America’s real Asian trade problem

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Looks like we’re headed for another, repetitive round of U.S.-China bickering over Chinese exports. The U.S. trade deficit with China in June rose to $26 billion, the widest gap in nearly two years. Meanwhile, the reform of China’s currency regime, announced by Beijing in June, has proven to be not much of a reform at all, since the value of the yuan against the greenback has barely budged since then. Lawmakers in Washington are sure to renew their calls for punitive action against China.

But Washington is focused on the wrong issues in regard to U.S. trade with China, and for that matter, the rest of Asia. American policymakers should be much more worried about getting left out of the Asian trade story, and the potentially dangerous consequences that would have for the future of the U.S. economy.

What do I mean? Asia is becoming much more economically integrated and intra-Asia trade is growing rapidly. Part of this is just a natural process – as the region gets wealthier, its firms are finding more and more customers at home. But the integration is also part of an active policy on the part of Asia’s leadership. The continent is being bound together by a strong spirit of free trade.

You can see that by the explosion of FTAs inked by Asian countries. According to Ganeshan Wignaraja, an economist at the Asian Development Bank in Manila, who studiously follows issues regarding economic integration in the region, the number of free-trade agreements (FTAs) signed by Asian countries has grown from just three in 2000 to 60 as of July. Nineteen of those FTAs are among just 16 Asian economies. That means Asian countries are increasingly opening markets and dropping tariffs for goods made within the region, and for those countries outside of Asia smart enough to get in on the action.

And where’s the U.S. in all of this free trade frenzy? Almost nowhere. According to Wignaraja, a mere two of those 60 FTAs involve the U.S., and only one has been put into effect — with miniscule Singapore. The other FTA, with South Korea, was signed way back in 2007 but never enacted.

What gives? Sentiment in Washington towards trade has just turned too sour. Last month, more than 100 Democrats in Congress expressed their concern about the Korea FTA to President Obama. The agreement, they said, was “job-killing.” That statement is typical of what appears to be a widely held attitude in Washington that trade is bad for the U.S. economy.

But here’s what will really be “job-killing.” If the U.S. doesn’t jump in on the Asian FTA game, it’ll find itself sitting on the bench watching everyone else scoring points. American companies will find their products will be less competitive than others in key Asian markets, because they’ll face higher tariffs than their competitors from countries that have been wise enough to sign FTAs with Asian countries. That will cost the U.S. exports to Asia, and that will truly be bad for American jobs. After all, Asia is becoming the fastest-growing market for everything, industrial and consumer products alike. If you’re not competitive in Asia, you’re in trouble, and bringing down trade barriers with South Korea and other Asian nations will only improve the chances those emerging Asian companies and consumers will Buy American.

Granted, getting a good trade deal done is difficult. Some Washington lawmakers have (probably legitimate) concerns that the Korea FTA as it currently stands doesn’t go far enough to ensure market access for American cars and beef. But these are specifics that can be worked out, perhaps over time. In the meantime, America’s overall market position in Asia is falling victim to the interests of a select few.

Asian leaders are keenly aware of the need to pursue trade agreements with their neighbors, and they’re willing to take political risks to get them done. Take Ma Ying-jeou, the president of Taiwan, for example. In June, his government inked an FTA with China. This trade pact was highly controversial in Taiwan. Many Taiwan residents fear too much integration with China will lead to the loss of their sovereignty, and protestors hit the streets to try to block the deal. But Ma stood firm – because he knows the dangers of not signing the FTA. China and the 10-member Association of Southeast Asian Nations (ASEAN) launched their FTA earlier this year, meaning Taiwan’s competitors in the region would have gotten better access to the all-important China market if Ma had bowed to political opposition. Fortunately for Taiwan’s future, he didn’t. Research from the Peterson Institute for International Economics figured that the Taiwan-China trade agreement would increase Taiwan’s 2020 GDP by about 4.5% from the current trend line.

The White House and Congress need to show similar guts. Standing by while others gain an advantage in the world’s fastest growing markets is not the way to strengthen the U.S. recovery or create jobs for Americans. Asia’s growth story is one not to be missed. But right now, Washington is reading the wrong page.