April 28, 2015    Volume 22, No. 6

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Imports Are Surging From China Because China Is Breaking The International Rules Of Trade, Yet The U.S. Does Nothing

By Richard A. McCormack

U.S. industry is increasingly uncompetitive in global markets and the consequences of fast-growing trade imbalances could be troublesome for the American economy and the international financial system, according to analyst Ernest Preeg of the Manufacturers Alliance / MAPI.

In a stunning report outlining the precipitous decline of American manufacturing and the "radical restructuring of international trade" away from the United States, Preeg notes that for the first time in history, China posted a trade surplus of almost $1 trillion in 2014. At the same time, the U.S. trade deficit is headed in the opposite direction, surging by -$206 billion between 2009 and 2013 and costing the United States 1.7 million manufacturing jobs.

During the same five-year period, Europe's export surplus soared by $300 billion and the Chinese surplus "was up by an amazing $492 billion," notes Preeg. In 2014 alone, the U.S. trade deficit worsened by another -$61 billion, and the trend continues in 2015.

From 2000 to 2013, the U.S. share of global exports dropped from 18 percent to 12 percent. China's share almost quadrupled during that period, from 6 percent to 23 percent. In the important category of high-technology products, Chinese exports are "far larger and growing faster" than those of the United States.

"This rapid decline in U.S. export competitiveness for manufactures is having game-changing consequences for international trade and financial systems," writes Preeg. It is imperative for the United States to take a leadership role in addressing the underlying issues of the growing imbalances caused by China gaining unfair advantage in trade by manipulating its currency. Both China and the European Union "are not up to the task of addressing the issue," Preeg writes, "and the alternative to forceful and effective U.S. leadership is the decline of international policy management to deal with trade and financial imbalances, and the threatening rise of financial market forces to do the job, which could be highly disruptive to international trade and investment."

The United States exported $1.124 trillion worth of manufactured goods in 2013 (excluding agricultural products and fuels), an increase of 73 percent from 2000. But during that period, China's exports of manufactured goods increased by 844 percent, from $220 billion to $2.077 trillion, while the EU's exports surged by 141 percent from $736 billion to $1.772 trillion. The United States exported only $74 billion worth of manufactured goods to China in 2013, while it imported six times that amount from China at $444 billion.

What worries Preeg is the most recent surge in the U.S. trade deficit in manufactured goods. For the five years ending in 2013, the U.S. trade deficit in manufactured goods worsened by -$206 billion (from -$321 billion to -$527 billion). China's surplus in manufactured goods increased by $492 billion during that period, from $450 billion to $942 billion, and the EU's surplus increased by $300 billion, from $229 billion to $529 billion.

"The dominance of the growth of the trade imbalances by the [three] cannot be overemphasized," Preeg writes. "From 2009 to 2013, the $492 billion increase in the Chinese surplus and the $300 billion increase in the EU surplus, or $792 billion together, accounted for 86 percent of the $925 billion surplus increase among the 13 largest exporters. And the $206 billion increase in the U.S. deficit was 74 percent of the $278 billion of increased deficits among the 13. . . A final vital and decisive dimension of the growing U.S. trade deficit in manufactures is that most of these industries are technology-intensive. [The] international rivalry to be at the forefront of technological innovation and development is clearly evident in trade terms and of deepest concern for the United States from the recent rapid rise of Chinese export competitiveness for high-technology industries."

In 10 high-tech intensive industries, Chinese exports in 2014 totaled $1.135 trillion, far surpassing the United States' total of $769 billion. "The Chinese lead centers on the IT industries -- office and data processing equipment, telecommunications and sound recording and electrical machinery and appliances," Preeg notes. "Chinese exports for the three industries grew by $341 billion, six times the $47 billion U.S. growth, while Chinese exports in 2014 of $781 billion were 3.6 times larger than the $217 billion of U.S. exports. . . These are striking figures for the rapidly growing Chinese lead over the United States for exports of high-technology industries."

He describes the trade balance as being "the bottom line for the impact on American production and jobs."

The radical shift of America's fortunes in high-tech trade is driving a global reassessment of the dollar as being the world's reserve currency. A transition to a global currency regime that is no longer dominated by the dollar but is shared with the euro and the Chinese yuan "is not only underway but closer upon us than almost all experts project because analysis of recent forces in play has not been adequately addressed."

The shift in global power away from the United States to China has been driven by China's wanton violation of international rules related to its currency and because of the "denial" of the U.S. government that this is taking place. Since 2000, China has purchased $4 trillion in foreign exchange allowing it to run large trade surpluses in price-sensitive manufactured goods. "Some other Asian nations, with China their dominant trading partner, have linked their currencies to the yuan, which has resulted in currency manipulation on their part as well, and growing trade surpluses in manufactures, particularly with the United States," he writes.

"The de facto repudiation of IMF Article IV [concerning currency manipulation] has come from the United States. Twice each year, over more than 10 years, the Secretary of the Treasury, as required, has reported to the Senate Banking Committee that no nation, including China, has manipulated its currency in violation of its IMF obligations. In other words, currency manipulation does not exist, and therefore there is no reason to discuss it in the IMF. This has also created a trade policy conflict between the President and the Congress. Bipartisan majorities in both Houses have pressed the president to include a provision within the TPP trade agreement prohibiting currency manipulation. But if the Secretary of the Treasury states every six months that currency manipulation does not exist, how can the Trade Representative pursue a major provision for such a nonexistent problem?

"The obvious U.S. policy response is for the Secretary of the Treasury, in his next semiannual report, to state that China and some others are indeed manipulating their currencies to gain an unfair competitive advantage in trade, and that such manipulation should stop, or else."

In his 30-page paper, Preeg describes what the U.S. should do in the "or else" scenario, located at https://www.mapi.net/system/files/PA-155_0.pdf.

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