PrintNovember 23, 2009
Obama's Failed Asia Trip
President Obama went to Asia this month with great hopes that he could persuade the Chinese government to let its people buy more American products. He failed. Here's the Wall Street Journal reporters' reading of the body language immediately following his final meeting on November 17 with Chinese President Hu Jintao:
(T)he two leaders issued the statement in an awkward fashion -- at a press "availability" where they took no questions, didn't address each other and exhibited body language that seemed to say they had been frustrated by the entire exercise....
President Obama needed President Hu's cooperation, but didn't get it. Without more balanced trade with China, his recovery plan will probably fail. Although Obama's deficit spending caused GDP to blip upward during the third quarter of 2009, the important statistics have almost all been negative. The effects of his consumer subsidy programs (Cash for Clunkers for car buyers and tax subsidies for first time home buyers) are proving to be temporary, mostly causing buyers to move forward purchases that they would have made later. Unemployment keeps increasing and investment by businesses in new factories and equipment keeps decreasing.
In recent months, Obama has been trying to pressure China to buy more American products. On September 25 in Pittsburgh he got the communiqué of the G 20 (the world's 20 largest governments) to call for "balanced global demand." Then six weeks later, he got the G 20 finance ministers in Scotland to approve "a timetable for agreeing on policies to help rebalance global trade." Then on his first stop in Tokyo he asked Asia to buy more American products in order to create good-paying U.S. jobs:
For America, this is a jobs strategy. Right now, our exports support millions upon millions of well-paying American jobs. Increasing those exports by just a small amount has the potential to create millions more. These are jobs making everything from wind turbines and solar panels to the technology that you use every day.
He tried to persuade the Asian governments that their own people would benefit:
For Asia, striking this better balance will provide an opportunity for workers and consumers to enjoy higher standards of living that their remarkable increases in productivity have made possible. It will allow for greater investments in housing and infrastructure and the service sector. And a more balanced global economy will lead to prosperity that reaches further and deeper.
Indeed, balancing trade with Asia would tremendously benefit the U.S. economy while benefiting Asian workers and consumers as well. But instead, America's trade deficit has been going up since February, with our trade deficit with China leading the way. For example, our monthly trade deficit with the world rose to $36.5 billion per month in September, up from $30.8 billion per month in August, while our goods trade deficit with China rose to $22.1 billion in September from $20.2 billion in August, after a slight decline the previous month, as shown below:
Obama is correct that the Asian governments could easily change policies. The Chinese government has kept its currency firmly pegged to the dollar for about a year and a half at a level that gives them a huge trade surplus with the United States. Several other Asian countries recently resumed their currency manipulations so that they would not lose market share to China.
China's Protectionism
The Chinese government only lets its people buy about 25¢ of American products for each $1 the U.S. buys from them. They not only keep out American products through currency manipulations, but also through a wide variety of tariff and non-tariff barriers, including all of the following:
- Autoparts. The Chinese government has high tariffs (about 25%) on foreign-made autoparts. Otherwise the Ford and GM plants in China would be importing them.
- Automobiles. The Chinese government has high tariffs (about 25%) on foreign-made vehicles. The Doha Round of the WTO agreement collapsed because China and India refused to reduce them.
- Video Games and DVDs. The Chinese government allows piracy of these products while delaying approval of import licenses for the legitimate products.
- Chicken. The Chinese government stopped issuing import licenses for import of American chicken at the same time they filed a complaint over U.S. rules against the importation of Chinese cooked-chicken products.
- Mining Equipment. The Chinese government currently has high tariffs (about 25%) on foreign mining machinery, a major U.S. export.
- Computer Products. When the U.S. government hands out consumer subsidies (such as "cash for clunkers") foreign products are eligible, but when the Chinese government hands out subsidies, including subsidies to computer products, only domestic manufacturers are eligible.
- Motorcycles. The Chinese government has numerous barriers to foreign motorcycles, starting with tariffs of about 25% and continuing with restrictions against using motorcycles with large motors on many Chinese roads.
- Nylon. In October, the Chinese government slapped a 36% tariff on U.S. nylon products in retaliation for U.S. tariffs on Chinese tires.
- Solar Panels. China requires that about ¾ of each solar panel purchased in China consist of Chinese-made content.
- Windmills. China used a temporary ban on American windmill parts to keep American parts out of Chinese windmills.
The Chinese government practices the "mercantilist" theory of trade in which it deliberately imposes barriers to imports while subsidizing exports. Economists euphemistically call China's policy an "export-based development strategy." But China is not only increasing its production for export but is also pursuing an "import-substitution development strategy" by imposing barriers to imports. As a result, China enjoys industrial growth while the U.S. experiences industrial decline.
Balanced trade with Asia would lead to a huge boost in demand for American exports. The result would lead to investment in the American manufacturing sector which would pull the American economy out of the recession. Rising American income would lead to rising purchases by Americans for Asian products. Both America and Asia would grow together as each would buy more and more of the other's products.
Unfortunately, the Chinese government is not likely to balance trade in response to Obama's diplomacy. At the current relative rates of growth, their country will soon replace the United States as the premier economic and political power in the world. Why should the Chinese government let us prosper? We are the chief advocate of democracy, the philosophy that poses the most serious challenge to their totalitarian regime.
How to Force China to Change
The United States simply needs to insist on balanced trade. No trade deficit country need import more than it exports. When trade is balanced, it benefits both trading partners. According to the economic theory of comparative advantage, if trade is balanced countries export goods that they produce relatively efficiently in return for goods their trading partners produce with relative efficiency. Both end up benefiting from the exchange. Like barter, each country gives up a bundle of goods it values less for a bundle of goods it values more.
President Obama could tell Chinese leaders that if they do not take down their barriers to our exports, we would start limiting our imports from them to the level of their imports from us. He could have the U.S. Treasury auction Import Certificates, permitting slightly more imports from China than China imports from the United States. Or he could level a general import surcharge upon all imports from China. Either policy would accord with WTO rules which state:
(A)ny contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported.
If the Chinese government knew that we were prepared to limit our imports from China to the level of China's imports from us, it would quickly take down its many tariff and non-tariff barriers to our exports. It could continue its export-oriented strategy, but not its protectionism.
If President Obama succeeds with balancing U.S. trade with Asia, his recovery plan could yet succeed. He would also strengthen the dollar, since, in the long run, trade deficits cause currency declines. But if he isn't up to solving the trade balance problem, he will preside over the continuing decline of the American economy and dollar.
The authors maintain a blog at tradeandtaxes.blogspot.com, and co-authored the 2008 book, Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.
