The One Thing That Will Help Restore U.S.-China Trade Balance

Have you heard of the U.S.-China Economic and Security Review Commission [1]? Their job is to assess the national security implications of the trade and economic relationship between the United States and the People's Republic of China. Actually, that’s a big deal, especially now.

I joined a conference call [2] today as the Commission today released its 2009 report to Congress [3]. Here is a link to the audio of today's conference call. [2]

Eric Lotke summarizes the report, in the post, Obama’s Home And The Report Is Out: China Takes Us To School [4]

The official, bipartisan China commission held hearings, traveled to China and received closed briefings on classified information. They reported back about expansion of the Chinese navy, China’s stepped-up espionage and cyber-warfare capabilities, and the world’s most sophisticated web filtering and Internet control systems.

But the economy is behind it all. China is quite literally eating our lunch. ...

[. . .] The report reads like an indictment of Chinese behavior and American compliance.

Eric continues with a summary of the report and lays out how the imbalances with China contributed to the economic collapse. Go to his post and read the rest [4].

One thing that came up in the call—featuring Carolyn Bartholomew, the chair of the U.S.-China Economic and Security Review Commission, and Clyde Prestowitz, the president of the Economic Strategy Institute—is that there is always an excuse not to do something about China's protectionism and the resulting trade imbalances. Today the excuse is that they loan us so much money (because of the Reagan/Bush debt and because we don't make things we used to make, and have to borrow money to buy them from China now) and if we make them mad they will stop loaning us money.

“This is sort of the elephant in the living room, the concern that the U.S. can’t do anything because the Chinese will stop buying our debt," said Bartholomew during the call. Before that, the argument was we couldn't upset the Chinese because then they won't help us with North Korea. At other times we couldn't do it because China had nukes. There is always an excuse for China's trade imbalance. But the fact is that China needs to sell into our market and this gives us a lot of leverage to use to improve the balance of trade.

"This fear that we can’t do anything to stick up for our own rights because if we do they will shop buying up our debt is just false. It’s just not going to happen.”

During the call I asked a question along the lines of, "If we can only do one thing, what’s the one thing we can do to get the greatest bang-for-buck?" The answer was:

1) Currency rates. Chinese manipulation of currency brings them an approximately 40 percent price advantage.
2) Industrial policy, which they prefer to call “innovation strategy.” Every other country has a strategic plan to help their own manufacturers and other businesses compete in the world. We don't.

(Yes, I know that's two things. Nothing is easy. "Nuanced" was the word they used.)

It is critical that we do something about Chinese deliberate undervaluation of their currency. It amounts to a 40 percent subsidy of Chinese goods by their government. That is just huge. and so when people look at where to buy something—consumer goods, steel, etc. they start out with a 40 percent price advantage. Changing China's currency to market rates would remove this price advantage and help bring manufacturing—and jobs—back to the U.S.

The idea that we need to develop a national policy or strategy or whatever you want to call it is essential to our future. And this is something that we aren't doing for ourselves, not something that someone else is doing to us. The first part of this is the language problem [5]. If we try to call it an "industrial policy," the idea is immediately attacked as "the government shouldn't be picking winners and losers." This is, of course, just the usual anti-government nonsense, because by doing nothing the government is currently picking China as the winner and the people of the United States as the losers.

Unfortunately, name-calling [6] seems to be an effective tactic for blocking government action. Some have suggested variations on the wording "economic strategy" or "innovation strategy." Whatever you want to call it, we need to do it. need to have some sort of national economic and innovation policy and strategy that helps Americans organize and helps us figure out how to respond to some of these things," Bartholomew said.

Listen to the call and read the report. We are losing manufacturing, and with it we are losing our ability to compete in the future! We are putting our national security at risk. By losing manufacturing we also lose the supply chain that supplies the manufacturers. And of course we lose the ability to make things which we then sell in order to obtain the money with which to buy things. If you don't make things to trade with you have to borrow.

The worst thing, though, that we lose is the research and development capability that drives the manufacturing. This is the very thing the right and the free-traders said we would keep if we let the outsourcers have their way. They said outsource what someone else does cheaper, and keep the intellectual property. But as Bartholomew points out, we are losing the research and development, and the high-tech, and the manufacturing processes -- the things that people with enough education and skill would be able to do, which are the drivers of the supposed information economy. Right.

"As China is moving up the value-added chain, it's luring r&d, so the research and development is following the manufacturing, and once you've lost your research and development capacity as well as your manufacturing capacity, you lose your innovation capability, you lose your innovative edge," Bartholomew said. "So I think how we talk about this issue moving forward is going to be very important."