Page 2 of
2 EYE ON
AMERICA Washington's mysterious China
policy By Peter
Morici
appreciation, the gap between the
value enforced by Beijing and the true market
value of the yuan grows each month. The yuan
remains undervalued against the dollar by at least
40%.
China's huge trade surplus creates an
excess demand for yuan on global currency markets;
however, to limit appreciation of the yuan against
the dollar and drive it down against the euro, the
Chinese central bank purchases
more than $200 billion in US and other foreign
currency and securities each year.
This
comes to about 9% of China's GDP and about 25% of
its exports. These purchases provide foreign
consumers with 1.6 trillion yuan to purchase
Chinese exports, and create a 25% "off budget"
subsidy on foreign sales of Chinese goods.
Other Asian governments must follow
China's lead and limit the appreciation of their
currencies, lest their industries lose
competitiveness to Chinese products in the US,
European and even their own markets. Therefore,
although the Federal Reserve index of the value of
the dollar against all trading partners has fallen
18% since February 2002, the dollar has fallen 28%
against the euro and currencies of other
industrialized countries, while falling only 4%
against those of China, India, and other
developing countries.
Diplomatic efforts
to persuade China to stop manipulating currency
markets have so far failed. US Treasury Secretary
Henry Paulson and Federal Reserve chairman Ben
Bernanke are again visiting China. Should they
return empty-handed or with only symbolic gestures
from Beijing, the United States will be left
either to impose tariffs or accept the
consequences of large and widening trade deficits
for US growth and living standards.
Many
US multinationals, such as General Electric,
Caterpillar and GM, have earned huge profits
investing in protected Chinese and other Asian
markets, and have lobbied Congress and the
administration not to take action against Chinese
mercantilism.
Together they have
persistently characterized as protectionist
critics of China's policy that advocate
affirmative steps that would either offset Chinese
export subsidies or move China to change its
policies. This is puzzling as the United States
regularly takes steps to offset subsidized imports
from the European Union or Japan that harm US
industries.
Why the Bush administration
insists on affording China special status is a
mystery.
Deficits, debt and growth
Trade deficits must be financed by
foreigners investing in the US economy or
Americans borrowing money abroad. Direct
investment in the United States provides only a
small fraction of the needed funds, and Americans
borrow more than $50 billion each month. The total
debt will exceed $6 trillion by early 2007, and at
5% interest, the debt service comes to about
$2,000 per worker each year.
The trade
deficit reduces growth, near term, by reducing the
demand for US-made goods and services, and longer
term, by shifting labor and capital away from
export and import-competing industries that invest
more in research and development and highly
skilled labor.
In the third quarter, the
trade deficit subtracted about two-tenths of a
percentage point from GDP growth. Over the past
two decades, large deficits have reduced US growth
by about 1 percentage point a year, and were it
not for these deficits, GDP would be at least 20%
larger in 2006.
Despite this disturbing
calculus, the Bush administration has repeatedly
sided with the interests of large multinational
corporations that profit from foreign government
policies and business practices that drive up the
trade deficit.
It is to be hoped that the
new Democratic majority in Congress will call the
president to account for these choices and effect
a change in policy.
Peter Morici
is a professor at the University of Maryland
School of Business and former chief economist at
the US International Trade Commission.
