Endnotes

¹These data refer to trade in goods only. Bilateral trade in both directions dropped sharply in early 2009 relative to the corresponding period in 2008.

²Economic analyses such as Bagwell and Staiger (1999, 2002) treated the GATT/WTO as a self-enforcing agreement and focus on outcomes sustained through each member's recognition that any country can seek to amend the initial bargain.

³The increased incentive to defect from the initial bargain can result from economic forces that are completely distinct from any political incentive to raise tariffs (e.g., to assist a preferred domestic industry or to redistribute income). Broda, Limão, and Weinstein (2008) provided recent empirical evidence that importers' market power does influence their trade policies.

⁴Although the link has wide acceptance among US policy makers and the public, economic analysis indicates that bilateral imbalances have no particular significance in a multi-country world. Free trade based on comparative advantage would be expected to produce trade surpluses with some partners and trade deficits with others. Moreover, as we discuss in Section 6, an overall external imbalance cannot exist without a corresponding imbalance between domestic saving and domestic investment spending.

⁵On the use of currency undervaluation to protect the entire tradables sector, see Corden (1981), Freund and Pierola (2008), Rodrik (2008), and Staiger and Sykes (2008).

⁶According to Saxonhouse (1983), Japan's industrial policy in the 1970s should be viewed as a means to overcome distortions resulting from the country's poorly functioning capital market. The PRC uses industrial policy tools including taxation, indicative lending, and input pricing to provide firms with incentives intended to achieve desired modifications in the composition of economic activity (Bergsten et al. 2008; USITC 2007). The PRC categorizes its industries as “encouraged,” “restricted,” or “to be eliminated,” with these classifications subject to frequent revision, and structures incentives accordingly. Although an ongoing goal of PRC industrial policy is to facilitate movement from a planned to a market economy, firms owned entirely or in part by government units continue to play a major role in the economy.

⁷We follow common practice in expressing national and regional bilateral imbalances as shares or fractions of the overall US imbalance. Note, however, that some US bilateral balances are positive. Moreover, this presentation may suggest that movements in individual bilateral balances are determined independently, while in fact they can be linked causally. In particular, the reduction over time in the shares of Japan and other East Asian countries reflects relocation via direct foreign investment of processing activities to the PRC.

⁸Data for the PRC do not include Hong Kong, China, with a ratio of 397%, nearly half of which represents exports to the mainland.

⁹Data for the PRC include inward FDI from Hong Kong, China, of which some portion is due to round-tripping from the mainland. With Hong Kong, China considered separately from the PRC, in 2008 Hong Kong, China ranked #3 worldwide in terms of FDI stock, after the US and the United Kingdom, while the PRC ranked #6, after France and Germany. Japan was #24 (US Central Intelligence Agency 2009).

¹⁰Bergsten et al. also note efforts in the early to mid-1990s to recentralize, particularly in the area of tax collection.

¹¹On the other hand, security concerns may have shaped US policies toward Japan until 1975, given US reliance on Japanese bases during the Vietnam War.

¹²See, for example, the discussion in Bown (2009b).

¹³The US had already negotiated similar restrictions on Japanese textile exports prior to World War II.

¹⁴During this period, the US also negotiated VERs with Japan and other exporters outside the legal frameworks of the safeguard and AD laws.

¹⁵Under the self-enforcing WTO system, the US and the PRC were free to choose this option as long as no country filed a complaint.

¹⁶Authors' estimates based on the data in Bown (2009a). Investigations naming firms in more than one European Union member country for the same product are combined as a single case.

¹⁷For a discussion of Section 301, see Bhagwati and Patrick (1990) and Bayard and Elliott (1994).

¹⁸This section draws on data compiled by Hudec (1993). The US was not the first country to file a formal GATT trade dispute against Japan. Australia filed a formal dispute in 1974 over Japanese quantitative import restrictions on beef.

¹⁹When the WTO was created in the Uruguay Round, many less-developed countries were permitted to join without special conditions. The PRC's “special” treatment was presumably a consequence of its already evident potential for significant global impact as an exporter.

²⁰For a number of years prior to 2001, the US had given the PRC's exports MFN treatment (Normal Trade Relations in US law) even though the PRC was not yet a member of the WTO. Thus, the PRC's 2001 entry did not substantially reduce the US applied tariffs faced by PRC exporters, although it did increase the certainty of that treatment.

²¹Indeed, the shift toward US use of countervailing duty policy against the PRC described above and illustrated in Table 3 may reflect the US desire to speed the elimination of the PRC's domestic subsidy programs, which increase the PRC's ability to export while reducing foreign access to the PRC's domestic market.

²²Perhaps in preparation for the possibility that the parties to a future dispute are unable to negotiate a settlement and the dispute goes to WTO adjudication, PRC officials are becoming well informed on WTO rules and case law regarding subsidies and countervailing measures. As Bown (forthcoming) indicated, the PRC has been closely following the evolution of WTO rulings on subsidies in other countries' disputes (see Tables). As of early 2009, the PRC had participated as an “interested third party” in over a dozen formal WTO disputes involving other countries' subsidy issues.

²³While VERs are banned under the Agreement on Safeguards, they are implicitly encouraged elsewhere in the WTO Agreements (e.g., through encouragement of “price undertakings” by targeted exporting firms in investigations under the WTO Antidumping Agreement). Moreover, because the WTO is a self-enforcing system, VERs can still be negotiated provided that no member complains. Because in many instances the exporting country is better off under a VER than under the likely alternative (usually a higher import duty levied under some other policy), there may be no “party” (member) to complain. Consumers of the affected imports and taxpayers in the importing country are likely to lose, but they have no direct standing in the WTO system.

²⁴One consequence of the failure of the US and other WTO members to address AD reform is that the use of AD has proliferated globally across the WTO membership. Indeed, the most frequent users of AD are now developing countries, with other developing country exporters, especially the PRC, a frequent target.

²⁵The current account balance is the balance on goods and services trade plus net earnings of factors employed abroad plus net unilateral transfers. In a very simple world of barter trade in which exports and imports of goods and services are the only international transactions, the trade balance is the same as the current account balance. In practice, movements in the US merchandise trade balance (our main focus elsewhere in this paper) are closely linked to movements in the current account.

²⁶More precisely, foreign acquisitions of US assets in that year must exceed US residents' acquisitions of foreign assets. However, equities and similar ownership claims do not reflect borrowing and lending. For example, “foreign acquisitions of US assets” can include greenfield construction of new foreign-owned manufacturing facilities in the US or sale of an interest in an existing US business to foreign investors. The statement may also be misleading in implying that it is international borrowing that must adjust to cover the gap between domestic production and domestic demand for goods and services.

²⁷See McCulloch (1990) on the macroeconomic roots of the US-Japan current account imbalance in the 1980s. Ito (2009) compared the US-Japan imbalance of the 1980s with the US-PRC imbalance in the 2000s. His empirical analysis confirmed a significant causal role of budget balances in determining current-account imbalances. However, he also concluded that the Japanese current-account surpluses of the 1980s were driven by underperformance of investment rather than over-saving.

²⁸US Bureau of Economic Analysis, National Income and Product Accounts, Table 5.1, shows the decomposition for each quarter of US saving into private saving and government saving.

²⁹Mann (2004), writing during a period of dollar depreciation, used the term “co-dependency” to describe the complementary domestic macroeconomic imbalances and emphasizes that currency realignments alone cannot correct the US external imbalance.

³⁰The full export price of these goods is reflected in the statistics on US-PRC trade even when PRC value-added is only a fraction of this price.

³¹The official position of the US may be shifting toward greater acceptance of the role of US macro policy in sustaining the imbalance. In a major speech at Beijing University on 1 June 2009, US Treasury Secretary Timothy Geithner explicitly acknowledged the need for the US to increase private saving and reduce the fiscal deficit. Similar to many past public pronouncements of US officials, he also called for the PRC to shift away from export-driven growth by strengthening domestic demand.

³²Because of the PRC's heavy reliance on coal-fired power plants, most analysts have assumed the PRC will lag wealthier trading partners in efforts to limit carbon omissions and that border measures associated with a new global regime would therefore reduce the international competitiveness of PRC exports. However, the PRC has recently taken the world lead in building coal-fired power plants that are efficient and less polluting (Bradsher 2009) and has also moved forward rapidly with wind and nuclear power generation. By mastering clean technologies and driving down costs, the PRC may emerge as a major exporter of the environmental capital goods needed to implement ambitious goals regarding carbon emissions.

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