Too Quick To Blame China

UPDATE: below

A month ago, Mitt Romney published a Washington Post Op-Ed pledging to

fundamentally alter our economic relationship with China. As I describe in my economic plan, I will begin on Day One by designating China as the currency manipulator it is.

Romney's piece came just after Senate approval of a bill that would allow imposition of retaliatory tariffs on any country deemed to have manipulated its currency. (House leaders probably won't let the bill come up for a vote.)

I was home recovering from surgery at the time. But a friend (a conservative Democrat) asked whether I agreed. Here was my reply -- unedited since -- which is light on linkage (because I was flat on my back).
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I hate it. It's my least favorite of Romney's positions. I don't get why people don't understand that:

1) An artificially cheaper Yuan brings down US consumer prices, and not just at Wal Mart--each Detroit car is thought to be $3k-5k cheaper because of Chinese steel and other Chinese exports. As I have argued often on my blog, the trade "deficit" is no bad thing:

A) it's not a "deficit" at all (they won't ship us goods unless we pay for them, so the deficit doesn't mean we owe anything);

B) that kind of thinking is 17th century mercantilism--and look where that got Spain by the end of that century: broke; and

C) look at Romney's own sentence--"The result is that China sells high-quality products to the United States at low prices". If this is "gaming the system," as Romney claims, I want more, not less.

2) The people most hurt by China's cheap Yuan are the Chinese workers themselves. Not only are they not my top priority, but a dissatisfied Chinese people might be good for Chinese democracy in the future. And no economy can go instantly from developing country wages to US minimum wage--thank god there was slum housing and slum jobs in 1939 when my grandfather, grandmother and father arrived in the US--had there been minimum wage, or one bathroom-per-N-people, laws then, my family would have starved;

3) The class of people thought to be second most effected are US manufacturing workers. But, the US still is the #1 manufacturing, and manufacturing exporting, economy in the world (in terms of both units shipped and inflation-adjusted value of goods shipped). What's changed is that manufacturing productivity has improved so much that it takes fewer US workers to produce more (our manufacturing output is back above 2007 levels). This isn't the fault of China at all; it would have happened even if Chinese manufacturing hadn't grown--demonstrating that Romney is focusing on the wrong causal chain. I have no problem with funding some trade assistance retraining -- just not anywhere near the levels Obama wants as a payoff for his union supporters. But, the truth is that America will never again be home to the sort of life-long assembly-line blue collar jobs that generated GDP and employment growth from 1948 through 1973. It's time for Romney (and all Democrats) to stop trying to return to a bygone era and concentrate on the era to come;

4) That era is this: The US is shifting to a knowledge-based, and service, economy. iPads may be assembled in China, but the parts in it come from many countries, and the largest underlying value component -- the intellectual property behind the iPad -- comes from Cupertino, California. But US trade statistics are outdated and don't factor that in; properly accounted for, 3/4th of an iPad ought to be counted as a re-import of a US good. Were we to update our trade statistics (for example, excluding intra-company transfers, and measured by value added), America's "trade deficit" would be cut in half at a stroke--suggesting the "problem" now is exaggerated;

5) Romney worries that failure to retaliate encourages China, and other countries, to keep cheating. But this isn't cheating. We let China into the WTO w/out requiring, as a condition, that the Yuan appreciate. By contrast, changing the rules after the game started WOULD be cheating. And should President Romney unilaterally declare China a currency manipulator, as he promises, I guarantee China would retaliate--and, if China is smart, would do it by bringing a WTO complaint, forcing the US to denounce free trade and eschew the pre-established rules in that international dispute resolution process. The effect would be to give China a free and easy shot at making the US look lawless. I could write China's brief myself--emphasizing, for example, our myriad and mostly illegal "buy America" laws (again, demanded by unions)--and it would be grossly embarrassing to the US;

6) The US is just as much currency manipulator as China. For 30 years, we've deliberately driven the dollar down, to make our exports more cost competitive and imports more expensive. Now we're bitching China is mimicking our Fed? Pot, meet kettle;

7) Sure, China has rules making it almost impossible for US companies to set up Chinese subsidiaries without a majority Chinese partner (or to repatriate profits back to the US). Do I like that?--no, of course not; indeed, I urged (on behalf of a US client) to reject the Chinese concessions as too restrictive. But I lost; we accepted those rules during the debate over Chinese accession to the WTO. It's too late, not to mention churlish, to re-litigate them now; and

8) The one thing I sort-of endorse in Romney's piece is more regional FTAs. As it turns out, we're negotiating one now, with Aus, NZ, Peru, Vietnam, Japan, and a bunch of other countries. So long as consistent with World Trade Organization commitments, regional FTAs are fine. FTA, like the three the House passed this week, will create tens of thousands of jobs. Studies show that the jobs gained by free trade outweigh those lost by almost 2:1. And the new jobs aren't burger-flipping "McJobs" but relatively high-paid knowledge and service industry positions--like me, for example. Virtually all my work is "exported," yet shows up in our trade statistics as domestic--another sign of our faulty trade statistics.

Conclusion: Even a Republican Senator understands the issue better than Romney.

MORE:

From the November 12, 2011, Economist:

In theory, countries’ current-account balances should all sum to zero because one country’s export is another’s import. However, if you add up all countries’ reported current-account transactions (exports minus imports of goods and services, net investment income, workers’ remittances and other transfers), the world exported $331 billion more than it imported in 2010, according to the IMF’s World Economic Outlook. The fund forecasts that the global current-account surplus will rise to almost $700 billion by 2014.

Are aliens buying Louis Vuitton handbags? Are little green men bagging the best sunbeds by the hotel pool? The more down-to-earth explanation is that the global surplus reflects statistical errors. . .

Another possible explanation posits that the surge in the global discrepancy broadly coincides with both the explosion in vertically integrated businesses, where firms locate different stages of production in different countries, and the increase in China’s trade. A rising share of trade consists of parts, semi-finished goods and final products moving across borders between parent companies and their foreign subsidiaries. In 2009 intra-firm trade accounted for half of America’s imports. Transfer pricing used by multinationals to shift profits around the globe may distort trade figures. Much of this mispricing of exports and imports should cancel out, but probably not all.