China - Industrial Policy, Not Just Currency

America needs an economic/industrial policy like other countries have. THAT is how we will pay off our debt -- by earning money.

You may have read about the back-and-forth on Chinese currency this weekend. China said they would [1] let their exchange rate adjust, and then pulled the football away [2]. The deal is that China manipulates its currency to keep undervalued, which makes Chinese good cost less than they otherwise would on the world market. So they end getting the manufacturing business (and jobs and supply chain and R&D and ...) In fact it looks like [3] next year China will replace the US as the #1 manufacturer.

But it is not just cheating on currency that is the problem. Today's news brings a reminder of another reason it costs less to make things in China: 47 killed when explosion rips through China mine [4],

The blast hit a mine in Pingdingshan city in the province of Henan, the State Administration of Work Safety said. Seventy-five miners were trapped initially but 28 escaped, the central government said on its website.

This is not an uncommon headline. We see headlines like this from China all the time. More than 2,600 miners were killed just last year.

When life is that cheap you can charge less for things.

We all know about the environmental problems in China, another reason things made there cost less. It is so bad that there are "cancer villages [5]" near polluting factories.

Here is a list [6] of the main unfair advantages China uses to its advantage:

1) Currency manipulation. China "pegs" its currency at a very low, or "weak" rate, so goods from China cost up to 40% less than they otherwise should.
2) Labor-rights suppression has lowered manufacturing wages of Chinese workers by 47% to 86%.
3) There is massive direct government subsidization of export production in many key industries.
4) China allows environmental degradation that ends up affecting all of us.
5) Intellectual property theft and piracy mean that American products that could be sold are stolen instead.
6) China has a number of policies that block U.S. firms from market access.

All of these things that China is doing are collectively called a national industrial policy. China has one. We don't. China's share of the world's business has grown exponentially because they have and follow a national industrial policy. Ours has declined dramatically because we don't. I'm trying to drop a hint here, but for those in Washington who aren't following let me spell it out more clearly: America needs to develop and follow a national industrial policy.

Other countries are aggressively pursuing industrial policies. Germany is going to try to export its way out of their "austerity" posture. So is Japan. Where will we land when they do?

We don't have to cheat, but we have to protect our interests when others cheat. And we do need to start being strategic. For example, China's stimulus package [7] was strategic and is paying off [8]. They are getting wind turbine and high-speed rail business around the world now, and we aren't.

From a year ago: China's Stimulus Package: A Breakdown of Spending [9]:

Compare the chart above to how we used our smaller (China spent 14% of 2008 GDP, US about 6%) stimulus package. The first chart of our plan [10] from the stimulus bill (as proposed) provides detail. The second chart from Think Progress [11] shows major categories.

China focused on investment in public infrastructure, which leads to future economic growth. We are mired in conservative ideology so we focused on tax cuts, which do little more than increase our debt.

Quick lessons on strategy:

- China spent serious money, quickly. It worked.
- China focused on infrastructure. It worked.
- China has a national economic/manufacturing strategy and invests in R&D and developing strategically important industries. We don't.
- Don't cut taxes, it only causes massive yearly deficits and accumulated debt.

Not having a clear forward-looking policy is hurting us. But this isn’t really accurate, because even if we don’t have a policy we have one, because it IS a policy not to have one. A vacuum is a policy. So current American policy appears to be:

• Send manufacturing plants to other countries that do have proactive industrial policies.

Face it, if we do not have an active and engaged industrial policy we are handing the business over to those who do. And they do. And we are. Meanwhile there are interests who benefit from this (lack of) policy and fight to keep it as it is. It is time to overcome the ideological "free market" and anti-government ideology and do what we need to do to compete in the world.

(This post originated at Open Left [12].)