The Commerce Department's release of trade figures last week showed another large deficit with China for October, albeit slightly lower than the record hit the previous month. This figure will renew the calls for stronger action against China.
Unfortunately the debate over China is often buried in confusion, leading to a situation that is not conducive to effective action. A major reason for this confusion is that there is not a common U.S. interest against China. The interests of the 99 percent differ greatly from the interests of the 1 percent. Until this fact is recognized more generally, there is no possibility that our economic relations with China will change in a way that benefits the vast majority of working people in the United States.
The central issue with China is the fact that the dollar is over-valued against the Chinese currency. This over-valuation is the result of the explicit Chinese policy of pegging its currency against the dollar.
The peg is often referred to as "manipulation," but it doesn't really fit the bill for two reasons. First, it is an official policy. China targets the value of its currency quite openly; it is not doing it in the middle of the night when no one is looking.
The second reason is that China's mechanism for targeting the value of its currency is something that on alternate days our Treasury actually requests. They buy up U.S. government debt.
If this seems absurd, it should because it is. The way in which China keeps its currency down against the dollar (or keeps the dollar up against its currency) is by buying huge amounts of U.S. government bonds.
The media often tells us that we need China to buy our debt. This is not true. There are plenty of other potential investors, including the Federal Reserve Board. However we cannot both want China to buy U.S. government debt and then complain about China's currency manipulation. This is how they "manipulate" their currency.
But the currency issue is only one of many complaints that routinely appear in the list of grievances against China. The longer list includes complaints that China doesn't respect the patents and copyrights of companies like Pfizer and Disney, they don't grant full access to financial giants like Merrill Lynch and Goldman Sachs, and they put up barriers to retail chains like Wal-Mart who want to open up stores across China. These sorts of items are often lumped together with the undervaluation of the Chinese yuan to make a sort of economic indictment against the Chinese government.
One can argue the merits of each of these issues, but that doesn't have anything to do with the real world. There is no court where we are going to prosecute China for its economic wrongdoing. China is a huge powerful country. Its GDP is nearly 80 percent of U.S. GDP. By comparison, at its peak the GDP of the Soviet Union may have been half as large as the GDP of the United States.
We are not ever going to be in a situation to dictate to China what it can and cannot do. We are going to have to negotiate with them as the equal that they are. This means that in order to get some concessions from China's government on issues that we care about we will have to give up on other issues.
From this standpoint, the interests of those yelling about China's "pirating" of Pfizer and Disney's intellectual property are 180 degrees at odds with those concerned about the undervaluation of the yuan. If China gives up some ground in agreeing to stronger enforcement of U.S. patents and copyrights, then it is going to give up less ground in agreeing to raise the value of its currency. Similarly, if China agrees to give Merrill Lynch and Goldman Sachs more access to its financial sector, it will be at the cost of progress on revaluing its currency.
The point is that in pushing various demands in its negotiations with China, the Obama administration will be favoring certain interests to the detriment of others. The bulk of the working population has a clear interest in having a lower valued dollar.
If the dollar falls by 20 percent relative to the yuan, this would have roughly the same impact as imposing a 20 percent tariff on importing Chinese goods and giving out a 20 percent subsidy on exports to subsidy. Since the dollar is likely to fall against other currencies as well, this could go far toward bringing down the trade deficit, creating millions of relatively high-paying manufacturing jobs.
By contrast, Pfizer and Disney will see higher profits if China's increases enforcement of their patents and copyrights, but this will provide little benefit to workers in the United States. Similarly, Goldman Sach's increased access to China's financial markets is not going to create jobs for workers in the United States.
In short, there is a very clear class divide in U.S. negotiations with China. The 1 percent have their laundry list of special concerns that will make them even richer. The 99 percent care about a lower-valued currency to create millions of manufacturing jobs. We will see which side the Obama administration is on.
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So, too bad, live with it.
"There are plenty of other potential investors, including the Federal Reserve Board."
Excluding the Chinese government from participating in this debt market will
(a) immediately drive up baseline interest rates, and
(b) immediately drive up other government's budget deficit.
But because such a measure does not exclude China from participating in other areas of the US capital market, China could still effectively peg its currency to the US dollar by shifting its flow of dollars into these other areas of that market. Such a response would result in:
1) a decrease in US bond default premiums (the yield spreads between Treasury and 'risky' bonds)
2) a decrease in the equity risk premium (the difference in the implied discount rates for equity versus Treasury securities),
3) increased influence by the Chinese government in the event of municipal bond defaults,
4) increased ownership and control of US firms, and
And this is the problem:
5) no appreciable change in the US-China foreign exchange rate to spur the much desired renaissance in the US manufacturing sector that Dr. Baker predicts.
Please! Someone! Correct me if I am wrong! Because I, and the many millions of un- and underemplyment US citizens would LOVE it if the solution to the US' "China problem" were that simple.
Our banks having been doing the opposite. they are selling assets(like commecial real estate ) at 50% discounts and pilling up U.S. treasuries which I consider junk bonds. I think China is going to be the winer in swaping junk for hard assets that like commodities and real estate if they can unload fast enough before the U.S. dollar collapes.
1. Many minor currencies are tied to the dollar.
2. Euro wants to dive but weak dollar will not permit it. Dollar weakens - so does Euro. So no advantage vis-a-vis Euroland.
There are other issues that can solve the problem, but which are almost never mentioned.As Indy Skeptic commented below, tariffs would fix the problem of trade imbalances. After all it is legitimate when considering that China and others have almost no workers rights and no environmental regulations.
IMO there is no real disagreement on China in Washington, other than political theater to divert attention from the real issue: Unfair Free Trade Agreements, which are good only for a tiny number of global "citizens", but a fatal blow to American labor's livelihood.
There is going to be a global revolt from China to Europe to America against the top 1% and it will make concerns over currency and Euro debt look like the good old days.
Essentially we, the 99%, are sick to death of Davos loving pundits, greedy politicians and corrupt Oligarchs taking it all, down to stealing our children's dreams.
Precisely correct.
It appears that is the case but is it? Does this mean that if China appreciates its currency all would be OK? No it would not. If I remember correctly about 60% of trade deficit is due to American giant cross national corporations. If Chinese currency appreciates those corporations aren't going to bring those jobs back to the US. They will move them to Vietnam and other low cost countries. China will then move into manufacturing of higher value added products. This is exactly what happened in Japan (we still have a trade deficit with Japan). And so as you can see adjustment of China's currency will not fix our problem because our problem is not so much with China as it is with American giant corporations whose interests have long ago diverged from the interests of American people. Just remember that US government is owned by these same corporations and their owning classes. Should we be surprised by results? And what do we propose to do to bring about meaningful change?
The brutal Chinese Communist Party has thousands of slave camps all over China, well hidden from public view, where innocent political and religious prisoners are forced to work for nothing except a bowl of rice.
Westerners then buy these items for next to nothing and complain about their quality. Ask yourselves this question also, if you were forced to make garbage toys and cell phones and millions of other silly items, would you put your heart into the quality of your work, of course not.
The Western Governments that deal with the cruel Chinese Communist Party are fully aware of the atrocities and lack of human rights in Communist China but look the other way because of corporate greed.
It cost them about $0.02/kwh for electricity. Compare that with industrial (not residential) electric rates of California $0.14+/kwh!
China only burnt 49% of all the coal consumed on the planet last year!
I think that is why not 1 but 3 highly automated (low labor cost) energy intensive American Solar Cell manufactures closed last summer.
Seems trade with China is the new engine driving man-made climate change.
Protectionism from the 1820's to the 1990's made this the economic power it is! Even with the U.S. importing over 50% of it's oil needs the U.S. deficit was only about $31 billion in 1991!
This year the trade deficit will be almost $300 billion to China alone!