Page 3 of
5 A dialogue of
the mute By Henry C K Liu
US exports for the past 15 years:
During 2000-05, for example, US exports to China
grew by 160% while its exports to the rest of the
world rose by only 10%.
Paulson observed:
"The Chinese government is committed to creation
of a social safety net, including health and
retirement programs that will contribute to
balanced growth by giving Chinese workers and
families the confidence to spend more. China's high
saving
rate is a major contributor to the country's large
global trade surplus. Increasing consumption in
China will benefit US and other exporters."
The need for China to reconstruct its
socialist, people-based economic policy and
programs that had fallen into neglect since 1978
is critical and long overdue. Yet the path to
success in this task cannot be through deregulated
market capitalism.
The United States
itself is the clearest example of such structural
failures, particularly in the two areas of health
care and retirement that Paulson mentioned. The US
has become one of the world's underdeveloped
nations in these two vital socioeconomic sectors.
Dollar hegemony prevents China from
saving With regard to Chinese savings,
Paulson betrays his misunderstanding of the
problem. China's huge foreign-exchange surplus is
not voluntary. It is the structural result of US
dollar hegemony, in which the Chinese central bank
must buy up the dollar inflow from both trade and
investment with its own currency, the yuan.
China cannot expand domestic consumption
because Chinese wages and benefits are too low.
Yet Chinese cannot raise wages faster because real
wealth has been leaving the country through export
trade while the yuan money supply is expanding
through the central bank buying dollar inflows
with yuan. The result is a liquidity bubble, with
too much currency chasing a dwindling supply of
real wealth that has been exported.
Unlike
Japan and Germany, whose governments have
structured their economies to save rather than to
consume, the Chinese trade surplus is not
benefiting China fully, as real domestic saving is
not an option for China because of dollar
hegemony. Despite a trade surplus, Chinese
consumers simply do not have enough income and
benefits to consume more.
In 2004, the
Chinese global surplus was only 8% of the US
global trade deficit, about the same as the
Netherlands'. The impact of World Trade
Organization (WTO) accession since 2004 has pushed
China's net global trade surplus up to more than
20% of the US trade deficit. In 2005, the US
bilateral trade deficit with China was about
US$200 billion, or about 25% of the US total
global deficit. But the rise was not caused by the
yuan being too low, but by China's inability to
channel its trade surplus into higher wages and
benefits because of dollar hegemony.
China consumes energy to serve US
gluttony Paulson correctly pointed out:
"Energy is an issue with far-reaching effects.
Both the pattern of China's growth - with its
heavy dependence on industry - and low domestic
prices for energy have led to rapidly increasing
energy use by China. Unfortunately, because of
technological and infrastructure challenges, much
of that energy is produced from sources that
generate high levels of pollution. This harms the
air and water we all share, and creates health
problems for Chinese citizens."
This is
all true. Yet much of the energy waste and
pollution is caused by China's export sector. As
pointed out in my earlier
articles, when it comes to energy
consumption, China is only the kitchen, while the
dining room is in the United States.
Danger of currency
liberalization The US Securities Industry
and Financial Markets Association, a lobby
organization representing the shared interests of
more than 650 securities firms, banks and asset
managers, issued on March 7 a statement in support
of Paulson's speech before China's Shanghai
Futures Exchange calling for opening of Chinese
financial and equity markets. The statement said:
Removing the roadblocks that prevent
innovation, reform and modernization is
essential to the success of the global financial
marketplace. Such barriers hurt not only the
international community being barred from entry,
but also stunt the growth and development of the
"protected" economy by blockading expertise and
innovation at the border.
We
congratulate Secretary Paulson and the Treasury
Department for continuing this dialogue. Because
financial reform is in China's self-interest and
is critical for achieving more balanced economic
growth, we are optimistic that these talks [SED]
will prove fruitful in the short term. But we
must remain grounded in the understanding that
immediate results cannot be willed overnight.
Yet freely convertible currency and
open financial and equity markets are a dangerous
combination that has destroyed many otherwise
healthy economies in the past several decades.
Congressional confrontation The
US Senate Committee on Banking, Housing and Urban
Affairs held a hearing on "The Treasury
Department's Report to Congress on International
Economic and Exchange Rate Policy (IEERP) and the
US-China Strategic Economic Dialogue (SED)" on
January 31 in which its new Democratic chairman,
Senator Chuck Schumer, said to Paulson:
Although the pace of currency
appreciation has quickened slightly, nearly all
experts still agree that the Chinese yuan
remains significantly undervalued; that this
undervaluation is the result of deliberate
intervention by the Chinese government in world
currency markets; and that this policy gives
Chinese products a tremendous advantage in the
United States market. Yet the Treasury
Department has repeatedly used a technical and
legalistic dodge to determine that China does
not manipulate its currency. You and I have
talked about that, and you know that I disagree
with your position because if it walks like a
duck and quacks like a duck, it's a
duck.
Schumer then quoted Federal
Reserve chairman Bernanke:
What the Chinese are doing with
their currency amounts to an export subsidy. I
think there is an emerging consensus that this
is simply a fact, regardless of what official
government reports may say, and regardless of
how administration officials might parse their
words to dance around the real issues ...
The simple fact is, Mr Secretary, the
Chinese could do more and should do more, and we
have not been pushing them hard enough. We need
to push them harder, even if that means ruffling
a few feathers. The American workforce is
counting on us.
Last Congress, Senator
[Lindsey] Graham and I ruffled a few feathers
with our bill, which we set aside at the very
end of the congressional session because we
wanted to work with Senators [Max] Baucus and
[Charles] Grassley - the [Republican] chairman
and [Democrat] ranking member of the Finance
Committee, albeit in reverse order than a few
months ago - on a new currency bill that was
WTO-compliant. I need for you to impress on your
Chinese counterparts that if the pace of
progress does not pick up, and more market
reforms are not accomplished in the currency
arena, then bipartisan legislation will pass the
Congress that will put the president in an
uncomfortable position.
Last year,
Senator Graham and I were clear that we never
intended for our bill to become law. It was a
shot across the bow. But now the possibility for
legislation in the 110th Congress is real,
because the number of people who will vote for
strong legislation exceeds the number of people
who would have voted for an explicit tariff. I
hope that you recognize that reality and that
you will communicate it forcefully.
It appears that Congress has issued
an ultimatum to replace the dialogue. Schumer went
on:
Finally, Mr Secretary, since you are
the principal economic spokesperson for the
administration, I want to make one point
regarding the challenges facing middle-class
Americans, since that is the primary focus of my
hearing as chairman of the Joint Economic
Committee ...
Just as he has for the
past several years, the president is again
making it clear through speeches the last couple
of days that his No 1 economic priority is
making his [anti-middle class] tax cuts
permanent. Now, I've heard you talk about how
you recognize that today's economic growth is
not being shared by all income groups, and I
commend you for saying it publicly when it
appears that so many members of the
administration have given that issue short
shrift ... I urge you to get the senior members
of this administration to think more broadly
about policies that can help the middle class in
both the short run and the long
run.
Thus there is official
recognition that the terms of trade in
globalization have produced growth in the United
States that is
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