Saturday, January 22, 2011

Trumped? Reasons China is not our friend ... Part 1

“These [China] are not our friends.”

-- Donald Trump, American businessman

Typically, I can’t find too may traits I share with Donald Trump. I have nice hair. Trump doesn’t. He has billions of dollars. I don’t. But this past week, Trump definitely touched on a topic I have been wanting more information on for some time. Trump called out President Obama and other government officials for rolling out the red carpet for Chinese President Hu Jintao and his delegation.

Trump was livid with the U.S. government for its inability to stand firm against the Chinese. Once an Asian afterthought, China has turned into the only viable nation next to the United States with the title of “superpower.” Trump’s issue dealt with why America is inviting Chinese officials over for an official state dinner when this is a nation that has consistently taken advantage of the United States at every opportunity.

And though I have little in common with Trump, I happen to believe he raises some interesting questions about the American relationship with China. The biggest problem with China is the horrific trade deficit America swallows every year.  The current statistics (pulled from census.gov, 2010) show the United States importing over $334 billion worth of good from China.  Conversely, the level of exports to China only totalled $81 billion.  Looking at statistics from the past 25 years, the trade deficit with China in 1986 stood at $1.6 billion and has grown in all but two of those years to its current level of $253 billion. 

Why is the trade deficit so large?  China has the ability to make goods far more cheaply than the United States.  Regulations on goods produced in China are much more relaxed than here in the States and our communist friends also pay their workers a mere pittance compared to what American laws and labor unions would permit.  Thus, manufacturing jobs in many labor sectors are 'outsourced' to places like China.  Part of the responsibility for this travesty is on the American government, who has unwisely chosen China as a major business partner. 

As a result of poor policy over the last three decades, countless American jobs in manufacturing have been lost.  Many experts have stated America needs to focus on technology and being the innovators of the world, and reduce our manufacturing base.  While the United States should always strive to lead the world in innovation, we have moved too many of our jobs overseas.  The citizens who lost these jobs were supposed to be retrained for other work but in reality, we abandoned these Americans, and for what?  Profit margin.  The American government should be working to push China towards a fair trade agreement, or if necessary, place tariffs on items made in China.  Drastic step?  Yes.  But the alternative means allowing China to continue to cheat American businesses and people out of jobs and billions of dollars annually.

President Obama has entertained Hu this week with a state dinner, private meetings, and a trip to Chicago.  However, now is the time to dig in and stand up to the Chinese, who also need to be reminded of their currency manipulation. 

The Chinese government has used a number of tools to keep their currency (the yuan) undervalued.  Currently, the yuan is currency tied to the American dollar.  China has its best interests at heart by keeping the value of the dollar high and their currency low.  By keeping the value of the yuan low, foreign nations such as the United States can't resist purchasing products made in China.  If the value of the yuan were to increase relative to the dollar, the Chinese advantage would be greatly diminished and their products would become significantly less attractive to Americans.

China has helped keep the value of the dollar high compared to the yuan buy purchasing American bonds and holding large reserves of American dollar assets.  Their investment into the United States helps China stay in front in the currency war.  With China holding back their undervalued yuan and using various tools as their disposal, why are political leaders holding back?

The United States continually operates on an annual budget far exceeding its revenues.  To make up the balance, we must obtain that money from elsewhere.  Guess who the elsewhere is?  Exactly.  China has purchased large quantities of our treasury securities (nearly $900 billion worth) and America is footing the bill by paying billions of dollars in interest annually.  In theory, China could call in their loans and sell those securities on the market, which would cause a great deal of problems for the United States.

Why do our political leaders allow this to happen?  America is looking at this problem in the wrong way. Critics are quick to point out how China could hurt the American economy, but we can easily place some burdens on the Chinese economy as well. The United States is the largest market to consume Chinese good and products. By eliminating that market, the impact on China would be significant. If they are unable to conduct business on a level playing field, then perhaps the United States needs to find a new source of goods.

The government can only be blamed for a portion of this mess. Businesses that were once primarily American are now multinational and have no loyalty to this country or its principles. They can reap great financial rewards from outsourcing and so the companies do it. Have we forgotten ourselves so quickly? 

Donald Trump is right.  China is not our friend and American leaders -- political and business -- need to respond.  China's leaders are looking out for the interests of their nation.  Should we not do the same?

Part 2 coming next week ...

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