EYE ON
AMERICA Playing into Beijing's
hands By Peter Morici
The US Commerce Department reported
Wednesday that the May trade deficit on goods and
services was US$63.8 billion, up from $63.3
billion in April and $61.9 billion in March.
The petroleum deficit increased to $25.4
billion in May from $21 billion in April and $20
billion in March, as both the volume and price of
imports jumped substantially.
Imports from
China and other sources in Asia moved up, and
reports from Beijing that China's global trade
surplus soared in June indicate the bilateral
trade gap with China will continue to
swell.
Tightening conditions in international oil markets
and rising imports from China will soon push the
annual trade deficit to $800 billion, imposing a
significant drag on economic growth.
The
trade deficit must be financed either by
foreigners investing in the US economy or loaning
Americans money. In the first quarter, direct
investment in US property and productive assets
only provided 6.8% of the needed funds, and the
balance was obtained through the sale of US
Treasury securities, corporate securities, bank
accounts, currency and other paper assets.
Essentially, Americans borrow nearly $60 billion
each month to consume more than they produce. The
total debt will exceed $6 trillion by the end of
2006.
Treasury Secretary Henry Paulson
urgently needs to persuade China to significantly
revalue the yuan, and the Bush administration and
Congress should take more credible steps to reduce
dependence on foreign oil.
The China
factor The Wal-Mart effect is broadly
apparent. The May trade deficit with China was
$17.7 billion, up from $17 billion in April.
Moreover, China recently reported its global trade
surplus jumped 11.5% in June, indicating the US
deficit with China worsened sharply in June.
In the months ahead, this situation is
likely to continue to deteriorate. The dollar
remains at least 40% overvalued against the
Chinese yuan, and significantly overvalued against
other Asian currencies too.
China
continues to peg against the dollar. Although
China revalued the yuan from 8.28 to 8.11 in July
2005 and announced it would adjust the currency to
a basket of currencies, the yuan continues to
track the dollar very closely. Currently, the yuan
is trading close to 8 to the dollar.
China
is permitting the yuan to appreciate less than 4%
a year. Since the underlying value of the yuan
rises about 5% each year, the yuan will remain at
least 40% overvalued for the foreseeable future.
Each year, the Chinese central bank
purchases more than $200 billion in US and other
foreign securities to keep the value of the yuan
from rising against the dollar. This comes to
about 9% of China's gross domestic product and
about one-quarter of its exports. These purchases
provide foreign consumers with 1.6 trillion yuan
to purchase Chinese exports, and create a 25%
subsidy on foreign sales of Chinese goods.
In his semi-annual reports to the
Congress, former treasury secretary John Snow did
not cite China for manipulating the yuan to
accomplish competitive advantages for its exports.
Instead, Snow chose diplomacy and achieved meager
success.
Henry Paulson, having strong ties
and greater experience in China, may be able to
accomplish better results than Snow, but President
George W Bush has been reluctant to give his
treasury secretaries significant levers that could
move China.
The Bush administration
opposes several bills in Congress that would
enable actions to offset Chinese currency
subsidies. For example, a bipartisan bill by
congressmen Duncan Hunter, a Republican, and Tim
Ryan, a Democrat, would add the subsidies provided
by currency manipulation to the list of unfair
trade practices actionable under US countervailing
duty law and permit domestic manufacturers to
petition the Department of Commerce and US
International Trade Commission for duties on
Chinese imports to offset these subsidies.
Were the Bush administration to merely
support passage of Hunter-Ryan or similar
legislation, Paulson's hand with China would be
greatly strengthened.
No help from the
Doha Round Another factor driving up US
trade deficits are lopsided World Trade
Organization (WTO) rules. For example, these
permit China to enforce investment rules on US
multinationals that limit imports of components
and services, and to subsidize Chinese
manufacturing with zero-interest loans.
Also, WTO rules permit many major trading
countries to rebate value-added taxes on their
exports and impose these taxes on imports. The
United States is much more dependent on corporate
and personal income taxes to finance government
than other countries, and WTO rules prohibit the
United States from making similar border tax
adjustment for income taxes on exports and
imports.
The average standard value-added
tax in the European Union is 19%. When rebated on
exports and applied to imports, these adjustments
provide a 19% subsidy on EU products sold in US
markets and a 19% import tariff on US products
sold in EU markets. China offers similar benefits
to its manufacturers.
Special and
differential treatment under WTO rules permits
developing countries to maintain prohibitively
high tariffs on many manufactures and a plethora
of other trade barriers under the guise of
promoting economic growth. Those block US exports
of technology-intensive goods and services.
The Doha Round of WTO negotiations, even
if it reaches a deal on agriculture will do little
to relieve these problems. Currency manipulation,
investment rules, most subsidies and the unequal
treatment of domestic taxation are not on the
negotiating agenda.
A successful Doha
Round would increase US exports about $7.5 billion
a month. Subtracting additional imports, this
would hardly dent the $64 billion monthly US trade
deficit.
Politics, protectionism and
the trade deficit Bush's reluctance to
tackle currency issues and government incentives
that give advantages to Asian industries create
strong incentives for large US multinationals,
such as Caterpillar, GE and GM, to move production
to China, India and other Asian destinations. Now,
these companies, profiting from Asian
protectionism, systematically oppose strong action
by Washington to reverse these practices. They
become Beijing's most effective lobbyists in
Washington.
Similarly, large retailers,
such as Wal-Mart, Target and Staples, importing
goods from Asia have sought to stem US government
efforts to address these policies.
The
consequences of the trade deficit for industries
in the US midwest and south, such as auto parts,
textiles, furniture and offices, and for wages of
ordinary working Americans, contribute to poor
approval ratings for Bush. This fallout could
prove the undoing of the Republican majority in
House of Representatives this fall.
Peter Morici is a professor at
the University of Maryland School of Business and
former chief economist at the US International
Trade Commission.
