EYE ON
AMERICA Blame
the China deficit By Peter
Morici
On Thursday, the US Commerce
Department reported that the June trade deficit on
goods and services was US$64.8 billion, down from
$65 billion in May but up from $63.3 billion in
April.
The petroleum deficit fell to $24.7
billion in June from $25.8 billion in May, but was
up from $21 billion in April. Prices rose in June
but import volumes fell. The oil-import bill is
likely to rise in July and August, because of
conditions in Middle East markets and the shutdown
of significant production in Alaska.
Also,
imports from China continued to rise.
Tightening conditions in international oil
markets and rising imports from China will soon
push the United States' annual trade
deficit to $800 billion,
imposing a significant drag on economic growth.
The trade deficit must be financed by
foreigners investing in the US economy or lending
Americans money. Direct investment in US property
and productive assets provides only a small
portion of the needed funds, and the balance is
obtained through the sale of Treasury bonds,
corporate bonds, bank accounts and other paper
assets. 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.
The China factor The June trade
deficit with China was $19.7 billion, up from
$17.7 billion in May. Moreover, China reported a
record global trade surplus for July, indicating
that the US deficit with China increased sharply
in June.
This situation is likely to
worsen. The US dollar remains at least 40%
overvalued against the Chinese yuan, and
significantly overvalued against other Asian
currencies.
China continues in effect to
maintain the peg against the dollar. Although it
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 closely and currently is trading at
7.96.
China is permitting the yuan to
appreciate less than 4% a year. Since the
underlying value of the yuan rises about 5% each
year, it will remain at least 40% overvalued for
the foreseeable future.
To limit
appreciation of the yuan against the dollar, the
Chinese central bank purchases more than $200
billion in US and other foreign securities each
year. 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 ($201 billion) to purchase
Chinese exports, and create a 25% subsidy on
foreign sales of Chinese goods.
While
economists may disagree about how much or through
what methods China should revalue the yuan,
massive Chinese intervention is suppressing the
value of the currency and increasing the US trade
deficit with China. China's policy compels other
Asian governments to follow similar policies and
limit revaluation of their currencies against the
dollar, increasing the global US trade deficit.
US manufacturers are hit particularly
hard. China's currency-market intervention creates
a 25% subsidy on its exports, and competitive
advantages in industries not dependent on low-wage
labor. Other Asia economies follow suit with
similar industrial policies. Through recession and
recovery, the US manufacturing sector has lost 3
million jobs. Following the pattern of past
economic recoveries, the manufacturing sector
should have regained about 2 million of these
jobs, especially given the very strong
productivity growth accomplished in the
durable-goods segment and throughout
manufacturing.
Politics and
protectionism US Treasury Secretary Henry
Paulson urgently needs to persuade China to
revalue the yuan significantly; however, President
George W Bush has been reluctant to give his
treasury secretary levers that could move China to
action.
For example, the Bush
administration opposes a bipartisan bill sponsored
by Congressmen Duncan Hunter and Tim Ryan that
would add the subsidies provided by currency
manipulation to the list of unfair trade practices
actionable under countervailing-duty law, and
permit domestic manufacturers to petition the
Department of Commerce and International Trade
Commission for duties on Chinese imports to offset
these subsidies.
Bush's reluctance to
tackle currency issues and other industrial
policies unfairly advantaging industries in Asia
creates strong incentives for large US
multinationals, such as Caterpillar, General
Electric and General Motors, to move production to
China, India and other Asian destinations.
Similarly, large retailers such as Wal-Mart,
Target and Staples stock their shelves and pad
their profits with subsidized Asian imports.
Now, these multinationals and retailers
are profiting from Asian protectionism and
systematically oppose strong action by Washington
to reverse the effects of protectionism. They have
become strong advocates of Chinese protectionism
and Beijing's most effective lobby in Washington.
Peter Morici is a professor at
the University of Maryland School of Business and
former chief economist at the US International
Trade Commission.
