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Current Trade Deficit:    
NYT's Krugman Starting to Abandon Free Trade Theory for Reality
Kevin L. Kearns
Friday, June 25, 2010
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NY Times columnist Paul Krugman points out the glaringly obvious in his latest column "The Renimbi Runaround" -- and that is that the Chinese government has been rolling US Treasury Secretaries for a decade with promises of appreciating its currency.  The problem is that the Chinese currency, called the renimbi or yuan, has been undervalued significantly for years now.  That allows the Chinese to steal American factories and jobs. One can date the practice to the competitive Chinese devaluation of January 1, 1994, when China decided to steal manufacturing from other low-cost Asian producers by artificially lowering the price of its currency.  

Since then, the Chinese government has intervened in the currency market (and I use the term market advisedly since the extent of the manipulation renders it meaningless) by printing yuan and buying dollars on a massive scale. This practice, illegal under international law and regulations, accomplishes several goals.  It keeps the price of the yuan cheap and thus makes Chinese exports more competitive than they would otherwise be.  It raise the price of incoming goods in China, making them less competitive.  And it allows the Chinese to accumulate a hoard of dollars, which they lend back to us (in the form of buying our Treasury bonds) so that we can continue to buy their artificially cheap goods, perpetuating the vicious American borrow-and-spend cycle.

The Chinese have been toying with American leaders for years -- in particular with vague promises to allow the yuan to move more freely.  In an episode lasting from 2005 to 2008, the yuan appreciated a nominal 17.5 percent, seeming to provide progress.  But the key word here is nominal.  The growing strength of the Chinese economy and vast increases in productivity made the yuan in real terms even stronger than the staged "float."  So the float was a nominal illusion and the yuan actually became more undervalued.  Now that's progress.

The US government has swallowed, hook, line, and sinker, every Chinese trick and manipulation.  The Chinese announcement last week of a new float -- in a cynical attempt to manipulate and disarm any serious discussion of yuan appreciation at the current G-20 summit -- was meet with school-girl like gushing by President Obama and Treasury Secretary Geithner, in a truly pathetic American performance.

It seems the last three American presidents don't want to "disturb" our important bilateral relationship with China, in which, for example, their client state North Korea launches ICBM missiles over Japan, develops nuclear bombs, sinks a South Korean warship, and threatens all-out war on the Korean peninsula. Right! Who would want to put an end to Chinese cooperation with sterling results like these?

In fact, the Chinese are happy to see the US government bogged down with another security crisis.  It helps take some of our focus off the yuan and other problems, like the rapidly growing strength of the Peoples Liberation Army, and Chinese threats to expel the "US hegemon" from the westerm Pacific.

Back to the free-trader extraodinaire Krugman.  He's finally caught on to the fact that what we have with China, and in fact with the rest of East Asia (and many other countries in the world)is not free trade, but manipulated trade -- only we are not doing the manipulation.  While US leaders blindly push for the implementation of theory through new trade agreements and institutions like the WTO, as a result of our Anglo-Saxon obession with the rule of law, the rest of the world is practicing raw economic power politics and taking us to the cleaners.

The result has been the decimation of our manufacturing base, and with it our R&D base, because the two go hand-in-hand in a reenforcing cycle. That's why manufacturing is responsible for 70 percent of American R&D. One result is a serious decline in our ability to maintain our lead in innovation and technology in the future.

The destruction of manufacturing also has resulted in the loss of millions of high-paying jobs, which used to generate further support jobs, and the closure of thousands of factories.  That's why we are witnessing the end of a middle class life for many of our citizens.  Our tax base has also shrunken dramatically.  Is it any wonder that our states are broke, and several are in worse shape than Greece?

Krugman, ever the paper tiger, apparently wants  to give the Chinese just one more chance to fly right.  If they don't start to cooperate soon -- and since he doesn't set any targets for appreciation, he leaves himself open to manipualtion, then it will be time talk about sanctions.  The Chinese are quaking.

No, Mr. Noble Laurate, the time for talk has long since passed.  The time for either traiffs or a tax on yuan dollar conversions is yesterday. There is a point of no return for American manufacturing -- and in fact the entire American economy.  We are rapidly approaching that point.  Once disassembled, manufacturing plants and teams are not easily reassembled. Lost skill-sets and knowledge bases are gone for good. We can't simply, in the great American tradition, throw money at the problem and reconstitute them.  Further, the "industries of tomorrow," a current Obama administration catch-phrase, are in fact built on the industries of today, not on wishes, hopes, dreams, and political rhetoric.  

The strengthening of our current manufacturing base and building upon it to regain lost industries and plant the seeds for new industries is job one for Congress and the Obama administration.  The only way to do that, given our uncooperative, export-obsessed trading partners, is through tariffs high enough to repatriate lost manufacturing.

Sure there will be pain -- here and around the  world. But we have dug ourselves into a 30-year hole, and we are not going to climb out easily.  All those countries that have stolen our factories and jobs should have had a plan for this day.  After all they excell at industrial planning, including hopefully for the day when the free ride ended. Hint: it's called strengthening domestic demand -- something the US govenrment has preached to them for years, to no avail.  They can't say they weren't warned.

So for all the Paul Krugmans and other paper tigers out there, the day of reckoning has come --and in many ways because of your past failures to deal with reality, it is here too late and thus will be accompanied by more pain.

We have no choice but to implement a tariff regimen -- and many other complementary programs along with it (see the USBIC plan to save American Manufacturing, which has been published on our web site for the last five years). No more talk, no more threats, no more chit-chat diplomacy, no more Johnny-come-lately columns.  Just abandonment of cherished but faulty free-trade theories, and bold action -- or we can kiss our high standard of living and middle class good-bye.

Kevin L. Kearns is President of The United States Business and Industry Council. Prior to joining USBIC in 1993, he was a Senior Fellow at the Manufacturing Policy Project, a Washington, DC think tank. For 13 years before that he was a U.S. Foreign Service Officer with overseas assignments in Germany, Korea, and Japan, where he witnessed firsthand the operation of highly cartelized, mercantilist economies.