All right, it’s time to take John McCain to task again.  He’s gone and done it once more—said some things that just don’t add up.

  In a Town Hall meeting yesterday morning in St. Louis, the good Senator made a very revealing remark: “The moral of the story is…we’re not going back to the old manufacturing base of the economy.”

But what exactly does that mean?

In the past 150 years, the United States amassed the greatest concentration of manufacturing capability in the history of the world.  In 1860, our economy was half that of Great Britain’s.  By 1913, it was more than double. 

In World War II, the United States became the “Arsenal of Democracy,” building more than 300,000 airplanes in five years.  In the years since 1945, the United States has generated much of the world’s wealth and served as protector and benefactor for many struggling countries.

Does anyone believe this would have been possible without a massive industrial base?

Consider some statistics:
-Manufacturing creates wealth: it generates $1.6 trillion for the U.S. economy—12% of GDP. 
-Manufacturing supports millions of good-paying jobs: it employs 14 million directly, with another 6-8 million related jobs throughout the rest of the economy.
-Manufacturing accounts for nearly three quarters of the nation’s industrial research and development. 
-Manufacturing provides the military hardware necessary to maintain our national defense. 

  But if we’ve lost 40,000 factories in the past 10 years, shed 3.5 million middle class manufacturing jobs since 2000, and are “not going back to the old manufacturing base,” just exactly where are we headed?  Is there some greater, even more prosperous route to be found in a nation of burger flippers and cash register attendants?

But it doesn’t end there.  In the same St. Louis speech, McCain also said, “I do not believe in isolationism and protectionism.” 

Fine, if true.  But it contradicts everything Senator McCain has wrought in his elected career.  Inexplicably, he has blocked every U.S. effort to tackle China’s protectionist trade practices, including illegal currency manipulation.

  And so, his comments about “old manufacturing,” like his inconsistency on China, reveal troubling hypocrisy in a would-be president.  They also demonstrate a simplistic disregard for history at a time when the United States is financially and militarily overextended throughout the world. 

To suggest that manufacturing is an antiquated part of the economy defies both common sense and the irresistible laws of commerce.  Like gravity, job losses tend to weigh us down, not build us up.  It’s doubtful, though, that Senator McCain gets the point.
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Treasury Secretary Henry Paulson testified before the Senate Budget Committee yesterday.  Chief among the topics of discussion was a potential economic stimulus bill.  However, Paulson was also queried about Congressional efforts to address China’s artificially devalued currency.

“Bordering on the silly” was Paulson’s view of such legislation targeting China’s illegal undervaluation. 

Verging on DoubleSpeak, Paulson stated: “I have engaged very actively with China. Engaged — and I think with some results — when you look at the currency.  Don’t be confused by the fact that I say I’d like them to move quicker, because I would like them to move quicker but their rate of appreciation of the currency roughly doubled last year to 6.7 percent.”

Most economists estimate the Chinese yuan to be at least 40% undervalued—creating an artificial subsidy for Chinese exports.  This currency rigging has been going on since 1994, so it’s hard to say what timeframe Mr. Paulson is looking at when he celebrates a 6.7% rise in the currency.

Time passes, though.  Civilizations rise and fall.  Nero fiddled while Rome burned.  The Treasury Secretary chats up Beijing while U.S. factories fold.

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It’s funny what folks can do when they put their minds to it.  And it’s even more amazing what the U.S. Congress can do when voters speak their mind.

A Reuters article today notes that the “Bush administration and Congress moved closer on Thursday to battles over free trade agreements with Colombia and South Korea and bills to curb the huge trade deficit with China.” 

With polls showing the economy as a top voter concern, it’s no wonder that Congress is finally paying attention.  Unfortunately, U.S. Trade Representative Sue Schwab is not enthusiastic about Congressional action to address China’s illegal currency manipulation.  According to Schwab, “This is not a good time for Congress to be seeking quick fixes for complex international economic challenges.”

It seems that Schwab doesn’t feel Congress is sufficiently skilled to meddle in the realm of international trade.  No matter that Article 1, Section 8 of the U.S. Constitution specifically empowers the Legislative Branch to “regulate Commerce with foreign nations.”  But Schwab is preoccupied with ensuring smooth U.S.-China relations, and worries that “legislation aimed at China could backfire on the United States.”
 
What the honorable Office of the USTR overlooks is that Congressional response to China’s 14-odd years of currency rigging—a practice deemed illegal by the WTO—is not a sudden effort or “quick fix.”  There’s a broad bipartisan consensus that action needs to be taken.

The overarching picture is not complex:  China is cheating.  Congress is owning up to its “We the people” mandate and taking action to ensure that U.S. businesses and workers have the same opportunity to compete as our trading partners. 

Regrettably, USTR favors the status quo, with 1.8 million jobs lost to China and a burgeoning bilateral trade deficit.  But as Harry Truman once noted, “The American people can always spot a counterfeit.  Sometimes it just takes time.”

In this case, Congress has seen through the Executive Branch’s China apologies and is finally turning on the griddle.  As AAM’s Horace Cooper is wont to say, “Some times you have to break a few eggs to make an omelet.”  It’s Congress’ turn to get tough.

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In its semi-annual report on world currencies yesterday, the Treasury Department declined to cite China as a currency manipulator.  A formal designation as a “manipulator” would have opened up China to potential penalties.

Interestingly, everyone in the world recognizes that China deliberately intervenes in world markets in order to depreciate its currency, the yuan.  The EU and Japan have begun pressing China for immediate action on the yuan.  And Treasury Secretary Henry Paulson, like his predecessor, John Snow, has repeatedly urged Beijing to revalue.

 Somehow, though, this latest semi-annual Treasury report once again finds wiggle room to let China off the hook.  China will only take the Administration seriously once it is designated as a manipulator.  It’s too bad the Administration doesn’t realize this. 

At what point will the Administration legally acknowledge what it, nearly every economist, and our friends in the EU already know:  China manipulates its currency to gain an unfair trade advantage, harming American businesses and workers.  How many shuttered U.S. factories, how many laid-off U.S. workers, how large a trade deficit must be reached?

The U.S. is on track to hit a $250 billion dollar trade deficit with China this year, 1/3 of our total trade shortfall.  Beijing’s predatory currency manipulation is responsible for a significant share of that gap.

The Chinese government is looking after its own interests.  The question is, when will our Administration do the same?

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 The Financial Times reported yesterday that Britain, Germany, and France will hold an economic summit next month to deal with “financial turbulence” in world markets.  While hedge funds and investments will certainly be on the roster of discussion topics, one can also presume that the leading EU countries will ponder how to deal with Chinese and Asian currency manipulation.

A coordinated realignment of Asian currencies relative to the euro and dollar is one of the best steps that can be taken to promote global financial stability.

Noting the spirit of cooperation involved in pulling EU leaders together for next month’s summit, ManufactureThis wonders if they would also be willing to join in a slightly larger Roundtable—one along the lines of that suggested last week by Rob Scott of the Economic Policy Institute (EPI ).  In a prescient Washington Times op-ed, Scott called for a new Plaza Accord in which the major economic powers could come together to hammer out the currency imbalances that are currently distorting world markets.  Chief among these is China’s grossly undervalued yuan—a millstone for U.S. manufacturers, and now a thorn in the side of the EU and Japan.

It’s going to take concerted action to fix an unsettled world picture, but this is exactly what’s needed right now—cooperative work to fix a common problem.
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According to the latest figures from the Commerce Department, the U.S. trade deficit fell slightly in the third quarter of 2007, to its lowest level since the first quarter of 2004.  This decline is easily attributed to a weakening dollar, which has benefited U.S. exporters and reduced the trade deficit.

 Curiously, though, this boon for U.S. manufacturers has been limited to trade with Canada and the Euro-zone countries.  While the overall trade deficit has fallen with them, it has instead risen sharply with China.

Rob Scott of the Economic Policy Institute (EPI) noted this strange occurrence today in an interesting article, pointing out that “the dollar has lost only 9% against the Chinese yuan since 2002, and…has actually risen slightly in value against the Japanese yen.”  As he explains it, “these countries intervene heavily in currency markets to prevent the dollar from falling against their currencies, boosting their competitiveness against U.S.-based production.”

Thus, thanks to a rigged currency system, the yuan, like the currencies of other Asian central banks, has remained tied to the dollar and essentially stayed in place.

This currency intervention has been a key force in driving China’s manufacturing juggernaut.  And, as EPI noted in a report earlier this year, the consequences have been dramatic.  Since 2001, the U.S. has lost 1.8 million jobs specifically due to unbalanced trade with China.

That 1.8 million lost jobs statistic has become a well-bandied figure of late, with presidential candidates like Hillary Clinton lamenting it at various debates.  The question then is which, if any, presidential candidates would actually take strong action to correct the situation.  Until they do, the U.S. trade deficit will continue to rise.
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BUPKIS

Etymology: Yiddish– lima beans.

Noun: bupkis, absolutely nothing; nothing of value, or substance.

EXAMPLE: Treasury Secretary Paulson went to China and all we got when he came back was bupkis.

Related terms diddly , diddly-squat , peanuts , squat , zilch

 Yessiree, Hank Paulson went to Beijing this week and came back empty-handed.  No luck whatsoever regarding illegal subsidies or currency manipulation.  But as he explained, he wasn’t in a hurry to chat with his counterparts about the undervalued Yuan: “we do not talk about how fast is fast.”  Thankfully Paulson vowed to crack down on “economic nationalism” in both countries.

This latest, fruitless round of talks shows that neither Paulson nor the administration is serious about addressing the currency issue.  But what’s desperately needed is strong leadership.  In yesterday’s Washington Times, Robert Scott of the Economic Policy Institute (EPI) made the very good point that what’s needed now is a serious, multinational effort along the lines of the Plaza Accord pushed by Ronald Reagan in 1985. 

Without serious concerted action like that of 20 years ago, we’ll simply see more useless chit-chat diplomacy.

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A few weeks ago, ManufactureThis reported on growing European disenchantment with China’s intransigence on currency issues.  EU Trade Commissioner Peter Mandelson was urging China to do more to “remedy” the currency “imbalances that exist.”

Now, it seems that Japan is getting in on the act.  According to the Wall Street Journal’s Michael Phillips, Japanese Finance Minister Fukushiro Nukaga is pressing Beijing for the “fastest possible” appreciation of its currency, the Yuan.

It’s no secret that China manipulates its currency in order to benefit its exporters.  And it happens that currency manipulation is illegal under existing WTO law.

But China continues this blatant currency manipulation, and U.S. manufacturers continue to bear the brunt of such deliberate mercantilism. 

Next week, Treasury Secretary Paulson travels to Beijing to discuss issues of “mutual interest” with his Chinese counterparts at the latest ‘Strategic Economic Dialogue.’  One would think that Secretary Paulson would bark quite loudly about currency issues when he lands.  But at present, the Treasury Department’s semi-annual report on foreign currency activity is two months overdue to the Senate Banking Committee.  If Mr. Paulson seems to be in little hurry to report China’s bad behavior to the U.S. Congress, it’s doubtful he’ll make much fuss when he rolls into dragon country.

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Once again, the European Union (EU) demonstrates that it is willing to go to bat for its manufacturers and workers when it comes to countering China’s unfair trade practices.  It’s embarrassing that our own government won’t do the same. 

Yesterday, EU trade commissioner Peter Mandelson took umbrage with China’s growing trade surplus, saying “I am looking for China to do more to remedy the imbalances that exist.”  Mandelson told Reuters that the EU-Beijing relationship “is already a large one and it is potentially a huge one.”  But the lopsided trade balance means that China needs to “get it right” regarding their intervention in financial markets.

The EU has traditionally been more easygoing in its dealings with China. But the EU86 billion deficit they’ve accrued with China this year has pushed their Worry button.  As Mandelson explained, “It’s a question of China exercising greater responsibility and being more conscientious in shouldering their fair share of the demands of this trading relationship.”

Congress and the Administration shouldn’t have to take guidance from the EU on holding China accountable for its unfair and illegal trade practices.  They should both act now, before more manufacturing jobs disappear.

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The big day is here and we have some big news…

The Alliance for American Manufacturing (AAM) has partnered with actor John Ratzenberger (“Cheers,” The Travel Channel’s “Made in America”) to host a national series of “Keep It Made In America” Town Hall meetings this fall.  We hope to see you there.

By the way, AAM’s Scott Paul published a piece on today’s Huffington Post that discusses the Town Hall meetings.  Read it here.

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