Wednesday, September 15, 2004

Any start to a measured global climb-down off the ledge of the US current account deficit has to begin with a new relationship between the US and China. So far this calendar year, China accounts for 24% of the overall US goods trade deficit. By comparison, Japan contributes 14.6% of the overall US current account deficit (the BEA won't give overall current account stats for China).

The Bush administration (as did the Clinton administration before it) is happily sacrificing the US manufacturing sector upon the altar of the God Which Emerges from the East, namely ultra-low interest rates financed by Chinese and Japanese investment (mainly from central banks in US bonds). Any climb-down will require more Chinese consumption of US exports, less US consumption of Chinese exports, and less Chinese purchases of US government debt (and less government debt in toto).

The nice way to do this is perhaps on our horizon already, an upwards revaluation of the renminbi.
The Japanese yen rose on Wednesday on hopes of a revaluation of China�s renminbi. Such a move is seen as allowing the world�s second largest economy to accommodate a stronger currency.

After the record US current account deficit of $166.18bn announced on Tuesday, John Snow, US treasury secretary, said the deficit with China was �too large� and unsustainable. He reiterated it was critical to use flexible exchange rates in the global economy. This is seen as a dig at China with its currency pegged to the dollar and a prod for it to revalue.

The world�s most populated economy, whose rapidly rising demand for oil has driven crude prices to record levels, is attending the forthcoming G7 meeting as a guest.

�Snow�s comments put further revaluation pressure on China overnight and this can only increase ahead of the G7 meeting on October 1,� Adam Cole of RBC Capital Markets said.
A floating renminbi is only a negotiating point; it will not come to pass. In fact, a floating currency could throw the entire Chinese banking system into crisis, not good for anybody concerned. So a revaluation should be in the works.

But will it matter? A falling USD since 2002 has had contributed absolutely nothing to reducing the CA deficit, and all the talk about "lagged currency effects" is wearing desperately thin after 30+ months.

The second, less friendly, way of starting to reorient the US-China relationship is via US tariffs on Chinese goods. In fact, this method is probably more effective than the currency path, since through intrafirm trade transnational corporations can avoid the costs of currency fluctuations more easily than avoid a tariff. It also targets those sectors in the US purposely sacrificed (yes, it has been an intentional policy!) by the Clinton and Bush administrations -- light industrial manufacturing.

The General mentioned the other day that South Carolina has lost 17% of its production jobs in manufacturing since January 2001 and North Carolina has lost 22% -- the two states most affected by Chinese textile and furniture exports. Overall South Carolina is only just now even with its jobs numbers from 2001, while North Carolina is still down 2.8% of its jobs since 2001.

Plus, tariffs on Chinese textiles could give Latin America and Africa some breathing room. CAFTA and AGOA were supposed to help these regions of the world particularly through light manufacturing, after all.

Yes, the New York Times, the Washington Post and poor Matt Yglesias will scream "heresy". But I don't practice their religion.


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