Chinese president's U.S. visit allays trade fears - for now
President Hu of China recently paid his first official visit to Washington, where he temporarily dampened loud accusations from hawkish politicians preparing for U.S. Congressional mid-term elections in November. Let us put these unfair accusations in perspective.
First, the whopping Chinese trade surplus with the U.S. — around $200 billion in 2005 — should have been dealt with by the Americans long ago. The overall U.S. trade deficit — close to $800 billion in 2005 — has been increasing over several decades, and started before China’s economy opened up.
The U.S. has imposed for several decades a quota system for textile and apparel products from developing countries. Agreements through the WTO called for the U.S. to phase out its quota system on Jan. 1, 2005, and provided an adjustment period for the U.S. industries.
Since January 2005, China’s export of textile and apparel products has surged tremendously, even taking away some other countries’ market share.
There has been an enormous gain in the U.S. in terms of “consumer surplus,” and huge gains for importing companies and brand-name designers resulting from lower production costs in China. These products are manufactured under very unfavourable working conditions — lower wages, long hours and lack of safety and health standards that are unacceptable in North America.
The U.S. has trade deficits with many other countries besides China. The way to correct this is through income adjustment, i.e., increase domestic saving by curbing the voracious American appetite for imported foreign goods.
The U.S. must exploit its innovative capacity, and crank out new products that foreign consumers will buy. It has to retrain workers who have lost their jobs so they will be re-employed in other industries. As the income of emerging economies increases around the world, those countries will import goods produced in the U.S.
China has also been accused of manipulating its foreign exchange rates by pegging the yuan with the U.S. dollar. Its currency was devalued in 1994 after adopting a unified exchange rate; since then it has been pegged to the U.S. dollar.
This makes economic sense. The Chinese yuan is likely undervalued measured in terms of China’s trade surplus, sustained capital inflow in the form of foreign direct investment and the huge international reserves accumulated over many years.
However, there are economic costs associated with keeping a fixed exchange rates regime. Chinese consumers will save more, spend less, and be forced to pay higher prices for imported goods. Producers in China will pay more for imported intermediate goods.
Furthermore, to maintain fixed exchange rates, the Chinese monetary authorities have to offset a surge in their domestic money supply resulting from their trade surplus, and are braced for rampant speculation in Chinese currency.
The Chinese government will probably revaluate its currency upward gradually, because the Communist Party wants to avoid any domestic destabilizing disturbance in its economy that would pose any threat to their power.
Indeed, there is a general belief among economists that economic growth will eventually lead to democracy.
However, while China has liberalized many aspects of life, there is no evidence that the country is moving in this direction. In fact, the government has recently tightened up restrictions on media freedom, e.g., imposing censorship on Internet traffic.
I do not see any prospect in the foreseeable future that the Communist Party will loosen its tight grip on political power, even if its economic growth is sustained.
Readers are invited to contact Barbara Black with ideas for future Viewpoints. Contact her by email at barblak@alcor.concordia.ca