http://www.chicagotribune.com/news/opinion/
chi-0507090226jul10,0,3347864.story
Buyer's market
The Bush administration's economic understanding with China puts
U.S. companies on the auction block
$170,000,000,000 ANNUAL U.S. TRADE DEFICIT WITH CHINA
By Richard C. Longworth, a former Tribune senior correspondent and
executive director of the Global Chicago Center at the Chicago
Council on Foreign Relations
Published July 10, 2005
Ah, those were the god old days when the Chinese were a billion red-
book-waving communists and the China syndrome meant a nuclear
meltdown, not a financial one.
Now the Chinese are our bankers, and Beijing wants to buy us, not
nuke us.
Congress and columnists are in a predictable tizzy over the news
that CNOOC, a state-owned Chinese oil company, had put in an $18.5
billion bid for Unocal, a U.S. oil company. This followed the $1.3
billion bid by Haier, a Chinese company, for Maytag, the troubled
but iconic Iowa-based appliance-maker, and the $1.75 billion
purchase in May of IBM's personal computer business by Lenovo,
China's largest computer-maker.
There are several things to be said about all this, none of it good
news for Americans who thought we controlled our own economic life.
First, you haven't seen anything yet. The Chinese have been dipping
their toes into American investments for a couple of years. Now
they've waded in up to their ankles. Pretty soon, they'll want to
make some really big purchases--one of the Big 3 auto companies
maybe. And they've got the money to do it.
Second, there isn't anything we can do about it, without creating a
solution that would be worse than the problem.
Third, this may be good for us. But like a lot of medicine, it's
going to sting a bit.
And fourth, all this stems from decisions by the Bush
administration--a deal with China, if you will--that has put us
deep in hock to a country and a government that may or may not have
our best interests at heart. We may still be the biggest economy,
but we're nowhere near as strong or as independent as we think.
China doesn't own us, although it's working on it. But it does own
great chunks of our national economic policy and, hence, part of
our foreign policy as well.
How did this happen? The answer is a tale of two deficits. The
deficits are separate and have different causes, but they add up to
one big result.
The first deficit is our trade deficit. We simply consume more and
spend more than we produce, 5 percent more. That adds up to a
yearly deficit of $700 billion. We run trade deficits with almost
everybody--with the Europeans and Canadians, with the oil-producing
countries, with Japan and Mexico, and especially with China.
That means we send $700 billion more to other countries every year
than they send to us, $170 billion to China alone. All that money
adds up. At the moment, a lot of it is sitting in Asian banks.
Japan (weren't they supposed to be going broke?) has nearly $1
trillion. South Korea and Taiwan also have great stocks of dollars.
And the Bank of China is sitting on some $800 billion.
This is more of a problem for the Chinese than it sounds. It's
possible to have too much of a good thing, even dollars.
The laws of economics say that, when a country runs a persistent
trade deficit, the value of its currency goes down. This is because
other countries built up a surplus of its currency. When there's
too much of something, its price goes down--the old law of supply
and demand. If there are too many dollars out there, the dollar's
price--the exchange rate--falls.
In time, this solves the trade problem. If the dollar goes down,
American goods should be cheaper for other countries to buy, and
their goods will be more expensive for us to buy. Result: They buy
more, we buy less, and the trade deficit disappears.
This is what is happening in Europe now. As every tourist knows,
the euro is strong, and the dollar is weak. This has not yet
eliminated our trade deficit with Europe but, in time, it probably
will.
This isn't working with the Chinese. The reason is that the Chinese
don't want their currency, the yuan, to weaken. The Chinese are
basing their growth on exports. They need to produce like crazy, to
employ all those millions of workers flowing in from the
countryside, and they need to export like crazy, because the
Chinese themselves can't afford to buy all those goods.
The Bush administration has been pleading with China to let the
yuan go down so we can sell more, buy less and do something about
that trade deficit. The Chinese have ignored these pleas and are
getting away with it, because the Bush administration lets them get
away with it--indeed, needs them to get away with it.
This is where that second deficit comes in.
The 2nd deficit
It is the federal budget deficit, the amount Washington spends over
and above the money it earns in taxes and other revenues.
Last year that deficit was $412 billion. Only five years ago, the
federal government actually ran a surplus of more than $200
billion, the result of the '90s economic boom, plus tax increases
and some tough budget-balancing by Congress and the Clinton
administration.
That's a $600 billion annual swing, from black ink to red. About
half of this is due to the slowing economy and increased post-Sept.
11 spending on the military and security. The other half came from
President Bush's tax cuts, which were meant as a trillion-dollar
giveaway to the rich but have, in effect, turned control of the
U.S. economy over to China and America's other creditors.
An excellent article by James Fallows in the current issue of The
Atlantic Monthly calls this an "unspoken deal with China," a
process in which China agrees to pay for Bush's deficits in return
for a weak yuan and a continued outflow of jobs to China.
Here's how it works. As we saw above, China's huge trade surplus
with us would normally make the yuan more expensive against the
dollar and hurt Chinese exports. The Chinese don't want this to
happen. But it's what would happen if they just sat on all those
dollars.
At the same time, the U.S. has created the biggest budget deficit
in history. Like any deficit, it can only be financed by borrowing.
It would be nice to borrow that money here at home, but Americans
have stopped saving--our national saving rate is nearly zero--so we
don't have the money to lend to ourselves.
The Asians do have the money. Of that $412 billion deficit last
year, no less than $399 billion, nearly 97 percent, was financed by
foreigners.
This is where that "unspoken deal" comes in. As we saw, if China
kept all its billions, the dollar's value would fall and the yuan
would rise.
But the U.S. wants that money to keep our government going. So
China sends those dollars back to the U.S. Treasury, to buy
government bonds to cover the deficit. This demand keeps the dollar
strong and the yuan weak. It also enables Bush to run deficits
without having to raise taxes to pay for them.
As Fallows points out, this deal has another result. It "shifted
part of the U.S. manufacturing base to China." Because the yuan
stays weak, Chinese wages stay low. This stimulates Chinese
manufacturing and helps China sell its products to the U.S., which
keeps the U.S. trade deficit high, which gives China even more
money to lend to the U.S., and so on.
In essence, every dollar Beijing sends back to Washington buys
another American job for China.
It was only a matter of time before the Chinese, like the Japanese
25 years ago, decided to use some of those surplus dollars to buy
American companies. That is what's happening now, and it's only
going to grow.
Although the U.S. House has passed a resolution urging Bush to
scrutinize the Unocal sale, there really isn't much we can do about
this. It would take a lot of chutzpah to tell the Chinese that they
can't spend the dollars we have begged them to take.
Nor would the Chinese listen if we tried. We are locked in a
scorpion's embrace with China, which needs us as badly to
industrialize as we need it to stave off financial collapse. A
Chinese threat to cut back on the lending flow should squelch any
talk about blocking Chinese investment here.
A more serious problem is the Chinese stranglehold on U.S. foreign
policy. Clyde Prestowitz, author of "Three Billion New
Capitalists," a new book on Asia and globalization, has mused about
what happens if Taiwan declares independence from China, China
tries to block this by force, and the Taiwanese invoke the U.S.
promise to protect them.
"It is not hard," Prestowitz said in a speech, "to imagine that the
head of the Central Bank of China might call the secretary of the
treasury and say something like, `John, do you know how many
dollars we have?' I'm not saying it would happen, but you have to
understand the geopolitical elements of this interdependence."
The administration scoffs at the problem. Vice President Dick
Cheney has been quoted as saying that "deficits don't matter." Bush
said the Chinese and other Asians will always want to buy U.S.
government bonds (the same bonds that he says will be worthless
when Baby Boomers need them to pay for their Social Security).
In essence, the administration argues that this "unspoken deal"
will last forever.
Forever? No way
Not a chance. In economics, nothing lasts forever.
Almost anything--a rumor, an oil crisis, a terrorist attack--could
frighten China and the other Asians into stopping their investments
in U.S. bonds and other American assets. This would lead to a run
on the stock market, double-digit interest rates, the pop of the
housing bubble, a first-class recession and, not incidentally, the
collapse of the U.S. market for Chinese exports.
Obviously, this makes no sense for either country. But countries
often do things--like wage wars--that make no sense.
In the meantime, get ready for more Chinese buying of U.S.
companies. Some will be small, like the auto components factories
they are already buying. Some will be huge, like Ford or, if laws
barring foreign ownership of airlines are changed, United.
As it did with the Japanese 25 years ago, this Chinese investment
will raise political storms. But as with the Japanese, it also will
create jobs. And unlike the Japanese, the Chinese have close ties
with so many American companies and know the United States so well
that they can avoid many pitfalls and problems.
In short, the sale of America to China Inc. could be good for both
sides.
While it lasts.
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<DIV><FONT face=Arial size=2><A href="http://
www.chicagotribune.com/news/opinion/
chi-0507090226jul10,0,3347864.story">http://www.chicagotribune.com/
news/opinion/chi-0507090226jul10,0,3347864.story</A></FONT></DIV>
<DIV><FONT face=Arial size=2></FONT> </DIV>
<DIV><FONT color=#0000ff size=6><STRONG>Buyer's market</STRONG></
FONT><BR><FONT id=subhead><FONT size=5><STRONG>The Bush
administration's economic understanding
with China puts U.S. companies on the auction block<BR></STRONG></
FONT><BR><FONT size=4><STRONG><EM>$170,000,000,000 ANNUAL U.S.
TRADE DEFICIT WITH
CHINA</EM></STRONG></FONT></FONT><BR><BR><FONT id=byline>By Richard C.
Longworth, a former Tribune senior correspondent and executive
director of the
Global Chicago Center at the Chicago Council on Foreign
Relations<BR></FONT><FONT idÚte>Published July 10, 2005</FONT><BR><BR>
<DIV id=watermark>
<DIV class=text>Ah, those were the god old days when the Chinese
were a billion
red-book-waving communists and the China syndrome meant a nuclear
meltdown, not
a financial one.<BR><BR>Now the Chinese are our bankers, and
Beijing wants to
buy us, not nuke us.<BR><BR>Congress and columnists are in a
predictable tizzy
over the news that CNOOC, a state-owned Chinese oil company, had
put in an $18.5
billion bid for Unocal, a U.S. oil company. This followed the $1.3
billion bid
by Haier, a Chinese company, for Maytag, the troubled but iconic
Iowa-based
appliance-maker, and the $1.75 billion purchase in May of IBM's
personal
computer business by Lenovo, China's largest computer-
maker.<BR><BR>There are
several things to be said about all this, none of it good news for
Americans who
thought we controlled our own economic life.<BR><BR>First, you
haven't seen
anything yet. The Chinese have been dipping their toes into
American investments
for a couple of years. Now they've waded in up to their ankles.
Pretty soon,
they'll want to make some really big purchases--one of the Big 3
auto companies
maybe. And they've got the money to do it.<BR><BR>Second, there
isn't anything
we can do about it, without creating a solution that would be worse
than the
problem.<BR><BR>Third, this may be good for us. But like a lot of
medicine, it's
going to sting a bit.<BR><BR>And fourth, all this stems from
decisions by the
Bush administration--a deal with China, if you will--that has put
us deep in
hock to a country and a government that may or may not have our
best interests
at heart. We may still be the biggest economy, but we're nowhere
near as strong
or as independent as we think.<BR><BR>China doesn't own us,
although it's
working on it. But it does own great chunks of our national
economic policy and,
hence, part of our foreign policy as well.<BR><BR>How did this
happen? The
answer is a tale of two deficits. The deficits are separate and
have different
causes, but they add up to one big result.<BR><BR>The first deficit
is our trade
deficit. We simply consume more and spend more than we produce, 5
percent more.
That adds up to a yearly deficit of $700 billion. We run trade
deficits with
almost everybody--with the Europeans and Canadians, with the oil-
producing
countries, with Japan and Mexico, and especially with
China.<BR><BR>That means
we send $700 billion more to other countries every year than they
send to us,
$170 billion to China alone. All that money adds up. At the moment,
a lot of it
is sitting in Asian banks. Japan (weren't they supposed to be going
broke?) has
nearly $1 trillion. South Korea and Taiwan also have great stocks of
dollars.<BR><BR>And the Bank of China is sitting on some $800
billion.<BR><BR>This is more of a problem for the Chinese than it
sounds. It's
possible to have too much of a good thing, even dollars.<BR><BR>The
laws of
economics say that, when a country runs a persistent trade deficit,
the value of
its currency goes down. This is because other countries built up a
surplus of
its currency. When there's too much of something, its price goes
down--the old
law of supply and demand. If there are too many dollars out there,
the dollar's
price--the exchange rate--falls.<BR><BR>In time, this solves the
trade problem.
If the dollar goes down, American goods should be cheaper for other
countries to
buy, and their goods will be more expensive for us to buy. Result:
They buy
more, we buy less, and the trade deficit disappears.<BR><BR>This is
what is
happening in Europe now. As every tourist knows, the euro is
strong, and the
dollar is weak. This has not yet eliminated our trade deficit with
Europe but,
in time, it probably will.<BR><BR>This isn't working with the
Chinese. The
reason is that the Chinese don't want their currency, the yuan, to
weaken. The
Chinese are basing their growth on exports. They need to produce
like crazy, to
employ all those millions of workers flowing in from the
countryside, and they
need to export like crazy, because the Chinese themselves can't
afford to buy
all those goods.<BR><BR>The Bush administration has been pleading
with China to
let the yuan go down so we can sell more, buy less and do something
about that
trade deficit. The Chinese have ignored these pleas and are getting
away with
it, because the Bush administration lets them get away with it--
indeed, needs
them to get away with it.<BR><BR>This is where that second deficit
comes
in.<BR></DIV>
<DIV class=text>The 2nd deficit<BR><BR>It is the federal budget
deficit, the
amount Washington spends over and above the money it earns in taxes
and other
revenues.<BR><BR>Last year that deficit was $412 billion. Only five
years ago,
the federal government actually ran a surplus of more than $200
billion, the
result of the '90s economic boom, plus tax increases and some tough
budget-balancing by Congress and the Clinton
administration.<BR><BR>That's a
$600 billion annual swing, from black ink to red. About half of
this is due to
the slowing economy and increased post-Sept. 11 spending on the
military and
security. The other half came from President Bush's tax cuts, which
were meant
as a trillion-dollar giveaway to the rich but have, in effect,
turned control of
the U.S. economy over to China and America's other
creditors.<BR><BR>An
excellent article by James Fallows in the current issue of The
Atlantic Monthly
calls this an "unspoken deal with China," a process in which China
agrees to pay
for Bush's deficits in return for a weak yuan and a continued
outflow of jobs to
China.<BR><BR>Here's how it works. As we saw above, China's huge
trade surplus
with us would normally make the yuan more expensive against the
dollar and hurt
Chinese exports. The Chinese don't want this to happen. But it's
what would
happen if they just sat on all those dollars.<BR><BR>At the same
time, the U.S.
has created the biggest budget deficit in history. Like any
deficit, it can only
be financed by borrowing. It would be nice to borrow that money
here at home,
but Americans have stopped saving--our national saving rate is
nearly zero--so
we don't have the money to lend to ourselves.<BR><BR>The Asians do
have the
money. Of that $412 billion deficit last year, no less than $399
billion, nearly
97 percent, was financed by foreigners.<BR><BR>This is where that
"unspoken
deal" comes in. As we saw, if China kept all its billions, the
dollar's value
would fall and the yuan would rise.<BR><BR>But the U.S. wants that
money to keep
our government going. So China sends those dollars back to the U.S.
Treasury, to
buy government bonds to cover the deficit. This demand keeps the
dollar strong
and the yuan weak. It also enables Bush to run deficits without
having to raise
taxes to pay for them.<BR><BR>As Fallows points out, this deal has
another
result. It "shifted part of the U.S. manufacturing base to China."
Because the
yuan stays weak, Chinese wages stay low. This stimulates Chinese
manufacturing
and helps China sell its products to the U.S., which keeps the U.S.
trade
deficit high, which gives China even more money to lend to the
U.S., and so
on.<BR><BR>In essence, every dollar Beijing sends back to
Washington buys
another American job for China.<BR><BR>It was only a matter of time
before the
Chinese, like the Japanese 25 years ago, decided to use some of
those surplus
dollars to buy American companies. That is what's happening now,
and it's only
going to grow.<BR><BR>Although the U.S. House has passed a
resolution urging
Bush to scrutinize the Unocal sale, there really isn't much we can
do about
this. It would take a lot of chutzpah to tell the Chinese that they
can't spend
the dollars we have begged them to take.<BR><BR>Nor would the
Chinese listen if
we tried. We are locked in a scorpion's embrace with China, which
needs us as
badly to industrialize as we need it to stave off financial
collapse. A Chinese
threat to cut back on the lending flow should squelch any talk
about blocking
Chinese investment here.<BR><BR>A more serious problem is the Chinese
stranglehold on U.S. foreign policy. Clyde Prestowitz, author of
"Three Billion
New Capitalists," a new book on Asia and globalization, has mused
about what
happens if Taiwan declares independence from China, China tries to
block this by
force, and the Taiwanese invoke the U.S. promise to protect
them.<BR><BR>"It is
not hard," Prestowitz said in a speech, "to imagine that the head
of the Central
Bank of China might call the secretary of the treasury and say
something like,
`John, do you know how many dollars we have?' I'm not saying it
would happen,
but you have to understand the geopolitical elements of this
interdependence."<BR><BR>The administration scoffs at the problem.
Vice
President Dick Cheney has been quoted as saying that "deficits
don't matter."
Bush said the Chinese and other Asians will always want to buy U.S.
government
bonds (the same bonds that he says will be worthless when Baby
Boomers need them
to pay for their Social Security).<BR><BR>In essence, the
administration argues
that this "unspoken deal" will last forever.<BR><BR>Forever? No
way</DIV>
<DIV class=text> </DIV>
<DIV class=text>Not a chance. In economics, nothing lasts
forever.<BR><BR>Almost
anything--a rumor, an oil crisis, a terrorist attack--could
frighten China and
the other Asians into stopping their investments in U.S. bonds and
other
American assets. This would lead to a run on the stock market,
double-digit
interest rates, the pop of the housing bubble, a first-class
recession and, not
incidentally, the collapse of the U.S. market for Chinese
exports.<BR><BR>Obviously, this makes no sense for either country.
But countries
often do things--like wage wars--that make no sense.<BR><BR>In the
meantime, get
ready for more Chinese buying of U.S. companies. Some will be
small, like the
auto components factories they are already buying. Some will be
huge, like Ford
or, if laws barring foreign ownership of airlines are changed,
United.<BR><BR>As
it did with the Japanese 25 years ago, this Chinese investment will
raise
political storms. But as with the Japanese, it also will create
jobs. And unlike
the Japanese, the Chinese have close ties with so many American
companies and
know the United States so well that they can avoid many pitfalls and
problems.<BR><BR>In short, the sale of America to China Inc. could
be good for
both sides.<BR><BR>While it lasts.<BR></DIV>
<DIV class=text><FONT face=Arial size=2></FONT> </DIV></
DIV></DIV>
<br><br>
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<BR>
OM<BR>
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