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2 EYE ON
AMERICA Washington's mysterious China
policy By Peter Morici
On Tuesday, the US Commerce Department
reported that the October deficit on trade in
goods and services was US$58.9 billion. This was
down from a $64.3 billion deficit in September but
remains about 5.3% of gross domestic product
(GDP).
The improvement was attributable to
a decline in the price and volume of oil imports,
and some increase in exports of services. The
trade deficit with China increased to $24.4
billion in October
from
$23 billion in September.
Since December
2001, the US monthly trade deficit has increased
$32.3 billion. This has saddled the economy with a
huge foreign debt and slowed growth, and Bush
administration policies have exacerbated these
problems.
Petroleum, automotive products,
and goods from China account for nearly 95% of the
trade deficit, and no solution is possible without
addressing issues particular to these segments.
Petroleum Crude oil and refined
products account for $18.8 billion of the monthly
trade gap. Since December 2001, net petroleum
imports have increased $13.3 billion, as the
average price of a barrel of imported oil has
risen from $15.46 to $55.47, and monthly imports
have increased by up to 400 million barrels.
Technologies, such as simply re-tuning
conventional gasoline engines and transmissions,
hybrid gasoline-electric systems, lighter-weight
steel, and alternative fuels, could substantially
reduce or eliminate US dependence on foreign oil.
Implementing and accelerating these solutions
requires national leadership, which has been
sorely lacking,
President Bill Clinton
sought an across-the-board energy tax that would
have handicapped the international competitiveness
of basic industries such as petrochemicals and
aluminum. The current president, George W Bush,
pushed through energy legislation that made Exxon
and other oil giants happy but accomplished little
to change the fundamental energy equation.
Now the incoming leadership of the new
Democratic majority in Congress seems intent on
punishing oil companies for higher oil prices
largely created by surging demand in China and
Asia, shortages of refining capacity, and
Detroit's obsession with overpowered vehicles.
Automotive products Automobiles
and parts account for about $12.4 billion of the
monthly US trade deficit; however, since December
2001, the deficit on vehicles has risen $1 billion
or 3.7%, while the parts deficit has increased
$1.8 billion or 135%.
Japanese and South
Korean manufacturers have captured larger market
share by offering more attractive and reliable
vehicles than US competitors, and are expanding
their US production. However, Asian manufacturers
tend to use more imported components than domestic
companies, and General Motors and Ford are pushing
their parts suppliers to move to China.
The US remains a competitive place to make
cars and many components, but GM and Ford carry a
$2,500 cost disadvantage thanks to costly labor
contracts and clumsy management. These cost
disadvantages far exceed those imposed by legacy
costs, such as providing health benefits for
retired blue-collar workers, and these cost
disadvantages would persist even with the
implementation of national health insurance.
Moreover, the sorry financial state of the
US automobile industry limits its ability to move
rapidly into advanced vehicle technologies that
would both reduce US dependence on imported
petroleum and match Toyota's and Honda's
successful hybrids.
Rather than
effectively addressing core structural problems,
GM and Ford have used their purchasing power to
hammer down component, steel and other material
prices to levels that have bankrupted many
suppliers. It remains a puzzle why the Bush
administration's Justice Department has not
investigated GM or Ford for abuse of monopoly
purchasing power.
China The US
trade deficit with China was $24.4 billion in
October, and has increased by $18.9 billion since
December 2001. The bilateral deficit keeps rising,
because China undervalues its currency, and this
makes Chinese exports artificially inexpensive and
US products too expensive in China.
In
July 2005, China revalued the yuan from 8.28 per
dollar to 8.11 and announced it would adjust the
currency to a basket of currencies. However, the
yuan continues to track the dollar closely and
currently is trading at about 7.84, a 3.3%
appreciation over 17 months.
Modernization
and productivity growth raises the implicit value
of the yuan about 5% a year; therefore, at the
current rate of
