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To those who say China will just sort of change


I and other CPA members met with U.S. Treasury staffers last November about the China currency and trade imbalance problem.  We requested that Treasury shift from relying upon dialogue to get China to change, and rely more heavily on actions under our control.  Like neutralizing currency subsidies through countervailing duties.  But the Treasury personnel simply believe that their dialogue was making an impact on their Chinese counterparts.  After more than a decade of dialogue attempts without more leverage, and with double digit Chinese growth as the U.S. stagnated and went into recession, we were not convinced.

The core issue is China’s persistent and growing trade surplus with the U.S.  They grow through a multi-faceted strategy to penetrate our market and harvest $300 billion per year in net funds via trade.  It is not a Polyanna “win-win” strategy with a balance of benefits.  It is extractive.  We are in a different game than they.

Wen Jiabao buttresses my argument, in his final address as China’s prime minister.

Mr. Wen, the nation’s top economic steward, set a 7.5 percent target for growth in the coming year, an enviable rate in much of the world but well below the double-digit increases that have in recent years made China one of the world’s fastest growing economies. He also pledged to create more than nine million jobs in Chinese cities and to keep the rate of inflation at 3.5 percent.

“Development is still the key to solving all our problems,” he said. …

“China is still in the primary stage of socialism and will remain so for a long time,” he said.

The 7.5% growth target is significant because it cannot be achieved without continuing the industry, jobs and wealth distraction from the U.S.  We’ve long talked about their means of doing so:  currency manipulation, strategic border taxes (VATs) and rebates, state owned and controlled enterprise subsidies, and other tactics to implement their five year plans.

But the point is that they are not on the cusp of rebalancing their economy to rely upon domestic consumption.  They must rely upon consumption from the U.S. consumer.  They must export far more than they import to accomplish a 7.5% growth target which would continue to be a growth outlier among large world economies.

Thus, the Treasury Department and the Congressional leaders that believe dialogue is the way to go must admit two things: (1) it has failed so far; and (2) there are no signs that it will avoid failure in the next decade. In the meantime, American citizens endure the hardship of unemployment, fiscal debt, broken families due to poverty stresses, and lost opportunities.


11 Responses to “To those who say China will just sort of change”

  1. Milt Heft says:

    An excellent article, but as usual there is one piece left out of the analysis: OUTSOURCING. It is not possible to accurately analyze our trade imbalance without mentioning 50,000 American factories that have moved mostly to China, and the resulting unemployment of 5 million American factory workers. Placing the cause of our predicament on “market forces”, taxes, wages, subsidies, etc. only masks the reality of our own American outsourcers who have forgotten that they are American citizens. Federal action could stop this in an instant. Meanwhile, WE ARE DOING THIS TO OURSELVES.

    • W. Raymond Mills says:

      Mr. Heft - I regret that I must disagree with you. Outsourcing is an inevitable and necessary reaction to U.S. trade policy. If producers in Taiwan, South Korea. Vietnam, China, Germany and Japan can have unrestricted access to U.S. market, some of the goods produced overseas will put U.S. producers out of business. Criticize U.S. law makers and the political forces that insist on no tariffs on imports. They are the persons responsible for our excess of imports over exports. Business people must deal with the competition as they find it.

  2. Tom T says:

    It is simply time to put an income tax on China’s trade until we have a balance of trade.

  3. Milt Heft says:

    Ray Mills:

    Your reply to my my beef abut OUTSOURCERS may have missed my point. You say:

    “If PRODUCERS in Taiwan, South Korea. Vietnam, China, Germany and Japan can have unrestricted access to U.S. market, some of the goods produced overseas will put U.S. producers out of business.”

    I am not complaining about foreign competition. I have no beef with CHINESE producers. I am complaining about American companies who invest in new facilities in, say, China, build up their factories, hire Chinese workers, fire their American workers, give away their technology, sell their goods back into the United States, and stuff their Chinese profits into their bank accounts.

    Chinese producers are not putting American producers out of business. It is the AMERICAN PRODUCER IN CHINA that is doing this. Do you think that the Chinese could build their own GM factory? If they could have, they would have. It takes GM to build a GM factory.

    • W. Raymond Mills says:

      The U.S. Bureau of Economic Analysis published an article in SURVEY OF CURRENT BUSINESS in November of 2011 titled “Operations of U.S. Multinational Companies in the United States and Abroad”. They say:
      1.”The operations of U.S. Multinational Companies remain concentrated in the United Stats: U.S. parents accounted for more than two-thirds and foreign affiliates for less than one-third of combined value-added”.
      2. “Sales by foreign affiliates (of MNC’s) were 4.8 trillion… Sales to U.S. customers accounted for 9%” (of that 4.8 trillion)(in the year 2009)
      3. “The longstanding tendency for foreign affiliates to serve as means for parents to access foreign markets rather than as a low-cost base of production from which to sell to the U.S…In both 1999 and 2009,about 90 percent of the goods and services produced by foreign affiliates were sold to foreign customers”.

      In my opinion, it diverts attention from our real problem when a magazine like the Economists ask whether U.S. firms should produce more in the U.S. The important question is why U.S. foreign trade policy allows enough imports into the U.S. to swamp the volume of exports we sell.

      U.S. business firms are struggling in a competitive environment they did not create - but their government does nothing to correct or improve. I salute our corporations that are able to make money in this environment by producing overseas to serve customers located overseas. Any way they can survive following existing laws in the face of other governments aggressive actions to export to the U.S. should be applauded.

      • W. Raymond Mills says:

        One other point. Table 5 of the article is titled “Real Value added by Majority-owned Foreign Affiliates in Manufacturing by Country, 1999-2099″ Ten percent of the total is produced in China.

        The goods you see in the U.S. labeled made in China are produced by Chinese companies, not foreign affiliates of U.S. companies. China would have almost the same large trade surplus with the U.S. if no U.S. firms were producing in China.

        • W. Raymond Mills says:

          I apologize for running on. The recent new about IPad’s made in China and sold in the U.S. contradicts the evidence above. Perhaps the reality in 2013 is different from 2009. The large order for IPad’s would influence overall statistics but I do not know how much change it would create.

  4. Milt Heft says:


    We all agree that at l;east 50,000 American factories have moved abroad, leaving 5 million factory workers unemployed plus an additional 15 million service workers.

    Whether American goods, made in China, are exported into the United States or exported to countries other than the US, is not very material. Either way the 20 million unemployed Americans are still out of work, the 50,000 factories are still closed.

    You say: “China would have almost the same large trade surplus with the U.S. if no U.S. firms were producing in China.”

    Not exactly a complete analysis. If the US firms returned home there would be TWO effect: First, China would have less exports, both to the US and to the world. Second: There would be even more US exports because orders from foreign countries would be filled by our rejuvenated American factories instead of US factories in China. Result: Our INTERNATIONAL BALANCE OF TRADE would be more balanced. And our newly employed 15 million would have the REAL purchasing power to buy our own stuff.

    As a side remark, it is now interesting to see the OBAMA administration scrambling to increase taxes and reduce spending, when only a few months ago they were in the middle of “Stimulating” the economy by printing money and passing it liberally around. There is a HUGE difference between spending/taxing and producing/consuming. The message I have for Obama is “THERE AIN’T NOTHING TO STIMULATE”.

  5. W. Raymond Mills says:

    Mr. Heft. If wishes were horses beggars would ride. Three economists were marooned on an island. Discussing how to get off, one said “Postulate a boat”.

    When you tell me what changes in economic or political forces will bring 50,000 factories back to the U.S. I will be happy to join in the celebration.

    • Tom T says:

      Raymond, I think a balanced trade policy is an economic policy that would allow U.S. factories to remain in the United States and perhaps new ones built. Warren Buffet’s plan is one solution that would accomplish this goal.

      We should not look at foreign based companies to do this on their own free volition. They will adhere only to an enforceable policy that we develop to change the situation, like Warren Buffet’s plan. Another would be just to have tariffs on all goods over and above what is encompassed in a balance of trade.

      We are getting into two separate issues here. One is whether or not we allow foreign companies to export to the United States while we have an imbalance of trade and the other is whether or not we allow foreign companies advantages that are produced by policies that allow that to happen.

      The first was a problem we had with Japan and automobiles. In response, we basically told the Japanese that they had to have production facilities in the United States to sell in the United States instead of continual exports accepted from Japan. We changed that situation and now Japanese companies have facilities here in the United States. This produces more incomes from Americans that in return pay taxes that support our government. In the previous situation, we allowed the benefits of production and sales in the United States to be captured by Japanese companies and Japanese workers as well as the Japanese government.

      The second is a product of the policies of the first. With Japanese factories here in the U.S., they produced here and tax revenues were captured by the U.S. government. We have a relative stable country in part because citizens pay taxes and support a government that protects them and also provides stability around the world. Exports from Japan without reciprocal imports from the United States means that on net, the Japanese government and Japanese citizens reaped the rewards of our market while we lost government supporting revenue.

      This is why I said we need an income tax on all trade that creates and is a function of this imbalance.

      We did it with Japan and we could do it with China if we had a U.S. Trade Representative that was worth their salt instead of one that writes trade agreements with self applause on the “promise” that these agreements will be a net benefit to all parties. Instead, we get a few companies an opportunity to reap the rewards of trade as they arbitrage our economic activity to the lowest common denominator and are able to park profits overseas.

      We have a system that is broken, we can fix it as we did with Japan, but we have a trade policy that, as Heft describes, allows a net export of wealth to these other countries and the companies that game our economic activity.

      All imports should have the same production costs that our government imposes on domestic production and when they do not, they should be adjusted at the border. Currently, this “free trade” ideology sells economic activity to companies and countries that game the rules.

      I personally want all Chinese to do better and have a higher standard of living through trade, but not at the cost of completely open markets that lead companies to game the system and capture economic benefits by displacing the laws that govern production through global arbitrage.

      To be sure, this kind of activity creates lower cost of goods for consumers but it also comes at the cost of economic activity that these consumers can participate in. I agree with you that printing money is no substitute for a better trade policy but the over all effect is that it reduces the value that accrues to foreign suppliers. It is the mechanism that creates a balance in trade. That mechanism is not allowed to operate when the Chinese or other countries set the value of their currency instead of allowing the market to set the value of their currencies.


      • Tom T says:

        I just also have to say that some governments have been smart about the situation I outlined above. Our government is too ineffective to do this. Their response was a value added tax that allows them to tax economic activity that gets sold in their markets whether they are manufactured in their economy or not so that importers help pay for their government instead of getting the benefits of their markets without paying for them.



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