Romney must plug a Chinese drain
While the US recovery is struggling, Americans are spending again – on Chinese goods. But Barack Obama's failure to confront Chinese mercantilism leaves a clear opportunity for Mitt Romney.
President Obama’s economy is a disaster – since the recovery began in June 2009, economic growth has averaged a paltry 2.4 per cent and unemployment hangs stubbornly above 8 per cent.
Ronald Reagan, like President Obama, inherited a deeply troubled economy. However, President Reagan implemented radical solutions to free up the private sector, and as he campaigned for re-election, the economy was growing at 6 per cent.
These days, the economy suffers from too little demand and over-regulation. Consumers are spending again, but too many dollars go abroad to purchase foreign oil and Chinese goods without returning to purchase US exports – thanks in significant measure to Congressional Democrats and President Obama blocking development of US offshore and Alaskan oil resources, and President Obama’s failure to confront Chinese mercantilism.
China exports to the United States four times more than it buys here, because it maintains an undervalued currency and blocks imports of competitive US products. For example, it maintains a 25 per cent tariff on automobiles – the US tariff is less than 3 per cent – and requires US companies to establish joint ventures with Chinese companies to gain access to its markets.
In new industries, like solar panels and windmills, Beijing has required suppliers to locate in China. Faced with choosing between producing in the United States or China, manufacturers can service both markets from China.
Repeatedly, the Obama administrations makes narrow complaints in bilateral forums and the World Trade Organisation, but once factories are established it is hard to relocate production even when Beijing relents and drops its administrative restrictions on foreign-made products.
The practice most destructive to US interests is China’s 40 per cent undervalued currency, which artificially underprices Chinese goods on American store shelves. Licensing and regulating the price of dollar-yuan conversions accomplish this, and official intervention in currency markets.
Beijing mops up excess demand for yuan, which would force its value higher, by printing and selling yuan to importers for dollars and euro, and then uses the proceeds to invest in US Treasuries, and oil and other mineral deposits around the world. The latter enhances Beijing’s diplomatic clout, and its ability to justify its authoritarian brand of state-managed capitalism.
This currency manipulation violates China’s WTO commitments and International Monetary Fund rules. Campaigning for the White House, Barack Obama promised to address this problem, but since becoming president has refused to even admit China manipulates its currency, or bring complaints in the WTO and IMF. Successful suits would permit the United States and the EU to impose broad tariffs on all imports from China, and force Beijing to end these practices.
Early in the primary campaign, Romney promised to pursue similar tactics, but since locking up the nomination, has emphasised traditional GOP themes – deregulation, free trade and lower taxes.
Polls show those don’t cut it with swing voters in battleground states, and have permitted President Obama to attack Romney for outsourcing, perhaps, several thousand jobs as chief executive of Bain Capital. However, the big outsourcer has been President Obama by failing to effectively address Chinese mercantilism, and by shutting down exploration and development of so much oil.
China and oil account each account for about half the $600 billion annual US trade deficit. Applying the usual policy multipliers, developing domestic resources and taxing China’s currency manipulation would easily cut that deficit in half, raise GDP by $500 billion and bring home 5 million outsourced jobs.
That is the story Romney needs to tell voters.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland School, and a widely published columnist.
Follow Peter Morici on Twitter @pmorici1