Geithner: China's Not Manipulating Currency 15 comments
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On October 15, rather than combat Chinese currency manipulations, Treasury Secretary Timothy Geithner issued a ludicrous report to Congress which claimed that China is not manipulating its currency. It concluded:
[This] report must consider whether any foreign economy manipulates its rate of exchange against the U.S. dollar to prevent effective balance of payments adjustments or to gain unfair competitive advantage in international trade. For the period covered in this Report, January 1, 2009 to June 30, 2009, Treasury has concluded that no major trading partner of the United States met the standards identified in Section 3004 of the Act. (p. 3)
America is currently experiencing the persistent economic depression that comes to countries who let their trading partners practice mercantilism, the strategy of maximizing exports and minimizing imports in order to run trade surpluses.
China is now using mercantilism to grow at about a 7% pace, while shrinking the economies of her political rivals in Japan, Europe, and America. China uses export subsidies, currency manipulations, and various tariff and non-tariff barriers to steal aggregate demand and production from the economies of her trading partners.
And American economists, following the lead of Adam Smith's 1776 book (The Wealth of Nations), allow this. Smith argued that mercantilism is a mistake because it reduces a country's current consumption. He correctly wrote:
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce. (iv.8.49)
But Smith missed an important fact. The mercantilist country only misses out on consumption for a while and the victim country only gets increased consumption for a while. Eventually the growth of industry and income in the mercantilist country and the loss of industry and income in the victim country reverses the tide. As we noted in our book Trading Away Our Future:
In 1997, Peking University economics professor Heng-Fu Zou, a Senior Research Economist for the World Bank’s Development Research Group, showed, in an intriguing paper [“Dynamic Analysis of the Viner Model of Mercantilism”], that mercantilism can succeed on its own terms for a small economy. Accumulating foreign assets (running a trade surplus) leads to long term positive outcomes. “A nation with strong mercantilist sentiment ends up with large foreign asset accumulation and high consumption in the long run.” (p. 26)
In 1936 while writing his magnum opus (The General Theory of Employment Interest and Money), John Maynard Keynes rejected Smith’s mercantilism theory, pointing out:
(A) favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)
We don’t have to permit Chinese mercantilism. Should we require that our trade ratio with China move to balance, the Chinese government would be forced to take down their many tariff and non-tariff barriers to American products.
Currently we buy about $1 from China for every 25¢ that China buys from us. The U.S. Treasury Department could achieve equality by auctioning import certificates that allow the same value of Chinese imports as China imports from us. The revival of American manufacturing and the American economy would be dramatic.
Disclosure: No Positions
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This article has 15 comments:
> You have to make something that that people wants to buy first
Here are some of the products that Americans make that Chinese would buy if it were not for Chinese policy of minimizing imports:
1. Autoparts. China has a 25% tariff on foreign-made autoparts. Otherwise the Ford and GM plants in China would be importing them.
2. Automobiles. China has a 25% tariff on foreign-made vehicles and doesn't let foreign-made vehicles qualify for its consumer subsidies.
3. Video games and Movies. China allows piracy of these products while delaying their approval of import licenses for the legitimate products.
4. Chicken. China stopped issuing import licenses for import of American chicken at the same time they filed a complaint over US rules against the importation of Chinese cooked-chicken products.
5. Commercial Aircraft. China is currently building its own commercial aircraft industry with huge government subsidies.
6. Mining Equipment. A few years ago China put 25% tariffs on American mining machinery to protect their new factories. This is still an area in which US exports lead the world.
7. Computers. Dell and other American manufacturers aren't eligible for government subsidies for computer purchases.
8. Motorcycles. China has numerous barriers to Harley Davidson motorcycles, starting with 25% tariffs and continuing with restrictions against using motorcycles with Harley size motors on most Chinese roads.
Need I go on?
On Oct 25 11:33 AM
Well you attended the producer by providing him with the capital and the technology, and you did the consuming. What exactly is your problem?
In other news, US consumer notices computer and Hummer price increases.
On Oct 25 12:48 PM Tom E. wrote:
> We should match the trade policies of the countries that we trade
> with. If they have domestic content laws, we should have them for their products etc.
I agree. It is inevitable. Many of the other Asian nations have already resumed their currency manipulations. They see China's success and will copy its policy.
If Keynes had had his way, we would have gotten a decent international institution which would have kept trade in balance so that it could have kept growing forever. Instead we got institutions that permitted mercantilism.
Howard
On Oct 25 05:07 PM rob134 wrote:
> Give it about 5-6 years and we could well see what a real global
> trade war is like. By that time it will be realized that America
> is in fact a second world economic sub-power, and we will have no
> choice but to finally stop the trade give a ways. Massive unemployment,
> increasing poverty and homelessness will demand more industrial production
> of real tangible items that can be exported freely.
You Did Not respond to Xcer.
"xcer wrote:
> You have to make something that that people wants to buy first
Here are some of the products that Americans make that Chinese would buy if it were not for Chinese policy of minimizing imports:
1. Autoparts. China has a 25% tariff on foreign-made autoparts. Otherwise the Ford and GM plants in China would be importing them.
2. Automobiles. China has a 25% tariff on foreign-made vehicles and doesn't let foreign-made vehicles qualify for its consumer subsidies.
3. Video games and Movies. China allows piracy of these products while delaying their approval of import licenses for the legitimate products.
4. Chicken. China stopped issuing import licenses for import of American chicken at the same time they filed a complaint over US rules against the importation of Chinese cooked-chicken products.
5. Commercial Aircraft. China is currently building its own commercial aircraft industry with huge government subsidies.
6. Mining Equipment. A few years ago China put 25% tariffs on American mining machinery to protect their new factories. This is still an area in which US exports lead the world.
The Chinese can do without All of the Above. What does the US export that China Needs?
One item from the above is considered a Luxury. Its number 4:
"4. Chicken. China stopped issuing import licenses for import of American chicken at the same time they filed a complaint over US rules against the importation of Chinese cooked-chicken products."
The Obama Admin. stopped the export of what OUR Farmers considered a waste product but the Chinese considered a Luxury Import item...Chicken Feet. Obama hurt our Farmers. The Chinese will go somewhere else.
They Do Not Need a single thing we produce. Squat, nothing, Nada.
And They are doing the same thing that the US has done for Decades, protecting their Fledgling Home Grown Industries.
Just Like Obama told Brazil's President on National TV one Sunday recently, the Ethanol Industry is just starting in the US. We have to protect it.
> America better start manufacturing again soon or it's going to be
> screwed.
Wages are just one factor factor in manufacturing. Other factors include property rights, patent protection, infrastructure, work ethic, political stability, and taxes. If wages were the only factor, corporations would be anxious to build their factories in Haiti!
The fact is that in the absence of mercantilism, trade is balanced. Each country produces that with which it has a comparative advantage. America would indeed by producing manufactured goods if trade were balanced.
Howard
Howard
Mercantilism works by sapping investment from its victims.
Howard
On Oct 26 05:30 PM Howard Richman wrote:
> Spook asks, "And how does the American compete in terms of cost?
> US have a high living standard, which also translate that the wages
> is also high...."
>
> Wages are just one factor factor in manufacturing. Other factors
> include property rights, patent protection, infrastructure, work
> ethic, political stability, and taxes. If wages were the only factor,
> corporations would be anxious to build their factories in Haiti!
>
>
> The fact is that in the absence of mercantilism, trade is balanced.
> Each country produces that with which it has a comparative advantage.
> America would indeed by producing manufactured goods if trade were
> balanced.
>
> Howard
>
> Howard