China and the Weak Yuan
On September 29, the US House of Representatives, on a lopsided 346-79 vote, authorized the US Commerce Department to impose duties on imports from countries with undervalued currencies. Read that China. In a Congress riven by partisan bickering, the vote represented a rare signal victory for bipartisanship. But it is probably unrealistic to believe it will have any effect on the US trade deficit with China.
Never mind that it is one more setback in what could eventually blow up into a trade war. China's Jiang Yu, the spokeswoman for the Ministry of Foreign Affairs, issued a statement saying that "We firmly oppose the US Congress approving the bill. Exercising protectionism only severely damages the relationship and will have a negative impact on both economies and the global economy."
It is the latest salvo by the US against China for keeping its currency undervalued against the US dollar, which, the US alleges has resulted in massive and historic trade deficits. For the first nine months of 2010, according to figures published by the US Commerce Department in its monthly International Trade in Goods and Services Report, China is running a massive US$145.37 billion trade surplus as a flood of Chinese goods arrive at US ports and carriers go back largely empty. In the same period, the US exported an anemic US$48.551 billion to China, a good deal of that in goods to be assembled by Chinese workers and re-exported to the United States. The yuan trades at about 6.8:US$1. The Americans would like to see that rise by about 25 percent. The average manufacturing wage in China was 81 cents per hour in 2006, compared to total compensation of US$29.98 per hour for US manufacturing workers, meaning US manufacturing wages were 37 times higher than those in China, according to China's Manufacturing Employment and Compensation Costs: 2002-06, in the April 2009 edition of Monthly Labor Review. So the yuan is going to have to rise a long way for American workers to become competitive.
But wind the film back to 1985, when there was another villain – Japan, which was accused of keeping its currency unnaturally devalued against the US and profiting by exporting billions of dollars of goods – from cars to tape recorders to hi-fi sets to a vast cornucopia of other exports – to the US. At that time, the Japanese yen traded at ¥239:US$1. In 1985, the Japanese were exporting US$68.78 billion in goods to the US, while the US exported just US$22.63 billion to Japan.At that point, central bankers from 10 major nations met at the Plaza Hotel in New York to hammer out what has since been known as the Plaza Accord, an agreement by which the Japanese were to dramatically allow the yen to float upwards. By 1988, three years later, the yen had risen to ¥128:US$1, almost doubling its value against the dollar and kicking off one of the biggest investment waves in history as endaka – the high yen, as it was known – allowed the Japanese to buy up what they thought were cheap properties across the United States. Actually, they got taken badly on most of the deals.
And what happened to Japan's surplus with the United States? In 1988, when the yen had fallen to ¥128, the Japanese trade surplus with the United States had not fallen but had grown from US$46.15 billion to US$51.753 billion. In the 25 years since, Japan's trade surplus with the US has never fallen below US$43 billion. By the middle of this decade, just before the global financial crisis and the deflation of the US housing bubble, the Japanese trade balance with the US was running well over US$80 billion annually. In 2007, just before the crisis took hold, the Japanese trade balance had surged to US$83.303 billion.
And the yen? It was averaging around ¥120:US$1. It has since risen to ¥84:US$1. Nonetheless, for the first nine months of 2010, Japan's trade balance was US$31.58 billion. In other words, the hopes of the 346 members of the US Congress to the contrary, it appears highly unlikely that a dramatic revaluation of the Chinese yuan against the dollar, even doubling in value, is likely to have any serious effect on China's continuing ability to pour everything from plastic toys to airplane parts into the United States, any more than did Japan's.
Clearly, as the experience with Japan shows, there are other forces at play here, including naked mercantilism on the part of both Japan and China. The Plaza Accord was successful in reducing global trade imbalances between Europe – whose industrial engine is Germany – and the United States. It had a less-dramatic effect on the deficit with Japan because of the non-tariff barriers which foreign companies faced when selling there. At one point, for instance, the Japanese refused to allow the import of American skis because, they said, Japanese snow was different from snow in the rest of the world. Despite the fact that both China and Japan are signatories to the World Trade Organization, both continue to maintain mercantilist regulations to keep out western goods.
According to the Office of the US Trade Representative, China continues to maintain high duties on such items as large motorcycles, most video, digital video and audio recorders and players, for example. Raisins face duties of 35 percent. China continues restrictions on copyrighted items such as software, films, DVDs, music, books, newspapers and journals. That certainly doesn't stop Chinese consumers from seeing them. Partly because of the delays and restrictions on legitimate products, China famously has perhaps the world's most active counterfeit market. Really popular films, etc., are on the street almost the same time they hit the street in the US, let alone China.
China, the USTR says, has also made selective use of its Value-Added Tax to keep out American phosphate fertilizers that compete with Chinese products, for instance. American telecommunications companies say they face delays and procurement directives to discourage the use of imported components and equipment. Cargoes of products such as soybeans, meat and poultry are often held up in Chinese ports for a variety of reasons. Shipments are at risk of disapproval if they are considered too large in quantity. It is thus crucial that the US continue the pressure, through the WTO and other means, to force open China's markets.
But it has to be recognized that this is not all China's fault, nor Japan's. One of the most important problems is the continuing deterioration of the US industrial plant and its infrastructure and its educational facilities. From the 1950s, when the US was the world's industrial giant, other countries have learned to make things faster and better. An astonishing 80 percent of American workers now are in the services industries, up from 65 percent in 1960. Any effort to rebuild the industrial plant will take vast amounts of money, mobilized by both private industry and the government. The US, especially from the election of Ronald Reagan as president in 1984, and who announced that government was the enemy, has allowed its roads and highways, airports, streets, bridges, electrical grid and other infrastructure to continue to deteriorate as the mantra of "No new taxes" has reverberated across the country.
Spending on energy research and development, both public and private, has declined steadily for the last 25 years. As to infrastructure, the port of Shanghai alone now has almost as much container capacity as all US ports combined, according to a study by the Brookings Institution. Singapore, with a population of less than 5 million, is spending well over $7 billion to increase its container capacity. Its port will have 30 percent more container capacity than all US ports combined as well.
"Increases in the educational attainment of American workers has nearly ceased, with more and more workers lacking the skills that are needed to make America an attractive location for high-productivity, high-compensation jobs," Martin J. Baily and Mathew J. Slaughter wrote recently in a report titled Strengthening U.S. Competitiveness in the Global Economy. "The US infrastructure is crumbling, with much talk but very little action. The tax code is inefficient and there is no real debate about the tradeoffs we face with respect to spending and taxes. All sensible forecasts are that Medicare and Medicaid are going to swallow the federal budget, but we lack the knowledge to make the needed reform."
Thus "the threat to U.S. competitiveness is not that emerging economies are becoming too strong, but that polarization and paralysis in Washington have allowed the US economy to become too weak. While other nations have been investing heavily in their people, ideas and infrastructure (and some in their own green transformations), the United States has been spending down the public goods that are crucial for our children's prosperity. It is past time to invest in America's society and economy," the Brookings Institution study concluded.
It doesn't appear that the US Congress has the will at this point to change course. If anything, the fall midterm elections, driven by Tea Party demands to cut taxes and services even more, appear likely to produce a new legislature even more recalcitrant and opposed to making the investment needed to spur an export infrastructure. It appears more likely to want to pass more punitive legislation that is likely to do little good.