Fixing China Trade

The Obama administration’s WTO complaint against Chinese export practices is welcome news, because more balanced trade with China is essential for achieving a sustainable economic recovery.

The recent U.S. economic expansion began in 2001, the same year China was granted WTO membership and assured access into the U.S. market. By 2008, Chinese exports to the United States more than tripled to $338 billion, exceeding U.S. exports to China by almost 5-to-1.

Meanwhile, rapid growth in China and throughout Asia helped push up prices for oil, and the U.S. oil import deficit quadrupled.

The U.S. trade deficit increased from $93 billion in 2001 to about $700 billion a year from 2005 to 2008. That’s more than 5 percent of GDP, and China and oil now account for nearly the entire total.

Dollars spent abroad cannot be spent on U.S. goods and services. When imports exceed exports by 5 percent of GDP, Americans must spend 105 percent of what they earn, or the demand for U.S. goods and services is less than supply, inventories of new homes, cars and other goods mount, layoffs result, and the economy slips into recession.

During the economic expansion, China and other foreign investors’ purchases of U.S. securities kept interest rates low on long-term bonds, even when the Federal Reserve raised its target rates on short-term paper. This allowed banks to offer mortgages and consumer loans on attractive terms. Many Americans spent more than they earned, and this kept the economic expansion going. When the credit bubble burst, consumer demand collapsed and the recession followed.

The $789 billion stimulus will lift demand for U.S. goods and services temporarily. Once that spending is done, however, consumers will again need to borrow and spend more than they earn to sustain demand for U.S. goods and services and keep the recovery going, or the trade deficit must be reduced significantly. Otherwise, demand will flag, and the recovery will collapse.

Reducing oil imports and better balancing trade with China are critical to a sustainable recovery.

Regarding oil, President Obama’s big push to get auto manufacturers more focused on fuel-efficient, hybrid and electric vehicles is a partial answer. Producing more oil from abundant domestic reserves is needed, too.

Trade with China is lopsided because the Asian giant pursues a mercantilist economic development strategy that blatantly violates commitments it made to the U.S. and others when joined the WTO. China subsidizes exports through tax rebates, regulated raw material prices, and other industrial policies that expand its foreign sales far beyond manufactured products that benefit from its abundant low-wage labor.

China also keeps out products its manufacturers lack skills to make effectively. For example, U.S. and Japanese automakers are required to enter joint ventures with Chinese companies, and produce vehicles and move parts suppliers to China to sell cars there.

Beijing maintains an undervalued currency by purchasing dollars with yuan on a regular basis and investing those dollars in U.S. Treasury securities. This provides the equivalent of a 25 percent subsidy on Chinese exports and disadvantages imports, too.

Most recently, China imposed minimum prices, quotas, taxes and other restrictions on critical materials used to produce steel, aluminum and chemicals. Often China is the key global supplier of raw materials, and its export controls disadvantage steel, aluminum and chemical manufacturers, and the industries that fabricate products from those materials, in the U.S. and elsewhere.

Such practices violate WTO rules, which require all members to export raw materials freely so manufacturing takes place where it is most cost competitive, consistent with the basic tenets of trade based on comparative advantages.

U.S. Trade Representative Ron Kirk has correctly characterized these egregious practices as a thumb on the scale, disadvantaging U.S. manufacturers during a tough recession.

In announcing the WTO complaint, the Obama administration noted the importance of manufacturing for creating high-paying jobs, and hopefully, this will be just the first initiative to recalibrate trade with China.

Next, the administration should tackle China’s undervalued yuan — its sweeping effect on U.S. industries competing with Chinese products make it essential to rebalancing trade with China and getting the U.S. economy back on a sustainable growth path.

Peter Morici is a professor at the University of Maryland’s Smith School of Business and a former chief economist at the U.S. International Trade Commission. He can be contacted at 703-618-4338, or at pmorici@rhsmith.umd.edu.