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Peter Morici is a Professor of Business at the University of Maryland. Prior to joining the University, he served as Director of Economics at the U.S. International Trade Commission. He directed the agency's professional economists working on ITC investigations and provided international... More
  • Facing Up to China 1 comment
    Nov 16, 2010 10:50 AM
    In 1876, Europeans visiting the Philadelphia Centennial Exposition were astonished by American industrial prowess. In two generations, the United States had progressed from a simple agrarian society to challenge the most advanced European economies.
    Now, China confronts America in an historic test transcending commerce.
    Americans believe individuals, each defining their own lives, best chart the progress of the nation. Governments draw legitimacy from collective approval—citizens are the sovereign.
    Markets and democracy define America. Our institutions cultivate competition among individuals and ideas that shape our common material and civic lives.
    Recently, Democrats and moderate Republicans lost sight of those fundamentals, and imposed health care reforms, bailouts and huge deficit voters simply don’t want. They were soundly defeated in mid-term elections.
    Markets and democracy are mutually reinforcing. Markets work best when personal freedoms are protected, and democracy best safeguards those liberties. Free markets give individuals a strong interest in securing democracy.
    Since World War II, the United States has worked with allies in Europe and elsewhere to build international institutions that promote open markets, human rights and democracy.
    China is no champion of those values.
    The Communist Party imposes an authoritarian regime and assumes parental authority over its citizens. It prefers state capitalism to private enterprise, and embraces market reforms only as needed to participate in global commerce on terms unfairly tilted to China’s advantage. Unless compelled by necessity, it will not adopt market reforms that could instigate popular sentiment for democracy.
    China is no 19th Century America.
    Nineteenth Century America made pioneering contributions to steam, railroad, telegraph, and electrical technologies. Wages were higher than in Europe and attracted skilled immigrants. Considerable resource wealth powered development.
    China accomplishes growth with appropriated technology and cheap labor, and is desperately dependent on imported oil and resources. It compensates for shortcomings by compelling western companies to transfer knowhow and with an undervalued currency that subsidizes exports and suppresses the real wages of industrial workers. Its middle class prosperity is built on exploited factory labor.
    During the Cold War, U.S. moderates advocated engagement with the Soviet Union. They believed, through our example, its citizens would see the power of individual liberty and compel change. Subsequently, Washington adopted that strategy toward China.
    That is folly.
    The Soviet Union collapsed, not because it bought into Jeffersonian ideas, but because its economy failed. China's economy is succeeding. Don't look for its leaders to call for free elections anytime soon.
    To sustain the Communist Party, Beijing has a strong interest in selling its brand of authoritarian capitalism to others and redefining international institutions that promote open global markets and human rights.
    To secure oil and other resources and enhance global influence, China is investing abroad, building a blue-water navy and modernizing its army.
    Through mercantilism, China has accomplished huge trade surpluses and breakneck growth, imposed on the United States huge trade deficits and high unemployment, and made American free market prescriptions for the global economy appear foolish and outdated
    Through diplomacy, the United States has failed to persuade China to abandon currency and other mercantilist policies that harm the U.S. economy.
    At the IMF and G20 meetings, German and other key Western allies abandoned the United States, leaving it to fend for itself.
    America stands on a lonely perch, and the time for talk is over.
    Washington must respond to Chinese mercantilism with actions, not words.
    China’s purchases of dollars and foreign securities to maintain undervalued yuan come to 35 percent of exports. Washington should impose proportionate tax on purchases of yuan used to buy Chinese goods or invest in China, and intervene in currency markets to push up the value of the yuan.
    Washington should place limits on Chinese technology sales and investments in the United States that mirror the restrictions China imposes on imports and foreign investments.
    Across the board and without exception, the United States should decisively answer Chinese protectionism.
    Failure to act aids China's success. It is appeasement and courts disaster.

    Disclosure: no positions
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  • steveiiii
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    Here are excerpts from an article in today’s New York Times.


    China Confronts Mounting Piles of Unsold Goods
    Forbes Conrad for The New York Times


    GUANGZHOU, China — After three decades of torrid growth, China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses.


    The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.


    Problems in China give some economists nightmares in which, in the worst case, the United States and much of the world slip back into recession as the Chinese economy sputters, the European currency zone collapses and political gridlock paralyzes the United States.


    Let’s stop at this point to ask ourselves:


    Why does China export? Answer: To obtain foreign currency.
    What does China do with foreign currency? Answer: Either spend or invest it abroad, or exchange it for Yuan, to be spent or invested domestically.


    Hold those thoughts and let’s continue with the article:


    China is the world’s second-largest economy and has been the largest engine of economic growth since the global financial crisis began in 2008. Economic weakness means that China is likely to buy fewer goods and services from abroad when the sovereign debt crisis in Europe is already hurting demand, raising the prospect of a global glut of goods and falling prices and weak production around the world.


    China not only is the world’s second-largest economy, but its government is Monetarily Sovereign. That is, the Chinese government has the unlimited ability to spend. Through its spending, it has the unlimited ability to create Yuan, as well as the unlimited ability to exchange Yuan for foreign currency.


    As a Monetarily Sovereign nation, China does not need to export.


    Do you see where I’m going with this?


    Let’s continue:


    Corporate hiring has slowed, and jobs are becoming less plentiful. Chinese exports, a mainstay of the economy for the last three decades, have almost stopped growing. Imports have also stalled, particularly for raw materials like iron ore for steel making, as industrialists have lost confidence that they will be able to sell if they keep factories running.


    When jobs are less plentiful, the Chinese workers could run short of Yuan. But the Chinese government never can run short of Yuan.


    Real estate prices have slid, although there have been hints that they might have bottomed out in July, and money has been leaving the country through legal and illegal channels.


    Wu Weiqing, the manager of a faucet and sink wholesaler, said that his sales dropped 30 percent in the last year and he has piled up extra merchandise. Yet the factory supplying him is still cranking out shiny kitchen fixtures at a fast pace.


    Premier Wen Jiabao has imposed a strict ban on purchases of second and subsequent homes, in the hope that discouraging real estate speculation will improve the affordability of homes. The ban has resulted in a steep decline in residential real estate prices, a sharp fall in housing construction and widespread job losses among construction workers.


    The Chinese auto industry has grown tenfold in the last decade to become the world’s largest, looking like a formidable challenger to Detroit. But now, the Chinese industry is starting to look more like Detroit in its dark days in the 1980s.


    Inventories of unsold cars are soaring at dealerships across the nation, and the Chinese industry’s problems show every sign of growing worse, not better. So many auto factories have opened in China in the last two years that the industry is operating at only about 65 percent of capacity — far below the 80 percent usually needed for profitability.


    Yet so many new factories are being built that, according to the Chinese government’s National Development and Reform Commission, the country’s auto manufacturing capacity is on track to increase again in the next three years by an amount equal to all the auto factories in Japan, or nearly all the auto factories in the United States.


    Let’s put it all together. The Chinese economy is controlled by its Monetarily Sovereign government, which can produce unlimited Yuan and distribute them to the Chinese people in any manner and amount it chooses. China’s government also can exchange Yuan for Dollars, for import purposes.


    As a large, Monetarily Sovereign government, particularly one that doesn’t need to worry about political agendas, China, and the Chinese people, never should have a shortage of their sovereign currency.


    China can buy all domestic production and simply destroy all excess inventory. It can close unneeded production plants, and put the workers on the government payroll. It can exchange Yuan for Dollars, and import anything in the world. The Chinese government has the financial and political freedom to do anything it wants. It can create Optimum Employment. There is no reason for the Chinese people ever to suffer poverty, starvation, unemployment, homelessness, a recession or a depression.


    While China remains a net exporter, it doesn’t need to be. The U.S., also being Monetarily Sovereign, is a net importer. Our imports exceed exports by $600 billion. That’s net $600 billion leaving America every year, and still there is no possibility we will run short of Dollars. We really don’t need to export at all.


    Only monetarily non-sovereign governments (Italy, France, Illinois, Chicago et al) need to be net exporters — one fundamental difference between Monetary Sovereignty and monetary non-sovereignty. So, if China imports less, the euro nations, which rely on export, will suffer. The U.S. will not need to suffer (depending on the actions of our leaders).


    Just as China easily can avoid any economic downturn, we could do the same. Our recession could end tomorrow, and we could rise to the greatest prosperity we ever have known. But we have one constraint the Chinese may (?) not have: We have warring political parties, where the “outs” cynically want the economy to be as bad as possible, so they can win the next election and become the “ins.”


    So far, our “outs” have done an excellent job of sinking America, by insisting on federal deficit reduction, which reduces Dollar creation. We’ll see whether China encounters a similar problem.


    Rodger Malcolm Mitchell
    Monetary Sovereignty
    25 Aug 2012, 04:50 PM Reply Like
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