Read between the lines guys
Renowned economist Peter Morici told the House Committee on Foreign Affairs that the current financial crisis had its roots in trade policy and the actions of foreign governments, according to a copy of his statement provided by the Web site TradeReform.org.
Testifying before the Subcommittee on Terrorism, Nonproliferation and Trade, Morici told its members that the U.S. economy is on the verge of a depression mainly due to America’s exploding trade deficit and China’s managed trade policies which allow the country to flood U.S. markets with its products.
The main tool China uses to maintain its huge trade surplus with America is its well-known practice of currency manipulation. By purposely undervaluing the yuan, China artificially forces the price of its exports down, making them all the more appealing to consumers in America. Unfortunately, if American consumers are buying Chinese products, they are not buying American products.
“The undervalued yuan provides Chinese manufacturers with a huge export subsidy and a hidden tariff on imports,” Morici said. “China is using its currency as a development tool, but this victimizes otherwise competitive businesses and their employees in the United States.”
China also uses high import tariffs to discourage imports. Through those tariffs and other regulations, China is also able to encourage American companies to outsource production to their country, with a consumer market of over one billion people and an abundance of extremely cheap labor. This throws the balance of trade between the two nations further out of equilibrium and accelerates the decline in American manufacturing, according to Morici.
Morici also stated that through America’s unsustainable trade deficit with China and other nations, an influx of foreign capital flooded the American market, creating a false sense of economic security when in fact, much of it was used to fund the housing bubble.
“The fact is most of the money was raised by borrowing or selling off fixed assets and was not new productive investments,” he said. “Much was used to prop up consumption, and some was used to leverage investment schemes that proved more speculative than productive. Much was provided by sovereigns and near sovereigns who were merely looking for hard currency parking places for cash and safe political environments in the event political conditions changed elsewhere in the world.” Addressing America’s massive trade deficit with China is the most pressing policy matter facing the country, according to Morici. If not brought under control, the U.S. will be forced to continue borrowing huge sums of money, further adding to America’s debt in order to fund more rounds of bailouts and stimulus packages simply to keep the economy from falling off the cliff.
If done right, it would do more to improve America’s economy than the stimulus package and also reinvigorate America’s floundering manufacturing base.
“Eliminating the trade deficit with China by eliminating or at least redressing currency manipulation would have a much greater stimulus effect on the economy than the package just approved by Congress,” he said. “It would inspire a renaissance in manufacturing and restore American growth and wages in a manner and magnitude no public policy this Congress could implement could ever achieve. Simply, it would permanently increase aggregate demand for U.S. goods and services, while raising revenue for positive public purposes; it would restore incentives for the efficient use of labor and capital that free trade should normally provide.”
Some may view these American measures as protectionism, however, Morici told Congress that it is China that is practicing protectionism and America must adopt a posture of self-defense and self-preservation in order to combat China’s managed trade policies.
“Redressing the trade deficit with China in this manner would not be protectionist,” Morici said. “China’s actions now are protectionist. China’s policies are about as protectionist and predatory as could ever be conceived by the most skilled Seventeenth Century mercantilist, and are an absolute threat to U.S. prosperity and sovereignty.”
On the same day Morici testified on the importance of combating China’s currency manipulation, Bloomberg News is reporting that, behind the scenes, Treasury Secretary Timothy Geithner is pushing Group of Seven officials to soften their criticism of China for the very same practice.
Just weeks after publicly accusing China of currency manipulation during his Senate confirmation hearings, Geithner is now reversing course and caving to Chinese demands it appears.
I guess, as Secretary of State Hillary Clinton once said, it’s hard to get tough on your banker. China is currently the biggest foreign owner of U.S. Treasuries, holding $696 billion at the end of December. China possesses leverage over the U.S., but America cannot abandon its fight to end China's currency manipulation if our economy is to survive the current economic war.
