8

Can Obama dispel clouds of trade war?

Commentator David Frum.

TEXT OF COMMENTARY

Kai Ryssdal: The back and forth sniping between Washington and Beijing over China's currency policy continues. After a U.S. congressional press conference on the topic yesterday, a key Chinese official responded this morning by saying his government's become a convenient scapegoat for America's trade problems. Commentator David Frum says it's about darn time the U.S. said something.


DAVID FRUM: Below the excitement over health care and financial reform, Congress has just delivered early notice of the top economic issue of the second half of this year: trade.

On Monday, 130 members of the House of Representatives signed a letter protesting China's manipulation of its currency to make Chinese goods seem cheaper.

This helps China's exports and disadvantages U.S. competitors.

In a more normal world, China's big trade surplus with the United States would lead to a big accumulation of dollars in Chinese banks. Directly or indirectly, the owners of those dollars would sooner or later spend them on American goods or services, correcting the trade imbalance.

But it is not a normal situation. China acts to force the dollars' owners to leave them in banks controlled by the government. There the dollars are used to purchase American debt, not American goods.

That's not good for either country in the long run. But with millions of Chinese moving to the cities every year to look for work, China cannot worry about the long run. In the short run, it must create jobs for its urban millions.

The undervaluation of China's currency creates those jobs, but at the expense of American workers: By one credible estimate, the manipulation has cost some 1.4 million American jobs.

It would be illegal under World Trade Organization rules for China to directly subsidize exports. But China's currency shenanigans have the same effect.

Back in the 1980s, the United States and Japan settled differences over currency reasonably amicably. But Japan is a friend and ally. China is something else.

Never mind Israel-Palestine. The real test of President Obama's peacemaking leadership will be his ability to dispel the clouds of trade war now gathering over the Pacific Ocean.

RYSSDAL: David Frum is a resident fellow at the American Enterprise Institute.

Log in to post8 Comments

I'm not at all clear on why Marketplace, an intelligent, interesting show, would subject its listeners to Frum. What insight has he given? What, beside coining memorable jingoistic phrases like "axis of evil" has he done to clarify anything? Marketplace should take a cue from AEI and put him on unpaid leave
http://www.chroniclesmagazine.org/index.php/2010/03/26/frums-firing/

David, I just have a key question for you, how many American goods you think Chinese are interested in buying, or can offered to buy? and do you really think appreciation of RMB will help the situation?

To David S,

If China was to sell dollars it would have a back lash upon their currency as well as the Yuan would appreciate. This would cause their exports to decrease & their unemployment to go up. Thus, China will not take this course of action in a drastic mannor.

To Susan,
Just b/c we were enemies in the past that doesn't mean we're enemies now. Would you say that we're enemies w/ Germany & UK now? We fought both of them in the past.

To Fred,

The issue with China buying our debt and why it is bad is that has to do with the Supply & Demand for Dollars. When US citizens buy chinese goods it causes the deman for the Yuan to increase. If China was to buy US goods then the demand for the Dollar would increase and then the currencys would be netural. But if China buys our debt, they're able to keep the currency's neutral but America doesn't get the benifit of more demand for their exports. But to Gregs point, it is self inflected. If our Government balanced their budget, we would issue less debt and thus China would have less debt to buy thus their would be more pressure on the Yuan to appreciate.

"the dollars are used to purchase American debt, not American goods."

So, what you're saying is China is actively buying the US' number one export, but not, say, numbers 2 through N.

Maybe we ought to look into making less of that whole 'debt' product, so we aren't flooding the export market with it.

I'm sure China says that as soon as the US stops regulating and controlling interest rates, they will stop regulating their currency.

The U.S. should be careful what they wish for...China says, "Fine...you want a more powerful currency compared with the dollar?! GREAT! We'll sell a couple hundred BILLION dollars worth of Treasuries on the international market. That'll decrease the dollar value REALLY quickly!" As soon as China starts selling, other countries will sell too, and U.S. dollar inflation will become 20,000% in a HURRY.

"Japan is a friend and ally. China is something else." -- Did this guy study any history lessons?

In a more normal world, China's big trade surplus with the United States would lead to a big accumulation of dollars in Chinese banks. Directly or indirectly, the owners of those dollars would sooner or later spend them on American goods or services, correcting the trade imbalance.

This sounds/reads like the neo-classical economic 'models' propagated by the economists who got us into the current economic woes. It's an assumption to be questioned. Like a good salesman, Frum embeds his key premise, expecting readers/listeners to accept and it and the rest of his spiel. Good shtick,dubious economics and politics.

So, we sell China our treasuries. But we are angry --- because they don't, according to this guy, "sooner or later spend them on American goods" ???? We are a sovereign nation, we don't have to sell our treasuries to China. This complaint against China is ridiculous. We are scapegoating them for our fiscal incompetence.

With Generous Support From...