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Romney is right—U.S. must get tough with China

By Peter Morici
web posted September 24, 2012

Governor Romney is right. The United States must get tough with China to restore growth and good paying jobs.
The idea behind free trade appears compelling. Let each nation specialize in what it does best to raise productivity and incomes. But Americans don't share in those benefits, because President Obama lets China and others cheat on the rules, with only token opposition at the World Trade Organization.
Through the WTO, industrialized nations have greatly reduced tariffs and limited domestic policies that discriminate against imports or artificially boost exports. However, to optimize trade and create good jobs for all, every nation must play by the same rules, and exchange rates—which translate prices for U.S. goods into yuan, euro and the like—must be free to adjust to reflect differences in national production costs.

Exchange rates are established in markets, where exporters, importers and investors buy and sell currencies needed to conduct international commerce. Unfortunately, China and other Asian governments blatantly manipulate those markets. Lacking a credible American response, this has ruinous consequences for growth and American workers.

Also, Beijing imposes high tariffs—for example, about 25 percent on autos— subsidizes exports, requires state agencies and enterprises to buy Chinese products, and refuses to adequately protect U.S. patents and copyrights.

These promote Chinese manufacturing in industries where high productivity and superior product designs would make American goods more competitive. It compels companies like GM and Apple to locate facilities in China and give away knowhow to Chinese partners in Beijing mandated joint-ventures. Ultimately, U.S. companies heavily invested in China become apologists for Chinese policies, and work to block meaningful U.S. actions in defense of American workers.

The United States annually exports $2.2 trillion in goods and services, and these finance a like amount of imports. This raises U.S. gross domestic product by about $220 billion, because workers are about 10 percent more productive in export industries, such as software, than in import-competing industries, such as apparel.

Unfortunately, U.S. imports exceed exports by nearly $600 billion, and workers released from making those products go into non-trade-competing industries, such as retailing, where productivity is at least 50 percent lower.  

If they can't find work, this slashes GDP by at least $300 billion, overwhelming the gains from trade, and forces workers to accept lower wages. In actual fact, that appears to be what is happening.

Currency manipulation creates as much as a huge subsidy on Chinese exports. Other Asian countries are impelled to follow similar policies, lest their exports become uncompetitive with Chinese products.

Huge trade imbalances between Asia and the West, perpetuated by currency manipulation and protectionism reduce demand for the goods and services produced in the United States and Europe.
To keep the U.S. economy going, Americans must both borrow from foreigners and spend too much, as they did through 2008, or their government must amass huge budget deficits by borrowing from abroad, as it is now.
In the bargain, the United States sends manufacturing jobs to Asia that would be competitive in the United States, but for rigged exchange rates and other mercantilism.
The trade deficit directly slices $600 billion off GDP, and nearly $1 trillion through the multiplier effects usually associated with a permanent boost in spending or a tax cut.

Americans lose 10 million jobs and wages sink, and that's what is destroying the middle class.

Campaigning in 2008, Barack Obama promised to deal with Chinese currency manipulation and protectionism, but he has failed beyond token complaints to the WTO.

It will be impossible for the United States to create the 14 million jobs needed to bring unemployment down to pre-recession levels without taking on China.

For that Americans need another president—one with the courage to stand up to China. ESR

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission. Follow him on Twitter.







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