With the economy finally starting to emerge from its darkest period since the 1930s, plotting the course of our future is dicey.
After millions have been thrown out of work, creating a sustainable platform for the resurgence of the domestic jobs market is on everyone’s mind, including the President’s.
Late last year, the President held a jobs summit at the White House. Mr. Obama has talked up the idea of creating “green” jobs, innovation jobs, support to small businesses to create new jobs, and now jobs by boosting our export market.
Today, President Obama said that the doubling of our export markets over the next five years could create 2 million new jobs at home.
The President is right.
But as New Englanders are fond of saying: “You can’t get there from here.” To advance his initiative, President Obama has ordered a cabinet-level group to oversee a new strategy to increase exports. The main focus is a vigorous drive to remove trade barriers. Under Mr. Obama’s proposed National Export Initiative, the administration will provide U.S. firms greater access to export financing to help them penetrate emerging high-growth markets such as Brazil, India and China.
Increasing supports to U.S. companies seeking to crack the export market is a good start. But unless the U.S. mounts a serious challenge to China’s unfettered manipulation of its currency, any attempts to jumpstart our export economy will fall flat.
How China Helps Itself
China's deliberate policy of pegging the Yuan to the dollar makes American imports of Chinese goods artificially cheap. It also gives American companies opening factories in China an artificial subsidy.
That is good for China, bad for America.
During the recent economic downturn, our trade deficit with nearly every other country shrank, including the OPEC nations. In the case of China, the trade gap continued to grow.
Most economists agree that the dollar’s exchange rate with China defies the laws of monetary physics. During the U.S.-led global recession, the dollar dropped precipitously. This made U.S. exports cheaper and more attractive for everyone but China because its currency fell in concert with the dollar.
China temporarily broke the Yuan’s direct link with the dollar in 2005 and allowed it to rise by about 20 percent over the next three years. Beijing stopped this policy in late 2008 in an effort to keep Chinese exporters competitive amid a climate of plunging global demand.
A stronger Yuan could ease domestic inflation and the burdens on the Chinese consumer. Historically, however, the Chinese are less concerned about the impact of inflation on their consumers than they are with continuing to promote their drive for global export superiority.
The notion that we can rebalance our trade with China by simply cultivating a taste for American consumer goods is flawed.
So Much for Chinese Populism
Although China's capital expenditures are on the way to exceeding that of the U.S., its consumer spending is barely one-sixth as large. Last year, personal consumption in China amounted to only 35 percent of the Chinese economy; 10 years ago consumption was almost 50 percent. Capital investment, by contrast, rose to 44 percent from 35percent over the decade. By comparison, U.S consumer spending makes up approximately 70 percent of our GDP.
Where our focus has shifted to building domestic consumer demand and buying power, the Chinese are continuing to put an emphasis on building their export machine. Unlike the U.S., China’s massive $600 billion stimulus package was directed at enlarging productive capacity rather than consumer demand.
There is no question that over the next 10 years, China, with more than 1.3 billion people, will become the largest consumer market on the planet. Last year, for example, the Chinese were second only to the U.S. in the number of computers they purchased. Other than the purchase of SUVs, the Chinese bought as many cars as Americans in 2009.
Even as the U.S. was bailing out G.M. and Chrysler, sales for the two ailing automakers were soaring in China. Proctor & Gamble is such a well-established brand in China that consumers think the company’s many products, like its green tea-flavored toothpaste, are Chinese.
With an artificially cheap Yuan, it is simply more attractive for U.S. companies to move their operations to China than to export.
If the President is truly serious about developing our export power, he must be more aggressive in challenging China’s continued currency manipulation. Until this happens, U.S. exports will remain stalled along with the President’s promise to create 2 million new jobs.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
