THE BLOG
05/24/2010 05:12 am ET | Updated May 25, 2011

With 2.4 Million U.S. Jobs Already Lost, China Sticks to "Screw-You" Trade Policy

Concern about massive jobs losses due to unfair Chinese trade practices is reshaping the American political battle-lines over trade, with labor winning new and sometimes unlikely supporters in its fight for stronger policies to protect American workers.

"We're picking up new allies, and Senators are signing on to introduce a bill that takes a tougher line on unfair trade than we've seen in in the past," Bill Samuel, the AFL-CIO's legislative director, told Truthout magazine in a recent interview. In addition, he believes the administration is more "open" to taking a tougher stance, including possibly ruling that China is a currency manipulator in an upcoming April 15 Treasury Department evaluation -- as ongoing high unemployment ramps up the political pressure on the administration and China.

To top it all off, China's "screw-you" public stance is only fueling anger on Capitol Hill. After meeting with Commerce and Treasury Department officials on Wednesday, China's deputy commerce minister, Zhong Shan, proclaimed last week, "The Chinese government will not succumb to foreign pressures to adjust our exchange rate." In addition, China reported last week -- perhaps even honestly -- that it experienced its first trade deficit in six years this month. As Bloomberg news quoted one Chinese economist: "A trade deficit will beef up Chinese leaders' argument in fending off pressure from the U.S. for the yuan [the Chinese currency] to appreciate."

China is sending mixed signals about whether it will allow adjustments in its currency, but most seasoned observers see China sticking to a hard line in the short term. As David Marsh, chairman of London and Oxford Capital Markets, wrote in an op-ed for the Wall Street Journal's Market Watch:
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"Based on off-the-record briefing from officials in Beijing, one development that does not appear likely in the short term is any Chinese action to change the currency peg that ties the renminbi [the Chinese currency also known as the yuan] to the dollar. The People's Bank, which is anyway fairly low down in the bureaucratic Beijing pecking order, has been criticized by some [Chinese] politicians as appearing too soft in the face of American sniping against the renminbi peg."

That's economic techno-speak for "China to US: We'll Keep Taking Your Jobs."

A new report released by the left-leaning Economic Policy Institute last Tuesday underscored how between 2001 and 2008, 2.4 million U.S. jobs were eliminated or displaced due largely to the flooding of the U.S. market with Chinese goods priced artificially low due to apparent Chinese government currency manipulation.

Senator Charles Schumer (D-NY) declared in stark terms in a conference call: "The future of America is at stake. If we continue to let the Chinese manipulate currency, unfairly export goods, and keep out imports of our best products, it will hurt America in ways from which we can never recover." For instance, EPI reported that a surge in imports in cheap Chines computer and electronic parts alone accounted for a roughly $75 billion increase in the trade deficit with China, leading to trade-related job losses in that high-tech sector of 627,700 jobs, with the hardest hit areas in California and Texas.

It's not that surprising, then, that the liberal Schumer has joined with Republican Lindsey Graham, among others, to sponsor legislation designed to force the Obama administration to declare that Chinese currency is "misallinged." The result is that the Chine "yuan" is undervalued in ways that make Chinese goods and services unfairly low in price, thus worsening a $420 billion U.S. trade deficit. An undervalued yuan means that fewer American dollars are needed to buy Chinese products, a pricing advantage worth between 20% to 40% on the international marketplace. A finding of currency manipulation can pave the way for protective import duties to compensate affected industries hit by Chinese currency-rigging.

To the conservative Graham, the risk of higher prices on some Chinese-made products is worth taking: "It's a price worth paying because the price of losing all our jobs to a Chinese currency imbalance is unacceptable. We have to allow American companies to [fairly] compete on the world stage with Chinese companies." Graham pointed out that China makes now roughly 45% of the world's solar panels, up from three percent or so not so long ago -- and that's due not just to the Chinese commitment to developing clean energy industries but their protective trade policies, too.

At hearings Wednesday before the House Ways and Means Committee, even a centrist economist, C. Fred Bergsten, the president of the pro-globalization Peterson Institute for International Economics, said bluntly that forcing China and a few other Asian countries to fairly adjust currencies "would be the most cost-effective step that can be taken to reduce the unemployment rate in the United States." He said such pressure would create as many as 1.2 million new jobs. Indeed, as Scott Paul, the executive director of labor-business Alliance for American Manufacturing coalition, noted earlier in the week, "If Washington is looking for a stimulus, this is a stimulus that costs no [government] money, helps the trade balance and creates good, sustainable jobs."

Currently, the Chinese government artificially pegs the yuan (also known as the renminbi) to be worth nearly 7 per dollar, when a dollar should be actually worth just 4 or so yuan if actual trading conditions applied. One scheme China uses to depress the value of their currency is to buy up with its yuan as many dollar-backed assets as possible: China has acquired $2 trillion in reserves, including $453 billion in U.S. treasury bills and other securites. So China isn't investing in the U.S for altruistic reasons, but to add another weapon in an economic fight with the United States. As an EPI press release explained following a panel last week on Chinese currency manipulation, featuring Paul Krugman and other experts:

The problem centers on China's currency, which unlike those of most major economies, does not fluctuate freely against the dollar. While the value of its currency should have increased as China exported more and more goods, it has instead remained artificially low, and China has aggressively acquired dollars to further depress the value of its own currency. Conservative estimates of how much it is undervalued range from 25% to 40%. As a result, the low prices of the goods it sells on the world market are difficult if not impossible to compete with. Currency manipulation also acts like a tariff - or a tax -- on U.S. exports to China.

China has another advantage, though, in its export game-plan for world economic domination: dirt-cheap wages that either compete with American companies unfairly -- or lure American firms to close down factories and outsource jobs. As Campaign for America's Future Fellow Dave Johnson, perhaps the most acerbic critic of China's trade scams, points out:

The fight over Chinese violations of trade rules is also another story about Wall Street and big, monopolistic corporations vs Main Street and American workers.

A China Daily story says China's huge export surplus is being "misread." The Chinese government says that US companies -- the ones who close US factories, lay off workers, devastate communities and throw the costs onto the government -- are also beneficiaries of China's government subsidies. From the story:

"China's large trade surplus is often used by the United States to argue why China should allow its currency to rise.

"Yet most US officials ignore a very important fact: a majority of China's exports to the US are produced by US-funded companies and huge profits go back into American pockets. . . .

"'China's cheap labor helps foreign companies cut wage costs and increase their profits. Ironically, the rising profits go into foreign bosses' pockets and China is left to take the blame for the trade imbalance,'" said Tan Yaling, an expert at the China Institute for Financial Derivatives at Peking University."

This story is correct. SOME Americans do benefit from closing our factories. Actually, "benefit" might even be the wrong word here. SOME Americans are getting fabulously wealthy from these policies, beyond anything seen before in history, with the rest of us falling further and further behind as a result.

This perverse dynamic has also set up unusual tensions within the usually united front of free-trade loving Republicans and business interests. For instance (via Campaign for America's Future Mike Elk), even the Chamber of Commerce is sending warning signals about China's job-killing trade policies. As the Financial Times reported in its piece, "China to lose ally against US trade hawks":

The US business community can no longer resist political pressure for Washington to take a tougher stand against China on trade issues, according to a senior figure from the US Chamber of Commerce.

Myron Brilliant, senior vice-president for international affairs, who has previously helped to protect Beijing from hawkish trade policies, told the Financial Times: "I don't think the Chinese government can count on the American business community to be able to push back and block action [on Capitol Hill]...."

Mr Brilliant said corporate America's attitude had changed in response to a range of "industrial policies" pursued by Beijing, including the undervaluation of the renminbi, which made it harder for US companies to do business and compete with China. He also cited the tough economic times in the US - particularly the near 10 per cent jobless rate - as making it more difficult to argue against tough action on China.

Southern Republicans like Lindsey Graham are normally quite willing to help out multi-national corporations and Big Business by promoting, say, anti-union policies and relatively low wages in their states. In 2008, he earned a 14 perecent rating from the AFL-CIO and a healthy 100 percent from the Chamber of Commerce, but on this issue, he's now taking a stance traditionally held by labor. Graham and Schumer, though, championed a similar tough stance against China's currency practices in 2005, winning 67 votes in the Senate, while no action was taken in the House. Yet even that threat of further action prompted China to initially strengthen its currency's value, before returning to its current currency gambit of promoting exports uber-alles. As Schumer said, "Only our pressure will make a difference. We're fed up."

Graham and Schumer, in the conference call with reporters, noted how the political winds have shifted since they first sought to rein in China's currency manipulations and were derided as "protectionists." Schumer said, "When we first introduced the bill, we were laughed at. Some in the U.S. denied there was a problem while others said what we were doing was an over-reaction. Today we know better."

It's not just the staggering job losses and the blow to economic recovery here and abroad that have given the once-arcane China trade issue new political importance. A broader spectrum of academic and expert analysts are viewing the currency manipulation with alarm. For instance, Atlantic journalist James Fallows (full disclosure: a former editor of mine), the China expert and author, believes that China's manufacturing advantage isn't just due to currency manipulation and have even questioned its role as a massive U.S. job-killer. But he believe these recent Chinese actions pose a major threat to our economy. Fallows observes, "Anything one government does to depress demand -- or to shift some other nation's demand to its own factories -- has a beggar-thy-neighbor effect and slows down recovery world wide." China's currency manipulation, though a complicated process, also depresses purchases of products by its own citizens and promotes their savings, while encouraging foreign companies and citizens to purchase Chinese goods.

A bipartisan consensus on Chinese trade is clearly growing, and the formerly discounted views of fair trade, pro-labor advocates during both Republican and Democratic administrations are now gaining in strength. Even Treasury Secretary Tim Geithner's
belief that China will voluntarily raise the value of its currency won't deter the mounting interest in strong Congressional action. The Washington Post reported last Thursday on Geithner's views:

Treasury Secretary Timothy F. Geithner said Wednesday that the United States "can't force" China to change its currency policies, as debate continues over whether the Obama administration will take action against Beijing as part of an assessment next month about how it sets its exchange rates.

Geithner said he thought the Chinese would take action on their own to allow the yuan to gain in value, fixing a misalignment some argue is a deliberate effort by China to keep its goods cheap on world markets.

"I think it is quite likely they move over time," Geithner said in an interview on CNN. "We can't force them to make that change. But it is very important that they let it start to appreciate."

Geithner is being encouraged by some members of Congress, economists and labor and business groups to label China a "currency manipulator" on April 15 when he issues a semiannual review of world currency policies.

But the political climate is shifting especially because American businesses, a key GOP constituency, are increasingly speaking out about the threat these currency maneuvers pose to them, and in the face of the persistent damage from the Great Recession, their voices can no longer be ignored. As EPI reported about one concerned American manufacturer:

In the 13 years since she purchased Schmald Tool & Dye, Inc., a small manufacturing company based in Michigan, Laurie Moncrieff has struggled to sustain capacity in the face of mounting global competition. Although competition is a fact of life in business, Moncrieff says the terms on which she is forced to compete are a losing proposition.

"Small businesses are now competing against countries," she said.

Moncrieff made her remarks during EPI's March 12 panel on currency manipulation, where she provided a real life example of the commonly-voiced assertion that China's currency policies were costing the United States millions of jobs. She described a global playing field that had become so uneven that Chinese goods were not just cheaper than comparable ones her company made, but often cost less than the price of the raw materials she used.

"It does me no good to hire people if I cannot sell my goods," Moncrieff said. With production capacity at her business down as low as 25%, she said she does not see how the business will be able to rebound unless lawmakers address trade and currency policy. William Jones, chairman of Cummins-Allison Corp., a Chicago maker of coin sorters and other currency handling machines, outlined a similar set of challenges which had forced him to stop making some products such as paper shredders, entirely. "If you level the playing field, we'll go back to making shredders," he said. "I'd love to hire more Americans: give me a reason to do it."

So with millions of workers and thousands of businesses affected by China's predatory trade practices, Congress is starting to listen. Indeed, the shocking statistics in the new EPI report --"worse than we could have expected," Schumer said -- came with accompanying charts and an interactive map that showed the job losses in each state and each Congressional district.

Strikingly, the hardest hit districts were once the jewels of American high-tech innovation: Silicon Valley. Three Congressional districts in the San Jose and Palo Alto area had 60,000 jobs lost or displaced.

"We have allowed the Chinese government to game the system for far too long, with serious consequences for the U.S. economy," says the EPI report's author, economist Robert Scott.

That's no longer much in doubt, but it's still not clear how far the Administration will be willing to go to push China. Congressional action may force the administration's hand, at least in labeling China a currency manipulator next month, which could ultimately pave the way for tariffs on Chinese goods.

At the Congressional hearings on Wednesday, Harvard University historian Niall Ferguson, author of The Ascent of Money: A Financial History of the World, observed, "If we don't label China a currency manipulator, we will look like the wimps of the Western world."

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Art Levine is a contributing editor of The Washington Monthly who has also done Nation Institute-funded investigative projects, and blogs regularly on progressive issues for Truthout.org and The Working In These Times blog, cross-posting to Huffington Post.