Fixing China Trade Is Key to a Sustainable Recovery 19 comments
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This week, the Obama Administration filed a WTO complaint against Chinese export practices that disadvantage U.S. manufacturers. This is welcome news, because more balanced trade with China is essential for achieving a sustainable economic recovery.
In 2001, the recent U.S. economic expansion began, and China was granted WTO membership and assured access into the U.S. market. By 2008, Chinese exports to the United States more than tripled to $338 billion, exceeding U.S. exports to China almost five to one.
Meanwhile, rapid growth in China and throughout Asia helped push up prices for oil, and the U.S. oil import deficit quadrupled.
The U.S. trade deficit increased from $93 billion in 2001 to about $700 billion a year from 2005 to 2008. That’s more than five percent of GDP, and China and oil now account for nearly the entire total.
Dollars spent abroad cannot be spent on U.S. goods and services. When imports exceed exports by 5 percent of GDP, Americans must spend 105 percent of what they earn, or the demand for U.S. goods and services is less than the supply, inventories of new homes, cars and other goods mount, layoffs result, and the economy slips into recession.
During the economic expansion, China and other foreign investors’ purchases of U.S. securities kept interest rates low on long-term bonds, even when the Federal Reserve raised its target rates on short-term paper. This permitted banks to offer mortgages and consumer loans on very attractive terms. Many Americans spent more than they earned, and this kept the economic expansion going. When the credit bubble burst, consumer demand collapsed and the recession followed.
The $789 billion stimulus will lift demand for U.S. goods and services temporarily. However, once that spending is done, either consumers again borrow and spend more than they earn to sustain demand for U.S. goods and services and keep the recovery going, or the trade deficit must be reduced significantly. Otherwise demand will flag and the recovery will collapse.
Reducing oil imports and better balancing trade with China are critical to a sustainable recovery.
Regarding oil, President Obama’s big push to get auto manufacturers more focused on fuel efficient, hybrid and electric vehicles is a partial answer. Producing more oil from abundant domestic reserves is needed too.
Trade with China with is lopsided because it pursues a mercantilist economic development strategy that blatantly violates commitments made to the United States and other WTO members when it was granted admission. China subsidizes exports through tax rebates, regulated raw material prices, and other industrial policies that expand its foreign sales far beyond manufactured products that benefit from its abundant low-wage labor.
China also keeps out products its manufacturers lack skills to make effectively. For example, U.S. and Japanese automakers are required to enter into joint ventures with Chinese companies, and produce vehicles and move parts suppliers to China to sell cars there.
Beijing maintains an undervalued currency by purchasing dollars with yuan on a regular basis and investing those dollars in U.S. Treasury securities. This provides the equivalent of a 25 percent subsidy on exports and disadvantages imports too.
Most recently, China imposed minimum prices, quotas, taxes, and other restrictions on critical materials used to produce steel, aluminum and chemicals. Often China is the key global supplier of raw materials, and its export controls disadvantage steel, aluminum and chemical manufacturers, and the industries that fabricate products from those materials, in the United States and elsewhere outside of China.
Such practices directly violate WTO rules, which require all members to export raw materials freely so that manufacturing takes place where it is most cost competitive, consistent with the basic tenets of trade based on comparative advantages.
The United States and European Union have initiated a formal complaint against these Chinese export restraints. U.S. Trade Representative Ron Kirk has correctly characterized these egregious practices as a thumb on the scale, disadvantaging U.S. manufacturers during a tough recession.
In announcing the WTO complaint, the Obama Administration noted the importance of manufacturing for creating high paying jobs, and hopefully, this will be just the first initiative to recalibrate trade with China.
Next the Obama Administration should tackle China’s undervalued yuan—its sweeping effect on U.S. industries competing with Chinese products make it essential to rebalancing trade with China and getting the U.S. economy back on a sustainable growth path.
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This article has 19 comments:
From what I have seen of American industry it comprises mainly of making mediocre product at hight cost, and then trying to make back the difference through building brands through incredibly expensive advertising. Obviously, there is some mileage in this approach, but eventually the wheels just fall off. The recession is making everyone look twice, and more often and not objective analysis shows many top brands to be little more than hype, and certainly not worth the price differential.
"The Chinese government has quietly started adopting policies aimed at encouraging exports while curbing imports, even though China, as one of the world’s largest exporters, has aggressively criticized protectionism in other countries.
The government has sharply expanded three programmes to help exporters, giving them larger tax rebates, more generous loans from state-owned banks to finance trade, and more government-paid travel to promote themselves at trade shows around the world.
At the same time, Beijing has banned all local, provincial and national government agencies from buying imported goods except in cases where no local substitute exists."
“China is not only continuing but accelerating many of the protectionist approaches they’ve taken in the past to promote economic development,” said Michael R. Wessel.
“The focus on maintaining export competitiveness to prevent job losses is clearly trumping longer-term considerations of rebalancing growth and reducing reliance on exports,” Eswar S. Prasad, a senior fellow at the Brookings Institution.
In other moves, Beijing has halted the rise of the renminbi against the dollar by intervening heavily in currency markets, dumping billions in renminbi and buying dollars and other currencies.
Provincial governments also appear to have cut back on their enforcement of counterfeiting laws and other intellectual property protections. Chinese consumers have less need to buy imported goods when they can buy much less expensive copies produced locally."
www.businesstimes.com....
This is the kind of behavior you can expect from a totalitarian regime focused only on staying in power, no matter the cost to its people or other nations.
The academics' and politicos' slavish devotion to David Ricardo's theory, postulate, principle, hypothesis (whatever it's called) is what got us into trouble. They forget that the concomitant to the theory was a mechanism to keep trade in balance: the exchange of gold.
The US has made its bed and it will lie in it...until it reinvents itself internally. The infantile response posted here is emblematic of why the US has failed to confront the world as it, not as it imagines it to be.
The 2009 report can be viewed at: www.ustr.gov/sites/def...
Please note that this report next year may be changed in its objectivity next year in order to maintain good credit terms with China.
On Jun 25 12:00 PM Gregman2 wrote:
> Peter, You know better than anyone that China's double standard is
> not new. They screamed foul in order to get into WTO, and now they
> just want to twist the rules in their favor.
This is the same old tune he has been playing for more than a decade. You need only to read one word and already know the whole article, not a single new thinking.
He never saw overleveraging as a problem, he never saw financial engineering as a problem. He has been barking up the wrong tree all this years. This is good enough that although he gets his share of air time for his simplistic jingoistic views, he has not been taken seriously.
Understand the economics. You are getting tough reviews on the Political Economy aspect. Such is life.
Going back to the economics. Very much joyed your following point:
Dollars spent abroad cannot be spent on U.S. goods and services. When imports exceed exports by 5 percent of GDP, Americans must spend 105 percent of what they earn, or the demand for U.S. goods and services is less than the supply, inventories of new homes, cars and other goods mount, layoffs result, and the economy slips into recession.
Excellent and cocise point!
Please see The Green Market
thegreenmarket.blogspo...