China Nixes Obama's Balanced Trade Rhetoric

President Obama is now in the midst of an Asia trip designed to produce more balanced trade so that American exports to Asia would jump start the U.S. economic recovery. Currently, China only lets its people buy about 25¢ for every $1 we buy from them, and other Asian countries recently resumed their currency manipulations so as not to lose market share to China.

In his speech at Suntory Hall in Tokyo on November 14, Obama said that the topic of balanced growth (i.e., balanced trade) would be discussed in Singapore the next day. He described his dream that balanced trade would benefit all sides. Specifically:

So we have now reached one of those rare inflection points in history where we have the opportunity to take a different path. And that must begin with the G20 pledge that we made in Pittsburgh to pursue a new strategy for balanced economic growth.

I'll be saying more about this in Singapore, but in the United States, this new strategy will mean that we save more and spend less, reform our financial systems, reduce our long-term deficit and borrowing. It will also mean a greater emphasis on exports that we can build, produce, and sell all over the world. For America, this is a jobs strategy. Right now, our exports support millions upon millions of well-paying American jobs. Increasing those exports by just a small amount has the potential to create millions more. These are jobs making everything from wind turbines and solar panels to the technology that you use every day.

For Asia, striking this better balance will provide an opportunity for workers and consumers to enjoy higher standards of living that their remarkable increases in productivity have made possible. It will allow for greater investments in housing and infrastructure and the service sector. And a more balanced global economy will lead to prosperity that reaches further and deeper.

For decades, the United States has had one of the most open markets in the world, and that openness has helped to fuel the success of so many countries in this region and others over the last century. In this new era, opening other markets around the globe will be critical not just to America's prosperity, but to the world's, as well.

An integral part of this new strategy is working towards an ambitious and balanced Doha agreement -- not any agreement, but an agreement that will open up markets and increase exports around the world. We are ready to work with our Asian partners to see if we can achieve that objective in a timely fashion -- and we invite our regional trading partners to join us at the table....

Then the next day, Obama flew to Singapore to join the meeting of Asian leaders at the APEC (Asia Pacific Economic Cooperation) forum. At the end of two days of discussion, Reuters reported that China and United States could not even agree to the mention of "market oriented exchange rates" in the final communique:

SINGAPORE (Reuters) - The United States and China sparred over exchange rates at a meeting of Asia Pacific leaders on Sunday, pointing to tricky talks ahead for President Barack Obama when he flies to China to address economic tensions.

The discord surfaced at a summit of the Asia Pacific Economic Cooperation (APEC) forum in Singapore when a reference to "market-oriented exchange rates" was cut from a communique issued at the end of two days of talks. An APEC delegation official said Washington and Beijing could not agree on the wording.

President Obama would have received a very different reaction from China were he to mention that America is thinking of adopting import restrictions to balance trade with China under the special WTO rule for trade deficit countries. If he were to auction Import Certificates allowing the same amount of imports from China as China imports from us, he could balance trade with or without Chinese cooperation.

China would not be able to respond with new tariffs on American products, as they did with tariffs on American nylon following Obama's tariffs on Chinese tires. Any new import restrictions that they would try would further reduce their exports to the United States.

But China does not think that they need to cooperate with this President. Are they correct?

Disclosure: No positions

Comments

[waf76:]

They are in a position of power and while helping us may help them, they're doing pretty good without it and long term they can really strike a blow to us by not being too accommodating...if I'm China, I keep the yuan pegged lower to the dollar while my massive surplus continues to increase while the economy in the US gets fundamentally worse with the weaker dollar (which hurts my war chest but so what, minimal impact in the long run), huge financing costs, credit card defaults waiting in the wings, no housing recovery, and no job creation on the horizon...

Nov 16 10:38 AM

[conceptwizard:]

Obama is powerless to do anything. The Chinese, Russians and Saudi Arabia (BRIC) hold all the cards, (our Debt). The plain fact that the President is even there to plead our dire circumstances speaks volumes.
The US as a superpower is over, military might has to be financed as well as domestic debt. The position that the US has put itself in with this tremendous debt load is completly irresponsible and embarrassing. We have lost control of the reins of our present and future.
Already as statistics show our middle class is eroding, our average earnings and weekly hours worked are crumbling, we cannot survive as a service economy in the future and the transition will be long and very painful.
The debt is a separate issue as is the dollar carry trade bubble. For those that think we are in a recovery mode they are mistaken. We are evolving into the next stage of this disaster.

Nov 16 11:00 AM

[User 353732:]

Trade or capital flow or energy negotiations require that there be leverage that is not only tangible but will be used.
The US Regime lacks both leverage and the will to create leverage. It struts around the world , drunk on its vanity and blinded by its greed, thinking it has the power to bend or persuade nations and continents to its will......the way indeed America once could when it had true might , true vision and true will.

The rest of the world sees the US Regime for what it is: a bully at home, a coward abroad and a self adoring glutton and deceiver everywhere and at all times.

The world struggles to conceal its contempt for the US Regime on issues ranging from containing North Korea and Iran to currency exchange rates, from trade and immigration to energy and environment. Soon it will cease to struggle and openly display its disdain. It has nothing to fear.

The world, especially the Global South, grasps a great ,transforming truth that most in America refuse to see or face: The Red Star is slowly setting in the East and liberty(and with liberty prosperity and power) is gradually ascending. In the USA, the Red Star is rapidly rising and liberty is rapidly descending.
Where the Red Star shines high it shines on totalitarianism, poverty, corruption and stagnation. It is a death star.

Nov 16 11:35 AM

[DrBenway:]

I have to strongly disagree with all of the posters above. China is forced to keep purchasing US treasuries to keep yuan pegged to a dollar and is unable to raise interest rates by definition.

If the dollar falls too much, China stands to lose both part of its main $800B investment (as of last month) kept in US treasuries and part of its trade surplus. Just on this particular issue US holds all the cards, not China. Also, remember that the US treasuries holdings is a diversification hedge if something goes wrong in China.

It made me chuckle when Chinese finance minister hypocritically complained about low US rates causing an asset bubble in China. Who forced China to peg its currency to USD?

Ironically, it still holds true that China needs US more than US needs China. Should China unpeg its currency and let it appreciate, the manufacturing will shift to Vietnam, Indonesia, and Thailand. Should China keep its peg, its monetary policy will stay defined by US Fed.

Nov 16 12:30 PM

[Tom E.:]

The US job growth has become de-coupled from GDP growth, so Obama is going to have to do something.

Over the last decade no net new private sector jobs have been created. All job growth has come from the public sector.

If you are a conservative you have a dilemma. Do you abandon open markets or do you allow unlimited government growth in public sector jobs?

Nov 16 12:54 PM

[Tom E.:]

Here is a good article from the Telegraph on the problem and shows why China is not holding all the cards:

China has now become the biggest risk to the world economy

www.telegraph.co.uk/fi...

Nov 16 12:57 PM

[conceptwizard:]

From the article:
"It is fashionable to talk of America as the supplicant. That misreads the strategic balance. Washington can bring China to its knees at any time by shutting markets. There is no symmetry here. Any move by Beijing to liquidate its holdings of US Treasuries could be neutralized – in extremis – by capital controls. Well-armed sovereign states can do whatever they want.

If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference. In such circumstances, China would collapse. Mao statues would be toppled by street riots."

We do not have the economic depth to re-tool a popicle stand. We are turning treasury auctions around in 30 minutes, these days. We have to sell our debt to foreign countries to exist daily. BRIC would not stand for tarriffs. And China can afford to lose its investments more that we can afford to not fund our debt.


On Nov 16 12:57 PM Tom E. wrote:

> Here is a good article from the Telegraph on the problem and shows
> why China is not holding all the cards:
>
> China has now become the biggest risk to the world economy
>
> www.telegraph.co.uk/fi...

Nov 16 04:07 PM

[robert.b.fe...:]

Excellent article. As it stands the POTUS has no coherent plan for anything as he is in way over his head. How unfortunate that we will have to float on a rudderless ship for another three years. Just the mere fact that the U.S. Dollar is seemingly in free fall (down again today) should scare the crap out of the Chinese. If terrible Tin and Helicopter Ben let it continue to fall and all indications are that they will the Chinese will have no choice but to unpeg their currency. After all nothing from nothing is nothing.

Nov 16 04:31 PM

[LCACM:]

The Chinese government is doing what is best for the Chinese billionaires as they don't need to get elected. In the US, as our politicians need large amounts of money to get elected they try to serve only the Billionaires who make election campaign contributions. These billionaires profit immensely from one sided trade using slave labor from Communist China.

Nov 16 09:25 PM

[Howard Richman:]

The remarks at the press conference after President Obama's meeting with President Hu yesterday were not encouraging:

HU JINTAO: "We reiterated that we will continue to increase dialogue and cooperation on macroeconomic and financial policies and continue to consult, on an equal footing, to properly resolve and address economic and trade frictions, in a joint effort to uphold the sound and steady growth of our business ties and trade.... "I stressed to President Obama that under the current circumstances our two countries need to oppose all kinds of trade protectionism even more strongly."

BARACK OBAMA: "Going forward we agreed to advance the pledge made at the G20 summit in Pittsburgh and pursue a strategy of more balanced economic growth. A strategy where America saves more, spends less, reduces our long-term debt and where China makes adjustments across a broad range of policies to rebalance its economy and spur domestic demand. "I was pleased to note the Chinese commitment made in past statements to move toward a more market-oriented exchange rate over time."

Here's my source:

www.reuters.com/articl...

Howard

Nov 17 11:14 AM

[Darrell:]

I think we are operating from a position of strength: our dollar is accepted as legal tender by most central bankers, meaning that we can use our dollar to buy goods, services and/or assets in most countries.

Our Federal Reserve Policy wonks control the production of dollars and our government policy wonks decide how foreign dollar holders can use the dollar. One saw how quickly our government policy wonks acted when China tried to use their vast dollar holdings to buy Union Oil.

Most central bankers understand that as long as global transactions are dominated in dollars our policy wonks are in the driver’s seat. We have veto powers on how foreign dollar holders can spend, invest, or save their dollar holdings.

This is why China, Frazil, Russia, France, Germany, India and other countries are pushing for a global currency system, a system that would replace the current currency system.

The above countries believe that they have “right” on their side. And, like the long march, they are patience in the execution of their plans.

The global trading community will, in time, adopt a global currency, what we are witnessing now is simply the beginning stages of negotiations between countries whose currencies are used as global currencies and countries that want to change the current currency system to a system that they think is fair to all.

I am in favor of a global currency system as I think the global community will come out the better for it. And I think our government policy wonks will recommend that we join the new currency system, simply because it will be the right thing to do.

Nov 17 12:12 PM