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China Currency Bill: Politics vs. Economics
The latest move onChina politics at Washingtonis the China currency bill, due at the U.S. Senate on Tuesday, Oct. 11. The proposal would levy tariffs on China and four other Asian countries for artificially depressing the value of their currencies to boost their exports. To us, it seems evident that those in Washington have not thought this through completely (or chose to ignore). Here is how the math would work. According to the government trade data, China imports from the U.S. about $57.7 billion for the first 7 months of 2011 ($100 billion annualized), and the number will only grow with increasing Chinese household income. So just based on pure math,the Big Question #1 is this: How many American jobs will be lost if the U.S. loses all or even part of the $100 billion annual export business with China when China retaliates with similar tariffs on U.S. goods? The same math works for the U.S. imports from China, which is at about $374 billion annualized using the July 2011 year-to-date figure. So the Big Question #2is: How much damage would the U.S. tariff on Chinese imported goods do to the pocketbook of American business and consumers? It seems many are quite fixated on the trade deficit number the U.S. has with China. However, as the table (showing the top 10 countries) and chart below illustrates, America runs trade deficits with many other trading partners, not just China. And realistically, the total trade deficit of $160.4 billion for the first seven months of 2011, even if completely reversed to zero, is a tiny drop in the big bucket of the $14-trillion U.S. economy. The point is that even if China revalues Yuan to Washington's satisfaction, it will not have the significant impact to the U.S. economy and jobs as some are led to believe.
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Chart Source: U.S. Census Bureau |
One strong support of this currency bill is that by keeping the Chinese Yuan artificially low, many American jobs have lost/outsourced to China; whereas in fact,tax is actually one of the biggest considerationsthat U.S. corporations have moved operations overseas, including China. Another reason China has become attractive to many western firms (including the U.S.) is the access to a large and highly educated work force on a lower pay scale. Due to the long ingrained cultural belief that values higher education,China has too many college graduatesthat the domestic economy can't fully absorb yet. Apple, for example, has a huge China operation with Foxcom producing its popular i products, but hit a wall at Brazil. Reuters reportedthat Apple's $12 billion iPad deal with Brazil came to a screeching halt partly due to "Brazil's own deep structural problems such as a lack of skilled labor,"high taxes and bad infrastructure. In addition todecades of anti-business policies, including unfavorable tax treatments and bureaucratic regulations, to disincentivize establishing business at home, the U.S. also has similar structural problems to those of Brazil in labor and infrastructure. A few forecasts we have seen so far already indicate that the U.S. isnot producing enough college educated work forceto even fuel its normal growth. On the infrastructure side, according to the estimate by the American Society of Civil Engineers (ASCE), America is in need of $2.2 trillion investment to high-grade the aging and outdated infrastructureup to where they should be. Now, since the central focus of this latest currency bill is China's "currency manipulation", we can take a look at other countries that have also dabbled in this sport. For instance, Japan has repeatedly intervened in the currency market over the years. So, does the massive unprecedented G7 Yen intervention in March count? How about when Swiss National Bank (SNB) vowed to "defend" the minimum EUR/CHF exchange rate at 1.20 with some very sizable interventions in the open currency market? The two aforementioned examples may all have perfectly legitimate reasons, but they highlighted the fact that no country wants a strong currency which hurts its export business. Many central banks have intervened in the currency market (some well publicized, some more "discrete") when its currency put the country at a disadvantage. And these past interventions will not be the last either. On that note, China most likely could make a fairly good argument that the U.S. Fed's programs ofQE's,Twist, the rising federal deficits, and debt are all just part of the effort by the U.S. government todebase the Dollarin order to have the trade advantage over rival currencies as well. Also from a logical point of view, should the bill not be amended to include all of the U.S. trading partners who have engaged in currency intervention activity? If so, thenthe Big Question #3would be: Is the U.S. ready for a global trade war? So it is quite hypocritical for the politicians at Washington to single China out when there are many other countries (including the U.S.) doing exactly the same thing. What it comes down to is that many U.S. politicians are facing reelection in 13 months, and China currency bill is one easy mark to show voters that they are doing something to address the unemployment issue. However, one such bill would come with a hidden high price tag and serious repercussion to the U.S. economy that taxpayers can not afford to foot. Even if Washington has the answers and contingency plans in place for the3 Big Questionsasked herein (which is highly improbable, and also begs the question of risk/reward and value-add), the currency bill is nothing more than politics to save their own jobs in the next election, instead of one with any kind of economic considerations. Frankly, in light ofthe U.S. debt and deficit shamble, lawmakers would be much better off focusing on cleaning the fiscal house (and not to repeat the embarrassingdebt ceiling debateto get yet anothersovereign credit downgrade), instead of spending precious time and energy taking on China and/or any of the trading partners over currency valuation. ©EconMattersAll Rights Reserved |Facebook|Twitter|Post Alert|Kindle
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Good article. The sad thing is, this diversion has actually worked on most people. When in doubt, blame someone else for your troubles and kick the shit out of a developing country trying to rise out of poverty. So predictable.
Another thing that's predictable: Who will win a trade war?: Neither opponents. Those who don't take part usually end up the winner, in this case, the EU, Russia, and a smattering of developed/developing countries in SE Asia. Like any war, you win by not fighting - because it is Pyrrhic.
It is true that the U.S. cannot only target China. If China undervalues it's currency, the large trade deficit is just aggregated production "stolen" from Thailand, Indonesia, Philippines, Brazil, Mexico, etc. The U.S. needs to consider a general tariff.
As for a general trade war, a big U.S. export is food. As long as you're not importing critical items (food, energy) then the trade deficit countries win the trade wars, big time. (U.S. imports oil, but no one is talking about doing anything to the oil exporters. Also, the Arabs need food more than anyone, and they fear Iran. So on that score, U.S. comes out pretty good.) For trade deficit countries, jobs come back, consumption drops, investment increases, GDP increases. In the trade surplus countries, they will have a major depression.
That doesn't mean a trade war is necessarily the best route, but given that it would be hugely good for the U.S. economy in the short-run (probably at least 3-5 years of growth) the question is why aren't there more politicians pushing for it?
To this author something I have never said before to any ZH contributor:
FUCK YOU!
As someone that makes "stuff" and has to compete with slaves and slave masters I find your arguments reprehensible. Perhaps we should peg all bankers, lawyers, and politicians pay to that of slaves as well.
Nothing has changed. We still have slavery apologists arguing that slavery is better than taxation. Neither is good but yet we have hacks like this one pushing the division as something to support and credible.
Not that I am against free speech...I am just against speech that supports slavery. Taxes are not the primary reason, 50 cent a day labor is but you are too dishonest to admit your love for a world of slaves. You are the vampire that needs the stake driven though your heart.
I do think Americans need to take some tough medicine. The longer we live off Chinese "genorosity" the weaker we become. Soon we won't have any manufacturing, engineering, or R&D capabilities. Then we will truly be fucked as a people.
I am looking at a birth certificate from the State of Nevada, issued by the "Department of Human Resources".
Live birth of another "human resource".
Your slavery is no different from Chinese slavery. Except that your human resources are also enslaved by debt. Your slaves don't work in manufacturing any more, but are in the "service industry", working for the government or for Walmart.
Manufacturing won't come back by acts of trade war.
Your only hope is new, innovative businesses. Engineering, yes, but where is the investment in education that is needed for that?
The only bright light short term is agriculture...
Writing from China.
The manufacturing supply chain for many industries is firmly based here, and moving it back to US/EU will not be easy, currency manupulation / trade barriers will work long term, but will not always bring the expected outcome.
In the bicycle industry, European countries first put an ADD on Taiwan, which has since been removed, but did encourage Giant to build a final assembly plant in Holland. However the 50% ADD on Chinese manufactured cycles remains.
It can be argued that this has helped protect some manuacturing, but for the most part volume production first moved to Vietnam, then when the ADD caught up, to Bangladesh, Cambodia, Phillipines, Sri Lanka etc.
The wages of workers is the one thing that is having an impact, as Taiwanese manufacturers are increasingly moving production back from the mainland as wages here spiral upwards.
It'd be nice if more cyclists started to appear back on the streets here, as the traffic noise, pollution, congestion etc. is awful. It's no longer all that cheap to live here though, food and drink is about the same, although with labour still relatively low cost things like getting a flat tire fixed are very cheap.
I will buck the trend and say that this article is about 50% correct which means 50% wrong.
It is correct in the underlying analysis that we benefit from trade with China. There is also the reality that whatever systems have developed, they have developed around China's managed currency and the policies of our own Fed and government. To change them dramatically is to cause great pain in the short run for both countries. Don't pretend you know what the consequences will be because you can't know in a complex system.
It is wrong in the whole basis of trade deficits. I will boldly posit to you there is no such thing as a trade deficit. When we buy an iPOD made in China they get currency and we get the ipod. The trade is EVEN. We stupidly say that China is running a surplus. It is not. They lost a product and we lost currency...not gold or silver either, mind you. What is described as a trade deficit is in fact a currency deficit or surplus. That is a problem for banks and markets to manage.
When a farmer in India wants to buy some excellent John Deere equipment to improve his farm India throws up a big tariff to prevent a trade deficit. So, the farmer does not get the equipment. Productivity stays lower. Food stays more expensive. John Deere does not get the sale to India. However, farmers in Iowa buy them, produce more and cheaper food and now India has to put tariffs on foreign food or subsidize the farmer that was not allowed to buy the John Deere. So, everyone gets poorer! No one wins, get it!
If you still believe in the myth of trade deficits ask yourself this: You run a trade deficit with your gas station, Walmart, Target, Nordstrom, Apple, Chevy, Taco Bell and a host of others. How the hell are you going to get them to buy the same amount of stuff from you? Yet, you do well. How is that possible?
This trade deficit myth has to stop before it throws us all into the poorhouse and causes another war.
You have hit on 2 key point.
1. My iPod is thrown away in 2 to 3 years, yet China keeps the money (plus interest for lending the money back to the US government) I paid for them to manufacture it. So, the deficit is latent and cumulative as we throw things away.
2. Money and value are not the same thing. Value is only created through labor. Money (in our society) is only created out of debt. We have a slight value surplus with China (since we buy almost exclusives consumables, even durable items are consumable, from China) and a large money deficit with China.
The banks and government figured out long ago that in an economy that runs on money from debt, it really does not matter where the money comes from as long as it comes here. So when Saudi Arabia and China lend money to us it is as good as the international banking crime syndicate lending money to us.
Your iPOD may be obsolete or more likely just superceded by something else but that money may be worthless. We trade a debt instrument as you correctly point out for a real good. My company uses ipods for productivity improvement. We can manipulate currencies and actually steal from the rest of the world. You cannot manipulate ipods, John Deere tractors, corn supply or even gold. They are real goods with consistent value as compared to fiat currencies.
I say trading debt for real goods is never too bad a deal. If China and Arabia lend it to us it is because they want to and they have nothing better to do with it. They could lend it to Greece, Egypt or venture capital firms. Once they have it it is their call.
The other part of our problem I failed to mention and didn't come up in the article is the nature of our own government. It is getting too difficult to start, expand and grow any businesses here when a field mouse can hold up plant construction. When selfish politicians and bureacrats keep Boeing from setting up a plant in S. Carolina they stupidly make it more likely that the plant will move to China or India instead. We are our own worst enemies.
This has to be a reason for the markets to rally again. The worse the news the more they rally.
Extremely Bullish....................................Just not with my money. I am done with the markets.
Boycott the Stock Market. Don't Buy Stocks.
Support Occupy Wall Steet. Better Yet. Burn the HFTs.
Seems to me the article says to bend over and take it as there is nothing we can do. Funny I bet the same guy said everything will be ok if you just do it because its just the plastic spoons and forks its not like their going to make computeres. Its the same as people saying no problem with bigger banks or a european Union now all of a sudden if it fails the whole world blows up.
FUCK OFF
Where do fools come from who write this drivel? And answer the question: "Why are the fastest growing economies the most protected their governments?" The "free trade" countries like the U.S. and Britain are falling to pieces. The absolutely unfair, mercantilist, high-tariff countries like China, Korea, India, Germany, Taiwan, etc. are booming.
as a direct product of world war ii, i've considered the pattern of increasing war resulting from 'margin compression' of nations--the point at which the successful profit model based on free trade is compressed by political backlash of mass unemployment . tarrifs being the obvious short term go to 'solution'.
a lot of people say , this portends a trade 'war' and a real war. ive been considering these arguments.
my thoughts are that , timing is everything as they say, and that a trade war can last a lot longer than it used to, perhaps another 50 years before it becomes world war iii. i wouldn't bet on the u.s. abdicating its nuclear deterrent anytime soon . however, the long term politics, maybe the u.s. is cutting a back door deal with china, giving it a promise that we will let them take over taiwan through their slow tentacle strategy without getting in their way--in return for them not protesting our tarrifs too much. who knows what the real deals are, but they will be made to the mutual benefit of the ruling classes of both western and eastern world, and built upon the backs of the underclasses.
tarrif war? maybe that's what this will be. but we are not even yet at the end of the beginning.
Yes, how dare China sell us cheaper, high-quality goods.
Written on my Made in China MacBook Pro.
They used to make Macintoshes and Powerbooks in California you know.
It's always tough to look in the mirror when you're ugly.
Have you ever worked for a company that made something real? Are we to believe that when China devalued it's currency by 40% and proceeded to suck 6,000,000 jobs worth of manufacturing out of the US, that if we reverse the currency manipulation it would be also be bad!, Are you fucking stupid? Manufacturing moved to China because it's cheaper, and it's cheaper for at least 2 reason, 1 is cheep currency, the other is peasants. If we put a tariff on, yes things get more expensive, but that should happen, cheep shit from China has masked a great inflation. And it need not happen all at once, 1% per month until we run a trade surplus.
Repeat after me, wealth comes from Agriculture, Mining and Manufacturing, nothing else, everything else just moves it around. The idea of a service economy is absolute stupidity.
Before we can rebuild Agriculture, Mining and Manufacturing...we will have to have a work force that has some practical experience in the trades. Over the last thirty years these industrial workers have allbut vanished or have pretty rusty skill sets.
We also have to have the capital equipment in place (guess where that mostly comes from). We've lost the majority of our tooling plants. We've lost the majority of our steel plants. We've lost the majority of our machining plants.
Initiating a tariff after all these years will have serious repercussions on both buy/sell in our economy.
It will be a long, hard reset before we will recover the means to rebuild.
With all that, though, we nust set ourselves to the task.
We need 1st a Government that does not try to regulate to death or outright ban any form of productive work
No, just a military one.
Tariffs are self defeating in the long run.
P.S. Stop conjuring up Smoot- Hawley. Today's U.S. economy is nothing like that of the 1930's.
Global Trade War ?
Isn't that exactly what China's peg to the dollar is ? Give yer head a shake. Managed trade is the only solution to this bullshit deal with American Corporatists and Communist China.
It is the America Middle Class that has financed this thievery. Close the U.S. market to China products, and move the pretend American companies to China.
I can't tell you just how sick I am of seeing something with an "American X" or "X of America" brand logo on the front of the box and "made in China" hidden on the bottom.
but we have been outsourcing for 20 years
.
and its like 1.4 trillion in deficits to fund the new normal of which china is only like 20%
.
its not communist to bail the chinese out via US money cartels to avoid accountability, war, and whatever bullshit
.
Obama 2012 ! ! ! ! !