BY EVA CHENG
Desperate to find a scapegoat for the loss of more than 2 million manufacturing jobs in the US over the last two years, US President George Bush's regime and the US Congress have been aggressively trying to put the blame on China, charging that China's currency, the yuan (renminbi in Chinese), has been held at an artificially low level by China's "inflexible" currency regime, thereby boosting its export competitiveness and attraction as an investment destination.
This offensive against China has helped ease the pressure on Bush and Congress to explain to voters why the present economic recovery in the US has delivered so few gains in jobs. However, the argument conveniently fails to remind US voters that manufacturing employment has been in a steady decline in the US since the end of World War II and today only accounts for 12.1% of US jobs.
On October 29, the US House of Representatives adopted a resolution demanding that the Bush administration press Beijing to switch to a "flexible" currency system. US commerce secretary Donald Evans timed a visit to Beijing to coincide with the vote in order to maximise the pressure. His visit followed a similar trip by treasury secretary John Snow in September. Their visits followed a barrage of verbal attacks by Bush, Federal Reserve Board chairperson Alan Greenspan and top US bosses on China's currency regime.
These "blame China" advocates, however, didn't explain how China, whose productivity levels are much lower than the US, is capable of "stealing" US manufacturing jobs. But more importantly, even less have they addressed the systemic risks that China will be exposed to by "floating" its currency. Under a so-called flexible currency arrangement, a country will greatly weaken its ability to regulate its external capital flows, leaving it highly vulnerable to attacks by speculative investors.
US manufacturing 'job flight'
The June issue of the Federal Reserve Bank of Chicago's Chicago Fed Letter didn't buy the theory that China has much to do with undermining US manufacturing jobs. The slow growth in US manufacturing jobs, it points out, has persisted since 1945, due to the increasing reliance of US manufacturers on automated machinery. As a result, US manufacturing productivity has grown at an average annual rate of 3.6% since 1947, compared to an average annual productivity growth rate of 1.7% for the entire US non-farm sector.
The flip side of this growth in productivity is the snail's pace at which US manufacturing jobs have increased — at an average annual rate of 0.1% since 1947, compared to 1.9% for US service jobs, according to the Chicago Fed Letter.
Mexico and China have been blamed for allegedly luring away US manufacturing jobs. This is an exaggeration. In the last two years, for example, US manufacturing investment to these two countries amounts to only 3% of US manufacturers' capital expenditure.
The Chicago Fed Letter adds: "While many believed the attraction of low wages would cause shifts in investments, American manufacturers seem to be more concerned with skill and education levels of the workers rather than wages, which are a relatively small percentage of their total costs."
The November issue of the Chicago Fed Letter further argues that the alleged impact of Chinese imports displacing US manufacturing jobs has been overstated. "[S]o long as it is based on real production cost differences between the US and China, import displacement frees up resources and workers in low-value production to pursue higher-value and higher-skilled activities in the US economy", it argues.
The November Fed Letter points out that "the bulk of the current US manufacturing weakness cannot be attributed to rising imports and outsourcing", and says this has much more to do with "the overhang of excess capital goods investment", the fact that "other production capacity continues to weigh on the pace of orders for new manufactured goods" and "the shallow US economic recovery from the 2001 downturn".
In the November issue of its Fedgazette, the Federal Reserve Bank of Minneapolis is also critical of the thesis that "a reportedly undervalued yuan" is responsible for US manufacturing job losses. "There is little proof that their solution — a flexible or 'floating' dollar-yuan exchange rate — would be an improvement", it argues.
The Fedgazette emphasises that while it's clear "any trend in job and firm flight is largely an extension of cost-cutting ... it's hard to say the extent to which plants and jobs are headed anywhere, including China". US government data suggests that "when US firms invest elsewhere, it's usually in higher-cost foreign markets, not in lower-cost ones like China".
Push to end peg
On the surface, Washington's main complaints about China's currency regime — which pegs the yuan to the US dollar — centre on Beijing's refusal to adopt a floating currency, which purportedly would let the "free market" determine the yuan's exchange rate such that capital can move "freely" in and out of China.
Letting the yuan float would mean that Beijing would let go of any residual measure insulating the Chinese economy from the attacks of speculative investors. This would open up the prospect of wild swings in China's exchange rates.
Furthermore, the complete lifting of capital controls by China would forcefully speed up capitalist restoration to the advantage of imperialist capital, which is led by US corporations. Periodic speculative attacks on their currencies has been a mechanism for enhancing the structural domination of imperialist capital over the economies of underdeveloped capitalist countries.
A glimpse of the notorious record of speculative funds is revealed in Banking and Currency Crises: How Common are Twins?, a 1999 study by Reuven Glick of the Federal Reserve Bank of San Francisco and Michael Hutchison of the University of California, Santa Cruz.
Glick and Hutchison documented the occurrence and recurrence of banking and/or currency crises in more than 80 countries between 1975 and 1997. They found a high rate of these "twin crises". This is hardly surprising, given the critical importance of credit and external borrowing in capitalist economies today, particularly underdeveloped capitalist economies.
Of the 66 instances of these crises in underdeveloped countries cited by Glick and Hutchison, 32 occurred in the better-positioned "emerging market" economies.
Glick and Hutchison correlated the occurrence of such crises against the time when these countries "liberalised" their financial systems and concluded: "[T]he openness of emerging markets to international capital flows, combined with a liberalized financial structure, make them particularly vulnerable to twin crises."
A 2000 study by Ajit Singh and Ann Zammit, published in World Development magazine, put the cumulative cost of the twin crises as high as 18% of GDP in each case.
When China took the first steps to inject "free market" mechanisms into its economy between 1979 and 1986, it welcomed foreign direct investment (FDI) in a highly regulated manner, mainly as joint Sino-foreign ventures, and confined them to four special economic zones. Beginning in 1986, wholly foreign-owned ventures were allowed and the SEZs were extended to 14 major cities. More systematic encouragement for wholly foreign-owned FDI ventures started in the early 1990s when the Beijing regime adopted a definitive course toward restoring capitalism throughout the country.
Also since the early 1990s, foreign investment has been allowed in the stock markets that were reopened for the first time in China since the 1949 revolution. On offer were shares of newly privatised (mostly partially) state-owned enterprises, but considerable limits remain on foreign investors' access to them. They can, for example, only buy the US-dollar denominated "B shares", or the "H shares" issued indirectly in Hong Kong. The yuan-denominated "A shares", however, were off limits to them until a year ago but are now available for purchase by foreign "institutional investors" which meet certain tests set by the Chinese authorities.
Beijing has responded to pressure from foreign investors for easier convertibility between the yuan and foreign currencies by relaxing its foreign exchange regulations in increments, with the biggest steps being the 1994 unification of a previous dual system and the 1996 decision to allow yuan to be convertible for current account items (i.e., mainly in trade, but also investment income).
But the decisive freedom for capital lies in the capital account which covers FDI, "portfolio investment" (shares and bond-type securities that are usually of a short-term nature) and external debt (borrowing from banks or directly from the securities market).
While Beijing has encouraged FDI, China's capital account transactions remain largely under government control. This is the last major barrier that imperialist capital wants removed by China, so that US and other Western corporations have complete "freedom of movement" for portfolio investments, which are mostly speculative and short-term.
This US offensive against China is not unique. The US-dominated International Monetary Fund has been waging a campaign since 1994 to "liberalise" capital account transactions in the Third World. The campaign slowed down after the 1997-98 Asian economic crisis but has never been abandoned. Getting China to "liberalise" its capital accounts would be a major victory for the US capitalists in pressuring others in the Third World to do the same.
From Green Left Weekly, November 19, 2003.
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