U.S.-China Trade: How Long Will the U.S. Be China's Doormat?

Enough already!

Prior to the G-20 meeting in Toronto in late June, the Obama administration decided that the 20 leaders would mostly focus on Europe because "China had announced plans to allow the yuan to rise". Having personally railed against China's unfair trade practices for the better part of the last four years, including its outrageous 40% or so undervaluation of the yuan or renminbi, as I said back then, this was like being told to forget about a very bad hangover.

The proof that this particular hangover continues, however, is that since China's promise to President Obama to let the renminbi float to its 'natural level', despite a pitifully low 0.8% rise against the dollar within the first two weeks after the promise was made, China has recently purposely pushed the yuan exchange rate back to its June level. At this rate, China will take longer to remedy its currency manipulation than it takes for Hell to freeze over.

When it comes to speaking at once from the heart and the gut on behalf of American workers, there's no one better than Senator Sherrod Brown (D-OH), who said back in June and several times since, that China is great at gaming the system on trade and thus the President "shouldn't just check the box and view China's currency abuse and its numerous other trade abuses closed". Even more pointedly, the Senator and ten of his colleagues, in a recent letter to the President, have elaborated on their views of China's persistent trade abuses by saying that the administration's focus on growing gross exports should instead have been on net exports (i.e., our trade balance) and in any event it "must not and cannot come at the expense of ensuring a fair playing field for our manufacturers."

The eleven Senators, I should add, also decried "the Department of Commerce's unwillingness to use the trade enforcement authorities and tools it has readily available to defend American manufacturers and workers against unfairly subsidized imports." I and many others have made this point for years, and it is especially nettlesome that it is now being made against the non-actions of the Obama administration. I would go even one step further, however, and move trade enforcement to a fully enabled and funded office in the Justice Department -- trade negotiation and the enforcement of agreements are distinct activities requiring very different skills, and enforcement best belongs with 'enforcers', not with those who negotiated the trade agreements.

President Obama's current hide-the-pea approach regarding China trade is of course in complete contradiction to Candidate Obama's promises throughout the '08 campaign, which he most notably advanced in a speech he gave to the United Steelworkers on July 2, 2008. In that speech he said: "Change is knowing that for trade to work for America, it has to work for all Americans; that we have to stand up to countries that are manipulating their currency or flooding our markets with subsidized goods; that it's wrong to have a "one-size fits all" trade policy that treats countries as different as China and Mexico as if they were the same; and that our job ends not when a trade deal is signed, but when it's enforced." Mr. Obama's tolerance today of China's trade abuses also contradicts the assertion of Tim Geithner in his January 2009 confirmation hearing to become Secretary of Treasury that China is a trade cheat and a "currency manipulator".

The President's views also run counter to the views of nearly two-thirds of Americans who, according to the latest polls, are only somewhat or not at all confident that the administration has the right domestic and trade policies to improve the economy and believe that:

  • Foreign trade has been bad for the U.S. economy because imports have reduced demand for American-made goods and cost jobs here at home;

  • We are at a tipping point as a nation when it comes to offshoring American jobs;
  • Free trade agreements or FTAs lead to job losses; and
  • There should be tough regulations to limit imports of foreign goods.
  • It's important to look at what's happened since the Toronto meeting in June to understand the absurdity of the administration's continued aversion to confronting China:

    • China's overall trade surplus surged in July to28.7 billion, its highest level in 18 months. Its surplus with just the U.S. was about26 billion, or an almost unbelievable 90% of the total. China's exports rose 38% year on year, while its pace of growth in imports slowed sharply.
  • After three decades of double-digit growth, China just passed Japan to become the world's second-largest economy behind only the United States, and it will now pass the U.S. as the world's biggest economy as early as 2030. This year China's economy is forecast to expand about 10%. China passed Germany last year to become the world's biggest exporter.
  • When China wins in trade, as it now does every day, it's really only the U.S. which loses. In fact, for the last several years the correlation has been almost dollar for dollar. In June, for example, the overall U.S. trade deficit in goods and services surged 19% to a 21-month high of $50 billion, and of this figure, 53% or $26 billion was with China, which matches, almost to the dollar, China's own overall trade surplus during the month of $28 billion.

    Obviously, China is not our only problematic trading partner. With our neighbor Mexico, for example, the U.S. has an expanding trade deficit of around $6.0 to $6.5 billion per month, while in June our deficit with the European Union ballooned by 26% to $8 billion. Yet China's enormous positive trade balance with the U.S. alone reduces each year our country's GDP by more than $400 billion or nearly three percent. When the U.S. reorders and reforms this relationship, we will be sending a strong message to all nations that it's finally, really time for them to trade fairly with America. No more unbridled 'free trade' with anyone - now only 'fair free trade' with everyone.

    Oil imports and consumer goods from China account for nearly 100% of America's trade deficit, and while Congress still has to decide what it has in mind for energy reform, the solutions related to trade are simple and obvious, so obvious in fact that Candidate Obama pretty much laid their principals out when he addressed the Steelworkers on that sweltering day in July 2008. Going forward, it is imperative - for financial, employment, competitiveness and national security reasons -- that the administration and Congress:

    1. Go after all of China's illegal subsidies, not just its currency manipulation, while also putting a quick halt to China's persistent theft of America's hard-gained, valuable intellectual property or IP, which zaps our economy almost as much as China's adverse currency moves. Many of China's practices provide its companies with a clear-cut "counteravailable subsidy" and they need to be treated as such, including China's abysmal environmental practices.

  • Establish buy-domestic and other domestic investment requirements for federal procurement and for grants to states and local governments to the fullest extent allowed under our various trade agreements and the WTO. The U.S. is almost alone among the developed nations and China in not having a significant buy-domestic government procurement program, yet no single stimulus effort would do more to resuscitate U.S. employment, especially manufacturing employment, and materially reduce our nation's massive trade deficit.
  • Bring what's called a Section 301 case at USTR against China's "Indigenous Innovation Production Accreditation Program" that was promulgated on November 15, 2009. This Program limits all Chinese central and provincial government procurement to companies that have "indigenous" - or Chinese - "innovation", and embedded in it are China's two so-called 'trade advantages', namely, (i) regulations to block non-Chinese firms from selling their products to Chinese government agencies and (ii) rules that force Western companies to give up technological secrets in exchange for access to China's markets. Because China is still not a member of the WTO Government Procurement Code, a Section 301 action is the only remedy currently available.
  • Establish strong review procedures for any planned investments by China in our nation's ports and transportation industry, natural resources, financial markets, "Advanced Technical Products" manufacturing, and items deemed by Defense to be "militarily critical". Before a controlling or influencing investment is made, there should be a "national security impact statement" prepared jointly by Commerce and Defense for the Congress and the administration which considers the investment's defense, security and infrastructure implications.
  • These policies aren't protectionist, anti-globalization or un-American -- they are simply good, necessary, balanced and reciprocal. Absent them and related actions, however, including securing that "fair playing field for our manufacturers" which the eleven Senators just demanded, China's massive foreign reserves (mostly of U.S. dollars) and its pervasive global mercantilist agenda will have even more dire repercussions for America's competitiveness in the world, our overall economic well being, and our national and military security.

    President Obama needs to listen to the American people and treat this entire issue more urgently. If he does not, then his relationship with workers and voters will be even more challenged than it is now. The United States must be as aggressive in defending its economic interests as China is in advancing its own, and if the administration won't act, then it is time - perhaps already past time -- for Congress to hold hearings this fall and provide badly needed legislation and oversight.

    With the exception in the short term of large-scale investing in infrastructure, nothing would be as helpful in putting millions of Americans back to work as meaningful China-related trade reform.

    Leo Hindery, Jr. is Chairman of the US Economy/Smart Globalization Initiative at the New America Foundation and a member of the Council on Foreign Relations. Currently an investor in media companies, he is the former CEO of Tele-Communications, Inc. (TCI), Liberty Media and their successor AT&T Broadband. He also serves on the Board of the Huffington Post Investigative Fund.