatest threat remains US protectionism.