Global Geopolitics & Political Economy
Originally published on AmericanEconomicAlert.org
Read the article in it’s original form on the American Economic Alert.
By Kevin L. Kearns
The House has just passed strong legislation to fight currency manipulation by China and other major U.S. trade competitors (H.R. 2378 – originally an initiative of the U.S. Business and Industry Council). But major hurdles remain to getting it passed into law so it can be used as an effective tool by domestic businesses to fight predatory currency practices.
The first is a Senate that has long supported current trade policies more enthusiastically than the House, largely because six-year terms shield its members effectively from public opinion. The second is a White House still far too beholden financially to outsourcing business interests to endorse the bill (even though candidate Obama did just that during his 2008 presidential run), yet too dependent on unions to get out the vote to stay in open opposition to the legislation (especially given an ongoing recession). The third is a World Trade Organization still dominated by countries following export-led growth strategies centered on running big trade surpluses with the United States, and therefore still determined to keep the U.S. market much more open to their goods than their markets are open to U.S. exports.
Facts, arguments, and debating points focused on strengthening U.S. interests obviously are useless in the WTO, but the Senate and White House can’t ignore them completely. Further, it’s important that Senators and the President think hard and astutely about the case being made against the currency bill by the U.S. outsourcing lobby – whose Chinese factories and business partners receive major subsidies for their selling prices when Beijing keeps the yuan artificially weak, and who therefore benefit just as much from manipulation as the Chinese state-owned enterprises and other Chinese businesses. Their arguments have all the veracity of the propaganda continuously spewed out by the communist regime with which they’ve aligned themselves.
For example, will the House bill really amount to a tax increase on American consumers? Not even close. This claim assumes that the bill will automatically impose tariffs on every product from China or any other manipulating country found on retail store shelves. But under the legislation, tariffs are possible only on products made by industries that file countervailing duty suits in the U.S. trade law system, and only if these industries win these cases. Most consumer goods categories nowadays are dominated by imports from China. Relatively few American-based players are left. Therefore, the number of American consumer goods industries that would file suits, and the number of products affected, would be small.
For consumer product areas where American competitors remain, the public would not be forced to pay a higher price for the good imported from China or another manipulating country. Consumers would always have the option of buying the American product. And isn’t consumer choice what all these alleged free market champions are all about?
Moreover, the idea of American companies exploiting the situation en masse by jacking up prices is absurd. Very few, if any, businesses today have the pricing power to do so in the current recessionary environment.
Finally on this score, to be a consumer, one has to be a producer first. H.R. 2378 will level the playing field in enough industries to Americans back to work, getting them off the unemployment line and enabling them to consume. Even better, they’d be better able to finance their consumption responsibly, through their earnings rather than their borrowings.
The charge that the House bill will raise taxes on businesses – boosting their prices and harming their exports – is just as false as the consumer tax hike argument. Supporters of this argument maintain – correctly – that many American-based manufactures use parts, components, and other inputs from China and other manipulating countries in their products. But this outsourcers’ argument ignores the fact that many of these intermediate goods are intra-firm inputs. In other words, they come from the Chinese and other foreign factories of U.S. companies. The House bill would result in prices increases for these firms only if they sued themselves – which is obviously absurd. Thus the prices of their goods won’t rise and their exports won’t suffer.
The outsourcers also claim that diplomacy provides a much more effective means of combating currency manipulation than unilateral moves like the currency bill. But they complete overlook a multi-year record of failure on the diplomatic front.
After all, for years, both the Bush and Obama administrations have raised currency manipulation in bilateral talks with the Chinese government and multilateral fora like the IMF and G-20. President Obama himself has raised the issue in meetings with Chinese President Hu Jintao and Premier Wen Jiabao.
The only results? The IMF reviewed China’s currency practices and its recommendations for change have been rejected by China. Moreover, this past summer, the IMF board – made up of representatives from the United States and other leading donor countries – weakened the language of a staff report describing the yuan as significantly undervalued. China has been completely free to ignore calls for revaluation at G-20 meetings, too – and has done so with impunity.
It’s true that from 2005-2008, the yuan rose in value. But the increase cited by the outsourcers is only a nominal increase. It’s been more than completely offset by increased productivity, inflation, and the enormous increase in China’s official foreign exchange reserves – nearly $2.2 trillion at last count. That is to say, the yuan today is even more undervalued than in 2005. And U.S. domestic companies and their employees, therefore, still face a China price problem just as substantial as ever, and just as artificial and unjustifiable.
It’s also vital that Senators, White House officials, and the public consider the opposition. It’s not only dangerously shortsighted, much of it is flagrantly incompetent. The U.S. multinational companies that oppose this bill do so out purely of the narrowest concept of self-interest. They have chosen to lay off American workers and close their factories here and move them to China – in part to take advantage of an undervalued Chinese currency (and other subsidies, as well as lax regulation).
These companies insist that they’re lobbying today for diplomacy. In fact, they’re simply defending their business strategies and profit margins. They also claim to be advocates for American consumers. But many of these consumers are Americans that these businesses have sent to the unemployment line when they outsourced their jobs.
Finally, it’s ironic that one of the business groups lobbying hard against H.R. 2378 is the Financial Services Forum. This, of course, is the main trade association representing the big Wall Street banks and investment companies – the very same ones who failed to see the credit and housing bubbles inflating, and whose reckless creation of and dabbling in exotic financial instruments nearly produced a global financial and economic meltdown. Many firms in the financial services industry couldn’t run their own businesses competently. Many have only survived only because of government welfare. And some are still wards of the government. Are House Members and the public supposed to take their advice on trade policy seriously?
More important, however, passing H.R. 2378 will bring a host of benefits. The bill is a measured but important first step toward strengthening the productive core of the American economy, and greatly reducing the nation’s still-dangerous reliance on foreign borrowing and spending on imports to create the illusion of prosperity. Indeed, it can help boost American economic output and job creation without spending a single tax dollar. Even better, far from increasing the country’s overall tax and financial burdens, the House bill can help reduce America’s bloated budget deficits by creating the new orders, the new jobs, and new earnings that will increase government revenues and financial stability.
H.R. 2378 will liberate many critical American industries and their employees from the heavy burden of competing against foreign governments, not foreign private companies. And it will give the Obama administration a truly effective negotiating tool – one that carries real leverage – in any discussions with the Chinese and other manipulators. Indeed, the House bill’s enactment into law will force the Chinese, and other currency manipulators, to take American negotiators more seriously. It represents nothing less than the main missing ingredient needed to ensure diplomatic success.
If the Senate fails to pass a strong companion bill for H.R. 2378, or if the President vetoes the measure, the Chinese and other manipulating countries will view the United States as a paper tiger. They will never cede an inch in any future negotiations. And the U.S. and world economies will retreat that much further from genuine, sustainable recovery. In its upcoming lame duck session, the Senate faces no higher priority than sending a strong currency manipulation bill to the White House. And the President faces no higher priority than signing it into law.
©1999-2010 United States Business & Industry Council
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About the author:
Kevin L. Kearns is President of The United States Business and Industry Council. Prior to joining USBIC in 1993, he was a Senior Fellow at the Manufacturing Policy Project, a Washington, DC think tank. For 13 years before that he was a U.S. Foreign Service Officer with overseas assignments in Germany, Korea, and Japan, where he witnessed firsthand the operation of highly cartelized, mercantilist economies.
