China and Currency Manipulation: Export Subsidy
In commenting on the U.S. $63.9 billion trade deficit, Professor Morici makes a number of important observations:
- Since December 2001, the monthly trade deficit has increased 140%
- To finance trade deficits, Americas have borrowed $6 trillion over and above foreign direct investment in the U.S.
- Petroleum, China, and automotive products account for 81% of the trade deficit.
Petroleum: The result of a short-sighted policy on the part of both Democrats and Republicans.
China: A number of points here.
- “Even though China has raised the value of the yuan about 5% every twelve months, the yuan remains undervalued against the dollar by at least 40%.”
- By purchasing $250 billion in U.S. and foreign currency and securities, China “limits appreciation of the yuan against the dollar and drive it down against the euro. This comes to 24 percent of its exports,” creating a “24 percent ‘off-budget’ subsidy on foreign sales of Chinese goods, and an even larger implicit tariff on Chinese imports.”
Morici argues, and I agree, that China’s currency manipulation is a clear violation of WTO rules, as well as its numerous tax incentives, rebates, and low interest loans.
Why have the Bush administration and Congress not taken strong action? Why have so many turned a blind eye. Remember Schumer’s visit to China and his strong words? How long ago was that?
Well, what happened? Nada. Nothing. Zilch. Meanwhile, China is becoming increasingly more sophisticated and efficient, replacing brute labor with up-to-date plants. Again, why has the U.S. been reluctant to press its case, labeling anyone who speaks out as protectionist?
Morici hits the target when he says:
Many U.S. multinationals corporations, like GE, Caterpillar and GM, have earned huge profits investing in China’s protected markets. Those MNCs have profited greatly from the conditions in China created by its blatant violations of WTO rules and currency subsidies; hence, it is not surprising they have lobbied the Congress and Administration not to take action against Chinese mercantilism and have persistently characterized as protectionist U.S. advocates for affirmative steps to offset China’s export subsidies. The Bush Administration has bent to these pressures, refusing to even acknowledge the subsidy on exports China’s currency market intervention creates, and has placed these corporate interests ahead of free trade principles.
Morici should have added Delphi to his list. Our multinationals have decoupled from our economy.
If Schumer really wants a tariff on Chinese exports, I have a suggestion: Tariff only Chinese goods that U.S. firms export from China. Leave the indigenous Chinese firms alone. K Street, I bet, would go into overdrive on that suggestion.
Turning again to China, I would add that suppressing labor’s right to bargain collectively is also a subsidy. If the market place is to work, then labor’s rights should not be abridge, for labor is as much a part of the market place as capital.
But China is about to pass a “Contract Labor” law. I will be interested in seeing its final form. Scuttlebutt has it that the multinationals have not been too happy with the draft form of the law, doing their best to gut it while maintaining good PR.