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Current Trade Deficit:    
Trade Policy-making Corruption with a New Face
Alan Tonelson
Monday, June 18, 2007
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Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).
On the off chance you’ve forgotten why Main Street Americans believe that Washington politics and government are powerfully rigged against them, John Snow and Peter Peterson have just provided stunning reminders.  Their abuses of the American political system also reveal once again that Congress and most of the media couldn’t play watchdog with an instruction book.

Snow, you may recall, served as Secretary of the Treasury from the beginning of 2003 through mid-2006.  Posterity will not confuse his tenure with Alexander Hamilton’s.  In fact, the inside-the-beltway conventional wisdom dismissed him as a lackluster salesman for President Bush’s ineffective economic policies.  In the process, Snow was blamed for further marginalizing his once powerhouse agency as a Washington policy player.

Snow, however, may be having the last laugh on his detractors in his new job as Chairman of the Cerberus private equity group.  Cerberus, of course, is the proud new owner of Chrysler, having bought the Detroit automaker from Daimler-Benz for a song.  Whereas the German industrial conglomerate paid $36 billion to “merge” with Chrysler in 1998, the company has lost so much value that Cerberus paid only $7.4 billion.  Even better for Snow and Cerberus, more than 80 percent of Daimler’s proceeds from the Chrysler sale will be plowed back into the automaker.

Why was Chrysler in terrible enough shape to make Daimler transparently desperate to sell it? Obviously, foreign competition bears considerable blame for Detroit’s problems and one of the main foreign predatory practices bedeviling the U.S.-owned automotive sector has been Japan’s currency manipulation.  Like the Chinese, the Japanese have intervened massively in foreign exchange markets to keep the yen artificially cheap, and thus give Japanese-made goods equally artificial price advantages in markets around the world.  And here’s where Snow comes in.

During his first year and a half in office, Japan engaged in nothing less than the biggest exchange rate intervention in world history, flooding global markets and cheapening its currency versus the greenback and others by selling 35 trillion yen – a sum equaling about $320 billion.  Japan’s yen diplomacy was so decisive that its currency has remained low without further massive yen sales and corresponding dollar purchases.  The reason? The Bank of Japan clearly has convinced the world’s currency traders not to challenge its power.  Think of it as financial deterrence.

Yet although Japan’s currency policy has significantly subsidized Japanese producers and penalized their U.S. (and European) competition, Snow’s Treasury Department not only sat by idly, but also, as made clear in the new memoirs of Snow’s chief international deputy, John Taylor, actually encouraged these moves.  

The stated rationale: The domestic pump-priming accomplished by such enormous liquidity creation would lift the Japanese economy out of its decade-long slump and (we kid you not) “provide the resources to help Japan play a key role with the United States and other allies in providing economic and security assistance for poor countries.”

The real rationale of course was less ditzy – but no wiser.  After 9-11, an America whose productive base had been weakened by decades of trade policy malpractice could only maintain its first world living standards – not to mention the budget resources necessary to fight a global war on terrorism – if foreign creditors lent the nation money at affordable interest rates.  As is the case now, in late 2002 no foreign creditor was bigger than Japan.  In other words, as has been the case so often since the end of World War II, American leaders have winked at predatory trade practices that undermined the nation’s productive infrastructure and long-term wealth-creation ability for handouts and band-aids to prop up short-dash consumption, thus creating the illusion of prosperity

There’s no reason to suppose that Snow gave Japan a pass on currency manipulation in order to drive U.S. automotive asset prices down to distress levels and then snap the companies up after he left government.  But that’s exactly how things have worked out.  In fact, Chrysler is far from the only automotive property Cerberus has acquired under Snow. In March, it purchased bankrupt parts maker Tower Automotive for $1 billion.  Last year, it bought 51 percent of GMAC, General Motors’ enormous finance arm.  Before Snow’s arrival, in 2004, Cerberus acquired auto supplier GDX.  And it was formerly one of the lead investors in the suspended plan to buy bankrupt Delphi, GM’s former parts division.

Upon acquiring Chrysler, Snow claimed that Cerberus “believes in the inherent strength of U.S. manufacturing and of the U.S. auto industry.” He should have added “especially at fire-sale prices!”

Where Snow has broken new ground in the art of revolving door politics, Peterson has taken idea laundering to new heights.  Idea laundering, as I explained in Congressional testimony last year,  is the practice of funding think tanks for the purpose of cloaking in neutral, pseudo-academic garb research and analysis that promotes the parochial positions of individuals or corporations or industries or other special interests.  Deception is the whole idea, and what distinguishes idea laundering from the type of advocacy engaged in by the U.S. Business and Industry Council – or for that matter, business groups that disagree with us, like the U.S. Chamber of Commerce or the National Association of Manufacturers.  After all, such organizational names make clear that our output reflects a particular perspective.

No individual today launders more ideas than Peterson, who is Chairman of both the Council on Foreign Relations and the recently renamed Peterson Institute for International Economics, and who not-so-incidentally runs the Blackstone group – Cerberus’s biggest peer in the private equity world.

Both organizations employ the typical think tank tactic of using an impressive-looking array of experts to churn out libraries worth of materials lauding the outsourcing-focused U.S. trade policies that fatten the profits of their Fortune 500 and other plutocratic benefactors.  Their paeans to a borderless world, where megacorps are free to organize a race to the bottom for domestic businesses and workers everywhere, no doubt has made life easier and more lucrative in countless ways for the Blackstones of the world.  But the direct contributions of these institutes to the company’s bottom line were surely limited.

No more.

As resentment over China’s predatory trade practices and alarm over China’s growing miliary power reached new heights in Washington this spring, both organizations headed by Peterson released major reports aimed at reassuring policymakers and the media that U.S.-China relations were in fact proceeding just swimmingly, and urging elected politicians to resist public calls to rock the boat – especially on trade.  And almost immediately after their release, Beijing made an investment in Blackstone big enough to make even a multimillionaire like Peterson much, much wealthier.

The Council on Foreign Relations report – sonorously titled “U.S.-China Relations: An Affirmative Agenda, A Responsible Course – summarized the work of a task force comprising many of the usual establishment suspects on the China scene.  America’s economic interests were supposedly represented by

– co-chair Carla Hills, a former U.S. Trade Representative and high priestess of apologism for outsourcing and predatory foreign trade practices;

– Roger Altman, a former Clinton Treasury bigwig who, with his former government boss, Robert Rubin, helped set the previous administration on its NAFTA- and China-happy outsourcing course; and

– Former AIG Chairman Maurice R. “Hank” Greenberg, American business’ foremost panda-hugger, who funds an alarming share of think-tank work on China and globalization.

Looking for a manufacturer large or small? A union representative? Forget it.

Although critical of China’s behavior on numerous specific fronts and endorsing the idea that the United States should stand up for its legitimate interests whether the Chinese like it or not, the report bent over backwards to accentuate the positive. It concludes, for example, that “Growing adherence to international rules, institutions, and norms – particularly in the areas of trade and security – marks China’s global integration.” Not bad for a civilization where the rule of law has been absent for 5,000 years!

The United States, the authors drone on, should (somehow) persuade China to take its World Trade Organization obligations more seriously, (somehow) persuade Beijing to rely less on exports and more on consumption for its growth, and (somehow) persuade China to liberalize its exchange-rate policy – along with enforcing its own trade laws and enhancing export promotion.

But the two top priorities for American leaders are getting America’s “own house in order” by (somehow) raising the savings rate, (somehow) fixing the schools, and giving the losers from expanded U.S.-China and global trade more welfare.  For good measure, Washington should offer to relax export controls, depending on China’s behavior as a weapons proliferator and its general national security posture – as if massive U.S. and other international technology transfers to China haven’t already greatly increased its military power and aren’t bringing it ever closer to the point of technology autonomy.  Eerily, China’s delegation to the recent Strategic Economic Dialogue session in Washington made exactly the same points.

Bottom line: “The United States should approach China...from a position of confidence.”

But Peterson apparently wasn’t completely certain that even this disingenuous mush had certified him as a card-carrying Friend of China.  One month after the Council report’s release, the Peterson Institute, in cooperation with the Center for Strategic and International Studies, chimed in with its second “China Balance Sheet” study.  Much the same cast of characters as that responsible for the Council report were involved – including Hills, her co-chair, retired Pacific Commander Chief Adm. Dennis Blair, the ubiquitous Greenberg, and Nicholas Lardy, the Peterson Institute analyst and the outsourcers’ favorite specialist on the Chinese economy.

And virtually the same arguments were made – though often somewhat more pointedly.  The Balance Sheet authors fretted about “the pessimism and alarmism that too often cloud the public’s perspective” on China.  Unilateral U.S. economic sanctions will never change Beijing’s behavior.  Nor is there much reason that they should have to, because China’s economic rise generally has only affected “the less competitive portions of the American economy.”

Even more important, these limited adverse effects “must also be set against the incontrovertible economic benefits China brings,” notably cheap consumer goods, subdued inflation, and the subsidization of U.S. interest rates and consumption (of Chinese and other goods).

America’s best response to this challenge? You guessed it: “First, the United States must strive even more diligently to put its own house in order” by (somehow) raising the savings rate, (somehow) fixing the schools, and giving the losers from expanded U.S.-China and global trade more welfare. (Yes, this is the same verbatim description I offered of the Council recommendations.)

The obligatory references to seeking a more flexible Chinese exchange rate and better compliance with WTO obligations were thrown in as well. Yet in contrast to these empty generalizations, the Balance Sheet specifically emphasized, “There is no need for any new China-specific legislation in the United States, such as across-the-board tariffs, or for Executive Branch standards and regulations uniquely targeting China."  And of course the “temptation to scapegoat foreigners, as occurred vis-a-vis Japan” during the 1970s and 1980s, must be “diminished.”

Such adamantly reactionary positions were a little surprising.  The Peterson Institute has recently demonstrated a knack for staying politically relevant in Washington by loudly complaining about China’s currency manipulation while never, ever endorsing responses that could actually solve the problem.  Perhaps for that reason, Peterson perceived the need for some conspicuous kowtowing at a critical juncture.

In any event, the China policy status quo endorsements sponsored by Peterson’s institutes seem to have reaped a stunning reward for their boss.  Scant days before the Strategic Economic Dialogue began, Blackstone and China announced that Beijing would pay $3 billion to acquire a 9.7 percent non-voting stake in the private equity group – just under the threshold that would trigger regulatory scrutiny in Washington.  Blackstone sold the shares to China at a 4.5 percent discount to the planned price of Blackstone’s upcoming initial public offering, and China’s investment enabled the firm to boost the IPO float by 75 percent, to 7 million shares.  In return, China agreed to hold the shares for four years, and not to sign similar deals with any of Blackstone’s private equity competitors for the same period unless Blackstone approves  

The China deal will enable Peterson himself to gain $1.88 billion from the IPO while still holding a stake in Blackstone worth more than $1.3 billion.

The failure of Congress and the media even to notice Snow’s windfall from Japan’s currency manipulation arguably can be chalked up to nothing more sinister than a toddler-like attention span and the widespread lack of any institutional memory.  But the indifference to obvious signs of a wildly lucrative Peterson-China connection is more disturbing.  It’s undoubtedly the latest sign that idea laundering, far from being exceptional in American politics and policy, is steadily becoming the norm.

Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).