In light of the number of manufacturing and goods producing jobs lost in America over the past decade, it's no wonder why many in Washington and on Main Street are clamoring for a trade and currency war with China. The furor has grown so loud that Congress, Treasury and the Commerce Department may soon be forced to declare China a currency manipulator. Senators Lindsey Graham (R) South Carolina and Chuck Schumer (D) New York have introduced legislation that would compel the Treasury to cite the Chinese as currency manipulators, which would allow the Commerce Department to impose duties and tariffs upon them.
On April 15th there was a deadline for the Department of the Treasury to deliver its semiannual report on foreign exchange. That report could have served as the mechanism in which to place the "manipulator" label on the Chinese. But the deadline for the report was delayed by Secretary Geithner in a statement he made on April 3rd.
Make no mistake; the reduction in the manufacturing and goods producing sector of the economy has been and continues to be a serious problem. Since the year 2000, the U.S. has seen its manufacturing sector as a percentage of GDP drop from 14.5% to 11.5%. More troubling is the jobs picture. The number of manufacturing jobs lost in the U.S since the year 2000 has been 5.73 Million. And the number of goods producing jobs lost has been 6.81 million!
But the answer for the U.S. can't be found by simply forcing the Chinese to appreciate their currency or by devaluing the U.S. dollar. History clearly shows any such currency manipulation strategy to be a complete failure. They have already tried it between the years 2005-2008. In 2005 China announced it would increase the value of its currency and abandon its decade-old fixed exchange rate to the U.S. dollar in favor of a link to a basket of world currencies. Later, in 2008, china then returned to a peg against the dollar. However, during that time frame the Yuan rallied from .1208 USD to .1467 USD (a move of over 20%). But the falling dollar had a negligible effect on U.S. exports. For all of 2005 the U.S. deficit with China was $201.5 billion. In 2008, three years into the dollar devaluation and Yuan appreciation, it soared to $266.3 billion (more than a 32% increase). The truth is that currency values are important but not as important as the wages, taxes and regulations within a given country.
To be clear, I believe that China manipulates its currency. But the question is what should we be doing about it? Trade and currency battles are not the answer. After all, the U.S. must finally accept that it's up to the Chinese how they want to handle their trade surplus. If they want to continue to recycle it into our bond market--thus providing us with much lower rates of interest--then so be it. If the Chinese don't want to sell dollars and drive up the value of the Yuan, then perhaps we need to consume less and/or produce more as a country. Because of the vast quantities of U.S. Treasury holdings the Chinese posses, we just aren't in the position to force them to do much of anything.
Besides, does the Commerce and Treasury Department believe that a Yuan revaluation will cause factories in the U.S. to sprout up like spring dandelions? Contrary to what many think, the U.S. should lower taxes and reduce regulations if it wants to compete better with the Chinese. We should also concentrate on boosting our high-tech manufacturing output and not necessarily seek to just supplant China's textile industry.
A trade and currency war with China will have a detrimental effect on both countries but less so for the Chinese. For China it will mean less exports and a lower value on their current Treasury holdings. However, a rising Yuan will also boost living standards for all Chinese citizens. Just think about the benefits received from reduced prices on their metals and energy related imports. Eventually, the Chinese will grow its middle class and be able to consume its own production. But for the U.S. it will mean a much higher interest expense on our debt as the Treasury Department scampers to find a replacement for China's support of our bond market. It will also send interest rates up to a level that would cripple our still overleveraged private sector and now massively-indebted public sector. And unlike the Chinese, it will mean the return of inflation in earnest for all U.S. consumers--especially given our heavy reliance on imports.
We should think twice and then think again about declaring China a currency manipulator. But even if we do choose to label them a "manipulator", we should be aware that it cannot alone resuscitate the goods producing sector of the economy. If we really want to compete with the Chinese and boost the exporting sector of our economy we should pass laws that significantly reduce the impediments for businesses to compete right here at home. A good place to start is by reducing corporate taxes and also by making sure the Card Check Bill doesn't become law.
Michael Pento is the Senior Market Strategist for Delta Global Advisors and a contributor to greenfaucet.com
Dude, are you cuttin' 'n pastin' from the 80's?
One only needs to look at the trade deficit to see the jobs, wealth and technology leaving our country. We have been brainwashed with the idea that trade deficits don't matter or are even go so far as to say they are good by dishonest and ideologic economists, think tanks, cable talking heads and politicians. no other country believes this and actively set up policy to protect and promote their domestic industries.
the other gage is take a drive thru your local industrial parks particularly in the (former) heavy industry states like MI, IN, OH, P, NJ, IL or really anywhere and see all the vacant, for sale/for lease industrial buildings in place that bustled and thrived 10 years ago. the few industries left are shadows of their former selves.
Yep there already is a trade war going on, and the US better get moving and get in it before the last factory closes, actually the time to have done so was 20 years ago. the damage china can doo to us has already been done, so we have little to lose at this point and everything to gain. the unilateral practice of "free" trade has been a bad deal for US industry and workers
In contrast, American rents alone in most major cities require American workers to hold multiple minimum wage jobs. There is no competing. Citizenship comes with a price, and it's time that Corporate "citizens" paid it just like everyone else does.
Just like everything else, America imports it's rural villagers, and, yes, they send a large percentage of their paychecks home to their rural relatives in other countries like Mexico.
If the jobs aren't here, how do we produce anything. If there's no incentive for corporations to keep production in this country, what is the man in the unemployment line supposed to produce? When people are working for minimum wage, they're, by necessity, shopping on price, which gives the advantage to ... yeah, cheap imports.
Save more? Aren't you presuming a little too much here?
Also, what I believe is that your solution "to produce more, save more and consume less" means we need to realign our balance of trade. Which means abrogating the "Free Trade" agreements (HARR HAR) to which our self interested economic elites like yourself have bound us. The NEXT economics lesson I give you I'm charging you for.
You don't have to like the Chinese. That's fine. Hate them for all I care. But never underestimate an enemy.
Sincerely
By the way the yuan isn't a floating currency. The Americans can't do anything about the yuan.
The U. S. emphasizes short term adjustment and wants a quick fix in RMB-dollar exchange rate. China would rather do it in a gradual fashion, focusing on long term structural and institutional change.
If RMB appreciates quickly, the U. S. may import less from China, but it does not necessarily help correct the trade deficit as the U. S. will import from other countries. And it will hurt American consumers because the prices of imported Chinese-made goods will rise and trigger inflation in the U. S.
For China, it may cause unemployment and social strife, which is what the Chinese government worries about. But let’s not forget that the unstable environment will hurt American businesses in China as well.
One of the biggest myths about China is that its economy is export-driven. Net exports accounted for only 3 % of China’s GDP growth in 2009. Although exports are important for China, China’s economy is mainly driven by investment.
China has taken measures to boost its domestic consumption. A growing Chinese middle class will help American businesses sell more into China’s markets.
I do not think a quick fix of the RMB-dollar exchange rate will create more U. S. manufacturing jobs. Americans should focus on innovation that will bring new jobs rather than trying to get the old manufacturing jobs back.
Quote: "…let's not forget an unstable environment will hurt American businesses in China..."
I would question how “American†some multinational corporations are. If a majority of their employees are in China or other countries, aren’t they Chinese or why do we call them "multinational"?
Quote: “I do not think a quick fix… “ will “… get the old manufacturing jobs back.â€
True. AND innovation is something that can help all business sectors or none. Textile factories and steel mills can be just as innovative as software companies. But innovation will help none of these unless the decision is made to keep the jobs in America.
Americans are the ones who advocate the competition. We cannot on one hand complain about China manipulating its currency, and on the other hand impose protectionism ourselves.
What I mean by innovation is that Americans should focus on creating new jobs, such as developing new technologies, new products, and new industries. This way, globalization will compete us to the top, not to the bottom.
The truth is that currency values are important but not as important as the wages, taxes and regulations within a given country.
MP's implied solution:
Lower wages in the US to Chinese standards for the masses, AND keep taxes on the masses but not on the wealthy, and close your eyes to regulations in the US.
Hmmm. Did he learn anything from the 8 year Bushco regime?
I have to say that I was very hesitant to push the issue of currency re-balancing before, but after Mr. Pento's article, I'm just about ready to push for a trade war with China.
http://www.treas.gov/tic/mfh.txt
But, really, why compete at all? If we are relegarted to competing, is't that conceding that we can't find a way to develop more of a win-win relationship with our working brothers and sisters in China? The status quo isn't exactly giving any of us the best of all possible worlds (it seems to me).
And, yes, it's possible that the Chinese government can help it's entire population to advance to middle class, goods consumers, just not in the lifetime of anyone now living. Or at least not trying to do it on their own and without regard to the welfare of the rest of the world community. China is the leading exporter exactly because it has a gigantic surplus of low cost labor, and in no reality known to real reality is that a formula, in and of itself, for making a billion plus people prosperous overnight. Not that I will concede the goal to be impossible before it has at least been the failed subject of intelligent planning and execution, but I just can't bring myself to believe that the Chinese Communist government, American multi-national corporations, and modern american labor unions are the only ones that can be trusted to create a better way. I just don't think that enough stakeholders have yet been enlisted to the challenge.
A cheaper dollar makes US exports more competitive as well - thus spurring mfg into a grwoth mode again creating jobs