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Gilbert B. Kaplan

Gilbert B. Kaplan

Posted: November 6, 2009 02:16 PM

I am glad that a company called Teletech Governmental Solutions in Englewood, Colorado used our stimulus funds to hire 635 call center employees to provide assistance to people transitioning to digital TV's. But I would be happier if a single one of those TV's were being made in the United States. The simple fact is, over and over again the United States is using its economic might and even our stimulus dollars to send jobs overseas. Some of this is conscious and obvious. There is no doubt that televisions are all made abroad these days. There was simply no reason that, coupled with the requirement to move to digital earlier this year, the United States government could not have invested several billion dollars in television plants in California, Texas, New York or anywhere else with a ready, willing and able unemployed high-tech work force. But none of this was done.

Why not? Because we have neglected the manufacturing base of our economy in much the same way we have neglected financial regulation. There simply is no manufacturing policy in the United States. To his credit, President Obama has appointed Ron Bloom to coordinate manufacturing policy in the White House. But there is an opportunity next week, when the President goes to China, to kick start this coordination effort and begin to make things happen.

There are two steps the President could take as part of his trip to retake the initiative on job creation in the United States. The creation of real jobs will take real work. It is not just a question of pouring money into financial institutions. Also, it will rub some of our trading partners the wrong way. So what? They've had it coming to them, and if there's any lesson the President should take from Tuesday's election results and today's unemployment numbers topping 10%, it's that the American people will not be satisfied with job creation efforts that only help the big banks. Trickle-down economics, which seems to be the theory underlying this policy, is not popular in New Jersey, in Virginia, or in the rest of the country.

The two actions the president can take will create jobs in the United States, will start passing the benefits of the anemic economic recovery more broadly to the American middle class, and will begin the revitalization of the manufacturing sector. First, he must tell the Chinese that they need to let their currency float freely against the dollar. This will immediately relieve the United States of the equivalent of a 35-40% duty charged by China on everything we ship there. More importantly, it will remove a 35-40% benefit, or subsidy, that Chinese companies receive every time they ship something here. The Chinese government gives their exporters this subsidy grant every time they exchange the dollars they get on their export transactions for their local currency, the Renminbi ("RMB"). This has the effect of supercharging China's exports in the manufacturing sector, and speeding the decline of the U. S. heartland.

There is almost uniform acknowledgment that the Chinese currency is undervalued and that this creates an enormous trade advantage for China. Ben Bernanke made this point strongly all the way back in 2006. The United States Treasury Department made the same point in an April 15, 2009 report. But nothing is done. Nothing changes.

On this issue, President Obama cannot come back empty-handed. He must either get a promise from the Chinese to freely float their currency, or take trade action to off-set the export subsidy. If we need trade action, he can apply what is called the countervailing duty law to currency manipulation, permitting the imposition of a duty on exports financed by currency subsidies. Or he can authorize the commencement of what is called a Section 301 case, which requires an intensive negotiation with the respondent country guilty of the subsidy practice. If the negotiation does not lead to a successful result in a short period of time, he can retaliate with a number of trade off-sets. Faced with these potential actions, the Chinese should act on their own, avoiding a confrontation. But if it is confrontation they want, we should be prepared for that. Tuesday's elections make clear that bailing out banks and leaving the job base in ruins will not be enough for the American people.

The second action President Obama should take is to tell the Chinese government they must end all industrial subsidies to manufacturing companies. These have taken the form of direct grants to manufacturers to build new plants, tax breaks, low cost inputs and a score of other innovative ways to create and brace up manufacturing companies. Over $50 billion has gone to the Chinese steel industry, over $30 billion to the Chinese glass industry, nearly $30 billion in subsidies to the textile industry each year. Some limited subsidy practices may have made sense twenty years ago when China was struggling to start up its economy and put its people to work. It makes no sense now that China has a sustained $250 billion trade surplus with the United States, and has had the largest trade surplus with our country of any other trading partner for 89 straight months. Our beneficence can only go so far. China is now a big boy, to put it mildly, and we should demand an end to these WTO-illegal subsidies. Here too, if the president cannot reach agreement in a short period of time, he should take action by self-initiating a large series of trade actions against China and bringing them to a quick resolution.

No doubt some people will say that we have subsidized our auto industry with bailouts. But there is an enormous difference. The Chinese subsidies go to export-oriented industries that are targeting the United States and other export markets. The subsidies to the U.S. auto industry do not affect China's companies, because the U. S. auto companies export hardly anything to China. In 2008, U. S. auto manufacturers exported about 46,000 vehicles to China, composing less than one half of one percent of the Chinese market. In contrast, for example, exports from Chinese pipe producers constituted close to 30% of the U.S. market several years ago. In apparel, China exported over $23 billion of product to the U.S. in the last year.

We have become a country of two economies. The bank, Wall Street and investment economy seems to be reviving. People are making money and going out to dinner with bailout funds. But the middle class economy of manufacturing workers is struggling to right itself after twenty years of government neglect, even before the additional burden of the financial crisis hit them.

The creation of real jobs that are sustaining and that will provide a long term successful life style for American workers can begin next week. But it won't begin without tough action and a demand for real change.