Posted on 10/27/2005 10:17:19 AM PDT by Willie Green
For education and discussion only. Not for commercial use.
Many American manufacturers and Members of Congress say that they're angry about China's currency manipulation, and that they're pushing the Bush administration hard to do something about it. Now we'll see if they really mean it. For on his recently concluded trip to China, Treasury Secretary John Snow made it clear as a bell that he and President Bush have decided to respond to China's intransigence by caving in.
Not that Bush and Snow ever tried very hard to change China's policies. Beijing's longstanding decision to keep its currency artificially cheap gives its products a significant price advantage in China's market, the U.S. market, and third-country markets. The cheap yuan also benefits the American multinational companies that do so much manufacturing for export in China and that dominate U.S. trade policymaking in Washington.
Still, for three years, the Bush administration has at least pretended to urge China to stop intervening in currency markets. After Snow's visit, none of the America's China critics has any excuse for continuing to put any faith in White House promises.
To be sure, Snow did discuss exchange rates in China. But his hosts emphatically and publicly rejected his importunings. In a culture that places so much stock in face, the decision to undermine Snow must have made at the highest political levels. Just before the economic policy talks began (with the participation of Snow, Federal Reserve Chairman Alan Greenspan, and new Securities and Exchange Commission chief Christopher Cox), no less than Premier Wen Jiabao insisted that China's currency policy would change according to "the process of independence, controllability, and gradual progress." Hardly a ringing endorsement of free market forces. For good measure, as the talks proceeded, Wen stated that China's currency would remain "stable at a reasonably balanced level." Hardly a promise of movement.
And how did Snow react to such brazen Chinese stone-walling? By demanding an apology for this public humiliation? By leaving the talks in a huff? Not exactly. First, he denounced as "ill-conceived" the Schumer-Graham bill, which would impose stiff tariffs on Chinese imports if Beijing continues its manipulation policies after six months of negotiations. The bill has attracted considerable support in the Senate, and Snow's remarks are nothing short of a kowtow.
Having undercut the political leverage provided by Schumer-Graham, Snow then decided to change the subject. The currency issue, he told a high-level finance conference in Beijing, "certainly is important" and progress on that front would "assist in the adjustment of imbalances in Asia and the global economy." Yet, the Secretary continued, the exchange rate "is just one of many economic and financial issues that would contribute to this goal" and made clear that America would start focusing on others.
Heading Snow's list are several nonstarters: securing greater access to China's financial services market for foreign companies, and helping China change "from a primarily export-driven economy to one that is more balanced and led by domestic demand with a far greater role for the consumer." This new, broader U.S. focus may sound great – so bold! So ambitious! But even assuming that the administration is serious about countering Chinese mercantilism, it's completely fatuous for several reasons.
First, if the Chinese bridle at taking American advice on their exchange rate policy, why does Snow suppose that they'll glom on to a much more thoroughgoing reform program pushed by Washington? Snow's cluelessness is illustrated perfectly by his arguments on why China should open up its financial sector quickly. China, he noted, has opened up the hotel sector quickly, and look at the terrific results – world-class facilities all over the country that would have taken much longer to build had China relied largely on domestic firms. Allowing foreigners to re-make the Chinese financial system would achieve much more wide-ranging results: "allowing the 'invisible hand' to play its role in organizing economic activity in ways that best advance societies' material well-being."
Trouble is, as anyone with a lick of sense can see, China's leaders are far from being converts to free markets. Preserving control over economic activity – which they rightly see as a major source of political power – remains their paramount goal. So where free marketeers like Snow see no significant difference between the tourism industry and the banking industry, Beijing clearly sees the latter as a critical lever over the entire economy and society.
Second, the notion that the United States can micro-manage the economic evolution of anything as vast as China is stunningly ironic for a market-worshiping administration. After all, true capitalists are supposed to know that government officials don't do a good job managing their own economy. Can they reasonably be expected to do better managing a foreign economy with which they are less familiar?
The assumption that American influence can be decisive is breathtakingly hubristic as well. In particular, it ignores the failure of similar U.S. attempts to restructure Japan a decade and a half ago. The complaint was much the same – the Japanese saved too much and spent too little, and if they would just abandon frugality, their trade surpluses with the United States and the rest of the world would fall to reasonable levels. And behind Washington's suggestions for change lay a deep-rooted reluctance to combat predatory Japanese trade barriers directly, with comparable sanctions or retaliation.
Fifteen years later, Japan is still closed tight as a drum, and Western economists are still lamenting the Japanese consumer's weakness. Indeed, the second Bush administration entered office insisting that high-profile American pressure to reform Japan was arrogant and counterproductive. But all of a sudden, the President's aides are acting as if the same formula will work with a China that is much less close to the United States politically, economically, and strategically. How long will it take U.S. leaders to learn that the key to effective trade policies is controlling what they can reasonably hope to control – access to their own country's market – rather than the behavior of distant countries and entire societies with which America often has little in common.
Finally, Snow's new strategy completely overlooks Chinese economic realities. China won't be abandoning its currency manipulation any time soon because promoting exports is its only realistic option for limiting unemployment, which the regime sees as the greatest political threat to its survival.
Even some mainstream economists are starting to recognize the obvious. HSBC bank's chief China economist Qu Hongbin wrote recently in the International Herald Tribune, "There's only one conclusion: Continuing to bolster labor-intensive production and exports is the only viable means for China to absorb its surplus labor and improve rural living standards." Thus Beijing sees consumerism as a luxury it simply can't yet afford politically.
More fundamentally, however, consumerism is a luxury China can't afford economically, either. China today is far from becoming a consumer society because its domestic markets are still too small to buy most of what its population can produce. And however much progress is made by China's growing but embryonic consuming class, consumption will continue to lag way behind production as long as the vast majority of the Chinese people remain so desperately poor. In this sense, China is still like a typical developing country, though on a much grander scale. It lacks the capital – the wealth – to generate sustainable growth and widespread income increases on its own. It has no choice but to sell products to countries where the necessary purchasing power already exists, like the United States.
Like most of its Asian neighbors – the only modern low-income countries to have attained reasonably secure middle-income status, China knows that the fastest way to promote export-led, job-creating growth is by encouraging (and often coercing) high domestic savings and plowing this accumulated capital (along with inflows of foreign investment) into industries that target foreign markets.
This strategy, of course, is not without risks – as Asia's smaller countries discovered in the late-1990s. Then, too many of them wound up competing for the same export markets and the losers were engulfed by financial crisis. But China has been winning the export competition hands down for years, and in any event, its leaders clearly have decided that the risks of changing course greatly outweigh the risks of the status quo. And given the complex politico-economic challenge they face, they must have viewed Snow's free market nostrums as ditzy at best.
The Bush-Snow cave-in has now brought China critics in American industry and the Congress to a critical juncture. They must recognize that they cannot rely on the current administration voluntarily to address the China currency issue in any effective way. Even if the Treasury Department finally brands China as a currency manipulator in its upcoming biannual report on foreign exchange-rate policies, the best that can be expected from the White House is a series of interminable make-believe negotiations.
As a result, Congress has to force a new China policy on the administration. The specifics of such an approach are debatable, but the imperative of confrontation is not. Beating the President on a big foreign and trade policy fight like this won't be easy. But the critics' only other choice is surrender.
ping
Why should Congress be in the business of manipulating the dollar? If the Chinese want to support the dollar, why shouldn't we take advantage of it?
Hey if China changes its exchange rate, imports with be more expensive here and the deficit will get even larger. Sounds like a plan?
If China changes its exchange rate, imports will be more expensive and the deficit will shrink as American manufacturers sell more products.
According to this piece, free trade with China is not free trade. What a surprise.
And why is their "consumer market" not growing? Could it be they are putting their money into the military? We'll be at war with them some day and I hope we can count on the free trade promoters to volunteer for the armed forces, pick up a rifle, and start shooting Chinese soldiers.
Maybe that will stop us buying Chinese?
"And why is their "consumer market" not growing? Could it be they are putting their money into the military? We'll be at war with them some day and I hope we can count on the free trade promoters to volunteer for the armed forces, pick up a rifle, and start shooting Chinese soldiers."
At long last somebody nailed it.
Hit them where they will hurt – PIRATEACY! They steal from everyone.
If the front door won’t budge – smash in the back door!
>>>"If the Chinese want to support the dollar, why shouldn't we take advantage of it?"
No, because we will have an economic meltdown if they decide to cash in their worthless pieces of paper -- SUDDENLY.
The value of our currency will drop like Argentina's, our interest rates will skyrocket, bankrupticies will grow like mushrooms after a three day rain.
If they dump the dollars slowly over five years, then you're correct. But, who can control their timing. They would be causing the loss of the value of their holdings by dumping suddenly. But China might see this stupid act as an extension of their military "strategery." Just as we saw with Japan's bombing of Hawaii, the insular attitude of the Chinese may lead them to make serious blunders.
If China did decide to cash in their debt all at once, then THEY would be the ones who take the hit, not us. And that's why they won't do it.
What China is doing is precisely the same thing that Japan did during the 60's and 70's. They propped up the dollar in order to keep up the level of their exports to the US. And we're still here. It did not destroy us. But , in the end, the Japanese themselves found they could not sustain that polcy in the long term.
print money its fun ping+chicom
Mmhmm Most Favored Nation
Sounds like the idiots that pushed this now have what they wanted. Unfortunately for them they are now the same ones griping about China's currency manipulation.
"If China did decide to cash in their debt all at once, then THEY would be the ones who take the hit, not us. And that's why they won't do it. "
Oh really? $800 billion debt (about 1/10 or 1/9 of total debt) sold at once will not affect us?
By selling, you increase interest rates. Who's going to buy new treasuries when $800 billion is dumped??
First of all, they don't own $800 billion of US treasuries. They own about $250 billion.
Second, it would have a neglible impact on interest rates to liquidate those holdings over the course of a year or so. Interest rates are only marginally impacted by US borrowing, as we found during the last recession. We're running a $350 billion deficit this year alone, and the credit markets seem to be very orderly. The vastness of the world credit markets is beyond comprehension.
It would more likely impact the dollar. But that is more their problem than ours. They are the ones who are trying to pump up the dollar in the first instance. And we are the ones trying to get them to stop.
How can they "cash in" US government bonds? Only by selling them on the open market. That may run the price of bonds down and interest rates up, but it doesn't hurt the US government any. It's not like they can take their bonds back to the Treasury and demand payment for them.
>>>"That may run the price of bonds down and interest rates up, but it doesn't hurt the US government any."
The bonds are sold on the market, driving prices down and interest rates up. Housing tanks. New capital investment tanks. Would the government be hurt at this point? Recession immediately starts. Credit card interest rates go to new usurious highs. Consumer spending stops. People get laid off, expected tax revenues do not come in for the Treasury. Would the government be hurt at this point?
Then, can you imagine raising taxes to cover higher interest rates? Could the U.S. service its debt at 10 percent, 20... 30? While the idiot Carter drove the interest rates up near 20 percent, this rapid run on dollars would push interest rates even higher. At some magical interest rate, perhaps now much lower than 20 percent, a new breaking point kicks in... where more and more debt has to be issued just to roll over the maturing debt.
Some think we can just issue more paper -- it's backed by our military (instead of gold now) and we're the strongest in the world. But if the U.S. government just inflates its way out of the problem, every American's savings becomes worthless and it could take a wheelbarrow of dollars to buy a loaf a bread (ala Germany) or a Starbucks Cafe Mocha (ala U.S. consumer society today). At that point, the far left Democratic party then running the socialist government at that point would be way past the point of price controls, a chicken in every pot. We would be in a deep, deep depression. Would the government be hurt at this point?
Do you remember Krinton and how his administration moved the government to borrowing mostly short term debt? If the U.S. government had borrowed more long term debt instead of short term debt then we would be insulated from short term fluctuations in interest rates to a greater degree. But we are still dependent on short term U.S. treasury debt.
Now, lets talk about derivatives, On a fast break up in interest rates, the counterparties on one side of the transaction most likely will not be able to deliver and we will have a series of many derivative explosions, like Long Term Capital Managements, going off. It will be like what we saw in the 1970's, with financial institutions falling over -- because another bank said they'd repay them but they failed.
It's the speed of the currency drop that will drive interest rates up, create derivative problems, and cause the U.S. government to effectively default on its paper currency. Can you say "new, new, new" dollarettes? Maybe we could call them Pesos.
No, we do need fluctuating exchange rates. But those idiots that hold our debt and put the pedal to metal for export earnings (Chinese and Japanese) are, as you say, doing us a favor (misallocating capital) UP UNTIL THE POINT THAT someone screams "Fire!" THEN EVERYONE LOSES. The U.S. debt bubble could collapse at that point and bring world trade to a standstill. There will be no hiding places at that point.
The rate of change is the danger. We driving towards another car and one of the drivers is playing "chicken."
Markets can and will correct for this, but the longer this goes on, the more likely it will end in a economic crash.
They have not, and will not change this successful strategy.
Not all that successful. They spent more than 10 years in a very deep recession because they would not change their policy. Hence my point that it was not sustainable. And while they were in a recession, we were growing like gangbusters.
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