What Happened in Greece ...
Didn't stay in Greece.
12:00 AM, Jun 19, 2010 • By IRWIN M. STELZER
There is a direct line from Athens to Toronto, and not only on Air Canada. The more important connection is provided by the financial markets. When Greece ran out of accounting subterfuges and the ability to borrow at non-ruinous interest rates, it set in motion a process that caused the euro to slump by some 15 percent against China’s yuan. That, in turn, made Chinese goods dearer in the eurozone, threatening China’s ability to increase export-sector jobs, and to respond to rebellious workers’ demands that their communist rulers provide decent wages and working conditions.
That bad news for China, already suffering from a loss of export jobs to lower-cost Vietnam and Cambodia, has caused the Chinese regime to retreat from its vague promises to resume the relaxation of the dollar peg. The relaxation was halted in mid-2008 when the financial crisis broke, lest it find its goods less competitive in America as well as in euroland. The net result is that relative to Europe, America has become an even more attractive market for Chinese exporters. That makes congressmen and the administration, faced with stubbornly high unemployment and congressional elections in five months, very unhappy indeed. The president has promised to create millions of new jobs in the export sector -- his absorption with personnel matters at BP has left him with no time to explain just how he plans to do that -- in the next several years, and had been counting on the Chinese to abandon some of their mercantilistic practices.
No luck. Or at least so it seems from the latest data, no matter that some of them tell only part of the story. Chinese exports jumped in May by 48.5 percent, the largest increase in six years, while America’s trade deficit inched up. The declining euro has made life difficult for U.S. firms relying on exports to euroland. And it has cut into the ability of U.S. carmakers, two of which are living on taxpayer handouts, to compete with BMW, Mercedes, and other foreign auto companies.
To make matters worse, trade, which has always been a subset of other geopolitical concerns, is now more obviously a geopolitical as well as an economic issue. The administration is trying to fend off criticism of its inability to control America’s border sufficiently to prevent a flood -- to be sure, reduced by the recession in the construction industries to be sure -- of immigrants illegally entering the country. Bad enough that these immigrants are seen to create pressure on lower-paid American workers, an important Democratic constituency. Now it also turns out that even in Ciudad Juárez, described by Bloomberg's BusinessWeek as “one of the most violent places on earth … the violence never ceases,” American firms such as Johnson & Johnson, Delphi Automotive, and Scientific Atlanta are adding tens of thousands of workers to their maquiladoras, which benefit from tax and other advantages conveyed by the North Atlantic Free Trade Agreement (NAFTA). Recall: During his election campaign, Obama promised to do something about both immigration and NAFTA, promises forgotten when he turned his attention to transforming the health care and energy sectors.
Then there is Russia and America’s farmers. The Putin government’s willingness to condone assassinations of critics, its bullying of its neighbors, and its ability to cow the president into making concessions that some see as dangerous to U.S. interests have made it unpopular among many congressmen and administration critics. Now, Russia’s wheat farmers are undercutting America’s, increasing Russia’ global market share from 0.5 percent in 2000 to 14 percent today, while the share of U.S. farmers fell from 26 percent to 19 percent. Senators from farm states are beginning to demand help for their constituents -- subsidies, or bilateral trade deals with wheat-importing countries.
Until now, the administration has tried to hold the line against Senator Chuck Schumer, a New York Democrat, and his followers who are demanding that China be named by the Treasury a “currency manipulator,” and advocating for tariffs up to 40 percent imposed on its goods to offset the undervaluation of the yuan. That is more difficult now that Treasury Secretary Timothy Geithner, a Mandarin-speaker who has counseled patience in dealing with the Chinese, has admitted to Congress that he does not expect to see “meaningful progress in the short term.”
When Obama arrives in Toronto for this week’s G20 meeting he will be under pressure to kick some asses that don’t belong to BP executives. For adding to congressional pressure to get the Chinese to ease the currency peg is new heat from American businesses that previously felt it would be best to allow the Chinese to move at their own pace. That was then, and this is now. Many leading members of the business community have had enough, and are backing an investigation by the International Trade Commission into China’s theft of intellectual property, and its procurement practices.
For one thing, China is attempting to force American firms to set up factories in China by limiting exports of needed minerals. For another, the Chinese regime is responding to lobbyists for state-owned companies by requiring local procurement officials to give preference to products that incorporate “indigenous innovation,” and is telling American firms that want to tap its markets that they must first share their intellectual property with Chinese manufacturers. If the Americans refuse, so be it: China has no need for foreign investment capital. Having cornered the U.S. market for many labor-intensive goods, the Chinese leaders are deploying a variety of protectionist measures to enable local manufacturers to move up the value scale.
Unfortunately for the president, the derrieres on which he is being urged to implant his footprint is the one on which his largest creditor sits. Obama is running staggering deficits, and is planning to increase spending on a second stimulus and on his new energy program. If China stops buying his IOUs or, worse, starts selling some U.S. Treasury notes, interest rates will rise and any hopes of a robust pre-election recovery in the jobs market will fade.
If the president can’t persuade his largest creditor to reverse its protectionist course, he will have to concede to the growing protectionist clamor from Congress. Geithner admits that congressional demands to force China’s hands are “overwhelmingly strong [and] bipartisan.” Sander Levin, the Democrat who is acting chairman of the House Ways and Means Committee (in the absence of ethically challenged Charlie Rangel), says that if the president does not get the Chinese to change their trade policy at next week’s G20 meeting, “Congress will act.”
Talk of a high-level U.S.-China Strategic and Economic Dialogue to increase Sino-American cooperation just won’t do. Neither will the hints by Chinese president Hu Jintao at last month’s meeting with Geithner that he will reform his nation’s exchange rate policy -- some day. The current cold war over trade just might be heating up.
What happened in Greece ... didn’t stay in Greece.
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