Tag Archive | "Morici"

The China Syndrome


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The following article by Josh Harkinson appeared on the Mother Jones site here. Campbell Fittings, Penn United and Kason Industries are all members of the Coalition for a Prosperous America.

Campbell Fittings, a maker of precision screws and couplings used by petrochemical, mining, and construction companies, is nothing if not efficient. A typical employee in its factory in Boyertown, Pennsylvania, supervises two machines that each stamp out a new screw every 12 seconds. Yet its Chinese competitors sell nearly identical screws in the US for at least 40 percent less—well below what Campbell pays for raw materials. It’s no secret why: For years, the Chinese government has kept the yuan trading at 40 percent below its true market value, making its exports that much cheaper. “I can fight companies,” says Joe McGlynn, Campbell Fittings’ vice president. “I can’t fight countries.”

The company’s 75 workers aren’t the only ones getting (ahem) screwed over by what is effectively a huge subsidy for China’s manufacturing sector. “Chinese currency manipulation is the single biggest reason why so many Americans are still jobless,” says Peter Morici, a University of Maryland business professor and former chief economist with the US International Trade Commission. Eliminating the practice, economists estimate, would boost American exports by $125 billion a year and create 900,000 US jobs. “The Chinese have figured out that this advantages them even though it’s unfair,” Morici says. “And they are not going to change it until we take action.”

But attempts to address the problem have hit a Great Wall here at home. Senior House Republicans are putting the brakes on the Currency Reform for Fair Trade Act of 2011, a bill that would make China’s currency practices punishable under US law. They oppose it, says an inside source familiar with the negotiations, because “US multinationals with operations in China really don’t like it.” These mega-companies fear that China will retaliate by crimping access to its markets—not to mention that their manufacturing operations in China will make less money selling goods back to American consumers without the subsidy.

“I think it is fair to say that Wall Street firms seeking financial business in China, and multinationals like Caterpillar with big manufacturing activities in China, have lobbied both Republican and Democratic administrations against action,” Morici says. “Goldman Sachs’ and Caterpillar’s interests are more aligned with China than with the US economy.”

Nowhere is China’s political stranglehold more evident than within the ranks of the 11,000-member National Association of Manufacturers, America’s most powerful trade group for factory owners. On the surface, NAM acts as though currency manipulation is one of its top concerns. Its website claims that NAM has “long pressed for China to allow the yuan to appreciate.” The high value of the dollar relative to currencies such as the yuan “simply prices US exports out of the market,” reads a 2010 NAM white paper. “NAM members, especially smaller manufacturers, have made it clear that the number-one factor affecting their exports is the value of the dollar.”

Yet well-placed members say the trade group has been unwilling to take action. It refuses, for example, to endorse the above-mentioned bill, a version of which passed the House last year with strong bipartisan support, but was derailed by Senate Republicans. NAM’s professed concern about currency manipulation “is just lip service,” says McGlynn, an active member. “They are doing it for appeasement.” (NAM did not return repeated calls for this story.)

Supporters of the currency bill, sponsored by Rep. Sander Levin (D-Mich.), say it’s far from draconian. It simply affirms the ability of the Department of Commerce to consider unfair currency manipulation as a factor in trade complaints—a power it already has but has so far declined to use. Far from being a shock to the global economy, the bill would let regulators gradually ratchet up duties against unfairly subsidized Chinese goods. If NAM threw its full weight behind the bill, says my inside source, “It would pass in a heartbeat.”

Not too many years ago, before it became standard practice for American businesses to outsource manufacturing to China, NAM very nearly went to bat on the currency issue. In 2003, its staff assembled several dozen NAM members into a group known as the Coalition for a Sound Dollar (later renamed the Fair Currency Alliance) and drew up a currency-manipulation complaint that it planned to file, in conjunction with the AFL-CIO, at the Office of the US Trade Representative. The effort had the backing of NAM’s then-president Jerry Jasinowski, but in 2004, before the complaint was finalized, Jasinowski was replaced by John Engler, the former Republican governor of Michigan. The trade group backpedaled on its support, so the currency alliance split with NAM and filed the complaint on its own. The Bush administration immediately rejected it, arguing that it “would hamper, rather than advance, Administration efforts to address Chinese currency valuation policies.” (Translation: It didn’t want to piss off China.)

In the ensuing months, the schism within NAM widened. A group of about 50 small and mid-size NAM members known as the Domestic Manufacturing Group began lobbying Congress to pass the Chinese Currency Act of 2005, an anti-manipulation bill then under consideration. When Engler learned of the DMG’s lobbying, he told the group it could not use NAM’s offices or claim any public affiliation with the trade association.

The DMG members kept agitating. Many joined NAM’s International Economic Policy Committee, which in 2006 voted to recommend that the trade group support the Chinese Currency Act. But their victory was short lived. A few months later, in a move that has never been widely reported, NAM’s executive committee, a body stacked with board members representing multinational corporations, took the unusual step of overruling the recommendation.

“A lot of the people who are powerful leaders within NAM are benefiting from the currency subsidy in China,” says DMG founder Dave Frengel, director of government affairs for the Pennsylvania-based tooling company Penn United. “They manufacture there cheaper with all the subsidies and then keep our trade-enforcement laws at bay so that they can import those unfairly cheap manufactured goods back into the US market.”

McGlynn, who is also a DMG member, goes so far as to say that NAM “is being run like it’s the International Association of Manufacturers.” Indeed, 19 of the 29 members of its board’s executive committee (about 65 percent) represent companies with large overseas production capacities—at least 13 have more employees abroad than in the United States. (Pfizer, which has a seat on the committee, won’t disclose where its employees are based.) Since only sitting board members get to elect new board members, it’s little surprise that NAM’s leadership doesn’t reflect its membership—reportedly two-thirds small and mid-size domestic manufacturers.

“A lot of people have different hot-button issues, and NAM is trying to address all of them at the same time,” says Drew Greenblatt, a Baltimore-based manufacturer of steel goods who sits on the executive committee. “It’s a challenge.” Greenblatt adds that he strongly supports federal action against Chinese currency manipulation, but says NAM has focused instead on opposing health care reform, higher taxes, and card check legislation, “things where there’s broad-based support.”

Fed up with NAM’s doublespeak on the currency issue, some small manufacturers have quit the group in favor of more sympathetic organizations such as the Fair Currency Coalition; the Alliance for American Manufacturing; the Tooling, Manufacturing, and Technologies Association; and the 2,000-member US Business and Industry Council. “By me being a NAM member, I was basically preaching against myself,” says Burl Finkelstein, owner of Georgia-based Kason Industries, a 250-employee maker of kitchen supplies that left NAM in 2006 because of its currency stance. While it’s hard to say how many NAM members have dropped out for that reason, the group is clearly shrinking. In 2004, press reports pegged its membership at 13,000, which is 2,000 more than it claims today. In 2009, NAM froze salaries and eliminated 17 staff positions.

In any case, it’s a bit of a mystery why more manufacturers aren’t calling on Congress to deal with the currency disparity. “We’re all too busy trying to run our businesses,” offers McGlynn of Campbell Fittings. “And that’s why we join organizations like NAM: We hope that they represent our interests. But when you scratch away at the surface, you find that it’s not what it appears to be.”

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Morici: 1.7.11: Another Disappointing Jobs Report


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The following was written by Peter Morici, professor at the Smith School of Business, University of Maryland School.

The economy added 103,000 jobs in December. Unemployment fell to 9.4 percent, largely because 260,000 adults dropped out of the labor force and are no longer counted as unemployed by the government.

The President’s $800 billion dollar stimulus package gave the economy a lift and additional tax cuts in 2011 will help too, but those did not address structural problems holding back jobs creation—principal among those is the huge trade deficit.

Since July 2009, spending by consumers, businesses, and federal and state governments has increased at a 3.8 percent annual pace, but imports and the trade deficit have jumped 17 and 37 percent. Simply, too many stimulus dollars are being spent on goods from China, and too few of those dollars return to purchase U.S. exports.

The growing trade deficit is a tax on domestic demand that offsets much of the benefits of stimulus spending and tax cuts. Consequently, the U.S. economy is expanding at a 2.9 percent annual pace, which is not enough to dent unemployment.

Since December 2009, the private sector has added 112,000 jobs per month, but most of those have been in government subsidized health care and social services, and temporary business services. Netting those out, core private sector jobs creation has been a paltry 58,000 per month—that comes to 18 per county as compared to more than 5000 job seekers per county.

oming out of a recession, temporary jobs appear first, but 18 months into the expansion the pace of permanent, non-government subsidized jobs creation should be accelerating. Instead, core private sector jobs rose only 60,000 in December—the same as the monthly pace for 2010, and only about one-sixth of what is needed to get unemployment down to 6 percent by the end of 2013.

By the end of 2013, about 13 million private sector jobs must be added to bring unemployment down to 6 percent, and current policies are not creating conditions for businesses to hire 350,000 workers each month.

The President and new Republican majority in the House agree the budget deficit must be slashed, but whether accomplished through higher taxes or less spending, a significantly smaller budget deficit will reduce domestic demand, kill the economic recovery and push unemployment well above 10 percent, unless the trade deficit is slashed by a like amount.

Beijing’s intervention in currency markets and undervalued yuan creates a 35 percent subsidy on Chinese exports into the U.S. market. Together with high tariffs and other barriers to U.S. sales in the Middle Kingdom, the undervalued yuan is responsible for about half the U.S. trade deficit and high unemployment in the United States.

Diplomacy has failed to end China’s currency market intervention and aggressive mercantilism, and more assertive action toward China protectionism is needed to bring down the trade deficit while reducing the federal budget deficit.

Imposing a tax on the conversion of U.S. dollars into yuan in proportion to Beijing’s currency market intervention—either for the purpose of importing Chinese products or investing in China—would offset the effects of China’s currency market intervention on the U.S. economy. Such a tax would significantly rebalance trade, instigate more investment and jobs creation in the United States, and reduce federal and state budget shortfalls by increasing GDP and tax receipts.

Whatever the merits of free trade internationally and laissez faire domestically, trade with China is hardly free now. Chinese mercantilism and a U.S. government that has not answered it are victimizing too many unemployed Americans.

Imposing such a tax is a tough choice for a president who views himself a liberal internationalist, and for Republicans in Congress who view themselves as champions of free markets, but these are extraordinary times. America needs pragmatic leadership, not blind allegiance to lofty principles, textbook theories and ideology.

We must address the world as we find it, not as we believe it should be.

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Morici: 10.11.10: Tax China and Bankers Pay to Bring Back Jobs


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The following was written by Peter Morici, a professor at the Smith School of Business, University of Maryland School.

Despair grips the nation, as nearly 15 million are counted as jobless and many more languish in part-time employment.

Free trade with China, flawed energy policies and pandering to Wall Street are destroying American prosperity.

China and Oil

Retail sales are up and businesses are replacing trucks, computers and critical equipment but too much is spent on imports.

In the second quarter, imports grew so much more rapidly than exports that the trade gap subtracted 3.5 percent from the demand for U.S. made goods and services. But for the trade deficit, GDP would have been up 5.2 percent instead of a paltry 1.7 percent. At the former pace, unemployment would fall to 5 percent by 2014.

Oil and China account for nearly the entire trade deficit, and without dramatic changes in policy, unemployment will stay near or above 10 percent indefinitely.

President Obama’s efforts to halt offshore drilling and otherwise curtail conventional energy supplies—premised on false assumptions about the immediate potential of electric cars and alternative energy sources—are making United States even more dependent on imported oil and more indebted to China and other overseas investors.

Detroit could build many more attractive and efficient gasoline-powered vehicles now, and a national policy to accelerate fleet replacement would reduce imports, spur growth and create jobs much more rapidly than investments in battery and electric technologies.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40 percent. It accomplishes this by printing yuan and selling those for dollars other currencies in foreign exchange markets. Annually, those purchases exceed $450 billion or 10 about percent of China’s GDP 35 percent of its exports.

President Obama has pleaded with China to stop manipulating its currency, but Beijing shrewdly recognizes he lacks the will to act against Chinese mercantilism; hence, Beijing offers token gestures and cultivates political support among U.S. businesses like General Electric and Caterpillar who lead in outsourcing jobs to China and profit from Chinese protectionism at the expense of American working families.

President Obama should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports—currently, about 35 percent. That would neutralize China’s currency subsidies that steal U.S. factories and jobs. The tax could be imposed on other currencies whose governments manipulate currencies to enjoy large trade surpluses.

Banks

Even with effective responses to oil import dependence and Chinese mercantilism, most small businesses need credit from the 8000 regional banks to expand.

Unfortunately, the Treasury used the TARP to recapitalize Wall Street banks and trading houses, like Goldman Sachs, which then recorded big record profits in 2009 and paid record bonuses with taxpayer money in 2010.

Treasury did not create a “Bad Bank”—an analog to the Savings and Loan Crisis Resolution Trust—to rehabilitate the Main Street banks. Many of those banks were blindsided by Wall Street trading and the credit crisis, and are now stuck with bad commercial mortgages and securities backed by those loans.

While Citigroup Chairman Vikram Pandit pays new bank executives 5 and 10 million dollars a year with its share of the $2 trillion in taxpayer money ploughed into Wall Street by the Federal Reserve and TARP, as many as 3000 of the 8000 regional banks may disappear through failure or acquisition by larger brethren.

Washington provided Wall Street with taxpayer cash to monopolize banking. Now those banks are pushing down CD rates the elderly receive on savings, jacking up credit card fees, and setting aside credit for big multinationals that outsource more jobs than they create. Meanwhile, disappearing small banks have no cash to lend the small businesses President Obama say he favors to create jobs.

To fix small banks, Congress should use repaid TARP money and impose a 50 percent tax on bank compensation over $2 million a year—paid now or deferred—to create a Resolution Trust to purchase loans and securities from regional banks. That trust could work out the loans and securities over several years and return a profit to the taxpayers. Smaller banks would then have the funds to lend and stay in business.

Radical Ideas

Taxes on currency manipulators and bankers and a national policy to build fuel efficient cars are radical departures from free market principals but the nation is in crisis.

Deindustrialization is rapidly reaching the point of no return, and the ascent of China threatens western democratic values globally.

Do Americans really want Beijing making the rules on human rights—forget about trade—in this century. If so, let China continue as banker to American decline.

Athens was a much more civilized place than Rome but in end the Greeks were enslaved by their more practical neighbors to the West.

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Morici: 6/23/10: The Fed, the Yuan and the Failure of Diplomacy


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The following was written by Peter Morici, a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.

When the Federal Reserve Open Market Committee meets Wednesday, no one expects it to raise the federal funds rate—the overnight bank rate that now hovers below 0.25 percent. However, businesses, politicians and prognosticators are eager, perhaps inappropriately so, to hear clues about when it will begin raising short-term interest rates to a more normal level.

Simply, Fed policy is much less relevant to U.S. growth and price stability than in the days of Paul Volcker, because China’s yuan policy has substantially limited the importance of Fed interest rate decisions by severing the historic link between short interest rates—like the federal funds rate it targets—and long rates on mortgages, corporate bonds, and the securities banks use to finance lending on cars and credit cards.

Through the boom years of the last decade, Beijing printed yuan to purchase hundreds of billions of dollars in foreign exchange markets. That made the yuan and Chinese products on U.S. store shelves artificially cheap, and imports from China, coupled with higher prices for imported oil, pushed the U.S. trade deficit to more than five percent of GDP from 2004 to 2008.

When Americans spend that much more abroad than foreigners purchase in the United States, American goods pile up in warehouses and a steep recession will result, unless Americans spend much more than they earn or produce.

During the boom, China facilitated such folly by using its dollars to purchase U.S. Treasury securities, and that kept U.S. long interest rates artificially low, even in the face of Federal Reserve efforts to reign in spending.

From 2003 to 2006, easy terms prevailed on mortgages, homeowner lines of credit, car loans, and credit cards even as the Fed raised the federal funds rate. Americans borrowed against their homes, pushed real estate prices to unreasonable levels, and spent on Chinese goods at Wal-Mart until the credit bubble burst in late 2007 and 2008.

China continues to recklessly print yuan to buy dollars and U.S. Treasuries, and all those yuan are creating inflation and real estate speculation in China that Beijing can’t contain.

With the dollar still overvalued by some 40 or 50 percent against the yuan, the U.S. trade deficit with China, and other Asian countries practicing similar currency mercantilism, is growing again. This deficit saps demand for U.S. goods and services, slows U.S. recovery, and suppresses U.S. land values and fuels fears of deflation in the United States, even though the U.S. banking system is flush with cheap credit from the Fed.

The fact is nothing the Fed does can appreciably accelerate U.S. economic recovery or stem deflation as long as China continues to print yuan, buy dollars and U.S. securities, and make its products woefully cheaper than its comparative advantage warrants in the United States and Europe.

Coupled with its high tariffs and administrative barriers to imports on anything the Chinese can make themselves, no matter how awkwardly or inefficiently, Beijing is hogging growth and jobs, and spreading unemployment and budget misery among workers and governments from Sacramento to Athens.

This past weekend, Beijing announced it will permit some more exchange rate flexibility but we have heard those words before. China will likely permit the yuan to rise slightly against the dollar—much less than six percent a year—while the true value of the yuan rises much more, thanks to Chinese modernization and productivity improvements.

China’s announcement is a cynical ploy to assuage critics less than a week before G20 meetings, and without a substantial one-off revaluation of the yuan, Beijing’s words are hypocritical and selfish.

China’s yuan policy makes the Fed nearly irrelevant but for crisis management—bailing out big banks and European governments that make fatal mistakes.

Worse, President Obama’s failure to take strong action against Chinese currency manipulation—for example, a tax on dollar-yuan conversion to make the price of Chinese products reflect their true underlying cost—crippled the jobs creation effectiveness of his $787 billion dollar stimulus package and delivers ineffective his broader efforts to resurrect the U.S. economy.

Obama’s exclusive reliance on diplomacy forfeits U.S. monetary policy to Beijing, renders impotent U.S. fiscal policy, and visits enormous pain on American workers.

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Dr. Morici: Can Charles Rangel Fix U.S. Trade Policy?


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Can Charles Rangel Fix U.S. Trade Policy?
Peter Morici

The Bush Administration and the House Ways and Means Committee Chairman
Charles Rangel appear close to an agreement to strengthen the labor
rights provisions in pending free trade pacts with Panama and Peru. The
prospect that such provisions could be generalized to all trade
agreements is scaring the pants off unions and business lobbies alike.
Their angst is unfortunate, because stronger labor safeguards will
neither fix what really bothers organized labor about free trade nor
harm American commercial interests.

More below the fold ***********

The Democratic leadership is generally pro free trade, but a deal is
necessary to get new trade pacts through Congress. Many newly-elected
House Democrats received significant campaign support from organized
labor, and for years, unions have urged that trade agreements better
safeguard worker rights. Now unions are getting their wish but slowly
realizing it won’t do them too much good.

Virtually all members of the World Trade Organization have adopted the
eight core International Labor Organization conventions that prohibit
exploitive child labor, forced labor, repression of unions, and
discrimination in employment.

The most a free trade agreement or new WTO rules could do is permit the
United States to exclude imports made by workers denied these rights.
However, the scope of trade potentially affected would not be large,
because the ILO applies these standards flexibly, according to each
country’s level of economic development.

It is not acceptable for 14 year olds to work full time in the United
States but it is in Pakistan, and more rigorously enforcing ILO
standards won’t raise the minimum wage in developing countries. Hence,
incorporating labor standards in trade agreements won’t save U.S.
workers from competing with cheap labor from China or anyplace else, or
restore lost union membership.

U.S. businesses fear international standards, applied through trade
agreements, could negate U.S. laws regulating their workplaces.
However, compared to the ILO core standards, U.S. Department of Labor
regulations are strenuous, and American employers abiding by those
regulations have more to fear from an invasion of Martians than an ILO
inspector.

The important foreign trade practices shutting U.S. factories and
costing union jobs are already addressed by World Trade Organization
rules, but the U.S. government does not effectively assert American
rights to combat their harmful consequences.

At the top of the list are artificially undervalued currencies that
make products in China, India and other Asian countries falsely
inexpensive when sold in U.S. markets. In 2006, China and India dumped
more than $280 billion worth of yuan and rupee into international
currency markets to keep down the values of those currencies. That
created subsidies on exports to the United States averaging about 24
percent.

Throughout Asia, exports to the United States benefit from various
export tax rebates, low interest loans, industrial development grants,
and technology extorted on the cheap by foreign governments from
companies like Microsoft and General Motors.

Whatever monetary gains businesses in developing countries obtain from
compromising workers rights, those could never equal the harm imposed
on U.S. workers and businesses by currency manipulation, other
subsidies and technology extortion.

U.S. countervailing duty (CVD) laws permit businesses to petition the
Commerce Department for import duties that precisely offset the
benefits bestowed by foreign government subsidies. However, since 1983,
the United States has not applied countervailing duties on subsidies
paid by governments in non-market economies, including China. In a
recent case on coated paper from China, the Commerce Department
indicated it will likely abandon that policy but the outcome is less
than certain.

Moreover, although Federal Reserve Chairman Ben Bernanke has labeled
Chinese currency manipulation an export subsidy, the Bush
Administration has refused to apply the countervailing duty laws to
these largest of all subsidies regardless of what country applies them.

For Congressman Rangel, the deal on labor standards is a first small
step toward closing divisions within his own party on trade and forging
a more bipartisan approach to trade policy. Watching him work gives me
new respect for his skills and dedication, but let’s hope his
colleagues address the truly salient issues.

In 2007, the Ways and Means Committee will be considering various
changes to strengthen U.S. trade laws that defend against foreign
subsidies, as well as other unfair trade practices such as dumping
products in the United States at prices below their cost of production.

Hopefully, the Committee will find ways to patch the important
loopholes, including currency manipulation, and give American workers a
fair shake at competing in global markets.

Peter Morici is a professor at the University of Maryland School of
Business and former Chief Economist at the U.S. International Trade
Commission.

Peter Morici
Professor
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
703 549 4338
Cell 703 618 4338
pmorici@rhsmith.umd.edu
http://www.smith.umd.edu/lbpp/faculty/morici.html
http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm

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