Us Permanent Normal Trade Relations with China : What is at Stake? - a Global CGE Analysis

The China-US trade relation has been plagued by the threat of MFN revocation in the past 10 years. The recent passage of China WTO bill in US House of Representatives paves the way for eventually granting China the Normal Trade Relations (NTR, formerly MFN) status on a permanent basis. As a result, the annual review of China?s trading status in the US mandated by the 1974 Jackson-Vanik legislation will come to an end. However, as the ideological and political hostility between the two countries which has motivated the MFN debate still exists, the bilateral trade relation will continued to be haunted by similar threats, though may in different semantics and under different legal justifications. Using GTAP, this paper tries to assess the stakes of the US permanent NTR with China by simulating the MFN removal. Given the fact that 75% of US-China trade is handled by the Hong Kong traders, and textile and clothing accounts for a large portion of China and Hong Kong export to the US, this study focuses on how the Hong Kong?s re-export trade and the Multi-fibre Arrangement (MFA) will complicate the assessment. The US trade sanctions against China will seriously disrupt the bilateral trade and both countries will suffer substantial welfare loss. The trade sanctions will also devastate Hong Kong?s economy, as it serves as a middleman in the US-China trade and will be caught in crossfire. The trade conflict between the US and China will make the countries involved (US, China and Hong Kong) less integrated with rest of the world and others more integrated with the rest of the world. Thus, while the US, China and Hong Kong all suffer welfare losses, other countries all have welfare gains. The assessment of the impact of MFN removal on Hong Kong is made possible by the inclusion of the author?s work on Hong Kong?s re-export margins into GTAP database. Based on this work and the US tariff schedules, the author is able to estimate the effective tariff on Hong Kong?s services export to the US induced by the US trade sanctions against China. A scenario that does not consider the role of Hong Kong?s re-export in US-China trade will over-estimate the damage done to the US, as it ignores the expansion of Hong Kong?s exports of non-services sectors, which will lower the cost of the US import replacement. The US welfare loss is conditional on the existence of MFA. If the US unilaterally relaxes the MFA quota, it will reverse the welfare loss to welfare gain. This is in part because the MFA keeps the prices of the textile and clothing high and this gives the high potential of welfare gain from removing MFA on the US part alone. But if the MFN and the worldwide MFA are removed simultaneously, the US will suffer a welfare loss. In fact, the MFA is going to be phased out in 2005 under the Uruguay round agreement. Without MFA, this paper shows that the US sanctions against China will cause the US $2.9 billion loss. This will be the only outcome and the US will not have any options to buffer the damage. Thus, it is a wise move for the US to grant China the permanent NTR