Irwin M. Stelzer, contributing writer
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THE AMERICAN ECONOMY seems bedeviled by twin towers. The terrorist destruction of the World Trade Center has left a residue of homeland security costs that will be a drag on the economy for years to come. Then there are those financial twin towers--the trade and budget deficits--that have caused a periodic outbreak of nervousness among policymakers for decades.
Now we have a new pair of threats, the towering pile of U.S. government IOUs held by China, and the increasing number of barrels of imported oil that America needs to keep its factories operating, its trucks rolling, and its citizens moving from meeting to meeting. Last week the vulnerability of America's economic recovery to these threats became obvious.
In an effort to appease industries that have been hurt by competition from imports, the Bush administration concluded that it had to do something about China, which is running a trade surplus with America of well over $100 billion per year. With new polls showing that president Bush is now running neck-and-neck with several of his potential opponents and the unemployment rate failing to respond instantly to an economic growth rate that is now probably approaching 6 percent, the president's men want to be seen to be tough on countries that are "stealing our jobs."
That leads them straight to China, whose undervalued currency makes Chinese goods cheap in America and made-in-the-USA products expensive over there. Never mind that the trade deficit issue is more complicated than the simple trade figures suggest. Take Wal-Mart. The giant
retailer imports about $12 billion in goods from China every year, enabling it to sell trainers, T-shirts, and a host of other goods to American consumers at prices they just love.
So is the trade deficit costing Americans jobs? Perhaps not. Stephanie Pomboy of consultants MacroMavens reports that "Since China first pegged the Yuan to the dollar in 1994, Wal-Mart has nearly tripled its workforce from 528,000 to 1.4 million today. And that's before counting the jobs associated with its plans to add 210 supercenters and 40 Sam's clubs [Wal-Mart's bulk discounter] stores this year."
The hundreds of thousands hired by Wal-Mart probably don't realize that their jobs depend on their employer's continued access to Chinese goods. But the 300,000-500,000 U.S. workers who lost their jobs over the past three years as a result of the "relocation of U.S. production to overseas affiliates" are certain that low-cost Chinese labor and the undervalued currency are the source of their woes. And they don't care that job losses due to such relocations come to only 0.1 percent of employment per year.
For Treasury Secretary John Snow, politics trumps economics. So he used the occasion of last week's meeting of the G-7 industrialized countries in Dubai to persuade his colleagues to endorse a call for a new exchange rate regime. The new program would require China to allow its currency to float higher, making its products more expensive in world markets.
BEWARE of what you wish for. Sitting in the vaults of China's central bank are hundreds of billions of dollars of Uncle Sam's IOUs. China uses the mounting pile of dollars from its favorable trade balance to buy U.S. Treasury bonds and notes. Chinese demand for these securities keeps their price up and, conversely, interest rates in the United States low. If China were to begin selling its holdings, or even announce that it has no interest in adding to them, the price of treasuries would fall, interest rates would rise, and the U.S. economy would slow.
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