Thursday, June 16, 2005

Hitting China With a Tariff Won't Help U.S. Economy

Pacific News Service, Commentary, George Koo, Posted: Jun 16, 2005

Editor's Note: Blaming China for U.S. economic ills doesn't make sense, the writer says.

SAN FRANCISCO--U.S. Congress, led by Sens. Charles Schumer (D-NY) and Lindsey Graham (R-SC), appears headed on a collision course with China over trade. Ironically, the senators see imposing a tariff duty on inbound Chinese goods as a solution to U.S. economic woes, contrary to the spirit of global free trade.

Any student of economics should be able to skewer the contradictions of this logic with ease. Here are some data to facilitate their exercise.

When Beijing pegged their currency, the Renminbi, to the dollar more than 10 years ago, it was considered a fair peg.

Some three years later, the Asian financial crisis struck and neighboring countries devalued their currencies to keep their economies from drowning. They were most fearful that China would devaluate the Renminbi in step, thus canceling any relief gained in devaluating.

Instead, Beijing hung onto the peg and rode with a subsequently strengthening dollar all the way up -- and then all the way down. To accuse Beijing of artificially weakening its currency, or of manipulation, is to give Beijing credit for knowing more about the twists and turns of the U.S. economy than even Alan Greenspan.

Even though the U.S. trade deficit with China continues to increase and has reached enormous proportions, so has the U.S. deficit with the entire world. The deficit with China now represents 25 percent of the total deficit. In earlier years, the deficit with China was as high as 27.5 percent of the total, but nobody made a fuss then because it was part of a much smaller overall deficit.

This would suggest that the problem lies with us and not in any policy of China.

A decade ago, Japan was accused of being the cause of American economic woes. Now China is being painted with the same brush, even though China is clearly not practicing mercantilism.

China has open borders and encourages foreign investments. Japan never has. China's world trade is actually in reasonable balance, around 95 cents of import for every dollar of export, the U.S. imbalance notwithstanding.

Annually, China buys about twice as much from the European Union and from Japan than they do from the United States. The problem is not an unwillingness on the part of China to buy, but seems to be our unwillingness to sell.

The United States is content to be the dominant supplier of wheat and soybeans to China, but it is reluctant to take maximum advantage of its strengths in high technology.

Washington is very adept at applying the "dual use" label to restrain technology export. Dual use means any conceivable potential non-civilian alternate use. Any hypothetical use represents a threat to the U.S. and could outweigh any economic gain in the sale. Hi-tech sales face tons of red tape effectively hogtying the high tech industry.

Nearly 60 percent of China's exports come from foreign invested enterprises -- in other words, from many of the U.S.-based multinationals. The manufacturer, the distributor and the retailer in the United States are all making money from China's ability to make quality goods at low prices.

The proposed 27.5 percent duty on China-made goods will hurt the bottom lines of American companies and certainly discourage spending by the American consumer, but it will have questionable effect on restoring American jobs. Virtually all of these manufacturing jobs moved offshore decades ago, and are now moving from those places -- Taiwan, Korea, Mexico, Singapore et al. -- to China.

The good senators seem to believe that if the yuan is allowed to float, our economic woes will be over. Actually, a stronger yuan will not do much to close the huge wage rate gap, as much as 20 to 1, between the U.S. and China.

In fact, over the most recent decade, China suffered job losses on an order of magnitude greater than the United States. Over the same period, China's wage scale increased by 300 percent, while the United States showed an increase of 30 percent.

China seems to have faced the challenges of its fast-growing economy better than we in the United States have managed our massive one. Of course, China does not have to contend with continuous billion-dollar hemorrhages like an Iraq war.

In a few years, China will be poised to challenge leading-edge efforts in stem cell research. By then the United States will be the world's leading authority on creationism and intelligent design.

Annually, China is already turning out more than seven times more graduates in engineering and other technical disciplines than the United States. They are amassing the human resources to move up the value chain of manufacturing. We are trying to leave no child behind.

Instead of looking for easy political solutions, we need to address the many systemic problems gnarling the insides of the American economy.

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