Posted on 09/13/2003 7:55:47 AM PDT by arete
The United States is turning protectionist. Or at least that’s the growing risk in this tough economic climate. America is now taking dead aim on the “China problem.” Legislation has been introduced in the US Congress that threatens to impose 27.5% across-the board tariffs on Chinese exports into the US if the RMB peg is not abandoned. In my opinion, this is a classic example of opportunistic politics leading to bad economics. Such an approach would have negative impacts on the US, China, and the broader global economy. It is right out of the script of the nightmares of the 1930s.
At present, the odds of this piece of legislation (S. 1586) being enacted are low. I would currently assign no higher than a one in five chance to such a possibility. Yet those odds will undoubtedly rise as the US political cycle heats up -- especially if America remains stuck in a jobless recovery. Perceptions of job and income security have long been the defining issue in US presidential campaigns. It’s hard to believe that it will be any different this time around, especially since America’s hiring shortfall -- some 4.2 million jobs and counting, by my reckoning -- is the worst in modern experience (see my 8 September dispatch, Traction, Multipliers, and Leakages). Significantly, this Congressional assault on China is bipartisan -- sponsored by three Democrats (Senators Schumer, Durbin, and Bayh) and three Republicans (Senators Bunning, L. Graham, and Dole). That underscores the breadth of support for the China assault -- an especially worrisome sign of more protectionist efforts to come. For that reason, it is hard to dismiss the real significance of S. 1596: It is a shot across the bow of America’s commitment to globalization.
The economic case for such a move is as weak as they come. Most obvious, is that China’s currency is pegged to the dollar -- it hasn’t changed one iota since 1994. That means there have been no currency-induced shifts in relative prices that can explain the deterioration of US-China trade deficit from $30 billion in 1994 to $103 billion in 2002. As I have noted previously, this trend is an unmistakable outgrowth of the US penchant for outsourcing and China’s rapidly emerging role as America’s outsourcing platform of choice (see my 14 July dispatch, The Scapegoating of China). While total Chinese exports have tripled over the past decade -- rising from $121 billion in 1994 to $365 billion in mid-2003 (annualized), fully 65% of that increase can be traceable to Chinese subsidiaries of Western multinationals and joint venture partners. China’s increasingly critical role in the global supply chain is not something it achieved unfairly. It is a conscious outgrowth of a voluntary surge of foreign direct investment from the developed world. Last year alone, $53 billion of FDI flowed into China, making it the largest destination of such investments anywhere in the world. The high-cost industrial world needs China for its competitive survival. That’s what outsourcing is all about.
But America’s needs are even more special. Never before has the United States suffered such an acute shortfall of domestic saving. America’s net national saving rate -- the combined saving of individuals, businesses, and the government sector adjusted for depreciation -- fell to 0.7% of GNP in the first half of 2003. Yet it is a given that saving must always equal investment. That means, lacking in domestically-generated saving, the US has no choice other than to import surplus saving from abroad in order to fund investment and economic growth. And so America must run massive current-account and trade deficits to attract that capital. In other words, trade deficits -- and large ones at that -- are a given for a saving-short US economy. If the US wasn’t trading with China, it would be forced to run trade deficits with other nations. The fact that our largest trade deficit is with the world’s low-cost producer is exactly the way the theory of comparative advantage is supposed to work. Yet by importing low-cost, high-quality goods from China, Americans are getting a break in purchasing power. Shifting our trade deficits elsewhere -- precisely what would have to occur for a saving-short US economy -- would only erode that windfall of purchasing power. Tariffs on China would, in fact, raise the cost of doing business for many American companies. For Wal-Mart, which reportedly sources some $15 billion of product in China, S. 1586 would result in the functional equivalent of a $4 billion tax hike.
Ironically, by pointing the finger at China, the US Congress is avoiding its fair share of responsibility for America’s conundrum. In recent years, the biggest swing factor in the plunge in national saving has been the extraordinary deterioration in the fiscal position of government units -- at the federal, as well as at the state and local levels. The combined government sector saving rate has swung from a surplus of about 3% of GNP in 2000 to a deficit of nearly 4% in mid-2003. Moreover, courtesy of Washington’s latest act of fiscal profligacy, the government shortfall is set to widen by another 1 to 1.5 percentage points over the next 12 months. Unless there is a spontaneous and lasting revival in private sector saving -- highly unlikely, in my view -- the national-saving-current-account dynamic is set to worsen significantly further. That, in turn, points to still larger trade deficits -- undoubtedly with China. Should China be blamed for Washington’s reckless fiscal adventures?
In tough economic times, politicians always need a scapegoat. That’s what this wave of China bashing is really all about. It has little to do with economics and everything to do with the blame game. Yet this politically-inspired foray is symptomatic of a much deeper macro problem that now confronts an unbalanced world. The world’s sole growth engine is encumbered with the largest current account deficit in recorded history. Not only does that reflect the inherent pitfalls of a saving-short US economy but it also is a by-product of an utter lack of autonomous domestic demand growth elsewhere in the world. As America pulls the world economy along for the ride, it goes deeper and deeper into the quagmire of trade deficits, budget gaps, saving shortfalls, and excess debt accumulation. This is hardly a sustainable outcome for the US or for the rest of the world. It speaks of a worrisome and dangerous build-up of tensions in the global macro environment. Like steam in a teapot, ultimately these pressures need to be vented. Two options are available -- the economics of a US current-account adjustment or the politics of trade frictions and protectionism. The interplay between America’s jobless recovery and the presidential election cycle is shifting the odds from the economic to the political remedy. Right now those odds are low. But the risk is that they will rise.
In 1930, Senator Reed Smoot and Representative Willis C. Hawley jointly sponsored legislation that significantly raised the level of US tariffs. Courtesy of a recently popped equity bubble, the US economy was in recession, and a Republican administration favored the protectionist remedy as a means to provide relief for hard-pressed American workers. President Herbert Hoover signed the Smoot-Hawley Tariff Act into law in June 1930. Global trade retaliation quickly followed, as did a downward spiral of world trade. Many believe that was the decisive trigger for the Great Depression that was soon to follow. Such painful lessons should not be ignored in today’s post-bubble era. Yet that’s precisely the risk as politics now comes face to face with stresses and strains of globalization. Are we forever doomed to repeat the mistakes of history.
I know, why don't we try exercising a little fiscal discipline.
Richard W.
Comments and opinions welcome.
Richard W.
The high-cost industrial world needs China for its competitive survival.
is BS. I can't think of a single reason why that business could not go to India or another developing nation that is less hostile to US interests.
Well business is going to India -- a lot of it. As far as China goes, would you rather deal with a hungry tiger or one one that is well fed? Deals have been made to keep China happy and fed.
Richard W.
Americans are not saving any money becasue they do not have any to save.
It is call consumerism and the religion of immediate gratification. Corporations, Wall Street and Washington have done a good job of convincing Americans that they can have it all if they only develop and actively pursue a borrow and spend mentality. As John Mauldin points out (The Weather Equalization Act), we have crossed the line. Our economy needs debt in order to grow.
Richard W.
When Morgan Stanley starts outsourcing senior analysts' jobs then a joker like this will start bellyaching about national priorities. These "perfumed princes of Wall Street" are a major part of the problem. These are the boys that brought us BIll Clinton. Wal Mart has problems? GOOD! Maybe a Dept. Store should not have a higher valuation than GM. We are still stuck in the Myths of the great depression. If someone would have started moving the economy overseas in the middle of the depression - or in the middle of a war- they would have been taken out and shot.
These are the same people that are telling us the we need immigration to "remain competetive."
Why do conservatives think these Wall St. types care the least about this country. They are part of the problem.
This is just Money Capital lecturing its archenemy, Productive Capital.
Yes, but that isn't how business and global politics works regardless of what the politicians are telling you. Deals have been made by the central planners and there is very little that you and I can do about it.
Richard W.
In the end it is circular reasoning. What you really mean is that for us to go on the way we have been going we need debt (and part of "the way we have been going" is for the US consumer to pull the world economy on its back.) But we cannot go on this way anyway. What we really need to do is restore the weath of our patrimony that we have squandered throught the New Deal, the Great Society and the cultural, intellectual, economic and social suicide of the last 40 years.
We need to reinvest and restore America. Not work our "deals" with our enemies.
Things are so twisted and upside down right now, that if anything were to threaten either the Japanese or Chinese economies or political systems, we would have to defend them.
Richard W.
Of course it is circular reasoning and that's the paradox that have more and more people wondering exactly how to deal with having to rethink everything they believed to be true but no longer appears valid in Greenspan's new era of structured finance and gloabization. You and I may think that savings are good, but where does that idea get us when savers are actively being punished with ridiculously low interest rates? Greenspan's message is more than a little obvious -- spend it, gamble it on Wall Street, or suffer the pain of holding your money in savings. See how easy this brave new world of the central plannering is?
Richard W.
If there was real leadership in this country we could still turn this around. Sure we could "drop out" of this cycle if we all dropped out together. We could roll it back in decade, maybe even less. I see no signs that Americans are to happy with the "Buy and Spend Lifestyle." Have you talked to young people trying to start a life? Have you talked to middle aged boomers (usually libs) that are just starting to realize that they will not have anything close to their parents in old age - just a SS check and a rented apartment? Have you talked to boomers' children that realize that no matter what they do in college they will have low wage jobs? Have you seen the moral and spiritual terror in their eyes? I have.
We are not all sheep yet. Wait until young people come to understand what lies before them. In our old age they will be shooting us boomers in the street.
You think that I am joking or being sentimental when I say "Restore America" or "Restore our Patrimony" but I am not. Conservative must find away to stop mincing around about our national failure and take these issues into the mainstream. You can talk about creeping socialism but the socialist will screw up and reveal themselves because they are so incompetent. Witness the buffonery in California. What is happening to this country must be turned back. It could if the mind and the will of the people of this nation were focused on the crisis. THe RIght must step up to the plate and have a revolution to rival the New Deal (a sort of "Anti-New Deal.")
We can rise to this challenge if it is laid out before us. Neither party has the guts to face it - laziness, narcissism and sloth rule the land. They can not face it for they cannot admit error. Perhaps it will take a real depression to have us face this crisis, and this crisis is quite simply the destruction of our nation. No amount of savings or gated communities or planning or selfishness is going to save anyone.
What if the president asked the CEO of Intel to come on the tube with him and explain why he needs to build a $500mil plant in China and instead of kiss his rump calls him on the carpet about, calls him a traitor right there in Prime Time Land? What if he had the head of Cornell in and just read him the course description of his English Dept. from his own catalogue right there on national TV and then call him a moral and intellectual coward, ask him what his grandmother would have thought of his support of abortion, sodomy and socialism? Have him explain his hated for his own civilization? Have the CEO of Ford in and ask him why he is so lazy that the Japanese can build a better car than he can? Go after the NEA. Above all, stop courting the votes of the villians that are hastening our demise, and stop behaving like a Democrat.
Why can't a "photogenic" Republican get on the news and say that the Democrats and the globalist corpate class are traitors and then prove it from the record. Why all the subtexts. I'll tell you why: cowardice and a lack of faith and imagination, that's why.
We need to articulate what at least 2/3 of us feel lead us out of this darkness.
If Bush wins by a meaningful margin and we pick up more House and Senate seats and we still have to listen to all this "new tone in Washington" horse shiite, then it is time to rethink our commitment to the Rebulican Party.
"For those of you who do not recognize the word "Demopublican" it is, at least in the way I use it, a highly pejorative term that indicates that both the Democrat Party, traditionally a clueless and relentlessly socialist and communist-inspired bunch of touchy-feely jackasses who actually believe, against the weight of thousands of years of actual experience, that large and intrusive governments are good for a society and economy, and the Republican Party, who are newcomers to that particular idiocy but rapidly making up for lost time, are now evil twins who are going to destroy the USA with their shared loathsome agenda. Just like it has ruined every other economy where it has been tried. Nowadays, there is very little difference between the two political parties, although, I am sorry to say, the Republicans have a distinct police-state viciousness about them. Ergo, Demopublicans."
If you haven't been following along, you may have missed some really good article postings recently. The above quote comes from this thread: The Only Safe Place To Put Money -- Economic Commentary by the Mogambo Guru
I would also recommend that you take a look at: Nelson Hultberg's article titled Apocalypse This Way Comes.
I believe that both of those threads will help you see just how large and seemingly unsolvable our financial problems have become.
Richard W.
Think of Greenspan in terms of Mr. Fixer. He works for both the gang of 22 and the Washington ruling class. He is there to keep the wheels on the wagon and magically fix all the problems that the other two groups create. No one is going to fire him cause he gives them exactly what they want, which is the ability to borrow and spend seemingly unlimited dollars. He keeps them happy, in power and wealthy. An independent and responsible FED chairman wouldn't last 10 mins.
Richard W.
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