Weekly Standard Online
October 8, 2011
by Irwin Stelzer
Better to war-war than to jaw-jaw, to stand Winston Churchill's remark on its head. The United States Senate and the trade unions are not alone in believing that we have been jaw-jawing with China for too many years, while it continues to take jobs from America by manipulating its currency, stealing our intellectual property, and subsidizing exports of solar panels and other bits of green technology so as to strangle the U.S. green industry in its cradle.
The Democratic controlled senate, with 12 Republicans joining 50 Democrats, passed by a vote of 62 to 38 what it calls the Currency Exchange Rate Oversight Reform Act to impose tariffs on Chinese goods unless the regime allows the yuan to appreciate faster, perhaps by somewhere between 15 percent and 40 percent. U.S. companies that have been competitively disadvantaged by China's currency manipulation can treat "misaligned" currencies as a form of subsidy, and apply for tariff protection. This bill, in the unlikely event that it passes the House—Speaker John Boehner calls it "dangerous"—would result in a flood of complaints by China to the World Trade Organization. American companies would almost certainly lose, and animosity towards the WTO and by extension other international organizations would rise. But those supporters of the bill who keep their dog-eared copies of The Wealth of Nations handy can at least claim to be acting in the great tradition of Adam Smith, who wrote that "when some foreign nation restrains … the importation of some of our manufactures … Revenge … naturally dictates retaliation, and that we should impose the like duties and prohibitions upon the importation of some or all of their manufactures into ours."
No use for opponents of the bill to claim that the trade war set off by the 1930 Smoot-Hawley tariff triggered the Great Depression (actually, it didn't). No use arguing that trade relations are only one item on a vast list of relationships between the leading and the emerging superpower, not least among them China's $1.2 trillion holding of American IOUs and the increasing military rivalry for power in the Asia-Pacific region. And certainly no use pointing out that China has allowed its currency to appreciate by 7 percent against the dollar since June of 2010, before freezing any further increases earlier this week, some say in response to the Senate's threat.
The presidential and congressional election campaigns are in full flow. No waiting until a few months before the voters have their say; the time for campaigning is now. After stalling for three years, President Obama finally sent trade agreements with Colombia, Panama, and Korea to Congress for approval. Although he is also proposing legislation to assist workers who lose their jobs because of these agreements, and is insisting that American inspectors have the right to inspect foreign factories to make sure they are maintaining the working conditions specified in these foreign countries' laws, the trade unions are fighting these deals with all the lobbying might at their command. Politicians who defy that pressure want to be able to say, "Well, I supported the trade deals but atoned for that sin by voting to attack China's currency manipulation."
Besides, supporters of the trade deals can point to studies showing that the deals will increase exports of agricultural products, machinery and chemicals by $13 billion and create 250,000 American jobs (the U.S. Chamber of Commerce says the pacts will "save" 350,000 jobs)—which puts Congress in the odd position of voting for tariffs on China to create American jobs and free trade with Korea and other countries to—create American jobs. Congress apparently believes that consistency is indeed the hobgoblin of small minds, with which they do not believe themselves afflicted.
Job creation, or its absence, is the president's Achilles' heel as he dashes around the country raising the $1 billion he says he needs for his reelection campaign, and whipping up support for his jobs (aka second stimulus) bill. In September, only 103,000 new jobs were created, and 45,000 of those were Verizon strikers returning to work: It would take more than 150,000 to make even a dent in the jobless rate, which is stuck at 9.1 percent, a level with which no president campaigning for reelection has ever had to cope. Almost 26 million workers are hunting for full time work, and another million are too discouraged to continue job hunting. Over 6 million workers have been out of work for 27 weeks or longer, while many employers complain they can't find skilled workers to fill vacancies, suggesting that the jobless problem will persist long into an economic recovery.
Equally politically potent is the falling or frozen standard of living of American workers. David Autor of the Massachusetts Institute of Technology, Gordon Hanson of the University of California, and David Dorn of the Centre for Monetary and Financial Studies in Madrid studied the impact of Chinese exports on 722 clusters of counties. They found that regions with manufacturers most exposed to competition from China lost not only more manufacturing jobs, but more non-manufacturing jobs as well, have higher levels of overall unemployment, and more workers receiving food stamps and disability benefits. "There are really huge adjustment costs to local communities that were far worse than people had appreciated," Professor Autor told the press. Voices crying that this study overstates the costs and understates the benefits of free trade are having difficulty getting heard.
It is not only the loss of jobs to foreign competition that rankles. The middle class is watching its living standard decline. The deal struck last week between the United Auto Workers Union (UAW) and Ford makes clear just how much the world has changed for workers in the manufacturing sector, once the breeding ground of the middle class. To persuade Ford to take on some 12,000 new workers over the next four years the union agreed that new workers would be paid half of the $28 per hour that veteran workers now get. That will enable Ford to bring back to the U.S. manufacturing facilities now located in Mexico, China, Britain, and Turkey. But at a cost to the new generation of autoworkers, who will find their predecessors' middle class life style difficult to attain.
Obama concedes that the answer to the question put so devastatingly to President Jimmy Carter by then-candidate Ronald Reagan—"Are you better off than you were four years ago?"—is an emphatic "no." The president, of course, blames the plight of the middle class on George W. Bush and "the mess" that he, Obama, inherited: "millionaires and billionaires" who are not paying their fair share of taxes, "fat cat bankers" who believe they have "an inherent right … to a certain amount of profit," the crisis in the eurozone, and the Tea Party. Polls suggest that he is having considerable difficulty passing the buck, which President Harry Truman famously said stops in the Oval Office, on the president's desk.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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