Eva Cheng
The US government is stepping up its attempts to blame China for some of its own economic woes. In a May report to the US Congress, it threatened to officially designate China a "currency manipulating economy" if by October it hadn't pushed up its currency value.
For the last few years, Washington has been accusing Beijing of keeping the yuan's value low in order to make Chinese goods cheaper, and hence sell more of them on the US market. Under the 1988 Omnibus Trade and Competitiveness Act — introduced when Washington accused Japan and East Asia of the same thing — countries designated as "currency manipulating" can be punished with sanctions.
The US is under pressure because of its "twin deficits" — in both its international current accounts (the flow of goods, services, investment and other incomes between the country and the rest of the world), and its domestic budget — and the decline in its manufacturing sector, which has cost jobs. Since November, the country has been in another "jobless recovery". Blaming China — a strategy supported by the US trade union bureaucracy — is a good way to deflect anger.
In recent years, China goods' exports to the US have risen rapidly. It already had a trade surplus with the US (more "Chinese goods" are exported to the US than US goods exported to China), and this has rapidly increased. At the same time, the US's current account deficit has been breaking records, due in large part to the country's exports being increasingly dwarfed by its imports.
However, this hardly means that China is threatening to harm the dominance of the US economy.
Firstly, keeping an even balance of imports and exports of goods is becoming less important for capitalists in First World countries, as the corporations that they own rely more on direct investment overseas (for example, building and operating an appliance plant in China) rather than producing goods at home. So the trade deficit is an increasingly incomplete measure of an economy's clout.
Secondly, imperialist economies tend to be much stronger in the "trade in services" than Third World countries. Grouped under "services" are activities such as banking, finance, insurance and transport, which are critical to capitalist economies.
Thirdly, the reason that the US can afford to run a big current account deficit, when other countries can't, is that the US dollar is the world's main currency for trade and reserves. This means that economies need to buy US dollars, and/or US government bonds, allowing the US to get cheap or almost free loans. This unique privilege is key to the US's ability to run current account deficits ever since 1982, with the sole exception of 1991. Its deficits jumped even more over the last decade, from US$109 billion in 1995 to $665.9 billion in 2004 (or 5.7% of GDP).
In most other countries, this scale of deficit would have triggered a collapse by now (as for example, in the 1997-98 Asian economic crisis). Even in the US, this is cause for alarm. And the government budget deficit is also rapidly rising, as the administration of US President George Bush funds its war on Iraq.
Capital export vs goods export
Instead of blaming the decisions of big corporations to make profits overseas, or to increase productivity by working fewer employees harder, for the shrinking US job market (especially in manufacturing), many US politicians instead focus on the trade deficit, and the level of imported goods in the country. They ignore the case of Japan, for example, which has one of the highest trade surpluses in the world, yet has rising unemployment.
Capitalists always strive to minimise their wages bill by squeezing existing workers harder or moving jobs, at least partly, overseas to places they can pay lower wages. The latter is particularly effective in weakening the bargaining position of the remaining workers.
However, China provides an easy scapegoat, given the strong export orientation of its economy of 1.3 billion people. Beijing's pro-capitalist "reforms", which ban workers from self-organising or striking, has made available an abundant source of cheap labour, almost unrivalled elsewhere. It is no accident that China has attracted more foreign direct investment (FDI) than any other Third World country — reaching $52.7 billion in 2002 or $427 billion in the 12 years since 1991. Most of this went into manufacturing, a sector that imperialist economies, including the US, have been phasing out.
The trade deficits, and the decline in manufacturing jobs, are both expressions of imperialist capital seeking to maximise profits. Capitalists do so by reducing production in their higher-waged "home base" and shifting part or whole of some manufacturing lines to "low-wage economies" directly through affiliates or indirectly through subcontractors.
As an aside, it is important to note that most foreign direct investment is between the US and Western Europe, not Third World countries. While the wages are high, producing goods in Europe makes it easier for US corporations to sell to Europeans, and access to a wealthy market is still an important consideration for capital.
Multinationals
Most importantly, multinational corporations, the main source of capital export, have generated significant imports (parts and intermediate goods) and exports (final products) for the countries where their overseas affiliates are located. They often send these products back to their "home" countries, but don't necessarily source inputs from there. They therefore create significant trade deficits for their "home" economy and nominal "trade surpluses" for the host economies of their overseas affiliates.
According to China's National Bureau of Statistics, of the country's 2004 imports ($561.4 billion) and exports ($593.4 billion), 57.8% and 57.1% respectively were generated by the "foreign invested enterprises" (US multinationals based in China make many of the "Chinese" goods sold in the US).
A research report by the McKinsey Global Institute in April even concluded that about one-third of the US's current account deficit has resulted from trade with US-owned subsidiaries abroad. On April 6, financial news service MaBiCo.com reported on the McKinsey proposal that "the US should change the way its trade balance is calculated, by taking an ownership-based view of trade and categorising companies on where they are owned rather than by where goods are produced".
"Under this method", reported MaBiCo.com, "the US Bureau of Economic Analysis found that the $418 billion 2002 current account deficit would have been nearly 25% smaller".
In a July 1, 2004 article in theglobalist.com, Bank of America Capital Management managing director Joseph Quinlan also pointed out: "American firms compete more through foreign direct investment — they establish a local presence in international markets by operating on the ground — than through arm's-length trade."
Quinlan emphasised: "In 2001, for instance US foreign affiliate sales topped nearly $3 trillion, roughly three times larger than US exports of goods and services." He went on: "Record affiliate earnings were also registered in China and India, two nations that were subjected to the wrath of US protectionist forces this year."
Democrat Senator Charles Schumer proposed a bill, due for a vote in late July, to slap a 27.5% tariff on Chinese imports, unless Beijing adjusted the value of its currency, the yuan. Schumer has won the support of 67 senators.
Backfire
A June 4 report in the Los Angeles Times warned the bill might backfire on the US: "So many things made in China and shipped to the US originate from multinational corporations that have either established their own factories or contracted out to manufacturers in China that produce largely for the American market."
The paper quoted Morgan Stanley economist Andy Xie as estimating that a 27.5% levy would be translated to $70 billion, 70% of which would be borne by US companies.
Based on the Bank of America Investment Strategies Group's May 16 estimates, US foreign affiliate sales for 2004 were $3.25 trillion, well beyond total US export that year of $1.1 trillion.
The May 2005 report of a simulation modelling by Asian Development Bank economist Park Cyn-Young also threw doubt on the theory that an appreciation of the yuan would correct the US's external imbalances.
Park found that if the yuan appreciated by 10%, the US trade balance will gain by $3.6 billion, or a 0.02% improvement to the current account measured against the GDP. The improvement will rise only to 0.05% if the yuan's appreciation rose to 20%, added Park.
In 2004, China accounted for only 13.4% of total US imports and 4.3% of total US exports. On this basis, Park found that "Even if the revaluation were to decrease imports from the PRC by half and double exports to the PRC, it would amount to a reduction of the US trade deficit by only about $29 billion, or 0.24% of GDP."
Park added that any reduction of imports from China would most likely be offset by increased imports from other Asian countries. He also noted that the yuan's appreciation would hurt China's income, thus its appetite for US goods.
From Green Left Weekly, July 6, 2005.
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