Wednesday, January 20, 2010

The currency quarrel with China is a dangerous distraction

In an article in the Washington Post last November entitled ‘The currency quarrel’ [1] there were a number of assertions made about the economic relationship between the US and China that are questionable, to say the least.

The opening sentence begins by pointing out that “it is a cliche that the United States has no more important bilateral relationship than that with China.” Is that true? Steve Dunaway, adjunct senior fellow for international economics at the Council for Foreign Relations says:
“Only roughly 15 percent of U.S. imports come from China. Moreover, all of the basic types of manufactured consumer goods that China exports to the United States (clothing, textiles, footwear, toys, small appliances, etc.) can be imported from other countries or could be produced domestically. The prices for goods that could substitute for products from China would be higher, but the difference in costs would be relatively small.” [2]

It's Canada – NOT China - that is the U.S.'s largest trading partner. It has been for some considerable time. [3]

The Washington Post article goes on:

“The United States, in fact, consumed more than it produced, but China enabled this by accumulating $2.3 trillion in reserves and plowing much of it back into U.S. government bonds.”

In actual fact, it is clear that the US Government created the conditions under which America consumes more than it produces at home. Successive American Governments have deliberately pursued a policy entailing the embedding of its domestic corporations or their subsidiaries in foreign nations. “Investment abroad is investment in America” has been the slogan of American corporations at least since the late 1960s.

Nowadays the world economy is quite literally dominated by giant transnational global corporations, most of which are owned and controlled by American citizens. In 2002 it was written:
“9 of the top ten companies in the world, 72% of the top 25 global corporations, 70% of the top 50 global corporations. 5 of the top global banks, six of the top 10 pharmaceutical/biotech companies, 4 of the top ten telecommunications, 7 of the top IT corporations, 4 of the top gas and oil corps, 9 of the top ten software companies, 4 of the top ten insurance companies, 9 of the top ten general retail companies.” All call the USA their home. [4]

and these firms tended to enjoy extraordinary levels of dominance in world markets:
“By the early 1990s, five firms controlled more than 50 percent of global market share in consumer durables, steel, aerospace, electronic components, airline, and auto industries. In oil, personal computers, and media, five firms controlled more than 40 percent of the market. In American markets ranging from commercial airlines and aerospace to computer hardware and software to household appliances, three or four firms control up to 90 percent of the market, and market share concentration continues to increase through mergers and targeted growth strategies.” [5]

China’s domestic firms, on the other hand, simply can’t compete with these global giants.

“At the start of the 21st century, not one of China’s leading enterprises had become a globally competitive giant corporation, with a global market, global brand, and a global procurement system…The brutal reality is that after two decade of reform, China’s large firms mostly are still far from being able to compete with the global giants. ” [6]

It seems odd under these conditions that the Washington Post article complains about China’s attempts to protect its export industries by linking its currency to the plunging US dollar. Why is the dollar plunging in value in the first instance?

The American government has pursued economic and military policies whose net effect tended to consistently devalue its domestic currency. Actions such as engaging in decades of avoidable military aggression against a long list of nations, refusing to enforce viable fuel standards for vehicles, failing to use the decades of opportunity since the ‘70s oil crisis to foster and protect an sustainable alternative energy industry, deregulation of financial and commodity markets that have consequently bred inflationary speculative activities on a disastrous scale. And so forth. The list of US government failure is a long one.“U.S. exports are not growing as much as they would otherwise, and neither are those of other countries in Asia.” Says the Washington Post.

Well, the United states is still, by every measure, the world’s largest economy but even the citizens of this wealthy nation are struggling to find the financial resources to sustain the huge markets that the global TNCs would like to see continued indefinitely. Neoliberalism has bred massive inequality:
“Between the mid-1970s and 2006 the Gross Domestic Product of the United States trebled; the level of labour productivity almost doubled; the Dow Jones Index rose from 1000 to 13,000. Yet astonishingly enough, during that entire period, according to several studies, the income of the average American worker and family essentially remained stagnant [whilst] …. from 1980 to 2006, … the wealthiest 10 per cent of Americans increased their share of national income from 35 per cent to 49 per cent.” “By 2006 the wealthiest 1 per cent earned 20 per cent of national income.” [7]

The rich have gained access to virtually unlimited funds in the context of the world economy being on a precipice. People all over the planet have been struggling to pay their bills. When China opened itself up to capitalism the global labour force increased immensely. Consequently, wages could be kept low almost everywhere. Consumption predictably declined and at a time when inflation was being experienced with the rising costs of business inputs. This has occurred in a general situation of global oversupply.
“Corporations had little motivation to increase investment and employment, so no interest in borrowing no matter how low the Fed made the cost of credit. On the contrary, they had every incentive to slow down capital accumulation and reduce costs by way of cutbacks on jobs and plant and machinery, while availing themselves of falling interest rates to pay down their debt. And that is what they did.” [8]

The Washington Post will probably continue to blame China for US’ woes. The US and other nations, however, cannot grow their way out of this slowdown. Governments around the world may try to continue pump-priming aggregate demand but if they do ecological catastrophe and other severe problems will continue to play out. They must stop blocking the urgently needed consolidation and restructuring of our economies.

There is now a dire shortage of energy and minerals and this problem will not be able to be addressed for years to come. The bailing out of big financial institutions is also causing the entrenchment of inflationary expectations.

We need a public media that ceases to point the finger at economic rivals and, instead, looks for real solutions to the whole range of pressing problems we all now face. Or we’ll be inundated by much bigger problems very, very soon. Avoidance is not a strategy.

[1] The currency quarrel
China won't change on command. America must retake control of its own financial destiny.
Tuesday, November 24, 2009

[2] The U.S.-China Economic Relationship: Separating Facts from Myths
Author: Steven Dunaway, Adjunct Senior Fellow for International Economics
November 16, 2009

[3] Canada, Not China, Is U.S.'s Largest Trade Partner
Sunday, January 03, 2010

[4] Facts on the US Economic Empire
by etra Jaimers. Eat the State. Volume 7, #3 October 9, 2002

[5] 'Corporation Nation' by Charles Derber. 1998. ISBN 0-312-19288-6. Pages 59- 62 Chapter three:'The Mouse, Mickey Mouse, and Baby Bells'

[6] (Nolan, P. 12) as quoted in:
The China Factor:Mystery, Myth or Magic?
CTMA Roundtable. Kim Korth and John Cleveland. February 26, 2004
IRN, Inc. 550 Three Mile Rd. Grand Rapids, MI 49544

[7] The Great Recession and neo-liberalism
Extract from Robert Manne's 2009 QE Lecture in Quarterly Essay 36,
19.01.10 12:24 am

[8] Brenner, Robert. (2009). What is Good for Goldman Sachs is Good for America The Origins of
the Present Crisis. UC Los Angeles: Center for Social Theory and Comparative History. Retrieved


r l love said...

The Chinese are replacing US consumers:

ASEAN-China Free Trade Area: Not a Zero-Sum Game
ASEAN Secretariat, 7 January 2010
"1 January 2010 did not only usher in a brand new year but at the same time also rang in a new economic space that would have major ramifications for millions of people in Asia. The date marked the full implementation of the ASEAN-China Free Trade Area – the world’s third largest free-trade area."

"China is a key trading partner of ASEAN – the third largest – and is responsible for 11.3% of total ASEAN trade in 2008 or US$ 192.6 billion. And the statistics clearly show the economic clout of the FTA: a combined GDP of US$ 6.6 trillion, 1.9 billion people and total trade of US$ 4.3 trillion."

"Trade between the parties is an impressive 13.3% of global trade or half of the total trade of Asia in 2008. In addition, the two regions attracted a combined 10% global FDI or US$ 167.3 of foreign direct investment in 2008."

This trade agreement is expected to remove tariffs on thousands of item.

It appears that a replacement for the IMF and the World Bank is also being put in place. The following is from CommodityOnline:

China, Japan contribute $38.4 billion to regional pool
29 December 2009 12:16:39

"China and Japan will each contribute $38.4 billion, while South Korea will contribute $19.2 billion to a $120-billion regional foreign-exchange reserve pool designed to help Asian countries deal with a possible foreign capital flow shortage."

"The total from the three nations will account for 80% of the $120-billion reserve pool."

"The remaining 20% will come from the 10 members of the Association of Southeast Asian Nations."

"The pool is being formed in accordance with the Chiang Mai Initiative, a multilateral currency swap arrangement among China, Japan, South Korea and ASEAN members."

"Asian countries currently hold two thirds of the world's foreign exchange reserves, which total $55 trillion. These countries have suffered a huge loss from the depreciation of the U.S. dollar during the global financial crisis."

These developments do not seem to be receiving the attention they deserve here in the US. (not to suggest that I am surprised by that) ray

minka said...

Is this a 'leave poverty stricken China alone!' view, or not?

I can't even tell, this is so unclear.

The Chinese rise has had a direct impact on US employment and wages. You are right: we could manufacture what we import from them. That is not an argument for focusing on fixing "our problems". It is an argument for reducing trade with China and allowing import substitution to take its course.

We need job growth to get out of this slowdown. That is not the same thing as increasing consumerism and plundering the environment. We could do it with a combo of import substitution (greener that chinese coal based manufacturing) and green jobs in new industries.

What exactly are you advocating?
Why the hands-off for China's predatory policies?

r l love said...

Globalization, as conceived over these past few decades, is beginning to show signs of systemic failure. China now has the World's 3 largest banks, and China now produces more autos than the US.
But of course the original premise of Globalization assigned the dominant roles in lending and auto-making to the US. It seems that the Chinese are unable to find a clear translation for the term "demographic dividend". This should not come as any big surprise though, it seems a great many people who speak English as their first language are a little confused about what "demographic dividend" means as well.
The current circumstances though are exposing that this term describes the process of people who need things producing things, for people who already have too many things. This relationship does however create some upwardly mobile consumers who are then expected to buy goods that only the advanced nations "could" produce. But it seems that the planners of this plan assumed that developing nations were not capable of what they are now clearly capable of. Whether this flaw in the plan stems from underestimating others, or overestimating ourselves, or a combo of both, is hard to say and of little importance now. A more pressing matter is that we need to admit that the original plan is failing and we seem well short of just being able to admit that it was a bad idea in the first place. We should have asked ourselves decades ago, what would we have done had some other powerful nation offered us a similar arrangement? Would we have shared our "demographic dividend" and a portion of the proceeds from the integral lending?
Then if we could only admit that our success resulted not from a superiority of intellect, but instead from the wealth inherent to our natural resources, and from our ruthless exploitation of those resources and of mankind, we may then be able to sort things out going forward.


Brenda Rosser said...

Thanks for the update, rl love. The establishment of an alternative 'free' trade zone and alternaves to the IMF and WB appear to be a predictable response to the 'zero sum game' of empire that the US has engaged in now for a very long time.

Minka, my article wasn't intended to be a story in support of China or America. Merely a response to the totally misleading article published in the Washington Post.
You ask 'Why the hands off China's predatory policies?' A far more complete article certainly would have incorporated such an exploration. The Washington Post article actually elicited a similar response from me when I read it. "Why the hands off America's predatory policies?"

From the viewpoint of someone who lives in Australia I am quite astounded at how Americans tend to display an almost complete lack of knowledge about the extent of the empire their governments have created. The vast majority of citizens who write on online forums such as these don't seem to have been informed of the history of incessant aggression against even some of the most defenceless nations on earth.

Other people in other nations are far more informed, it seems. And such knowledge elicits a widespread response that, in the long term, is almost guaranteed to undermine the wellbeing of the largely unconscious US population.

How can Americans change their government for the better if they don't know what it's doing?

That's why Washington Post articles such as this one need to be highlighted. It's a pretty blatant form of misleading propaganda IMHO.

Rdan said...

May I crosspost Brenda with AB?


Brenda Rosser said...

No worries, Rdan. Go ahead.