Critics of China specifically, and global sourcing generally, are reluctant to recognize the domestic benefits flowing from outsourcing, e.g., lower domestic consumer prices; money flowing to more efficient and competitively advantageous domestic uses thereby creating jobs in new growth industries.
Neither do they care that a stronger Chinese Yuan will merely shift the venue of sourcing, not its incidence. The latter won't happen until US union wages fall back to earth, as evidenced by Ford's recent announcement pending union approval of a newly negotiated contract.
Many manufacturing jobs are union jobs. Union jobs pay a lot, often more than the companies providing them can afford. That's how the Big-Three automakers were driven to penury. Incidentally, unions are Democrat, vote Democrat, fund Democrats, and provide muscle for Democrats, e.g., marching on New York to protest capital, capitalists and capitalism.
The Democratic Senate's response to these interconnected phenomena is to propose tariffs on Chinese imports. If China won't let the market float the value of its currency, then the US will forcibly increase costs associated with doing business in China. Those costs will fall onto companies and ultimately consumers. Nicholas Hastings thinks this is a desperate response to recent dollar appreciation due mainly to Euro disintegration.
President Obama has joined the chorus despite cautioning Senators recently to proceed with respect for international norms.
The trouble is the U.S. is getting desperate.
It is looking for any solution to stop unemployment from rising and its economy from heading back into recession. And China, with its weak yuan, is back in the firing line.
For most of last year and much of this one, the dollar itself had been under heavy selling pressure and China was essentially off the hook.
With the weakness of its own currency being accused of causing ‘currency wars’ by countries such as Brazil, the U.S. was hardly in a position to point the finger of blame anywhere else.
"China has been very aggressive in gaming the trading system to its advantage and to the disadvantage of other countries, particularly the United States," Mr. Obama said. He acknowledged China has allowed some appreciation in the yuan, but said "it's not enough."
Senate lawmakers, voting almost at the same time as Mr. Obama spoke, moved a step closer to passing legislation that would target Beijing for its exchange-rate policies...
"We are in a trade war (emphasis added). We have our clocks cleaned every day and lose jobs every day because of unfair Chinese practices," Sen. Charles Schumer (D., N.Y.) said on the Senate floor before the vote...
"They don't outwork us, they don't outperform you, they steal our intellectual property, they manipulate their currency, they subsidize their industries," Sen. Lindsey Graham (R., S.C.) said during debate, referring to China as a "communist dictatorship who cheats" (emphases added).The President cautioned the Senate not to punish American companies by exposing them to WTO sanctions. Punishing them with higher prices, and squeezing their margins, apparently doesn't bother him, at least in principle.
“I don’t want a situation where we’re just passing laws that are symbolic, knowing that they’re probably not going to be upheld by the World Trade Organization for example, and then suddenly U.S. companies are subject to a whole bunch of sanctions,” he said.
“I think we’ve got a strong case to make, but we’ve just got to make sure that we do it in a way that’s going to be effective,” the president said. Chinese officials this week threatened a trade war if the bill is enacted.
In a key procedural vote Thursday, the Senate moved the currency bill a step closer to passage. The chamber could hold a final vote on the bill later Thursday. It faces an uncertain fate in the House where Speaker John Boehner (R., Ohio) has called it “dangerous.”
The legislation is a popular political symbol for lawmakers concerned about the faltering U.S. economy. With unemployment still above 9%, many politicians see targeting China as an issue that will resonate with voters in next year’s elections.Mechanisms already exist for the Treasury Department to officially designate China a "currency manipulator" in its periodic currency report, which would have legal trade trade implications. That Tim Geithner hasn't done so indicates to Noman that the President and his Party are more interested in drumming up populist passions for political gain rather than in addressing China's currency peg.
Presumably, Americans should not be concerned about the resurrection of yellow-peril scapegoating. Korematsu was such a long time ago, and it couldn't happen again, not here. In any event, the end of resonating with voters in next year's elections justifies pretty much any means (see "Rules for Radicals" below).
Unlike America's last great trade blunder, the Tariff Act of 1930 (aka Smoot-Hawley), the China bill wouldn't raise tariffs across the board, but would instead allow companies to seek countervailing duties by treating a "misaligned" currency as a subsidy. This would nonetheless open the floodgates to applications from American companies, and the resulting tariffs would violate World Trade Organization rules. China would undoubtedly retaliate, meaning companies and consumers in both countries would lose.
If other countries follow suit, there would be knock-on effects throughout the global economy. As the erstwhile leader of the world's trading system as well as one of its main beneficiaries, the U.S. bears a special responsibility to avoid this outcome.
One reason we are so close to this ledge is that Washington has not led on global and regional liberalization. Free trade is like a bicycle, which needs to be pedaled forward or it tips over. When a President is AWOL on trade as Mr. Obama has been, U.S. politicians succumb to populist temptations. Instead of concentrating on domestic reforms to restore growth, Congressmen tell Americans that their lost prosperity was taken by China rather than by poor policy decisions. So now the U.S. will punish the biggest developing nation, and one of America's main goods suppliers, for its economic success.
The last six years are proof that revaluing the yuan is not the key to reducing China's large and persistent trade surplus with the world. The yuan has appreciated by almost 30% since the middle of 2005, when Mr. Schumer was pushing for a 25% revaluation. But the Chinese surplus has mostly grown and occasionally shrunk during this period in response to other forces...
Democrats want to appease labor to hold the Senate next year. The White House wants to appease Senate Democrats and labor, so it has failed to speak against the tariff bill. White House spokesman Jay Carney says only that it is "reviewing" the legislation and that "we share the goal."
Senate Republicans aren't about to stand in the way, especially when their Presidential front-runner, the supposedly business savvy Mitt Romney, is also calling for unilateral trade duties against China to give his candidacy a populist edge. John Boehner's House Republicans may be the last obstacle to such a destructive bill passing.Boehner is paying a high price in populist bashing for it, too. Senator Schumer's response to the House Speaker's description of the proposed legislation stopped just short of calling him a traitor:
"The only thing that would be dangerous would be to continue turning he other cheek while China mounts its assault on U.S. jobs, U.S. wealth, U.S. manufacturing," Schumer said on the Senate floor. He said that "I'm aghast at that notion that the Speaker says fighting for American jobs against unfair practices that China foists upon is us well beyond what Congress should be doing ... There is nothing else Congress should be doing except rising to defend American jobs."..."
For some inexplicable reason, the Republican leadership in the House is siding with the Chinese government," Schumer said. "This is not the time to go soft on China."..
Though Boehner's position suggests he won't allow a vote in the U.S. House of Representatives, "there's going to be huge pressure for him to do so," Schumer said. Schumer said that the only answer is to get tough with China, saying that "the Chinese only understand one thing: being tough, telling them if they don't discontinue these actions we are going to take action unilaterally on our own."...
"There's already a trade war going on Mr. Speaker -- China is cheating to gain unfair advantage," Schumer said. "It's about time we do something about it."...
"China has more to lose in a trade war than we do," Schumer said. "They may take a few sanctions in response," he said, but "they're not going to create a trade war -- absolutely not."
Timing is everything. With things not going well for the President on the offensive and facing public scrutiny of his ideas, it's better to change the subject, demagog, and let Senate surrogates and street smart union organizers take the lead.
Noman alludes to the twin populist pressure-whistles blowing from Democratic kettles in recent days. China-bashing is one. The other is Wall Street bashing.
Noman finds this amusing as it was President Clinton who mined the Chinese Communists for campaign contributions in return for sensitive military technology, and the Democratic Party which reaps the majority of Wall Street contributions. Perhaps these confrontations have all been prearranged in back rooms, like a staged bout of Big-Time Wrestling. Do you think?
The Senate vote puts the White House in a delicate position. Like previous administrations, the Obama White House is wary of antagonizing Chinese leaders, whose cooperation it needs not just on economic issues but also on an array of national security matters. But criticizing China remains popular with the public, and many Democrats, including those from big industrial states, say China's currency policy is unfair to U.S. workers...
Opponents of the bill say that instead of potentially sparking a trade war, the U.S. should face its own problems, such as the burgeoning federal budget deficit. "It's like we know what we've got to do but we won't do it," said Sen. Bob Corker (R., Tenn.). "It's like we've got to find a bogeyman."Readers of Saul Alinsky's "Rules for Radicals"--the community organizer's and practical revolutionary's bible--will immediately recognize his handiwork in current events.
Rules for Power Tactic:
#2 - Never go outside the experience of your people.
# 8 - Keep the pressure on with different tactics and actions, and utilize all events of the period for your purpose.
#13 - Pick the target, freeze it, personalize it, and polarize it.
Rules to test whether power tactics are ethical:
#3 - In war the end justifies almost any means. (n.b., the minor premise is that everything you consider important is war.)
#7 - Generally, success or failure is a mighty determinant of ethics.
#8 - The morality of means depends upon whether the means is being employed at a time of imminent defeat or imminent victory.
#10 - You do what you can with what you have and clothe it in moral garments.Americans are frustrated with a collapsing economy and high unemployment despite assurances of a government-driven turnaround. They are disgusted with the trillions of dollars that have been wastefully larded into government-selected troughs since the President's election.
The people are looking for a convenient bogeyman, but don't want to look too closely at their President who might not be the nice, clean-cut fellow they imagined him to be. It is crucial for Democrats to deflect their frustration, disgust and desperation onto a perceived enemy and away from their governance. The Chinese (and Wall Street bankers) are straight out of central casting.
Democrats are hoping that populist demagoguery along Alinskyite lines will turn the trick. Defeat has been looking rather imminent, with a recent poll indicating that any Republican candidate is preferable to President Obama.
It is evident from Alinsky's ethics rules that his disciples are not bound by classical-Christian notions of reality (being), truth, goodness, virtue, the moral object, etc. In essence, they reduce to one rule: metaphysics are what you make them. Demonizing third parties while throwing world markets into chaos as the global economy teeters on the brink of a double-dip recession are perfectly acceptable means. You've got to break a few nest eggs to make a Statist omelet.
Senior Chinese officials have become increasingly forceful in their approach to the U.S. since the global recession, with many convinced that China is now in the ascendant and the U.S. is in permanent decline. Some feel China has the upper hand as the largest holder of U.S. debt—and the only major economy still growing rapidly.Noman wonders why the Senate and White House don't recognize that in this globalized economy with a universal capital market, America's fate is closely linked to that of China's.
Chinese leaders say the U.S. is to blame for plunging the world into crisis as a result of economic mismanagement, and resent moves that America has taken to boost its recovery, including buying bonds to hold down interest rates—so-called quantitative easing—which they argue is debasing the U.S. dollar and pumping up inflation in China and other emerging economies...
Chinese leaders also recognize that in a globalized economy, their own fate is closely linked to that of the U.S., and a trade war would likely be as damaging to China as the U.S.—perhaps even more so given China's greater reliance on exports.
If he understands Americas's economic predicament correctly, it is that America--especially its Blue States, and federal government--refuses to live within its means, and insists that China and other foreign nations finance the profligacy on our terms, even to the point of their own detriment.
At the risk of desdcending into arcana and boring the reader to distraction, Noman thinks it worth the digression to contextualize this controversy, and situate it in reality.
Peter and Andrew Schiff have written an informative little economics allegory illustrated with comic book drawings entitled "How an Economy Grows and Why It Crashes." It is imminently accessible, and will help to shed light.
America doesn't under-consume sufficiently to generate enough savings to create capital--that which is used to increase productivity and supply future consumption. On the contrary, Americans are negative savers--America spends more than it earns. It borrows from other producers, China for instance, in order to consume more. America's consumption addiction adds little to US productive capacity, and drives the country deeper into debt.
Government compounds matters by inserting itself into the process of credit allocation via guarantees, credits, taxes and penalties, which is to say that it directs how savings (loanable funds) are to be allocated. For instance, it threw its full weight behind an "affordable housing mission" that led to an overallocation of economic resources to housing, generally, and sub-prime housing specifically. America and the world are still suffering the affects of this public-private partnership.
Artificial booms and busts follow investment choices predicated upon artificially set rates that send false signals to borrowers, i.e., that consumption has been deferred thereby pushing rates lower, indicating pent-up demand for future consumption. Capital investment made to supply this future consumption is likely to underperform, if not be lost altogether, because the demand won't actually materialize.
Since the Fed's creation in 1913, the dollar has lost 95% of its value to inflation! The Schiffs write that "the Fed now exists for the sole purpose of providing the inflation necessary to allow the government to spend more than it collects in taxes."
In 1971, President Nixon terminated the dollar's gold backing. Consequently, America's currency is supported by nothing other than government's power to tax savings away from citizens who under consumed, risked, and produced them. It has neither intrinsic nor convertible value.
The money supply, consequently, is inflatable at will. While doing so deflates the purchasing power, or value, of the currency, it defers hard choices regarding spending and taxes.
The money supply is presently rocketing under the Fed's various quantitative easing initiatives. Because only some prices are rising (e.g., food, energy, resources), and others are remaining stable in the recessionary economy, inflation is masked. Yet, prices should be falling as people pay down debt and reign in their spending.
The economy is being prevented by government action from rebalancing at lower prices that will give relief to consumers, and eventually settle at a level where purchasing will resume. That is when the economy will sustainably expand.
Low interest rates in the US are made possible by high savings rates abroad. Because the US dollar is the world's official reserve currency, every country needs dollars to conduct trade. Dollars are consequently always in demand for reasons not directly related to the health of the US economy. Many dollars held by foreigners are done so in US banks, where they can be lent easily to Americans. Others save, we borrow cheaply.
Without China's savings, America would find it much harder to borrow, even at much higher interest rates. How would that work for the federal government given its $14 trillion debt--over $1 trillion of it held by China, America's largest creditor? Additionally, China is estimated to hold in excess of $2 trillion of dollar denominated assets.
The US has run persistent trade deficits since 1976, which is only possible due to the built-in demand for dollars occasioned by its world reserve currency status. The US trade deficit averaged roughly $600 billion per year between 2000 and 2010, or $2,500 per citizen. Reserve currency status is neither permanent nor guaranteed.
China keeps the Yuan artificially low. Perhaps it might be said with equal justice that foreign demand for America's currency due to its reserve status keeps the value of the dollar artificially high.
DC has made no effort to seriously cut government spending. Quite the contrary, it has dug in to preserve prerogatives, expand entitlements, and balloon spending. China is continuing to extend credit, albeit more reluctantly, to a debtor that is decreasingly likely to pay with anything but near-worthless dollars. It is also moving to forge consensus on the need for an alternative reserve currency.
Eventually, China will cease lending to America and refocus its productivity on domestic consumption. It will then enjoy the fruits of its labor, rather than make them available to us at low rates in return for depreciating paper currency and political abuse.
America is inflating its way out of its debts with rounds of quantitative easing and other weapons of mass distraction, which ensures it will pay debts off with diluted currency. The money China gets in return will not buy as much as what it lent. Consequently, China partially protects itself and its present advantages by pegging the Yuan.
In sum, Inflation transfers money from savers in a currency (China) to debtors in that same currency (America). DC is mad ostensibly because China takes steps to prevent the full brunt of Americas's backdoor devaluation strategy from falling on it.
Senators Schumer, Graham and company appear to Noman not only to be biting the hand that feeds America, they are shooting America in the foot. Because the dollar is the reserve currency, it is widely accepted regardless of America's economic fundamentals. Either hyperinflation, or a loss of reserve status, however, will change that, and thrust America into abject penury.
The proposed Currency Exchange Rate Oversight Reform Act does nothing to address those horizontal concerns, but rather does much to hasten their onset.
Noman has sufficient doubts about the wisdom of this course to hope that the Senate will desist from its populist exercise before it hastens America's comeuppance in return for political gain, and alienates those who permit the Senators to maintain illusions of government omnipotence. At the very least, Noman hopes that if Senator Schumer must play with guns, he learns to shoot straight.
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