International Finance International Trade US-China

US-China Policy Makes US Look Weaker

The US is the largest economy in the world. Sure China may be number two, but when you consider it in per capita terms the US is near the top and China is closer to 100 in rank. The US has the most integrated market, its labor force is highly skilled and flexible, it has innovative entrepreneurs that are the envy of the world, it has a smoothly functioning and reliant legal system, it preserves and promotes intellectual property creation, it has an higher education system that attracts students and researchers from all over the world, and it has a living environment and opportunities that attract people in much greater numbers than we would like to admit. Add to that a military capacity with power and reach that is truly ominous in comparison to any other country and you have a country that is the equivalent of the NY Yankees in the 20th century.

Yes, the US economy is stumbling and the mood for the future is dour. But many other countries, including China, have conditions that are far worse in many respects. China is strong militarily, but they can’t project power on the other side of the globe like the US has done (rightly or wrongly) in Afghanistan and Iraq. China just commissioned its 1st aircraft carrier! The US has 11 with three more under construction … more than all other countries combined. China’s economy is expanding but they face enormous internal stability problems. They have an immature financial sector, a highly dubious legal system, and the potential for rural-urban migration in future years in numbers that exceeds the population of the US. They also have an aging population entering retirement, as does the US, only China’s is 5 or 6 times larger. And still their per capita income is only1/6th that of the US.

The US unemployment rate is currently over 9%. But is this something the US cannot endure and overcome? The unemployment rate was well over this in Spain and some other European countries during our previous boom years. In South Africa the unemployment rate is 25% … that’s as high as it was in the US at the height of the Great Depression in 1933. Remember, that while 9% unemployment is twice as bad as 5 years ago, there is still 91% of the labor force working. (some will say it is much less because of discouraged workers but I am trying to tell the “glass half filled’ story!) An impressive variety of goods and services that households buy remain on the shelves and while economic growth has slowed, the US economy continues to produce a vast amount of goods and services every year and will surely continue to do so.

So how must it look when a dominant country like the US stumbles economically and rather than looking inside itself to resolve its inner imperfections, instead it looks outside its borders to the things it cannot control and blames others for its problems. By this I mean the new Senate bill seeking to brand China as a currency manipulator. This action looks weak, not strong, … even more so because the target of our accusations is decidedly poorer and weaker than the US. Do people really believe that China can exert so much influence over the US economy via its exchange rate policy as to force the current recession and the loss of millions of US jobs? Not only is this outcome not in China’s own interests, it is not the likely effect merely by running trade surpluses with the US. (see my previous post explaining why the lost jobs argument is specious). Furthermore, even if China let its currency float freely, there is no guarantee that it will rise in value to the level some American observers would like.

Politicians are trying to rally American support around a policy position that has very little hope of generating the intended outcome. They are trying to act tough on China, largely because they have very little else to go home and tell their constituents. Within six months politicians will be campaigning for re-election and what are the accomplishments they can tell their constituents about? Not many! A bill that gets tough with China will give them something to ballyhoo.

There is one reason passage of this bill will create jobs though. What the bill seeks is to allow exchange rate undervaluation to be used in the determination of anti-subsidy actions. These actions allow an industry in the US to obtain higher import tariffs if it can be shown that a foreign government has implemented targeted subsidies on exports and if those exports cause injury to the import-competing firms. These actions require firms to file petitions with the US government, which in turn requires skilled legal assistance. These investigations must be then be conducted by government employees. If these petitions rise in number due to the new law we can count on more lawyer, lobbyist, and government jobs will be required to make the process work. On top of that we can surely expect that the Chinese would immediately file a complaint with the WTO and claim that the US was violating its trade commitments. This will inspire further investigations that will take years to resolve requiring even more Washington lawyers and lobbyists. In fact we may even see the Chinese hiring US lawyers to help them in their dispute with the US (many law firms in DC specialize in helping foreign countries with their trade disputes). Now it is highly unlikely that this bill will create millions of jobs. However, it is virtually certain to create hundreds or thousands of high-paying jobs for Washington lawyers and lobbyists. Is this the best way to devote our economic resources … enabling lawyers to earn millions of dollars arguing that government X violated promise Y and caused harm to firm Z? Hardly! Instead it will make a country that traditionally has championed free trade and free markets, look hypocritical, petty, and weak.

About

Steve Suranovic received his B.S. in mathematics from the University of Illinois at Urbana/Champaign and his M.S. and Ph.D. in economics from Cornell University. He has been a faculty member at the George Washington University since 1988. He has served several terms as the current Director of the International Trade and Investment Policy M.A. program at the Elliott School of International Affairs.

About the author

Steve Suranovic

Steve Suranovic received his B.S. in mathematics from the University of Illinois at Urbana/Champaign and his M.S. and Ph.D. in economics from Cornell University. He has been a faculty member at the George Washington University since 1988. He has served several terms as the current Director of the International Trade and Investment Policy M.A. program at the Elliott School of International Affairs.

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