RISKY
BUSINESS Democrats to tackle the dollar
By Jephraim P Gundzik
Last week's sweeping victories for
Democrats in the US mid-term elections could
prompt significant economic policy changes in the
United States over the next 24 months.
Boosting US exports will top the
Democrats' economic agenda. In addition to
stepped-up efforts aimed at prying export markets
open, the 110th Congress may pressure the
increasingly pliant administration of President
George W Bush to reverse course on
exchange-rate policy and
encourage the depreciation of the dollar.
Intensifying trade disputes, the sliding value of
the dollar and
weakening US demand could
produce a sharp slowdown in Asia's export and
economic growth next year.
With majority
positions in the House of Representatives, in the
Senate and among state governors, Democrats are
now firmly in control of America's legislative
initiative, giving the party a unique opportunity
to increase its popular support ahead of the 2008
presidential election.
Democrats are
unlikely to challenge the incoherent foreign
policies of the Bush administration, which have
produced an unwinnable war in Iraq and growing
instability in the Middle East, Africa and Asia.
As in the Republican Party, there is no consensus
among Democrats about the future role of the US
military in Iraq and the direction of Middle East
and other foreign policies. Only a handful of
legislators even recognize that Iraq has already
become engulfed in civil war.
Rather than
pressuring the administration into changing its
foreign policies, Democrats will probably be happy
to leave the foreign-policy initiative in the
hands of President Bush, who has proved remarkably
adept at strangling popular support for his
Republican Party in the past two years. Democrats
will use their control over powerful legislative
committees in the House and Senate to highlight
the administration's ongoing foreign-policy
catastrophes, further undermining popular support
for the Republicans.
Economic policy
initiative In sharp contrast to foreign
policy, Democrats and Republicans are seemingly
united in the realm of trade and foreign-exchange
policies. Legislation aimed at forcing other
countries to open their markets to US exports and
revalue their currencies against the dollar,
another term for dollar devaluation, have
significant bipartisan support in the House and
Senate, for good reason.
The US trade
deficits with Canada and Mexico, America's top two
trading partners, have grown from US$52 billion
and $41 billion in 2003 to an estimated $85
billion and $60 billion in 2006, respectively. The
US trade deficit with the European Union has
increased from $97 billion in 2003 to an estimated
$135 billion in 2006. Finally, the US trade
deficits with China and Japan have soared from
$124 billion and $66 billion in 2003 to an
estimated $250 billion and $90 billion in 2006,
respectively.
Factors such as rapidly
rising energy prices and overly strong growth in
private consumption expenditure have boosted US
imports in the past four years, contributing to
record growth of the trade deficit. Equally
important has been the plunging competitiveness of
US manufactured goods wrought by an increasingly
overvalued dollar. Dollar overvaluation has driven
the politically and economically crucial US
auto-manufacturing industry to the brink of
bankruptcy by making imported autos cheaper for
Americans. Dollar overvaluation has also greatly
impeded the export growth of US manufactured
goods.
In addition to pushing the US trade
deficit to stratospheric levels, evaporating
competitiveness of America's manufactured goods
has contributed to the loss of nearly 3 million
jobs in the manufacturing sector since 2000.
Growing employment in the service sector has
offset these job losses somewhat. However, slowing
growth of private consumption expenditure because
of the collapse of the US housing market will lead
to service-sector job losses and mounting
unemployment in 2007.
Democrats, who have
a strong history of economic intervention, are
very likely to use policy changes on trade and
exchange rates in an attempt to reinvigorate
waning US economic growth. Though the economic
merits of such intervention may be questionable,
such will be well received by US manufacturers,
especially of autos, and their heavily unionized
employees. These manufacturing-sector employers
and employees comprise an outsized political
constituency, the support of which Democrats will
need if they expect to win the US presidency in
2008.
Republicans will contend for the
support of manufacturing-sector employers and
employees in 2008, making it improbable that the
party's legislators will obstruct Democratic trade
and exchange-rate initiatives. Republicans have
little to lose and much to gain by supporting such
initiatives. Strong bipartisan support for trade
and exchange-rate policy changes will be very
difficult for the Bush administration to resist.
As a lame duck, President Bush will have little
power and even less inclination to swim against
the rising tide of protectionism and dollar
depreciation in Congress.
Nothing good
for Asia Asia's economic giants, Japan and
China, are likely to take the brunt of any
economic-policy changes engineered in the US
Congress. America's auto manufacturers have long
argued that undervaluation of the Japanese yen has
been behind all of their troubles. Ahead of the
late meeting in late June between Bush and the
then prime minister, Junichiro Koizumi, Democratic
senators from Michigan, where all US auto
manufacturers are based, sent a letter to Bush
demanding that he address "the deliberate actions
of Japanese officials to maintain an undervalued
yen" and Japan's failure to open its market to
imports of US automobiles.
These demands
were reiterated by the heads of America's three
largest automobile manufacturers when they met
with Bush this Tuesday.
Yen undervaluation
is synonymous with dollar overvaluation. Expect
the 110th US Congress to produce legislation that
calls for immediate action by Japan both to
strengthen the exchange rate of the yen and open
its auto market to US exports. Such legislation
will put enormous pressure on the Bush
administration to push the value of the dollar
lower.
Like Japan, China has raised the
ire of the US Congress over the past several years
for so-called unfair trade practices, including
exchange-rate manipulation and failure to open its
markets to US exports. Proposed legislation
including the Schumer-Graham Bill that would slap
a 27.5% tariff on all imports from China and the
closely related Grassley-Baucus Bill have strong
support among both Democrats and Republicans.
More significant, one of America's most
stridently anti-China legislators, Nancy Pelosi of
California, is to become House Speaker, the most
powerful position in the House of Representatives.
Over the past year, Pelosi has often asserted that
China intentionally manipulates the value of its
currency to gain a trade advantage. Expect some
type of anti-China legislation to be passed with
broad bipartisan support by Congress by mid-2007.
This bipartisan support will make it impossible
for Bush to veto such legislation.
Legislation in the US aimed at prying open
export markets in Japan and China is likely to
intensify already-substantial trade tensions,
especially between Washington and Beijing.
Meanwhile, the implicit change in US exchange-rate
policy that will precede such legislation will
increase downward pressure on the value of the
dollar against all major currencies, particularly
the yen.
Escalating trade disputes with
the US, the sliding value of the dollar and
further weakness of growth in US personal
consumption expenditure could produce a sharp
slowdown in export and economic growth across Asia
in 2007.
Jephraim P Gundzik is
president of Condor Advisers. Condor Advisers
provides investment risk analysis on developing
countries to individuals and institutions
worldwide. Visit www.condoradvisers.com for more
information.
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