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Economic Talks with China Not Likely to Accomplish Much

Prof. Peter Morici - 8/7/2009

U.S. leaders are sitting down to another round of talks with China on security, the economy and the environment. With banks stabilized, nothing is more important to accomplishing a sustainable U.S. economic recovery than recalibrating trade with China.

The idea behind admitting China into the WTO was that it would expand trade based on comparative advantage—both China and the United States would grow exports of what they do most efficiently. That simply has not happened.

China systematically undervalues its currency to boost exports of low wage products and products it should be importing. Hence, its exports exceed imports with the United States more than four to one, and it enjoys a $268 billion annual trade surplus with the United States

The huge trade deficit with China pulls down demand for U.S. goods and services—in particular manufactured products—much more than the lift provided by the stimulus package, because it is permanent and encourages U.S. manufacturers to relocate to China or shutdown completely. Yet the president has boxed in U.S. negotiators with idealistic and ideological stances on trade and the environment.

China maintains its huge currency advantage by systematically buying dollars with yuan—increasing its hoard of U.S. Treasuries in the process—instead of letting market forces determine its value, which would be much higher than its current pegged rate.

The U.S. could offset these purchases by taxing dollar-yuan conversions but has failed to act. Instead, like President Bush, he talks a good game and practices appeasement.

The President promises no protectionism to cure the recession, but his hands off policy on currency is akin to unilateral disarmament. A tax on currency conversion would do no more than offset China’s currency subsidy.

The President promises no protectionism to cure the recession. But what are western nations to do in the face of Chinese mercantilism if not take offsetting measures?

The President only pleads with China, making America a supplicant nation.

On cap and trade, limiting U.S. CO2 emissions would do little to solve the global warming problem if CO2 emitting are not similarly limited in China. Yet, China refuses to match the legislation President Obama is pushing through Congress.

Cap and trade, should it pass the Senate, will finish the job China’s currency intervention began—decimating U.S. manufacturing and a good deal of the American middle class.