More Useless Trade Talks with China

http://news.yahoo.com/s/ap/20090726/ap_on_go_ca_st_pe/us_china_talks

A delegation of 150 Chinese officials is in Washington today for bilateral talks on a host of issues, trade and the economy being foremost among them. 

With the global economy mired in recession, the United States and China begin talks Monday to seek a solution together despite tensions over currencies, the U.S. budget deficit and the huge U.S. trade gap with China.Ultimately, how well the U.S. efforts succeed could help determine how fast the economy recovers and how many U.S. jobs might be created once it does.

Three years ago, Henry Paulson, then Treasury secretary, used the talks to press Beijing to let its currency, the yuan, rise in value against the dollar, to make it cheaper for Chinese to buy U.S. goods. U.S. manufacturers blame an undervalued yuan for record U.S. trade deficits with China — and, in part, for a decline in U.S. jobs.

The U.S. efforts have yielded only mixed results. The yuan, after rising in value about 22 percent since 2005, has scarcely budged in the past year.

I have news for the writers of this article:  there were absolutely zero results.  Yes, the yuan rose in value, but it had no effect on our trade deficit with China, which has continued to rise.  That’s because currency valuations have almost nothing to do with the trade deficit – the best example being what’s happened between the U.S. and Japan over the past few decades.  While the value of the yen soared against the dollar by over 300%, our trade deficit with Japan soared as well.  This sounds counter-intuitive, but facts are facts.  It’s not currency valuations that drive trade deficits, it’s large disparities in population density. 

But the Obama administration intends to remain focused on the trade gap. It plans to stress at the talks Monday and Tuesday that China can’t rely on U.S. consumers to pull the global economy out of recession this time. In part, that’s because U.S. household savings rates are rising, shrinking consumer spending in this country.

“Perhaps the most important message we are going to have for the Chinese is that there has been a fundamental change in the U.S. economy,” said a senior administration official, who briefed reporters on the meetings under rules that did not permit use of his name. “The U.S. economy is going to recover, but it is going to be a different type of recovery than what the Chinese have seen in the past.”

Give the Obama administration credit for finally understanding the role of the trade deficit in wrecking our economy.  But that enlightenment hasn’t translated into action, other than to substitute high-level officials like Geithner for low-level flunky trade delegations at these talks.  The approach remains the same – talk, talk, talk.  Complain about currency valuations.

But there’s a slightly different twist this time – talk about fundamental changes in the economy that will cause Americans to save more.  In yet another display of the tortured logic of economics that has guided the policies of administrations for decades, the Obama administration somehow believes that saving money and spending and consuming less will create jobs – American jobs.  It’s just not true.  Saving money has never created a job for anyone.  It has other benefits for the economy and for individuals’ finances, but it doesn’t create jobs.  Only spending money and buying things and services creates jobs. 

That’s not to say that people shouldn’t save money.  There was a time when people could do both – buy the things needed to improve their standard of living and save at the same time.  They could do this because there was a strong demand for labor that kept incomes rising faster than inflation.  It was before the dawn of economic enlightenment that said we would somehow benefit by giving away the whole manufacturing sector of our economy. 

So it’s a complete mystery how the Obama administration envisions changes in the economic relationship between the U.S. and China creating jobs for Americans.  OK, so we cut spending and start saving more.  How does that create jobs?  The only thing that would create jobs would be if American consumers began choosing American-made products in favor of Chinese products.  How can that possibly happen when (a) in most cases, there are no American-made alternatives, and (b) the administration has vowed not to undertake any protectionist measures that would make American-made alternatives cheaper than Chinese products.  Increase the value of the yuan?  That won’t do anything.  Chinese manufacturers will simply cut their prices to maintain market share. 

Oh, and don’t even get me started about why the administration singles out China to fix our trade deficit when, in per capita terms, our deficit with China barely makes the top twenty.  Japan, Germany, Korea, Mexico and a whole host of others with worse trade imbalances (relative to the size of the nations)  get a free pass.  It makes no sense.

This kind of illogical, misguided, fractured and bumbling approach to trade makes me want to scream and, I’m sure, leaves our trade partners alternately rolling their eyes, scratching their heads, or rolling in the aisles with laughter once we’ve gone.

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8 Responses to More Useless Trade Talks with China

  1. mtnmike says:

    Pete,

    I think you missed the point. If in fact we save more, there will be more money available for Wall Street to invest in foreign companies and that will in turn create more jobs on Wall Street and banking who in turn support the campaigns of our leadership.

    In response to the pussyfooting around with China, it’s difficult to get tough with your banker. We depend on China and the Middle East oil block countries to support our ever growing deficit. It’s called the point of diminishing returns; dammed if you do and dammed if you don’t.

  2. mtnmike says:

    Pete,

    My first response is in no way to be considered condescending to your article; you covered the subject nicely as usual.

    A problem that goes unresolved for 39 years has a tendency to become a crisis.

    • Pete Murphy says:

      No problem, Mike. Although I’m a bit humor-challenged and sarcasm is sometimes lost on me, it came through loud and clear.

      Actually, you make a good point about savings. The benefit, of course, is that it provides a source of capital for investment in things like factories, for loans like mortgages, and so on. But those activities only then create jobs in response to someone else foregoing their savings to make purchases. It’s the spending that still creates the jobs, not the savings. You’re exactly right that, unless changes are made to trade policy, these increased savings that the government is counting on to improve our economy will be used not for investment in the U.S., but to fund investment in foreign countries. It’s kind of like the cash-for-clunkers program. Most of the taxpayer money being used to fund that program is instead stimulating the economies of Japan, Korea and Mexico. In an article I read yesterday, listing the top ten cars to purchase in the cash-for-clunkers program, only one was an American-made car.

      • Pete Murphy says:

        One more thing, Mike. Although I’m no expert in this matter, I think the threat of China dumping bonds in response to any protectionist measures by the U.S. is over-blown. Any move to restore a balance of trade would likely send the dollar soaring, making Chinese dollar holdings more valuable. I don’t think they’d be in a rush to dump them. If they did, I think others would quickly snap them up, recognizing that the American economy would take off big-time if trade were balanced.

  3. mtnmike says:

    Pete,

    The value of the dollar is enormously overstated for pure political reasons. The issuance of any currency without benefit of physical backing is nothing more than a Charles “Carlo” Ponzi scheme. In 1970, M-3 was around $500 Billion, today it is estimated at greater than $12 TRILLION!

    To your point, China will hold U.S. debt for the period that it benefits them. The near problem that I see is rather than dumping, China and other nations that support our growing daily deficit will soon seize to purchase NEW debt. That will leave the U.S. with little other choice than monetizing our own debt which is similar to you borrowing money from your wife.

    As you know, I see no possibility of returning to pre-recession status or pre-deindustrialization levels. Attempting to do so would in today’s global appetite for resources, hit a solid wall of permanent shortages.

    It is of course my opinion that we have reached zenith for an expansion oriented economy while at the same time attempting to maintain our standard of living.

    • Pete Murphy says:

      Agreed, Mike, except that it would be eventually possible to sustain a high standard of living and even improve our quality of life, not just in the U.S. but globally, if we get serious about reducing our population. I believe that means a 50% reduction in the U.S., an 88% reduction in China, 95% in Japan, and so on. The odds of that happening are zero in our lifetime, close to zero in the lifetime of the next generation, but could improve steadily beyond that if we get to work on it right now.

      That’s globally. Locally (in the U.S.), we could improve the economy dramatically and almost immediately by quickly reducing our “effective” population density (the population density our economy mimics by trading freely with badly overpopulated nations) by implementing my density-indexed tariff system on manufactured products. Even if we do that, it is still imperative that we reduce our real population density to a level that’s sustainable with domestically-sourced resources. (Domestically sourced because if a nation the size of the U.S. can’t provide its own resources for that population density, then no nation can.) For now, my guess is that’s a reduction of about 50%. (I realize that we import 70% of our oil, but cutting our population by half would reduce that figure to a level where the rest could be made up by converting to renewable energy sources.) Beyond that, we may very well find it necessary to cut further, but I think a cut of 50% would be a very aggressive (and necessary) first step.

      First-time readers seeing such comments would think both you and I are nuts, because they don’t understand the economic theory that shows how the micro-economies of individuals would actually improve as population density declines.

  4. Mark A. Hall says:

    Pete:

    I believe many of our congressional leaders have read your book and are now in the process of implementing some aspects of your theory.

    As a direct result, they have focused increased attention on the upcoming 2010 U.S. National Census.

    Our census takers have now been instructed to avoid certain “PROBLEM” areas such as Michigan and California which tend to exhbit unacceptable levels of unemployment and financial difficulty.

    THERE REVISED THEORY:

    IF YOU DON’T COUNT IT, IT DOESN’T EXIST!!!!!

    PROBLEM SOLVED!!!!!!!!!!!!

  5. […] More Useless Trade Talks with China « “Five Short Blasts” Forum […]

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