Proposal for California-China Free Trade Agreement (CCFTA)

In this post, I call on the Gubernator, Governor Arnold Schwarzenegger of California, to use his trip to Beijing (November 13-18, 2005) as a stepping stone to negotiate a free-trade agreement with California. One important reason, as a review of the recent Central America Free Trade Agreement (CAFTA) shows, is that California is subsidizing socks, skirts, shirts, and other garments being produced in Alabama and North Carolina.

What is it about China?

Two articles in The Economist last week (entitles “How China runs the World Economy” and “From T-shirts to T-bonds,” both published in the print edition on July 28, 2005) give us a reasonable understanding of the relation between China, the U.S., and the world economy.

First, China: it has a massive, cheap labor force to the extent that shoes, toys, clothes, electronics, and other manufactured goods are made cheaper by being made in China. Of at least as much important, however, is the second thing about China, namely that is usually open to trade (total goods and services in export and import is equivalent to 75% of its GDP according to The Economist).

Why does this affect the U.S.? Because the yuan or renminbi (China’s currency) has been pegged to the dollar at around 8.27 yuan per USD, the more investment and export of goods and services, the more foreign (U.S.) currency China has. Since the exchange rate is supposed to remain constant, China must push the U.S. dollars it earns back out of the country (or else the yuan will rise naturally due to less dollars in the world economy). China’s central bank does this by purchasing treasury bonds from the U.S. government. As a result, money spent comes back as money loaned out, in effect, by China’s central bank.

Needless to say, if China’s bank decided to stop buying treasury bonds or even sold some off, the U.S., its banks, and its consumers would have to pay up or face high interest rates.

Revaluing the Yuan
Some politicians call for measures to penalize China since it pegs the yuan to the dollar. With a cheaper yuan, the cost of exports from China would rise, making the price of goods (shirts, socks, and televisions) more expensive and hence more competitive with manufacturers of these goods in the U.S. The U.S. does not manufacture televisions. But, apparently, it still does manufacture shirts, socks, and skirts. To protect their constituents, politicians pressure the government to pass measures to restrict competition. Not only is this unfair trade and more typical of big government interference than free-market capitalism, it ends with consumers paying more, or subsidizing, for goods that could be made cheaper elsewhere. This is a same and I call on Governor Schwarzenegger to stop it.

Note: According to an August 2, 2005 New York Times article, entitled “Bush Administration Will Ask China to Agree to Broad Limits on Clothing Exports,” the Bush administration was forced to concede to politicians from Alabama and North Carolina to pass the Central America Free Trade Agreement (CAFTA). First, in elaborate conditions, shirt pockets and skirt waistbands must be “made in America” in order to be “freely traded.” This is essentially a subsidy on clothing imports from central America, and it is endemic in this type of agreement (see a wonderful book by Pietra Rivoli entitled The Travels of a T-Shirt in the Global Economy). Second, the Bush administration promised to force quotas in China imports. This is grossly unfair competition. I hope that the mechanisms of free trade and competition can put an end to subsidies that are wasting away on shirt pocket and skirt waistband manufacturing in Alabama and North Carolina. I am sure the workers can find something better, more productive, and more competitive to do.

But as for California, it is a dynamic state. It’s GDP is high, with vast farmlands, world-class technology, and cultural resources. Why should California subsidize the workers in Alabama and North Carolina? It shouldn’t. Therefore, California should negotiate a free trade agreement with China, independent of the rest of the United States.

This would have several advantages: first, California would no longer be forced to pay higher prices for consumer goods made more cheaply in China. California’s consumers would enjoy low prices on many consumer goods, leaving them with money to invest in business, home, and well-being. Second, removing subsidies to Alabama and North Carolina would attract businesses into California. California has lost much business due to its concern with worker welfare and corporate responsibility. A free trade agreement with China would allow business to purchase unsubsidized goods and deploy resources where they are most effective.

If Alabama and North Carolina want to outlaw Target and Wal-Mart in order for their shirt, sock, and skirt factories remain subsidized, I will grant them that freedom. But I do not believe California, California business, or Californians should be forced to bear this subsidy. Negotiate a California-China Free Trade Agreement today! Make California a better, richer, and more productive place to live!