America’s Unbalanced Approach to Balanced Trade

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July saw another hefty trade surplus (according to Chron.com), and China will face still more pressure to revalue the RMB. The surplus was US$14.6 billion, bringing the total to US$75.9 billion for the first seven months of the year (up 51.9 percent year-on-year). An analyst from UBS has forecast that the surplus could reach US$138.4 billion (up from $102 billion last year).

The RMB (which passed the lucky 8 mark earlier in the year) rose another 0.36 percent to 7.9732 per dollar Shanghai on 8th August. It has now gained 1.7 percent since the original revaluation last July – far less than what the US is calling for.

If “progress” on this issue is not made by September 30th, the threat of a 27.5 percent tariff on Chinese imports to the US is still on the table. Imposing the tariff would be a senseless and vindictive act of economic vandalism (based on many misconceptions), and would do untold damage to both sides – as well as many innocent bystanders.

The China Economic Review blog reminds us that it is not the RMB that will save or kill off US manufacturing. They refer to a Cato Institue paper and report the following:

    • Imports from China are not the primary cause of the decline in US manufacturing jobs since 2000. The real reasons for the loss of some 3 million such jobs during this time were the US recession of 2001, sluggish demand abroad for US exports, and especially increased productivity in US manufacturing.

    • 60% of China’s exports are made in foreign-owned plants, and much of the increase in Chinese exports has come as a result of other Asian countries sending their products to China to be “finished” before being exported to America and Europe. As Chinese exports to the US have gone up, those from other East Asian countries have gone down as a percentage of all US imports.

    • Tariffs on Chinese exports would do great harm to American consumers, whose access to low-cost Chinese-made textiles and shoes, home appliances and furniture, computers, electronics, toys, and other goods greatly increases their real wages by stretching the value of their paychecks.

    • Since 2001, the euro has appreciated by one third against the dollar, yet the US trade deficit with the euro zone has increased by 69%, suggesting that RMB revaluation would do nothing to lower the US trade deficit with China.

Luckily reports indicate that that the US government is less aggressive on the currency issue than the two senators promoting the proposed duty. Carl Weinberg, chief economist at High Frequency Economics is quoted by Bloomberg as saying:

    “The Graham-Schumer tariff threat remains a grand soapbox for the two senators, but it poses no threat to trade at this time.

Let’s hope so. But, if the US wants to reduce the trade balance with China (and there are some positive signs), getting the Chinese to appreciate their currency may help (or it may not), but it does not take a PhD in economics to see that further restricting (already difficult) high-technology exports – one area where the US has real competitive advantage – will not help. However, that is exactly what is being proposed. An article in Asia Times notes another rumbling threat from (and, I would suggest, to) the US. This time it is in relation to the “China Military Catch-all Rule”:

    “The proposed rule seeks to block modernization of the Chinese military by imposing new licensing requirements on exports, re-exports or transfers of US-origin commercial commodities or technology in 47 fairly expansive categories (from machine tools to medical chemicals, from microprocessors to music equipment) for potential “military use” in China.”

The fear in Washington is the commercially-available technology could be used to help modernize China’s military. The reflected fear in boardrooms is that buyers will simply “design out” US parts, with a big loss for US business. The political positioning is pretty aggressive to say the least, and would not do much for “positive engagement” with China. (The UK, which I am pretty sure poses no strategic threat – to anyone – has already found problems in getting US military technology for “joint” projects, so hopefully China won’t take it too personally). The article notes:

    “The new proposed rule signals a breathtaking rollback of export licensing policy to Cold War levels. The rule restricts commodities widely available from Asia, Europe, Israel and even China, coupled with a remarkable liability umbrella, which includes the US exporter, the Chinese importer, all companies in the chain of title, shippers, forwarders, financial institutions (eg letters of credit, project finance, mergers and acquisitions), accountants, lawyers and the like.”

Many companies (and even some EU governments) already have a hard time understanding what technologies can and can’t be sold to China. If this report is correct, the situation could get much worse. A link is provided to the proposed rule here (pdf file).

As I noted in this recent posting, politics are making a comeback in trade, but the protectionism that used to be associated with China is now more likely to be on the other, western, foot.

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