This morning, the New York Times reported that China is now actively lecturing the United States for its lack of “market regulation” in the mortgage crisis and for its failure to “halt the dollar’s unchecked depreciation” that has caused “soaring oil and food prices.”

This constructive criticism offers a rather fun way to start the fourth round of the Strategic Economic Dialogue (SED), which is taking place today and tomorrow in Annapolis. 

There’s rich irony in the Chinese lecturing the U.S.  As AAM Director Scott Paul pointed out on CNBC yesterday, the Chinese continue to brazenly flout world trade law, no matter how great the resulting distortions of the international market.

  With that said, ManufactureThis thought it might be fun to offer a brief preview of this week’s SED talks.  Specifically, Treasury Secretary Henry Paulson said the meetings would focus on five areas.  Below are those five sections, with a helpful reminder about why these issues actually matter to the world community:

“Managing financial and macroeconomic cycles.”
China utilizes numerous questionable subsidies to artificially boost production, including $27 billion in energy subsidies since 2000 for its steel producers.  If Secretary Paulson and his Chinese counterparts want to equitably manage “macroeconomic cycles,” they would start by ensuring that China does not continue to dump steel on the world market.  

“Developing human capital.”
China’s human rights abuses are notorious, as are the woefully inadequate labor conditions in many factories, including slave labor.  Rather than token efforts, Beijing must stop bashing heads in Tibet and begin to reform the institutionalized child labor (and other unacceptable practices) so rampant throughout its rural provinces.

“The benefits of trade and open markets.”
Despite a minor appreciation of the Yuan since 2005, Beijing continues to undervalue its currency by as much as 40%.  Such massive intervention in world currency markets is clearly one-sided—the exact opposite of a free, open trade.  With the EU and Japan joining U.S. calls for a significant rise in the Yuan, Beijing must commit to lifting its currency peg, or else face sanctions.

“Enhancing investment.”
China has been reluctant to open its market to foreign financial services, and has only approved one foreign securities joint venture—for Credit Suisse.  It’s hard to call this enhanced investment equitable.  Unless U.S. financial firms are given greater access to China’s market, sanctions must again be considered.

“Advancing joint opportunities for cooperation in energy and the environment.”
While the Environmental Protection Agency estimates that 25% of all California air pollution comes from China, the U.S. is considering sweeping measures to cut greenhouse emissions.  If Beijing honestly shares in such concerns it will demonstrate movement to share in such efforts.

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  As the latest Strategic Economic Dialogue (SED) approaches next week, China complained in Geneva on Monday that the United States has recently let the dollar depreciate, upsetting the global economy with higher oil prices.

Ironically, the United States functions as an open, free-market economy.  The dollar’s decline has come because nervous investors, eyeing ever grater U.S. trade deficits, have lost confidence in the sharpness of U.S. assets.  Thus, the “invisible hand” of the market is moving the dollar to a lower point.  Despite Beijing’s assertions, the U.S. government has not specifically maneuvered the dollar’s fall.

However, China’s currency, the Yuan has been specifically manipulated in recent years.  Since 1994, Beijing has deliberately undervalued their currency in order to promote exports.  Thus the irony of China lecturing the U.S. for higher oil prices due to a weakened dollar.

Funny that China is expressing concern over rising gas prices.  While U.S. manufacturers are undoubtedly feeling the pinch, Chinese manufacturers are enjoying a comparatively easier ride.  That’s because they receive huge government energy subsidies that lower the costs of production.

Take Chinese steel as but one example.  A recent study commissioned by AAM found that since 2000, the Chinese government has exponentially boosted the country’s steel output by providing more than $27.11 billion in subsidies for thermal and coking coal, electricity, and natural gas.  In that time, China has moved from a net steel importer to the world’s largest steel exporter.

It remains to be seen what the WTO thinks of these subsidies.  But with a Chinese delegation coming to the U.S. next week to hector the Administration about falling currency and rising oil, one can’t help but shake their head at Beijing’s gall.  Treasury Secretary Paulson should point a stern finger at China and simply ask them to explain their energy subsidies.  China’s concerns seem a bit hypocritical by comparison.

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As AAM Executive Director Scott Paul noted this morning, the monthly U.S. trade deficit reached $60.9 billion in April 2008, the highest level in 13 months.  In a brief statement he said:

  “As the trade deficit rises, manufacturing jobs continue to decline.  We hope this will serve as a wake up call for Congress and the Administration to stop unfair foreign trade practices like currency manipulation, dumping and subsidies, and reform our trade policies to ensure that we are shipping more products—and not jobs—overseas.  Senators Obama and McCain should make reducing the trade deficit and reforming our trade policies a priority in 2009.  This is an issue that matters to voters in battleground states throughout the industrial heartland of our nation.”

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  The latest monthly U.S. jobs report showed a loss of 49,000 jobs in May—with more than half of those (26,000) coming in the manufacturing sector alone.  After five straight months of job losses, and a seemingly endless freefall for manufacturing jobs, it seems palpable that something is amiss in the U.S. machine.

But what specifically is ailing us?  A rather obvious start would be the continuing loss of good-paying manufacturing jobs.  As one of the historical engines of growth for the U.S. economy, manufacturing is clearly linked to the success or failure of the U.S.  As was said many times in the 20th Century, “So goes General Motors, so goes America.”

The problem for manufacturing, though, is that U.S. trade policy has taken the wrong course.  This is the candid admission of Robert Cassidy, the former assistant U.S. Trade Representative for both Asia and China.  Cassidy was the lead negotiator for China’s 1999 Market Access Agreement, which paved the way for China’s accession to the World Trade Organization (WTO). 

Essentially, Cassidy was one of the chief architects of the plan that steered the U.S. into more global waters.  And now, he’s regretful, asking “whether the agreements we negotiated really lived up to our expectations.”  A “sober reflection” has led him to conclude that they “did not.”

So what went wrong?

According to Cassidy: “We failed to address the underlying fundamental market distortions that skew the benefits toward the few while leaving the rest of the economy less well off… The premise on which our trade agreements are negotiated is at best flawed, if not broken.” 

But what does that mean in practical terms?  Since China entered the WTO in 2001, the U.S. trade deficit with China has tripled, from $83 billion to $256 billion.  That massive increase in imports has also directly contributed to 1.8 million lost U.S. jobs, according to the Economic Policy Institute (EPI).

  As Cassidy explains it, upon joining the WTO, “China made unilateral concessions to reduce and, in some cases, eliminate barriers to entry for US goods and services.”  These concessions were projected to raise “US exports of goods to China… thus creating jobs in the higher-paying export sector.”  But in actual fact, U.S. exports to China have only grown “from a very low level.”

Cassidy notes that the real beneficiaries of increased U.S. trade are the multinational companies that have moved to China and the financial institutions that have financed them.  As he acknowledges, “Sourcing from China…has allowed companies to cut costs and increase profits, as reflected in increased corporate profits.”

Cassidy sees serious downsides as a result:
-“It is doubtful that the US economy or its workers are better off.”
-“US manufacturing jobs have declined by more than 2.5 million since China joined the WTO in 2001.”
-“Wages have been stagnant and real disposable income for three-quarters of US households has been stable or declining.”

Even more disconcerting according to Cassidy is that “the problem extends to nearly all trade agreements since they are based on the flawed premise that free trade benefits the economy. The premise is flawed and broken since free trade does not exist in a ‘free market’ petri dish where all other factors are neutral.”

The bottom line is that countries like China have “adopted an export-led development strategy, the centerpiece of which is a currency that is undervalued by 20-80%, with the consensus leaning toward 40%.”  China also has “internal barriers to trade” that “restrict US exports.”

The bigger question is why, if our trading partners have embraced export-led strategies, why doesn’t the U.S.?  With our mushrooming trade deficit ($709 billion in 2007), it’s clear that the U.S. has, in effect, settled on an outsourcing-focused strategy. 

Cassidy concludes by suggesting that “the next administration has to take a hard look at the trade agreements currently on the table…and ask: Who benefits? The answers should lead to a fundamental reassessment of what needs to be included in those trade agreements so that the benefits flow to broader and more equitable segments of the economy.”

  ManufactureThis couldn’t have said it better.  But we thought we’d let one of the people who set us on this path tell us where we’re going, and why we need to change course.

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As ManufactureThis noted yesterday, John McCain has straight-talked himself into a bit of a corner.  During the recent primary season, he made it clear to voters that the manufacturing jobs that have sustained much of the American Middle Class “aren’t coming back.”  However, he also suggested to voters that his plan for lower taxes and reduced federal spending would prove helpful to the economy.

Interestingly, and now that McCain has entered the general election, he has shifted his “tone and emphasis,” according to Bloomberg News.  Acknowledging that “Americans are hurting,” McCain now suggests that he’ll fight for new jobs.

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ManufactureThis is having a chuckle today.  According to the Office of the U.S. Trade Representative (USTR) a bill currently working its way through the Senate might be too helpful, and thus could get the USTR “bogged down” in its work.

  Specifically, Senate Finance Committee Chairman Max Baucus has co-sponsored a bill (S. 1919, the Trade Enforcement Act of 2007) aimed at strengthening a variety of U.S. trade remedies and creating a chief trade enforcer to oversee WTO rulings.  At a committee hearing yesterday, USTR general counsel Warren Maruyama rejected the bill noting that “Sometimes if you get too many tools or too much process you can get bogged down.”

Bogged down?  The Bush administration has overseen a threefold increase in the U.S. trade deficit with China on its watch (from $83 billion in 2001, to $256 billion in 2007) and has presided over a near doubling of the overall trade deficit, to a walloping $709 billion in 2007.  While some of that increase comes from inevitable global developments and increased dependence on foreign oil, there’s almost no one who wouldn’t recognize predatory foreign practices as a prime culprit.  As such, it would seem that USTR cold use all the help it can get.

Take China.  As ManufactureThis noted yesterday, the Treasury Department remains concerned about China’s deliberately undervalued currency.  And even the USTR readily admits to other serious trade problems with Beijing, including piracy and intellectual property theft.

So, if these varied practices are continuing to hurt U.S. manufacturing, why not welcome any and all possible tools?

Interestingly, one of the witnesses at yesterday’s hearing was TradeWins’ John Magnus, a co-author AAM’s recent ‘Enforcing the Rules’ report.  In his prepared statement, Magnus noted that “America’s global diplomatic and financial strategies are going to have to make more and more space for…energetic trade enforcement.”

Whether S. 1919 successfully makes its way through the Senate remains to be seen, but with 3.5 million manufacturing workers idled since 2000, it’s clear that U.S. trade policy needs a re-write.  Simply put, current policy isn’t working, and the USTR should cheerfully admit that they can use an extra hand. 

The logical option would be for both the House and Senate to pass strong trade enforcement legislation by the end of 2008 that provides for:
-strong remedies to address China’s illegal currency manipulation;
-strengthening of U.S. trade laws to ensure that American workers and producers have the same opportunity to compete in the global marketplace as their overseas competitors;
-reform of tax, energy, and health care policies to make sure that manufacturing can fairly compete.
-new standards and enforcement to ensure that imported goods are safe for U.S. consumers.

Both USTR and Congress must get on the ball.  Too many U.S. jobs are hanging in the balance.

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Bloomberg News’ Mark Drajem reported yesterday that the World Trade Organization (WTO) is urging China to revalue its currency, the Yuan.  The WTO’s comments join steady calls from the EU, Japan, and concerned U.S. legislators to end the manipulation of its currency that has seen China devalue the Yuan by as much as 40%.

  Specifically, the WTO report noted that “A more flexible exchange rate regime could enable China to operate a more independent monetary policy, which would be better suited to ensuring a low and stable rate of inflation.”

What’s interesting to note is that essentially the entire world is concerned with China’s currency practices.  Everyone that is except some U.S. lawmakers and the Bush administration.  Even though China has been rigging its currency exchange rates since 1994, and has continued to do so despite promises to the contrary when joining the WTO in 2001, the Bush administration has steadfastly refused to take concerted action.

As ManufactureThis noted last week, the Treasury Department once again refused to characterize China’s currency practices as outright “manipulation,” thus avoiding any effective action to rectify the problem.  Treasury Secretary Henry Paulson has frequently suggested that China should raise the value of its currency, and has praised any incremental steps in this regard.  But he has refrained from taking any serious action.

The end result is simply “chit-chat diplomacy”—a nod, a wink, a smile…and no effective change in the status quo.

Next month, a delegation from Beijing will meet in Annapolis with U.S. officials for negotiations in the latest semi-annual Strategic Economic Dialogue (SED).  As with previous SED’s, little of substance will be accomplished.  In the interim, the U.S. continues to shed good-paying jobs due to China’s mercantilism.

  The China issue will be of significant note come the fall presidential election.  Hopefully all of the candidates will be talking about this, and will express their desire to stand up to Beijing.

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  Yesterday, the Financial Times quoted John McCain as warning that a Clinton or Obama administration would mean “more federal regulation, more government control of the economy, and more government spending.”  He also worried that a Democratic administration would follow the wrong path on trade policy by, as the Times put it, “exploiting public resentment of foreign trade rather than focusing on how to make the U.S. more competitive.”

According to the Financial Times, McCain did acknowledge that “more must be done to help people who lost jobs because of globalization” and that he “promised more rigorous enforcement of trade agreements to protect U.S. interests.”

But in such points we begin to see some of the hypocrisy of Sen. McCain’s overall position on trade.

If indeed Sen. McCain favored rigorous enforcement of trade agreements, he would no doubt start by addressing culprit number one—the regime in China that brazenly flaunts world trade law for its own gain.  When entering the WTO in December 2001, China foreswore the very lucrative (and illegal) practice of currency manipulation.  And yet Beijing continues to undervalue its currency by as much as 40%.  Unfortunately, John McCain is one of a handful of Senators who has steadfastly refused to take action on the currency issue.

Wantonly violating world trade law for one’s own gain is a clearly protectionist act.  Or, conversely, it is a rather egregious swipe at free trade.  And so it’s hard to see how Sen. McCain can favor open markets while simultaneously supporting Beijing’s one-sided policies.

But that’s not the only contradiction in the McCain bag.  There’s a strange irony in Sen. McCain warning about Democratic imprudence with money while pursuing exactly the policies that have led to a $711 billion trade deficit in 2007.  More than a third of that shortfall, $256 billion, comes just from a mushrooming bilateral deficit with China.

U.S. manufacturers are put at a consistent disadvantage when countries like China utilize dumping, subsidies, and currency manipulation to undercut them.  The most unfortunate result is 3.5 million lost U.S. manufacturing jobs since 2000.  No doubt these displaced workers are feeling the pinch in their wallets, and McCain’s talk of low taxes will be of relatively little comfort until they again find good-paying jobs.

Far better would be for Sen. McCain to adopt a long-range plan that encompasses modernization of American manufacturing while addressing the cheating of countries like China that is displacing U.S. workers in the first place.

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  In its latest semi-annual report to Congress, the U.S. Treasury Department has again declined to cite China for currency manipulation.  This despite worldwide calls, led by the EU and Japan, for China to revalue it currency, the Yuan.

In response, AAM Executive Director Scott Paul offered the following statement regarding Treasury Secretary Paulson’s decision yesterday:

“This is a deeply disappointing decision, one that indicates the Treasury Department has no intention of insisting that China honor its commitments to the global rules of finance and trade.  The yuan remains about forty percent undervalued.  As a result, America racks up an enormous bilateral trade deficit with China, and our manufacturers and workers suffer.  We aren’t asking for special protection.  We’re merely asking our own government to enforce the rules of trade and finance and ensure that we have a fair opportunity to compete in the global marketplace.  China’s government continues to cheat, and we continue to pay the price.” 

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Campaigning in Michigan yesterday, Sen. Barack Obama seemed to be making a case for saving American manufacturing: “These have been disastrous years for our manufacturers.  Manufacturing supports one in six American jobs — jobs that pay more and offer better benefits than other jobs — and we all have a stake in saving them.”

  With polls showing that Americans are increasingly concerned about the economy, Sen. Obama was right to focus on the plight of U.S. manufacturing.  Michigan alone has lost  more than 279,000 manufacturing jobs since 2000, or roughly one-third of all factory jobs.  Such a heavy downshift in industrial employment has grievously affected the state’s economy, with one in eight Michigan residents now receiving food stamps, according to a recent New York Times article.

Obama’s speech in Macomb County, Michigan seemed prudently addressed to the state’s “Reagan Democrats,” the very voters most concerned about job losses.  Both the eventual Democratic nominee and Sen. John McCain will compete for their votes, with the “jobs issue” figuring prominently.

In the conclusion of his speech, Obama noted: “if we want to fight for manufacturers here at home, we have to fight for them around the world. Now, I believe in trade, but I also believe that for America to compete and win in the global economy, trade has to work for all Americans. That means making sure that our workers are competing on a level playing field, and that countries like China aren’t breaking the rules and putting American workers at a disadvantage. Fighting for our workers isn’t bad for business; it’s good for our economy. And it’s how we’ll make sure that the costs and benefits of our global economy are being shared more fairly.”

Hopefully we’ll see a full, continuing debate on these issues as we move toward the general election, with a focus on China’s currency manipulation, dumping, and subsidies.  
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