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Department of the Obvious: A Global Trade War is Looming Even as Officials Downplay It

First decline in global trade in more than 60 years calls in doubt finance capitalism and free market theories as other nations take advantage of the U.S.

by on Apr.16, 2009

TK

Geithner singled out China as having a currency, the renminbi, that is undervalued.

The global economy is in recession, U.S. Secretary of Treasury Tim Geithner said yesterday in a semi-annual report to Congress on international economic and exchange rate policies. Since the start of the recession there have been “more than 5 million job losses” in the United States; job losses globally are “much larger” since the second half of 2008.

Geithner claims that the financial shocks of the past 20 months have caused “transformational changes to the environment in which the U.S. economy operates.” 

Well, the political landscape has certainly changed. Several bills are now pending or threatened in Congress that address currency manipulation and trade policies, and they could potentially close the U.S. market to goods from countries such as China, Korea and Japan.

The problem has been festering for a long time. In the aftermath of the emerging market crises of the late 1990s, many governments put in place “sound policies and institutions,” he said, and attracted considerable capital inflow. 

Geithner fails to point out that this transfer of capital hurt job growth in the United States as factories were built elsewhere, and caused real wages here to decline for the vast majority of Americans. Economic theory is all well and good in an academic setting but the U.S. needs high paying jobs, now and in the future.

And I also find it amusing that the man who evaded paying his share of income taxes, also did not comment on whether the U.S. had instituted the sound policies and institutions he claims foreign economies have. Geithner, of course, presided over the Federal Reserve Bank in New York as the worst Ponzi schemes, mortgage backed securities frauds, and credit default insurance scams careened out of control and brought the global economy to a crashing halt. These unsound practices presided over by demonstrably incompetent institutions put U.S. taxpayers on the hook for billions upon billions of dollars in bailouts — with no end in sight.

The fact remains that foreign economies were and are in Geithner’s words increasingly “dependent on exports for their economic growth and job creation” and accumulated large stockpiles of foreign exchange reserves, often as a form of self-insurance.”

Translation: foreign economies depend on the U.S. to buy their manufactured goods, a proposition that is now dubious as U.S. consumers pull back on spending, but they have little interest in buying goods from us. The U.S. auto market – running at less than 10 million units annually – is but one example of the how the Great Recession is a global affair in its effects. It’s also a demonstration of how major Asian and European companies continue sell large numbers of vehicles with the help of their government’s trade and currency policies; policies that also block the sale of our goods and services to them.

The looming issue for all of us is how we get the U.S. back on track and create jobs in our country, when our trading partners have well organized industrial policies that are designed to take jobs from the U.S., while using this country as the market for goods that used to be manufactured here. This creates a collision of political expediency and economic theory that is on view in Geithner’s report, and in the increasing anger of Congressional Committees.

U.S. Senator Lindsey Graham (R-South Carolina) has been a consistent critic of such practices. Last month he applauded a move by U.S. Trade Representative Susan C. Schwab to use the World Trade Organization (WTO) in a dispute over China’s treatment of U.S. suppliers of financial information services. Graham is a long-time vociferous critic of Chinese trading practices and one of the leaders in the U.S. Senate to end Chinese currency manipulation. “The Chinese have tilted the playing field against American providers,” Graham said. Expect to hear more on this from Graham.

The looming trade war is cloaked in the dense theoretical language in Geithner’s report. Until recently “currency reserve accumulation by emerging market economies in the two years ending March 2008 averaged nearly $90 billion monthly.  Those huge reserves were placed in various U.S. dollar assets.”

Translation: Other countries were accumulating so much of our currency that they increasingly own us.

“Today’s environment is characterized by an unprecedented contraction in global trade and, for many economies, sharp declines in the dollar value of their exports. Virtually every advanced economy and many emerging markets are in recession. Deleveraging and heightened risk aversion by investors has led to a large unwinding of foreign risk positions and a reversal in capital flows to emerging markets,” Geithner said.

This game of using the U.S. slowed during the second half of 2008, and further declined this year as foreign currencies collapsed and reserves were sold to “stem or slow the pace of currency decline.”

So much money was flowing into U.S. Treasury bills that the current account deficit of the United States has fallen sharply from a peak of 6.6% of Gross Domestic Product in late 2005 to 3.7% of GDP in late 2008. Normally this would be good news, but it’s not that we are growing from increased exports of manufactured goods, but rather money is flowing into the U.S. because it is thought to be a safe place until the turmoil in the financial markets wanes.

Not surprisingly, Geithner “did not find that any major trading partner had manipulated its exchange rate for the purposes of preventing effective balance of payments adjustment or to gain unfair competitive advantage.”

Geithner singled out China as having a currency, the renminbi, that is undervalued, even though the currency appreciated by 16.6% between the end of June 2008 and the end of February 2009. However, he completely reversed himself by declining to say that China is manipulating the Yuan, as he did during his confirmation hearings.

Depending on whose estimate you use, the Yuan is still between 20% and 40% undervalued. A true valuation would make Chinese manufactured goods that much more expensive, thereby diminishing their attractiveness here. His statement that manipulation isn’t occurring would be laughable, if there weren’t so many unemployed Americans as a result of this currency issue.

The stark political reality is that the 75th head of the U.S. Treasury is bowing deeply to the Chinese because they own so many of our Treasury bills — $2 Trillion worth–  and that the threatened sell off by the Chinese would have severe consequences for our economy as the dollar collapsed as a result. That’s why China has now proposed replacing the dollar as the world’s reserve currency with a new one. The U.S. is printing so many paper dollars and T-bills that sooner or later our currency is going to collapse if we continue the present policies.

Balanced trade with China (or Japan, Germany, and Korea etc.) is the potential solution to currency imbalances, but U.S. exports to restricted Chinese markets are so minimal that entire cargo ships and planes routinely return there with empty shipping containers. And trade of course means you have to be making something to sell.

Maybe the Chinese will buy some more mortgage backed securities?

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