China is no job-stealing bully
The Bush administration
blames China for the
loss of U.S.
manufacturing jobs.
Here’s why they're
wrong, and why picking a
fight with China is
picking a fight with
ourselves.
By Jon D. Markman
It’s Halloween, and the
Bush administration is
going all out to frighten
Americans into believing
China is an evil monster
trying to steal their jobs
and the future. But don’t let them scare you.
This week, and probably for the next several months as the presidential election
gets closer, we’re going to hear a lot of noise, in particular out of Washington,
about China’s currency -- known both as the renminbi and the yuan -- and its
manufacturing policies. It’s important that you not tune it out, whether you’re an
investor, small business owner or an employee.
Essentially, the administration is going to try to blame the high U.S.
unemployment rate on the Chinese. They are going to claim Beijing is violating
World Trade Organization and International Monetary Fund rules by
“manipulating” the renminbi through complex currency transactions in a blatant
attempt to keep it undervalued. A purposefully undervalued currency makes a
country’s exports cheaper than they would otherwise be, providing an unfair
trade advantage.
You won’t have to wait long to see how this plays out. On Capitol Hill Thursday,
the Bush administration’s stance toward China will come into potentially
explosive view in testimony that could affect everything from the prospect of
financial stability in Asia to the value of tech stocks on Wall Street and the price
of pajamas in Arkansas.
The venue will be Treasury Secretary John Snow’s required annual testimony to
the Senate Banking Committee on trading partners’ currency practices. For
years, this has been just another obscure date on the congressional calendar,
but since the political wing of the White House decided that President Bush’s
standing in industrial states would improve if he blamed the decline in U.S. jobs
on China, the secretary’s appearance has taken on a new level of importance.
Either way, this is a big deal
Technically, the administration is required only to
declare whether countries are manipulating their currencies to keep them
artificially undervalued. If Snow finds China guilty of unfairly weakening the
renminbi, then his team must initiate formal negotiations to resolve the
complaint.
Big deal, right? It is a big deal whether Snow -- who has been humiliated by
unsuccessful, informal renminbi negotiations for months -- declares the Chinese
guilty of manipulation or not:
A positive finding would push the executive branch deeper into a
financial Cold War with the world’s most populous country, with
ever-escalating demands that China believes it cannot meet without
destabilizing its social structure. China could retaliate by halting its
massive purchases of U.S. government bonds, which helps to finance our
budget deficit, or by switching gradually to the euro as its reserve
currency. Either result would push U.S. interest rates up and potentially
stall the global economic recovery. (Asian central banks keep 80% to
90% of their $1.7 trillion in reserves invested in U.S. debt, according to
government statistics.)
A negative finding would encourage opportunists in Congress to take
up the fight instead, pushing forward on bills to impose big new tariffs on
Chinese imports. Not only would that boost the cost of things like
children’s sleepwear at Wal-Mart Stores (WMT, news, msgs) or mobile
phones at RadioShack (RSH, news, msgs), it also could lead to
economic brinksmanship around the world. Virtually every major financial
crisis in modern world history has started with politically motivated
protectionism.
U.S. monetary hawks contend that the renminbi is 25% to 40% undervalued,
thus making the price of Chinese goods so cheap that American manufacturers
can’t compete. Few experts disagree. Federal Reserve Chairman Alan
Greenspan, in testimony over the summer, said that there was “no question”
China was “suppressing” the value of its currency. And academics such as
George Mason University professor Patrick Mulloy, an expert on international
trade law and former counsel to the Senate Banking Committee, believe that
Snow “should take on” the Chinese with a finding of manipulation.
An exercise in shifting blame
Yet skeptics believe that debate over Chinese currency puts the blame for the
loss of manufacturing jobs entirely in the wrong place -- insisting that we are
simply witnessing economic evolution at work and that protectionism would
make America weaker, not stronger. Critics of U.S. policy believe that
confrontationists ignore ample facts to the contrary when they state that if the
yuan were to float freely on currency markets from its current peg at 8.3 to the
U.S. dollar, the Behemoth of Beijing would not be in a position to “steal” so
many jobs from the U.S. heartland.
For one thing, manufacturing-job losses are primarily a historic inevitability
propelled by technological advances just like the loss of agricultural jobs was at
the turn of the last century. And for another, it might surprise many to learn that
China is far from a financial powerhouse: It is deeply impoverished except for a
few tiny pockets of free enterprise near the coast; it is ravished by drought and
pollution; it has managed to develop no major companies with global markets or
brands; and its banking system is incredibly fragile. China has just two
companies in the Financial Times 500, which ranks companies by market
capitalization: the state oil company CNOOC (CEO, news, msgs) and the
domestically focused China Mobile (CHL, news, msgs).
It’s not as if the Chinese equivalent of Motorola (MOT, news, msgs) or Ford
Motor (F, news, msgs) has enriched itself at the expense of U.S. working
people and consumers. It is Motorola and Ford themselves -- and their
customers -- that have been so enriched through lower manufacturing costs and
lower consumer prices. American, Japanese and other foreign companies with
manufacturing operations in China account for nearly half of the goods being
exported by China into the world market.
When the U.S. picks a fight with China over its currency, it is picking a fight with
its own citizens. It’s not much of an exaggeration to suggest that the largest
Chinese company in the world is Wal-Mart, which makes its popular
house-brand goods there.
Undervalued currency not the problem
In testimony last month before a blue-ribbon panel assigned by Congress to
study U.S.-China trade, Chicago economist David Hale pointed out that the
major cause of China’s booming exports is not an undervalued currency but a
surge of what academics call “foreign direct investment.” China now has $400
billion in such investment, compared to $497 billion for the United Kingdom and
$480 billion for Germany, according to Hale. As this investment is expanding by
$55 billion per year, Hale says, China will soon have the second-largest
investment by foreigners in the world, after the United States. He notes that
China’s openness to direct investment is in “striking contrast” to Japan and
Korea, which banned direct investment for half a century to nurture domestic
companies and still have comparatively little.
Hale observes that the major complaints from corporate America on China are
coming from small or medium-sized companies that don’t have the capital to
invest in China or penetrate its market. He concludes that if Beijing were to
simply improve market access for small companies there would be fewer
demands for trade protection or currency revaluation.
Protectionism, indeed, could backfire and delay China’s progress toward
becoming a terrific market for Western finished goods. Forget about the
fearsome image of China conjured up by U.S. politicians focused on making it
more of a strategic enemy than partner. In another paper submitted to the
U.S.-China Economic and Security Review Commission last month, Peter
Nolan, professor of Chinese management at the University of Cambridge in
London, made several interesting points about a country we probably ought to
be helping, not impeding:
China’s population of almost 1.3 billion increases by 15 million a year.
Almost 70% still live in the countryside, where agriculture employment is
stagnant and real incomes are dropping. There are estimated to be 150
million “surplus” farm workers. Unemployment has increased explosively
as a result of reform in state-owned enterprises.
Privatization has lead to a wide gulf between the few haves and the many
have-nots. Just 0.16% of the population controls 65% of the country’s
$1.5 trillion in liquid assets in mainland banks.
About 38% of the country suffers from serious soil erosion. The area of
desert is increasing at 1,500 square miles per year. In the past four
decades, almost half of China’s forests have been destroyed, there is a
serious shortage of fresh water, and water pollution is rampant.
China’s industrial growth has obviously led to an expansion of
energy-intensive industries. China has overtaken the United States as the
world’s biggest coal producer, accounting for 30% of global output. The
ways in which coal is mined, transported and used as a fuel for 70% of
electricity generation approximates that of advanced economies before
the 1950s, creating a widespread air pollution problem.
China’s largest financial firms have been plagued with corruption and
saddled with billions of dollars in non-performing loans. They are nowhere
close to Western banks in terms of size or capabilities. Citigroup alone
has annual revenues of $93 billion, many times greater than all of China’s
four big banks put together.
In short, China is more bogeyman than bully in its trade relationship with the
United States. An attempt to vilify it over the loss of manufacturing jobs is
short-sighted, giving fuel to critics who believe that the Bush administration has
progressed from a militarization of its foreign policy to a criminalization of its
trade policy.
President Bush is walking a tightrope as he balances an economic policy bent
on antagonizing China with a foreign policy that desperately needs China’s help
on North Korea. At the moment, it seems aggression is winning out over
diplomacy, and one wonders if that could be bad news for investors.
Fine Print
You can read all about the U.S.-China Economic and Security Review
Commission at its well-documented Web site. . . . On Oct. 15, the commission
sent a report to Congress declaring that it believed China had violated its
International Monetary Fund and World Trade Organization obligations by
manipulating its currency for trade advantage. It recommended the Treasury
Department “immediately enter into formal negotiations with the Chinese
government” over its undervalued currency. The commission urged Congress to
use its legislative powers “to force action by the U.S. and Chinese Governments
to address this unfair and mercantilist trade practice” should the Treasury’s
efforts prove ineffective. Here’s the press release. . . . An interview by China
Daily with Zhou Xiaochuan, governor of the People's Bank of China, provided
useful insights on the yuan revaluation issue. . . . U.S. companies continued the
torrid pace of their investments in China last week.
Motorola (MOT, news, msgs) said it would transfer the ownership of a $1 billion
chip plant in China to Shanghai-based Semiconductor Manufacturing
International in exchange for a stake in the leading Chinese chipmaker.
Meanwhile, Eastman Kodak (EK, news, msgs) said it would acquire 20% of the
shares of China Lucky Film in a deal estimated at $100 million. China is
Kodak’s second-largest market for photographic film. . . . Economist David Hale
has a good article on Chinese trade in the latest issue of Foreign Affairs.
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