China Currency Showdown

The Next Debate: China and Trade Deficit

Dave Johnson — Fri, 19 Oct 2012 14:56:15 -0400

Monday's final campaign debate focuses on foreign policy. Will it focus on our policy of running huge trade deficits with China? Every dollar of trade deficits makes our country a dollar poorer. That trade deficit is the deficit that our Washington elites should be worried about.

The China Trade Deficit

For some reason, when we close a factory here,lay off the workers and ship the equipment to China, and then ship the same goods back here to sell in the same stores, that is called "trade." And when we buy vastly more stuff from China than they buy from us, that is also called "trade."

We have a huge "trade" deficit with China. We sent China $28.7 billion dollars in August alone - $295 billion last year. So in one year we transferred $295 billion of our wealth to China.

The trade deficit not only drains the economy and our jobs, it sends essential pieces of our industrial ecosystems out of the country. And this means that it is sending our ability to make a living in the future out of the country, too.

President Obama is working to double American exports, but imports also continue to rise. The problem here is that even if we double exports we continue to drain our economy if the export increase doesn't catch up to the level of imports.

From Trade Deficit - One Root Of Many Problems,

You buy things till your wallet is empty. So you raid the savings account to buy more stuff. Then you get a loan, and buy more stuff. Another loan, another, you keep buying stuff... Finally you're selling off the tools you had used to make a living. That's where the country is now because of the huge imbalance in our trade relationships. We buy more from them than they buy from us and we have let this go on and on and on. This is the deficit we should be worried about.

Trade Deficit Costs Jobs

From, Report On Job Cost Of Trade Deficit With China,

A new report, The China Toll, takes a look at the effect of our trade deficit with China since that country joined the World Trade Organization (WTO) ten years ago, and comes up with some very specific numbers. In summary:

"Growing U.S. trade deficit with China cost more than 2.7 million jobs between 2001 and 2011, with job losses in every state"

The Economic Policy Institute (EPI) released the report, The China toll, Thursday.

According to the report,

Between 2001 and 2011, the trade deficit with China eliminated or displaced more than half of all U.S. manufacturing jobs lost over that period. The growing trade deficit with China has cost jobs in every congressional district in all 50 states as well as in the District of Columbia and Puerto Rico.

The total losses include 662,100 jobs from 2008 to 2011 alone—even though imports from China and the rest of the world plunged in 2009 before recovering and surpassing the previous peak reached in 2008. The trade deficit in the computer and electronic parts industry grew the most, displacing more than 1 million jobs in high-tech industries. In fact, rapidly growing imports of computer and electronic parts, including computers, semiconductors and audio-video equipment, accounted for nearly 55 percent of the $217.5 billion increase in the U.S. trade deficit with China between 2001 and 2011.

Again: Half of our manufacturing job loss is lost to the trade deficit with China. ... The trade deficit in the computer and electronic parts industry grew the most, displacing more than 1 million jobs in high-tech industries.

Trade Deficit Makes Workers Afraid

The trade deficit and resulting job loss makes workers afraid, so they work longer hours, skip vacations and accept cuts in wages and benefits, which also hurts the economy. From Job Fear From Trade Deficit Is What Happened To Jobs And The Middle Class,

The middle class is disappearing. Our economy is "hollowing out" because the money goes to the top and the people fall to the bottom. This is because we allow American companies to close factories here and open them there, shipping the same goods back here to sell in the same stores, costing jobs, companies, industries and our economy. This makes us afraid for our own jobs and afraid to make waves. By helping a few at the top get fabulously rich, China has essentially recruited our own businesses leaders to fight against our own government - and us.

Trade Actions

The President has filed several trade complaints against China, including actions involving tires, steel pipes and solar panels. This has made a difference. Just yesterday the WTO found in favor of the United States in a dispute challenging China’s imposition of duties on U.S exports of grain oriented flat-rolled electrical steel (GOES). This ruling ensures that American workers and businesses that make certain types of steel won’t face Chinese retaliatory tariffs.

But these trade actions are just one piece of the big puzzle. Another piece is confronting China's currency manipulation.

The Currency Problem

China manipulates their currency. Because their currency is "weak" goods made there cost as much as 30% less than goods made here, even before you take into account the effect of various Chinese government subsidies and other trade cheating.

There is a bill in Congress to crack down on China's currency manipulation. This is a bipartisan bill that has passed the Senate. In past years this bill has overwhemingly passed in the House, and the current bill has more than 60 Republican co-sponsors.

But that bill cannot get a vote in the House, even with more than 60 Republican co-sponsors. Wall Street's front group The Club For Growth has made the currency bill a litmus test. Politico: Club for Growth warns GOP on China currency bill,

The influential Club for Growth is pressuring Republican presidential candidates and lawmakers to oppose bipartisan legislation cracking down on China’s currency policies.

... The Club for Growth has urged lawmakers to vote no on the bill, warning that the vote will be included in the group’s 2011 Congressional Scorecard, used to measure how fiscally conservative they are.

So Speaker Boehner refuses to bring the bill to the floor for a vote -- because it will pass. And the 60+ Republican co-sponsors in the House refuse to sign a discharge petition that forces the bill to come to the floor for a vote because they fear retaliation from Wall Street.

Romney Says he Will Crack Down On China, Refuses To Actually Crack Down On China

On the campaign trail Mitt Roney says he will crack down on China. He says he will do something about China's currency manipulation on the first day he is in office.

But there is something he will not do: he will not actually crack down on China right now, by pressuring Boehner to bring the currency bill to the floor, or by asking the 60+ Repubican co-sponsors of the bill to sign a discharge petition.

If Romney wants to crack down on China he should crack down on Boehner and House Republicans right now. This needs to be part of Monday's final campaign debate.

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Hey check out what happens when you click these:

Romney Etch-A-Sketching On China Currency

Dave Johnson — Fri, 15 Jun 2012 13:11:23 -0400

Yesterday in Ohio candidate Mitt Romney said he would clamp down on China's currency manipulation. Today he is still not asking the House Republicans to bring the China currency bill up for a vote. Mr. Romney has the opportunity to demonstrate leadership and put his actions where his campaign words are -- or not. He can ask Republicans in the House to vote on the bill to do something about the problem - or not.

The Currency Manipulation Issue

China has been manipulating its currency rate, keeping it as much as 30% below market value. This means that things made in China cost as much as 30% less than things made elsewhere. This is 30% before taking into account the various subsidies China gives to companies manufacturing in China, or how China allows companies to pollute freely. This gives them a competitive advantage in world markets, and lures our own companies to outsource their manufacturing to China. And it contributes to our dramatic, huge, bloodsucking trade deficit that drains hundreds of billions of dollars a year out of our economy.

Steven Capozzola explained in Why Should Congress Pass China Currency Legislation?,

What few seem to understand is that we are already in a trade war with China. It’s not one that we launched, nor one that we wanted. But China’s undervaluation of its currency, which violates world trade rules, is part of a deliberate, well-coordinated strategy to undercut U.S. manufacturers.

... How did this happen? China intervenes in the currency market to buy dollars and set its own currency at an artificially low exchange rate. This makes Chinese goods 40% cheaper when entering the U.S. market while making our goods significantly more costly when exported to China.

... This is a bipartisan issue, one that marks a clear chance for Congress to stand up to a very protectionist, predatory campaign. China can purchase dollars, which are freely traded, in order to set its currency peg. But conversely, it is illegal to buy China’s closely held currency.

The Currency Bill And Discharge Petition

To address this (and other) currency manipulation the Senate passed a bill requiring our government to act against countries that manipulate their currency. This bill is waiting for the House to act because Speaker Boehner will not allow it to come to the floor for a vote.

The House has a procedure for forcing a bill to come to the floor when House leadership is blocking a vote. This is called a Discharge Petition. If enough Representatives sign a discharge petition it must be brought up for a vote. There are 67* Republican members of the House of Representatives who co-sponsored legislation to confront China over their currency manipulation: Currency Reform for Fair Trade Act (HR639). If enough of them sign the discharge petition it has to be voted on, and it will pass.

From 61 House Republicans Co-Sponsored China Currency Bill, Now Side With China,

61 House Republicans ... had co-sponsored the China currency bill, but who now side with China by refusing to help force a vote on the bill. The bill has passed the Senate and Republican leaders are refusing to allow a vote in the House. This bill means jobs. This bill means confronting China over their trade cheating. Call these members of Congress and demand that they side with American workers instead of China.

[. . .] The Club For Growth, a Wall Street front-group that backs China's positions on these issues, has demanded that Republicans side with China on this, and has called it a "litmus test." One Republican who actually did sign the discharge petition to force the House to vote, Harold Rogers, was forced by House leadership to remove his name!

Romney's Etch-A-Sketch On Currency

At campaign stop after campaign stop Mitt Romney says that he will crack down on China's currency manipulation on his first day in office. Yet he has an opportunity to do something about it right now. Romney has the opportunity right now to demonstrate that he will live up to his words. He can ask Speaker Boehner to bring the currency bill to the floor of the House for a vote. And he can ask Republicans in Congress to sign a discharge petition to bring up for a vote a currency manipulation bill that 61 of them co-sponsored. It is his own party that is holding this up.

So it this another Etch-A-Sketch or does Romney really mean what he says about China's currency manipulation. He can show us right now.

*The number of Republican co-sponsors (who also refuse to sign the discharge petition) has risen.

Update - After writing this post earlier today, a petition came in my email, clicking through to:

Tell Congress to take a stand on China's currency manipulation

End Currency Manipulation Now
Tell Congress to stop China's cheating on currency manipulation, which stands in the way of free and fair trade, job creation, and a higher standard of living for millions of Americans.

China Currency Fight In Congress

Dave Johnson — Thu, 29 Sep 2011 14:08:21 -0400

The fight to get China to stop their currency manipulation is heating up. China keeps its currency very low, giving their goods a huge price advantage even before all their other trade manipulations come into play. This costs us jobs, factories, companies and entire industries. Now the Congress is taking steps to force them to stop. This has been going on a long time (see my own list of posts below). Our trade deficit worsens, more jobs are lost, more factories close, more imbalances threaten the world's economy. It is time to act.

Background

China has decided that it is to their advantage to capture as many jobs, factories, companies and industries as possible. Like many countries they have national industrial/economic strategies for key target industries, and we do not. In pursuit of their strategies they use every trick we let them get away with -- and we let them get away with a lot. They directly subsidize companies and industries, require companies from other countries to share intellectual property if they want to do business in China, subsidize electricity to factories, provide free land, "indigenous innovation" (Buy China) policies, and numerous other methods to gain advantage. Some of these are very smart self-interested policies (that we do not match) like the basic, normal government function of spending to provide top-notch infrastructure and education so their companies will flourish. Others are illegal trade practices that we do not challenge.

In effect, by not having our own national strategies and willingness to invest public funds, we send American companies out alone, to compete with national systems like China's. Even our largest companies do not have the resources to take this on.

Over 2 Million Jobs

The Alliance for American Manufacturing says that ending China’s currency manipulation would create over 2 million jobs,

According to a new report released today by Robert E. Scott of the Economic Policy Institute, The Benefits of Revaluation, if China were to revalue the yuan to its equilibrium level – and other Asian countries were to follow suit – the benefits for the U.S. economy would be significant:
• U.S. GDP would increase by as much as $285.7 billion (1.9%);
• As many as 2.25 million American jobs would be created, enough to increase total U.S. employment by 1.6%; and
• The U.S. budget deficit would be lowered by up to $71.4 billion per year – or between $621 to $857 billion over ten years, if sustained.

Seriously Undervalued

China's currency is estimated to be undervalued by 28% or more. Again from AAM,

A year ago, on June 18, 2010, Chinese leaders vowed to “allow the country's currency to float more freely against the dollar and other foreign currencies.” Yet, U.S. trade deficit with China reached a record $273 billion in 2010, and according to research by the Peterson Institute for International Economics, the yuan is even more undervalued today against the dollar (28.5%) than it was a year ago (24.2%) and also more undervalued against a basket of currencies (the “effective” exchange rate) than it was a year ago (17.6% vs. 15.3%).

This Fight

The fight over doing something about China’s currency manipulation is heating up again, with a bill before Congress requiring tariffs unless China lets its currency rate be set by international currency exchange markets. Financial Times, US Senate to vote on China tariffs

The US Senate is set to vote next week on legislation to punish China for manipulating its currency, as the renewed threat of global recession raises tension over exchange rates.

Harry Reid, Democratic leader of the Senate, said this week he would invoke “cloture” – a procedure to prevent delay – for senators to vote on a bill that would require the US to use estimates of currency undervaluation when calculating anti-subsidy import tariffs. The bill is subject to amendment, meaning that it could end up with so many additions it becomes in effect impossible to move forward, but experts in trade policy said it had a good chance of passing.

... The main stumbling block to the measure is the House of Representatives, where senior Republicans have previously expressed scepticism about similar laws

Washington Post, Senate will take up Chinese currency measure before jobs bill,

Reid, who is sponsoring the package in the Senate, said the Senate will first take up debate next week on a bill to punish Chinese and other nations for currency manipulation.

“I don’t think there’s anything more important for a jobs measure than China trade, and that’s what we’re going to work on next week,” he said.

... A senior Senate Democratic aide insisted the decision to complete the Chinese currency measure simply means the chamber is taking up a bill that will pass before holding what will likely be a symbolic vote on the jobs plan.

China Weighs In

China has weighed in, saying that protecting American jobs, companies and industries from the effects of their trade xxx is “protectionism.” The Economic Times (India) reports in Currency manipulation: China says it hopes US will 'reconsider' bill,

"We hope that the two countries can solve problems on the basis of mutual respect and equality and in keeping with WTO (World Trade Organisation) rules, rather than politicising economic trade issues and resorting to trade protectionism," said ministry spokesman Hong Lei.

"We hope the US lawmakers safeguard the smooth development of China-US economic relations... and will reconsider their decision and refrain from pushing through the bill."

Wall Street Opposes

Wall Street's Club For Growth is letting Republican Senators know that Wall Street will oppose them if they use trade enforcement to try to bring American jobs and factories back. From Politico, Club for Growth warns GOP on China currency bill,

The influential Club for Growth is pressuring Republican presidential candidates and lawmakers to oppose bipartisan legislation cracking down on China’s currency policies.

... The Club for Growth has urged lawmakers to vote no on the bill, warning that the vote will be included in the group’s 2011 Congressional Scorecard, used to measure how fiscally conservative they are.

The Wall Street group says we should instead pass tax cuts, deregulate controls over how businesses behave toward the environment, workers, customers and their communities, and get rid of unions so the United States can be more like China, which they say would brings companies back.

Solyndra Example

There is a lot of press over the solar company Solyndra that went bankrupt. Many argue that our government has no business helping the green-energy industry to get a foothold in the United States. But China sees the jobs and wealth this industry will create in the future and takes this effort very seriously. Solyndra collapsed after China helped nurture Solyndra's competition, giving them $30 billion of financing in a single year, free land and subsidized energy for factories, and many other advantages all on top of the currency rate advantage.

How Long Will We Play This Game?

This has been going on a while, and we keep putting it off. Meanwhile the world trade imbalance worsens, the trade deficit grows -- draining money from our economy, the jobs keep moving, wage pressure here continues... As long as we put this off it get seriously worse.

I looked back at just some of what I have been writing on this subject. This has been going on too long:

March 11 2010 Why Won't Obama Label China A Currency Manipulator?

March 15, 2010 Chinese Currency Showdown

March 17, 2010 Chinese Currency Manipulation: "Not A Small Issue"

March 24 2010 Why China's Currency Matters To American Jobs

March 24 2010 Even Chinese CEOS Call For Chinese Currency Fix

March 25, 2010 Pressure Rises For China Currency Fix -- Yesterday Chinese CEOs, Today Chinese Economists

March 26, 2010 Even Chinese Officials Understand -- Their Currency Must Rise

March 30 2010 Chinese Currency Manipulation Is Just One Piece

April 5 2010 Big Weekend News On China Currency Problem

April 7 2010 Understanding Why The China Currency Issue Matters

April 21 2010 India and Brazil Join Call For Chinese Currency Adjustment

April 22 2010 China Currency Hearing

Apr 27 2010 IMF: ONLY Market Rate for Yuan Can Guarantee World Recovery

May 7 2010 China Trade: Currency, Barriers AND Industrial Policy

May 25 2010 China Dialogue - No Currency Agreement

June 21 2010 China - Industrial Policy, Not Just Currency

June 17 2010 China Says G20 Should Not Discuss Currency Imbalance

June 22 2010 Sorting Out China's Currency Move

July 8 2010 After Saying China Manipulates Currency Treasury Dept. Declines To Say China Manipulates Currency

Aug 12 2010 China Currency Manipulation - Still A Big Issue

Aug 13 2010 China Springs The Trap

Sept 13 2010 China Currency Surprise: Lucy Pulled The Football

Sept 15, 2010 China Currency Battle Heating Up

Sept 20 2010 Obama Needs Congress' Help On China Currency

Sept 22 2010 President To Talk Currency With Chinese Premier Wen Tomorrow

Sept 23 2010 China Currency Bill Moves -- Why Some Corporate Interests Oppose

Sept 24 2010 House Committee Approves China Currency Bill

Sept 27 2010 Consensus Grows: Confront China On Trade

Sept 29 2010 Dems Right To Force Votes On Outsourcing And China Currency

Oct 4 2010 Is There A Currency War?

Oct 5 2010 More Consensus On Confronting China

Oct 6 2010 How "Free Trade" Led To Currency War

Oct 25 2010 G-20 On Currency -- Maybe In November

Jan 19 2011 The China Currency Battle

Jan 21 2011 China Currency Manipulation Equals China Inflation

What To Do

Call your member of Congress and your Senators and let them know you want them to support this bill and crack down of China's currency manipulation. This will give American-based companies a chance to compete on a level playing field. This will bring jobs, factories, companies and industries back the the United States, and you will be able to buy goods Made In America in our stores again.

G-20 On Currency -- Maybe In November

Dave Johnson — Mon, 25 Oct 2010 20:50:10 -0400

The G-20 is trying to calm fears of a currency war and will take up currency problems again when leaders meet in November.

Bloomberg: G-20 to Avoid `Competitive Devaluation,' Prod China,

Group of 20 finance chiefs vowed to avoid weakening currencies to lift exports and left it to a leaders’ meeting next month to flesh out how to further pressure member China to allow faster gains in the yuan.

Finance ministers and central bankers ended talks in South Korea Oct. 23 foreswearing “competitive devaluation” to calm fears of a trade war stemming from using cheaper currencies to spur growth. They called for reduced trade imbalances while stopping short of a U.S. proposal for targets that was aimed at making a yuan advance more palatable to China. Leaders will take up the debate at the Seoul summit on Nov. 11-12.

AP: World stocks up as G-20 vows to avoid currency war,

World stocks rose and the dollar slumped Monday after global finance chiefs vowed to avoid a currency war that could derail the global recovery. With no concrete guidelines to go by, however, investors are wary that this may only prove a temporary truce.

Finance ministers from the Group of 20 developed and emerging countries promised to avoid competitive devaluations — weakening a national currency to help exports and sustain economic recovery — but offered no binding targets for evening out trade imbalances.

(Note - The dollar "slumping" and becoming "weaker" is good. It means that American-made goods will be more competitive in world markets.)

Washington Post, Saturday: G-20 powers agree to Geithner currency and trade plan,

Finance ministers from the world's major nations agreed to a U.S.-brokered plan for easing tensions over exchange rates and world trade patterns, saying that a "fragile and uneven" economic recovery was at risk if top powers pursued conflicting policies or used the value of their currencies to gain an edge for their exports.
[. . .] The group agreed as it has before that "excessive imbalances" in trade and other relationships should even out over time - requiring countries such as China and Germany to rely less on exports for their economic growth - and the members pledged for the first time to submit to an agreed-upon procedure for measuring progress.

The methods of measurement are still to be developed, but the language marks a potential turning point as the G-20 struggles to ensure its agreement over broad principles translates into action. U.S. officials say they intend to push for more detail, including possible timeframes and numerical targets, as the work of the finance leaders is submitted for approval by the G-20 heads of state who gather in South Korea next month.

. . . Countries with "persistently large imbalances," the agreement states, would undergo closer IMF scrutiny to see if their exchange rates or other policies are preventing progress.

Nothing concrete, picking it up again in a few weeks.

How "Free Trade" Led To Currency War

Dave Johnson — Wed, 06 Oct 2010 12:32:10 -0400

President Lyndon Johnson is said to have commented that the press is like birds sitting on a telephone line. When one flies away, they all fly away.

This week they are all flying around squawking "currency war!" But the world has been in a currency and trade war for some time, with only one side fighting and the rest losing. Now the world, on the edge of defeat in that war, sees that China is not "trading"; they are taking. So, how do we fight back without (further) blowing up the world's economy?

The world can’t get to full recovery from this terrible recession without more balanced trade. That is a huge part of the equation. Our trade deficits started with Reagan when "free trade" was used to force concessions from labor by threatening to move the factories to non-democracies, away from the wage and environmental protections We, the People fought so hard to achieve. The wage squeeze resulted in unprecedented concentration of wealth —and loss of buying power for the rest of the population.

Under 'W' Bush, Wall Street used China for short-term profits and bonuses and China used the power that brought to buy advantage around the world. So now the rest of us are living with the long-term consequences of race-to-the-bottom policies. Namely, the bottom.

That loss of buying power—lack of demand—is holding back recovery. To lift the economy we need to lift wages. We can’t get there without challenging current arrangements with China.

Yves Smith sums up this "full boil," in Currency War Threats Escalating, at naked capitalism,

Last week, the simmering threat of trade disputes erupted into a full boil when Brazil’s finance minister Guido Mantega said that national governments around the world were weakening their currencies in an “international currency war” to gain competitive advantage. Mantega stressed that Brazil was prepared to back his words with action to lower the value of the Brazilian real. Yesterday, IMF chief Dominique Struass-Kahn warned that countries were beginning to use their currencies as “a policy weapon” in a Financial Times interview.

So does the world now go into a full-on, chaotic currency and trade war? Martin Wolf weighs in at the Financial Times, How to fight the currency wars with stubborn China, (Click through to see the charts)

Has the time for a currency war with China arrived? The answer looks increasingly to be yes. The politics and economics of an assault on Chinese exchange rate policy are increasingly convincing. The idea is, of course, deeply disturbing. But I no longer believe there is an alternative.

Wolf runs down the issues.

Currency manipulation? "If a decision to invest half a country’s gross domestic product in currency reserves is not exchange rate manipulation, what is?"

Does it matter? "By keeping its real exchange rate down, China subsidizes production of its exports and import substitutes. Since China is now the world’s biggest exporter, this has to be a significant distortion of world trade."

What might China reasonably be asked to do? Stop the manipulation and increase domestic demand. "[T]he menu of possible options for the Chinese authorities could include a cap on the intervention, an end to sterilization of the monetary consequences and targets for real domestic demand, household consumption and the current account."

Can other countries shift China’s policies, with limited collateral damage?

Negotiation remains a hope. The rest of Group of 20 leading countries should unite in calling for these changes. But if negotiation continues to fail, alternatives must be considered. Import surcharges are one possibility. ... countervailing currency intervention ... affected countries could prevent other countries from purchasing their financial instruments, unless the latter offered reciprocal access to their financial markets.

OK, about that "without (further) blowing up the world's economy" I mentioned at the top. Instead of tariffs and other trade sanctions Wolf suggests currency-rate counter-policies,

"I find ideas for intervention in capital markets far more attractive than those involving action against trade. ... A trade war would be very dangerous. Insisting that China stop purchasing the liabilities of other countries so long as it operates tight controls on capital inflows is, instead, direct and proportionate and, above all, moves the world towards market opening."

Will China retaliate by ceasing to buy U.S. bonds? If they do, that would be a good thing.

Some fear that a cessation of Chinese purchases of U.S. government bonds would lead to a collapse. Nothing is less likely, given the massive financial surpluses of the private sectors of the world and the continuing role of the dollar. If it weakened the dollar, however, that would be helpful, not damaging.

Yves Smith weighs in on Wolf's recommendations,

Yves here. I see the odds of things going Wolf’s way as close to zero. China has no intention of “opening” its markets to investment bankers; it is not about to have its capital markets colonized, and it lacks the domestic finance skills to cope. China has made a close study of the errors Japan made in its peak years, in the 1980s, and one was the overly rapid deregulation of its financial sector….in response to U.S. pressure.

Similarly, the impetus to put pressure on China is coming from the trade front, due to high unemployment. Action on the trade/tariff front looks like a more direct remedy, even if the lags in trade are long. And with more economists lining up behind the crowd-pleasing idea of getting tough with China, the pressures and the intellectual cover, are in place.

Even though no one wants a trade war with China, it is not beyond the real of possibility that we wind up there. ... he odds of miscalculation have to be magnified when operating across a large cultural divide.

I wrote the other day, and want to repeat: There are always winners and losers. Right now in China there are currently winners and losers from the manipulated currency rate. If rates adjust to where they should be China might lose some jobs, but Chinese workers will immediately be higher-paid relative to the world than they had been, and Chinese consumers will also be more able to buy things made elsewhere.

Right now those in control of industries that are moving to China are winners and those in China who want higher pay and want to import are losers. And, as is the way of the world, the winners are fighting to keep their advantages, while the losers want change to occur.

But if China starts bringing its currency to market rates, the world's winners and losers will be the winners and losers for the right reasons. It is time for China to move on from currency manipulation.

More Consensus On Confronting China

Dave Johnson — Tue, 05 Oct 2010 15:23:43 -0400

A new example today of the consensus that has formed on confronting China's trade practices: At the America’s Fiscal Choices conference today economists Paul Krugman, Martin Feldstein and Jan Hatzius all agreed on the need for the dollar to fall.

Last week, in Consensus Grows: Confront China On Trade, I wrote.

Now that the beneficiaries of the "free trade' bamboozlement are off to their private islands in their private jets or private yachts the rest of us are looking around at the devastation of our economy and standard of living, wondering what to do and finally becoming aware that rigid ideologies and their enforcers have kept us from looking for practical solutions that actually work for all of us as a country and community.

China's currency scheme is just one part of their mercantilist trade manipulation. By keeping their currency undervalued they are able to bring goods to the world market with a huge price advantage. But they do a number of other things as well. Here are a few more of the main unfair advantages China uses to its advantage:
1) Currency manipulation. China "pegs" its currency at a very low, or "weak" rate, so goods from China cost up to 40% less than they otherwise should.
2) Labor-rights suppression has lowered manufacturing wages of Chinese workers by 47% to 86%.
3) There is massive direct government subsidization of export production in many key industries.
4) China allows environmental degradation that ends up affecting all of us.
5) Intellectual property theft and piracy mean that American products that could be sold are stolen instead.
6) China has a number of policies that block U.S. firms from market access.

Meanwhile, Europe calls on China to let currency appreciate,

European leaders on Tuesday urged China to let its currency rise and narrow a trade deficit that has strained relations, while promising Asian countries in return more power in global financial institutions.
China did not, however, commit to new currency action at a summit that highlighted how the global financial crisis had shifted the economic balance of power eastward.

Is There A Currency War?

Dave Johnson — Mon, 04 Oct 2010 15:48:37 -0400

Is there a currency war going on? Yes, it has been going on for some time. It's up to China to end it.

China has taken a number of steps over recent years to boost and “protect” its economy, building industries and providing badly-needed jobs. Good for them. But they have succeeded and they need to recognize that, and they also need to recognize that their own mercantilism is now causing huge imbalances and tensions in the rest of the world. China can’t have everything, imbalances are huge and growing and if they continue to try to have everything they risk a great fall nd risk bringing all of us down with them.

One – just one – of the ways China has been gaining advantage is by manipulating currency rates. They have a scheme that has enabled them to evade market forces resulting in their currency being as much as 40% out of balance. This means goods made there cost up to 40% less than goods made here, even before accounting for other trade manipulations they engage in. So companies have been moving factories to China. Entire industries have been migrating to China.

But this evasion of market forces can't go one forever and the longer it goes on the worse the effects will be when it rebalances. Robert Kuttner explains why we've got to fight this before we lose our remaining leverage and can't.

Others are starting to fight back in this currency war that has been going on. In September Japan finally got fed up with lack of progress ending China’s currency manipulation, and started manipulating their own currency in response. Then Brazil. Other nations are joining in. Our own House of Representatives passed a bill last week requiring the administration to act. So it is coming to a head.

Of course everyone has something to say.

There is an argument that bringing China’s currency to market rates won’t fix everything. That is correct.

Many argue that Chinese subsidies and currency manipulations mean our own consumers pay less for things we get from China. Yes.

Steven Roach says our own low savings rate is a problem. Yes.

Robert Reich says a weaker dollar makes us poorer. Yes- some of us.

Dan Ikenson says that the raw materials and components China imports will cost them less. Correct.

All of these are correct. But here is the thing: it is also correct that China’s currency is possibly as much as 40% out of alignment. I hate to state the obvious, but bringing China’s currency to market rates will bring China’s currency to market rates, which means that markets can balance and adjust and react as those markets are supposed to do.

There are always winners and losers. Right now in China there are currently winners and losers from the manipulated currency rate. If rates adjust to where they should be China might lose some jobs, but Chinese workers will immediately be higher-paid relative to the world than they had been, and Chinese consumers will also be more able to buy things made elsewhere.

Right now those in control of industries that are moving to China are winners and those in China who want to import are losers. And as is the way of the world the winners in China are fighting to keep their advantages, while the losers want change to occur. And outside of China the winners are fighting to keep their advantages, while the losers want change to occur.

But if China brings its currency to market rates the world's winners and losers will be the winners and losers for the right reasons. It is time for China to move on from currency manipulation.

Consensus Grows: Confront China On Trade

Dave Johnson — Mon, 27 Sep 2010 15:07:47 -0400

In the day-to-day news about trade problems with China the bigger picture can get lost. America is giving up its competitive position in industries of the present and future and it is costing us. Even the people you would think would defend "free trade" are coming to understand that America is losing its vital ability to invent, keep and create industries and jobs and to keep a modern economy humming.

Robert J Samuelson has a significant op-ed today in the Washington Post, The makings of a trade war with China in which he says we need to confront China's illegal trade manipulations. You should read the whole thing but here are excerpts,

... Confronting China's export subsidies risks a similar tit-for-tat cycle at a time when the global economic recovery is weak. This is a risk, unfortunately, we need to take.

... The trouble is that China has never genuinely accepted the basic rules governing the world economy. China follows those rules when they suit its interests and rejects, modifies or ignores them when they don't.

... China's worst abuse involves its undervalued currency and its promotion of export-led economic growth.

Samuelson concludes,

The collision is between two concepts of the world order. As the old order's main architect and guardian, the United States faces a dreadful choice: resist Chinese ambitions and risk a trade war in which everyone loses; or do nothing and let China remake the trading system. The first would be dangerous; the second, potentially disastrous.

It's not just Samuelson concluding that we need to confront China's cheating on trade. Many others have been weighing in that we are losing too much and have to take steps. For example, in July Andy Grove, Intel's influential former CEO published a very important opinion piece on a similar topic, How to Make an American Job Before It's Too Late. Grove wrote that we are not just losing jobs to China, we are losing the "chain of experience" that enables new companies and industries to form and to create new jobs and argues for a national economic strategy to preserve our manufacturing and technology base. (These are excerpts but Grove's entire piece is an absolute must-read.)

You could say, as many do, that shipping jobs overseas is no big deal because the high-value work -- and much of the profits -- remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work -- and masses of unemployed?

...evidence stares at us from the performance of several Asian countries in the past few decades. These countries seem to understand that job creation must be the No. 1 objective of state economic policy. The government plays a strategic role in setting the priorities and arraying the forces and organization necessary to achieve this goal.

Grove also says that we need to fix this and fix the unemployment problem for other reasons as well,

Unemployment is corrosive. If what I’m suggesting sounds protectionist, so be it.

One after another our business leaders and economists are realizing that the "free trade" ideology has not worked out very well for us. We were told by the "experts" that moving our factories out of the country was a good idea, that new jobs would replace those lost. They didn't. We were told that we don't need or want a national strategy to be competitive in the world because an invisible hand would guide us. It didn't. We were told that trade "partners" would reciprocate by buying from us equally. They didn't. We were told that we would invent new industries to replace ones we lost. We did, but the new industries moved or are moving out of the country, too.

Now that we are in the midst of the resulting crisis even the "experts" are realizing that trade needs to be a two-way street for it to work, and it hasn't been. "Free trade" was supposed to be a panacea, bringing us a prosperous future. The reality was different. A few corporate leaders (the ones who promoted these ideas) have gotten really, really rich at the expense of the rest of us (and that includes other corporations and corporate leaders). Now that the beneficiaries of the "free trade' bamboozlement are off to their private islands in their private jets or private yachts the rest of us are looking around at the devastation of our economy and standard of living, wondering what to do and finally becoming aware that rigid ideologies and their enforcers have kept us from looking for practical solutions that actually work for all of us as a country and community.

So finally from the depth of the resulting crisis a rational national discussion may be beginning, one in which people on the "free trade' side are not able to just shut down different opinions by shouting "protectionist" or other slogans. As this discussion gets underway here are three principles to help guide us:

1) Let's drop ideological preconceptions and look at what has worked in history and what is working for other countries today. Science is supposed to DEscribe, but economics has too often been about "if only people would do such-and-such, so-and-so would result." That is PREscribing and is not science.

2) We have to talk about how we handle mercantilist nations like China who are not playing by the trade rules and what we, together as a nation, can do about it. Let's also talk about and multinational reactions to the mercantilists. We can join with countries interested in lifting each other with fair trade, interested in trade models that help us mutually lift each other, and together take on those who want it all for themselves.

3) Ultimately we can't all export our way out of this mess. And ultimately we can't return to unsustainable old economic models that have failed us over and over. We can't continue with a few taking as much as they can get at the expense of the rest of us. As machines and technology solve more of our problems and do more of our work our overpopulated, undereducated world has to come to grips with equitable models for who gets what for what and how to take care of our planet and each other. That is the only thing that will work in the long run.

House Committee Approves China Currency Bill

Dave Johnson — Fri, 24 Sep 2010 11:50:28 -0400

The House Ways and Means Committee just approved a bill that pushes China to raise the value of its currency. It looks like the bill will go to a vote on the House floor next week. This is a very big deal because it is a "second front" pushing China to bring its currency to market rates. President Obama met with Chinese Premier Wen yesterday and most of their 2-hour meeting was taken up discussing this issue, and today he gets backing from the House. This tells China that we are serious, that it is more than just the administration talking, and they have to start doing the right thing.

China has been manipulating its currency to keep it low, which means goods made in China cost less in world markets. This, combined with other trade manipulations, has created a huge imbalance in world markets. It moves industries, jobs, expertise, money and power to China, and has created a huge "bubble" of imbalance that threatens the world's economy. Currently the interests in China and elsewhere, including here, that benefit from the imbalance have the upper hand. But this vote demonstrates that the rest of us, here, in China and around the world, that would benefit from a rebalancing are rallying and challenging the current policies.

Bloomberg: China Currency Measure Heads for House Vote After Panel Approval

The measure would let companies petition for higher duties on imports from China to compensate for the effect of a weak currency. President Barack Obama “does not take a position on this specific legislation,” Jeff Bader, his director of Asian affairs, said yesterday.

“China’s exchange-rate policy has a major impact on American businesses, and American jobs, which is what this is all about,” Levin said before the vote.

The U.S. trade deficit with China widened to $145 billion in the first seven months of this year, from $123 billion for the same period in 2009. The expanding deficit, the unemployment rate lingering at almost 10 percent and polls showing Democrats’ seats at risk heading into the elections have added support for the bill, which has been discussed since 2005.

China had agreed to start rebalancing its currency, but the currency has moved only 1 percent since the agreement - nothing near the 40% some claim it needs to move. Meanwhile our trade deficit with China has increased. China's Wen claims that China is still a poor country and needs this protection to help it build the industries that will help its people rise out of poverty,

China might now be the second largest economy in the world, but Premier Wen insisted at the UN General Assembly that the "real China" was still in the "primary stage of socialism" and remains a developing country.

Pointing out that 150 million Chinese people still live in poverty, Wen said many regions in central and western China were still very poor and this is the "real China".

"Taken as a whole, China is still in the primary stage of socialism and remains a developing country... These are our basic national conditions. This is the real China," he said.

The way to bring China, now the second largest manufacturer in the world, out of poverty is to trade fairly and work with its trade partners, not to manipulate the rules and create a huge imbalance that threatens the economy of the entire world.

China Currency Bill Moves -- Why Some Corporate Interests Oppose

Dave Johnson — Thu, 23 Sep 2010 12:18:05 -0400

As President Obama meets with Chinese Premier Wen, the House Ways and Means Committee announces it will vote tomorrow on a bill to take action if China does not bring its currency to market rates. This sends a loud and clear signal to China that action is coming, one way or another, and they are going to have to make adjustments. This has every appearance of a smart, coordinated strategy between the administration and the leadership of the Congress.

WaPo: Bill combating China currency to advance,

House leaders are moving forward with legislation to combat China's currency policies, adding to pressure from the Obama administration and giving lawmakers an election-year chance to vote on a sensitive trade matter.

The House Ways and Means Committee plans to vote Friday on a bill that would expand the Commerce Department's power to impose duties on Chinese imports in response to that country's currency being undervalued on world markets.

But there is opposition from inside our own country.

Some business groups oppose the bill, arguing that it could backfire if it raises trade tensions with China and prompts the Chinese government to use the many tools at its disposal to interfere with American companies. China is a major destination for U.S. exports - about $70 billion a year - although the United States runs a trade deficit of about $200 billion a year with that country. Duties on Chinese imports might also raise prices for U.S. consumers.

There are competing interests at work. Robert Reich wrote about this a week ago in The Two Categories of American Corporation — And Their Politics and Harold Meyerson picks up the theme today in The real un-Americans.

Reich points out that some giant companies sell to Americans, and therefore want us strong and prosperous, and want policies that stimulate our economy, provide jobs with good pay and generally boost the middle class. Others, not so much.

The first group includes national telecoms like Verizon and AT&T that need a prosperous America because most of their sales are here. Same with finance companies like Bank of America and Travelers Insurance whose business strategy has been built around U.S. consumers. Ditto certain giant chains like Home Depot. Naturally, all these companies were especially hard hit by the Great Depression and its devastating impact on American consumers.

The second group includes companies like Coca Cola, Exxon-Mobil, Hewlett-Packard, Intel, and McDonalds, that get substantial revenues from their overseas operations. Increasingly this means China, India, and Brazil. Ford and GM are still largely dependent on US sales but becoming less so. ...

What does this mean for Main Street? Reich says,

Large American corporations are going global as fast as they can. That’s good for their shareholders. But in a Washington ever more susceptible to their money and influence, that’s not necessarily good for most Americans.

Meyerson picks up on this today,

Consider the debate in Congress about whether to impose tariffs on Chinese imports if China continues to depress the value of its currency. ... Unions and some domestic manufacturers support the bill. But a large number of American businesses, in a campaign coordinated by the U.S.-China Business Council, oppose it.

... The question here is whether the 220 corporations that belong to the council ... are already so deeply invested in China as manufacturers, marketers or retailers that buy goods there to sell them here that their interests are more closely aligned with China's than with America's. [emphasis added]

It is important to understand that some of the country's most powerful entrenched, wealthy interests no longer depend on the success of America's economy and the prosperity of our people. They have a lot of power and money, and use it to influence our country's politics to increase their own wealth and power. But their interests are not our interests. They want low taxes and don't care whether we have good jobs, good schools, modern infrastructure and an economy that works for We, the People. They just don't care about that. And they are willing to say and spend what it takes to set us against each other, poison our politics, and anything else they need to do to get us to act in their interests not ours. "Globalization" and "free trade' policies work for them, because they enable them to evade the protections that our democracy gives us. But allowing them to just move factories and jobs out of the country and then bring the goods back here with no penalty does not work for the rest of us.

Keep this in mind when you hear the different arguments over taxes, infrastructure, education and government in general.