Blogs > HNN > ON CHINA: EU ACTS, US SHOULD TOO!

Jul 29, 2009 4:46 pm


ON CHINA: EU ACTS, US SHOULD TOO!



Time to face facts. In 2001, in an act of supreme hubris, Western democracies opened their door to the Chinese command economy by permitting it to join the WTO. I call it hubris because it assumed following the demise of the USSR and the taming of OPEC that capitalism is too strong to need protection. Indeed, it can beat the Communists with two hands tied behind its back. The Chinese have since proven that assumption wrong. The time has come to amend the deal and condition continued Western free trade on China letting its currency float.

Using its absolute control over its currency and workers while conditioning imports on"technology transfers," China proceeded, as economic professor, Peter Navarro, so accurately notes, to take over"the manufacturing factory floor of the world."

If you look at what China does in order to take jobs from America, you have the biggest foremost issue is what's called currency manipulation. China fixes their currency to our currency, keeps it undervalued. It's a tax on our exports to China. It's a subsidy to their exports here, creates the biggest trade imbalance. Our trade imbalance with China is 55% of our entire trade deficit when you take out oil. They use large export subsidies, they use flagrant stealing of our intellectual property, which basically cuts the costs of their automakers or their pharmaceuticals. And so it goes. And we in America, going back to the Bush administration when China got into the World Trade Organization, has basically, under the guise of free trade, allowed China to take, essentially, the core of our economy.

Navarro points out that"about 40,000 plants have closed since 2001."

And the tale of GM, a kind of a tale of two countries, if you look at what happened to GM in the U.S. versus what happened to it in China, it's very instructive. GM is absolutely booming in China. They're making money hand over fist but it's not really helping America. And what China does, for example, is when GM goes over to try to sell cars in the Chinese market, China engages in one of the most dangerous, unfair trade practices, which is called forced technology transfer. If GM wants to set up a plant in China, they basically have to give China state of the art technology. And so in the short run, that's good for GM because they get entry into that market but in the long run it makes GM obsolete because China basically gets the technology. . . .

But we're confused about kind of what's happening to us and when it's all said and done, the president and the congress and Ben Bernanke at the Fed can throw all the money in the world they want at the current problem but at the end of the day if we don't make things here, the problem's not going away.

The result? A huge wealth transfer from Western Capitalist to Asian Communist countries caused by an unsustainable trade imbalance. As the US, unlike China, cannot prevent the rise in the value of its own currency, the run for the dollar safety combined with the American altruistic efforts to keep the global economy afloat ended up emptying American coffers faster and faster to the benefit of America's economic competitors. Suddenly, economists even took it into their heads that it is possible for the dollar, a mere paper currency, to function as an economy's top export if not indefinitely than for the foreseeable future. How else can one explain the absurd, WSJ editorial entitled,"The Customer is Right Who is the customer? China, they argue, not the US!

The Chinese merely want to protect their dollar purchases, we are told. Yes, they also want to continue to make money from their cheap exports. By promising to keep the dollar strong without demanding that the Chinese let the Yuan float, the US is doing nothing to solve its basic problem, the American trade deficit.

Not so the Europeans. Led by Angela Merkel, the EU refused to follow in American footsteps and agree to impoverish themselves in the name of free trade with a command economy. They even"refused to wait" until it was too late, and their steel industry too decimated to matter. They acted preemptively. Hence, on the day America humbly listened to Chinese"advice" on the best way to handle the economy, the EU sets permanent import duty on China steel pipes.

After all, the evidence is more than in and the demand drop is bound to make matters worse.

Chinese exports have flooded the EU ever since China joined the WTO in 2001. Total shipments to the EU from China were $357 billion last year, up from $67 billion in 2000.

The EU's steel sector, a $250 billion-a-year business with 420,000 employees, has been vulnerable to imports because of Europe's high labor and environmental costs. Eurofer, the lobby group that represents European steelmakers, has lobbied hard for higher tariffs. . . .

China came into Europe's seamless-pipe market only recently, its exports leaping to 552,368 tons last year from 35,000 tons in 2005.

American carping aside, Europe is bound to come out of the recession in a better shape than the US. It's green shoots look better because Europe holds on to its manufacturing base.

The sharp drop in economic activity in 2008 is best understood, as everyone has pointed out, as the result of a contraction in exports. As demand picks up, the German economy reaches cruising speed again, French exports pick up as a result (and with it those of most small economies in northern Europe, for whom Germany and France are the main export markets), Italy’s exports rise, and ‘happy days are here again’. To many a benign scenario, which shows just how well-organized the Euro-zone is when it comes to coping with this crisis – especially true when comparing with the dire reading of the economic indicators in the UK.

If only the US dared to act too. It is time to demand that China let its currency float in the manner of the Dollar, Yen and Euro. Everybody agrees that the world economy needs rebalancing. The US must produce more and China consume more. The Chinese consumer need the kind of purchasing power their artificially weak Yuan makes impossible. Indeed, that self evident truth has been"sort of" reaffirmed in the recent US-Chinese economic summit. I write"sort of" because the proposal fails to mention either the need to increase US production or devalue the Chinese currency.

The proposal agreed to by the two powers involves the U.S. continuing to bring down the current-account deficit and raise its savings rate, with China supporting consumption and moving away from export-led growth.

In other words, the US kow towed to China by letting the Chinese insist that the US do nothing meaningful to help it's manufacturing base and thereby decrease it's trade deficit in the most efficient manner possible, by weakening the dollar. Nor has it repeated previous demands that China raise the value of the Yuan.

Forget all the talk about the Chinese worrying about their dollar holding. I am sure they could not be happier. Their economy is growing while Americans, indeed, capitalists, still do not understand what is happening to them. Indeed, many believe, as they did in the Thirties, that current economic trend prove the superiority of command economies. As capitalism and democracy are Siamese twins, nothing less than the future of liberty is at stake.




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