Current economic theory assumes that nations will voluntarily adopt “fair trade” practices. The U.S. is in a strong bargaining position to negotiate balanced trade relative to partners that drive our trade deficit – in a trade war, they have a lot more to loose. The U.S. should proactively adopt a tit-for-tat approach to foster trade liberalization and fairness or risk losing the “international trade war”. Above ‘fair trade” enforcing mechanism would provide crucial time for retraining displaced labor and/or protecting sectors impacted by unfair practices.

1. November, 2012
53rd ANNUAL TAX FORUM.
“No nation was ever been ruined by trade”
Benjamin Franklin
“Free trade is not based on utility but on justice”
Edmund Burke

2. Background.
1
Entrepreneur
Investor
Managing Partner
ARGENTO DIGITAL VENTURES
Partner / Vice-President
ADVENTIS MANAGEMENT
CONSULTING
Leader, Telecommunications &
Media Practice
ROLAND BERGER STRATEGY
CONSULTANTS
Principal (Twice Winner of
Professional Excellence Award)
BOOZ ALLEN HAMILTON
Managing Director
GOLDEN SEEDS - Angel &
Venture Capital Investment Group
Managing Partner
ARGENTO DIGITAL VENTURES
CEO / Founder
MON AMI PET WORLD
Member of Technical Staff
AT&T BELL LABORATORIES

3. 2
1. International Trade and the U.S. Trade Deficit.

4. Globalization and International Trade are related by a “virtuous”
cycle.
3
Technology
evolution. Rising
incomes.
Reduced transportation
and communication costs
Increased economic
specialization
GLOBALIZATION
INTERNATIONAL
TRADE
Increased interdependence (goods, financial) across nations

5. As a result, the growth in exports worldwide has largely outpaced GDP
growth since 1950. Export increased 35X while GDP only 9X.
4
Source: WTO
0
500
1000
1500
2000
2500
3000
3500
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
1950 = 100 Exports (volume) GDP (volume)
Exports multiplied by 35 times since1950,while
GDP only by less than 9 times
EXPORTS AND GDP GROWTH WORLDWIDE

6. The Great Recession of 2009, temporarily slowed down exports growth. In
the last decade, exports grew 1.6X, while GDP grew 1.3X.
5
90
100
110
120
130
140
150
160
2000 = 100 Exports (volume) GDP (volume)
-15%
-10%
-5%
0%
5%
10%
15%
20%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
volume growth rates
average growth rate
of exports = 4.3%
average growth
rate of GDP= 2.4%
EXPORTS AND GDP GROWTH WORLDWIDE
Source: WTO

7. In the last two decades, U.S. imports grew 3.6X, exports 3.2X, while
GDP 1.7X. As a result, trade deficit has increasingly become an issue.
6
Source: IMF, World Economic Outlook
90
140
190
240
290
340
390
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1990 = 100 GDP (volume) Exports (volume) Imports (volume)
U.S. IMPORTS & EXPORTS

8. In the last two decades , the U.S. trade deficit has increased from 2%
of GDP to over 5% of GDP. China has been responsible for 40% of the
U.S. trade deficit, in the last three years.
7
Trade balance
in $ billion (rhs)
-1000
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
$ billion% of GDP -
current prices
Source: IMF World Economic Outlook Database
U.S. TRADE DEFICIT
- Decrease in U.S. demand
- QE I, II – cheaper dollar.
- Sanctions.

9. The U.S. ranks third in exports and second in imports, worldwide.
8
0
500
1000
1500
2000
0%
3%
6%
9%
12%
15%
$ billionShare of total
exports
0
500
1000
1500
2000
2500
0%
4%
8%
12%
16%
20%
$ billionShare of total
imports
The U.S. ranks 3rd in exports
worldwide (share of 10.3%)
Source: WTO
The U.S. ranks 2nd in imports
worldwide (share of 15.6%)
The U.S. share of WW
GDP is 22%
(China’s is 10.4%)

10. China is the world’s largest exporter, surpassing the UK (2002), Japan
(2004), the U.S. (2007) and Germany (2009).
9
16 32
128
0
25
50
75
100
125
150
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
USexports = 100 China Germany Japan UK India Brazil
In2007, China overtookthe US
Source: WTO
TOP WORLD EXPORTERS
Is GERMANY an example
worth following?

11. U.S. imports are concentrated around 5 trading partners that represent
68% of total. China is our largest import partner.
10
14%
12%
19%
17%
6%
U.S. TOP IMPORT PARTNERS
Source: WTO

12. U.S. exports are concentrated around 5 trading partners representing
62% of total. China is our fourth largest export partner.
11
19%
18%
13%
5%
7%
Source: WTO
U.S. TOP FIVE EXPORT PARTNERS

13. Germany and China rely on exports as their “economic growth
engine”. The U.S. relies much less so, among industrialized nations.
12
16% 21%
36%
26%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
US China Germany Japan UK India Brazil
Source: WTO, IMF World Economic Outlook Database
DEPENDANCE OF ECONOMY ON EXPORTS (EXPORTS/GDP)
The U.S. has
BARGAINING POWER in
TRADE NEGOTIATIONS

14. The U.S. dependence on trade for “economic growth” is
relatively low when compared to major trading partners. The
U.S. bargaining position in trade negotiations is STRONG.
13
28%
48%
53%
30%
23%
30%
51%
61%
Source: WTO
DEPENDANCE OF ECONOMY ON TRADE (EXPORTS+IMPORTS/GDP)
The U.S. has
BARGAINING POWER in
TRADE NEGOTIATIONS

15. 14
2. Trade Practices the Role of Free Trade
Organizations and Free Trade Agreements.

16. The U.S. has the lowest average import tariffs among large,
industrialized economies.
15
3.5%
5.3%
9.4%
4.5%
13.7%
5.3%
9.6%
12.6%
Source: WTO
IMPORT TARIFF IMBALANCE – U.S. & ROW

17. The U.S. also has the lowest import tariffs as a percentage of total
imports.
16
2.1%
7.2%
10.2%
4.6%
3.1%
2.1%
9.5%
2.8%
Source: WTO

18. Import tariff imbalance across key goods is much more severe.
17
Source: WTO – average tariffs by product
0
2
4
6
8
10
% Chemicals
0
10
20
30
40
% Clothing
0
5
10
15
20
% Leather and Footwear
0
5
10
15
% Non-electrical machinery
0
5
10
15
% Electrical machinery
0
5
10
15
20
25
% Transport equipment

19. Non-tariff barriers, a major obstacle to fair trade are applied routinely
by some export-driven nations.
18
NON-TARIFF MEASURES (NTMs)
First three measures are often necessary to achieve public policy goals (e.g., health
and safety of consumers).
A harmonization, rather than elimination of these practices is recommended.
Important NTMs (Non-Tariff Measures)
Technical barriers (e.g., labeling).
Sanitary measures (e.g., licenses, certifications).
Domestic regulation.
Quantity restrictions.
Export subsidies.
The impact of NTMs on total imports is estimated at 10%, higher than the impact
of tariffs. Quantification of their impact is challenging.

20. Other unfair practices are used to unbalance international trade.
19
DUMPING
Pricing on imported products lower than in their domestic markets.
WTO’s “Anti-Dumping Agreement” aims at addressing this issue.
EXCHANGE RATE MANIPULATION
China’s currency is “purposely” under-valued distorting trade in their favor
(imports from China become cheaper and exports to China more expensive).
Trade deficit with China could be easily narrowed by a re-alignment of the
Dollar/Yuen exchange rate.
An agreement for global re-alignment of exchange rates is urgently needed.

21. The World Trade Organization (WTO) is the main body overseeing
“trade practices”. Multilateral Trade Agreements go further in
liberalizing trade.
20
ORGANIZATIONS AND AGREEMENTS AIMED AT FOSTERING “FAIR TRADE”
GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) -- January, 1948.
Initially 23 member countries.
The first round of negotiations resulted in 45,000 tariff agreements affecting
$10 billion (around one-fifth of the world trade, at that time).
MULTILATERAL TRADE NEGOTIATIONS (Trade Rounds)
Aimed at tariff reduction and non-tariff barriers elimination.
Several rounds have taken place over last 50 years fostering international trade
by eliminating barriers to free trade (e.g., NAFTA).
URUGUAY ROUND (1986-1994). Birth of the World Trade Organization (WTO)
Formally replaced GATT.
Permanent International Institution -- GATT was a multilateral agreement.
Besides goods trading practices, WTO covers trade in services and
Intellectual Property (GATT focused exclusively on goods).
The US has been a member of the WTO since its birth, 1 January 1995;
The US was also one of the 23 first signatories of the GATT in 1948.
Bare
Minimum
“Free”
Trade

22. The U.S. has signed several Regional and Bilateral Trade Agreements
but not with China, India, Russia, Japan or Brazil some of the most
protectionist nations.
21
TRADE AGREEMENTS – U.S.
BILATERAL TRADE AGREEMENTS
Australia, Chile, Morocco, Bahrain, Oman, Peru, Singapore.
Several other bilateral agreements are waiting for Congressional approval.
REGIONAL TRADE AGREEMENTS
North-America Free Trade Association (NAFTA).
Trans-Pacific Partnership Agreement (TPP).
Free Trade Area of the Americas (FTAA).
US-Southern African Customs Union Free Trade Agreement.
The Enterprise for ASEAN Initiative.
U.S.-Andean Free Trade Agreement.
Central American Free Trade Agreement—Dominican Republic.

23. In 2011, the WTO had 153 members accounting for 95% of the world’s
trade. Four new members entered in 2012, Russia among them.
22
WTO FOOTPRINT

24. Doha Round, sponsored by the WTO, is a key effort to balance
tariffs. It has been deadlocked for a number of years.
23
DOHA ROUND
Negotiations have extended for over 10 years.
The U.S. is offering to improve access to foreign agricultural
products into the U.S., eliminating agricultural export subsidies; easing tariffs
and quotas and reducing other forms of trade-distortions.
In return, the US aims to negotiate services trading and to reach a level
playing field with emerging economies by reducing tariffs on industrial
goods for some manufacturing sectors;
Emerging economies insist that the Doha round was never intended to
result in such balancing.
RATIONALE FOR NEGOCIATION FAILURE
Scope creep. Excessive delays.
Shifting economic power away from industrialized nations. (75% of world’s GDP
growth in 2011- 2014 will come from developing nations, compared to less than
50% in 1998 - 2001)

25. The WTO mandate does not go far enough to ensure “fair trade”.
24
OBJECTIVE OF WTO AND MULTILATERAL TRADE AGREEMENTS
Reciprocal liberalization of trade-barriers applied in a
non-discriminatory fashion.
BARRIERS TO “FAIR” TRADE
Tariffs, import taxes across product categories.
Non-tariff barriers, such as quantitative restrictions (e.g., rare earth metals) or
export subsidies (e.g., solar panels).
Dumping (e.g., solar panels).
Currency manipulation/devaluation.
NATIONS FAVORED BY TRADE IMBALANCED HAVE “LITTLE” INCENTIVE TO
NEGOTIATE

26. 25
4. Impact of International Trade on the U.S. Economy.

27. Nations’ core capabilities determine their exports. International trade
influences economic development and social welfare.
26
IMPORTS IMPACT THE ECONOMY AND SOCIAL WELFARE
Economic structure, Welfare.
Inflation.
Unemployment.
Wage inequality..
NATIONS EXPORT PRODUCTS WITH COMPETITIVE ADVANTAGE
Economics Models (e.g., Heckscher - Ohlin) indicate that countries export
goods that use abundant resources and import goods that use scarce
resources.
Under this theory, the US and other developed economies would
export mostly capital-intensive and knowledge-intensive goods and
import from developing economies labor-intensive goods and natural
resources..
IMPACT OF INTERNATIONAL TRADE ON THE U.S. ECONOMY

28. EXPORTS bring innumerous benefits to a nation’s economy and it
drives local businesses to become world-class players.
27
• Increased revenues. Selling to new “foreign” customers. Foreign
market may be growing faster than domestic market.
• Lower production costs due to economies of scale and
“experience curve” effects.
• Utilization of idle capacity.
Access to New
Markets
• Focus on core capabilities.
• Improved efficiency.
• Improved product quality.
• Becoming more price competitive.
Enhances
Competitiveness
• Balance domestic market fluctuations.
• Overcome saturation of domestic markets.
• Extent product-life cycle.
• Follow domestic customer while overseas.
Increased
flexibility

29. IMPORTS also bring significant consumer and economic benefits.
28
• Lower prices for certain products due to increased supply 
increased real disposable income.
• Increased variety of products to choose from.
• Hedge against temporary shortages (e.g., agricultural products
and local weather effects).
Benefits to
Consumers
• Fair trade fosters competitiveness and keeps suppliers efficient
(e.g., making investments, reducing production costs).
• Trade barriers foster non-competitive industries, able to supply
only protected domestic market (e.g., Brazil auto industry)
Enhanced
Competitiveness
• Lower cost imported intermediate goods.
• Lower production costs for local producers.
• Reduced prices for consumers or increased profits for producers.
Lower Inflation

30. IMPORTS are capable of creating or destroying jobs.
29
IMPACT ON U.S. JOBS
Between 1983-2002, 6 million manufacturing jobs were lost mainly due to
imports and offshoring.(source: 2011 World Bank).
Despite this loss of jobs the manufacturing sector maintained its share of
real GDP (around 23% vs. 22% in the 1960s) and even increased its share in
exports of goods (from 61% in 1963 to 71% in 2011).
Manufacturing in now more concentrated on capital goods (around 38% vs.
28% in the 1960s), which is in line with theoretical predictions.
IMPACT OF IMPORTS ON “U.S. JOBS”
Timely availability of “alternative” jobs for displaced manufacturing workers
and /or retraining mechanisms MUST BE ENSURED !!.

31. The trade deficit with China eliminated or displaced more than 2.7
million jobs (2.1 million in manufacturing), since entering the WTO.
30
Source: Scott (2012)

32. The major NEGATIVE impact of IMPORTS appears to be on wages.
31
FLEXIBILITY AND SIZE OF U.S. ECONOMY ALLOWS TRADE TO IMPACT WAGES
MORE THAN UNEMPLOYMENT LEVELS
65% of manufacturing workers who lost their job during the 1980s-90s due to
trade liberalization were employed two years later.
However, 25% accepted jobs with 30% lower wages.
(source: The Economist, 2007)
TECHNOLOGICAL CHANGE AND REQUIRED SKILLS-SETS >> WAGE EROSION.
OTHER POTENTIAL REASONS.
De-unionization.
Decrease in real minimum wage.
Immigration of unskilled workers.

33. The U.S. focus on EXPORT of knowledge and capital-intensive goods
exacerbates demand for highly skilled labor.
32
1
• The U.S. excels on knowledge and capital-intensive sectors.
2
• Demand for skilled workers increases.
• Demand for unskilled workers decreases.
3
• Skill premium increases.
• WAGE INEQUALITY INCREASES
REAL HOURLY WAGES ACROSS INCOME PERCENTILES

34. Wage inequality has been expanding since the 1980s. Individuals with
lower incomes and education levels are the losers.
33
REAL HOURLY WAGES ACROSS INCOME
PERCENTILES
REAL HOURLY WAGES ACROSS
EDUCATION LEVELS
Source: Yellen (2006)
While the real hourly wages of workers in the 90th percentile rose by 30%
from 1973 to 2005, those at the 50th percentile or below saw real hourly
wages increasing by only 5% to 10%.
Individuals in lower skilled jobs - lower education levels - are most affected
by international trade.

35. International trade must be carefully balanced. “Dogmatic”
approaches could be disastrous.
34
INTERNATIONAL TRADE IN THE BALANCE - U.S. ECONOMY
Benefits Costs
National Security
Potential loss of
Industrial Base
Increased Wage
Inequality
High Unemployment
Levels
Controlled
Inflation
Improved
Competitiveness
Improved Consumer
Welfare
Economic Growth

36. 35
5. The U.S. Response to Trade Imbalance.

37. For the U.S., the promise of international trade is not being fully
realized. However, the U.S. is in a strong bargaining position.
36
THE PROMISE AND REALITY OF U.S. INTERNATIONAL TRADE
- Globalization >> Trade.
- Trade >> Economic Growth,
Social Welfare,
Competitiveness.
- U.S. Complacency >> Barriers
- Barriers >> Trade Deficit.
- Trade Deficit >>
Unemployment, Wage Inequality,
Industrial Base Erosion.
- Trade partners unwilling to
negotiate.
- Trade Agreements Insufficient.
PROMISE REALITY
U.S. BARGAINING POWER (TRADE / GDP)
U.S.= 28%.
China = 53%..
Russia = 48%.
India = 51%%.

38. In an environment where “lack of trust” prevails, how to play the
game to balance our trade deficit ?
37
FAILURE OF TERMS-OF-TRADE APPROACH
FAIR TRADE SHOULD LEAD TO OPTIMAL OUTCOMES, BUT…
Consider two trading partners (e.g., U.S. and China) and two trade policy options:
i. Fair trade or
ii. Impose tariffs that raises own real income at the expense of trading
partner’s income
The Prisoners' Dilemma game illustrates that short-term mentality and lack of
trust, would drive both partners to protect themselves and get sub-optimal
payoffs (-5, -5) -- equilibrium position.
If both parties are not equally aggressive, the passive party pays dearly
(-10, 20).
China (aggressive)
Fair Trade Protection
U.S. (passive)
Fair Trade (10, 10) (-10, 20)
Protection (20, -10) (-5, -5)NE
C

39. A “tit-for-tat” approach to trade would induce aggressive trade partners
to cooperate – fair trade. (1/2)
38
Source: The Evolution of Cooperation. D. Axeldrod.
CURRENT
AGGRESSIVE PARTNER
SAYS ‘UNCLE”
“FAIR TRADE”
(NASH EQUILIBRIUM)
The U.S. is in a
STRONG BARGAINING
position

40. A “tit-for-tat” approach to trade would induce aggressive trade partners
to cooperate – fair trade. (2/2).
39
In trade relations, short-run incentives for non-cooperation often dominate.
Countries boost domestic production by levying tariffs on imports or by resorting
to non-tariff barriers.
Disadvantaged trade partners may retaliate and initiate what is known as a
TIT-FOR-TAT strategy
The objective of this strategy is twofold:
(i) In the short-term it stops unfair trade.
(ii) in the longer-term, it enforces cooperative behavior.
The threat of future payoffs forgone in case of non-cooperation serves as a
disciplining device to foster cooperation.
A tit-for-tat strategy would foster trade liberalization and fairness..

41. 40
6. Conclusion.

42. Most agree with the end-goal of free trade and its benefits. The path
for getting there is crucial and must be defended.
41
International Trade driven by Globalization is here to stay.
Exports fuel GDP growth – the U.S, does not export enough – 10% of WW exports
and 22% of WW GDP.
Unfair trade practices by key U.S. trading partners have created a trade deficit that
contributes to job losses, wage inequality and erosion of our industrial base.
WTO is unable to guarantee “fair trade”. “Rogue” nations have no incentive to negotiate.
Multi-lateral Trade Agreements are effective but take long to negotiate.
Economic theory models free trade, “statically” (end goal only, not the path) and
assumes that nations will voluntarily adopt “fair trade” practices while getting there.
The dynamic nature of international trade and its consequences – unemployment,
wage inequality, potential loss of industrial base - demands a dynamic, proactive response.
The U.S. is in a strong bargaining position to negotiate balanced trade relative to
partners that drive our trade deficit – in a trade war, they have a lot more to loose.
The U.S. should proactively adopt a tit-for-tat approach to foster trade
liberalization and fairness or risk losing the “international trade war”.
Above ‘fair trade” enforcing mechanism would provide crucial time for retraining of
displaced labor and/or protecting sectors impacted by unfair practices.
CONCLUSION

43. 42
Appendix

44. REFERENCES
 Ebenstein A., Ann Harrison, Margaret McMillan and Shannon Phillips, “Estimating the Impact
of Trade and Offshoring on American Workers Using the Current Population Surveys”, World Bank,
2011.
 Janet L. “Economic inequality in the United States.” FRBSF Economic Letter 33-34 (2006): 1-7.
 Scott R., “The China toll - Growing U.S. trade deficit with China cost more than 2.7 million jobs
between 2001 and 2011, with job losses in every state”, Economic Policy Institute, 2012.
 Sitchinava N. “Trade, Technology, and Wage Inequality: Evidence from U.S. Manufacturing, 1989-
2004” (working paper).
 “Trade's victims - In the shadow of prosperity.” The Economist, January 18, 2007.
 “The Doha round - Dead man talking.” The Economist, April 28, 2011.
 World Trade Reports of 2007, 2008, 2011 and 2012, www.WTO.org.
 Tariff Profiles, www.WTO.org.
43