With all due respect to the men and women on the Committee (and no, they haven't done much lately to earn that respect), pressuring China on currency is an absolutely ridiculous idea. The ostensible purpose of this "pressure" is to stimulate economic recovery in the United States. As UC Irvine professor Peter Navarro wrote in an op-ed for the Los Angeles Times,
China's grossly undervalued yuan gives Chinese exporters a huge economic advantage, allowing them to price Chinese-made goods far lower than those made in the United States. At the same time, the yuan's undervaluation imposes the equivalent of a heavy tax on U.S. exports to China.
This currency manipulation, in concert with China's massive export subsidies, has resulted in chronic U.S. trade deficits, a severe weakening of our manufacturing base and the loss of as many as 20 million American jobs, even as China's economy has boomed.All of this is completely true. Unfortunately, it's only half the story. The fact is, the relatively low labor rate in China has been a huge driver of economic growth and corporate profits in the United States for a generation. With our rapid debasement of the dollar through accommodative monetary policy (coupled with massive credit expansion), it is also one of the only factors that has prevented our country from a significant inflationary event.
Furthermore, with China owning a significant portion of our outstanding national debt (about 20%, the largest foreign holder), it is simply bad policy to instigate a trade conflict with the same people who have enabled our government's profligate ways. True, their ownership of our debt is partially their problem--as the old (Keynesian?) saying goes, if you owe somebody thousands of dollars, that's your problem; if you owe somebody millions, that's their problem--but not entirely.
Remember, a significant (though shrinking) portion of our national debt is short-term debt, meaning that it needs to be rolled over (re-borrowed) frequently--unless, of course, we start to retire or shrink our national debt, which uh, isn't happening. Therefore, any policy that has the effect of thumbing its nose at one of our largest enablers represents a very dangerous game. The fewer people who are willing to buy our debt, the higher our interest expense goes, and the more insolvent our government becomes.
But, sadly, the debt issue is not the most important reason to avoid a trade conflict with China. The fact is, the supposed economic gains from a "properly valued" yuan are simply fantasy. As former Secretary of Labor Robert Reich writes (I don't always agree with Mr. Reich, but this particular piece is a must-read),
Even if China did allow its currency to rise against the dollar, there’s no reason to think this would automatically generate lots more American jobs.
American exports would become cheaper to Chinese consumers. But Japan, Germany, and other major exporters would also demand a piece of the action. Unemployment is high in all developed nations, and every government is under pressure to create more jobs.
Meanwhile, Chinese manufacturers – whose goods would suddenly become more expensive to American consumers – could simply shift their production to other nations with lower currencies. Indeed, as Chinese wages have begun to rise, Chinese manufacturers have already started to shift production to Vietnam, Indonesia, and other low-wage outposts of Southeast Asia.In other words, we've lost manufacturing jobs not because China's yuan is undervalued, but because the American worker is overpriced. Remove Chinese labor from the equation, and U.S. corporations will simply find new places to farm cheap labor. No amount of trade sanctions against China can revive our beaten-up manufacturing industry, as I mentioned in my previous post.
If there were reasonably priced manufacturing laborers here in the U.S. just waiting to work, they'd have jobs by now. But we don't (as this link demonstrates) and probably won't any time soon. So in the short term, forcing China to revalue its currency will only serve to cost our corporations money, which will make it even more unlikely for them to begin hiring domestic workers. As this piece at Zero Hedge points out, a revalued yuan might in fact hurt the U.S. consumer more than it helps them. In other words, be careful what you wish for.
I argued in my previous piece on globalization that all of these issues are an inevitable (if unintended) consequence of the expansion of global trade. Motivations of all trading partners must be aligned for these situations to be sustainable, and that is rarely a fair expectation when dealing with rapidly developing global economies. With U.S. unemployment remaining stubbornly high, it seems that there is a growing trend toward protectionism in Washington. The consequences of this trend on our economy could be significant, both in the short-term and the long-term.
With a confluence of factors (trade conflicts among them) making it unlikely that large corporations will increase their hiring any time soon, it is becoming increasingly clear that our only way out of this economic recession is via ingenuity and entrepreneurship. Ironically, what has historically been the greatest source of entrepreneurship--immigration--is also under attack as protectionist feelings take hold. As Joel Kotkin wrote for Forbes (emphasis mine),
Between one-third and one-half all students at Stanford, MIT, University of Pennsylvania, University of Chicago and UC Berkeley come from abroad. These schools are training camps for immigrants transitioning into careers as American entrepreneurs.
Equally important, immigrant commerce also thrives at the grassroots level. It manifests most visibly in the proliferation of small stores, restaurants, food-processing businesses, garment factories and trucking lines. Overall, immigrants are 60% more likely to start a new business than native-born Americans. The number of self-employed immigrants has grown even in New York City, where the number of self-employed among the native-born has dropped.My take-home lesson? While globalization may indeed have unintended consequences, and our current unemployment rate has its roots in our trade policy over the last two decades, protectionism is not the answer. Thumbing our nose at China, closing our doors to immigrants, or even simply taxing firms who outsource jobs might seem like good policy in the short run--and make for good election-year soundbites--but will all prove to be self-defeating behavior in the long run, which you know I hate.
I do hope that these lessons will be remembered when future debate arises over globalization and free trade (and immigration policy), but I'm not particularly confident. Recessions always bring out protectionist fervor, and well-reasoned debate is hard to find. Hopefully our friends in the Ways and Means Committee can buck that trend.
[Los Angeles Times]
[RobertReich.org]
[Forbes.com]
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