The Looming Trade War With China

by MIKE WHITNEY

A war of words has broken out between China and the United States and the pundits are predicting that it will end in a  full-blown trade war. The Obama administration thinks that China is manipulating its currency to gain an unfair trade advantage and increase its exports. China’s Premier Wen Jiabao’s adamantly denies the charge.  "I do not think the renminbi is undervalued" he says. "And we are opposed to countries pointing fingers at each other or taking strong measures to force other countries to appreciate their currencies….If the United States uses the exchange rate to start a new trade war, China will be hurt. But the American people and US companies will be hurt even more."

President Obama has tried a number of things to get China to break the dollar-link and let its currency appreciate, but, so far, nothing has worked.  The president met with Tibet’s Dalai Lama,  in an attempt to publicly embarrass Premier Wen so that he’d rethink his exchange-rate policy. But the meeting only angered China and further strained relations between the two trade giants. The administration also announced plans to sell high-tech weapons to Taiwan, knowing the transaction would ruffle feathers in Beijing.  China threatened to retaliate, but  refused to budge on the central issue. 

This week, a bipartisan group of senators joined the fray by introducing legislation that will require the president to take "reciprocal action" against any "country that uses its  foreign exchange policy as a countervailing subsidy."  The bill is clearly aimed at China and increases the likelihood that Obama will be forced to put punitive tariffs on Chinese products and start a trade war with America’s biggest creditor.

But will it really happen?

There’s no question that the renminbi is undervalued or that China manipulates its currency.  The dollar-peg allows China to underbid US manufacturers on every product by slashing the value of its currency. The practice amounts to a direct subsidy to Chinese industry and costs the US dearly in terms of exports and jobs. But the current flap has nothing to do with currency manipulation. That’s just a public relations smokescreen.  What’s really going on is that US corporations operating in China are getting squeezed on big deals, and they don’t like it. So they’re using their political muscle to beat up on China. The Wall Street Journal explains it like this:

"A growing number of U.S. companies feel unwelcome in China, according to a new survey by the American Chamber of Commerce in China…Negative sentiment among Amcham’s members, which traditionally have been a strong lobby in Washington arguing for more engagement with China, adds to wider risks in U.S.-China relations….
 
“Amcham conducted the latest survey because it was concerned about the deteriorating investment environment and the impact of the rules on indigenous innovation….

“In late October, three Chinese ministries posted a joint notice requiring technology vendors to gain accreditation for their products before they could be included in a government-procurement catalog of products containing ‘indigenous innovation.’ The catalog will cover dozens of products sold by foreign companies, including servers, mobile base stations, security and finance software, and wind-power generators….

“However, this broader push for ‘indigenous innovation’ has already been interpreted and implemented in different ways across the country, and industry groups say that in some cases provincial-level officials have taken it upon themselves to implement their own preferential purchasing practices. That explains why some companies in the Amcham survey say their businesses are already taking a hit…

"A U.S. Treasury report due next month must decide whether to label China a currency manipulator, which would trigger talks between the countries followed possibly by sanctions." (US firms feel shut out in China, Andrew Browne and Loretta Chow, Wall Street Journal)

To summarize: The multinationals see a "deteriorating investment environment" because of "rules on indigenous innovation." In other words, China’s leaders want to strengthen their own industries and keep more of the profits for themselves (which is what governments are supposed to do.) The proposed rules will affect "dozens of products sold by foreign companies, including servers, mobile base stations, security and finance software, and wind-power generators." So, naturally, the multinationals are angry. The Chinese government is "implementing their own preferential purchasing practices", which means they are buying more China-made products. This is causing real pain for the multinationals that are "already taking a hit."

So the current confrontation has nothing to do with currency manipulation. It’s about whiny corporations that need to Uncle Sam’s help to get China to play fair.  And the White House is only too happy to oblige. After all, Obama task is to make sure that the rules which enrich the multinationals ("free trade") are strictly enforced. Sometimes that involves tough talk and arm twisting, but no one wants a trade war. Protectionism is bad for business; it pushes prices up, lowers demand, and hurts profits. What good is that? Here’s an excerpt from the Washington Post which explains what’s really going on behind the splashy headlines:

"If the United States does decide to impose tariffs on China, Chen said, American companies operating in China, which account for more than 60 percent of China’s exports to the United States, would surely be hurt the most. ‘In the end,’ Chen said, ‘America is the one that needs to adjust.’

"While some analysts have predicted that China would soon start to let the yuan appreciate, Chen’s interview illustrated the fact that there is a strong lobby in China opposing revaluation. One reason why a revaluation would be dangerous for China, Chen said, is that profit margins for Chinese exporters are tiny — ranging from 1.7 to two percentage points." ("China’s commerce minister: U.S. has the most to lose in a trade war" Washington Post)

Read that again. "American companies…. account for more than 60 percent of China’s exports to the United States." So, the reason unemployment is rising in the US, is because US-owned corporations are diverting those jobs to sweatshops in China so they can fatten the bottom line. China is not to blame, after all.

At the same time, the profits for the host-nation (China) are a measly 1.7 percent; hardly enough to make it worth their while. The multinationals are making the windfall, not China.

Does anyone seriously believe that the corporations would slit their own throat by starting a trade war?

Consider this: Maybe China’s "currency manipulation" policy was just one of the many preconditions demanded by foreign corporations before they relocated to China. Naturally they would want to ensure that they’d have an advantage over the competition regardless of the costs to China or workers in America. In other words, the multinationals are probably the driving force behind the exchange rate.

Here’s an excerpt from the American Prospect:

"China policy has, over the past two decades, been driven by the interests of the multinational corporations, and those global firms have benefited from many of China’s policies. Starting several decades ago, it was a handful of the exporting elite — Boeing, Motorola, and GE among them — who argued persuasively to the Bush, Clinton, and Bush administrations that U.S. economic interests would be served if only these companies had access to the Chinese consumer…. As more and more companies signed on, and the investment banks got involved, production shifted to China….

“Instead of adjusting our trade and economic policy, U.S. policy-makers adjusted the rationale for the continuation of a status quo that was failing the American worker. Of the estimated 1.94 million U.S. jobs lost to China since China’s economic reforms started 30 years ago, 1.05 million of them — over half — were lost since China acceded to the WTO in 2001…….. Today, of course, we see the result of that sort of thinking. With the global economic crisis, American workers have ended up without jobs and without pension funds.

“….At the behest of U.S. based multinationals, Washington has championed the causes of corporate interests masquerading as free trade." ("The Great Industrial Wall of China", Carolyn Bartholomew, The American Prospect)

Bartholomew’s article is a good summary of the problems with globalization, but it places too much blame on China and too little on the corporations that are shaping policy. China’s newfound prosperity has less to do with its own innate ability to beat the competition, than it does with the machinations of capitalism and its never-ending search for lower  production costs through cheap labor. That said, China still faces stiff headwinds ahead even if a trade war doesn’t break out. Here’s a clip from China Daily which states that the Chinese government now anticipate a trade DEFICIT for March:

"The country will probably see a ‘record trade deficit’ in March thanks to surging imports, Minister of Commerce Chen Deming said on Sunday, while warning that Beijing will ‘fight back’ if Washington labels China a currency manipulator.

Speaking at the three-day China Development Forum that ends on Monday, Chen said: ‘I believe there will be a trade deficit in March’ – which will be the first since May 2004."

But is it true or just a hoax to avoid a trade war?

According to the World Bank, China’s GDP will soar to 9.5 percent in 2010. So it could be that China’s economy really is overheating and inflation is becoming a problem. The situation may be further aggravated by the dollar-peg which keeps rates fixed to the Fed’s zero-interest rates. Here’s how economist Marshall Auerback explains what is going on:

"The (Chinese) government has engineered an enormous increase in money and credit in the past year.  In fact, it seems to be as great as 5 years’ growth in credit in the previous Chinese bubble. The increase in money and credit is so great and so abrupt that you tend to get a high inflation quite quickly even if there are under utilized resources. Add to this the fact that China simultaneously is providing massive fiscal stimulus.

"This combination is the making of a very messy situation. If China seeks to sustain demand via fiscal policy, the result is likely to be a big inflation problem….

"Inflation can take off and thereby begin to erode the competitiveness of Chinese exports…. A continued high rate of inflation relative to its trade partners would push up the price of goods in home currency terms, which in turn translates into higher export prices. This might be the real reason why China is so reticent to revalue its currency. The Americans might go crazy if the Chinese devalued, but if the inflation is high enough, they might have to do it, as it will severely erode their terms of trade and cause their tradeables sector to collapse.

("Thinking the Unthinkable: What if China devalues the Renminbi?" Marshall Auerback, New Deal 2.0)

China’s economy is dangerously off-kilter and headed for a reckoning. The current rate of investment is over 50 per cent and rising. That’s clearly unsustainable. By focusing on real estate and exports, China has failed to create strong domestic demand; personal consumption needs to increase and investment needs to slow. But that will take time, and now the situation is dire. If exports collapse because of a stronger currency, China might do "the unthinkable" (as Auerback suggests) and devalue the remnimbi which would further widen the trade deficits, exacerbate global imbalances, and increase the present rate of inflation. That would force Obama to step in and take decisive action whether he wants to or not.  Perhaps a full-blown trade war is not so far fetched, after all.

MIKE WHITNEY lives in Washington state. He can be reached at fergiewhitney@msn.com

 

WORDS THAT STICK

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

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