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, shrinkingin 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.