On Trade Wars and Currency Skirmishes
The early battles have already been fought.
12:00 AM, Oct 9, 2010 • By IRWIN M. STELZER
Some 53 percent of Americans now say they don’t much like free trade, compared with 32 percent a decade ago. In part that is due to unhappiness with the jobs situation. Today’s jobs report might have cheered specialists who dig beneath the headline numbers: 64,000 private sector jobs were created in September. But non-experts focus on the headline number: a net loss of 95,000 jobs as state and local governments laid off workers, and the construction and manufacturing sectors did the same. The unemployment rate remains stuck at 9.6 percent. Almost 15 million Americans are actively and, with over six million out of work for 27 weeks or more, desperately looking for work. Throw in workers too discouraged to continue looking for work, and those involuntarily working short hours, and the total soars to almost 26.4 million, or 17.1 percent of the work force.
But there’s more to rising protectionist fervor. Yes, we believe that China is manipulating its currency, which it is; that the manipulation keeps the value of the yuan artificially low, which it does; and that the undervalued yuan to some unknowable extent is contributing to a flood of imports and joblessness in America, which it is. We also know that China has no intention of changing its policy. Responding to pressure from the U.S. Congress and from the EU, Chinese premier Wen Jiabao said the regime will not bend, because if the yuan rises, low-margin Chinese exporters would go out of business, causing “social and economic turbulence … [that] would be a disaster for the world.” More likely, as he preferred not to add, a disaster for a regime that, lacking democratic legitimacy, can survive only by delivering a better material life for the still-poor Chinese masses. So America’s appeal for support to the International Monetary Fund at this weekend’s meeting of finance ministers can only be met with, “We’d like to help if we could…”
Still, even if China were to accede to its trading partners’ demands, most Americans would be unappeased. They see not only an unfair trading partner, but also a nation that is using the fruits of that unfair trading to threaten America’s position in the world. No good calling this a new version of the old xenophobic fear of the “yellow peril”; this fear is well founded.
Start with the fact that America’s fiscal deficit is adding to pressures to reduce military spending, just as fiscal deficits in Europe are forcing our allies to cut back their already puny defense spending in order to minimize the shrinking of their welfare states. At the same time, China is both expanding its military – to the point where the Peoples Liberation Army is now an important player in choosing successors to the current Communist leadership and in shaping foreign policy – and becoming more belligerent. So when a dispute with Japan over fishing rights in the East China Sea erupted, it simply halted exports of rare earth minerals essential to the production of iPhones, hybrid cars, and many other products. China controls about half of the world’s output, and 90 percent of the related refining capacity, in part due to shutdowns of U.S. facilities forced by the Environmental Protection Agency. Most Americans never heard of this stuff before now, but we know that when China is willing to use its minerals in the same way the Russia uses its natural gas exports – to cow U.S. allies – we have reason to be uneasy.
Most non-experts also might not have details about China’s use of its vast currency reserves, but they know that more and more countries are looking to the regime, and fewer and fewer to America for leadership. It was Winston Churchill and Harry Truman who took the steps necessary to prevent a communist takeover of Greece; it is Chinese premier Wen Jiabao who now makes the running by promising to buy Greek bonds when those are once again offered on world markets, and to help that bankrupt nation’s recovery with significant investments in its economy. Oh, and it would be much appreciated if the EU would declare China a “market economy” so that it would be less subject to dumping charges.
This contrast between the expanding influence of China, now a favored trading partner of Brazil and other Latin American countries, and the diminished influence of America is not all that is on Americans’ minds. They worry that China is locking up supplies of vital raw materials, from oil to food, by befriending Iran and other countries hostile to American interests. They see their president humiliated during his visit to China by the regime’s refusal to give him access to anything except hand-picked audiences, and later, at a climate change conference in Copenhagen, being dressed down by a low-level Chinese official when he attempted to cut an international climate change deal.
All of which means that the changes in the trade balance that might result from an appreciation of the yuan will do little to rekindle American enthusiasm for free trade. There is more to American irritation with China than the exchange rate, or even China’s persistent theft of American intellectual property. There is concern that a new enemy is emerging while, to borrow from Jack Kennedy, America’s political establishment sleeps.
The rest of the world is more narrowly focused on China’s currency manipulation. Since its trading partners can’t get China to increase the value of its currency, which is dropping in lock step with the dollar, they have decided to reduce the value of their own currencies in a competitive round of devaluations that bode ill for world economic recovery. Japan is intervening to drive down the yen, Brazil is taking steps to lower the value of the real, and France’s president, Nikolas Sarkozy, wants to put in place a new currency system that will prevent the euro from appreciating.
John Lipsky, first deputy managing director of the International Monetary Fund, says there is no currency war. Treasury secretary Timothy Geithner, the sole survivor of the original Obama economic team, says, “We’re not going to have a trade war. We’re not going to have currency wars.” Unfortunately, those estimable gentlemen are confusing their hopes with reality: The early skirmishes in those wars have already been fought.
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