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August 18, 2009

China Is Being Smart On Trade. Will We?

-- by Dave Johnson

This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture as part of the Making It In America project. I am a Fellow with CAF.

Trade is not complicated. Trade is just an exchange of goods. You trade something for something. I buy something from you, and in exchange you buy something from me. It is simple. It is a win-win bargain because we both end up with something we needed. The wealth of each of us is increased.

In modern times we use money as an intermediary instead of making a direct and immediate trade of one good for another. You have the money I used to buy from you, and you can use it to buy from me in the future. Of course, we both have to agree on what to use as money and its value for exchanges, but once we do our transactions proceed smoothly.

Trade between countries works the same way: we buy tings made in Factorystan and Factorystan gets richer, then the Factorystanis buy from us and we get richer. Both of us have things we didn’t have before.
Add in additional countries and the equations become more complicated. But it comes back to the same principle. Goods are exchanged. Each side benefits.

So obviously the more goods a country makes or grows, the stronger its position in this global system.
Just as the intermediary of money enable individuals to trade more easily, it introduces ways for international transactions to proceed. We agree on the value of the money using “exchange rates.” This allows a balancing mechanism. As countries accumulate an excess of the money without exchanging it for goods made elsewhere the exchange rates fluctuate according to the rules of supply and demand, making their goods more expensive to others. Therefore goods made in the other countries become less expensive and the exchange flows should come into balance.

In free markets things come back into balance. But this natural balancing is not occurring today. China has been building up their economic power for some time. China should be the economic powerhouse now. According to the rules of currency and balance its currency should be extremely strong. Its products should be the most expensive on the planet. Its people should be rich, enjoying the consumption of things made elsewhere. This should be providing strong incentives to open factories in our own country.

This is not what is happening. Instead China’s currency is not strong, so the prices for their goods continue to undercut everyone else’s. China is manipulating the exchange rate so that its currency stays low. This keeps the price of its goods low, and keeps the business flowing to its factories. They are not buying from us. In fact they are even requiring that internally they buy Chinese.

This is occurring under the current rules described as “free trade.” Of course this is not free trade. It is manipulated and enables China to capture much of the world’s manufacturing. China is rising up and seizing the world’s means of production.

China is just being smart. The problem is that we are not responding and protecting our own interests. Our country’s leadership appears to be hamstrung, unable or unwilling to challenge this and develop a long-term economic and manufacturing plan. Part of the reason for this is that a wealthy Wall Street few profits from this in the short term, as we bleed away our country’s long-term interests. Our country’s decision-making processes appear to be under the control of that wealthy Wall Street few. And they are selling China the rope with which it is hanging us.

Theorists tell us that eventually economic forces should force a rebalancing of China’s currency and a shift in the world economic order. But there are a number of problems with sitting back and waiting for this to occur. It could take decades, and things could get (and may already be) so far out of whack that any rebalancing will be “disorderly,” meaning another – and worse – chaotic economic crash. And there is no guarantee that a rebalancing will ever occur. As China increases its economic power it increases its ability to bend the rules in its favor. The lesson learned so far is that manipulating the rules is highly profitable and brings few, if any, consequences.

Even if a rebalancing does eventually occur there is no guarantee that it will help us. When a factory closes we lose more than the jobs. We lose the know-how – the intellectual infrastructure that supports modern technological processes. We lose the supply chain. We lose the customer base. We lose the economic power that could enable us to rebuild. We lose more of our manufacturing capacity every day this situation is allowed to continue.

Our country’s leadership must engage and develop policies to fight this and restore our economic power. We need an economic plan. We need a manufacturing plan. We need an accountability plan, holding Wall Street and China accountable, making them follow the rules. We need to know that our leadership is on our side and is fighting for us.

Trade is a two-way street and it is time that the goods flow in both directions. "Free" trade is not "free" if only one side plays by the rules.

Posted by Dave Johnson at August 18, 2009 11:33 AM


Comments

Could not agree more. I feel this situation should have been the president's first priority. Healthcare, while most assuredly a vitally important issue, could have waited until second term and possibly garnered more support due to the sucessful execution of the issues in the first term. Now I wonder if there will be a second term. He has too many of his irons in the fire and each of those irons demand his utmost and absolute attention. He should have picked one and focused squarely on it, and then moved on to the next.

Posted by: HewisL [TypeKey Profile Page] at August 22, 2009 8:44 AM

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