By Robert J. Samuelson
Wednesday, May 4, 2005
It's a sign of the times that well-known economist Fred Bergsten, an avowed free-trader, thinks the United States should threaten to impose a 50 percent surcharge on imports from China. He's not alone. In April the Senate voted 67 to 33 for a proposal from Democrat Charles Schumer of New York and Republican Lindsey Graham of South Carolina to adopt a 27.5 percent surcharge. The U.S.-China Economic and Security Review Commission, created by Congress in 2000, also urges a surcharge. The point of these proposals is not actually to impose the duties. It is to persuade -- intimidate , really -- China to raise the value of its currency, the yuan, by 25 percent or more.
Can this be serious? Well, yes. The blame for today's unsustainable pattern of global trade -- expanding U.S. deficits and Asian surpluses -- lies heavily in Asia. Led by China, the region depends on export-led economic growth. This siphons jobs and production from the United States and, particularly in textiles and apparel, from poor countries in Africa and Latin America. They can't compete with China's cheap labor and cheap currency. Bergsten fears a protectionist backlash. His plan aims to preempt that by forcing China to revalue. He notes the irony: "You've got to threaten protectionism to avoid protectionism."
In theory, trade flows ought to change. A higher currency would make Chinese exports more expensive on world markets. It would also make U.S. exports cheaper in China. Beyond that, a higher yuan would allow other Asian countries to revalue their currencies. These nations "are terrified to revalue their currencies [alone] because they'll become even less competitive" against China, says Robert Scott of the Economic Policy Institute. If all Asian countries moved together, there's a chance that today's huge trade imbalances would narrow. U.S. exports to Asia would strengthen and U.S. imports would slacken.
Let's admit that the gambit could backfire. A U.S. import surcharge, if ever invoked, could roil U.S. relations with all of Asia. There would be fierce challenges to its legality under international trade law; proponents say it's a permissible response to China's "currency manipulation." Facing a humiliating capitulation to the United States, China might retaliate. Would it cancel commitments to buy 60 new Boeing 787 Dreamliner aircraft? Cooperation on other matters -- notably North Korea's nuclear weapons -- would surely suffer. Still, there are dangers in not acting, because the underlying problems will only worsen with time.
"Out here in Asia," economist Stephen Roach of Morgan Stanley recently wrote, "they have only one question for me: How's the American consumer?" Little wonder. China is now the hub of a regional economy that depends on U.S. shoppers. In 2004 the American trade deficit with China alone was $162 billion; in 2003 it was $124 billion. In 2004 exports were 35 percent of China's gross domestic product, up from 20 percent in 1999, reports Roach.
To be sure, there have been huge benefits. Asians get jobs; Americans get cheap consumer goods. But the dangers increasingly overshadow the gains. When Americans buy more abroad than they sell, they go deeper into debt. In practice, American consumers have borrowed more and more. China and other Asian countries foster this by investing the surplus dollars earned from exports in U.S. Treasury bonds and other dollar securities. This recycles the money into the United States. It helps hold down U.S. interest rates, encourages American consumers to borrow and (simultaneously) keeps Asian currencies from rising. If dollars were sold for Asian currencies, the dollar would drop and Asian currencies would increase.
This can't continue indefinitely. Here are two ways it might unravel. First, Americans may recoil from rising debt burdens. People may grow uneasy with their monthly payments. Lenders may decline to make riskier loans. At year-end 2004, household debt (including mortgages) was 121 percent of annual disposable income, reports the Federal Reserve. Four years earlier, it was 103 percent of disposable income. Second, the continuing loss of factories to China may reduce employment growth and fan job insecurity. These developments could threaten the recovery or incite protectionism -- if not today, then someday.
By all logic, China shouldn't object to revaluing the yuan. Despite astounding economic progress, it's still a poor country. In 2004 about 416 million people lived on less than $2 a day, estimates the World Bank. Yes, that's down from 800 million in 1990, but it's still 32 percent of the population. China ought to be producing mostly for its own people and exporting mainly to buy essential imports. The trouble is that, after Japan pioneered export-led growth in the 1970s and 1980s, many other Asian countries became eager imitators. They emphasized efficient export industries and tolerated inefficient domestic markets.
With Asia now a third of the world economy, this strategy jeopardizes the entire trading system. It squeezes other countries out of export markets or requires someone else (the United States) to run unsustainably large trade deficits. Japan is ironically now a victim. It lost many export markets, and weak domestic markets have produced 15 years of semi-stagnation. China and other Asian countries need to move from export-led growth and toward stronger domestic consumption. There's now huge pressure on China to revalue the yuan; but a small move (3 to 5 percent) won't do much. The threat of punitive tariffs is a stupid, dangerous way of pushing for more. But it's better than nothing.