Why Getting Tough with China Won’t Solve Our Jobs Problem

With unemployment in the stratosphere and the midterm elections weeks away, politicians naturally want to show voters they’re committed to getting jobs back.  

So now they’re getting tough on China.

But it’s a dangerous ploy based on wishful thinking.

Treasury Secretary Tim Geithner told the Senate Banking Committee Thursday the Administration is “examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly.” Translated: We’re on the verge of threatening them with trade sanctions.

Even this didn’t satisfy the Senators. Charles Schumer (D-New York) charged that trade with China “diminishes America, our standard of living here in America, and America as a world power.” Richard Shelby (R-Ala) demanded to know why “the administration protecting China by refusing to designate it as a currency manipulator” – a designation that could lead to trade sanctions.

On Wednesday the U.S. filed a pair of complaints against China with the World Trade Organization, alleging China was unfairly denying American companies access to its market. Meanwhile, several Democrats facing elections in November are introducing measures that would allow companies to pursue sanctions against China for manipulating its currency.

It’s true China has kept the value of its currency artificially low relative to the dollar. If China allowed its currency to rise, Chinese exports would become more expensive to us and our exports would be relatively cheaper to them. This would help shrink the trade imbalance.

It’s also true China has dragged its feet. In June, the U.S. stopped short of branding China a currency manipulator after China promised to reform its ways. But since then China’s currency has risen just 1 percent relative to the dollar.

America’s trade imbalance with China is growing. In the first half of this year, China exported $119 billion more goods and services to us than we did to them – putting the two nations on course to exceed last year’s $227 billion trade gap.

But it’s naive to assume all we have to do to get Chinese to do what we want is to threaten them with tariffs.

First, they might retaliate. Remember, China is the biggest foreign investor in U.S. Treasury securities, with holdings of more than $843 billion. If China were to start selling off large amounts, America’s borrowing costs would soar – and we’d end up worse off.

Second, it’s already costly to China to keep its currency artificially low – requiring that China buy loads of dollars. So why would anyone suppose that making it more expensive for them would bring China around?

China has been willing to bear this huge cost because its export policy doubles as a social policy, designed to maintain order.

Each year, tens of millions of poor Chinese stream into China’s large cities from the countryside in pursuit of better-paying work. If they don’t find it, China risks riots and other upheaval. Massive disorder is one of the greatest risks facing China’s governing elite. That elite would much rather create jobs than allow its currency to rise substantially and thereby risk job shortages at home.

Third, even if China did allow its currency to rise against the dollar, there’s no reason to think this would automatically generate lots more American jobs.

American exports would become cheaper to Chinese consumers. But Japan, Germany, and other major exporters would also demand a piece of the action. Unemployment is high in all developed nations, and every government is under pressure to create more jobs.

Meanwhile, Chinese manufacturers – whose goods would suddenly become more expensive to American consumers – could simply shift their production to other nations with lower currencies. Indeed, as Chinese wages have begun to rise, Chinese manufacturers have already started to shift production to Vietnam, Indonesia, and other low-wage outposts of Southeast Asia.

What worries me most about all this tough talk about China is it diverts attention from the real problem. American isn’t suffering high unemployment because we’re buying too much from China and not selling them enough. Trade with China is a small portion of the U.S. economy.

Twenty million Americans lack jobs because American consumers – especially America’s vast middle class – can no longer spend what’s necessary to keep nearly everyone employed.

After three decades of stagnant middle-class wages, during which almost all the economic gains have gone to the top, we’ve finally reached a day of reckoning. The middle class can no longer borrow vast sums by using their homes as ATMs. They can’t squeeze more working hours out of two wage earners. And they have to start saving for retirement.

The central challenge we face isn’t to rebalance trade with China. It’s to rebalance the American economy so its benefits are more widely shared.

Originally published at Robert Reich’s Blog and reproduced here with the author’s permission.

One Response to "Why Getting Tough with China Won’t Solve Our Jobs Problem"

  1. 11b40   September 18, 2010 at 9:37 am

    It’s all about jobs and demand. No jobs, no demand – no demand, no jobs. It is past time that america wake up and realize where all the jobs have gone, and why.Free Trade has been paracticed “on” us by predatory multi-national corporations in combination with predatory governments, China being only one of them. We have been sold a bill of goods by big business and big government for more the 30 years, and the word “protectionism” has somehow been made into a vulgarity. Instead, we should have Fair Trade, and there should be some off-setting, common sense tarrif codes imposed by country and industry. How can we as a country expect to support the quality of life our forefathers built for us without jobs? How can we continue to allow our jobs to exported and out-sourced without off-setting penalties for those who do it?Obviously, we can’t. It ain’t workin’ folks. Just look around and think about all the industries we have lost. In my neck of the woods, it has been textiles and furniture, but almost every region in America has lost some big manufacturing segment of their economy. These were good paying jobs that did not require high levels of education, but still allowed for stable families and steady upward mobility. The jobs also provided the needed tax base to pay for the services we have voted ourselves. The loss of these jobs has ruined our country. Our infrastructure is crumbling, the drop-out rate has soared, unemployment is rampant with nothing visible on the horizon to make us think the situation will change, and large segments of our population are facing demoralizing realities of diminished lifestyles.I am hopeful, but not very optimistic, that change will come. America for generations has been a beacon of freedom and a positive guiding light in the world. If we are to continue to be a force for good, we must stay healthy. Instead, we are sick and decaying.Independent Contractor