China Currency Showdown

In Other News China Trade Deficit Still Huge

Dave Johnson — Thu, 11 Oct 2012 14:18:28 -0400

The August trade figures are out and they are not good. The terrible trade deficit is where the jobs and the economy went but is ignored because it makes a few elites wealthy. Meanwhile our elites are whipping up fears about the budget deficit instead of the trade deficit, because they can use that fear to herd politicians toward a "grand bargain" that cuts taxes on the wealthy and corporations while cutting the things We, the People do for each other.

The Bad News

AP: US trade deficit rose to $44.2 billion in August,

The U.S. trade deficit widened in August from July because exports fell to the lowest level in six months. The wider deficit likely dragged on already-weak economic growth.

The deficit grew 4.1 percent to $44.2 billion in August, the biggest gap since May, the Commerce Department said Thursday.

Exports dropped 1 percent to $181.3 billion. Demand for American-made cars and farm goods declined.

Imports edged down a slight 0.1 percent to $225.5 billion. Purchases of foreign-made autos, aircraft and heavy machinery fell. The cost of oil imports rose sharply.

[. . .] For August, the deficit with China dipped 2.3 percent to $28.7 billion. U.S. exports edged up modestly, while imports from China fell. For the year, the U.S. deficit is on track to surpass last year's record, the highest ever recorded with a single country.

The widening trade gap with China has heightened trade tensions between the two countries. And it has become a flash point in the presidential race. GOP challenger Mitt Romney has promised a tougher approach than President Barack Obama with trade practices that he says are giving China unfair advantages.

Two key take-aways:

We had an international goods and services trade deficit of $44.2 billion.
The monthly goods deficit with China fell slightly to $28.7 billion from $29.4 billion in July. This is the second highest monthly trade deficit with China this year.

Here is the Census Bureau release.

Here is the Bureau's Trade in Goods with China.

Trade Deficit Drains Jobs, Economy, Makes Workers Accept Lower Wages

The trade deficit, especially the trade deficit with China, costs jobs and jobs and jobs. From the post, Report On Job Cost Of Trade Deficit With China,

So just how many jobs are lost to trade deficits? 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 trade deficit also drains the economy, and sends essential pieces of the industrial ecosystems out of the country. Note that even if we double exports, as the President is working to do, we continue to drain our economy if this 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.

The trade deficit 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.

The trade deficit is the problem we should be terrified by, not the budget deficit. If we fix the trade deficit and jobs that will fix the budget deficit!

Chinese Currency Decision Could Be Obama's Biggest Wall Street Giveaway

Mike Elk — Mon, 05 Apr 2010 13:25:44 -0400

Despite the Treasury Department's decision to postpone a report that could have branded China a currency manipulator, the economic damage being done by the Chinese government is not ending anytime soon. When we talk about China currency manipulation, we often talk about the role it has played in the loss of 2.4 million manufacturing jobs since 2000 to China. We talk about how Chinese currency manipulation makes Chinese goods 20-40% cheaper than they would be if China priced its currency like everyone else in the world.

However, what Chinese currency manipulation is really about is freedom. It's about freedom from the power of an elite to negatively affect both Chinese and Americans workers in order to fuel their own greed.

Wall Street clearly profits from multinational companies that send jobs overseas. Want proof? Nearly the whole world, economists from the left to right have presented evidence that Chinese are manipulating its currency.

So who comes out and says China isn't manipulating its currency? Goldman Sachs. Jim O'Neil, the chief economist of Goldman Sachs penned an op-ed in the Financial Times last week claiming that Goldman Sachs' financial models showed China wasn't manipulating their currency. Might Goldman Sachs and their have a conflict of interest in keeping Chinese currency manipulation going? You betcha they do; Goldman Sachs makes billions of dollars in profit from China. Low environmental standards, low wages, and cheap currency means bigger profits for Wall Street.

It’s important to realize that we aren't just talking about Wall Street elites profiting off of China, Chinese elites profit as well. Corrupt Chinese leaders, unelected by their people, make huge amounts of money off of the companies coming to China. In order to do this, they keep Chinese workers wages low in part through currency manipulation. As the New York Times pointed out:

From 1998 to 2008, the total cost of labor that goes into producing one unit of output fell 40 percent in China as workers became better at making goods. Had Beijing not intervened in foreign exchange markets that higher level of output should have led to higher real wages in dollar terms for the Chinese workers as they approached American levels of productivity? But the currency appreciated just 15 percent in those 10 years.

“The Chinese government is taxing their own workers,” said Moritz Schularick, a professor at Freie Universität Berlin.

You can debate the effects this has on Chinese workers since it helps sells more goods abroad. However what is clear that Chinese elites have pursued an export driven strategy that is not focused on raising wages. China has made little investment in developing its own internal markets and raising the wages of its workers.

Indeed China is taking active efforts to suppress the wages of its workers. Independent trade unions are outlawed in China. As a result, Chinese workers aren't able to bargain for higher wages and wages are kept down by anywhere from 47-86% from the market would typically determine them.

Likewise the threat of shipping jobs to China is used to keep wages down and suppress unions in the United States. Kate Bronfenbrenner study of workplace intimidation "No Holds Barred" showed that 58% of the time companies threaten to close a plant and ship it overseas if workers vote for a union. The threat is an effective one for keeping unions out and workers wages low.

Keeping workers' wages low isn't sustainable and leads to economic bubbles. Right now all that is keeping Wall Street going is the bailout and the cheap cost of goods from China - the China Bubble. However, like the housing bubble, and the tech bubble before, the China bubble is about to pop. Economist James Rickard recently called China "the greatest bubble in history with the most massive misallocation of wealth".

As a result of this misallocation, American workers will soon no longer have the economic means to buy Chinese products. Chinese workers won’t be able to buy products with the wages they make. Chinese Lenovo CEO Yang Yuanging was quoted in Business Week advocating for appreciating the value of yuan saying that China fixing its currency would boost Chinese consumers' purchasing power.

Instead, China has pursued an export-driven strategy through Chinese currency manipulation that keeps wages low both in the U.S. and China. Without Chinese currency manipulation, China wouldn't be able to do this. A recent Bloomberg article noted that even a 3% appreciation of the yuan (which is expected to be undervalued by at least 20%) would result 30-50% plunge in profits for Chinese manufacturers. Noted financial expert Yves Smith commented:

A 30% to 50% fall in profits on a mere 3% rise in the RMB (already an admission that they compete only on price), says their margins are unhealthy even with the benefit of a cheap RMB. Margins that thin will not support needed reinvestment in the business (nominal depreciation is often too low to cover needed reinvestment) nor allow the business to have much in the way of buffers for any kind of shocks

As you see Chinese Currency manipulation is a big part of the glue that allows that holds this whole Ponzi scheme together.

As President Obama faces his decision to take on China's currency manipulations, he is faced with a choice about who runs our economy. Will he label China a currency manipulator and take the first step towards an industrial policy that encompasses everyone's voices and raises all boats? Or will he ignore reality and give Wall Street the biggest giveaway that could possibly be imagined?