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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. Complete archives at http://www.sitbot.net/ Please let us stay on topic and be civil. OM
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