After several years of patient negotiation, the US appears embarked on a harder stance in dealing with its China trade deficit. In Congress there is talk of veto-proof legislation addressing China’s under-valuation of its currency, while the Bush Administration has imposed tariffs on coated paper products to offset Chinese subsidies. Behind this shift is a dawning recognition that China is unwilling to reduce its surplus, and that reduces the policy choice to one of “pay now or pay more laterâ€.
Today’s international trading system is a liberal order in which open exchange works well when all participants are market economies. However, it is widely recognized that individual countries can strategically game the system for their benefit at the expense of others. That is why the system needs rules and a spirit of cooperation. The problem is China has been admitted into the system but it is unwilling to play by the rules, in letter or spirit.
This unwillingness reflects political realities within China. China is strongly nationalist and prone to equate negotiation with external pressure. It remains an authoritarian country in which extensive state economic intervention is normal, and it is also beset by political divisions between hard and soft-liners that limit its ability to deliver on its WTO commitments.
In retrospect the US decision in 2000 to permanently open its markets to China seems poorly conceived. That decision was driven by manic optimism about globalization that pushed a biased benefit – cost calculus that ignored economic and political reality. The Clinton Administration naively argued that simply exposing China to market forces would transform it into a democratic ally, while US multinationals lobbied heavily on China’s behalf seeing it as a profitable offshore production location.
The net result is the US is now stuck between a rock and a hard place. Either it must live with China’s gaming of the system that slowly erodes US economic foundations, or it must adopt a tougher policy stance that even risks a costly trade war.
The downside of tougher policy is a trade war, which could be very disruptive. The upside is that it could spur a speedy negotiated settlement. Chinese policymakers are realists and likely recognize that China has more to lose from a trade war because it needs access to US markets for its manufacturing sector and to attract foreign direct investment. Moreover, China is vulnerable to losses on its large holdings of US financial assets.
Even if a trade war cannot be avoided, the US still stands to benefit from tough policy because it is better to fix the problem now rather than later. Delay is costly. Larger trade deficits mean greater dependence on Chinese imports, along with further erosion of the US manufacturing sector’s ability to replace those imports. Had the US acted firmly five years ago, the costs would have been smaller and manufacturing healthier. Another five-year delay means further erosion of manufacturing and larger costs to any future trade war.
Inevitably, the new tougher stance has triggered accusations that the US is engaging in protectionism. These accusations are based on faulty economics and fail to distinguish protectionism from legitimate economic self-defense.
Opponents claim that the trade deficit stems from lack of US saving, not exchange rates. This argument misunderstands market economics. Reducing the trade deficit requires increasing exports and decreasing imports. That requires inducing foreigners to buy more U.S. made goods, and inducing Americans to “switch†their spending from imports to domestic made goods. Market economies accomplish this through changed relative prices. That calls for exchange rate adjustment that makes foreign goods more expensive for US consumers, and US goods cheaper for foreign consumers.
The opposition to tough policy also comes wrapped in faulty economic history that blames protectionism and the Smoot-Hawley tariff for the Great Depression. Yet, the fact is Smoot-Hawley was passed in June 1930, after the Depression had already begun. Moreover, its economic effects were minor given the pre-existing high US tariff structure of 34 percent and small US engagement in trade (less than ten percent of GDP).
The reality is that the US has delayed addressing the China trade imbalance problem for five years. That delay has harmed manufacturing, distorted the current economic expansion, and raised the costs of remedy. Further delay will do further injury and further raise the costs of future remedy. That is the inexorable logic of “pay now or pay more laterâ€.
Copyright Thomas I. Palley
How can we be so naive and oblivious to what the Chinese intentions are? It is clear that by increasing the trade between China and the U.S., we are by our own actions committing our own demise. How’s that will you ask?
Well every time that one of us, buys an item made in China, we enhance their ability to increase their military power. The Chinese government has only one objective in mind is to become the next Super Power and in the process to make sure that we the U.S. is militarily and economically weak and unable to stand up. The Chinese population is 1,321,851,888, four times the U.S. and makes no mistake; their government will gladly sacrifice every one of them to accomplish their “Evil†deed. Yes we have a nuclear power, but then, should we choose to use it, and this will be the end of civilization as we know it.
The Trade Agreement between China and the U.S. was signed with a clear intent of creating a fair and well balance economic exchange between our two countries. Well guess what, and if you watch the news, you probably are aware of the unfair trade from the Chinese government so far which is affecting the U.S. currency and economy to a critical point.
A present, China severely restricts trading rights (the right to import and export) and distribution.
The Chinese are simply laughing all the way to the bank and making fun of us, yes us the U.S. We are leaving in a very dangerous time, even more so than the time of the cold war. China will one day decide to use its superpower for their own intention regardless of world opinion.
Yes these are harsh and blunt statements, but it is very unfortunate that in spite of flagrant violation of the trade agreement by China, our administration is standing by idle taking every punch that China is throwing at us. Adding to this crisis, now we are discovering problems with food products from China.
So what will it take to make these Chinese understand that “WE THE PEOPLE†are not going to put up with it anymore and that we are going to take action.
Well, China needs to understand that it is dealing with the most democratic and free country in the world and that, should we decide to act will be their demise.
WE THE PEOPLE have got to act and act now. I am willing to pay a bit more for a product not made in China and this will have a tremendous positive effect on our economy and our children’s future.
So I ask everyone reading this message to join me in this crusade. For every none Chinese product that I will purchase, I will know that my participation will mean taking a step in the right direction. Thanks for reading.
God Bless America!!!!