Bursting the Currency Hawks' Bubble

The Wall Street Journal yesterday had a great article which singlehandledly exposes the silliness of currency hawks' argument that threatening China with retaliatory tariffs will somehow "pressure" the Chinese into appreciating the Yuan (and, of course, magically saving the US economy).  In fact, China's latest response to the angry rants of certain US senators and GOP presidential candidates should make it abundantly clear to everyone that the Chinese government is motivated entirely by self-interest (and self-preservation) rather than what some good-haired politician is telling folks 2000 miles away:

China said that rapid yuan appreciation in the near term is out of the question as it would harm China's economic growth, in one of the strongest responses yet to U.S. pressure for a faster rise in the currency.

The comments by a spokeswoman for the Ministry of Foreign Affairs on Wednesday reflect China's growing anxiety as its domestic economy slows and demand for its exports is threatened by economic stagnation in Europe and the U.S.... 

"In the short term, pushing for rapid yuan appreciation is not possible. If Chinese economic growth slows, it will reduce global aggregate demand," Ms. Jiang said.

In public comments about the issue, Chinese officials have stressed that yuan reform will be gradual, but haven't explicitly said that rapid appreciation is off the table.

The WSJ article also notes what some of us have been saying for a while: due to the Chinese currency and other economic policies, the economy could be in big trouble if the government doesn't figure out a way to appreciate their currency and curb inflation, while maintaining economic growth (and employment):

The comments also come after Chinese Premier Wen Jiabao on Tuesday called for China to "fine-tune" its economic policies to support growth, adding to speculation that China may at some point shift away from its focus on curbing inflation.

Yuan appreciation could be one way to offset inflation, but a return to a growth focus could lead to Beijing considering slowing the trend as a way to help China's exporters. 

China now faces a dilemma, as some economists have begun arguing that the country's situation justifies slower yuan appreciation, while external pressure on China to keep the yuan rising is likely to remain intense....

Standard Chartered economist Stephen Green projected Tuesday that the yuan's appreciation against the dollar will slow to 3% to 4% in 2012 from 5.5% in 2011, due to China's slowing economic growth.....

China has other levers that it is already pulling to fine-tune its economic policy beyond the yuan's value. Measures are being rolled out to support smaller companies, which have been starved of access to credit. And Beijing may move to lift restrictions on bank lending, analysts say.

Stronger stimulus measures like interest rate cuts don't look likely, with inflation still alarmingly elevated. On Tuesday, Mr. Wen reiterated that maintaining price stability remains the government's top priority.

Meanwhile, China's currency has actually appreciated quite a bit over the last few years, including in 2010-2011:

Since 2005, the yuan has risen around 30% against the U.S. dollar, and it is now "close to a reasonable equilibrium level," Foreign Ministry spokeswoman Jiang Yu said at a regular press briefing.... 

On Wednesday, Bank of America-Merrill Lynch economist Lu Ting said that due to recent dollar strength, the yuan has actually appreciated by 4.1% against a broader basket of currencies since the end of July...

The dollar late in the Asia trading day Wednesday was at 6.3533 from 6.3604 late Tuesday, with the yuan higher against the dollar for the fourth straight trading day....

The yuan has risen 3.7% against the U.S. currency so far this year and 7.4% since June 2010, when China essentially unpegged its currency from the dollar.

And yet, despite all of these facts...

Political pressure on China from abroad to allow faster yuan appreciation is unlikely to abate in the near future. A U.S. Senate bill that would penalize China for its currency policies may be stalled in the House of Representatives, but the U.S. presidential elections in November 2012 are likely to keep the issue in the headlines for at least the next year, with Republican presidential hopeful Mitt Romney already pledging to declare China a currency manipulator.  

Will they ever learn?

Podcast on FTAs, China Currency and Trade Policy/Politics

The folks at RedState's "Coffee & Markets" had me on this morning to talk FTAs, China currency and US trade policy/politics.  Unsurprisingly, I lack the technical expertise to download the podcast and post it here, but you can just click over to RedState to listen there or download it to your iPod.

Enjoy!

China-bashing:Good Politics, Bad Consequences

The Wall Street Journal's Bob Davis explains in must-read column what some of us have known for a while now: poll-driven attacks on China may score some cheap political points, but they also have some really nasty consequences. The entire item is well worth your time, but here are some key sections:

One Republican presidential hopeful, Mitt Romney, has propelled China into the center of the contest by accusing it of "cheating," and by threatening to shut down U.S. markets to Chinese goods unless China lets its currency appreciate significantly. President Barack Obama has attacked Beijing for "gaming the trading system."

The Senate last week overwhelmingly passed legislation to penalize China for its currency policy, through trade sanctions. Unless the House Republican leadership continues to block a vote, the legislation would likely pass the House by a huge margin, as a similar bill did last year.

The debate has become so heated that Republican presidential hopeful Jon Huntsman, a former U.S. ambassador to China, said he backs the Senate bill even though he warns that "slapping penalties" on China could ignite a trade war.

Much of this can be dismissed as election-year posturing. Every president finds that the U.S. has limited options in getting China, the world's second-largest economy and the U.S.'s largest foreign creditor, to adopt market-oriented change. The trick is to get Beijing to see the reform as in its interest, and even then the pace of change is slow....

But political threats, even if they don't become law or policy, have consequences in Beijing and can backfire in ways that Americans may not appreciate. Beijing is in the throes of its own 2012 leadership change, with top politicians jockeying for power. There's no election, but public opinion matters. Being seen as close to the U.S. at a time when Washington threatens to whack Beijing is as much a burden for a Chinese politician as being a pal of China would be for an American candidate campaigning in Cleveland.

Cheng Li, a Brookings Institution China scholar, says the threats from Washington have already hurt a U.S. favorite, Vice Premier Wang Qishan, who is viewed as having an outside shot at becoming Chinese premier, the No. 2 position in China. Mr. Wang has argued that China needs to rely more on domestic consumption rather than exports—precisely the U.S. position.

A backlash against U.S. threats could help Bo Xilai, the nationalist party secretary of Chonqqing, a city that recently shut down 13 Wal-Marts for allegedly selling mislabeled pork. Shutting down a supermarket for such a common infraction is unusual.

He's aiming for a slot on the standing committee of the Politburo. "You're hurting economic policy makers that have strong ties to the U.S," Mr. Li said. "It puts them in an awkward position."...

So American politicians' China demagoguery not only is smarmy politics, bad economics and questionable law, but also could end up slowing reforms in China and pushing sympathetic Chinese politicians from power.

But other than that...

FTA Round-up

With both the House and Senate poised to vote on, and approve, pending US FTAs with Colombia, Korea and Panama tomorrow, it seemed like a good time to provide some recent must-read items to get you caught up to speed:

• The Competitive Enterprise Institute just issued a great new study documenting the Obama administration's failed - and economically harmful - strategy of delaying ratification of our pending FTAs in order to appease US labor unions (through, for example, revised FTA obligations, side agreements and reauthorization of expanded TAA).  CEI provides good support for something that I've been saying here for years: placating anti-traders, especially unions, is a fool's errand.

• Speaking of economically harmful delay of these FTAs, the Korea Herald reports that the recently-ratified EU-Korea FTA (started years after the still-pending US-Korea FTA) is reaping major benefits for European carmakers.  Good for them.

• However, as the FT's Alan Beattie explains in this new op-ed, the economic value of these FTAs shouldn't be oversold, and their final ratification has come at a pretty big price.  He concludes: "The US, along with all countries that trade – poor and middle-income as well as rich – is presented with a complex array of interlocking issues by the operation of globalisation: technological change, migration, exchange rates, capital movements and geopolitical power politics, as well as flows of goods and services.  Reducing the globalisation debate to passing three bilateral trade deals – at the cost of adding momentum to a potentially dangerous currency bill – is a very long way from being a proportionate response. In net terms, this was a bad week in Washington for free trade and real free-traders should recognise it."

• Jagdish Bhagwati takes a different, but kinda similar, angle, lamenting that "Congress and the president apparently have plenty of time to discuss bilateral FTAs with South Korea, Colombia, and Panama, as well as the regional Trans-Pacific Partnership (TPP), but none for negotiating the non-discriminatory Doha Round, which is languishing in its tenth year of talks." 

• Not to be outdone, Australian Marc-William Palen actually goes a bit further than Beattie and Bhagwati and argues that the FTAs' price tag - TAA - shows that the President is, deep-down, a protectionist.

• Speaking of the FTAs' price tag, the CBO released its cost estimates for the Korea, Colombia and Panama implementing legislation.  The Korea report is by far the most interesting, as it shows that the FTA's implementing legislation includes almost $8.5 billion in new customs users fees - $4.1 billion in extensions and, more importantly, $4.3 billion in increased merchandise processing fees because the FTA implementing legislation raises the fee from 0.21% to 0.3464% of a shipment's value.  I've already gone over why raising taxes on American import consumers to fund a free trade agreement is really misguided, but I do think it's very interesting that the revised KORUS legislation includes an exemption from these new fees for imports from Korea.  Colombia and Panama legislation provides for a similar exemption.  So, really, Korean, Colombian and Panamanian imports into the US will get a double benefit from the respective FTAs - lower tariffs and cheaper customs fees.  Unfortunately, US consumers of non-Korean/Panamanian/Colombian imports will be left holding the tab, and the FTAs' overall trade liberalization benefits will be muted.  Sigh.

• Finally, AEI's Phil Levy explains that, although the FTAs should definitely help the US economy, their tortuous path to final implementation is indicative of the sad state of US trade leadership.  Yep.

That's all for now, folks.  

Senators Blindly Promising to "Get Tough" on China's Currency

The US Senate is poised to take up the issue of China's currency policies, and nothing - certainly not some measly little facts that totally undermine the issue's relevance - is going to slow the legislation down.  You see, in today's Senate - one that hasn't passed a budget in almost 900 days - politics trumps reality.  Every single time.

Last Thursday, a bi-partisan group of Senators, led by Sens. Chuck Schumer (D-NY) and Sherrod Brown (D-OH) announced their much-anticipated legislation targeting China's currency policies:

Senators Charles Schumer of New York and Sherrod Brown of Ohio, both Democrats, urged support for legislation pushing China to raise the value of its currency as a way to stem U.S. job losses.

China’s currency policies cost more than 2.8 million U.S. jobs since 2001, the lawmakers said today at a Washington news conference. The legislation would let U.S. companies seek duties on imports from China to compensate for the effect of a weak yuan, which lawmakers said gives Chinese companies an unfair advantage against U.S. manufacturers.

“They get away with economic murder,” Schumer told reporters. “We are fed up; we are not going to take it anymore.” 

Schumer proposed similar measures in each of the past six years. None has received a Senate vote. The bill also is supported by Democratic Senators Robert Casey of Pennsylvania and Debbie Stabenow of Michigan, and Republicans Lindsey Graham of South Carolina, Richard Burr of North Carolina and Jeff Sessions of Alabama.

So to recap the Senators' argument: China's undervalued currency has eliminated 2.8 million US jobs, and these brave Senators want to empower US companies to seek new tariffs on Chinese imports in order to force China's hand.  Sounds almost plausible, but there's one big problem: every single "fact" in that previous sentence is dubious.

At best.

First, the employment study that the Senators cited - by the union-run and union-funded Economic Policy Institute - is total economic bunk.  I've already been over this fact several times, citing to myriad economists who have explained that EPI's methodology, which simply ties the US trade deficit to American job losses, is utter poppycock.  Cato's Dan Ikenson elaborated on this little fact last week, showing how EPI's so-called "findings" fly in the face of both economic theory and reality:

As the chart below (which is based on easily verifiable figures published in the Economic Report of the President) reveals, the trade deficit and job creation appear to be positively correlated. When the deficit rises, employment increases; when the deficit shrinks, employment declines. So, right off the bat, a central premise of [EPI's Robert] Scott’s analysis is in doubt.... 

Last month, the U.S. International Trade Commission published its seventh update to the “The Economic Effects of Significant U.S. Import Restraints” study, which contains a special section on global supply chains. On page xv of the executive summary is a table that not only raises more serious doubts about EPI’s methodology, but should put to rest once and for all the hyperbole employed and anxiety caused by alarmist public relations campaigns and the politicians they serve.

Table ES.4 of that study indicates that there is more U.S. valued added (U.S. labor, material, and overhead) in U.S. imports than there is Chinese valued added in U.S. imports. Specifically, 8.3 percent of the value of U.S. imports (about $160 billion last year) is U.S. value, while 7.7 percent of the value of U.S. imports is Chinese value added. EPI’s methodology does not account for the U.S. jobs associated with the U.S. value added in U.S. imports.

Furthermore, that same table reveals that U.S. value added accounts for 89 percent of total U.S. consumption (a figure that confirms the findings in a recent San Francisco Federal Reserve study), which means that foreign value-added accounts for just 11 percent of U.S. consumption, making the United States a fairly closed economy—or at least, a relatively non-integrated economy. And China? Well, China only accounts for a measly 0.9 percent of the goods and services consumed in the United States. So, if 2.8 million U.S. jobs were lost to a country that produces less than one percent of what Americans consume, I say its about time we shed those highly inefficient jobs that have been a drag on the U.S. economy. The fact is, however, that 2.8 million is a fiction....

Yes, the 2.8 million job loss figure is a fiction, concocted to support political talking points and a narrow agenda that distract the public from the real problems that ail our economy. Some Chinese government policies are genuine causes for concern, worthy of efforts to resolve, but we limit our capacity to address the real problems effectively when every last gripe becomes a call to arms.

In short, the EPI study is totally worthless for anything other than shameless political demagoguery.  Fortunately for EPI, that just happens to be a certain New York Senator's specialty!  Unfortunately for the rest of us, most reporters hired to cover that Senator's currency shenanigans don't do their homework and instead treat the "study" cited by Schumer (and others) as gospel.

Shame on them.

The second problem with the Senator's argument is that most US companies aren't begging for relief from China's currency policies.  Indeed, a lot of them are literally begging the Senate to back off the currency issue and focus on other, real bilateral trade issues.  For example, just last week over 50 trade associations, representing hundreds (if not more) US companies, sent a letter to Senate leaders asking them to drop the tough currency talk.  The full letter is available online and definitely worth reading, but here are some key excerpts:

We agree with many in Congress and the Administration that China needs a yuan exchange rate that responds to trade flows and that China should move steadily towards a market-determined exchange rate.

However, unilateral legislation on this issue would be counterproductive not only to the goals related to China’s exchange rate that we all share, but also to our nation’s broader objectives of addressing the many and growing challenges that we face in China.

Legislation that would increase tariffs on imports from China is unlikely to create any incentive for China to move expeditiously to modify its exchange policies. Rather, it would likely have the opposite effect and result in retaliation against U.S. exports into China – currently the fastest-growing market for U.S. exports.

We urge you to oppose currency legislation and instead work with and vigorously call on the Administration to develop a robust bilateral and multilateral approach to achieve tangible results, not only on China’s exchange-rate policies, but also on other Chinese policies that are harming American economic interests.

The business group letter also highlights the third problem with Schumer's plan: unilateral US action (i.e., tariffs) against China are unlikely to convince the Chinese government to do anything except resist further Yuan appreciation and retaliate against US exports and companies.  As I said earlier this month about Mitt Romney's misguided plan to aggressively target China's currency via Executive Order:

The idea that the Chinese government would just roll over and concede "defeat" in the face of President Trump[Romney]'s big, macho tariff is absurd.  First, Trump[Romney] fails to grasp that the Chinese government would never, ever do anything that makes it appear weak in the face of American aggression.  Instead, retaliation, not concession, is the far more likely reaction (just as China did when President Obama imposed those tire tariffs), and such sinophobic chest-thumping would likely retard, not quicken, the gradual appreciation of the yuan that China needs to undertake.  Second, China's not nearly as dependent on the US market as Trump[Romney] seems to think.  The EU is now China's biggest export market, and Chinese exports to the US represent under 30% of China's exports to its top 10 export destinations.  So while the US market is big and important, China has other options.  Third, China couldn't rapidly and dramatically appreciate its currency even if it wanted to because any such move would implode the Chinese - and by extension, global - economy.

So the tariffs probably won't change China's behavior, and they definitely will harm US companies and consumers.  Thanks for nothing, Senators.

Finally, it's far from clear that the Yuan remains significantly undervalued against the US dollar.  I've already discussed this inconvenient truth repeatedly, and news last Friday about a massive selloff of Yuan further undermines the conventional wisdom regarding China's currency:

A rush for safe investment havens led to an unexpected drop in the value of the Chinese yuan traded outside the mainland, as global investors eschewed a bet on a currency widely seen as undervalued for the comfort of the U.S. dollar and the Japanese yen. The move will have little effect on yuan as a whole because Beijing still tightly controls the currency. But it offers an example of the uncertainties China could face as it moves in fits and starts to loosen its restrictions on the yuan and give it a more central global role.

The drop took place mostly in Hong Kong, a Chinese city that operates under its own set of laws and the only place where the yuan can be traded outside the Chinese mainland. Chinese officials over the past year have transformed the city into a laboratory for yuan liberalization, allowing everything from the issuance of yuan-denominated bonds to yuan-trade settlement to yuan accounts for individual investors.

Until this week, the Hong Kong-traded yuan had remained broadly in line with the official yuan trading range. But market turmoil Thursday and Friday prompted the Hong Kong price to slump at one point to a discount of as much as 2.5% to the mainland yuan, the biggest gap since China began relaxing its currency restrictions about a year ago. The yuan on the mainland trades in a tight band because of Beijing's restrictions on its currency.

The discrepancy between Hong Kong-traded yuan and mainland yuan, known as of offshore market and the onshore market, respectively, later narrowed somewhat but remained high by historical standards, and late Friday traded at 6.49 yuan to the dollar in Hong Kong, compared with 6.39 yuan in the mainland. The moves fly in the face of currency-market conventional wisdom, which holds that the yuan is set to rise against the U.S. dollar as China soaks up capital and trade flows.

The selling pressure overwhelmed a facility set up by China to sell yuan at the mainland rate, which on Friday was offering investors more dollars for their yuan. Late in the day, Bank of China Ltd.'s Hong Kong arm, the designated clearing bank for the Hong Kong market, said it would temporarily stop buying yuan used for trade settlement as its quarterly quota for such transactions was full....

Market turmoil also roiled the market for yuan nondeliverable forwards, which are offshore derivatives that track the value of the yuan but can't be exchanged for the currency. The dollar one-year forward on Friday was bid as high as 6.47 yuan against the domestic spot rate of 6.39 yuan, implying expectations of a 1.3% yuan fall over the coming months.

Until now, global investors have largely adopted a strategy of shorting the dollar for the yuan on expectations that Beijing would continue to allow its currency to rise. In fact, desire for yuan offshore has caused the Chinese currency traded in Hong Kong to boast a premium over its mainland counterpart at most times.

Now, worries of an economic recession around the globe and a Greek debt default are driving investors back into the relatively safety of the U.S. dollar, leading many investors to sell yuan and other currencies for dollars.

For those of you (like me) who aren't currency experts, investors don't typically flee an "undervalued" Yuan for an "overvalued" Dollar.

So to summarize: the Senators are using a debunked economic study to justify their targeting a problem that might not even exist with a strategy that will never work on behalf of a constituency that doesn't want their help.

But other than that....

Mitt Romney's Playing with Chinese Matches

On Sunday, I explained the economic, strategic and political problems with Mitt Romney's plan to impose countervailing duties on Chinese imports in order to pressure China into changing its currency policies.  Today, two news articles show that, only a week after its release, Romney's politically-motivated plan may already be backfiring.  The WSJ explains:

As early as this month, the Democratic-controlled Senate is expected to vote on a central plank of Mitt Romney’s economic plan.

Well, that’s not how Senate Majority Leader Harry Reid (D., Nev.) will put it, nor will Sens. Charles Schumer (D., N.Y.) or Sherrod Brown (D., Ohio), the authors of the Senate bill to label China a currency manipulator and order the Department of Commerce to impose countervailing duties on Chinese imports. Since Mr. Schumer has been pressing the issue since 2005, he’s not about to give it up to a newcomer.

But the fact that the former Massachusetts governor and Republican White House hopeful has promised to do the same thing if elected president has not escaped notice – either among Democrats or among conservative groups unhappy with the plank.

“Basically, Mitt Romney is standing with the most liberal members of Congress in wanting to raise taxes on American consumers. It’s beyond ridiculous that Romney won’t endorse legislation that would, in effect, implement the protectionist executive order he himself has said he’d sign on Day 1 of his presidency,” said Andy Roth, vice president for government affairs at Club for Growth, a conservative political action committee.

Mr. Romney’s 160-page “Believe In America” economic plan largely sticks to Republican type, promising fewer regulations, lower corporate taxes and a repeal of President Barack Obama’s health care law. But it also talks tough on China, promising steep tariffs on Chinese imports unless Beijing allows its currency to float on international exchange markets.

“It is time to end the Obama administration’s acquiescence to the one-way arrangements the Chinese have come to enjoy,” the policy says. “We need a fresh and fearless approach.”

Sen. Brown, one of the most liberal and labor-friendly members of Congress, echoed that sentiment earlier this month as he promoted the same move: “Strong trade law enforcement—including cracking down on China’s illegal currency manipulation—is critical to closing the trade gap with China and America’s other trading partners. It’s past time for Congress to act.”

Mr. Romney’s campaign would not say whether the candidate would endorse the Schumer-Brown bill. “There have been a number of pieces of legislation addressing China’s unfair trade practices. Governor Romney clearly laid out the approach he would take on this issue in his jobs and economic growth plan,” said campaign spokeswoman Andrea Saul.

Sen. Brown’s staff was happy to tweak the Romney campaign, even as the senator sought credit for the effort.

“Senator Brown has had a long history of standing up against unfair Chinese trade practices. He’s glad that Governor Romney now shares his views that we must put American workers first by treating Chinese currency manipulation as an unfair subsidy so that our companies can compete on a level playing field,” said Meghan Dubyak, a spokeswoman for the senator.

The Boston Globe had a similar story today, snarkily concluding that if Schumer's anti-China bill becomes law, "it would be one less executive order for Romney to pursue and would leave 58 items left on his economic plan."  As humorous as that is, of course, it's also quite distressing because, as I explained at length on Sunday and in previous blog posts, anti-China currency is misguided and potentially devastating for American families and companies (and thus, the US economy).

And, as I also explained on Sunday, Mitt Romney would definitely deserve some of the blame:

[E]ven assuming that the Romney team is just playing politics and doesn't actually intend to follow through with its China currency plans (a valid assumption, I think), the endorsment of the currency/CVD approach by one of the GOP's top presidential contenders could have serious, unintended political and economic consequences before the 2012 election by fueling congressional anti-China protectionism.  Indeed, the plan could unintentionally achieve its politically-motivated goal by leading to the implementation of a US currency/CVD law.  Problematic House legislation (H.R. 639) mandating that the Commerce Department treat "undervalued currency" as a countervailable export subsidy now has over 200 co-sponsors, a large marjority of which are Democrats.  If Romney's indirect endorsement of that legislation lets a few squishy House Republicans join as co-sponsors and thus gets the total number to 218 (an absolute majority), it could lead to a "discharge petition" and force a floor vote on the bill, and there's nothing that sane/resistant GOP leadership could do about it.  Senate Democrats have been itching to vote on similar legislation, and a few Senate Republicans (e.g., Lindsay Graham and the Maine Senators) would certainly join the charge, again with Mitt Romney's implied support.  And does anyone expect President Obama to veto any China currency bill that reaches his desk? 

...[I]f that bill becomes law, it could have serious consequences for US exporters and consumers.  And its implementation could legitimately be owed - at least in part - to Mitt Romney's economic platform.  That's hardly what one should expect from the "safe" and "moderate" GOP candidate.

Other than the fact that the Senate is going before the House, this analysis still stands.  And I must admit: I never thought that my prediction could come true so quickly (the Senate vote announcement came as a pretty big surprise to most observers).  Small victory for me, I guess; too bad it would also be a big loss for the US economy.

When Governor Romney first announced his economic plan, the WSJ editorial board warned that "once a President unleashes protectionist furies they are hard to contain."  Considering this week's distressing events and Mitt Romney's contribution thereto, they probably should change that warning to include "Presidential candidates."

Stay tuned, folks.

Mitt Romney's Big China Trade Fail

As mentioned, Mitt Romney released his big economic plan last week.  Let me first say that there is a lot in the dictionary-length manifesto that I like, such as his calls for reducing the corporate income tax rate, passing pending FTAs, and enhancing domestic energy production.  However (and you knew that there was a "however"), as I alluded to last Tuesday, one headline issue in the Romney plan is deeply flawed: his stance on China trade and, in particular, currency.  The Wall Street Journal recently expressed similar distaste for Romney's China trade plan, arguing that it could incite additional US protectionism and spark a "trade war" with one of America's biggest trading partners.  But I think that the Journal was actually being far too kind on this front.  Indeed, on China trade, Romney's plan is wrong-headed on pretty much every level: economic, legal, strategic and political.

But before I get into all of that, let's first see what Governor Romney proposes on China. First, the plan explains how the current US-China trade relationship is bad for American workers and businesses because it is "one sided."  It targets China's lack of effective IPR enforcement, discriminatory procurement policies, market access restrictions and currency policies.  On currency in particular, the plan states that "China’s unfair trade practices extend to the country’s manipulation of its currency to reduce the price of its products relative to those of competing nations such as ours. While the extent and impact of the manipulation is widely debated, the practice provides an invisible subsidy to Chinese goods sold internationally and an invisible tariff on other nations attempting to sell in China."  The primary (only?) evidence of this assertion is the following graphic, which shows the current US-China trade balance:

The plan then suggests ways to change this "one-sided relationship."  After arguing for more border enforcement to prevent Customs circumvention and for a more aggressive USTR at the WTO and in US courts, the plan promises an aggressive unilateral approach to China's currency policies:

Current U.S. law requires that the Department of the Treasury release a biannual review in which it identifies any countries that are manipulating their currency to gain an unfair advantage. The Department of Commerce also has the power to find that Chinese currency policy constitutes an unfair subsidy to Chinese exporters, and to assess countervailing duties on Chinese products. The Obama administration has declined to take either action, effectively accepting China’s problematic practices. That acceptance has to end. If China fails to move quickly to bring its currency to fair value, the Department of the Treasury in a Romney administration will designate China a currency manipulator and the Department of Commerce will impose countervailing duties.

So to summarize: as evidenced by the bilateral trade deficit, China's currency "manipulation" is unfairly tilting the playing field in China's favor; thus, President Romney would require Treasury to declare China a "currency manipulator" and then instruct DOC to impose countervailing duties (i.e., tariffs) on Chinese imports unless China floats its currency.  Indeed, one of President Romney's "Day One" Executive Orders would be an "Order to Sanction China for Unfair Trade Practices," which "[d]irects the Department of the Treasury to list China as a currency manipulator in its biannual report and directs the Department of Commerce to assess countervailing duties on Chinese imports if China does not quickly move to float its currency."

As mentioned, there is a lot wrong with this plan, so let's go through it subject by subject.  I've already addressed a lot of the problems with this line of thinking in my April post on Donald Trump's similar China policy, so where possible I'm going to steal from that because I'm lazy and no one is paying me for this.

1. Romney's plan gets its basic facts wrong. 

As I noted in April, any suggestion that China's currency policies are driving the bilateral trade balance and thereby harming the US economy is rife with problems. (I've replaced "Trump" with "Romney" here and throughout this post because they're basically arguing the same thing.)

[I]t's important to understand the serial fallacy of Trump[Romney]'s basic factual assertions, i.e., that (a) China's currency remains extremely undervalued versus the US dollar; (b) China's currency policies are driving both the US-China trade balance and US unemployment; and (c) that the US trade deficit, and especially the United States' bilateral trade deficit with China, is a big problem for the US economy.

As I've noted here many times, China's currency policies are not nearly the vehicle of economic destruction that Trump[Romney]  and others claim them to be....  [A]s I've noted repeatedly here, the real dollar-yuan exchange rats has increased dramatically - almost 50% percent - since 2005.  Second, as the real value of China's currency has increased, American unemployment has gone from about 5% in 2005 to slightly under 9% today, and the US-China trade deficit has (except for the recession) steadily increased.  So there's no strong connection between China' currency and total American jobs or the trade balance (as the Congressional Research Service has repeatedly noted).

Next, Trump[Romney]'s assertion that $300 billion annual US-China trade deficit is a sign that America is "losing at trade" is the height of economic ignorance.  First, there's actually a strong correlation between US economic growth and an expanding US trade deficit.  As Cato's Dan Griswold recently wrote in a must-read paper on the subject:

An examination of the past 30 years of U.S. economic performance offers no evidence that a rising level of imports or growing trade deficits have negatively affected the U.S. economy. In fact, since 1980, the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. Stock market appreciation, manufacturing output, and job growth were all significantly more robust during periods of expanding imports and trade deficits.

And if fixating on the overall US trade balance weren't dumb enough, Trump[Romney] goes one further and obsesses over an even more economically meaningless stat when he worries about the US-China trade balance.  As I've noted here repeatedly, the proliferation of global supply chains and multinational investment has rendered bilateral trade balances a totally unimportant trade policy metric.  Indeed, old school trade stats like these have become so obsolete that the WTO has launched a new global initiative to determine how better to account for actual trade flows.  The most common example of the indisputable obsolescence of the US-China trade deficit is the iPhone (and the iPod before that): each device imported into the US from China accounts for about $300 towards the bilateral trade deficit, yet the Chinese get only about six bucks worth of value from the item's assembly and shipment.  Meanwhile, the US-based Apple and its affiliates get hundreds of dollars from an iPhone's final US sale (for things like design, marketing, and even some manufacturing).

Even the idea that China is totally dominating the United States is absurd.  Yes, China has experienced impressive GDP growth, but (a) that's what developing countries do; and (b) America is still much, much wealthier, greener, and more productive.  Moreover, China's incessant quest for GDP growth through industrial planning has led to some pretty scary inflation (which is driving the increase in the Yuan's real value), some major league economic distortions (e.g., a frightening property bubble and an increasingly troublesome high-speed rail system), and a lot of other serious problems that, if not solved pretty quickly, could implode the entire Chinese economy.  

None of these facts has changed since I wrote the post above.  In fact, additional factual support has emerged since I first wrote it.  For example, the Economist's Big Mac Index - routinely cited by American currency hawks - now shows that the RMB is slightly overvalued versus the dollar.

2. Romney's plan is legally problematic.

Unlike Donald Trump's brilliant plan to impose an across-the-board tariff on Chinese imports, the Romney plan takes a slightly more nuanced approach by designating China a currency manipulator in the Treasury Department's semi-annual currency report and directing Commerce to impose CVDs on Chinese goods.  However, this change doesn't save Romney's plan from serious legal pitfalls.

First, as I've explained here repeatedly, Treasury's assessment and designation of foreign countries as "currency manipulators" is conducted pursuant to US law (22 U.S.C. § 5301-5306), which defines "currency manipulators" as countries that "manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade.”  Treasury's assessment must be done in consultation with the IMF and prusuant to pretty strict guidelines.  In short, the President can't just tell Treasury to designate a country a "currency manipulator," and he/she certainly can't do it publicly via Executive Order (as Romney's plan promises).  To do so would not only violate the letter of the law, but also destroy the Treasury report's credibility.

Second, the President can't just instruct the Commerce Department to begin imposing countervailing duties on Chinese goods.  Pursuant to US trade law and regulations, the imposition of countervailing duties on imports requires (i) a petition from an affected industry or self-initiation by Commerce (something that never happens) requesting remedial tariffs on a discrete subset of allegedly subsidized imports; (ii) preliminary and final findings, based on extensive evidence (including rebuttal from Chinese producers, US importers and the Chinese government), of that said imports are being subsidized; and (iii) preliminary and final findings by the non-partisan International Trade Commission that said imports are injuring the US industry.  Each of these steps is required by US law and WTO rules.  So Romney's plan to, on the very first day of his presidency, just start imposing CVDs on Chinese imports would be in direct conflict with both US law and the United States' WTO obligations.

Third, even assuming that the Romney plan actually envisions a more subtle approach by merely authorizing DOC to begin investigating "currency manipulation" as a countervailable subsidy, it would still raise major red flags for two big reasons: (1) the treatment of a country's currency policy as a countervailable subsidy probably violates WTO rules (as I explained here in excruciating detail); and (2) DOC's current policy for imposing CVDs on imports from "non-market economies" like China has been ruled illegal by both the WTO's Appellate Body and the US Court of International Trade.  So even assuming that the Romney plan takes this more conservative approach, it still faces serious legal problems.

3.  Romney's plan is economically unsound.

Unfortunately for Governor Romney, the economics of his plan are just as dubious as its factual and legal premises.  Assuming for a moment that the plan survives the legal problems I outlined above (an admittedly charitable assumption, I know), the imposition of tariffs on Chinese goods would end up causing a lot of pain (for both China and the US) for little or no economic gain.  

First, as noted above, the Romney plan may be WTO-inconsistent, so China would very likely go straight to the WTO and could win the right to impose retaliatory tariffs on US exports in the amount of the damage caused by the tariffs.  Considering that Chinese imports into the US totaled $365 billion in 2010 and that US exports to China totaled about $100 billion in 2010, this WTO-legal retaliation could take a significant chunk out of the United States' third largest export market (and one of American exporters' fastest-growing markets - US exports to China have more than doubled since 2005).

Second, as I noted in April with respect to Donald Trump's call for tariffs on Chinese imports:

[T]he economic pain wouldn't stop with US exporters because the Trump Tariff, just like any other consumption tax, would inevitably increase US prices of everything that American consumers currently buy from China.  Remember, US importers, not Chinese exporters, pay US tariffs and pass those on to American consumers.  This, of course, means that American families, many of whom are already struggling to get by, would end up paying more - a LOT more - for food, clothing, electronics, Smithsonian souvenirs, and everything else that now says "Made in China."  However, individuals wouldn't be the only ones screwed by the Trump Tariff - American businesses (and their many workers) would also be hit hard.  Because almost half of what we import from China is industrial supplies and materials or non-automotive capital goods - i.e., inputs used by American companies - lots and lots of these firms would inevitably pay more for the things that they need to remain globally competitive.  These higher costs, of course, also mean fewer employees, if not outright bankruptcy.  Awesome.

[I]t's [also] highly unlikely that the Trump Tariff would lead to a significant increase in US manufacturing.  Sure, a few directly competitive US companies would benefit from that sweet, sweet import protection (by being able to milk US consumers for more money, natch), but the far more likely result is trade diversion - i.e., our imports would shift from China to other (more expensive) foreign countries like Vietnam, India or Mexico.  This is exactly what happened when the US imposed tariffs on Chinese tires under Section 421, and it's the very common result in anti-dumping and CVD cases.

Finally, even if the Trump Tariff succeeded in getting China to rapidly appreciate its currency (and, as noted below, it won't), it's far from certain that such appreciation would harm China's global competitiveness.  As Cato's Dan Ikenson stated last year: "RMB appreciation not only bolsters the buying power of Chinese consumers, but it makes Chinese-based producers and assemblers even more competitive because the relative prices of their imported inputs fall, reducing their costs of production. That reduction in cost can be passed on to foreign consumers in the form of lower export prices, which could mitigate entirely the intended effect of the currency adjustment, which is to reduce U.S. imports from China."  As an intermediate producer and big assembly hub, China is importing more these days than they did during the last period (2005-2008) of nominal currency appreciation, so Ikenson's insights likely hold truer today than they did even a few short years ago.

In sum, the Trump Tariff would cause massive pain for very, very little gain.

Since I wrote that, other empirical evidence has emerged to further demonstrate the economic ignorance of any US plan to unilaterally attack China's currency policies via import tariffs.  For example, the San Francisco Fed has found that of every dollar spent on "made in China" product, $0.55 goes to US companies and workers.  So any tariffs on Chinese imports would actually harm these Americans as much, or more, than it would Chinese producers.  Also, the New York Fed very recently demonstrated that (i) RMB appreciation has little affect on the prices of Chinese consumer goods imported into the United States; (ii) for basic commodities, a rising Chinese currency might just lead to trade diversion rather than bolstering the prospects of directly-competitive US companies; and (iii) increasing Chinese import prices can actually harm the US economy by feeding US inflation and raising input costs for American businesses.  All of this strongly argues against Romney's duty-based approach to confronting China.

4. Romney's plan is strategically weak.

There are also several strategic problems with Romney's plan for aggressive, uniltateral action against China.  As I explained in April:

The idea that the Chinese government would just roll over and concede "defeat" in the face of President Trump[Romney]'s big, macho tariff is absurd.  First, Trump[Romney] fails to grasp that the Chinese government would never, ever do anything that makes it appear weak in the face of American aggression.  Instead, retaliation, not concession, is the far more likely reaction (just as China did when President Obama imposed those tire tariffs), and such sinophobic chest-thumping would likely retard, not quicken, the gradual appreciation of the yuan that China needs to undertake.  Second, China's not nearly as dependent on the US market as Trump[Romney] seems to think.  The EU is now China's biggest export market, and Chinese exports to the US represent under 30% of China's exports to its top 10 export destinations.  So while the US market is big and important, China has other options.  Third, China couldn't rapidly and dramatically appreciate its currency even if it wanted to because any such move would implode the Chinese - and by extension, global - economy.

All of this remains true today, so one must why Governor Romney thinks that designating China a "currency manipulator" and threatening it with legally-suspect countervailing duties would do anything to help US exporters sell more products in China.  History has proven that the far more likely outcome of any direct confrontation is less trade, not more, between the United States and China.  And I seriously doubt that the Governor wants that.

Moreover, and as I've repeatedly explained here, prioritizing unilateral action on China's currency policies distracts from the real problems with the US-China trade relationship, such as IPR enforcement and market access.  Romney's plan exemplifies this misstep: it mentions these other bilateral trade issues, but instead of focusing on them, its primary policy action - and the only thing warranting a "Day One" executive order - is on currency.  And, let's face it, the chances of successfully negotiating or litigating these other, far more important issues after aggressively targeting China's currency policies would be dramatically diminished.  In short, Romney's plan pushes an ineffectual and potentially harmful China trade policy at the expense of an effective and helpful one.

There is one other strategic problem with Romney's plan: it sets a bad, and perhaps uncontrollable, precedent.  China is certainly not the only country in the world that is intentionally meddling with its currency for trade purposes.  As I noted a few days ago, the Wall Street Journal reported that Korea appears to be pursuing a similar policy (and is reaping the same inflationary problems because of it).  And other news reports indicate that many countries in Latin America and Asia are also attempting to temper the their currencies' appreciation.  The United States runs a trade deficit with many of these nations, so once the pandora's box of currency protectionism is opened with respect to China, how will the Romney administration ignore perfectly-consistent calls from domestic industries or Congress for similar levels of protection from imports from these other "currency-meddling" countries?  And if such pleas are ignored, how will President Romney justify only targeting China, and how would this disparate treatment not lead to serious bilateral conflict?  And, finally, many have argued that the United States' easy money policy is creating an artifically weak US dollar and thus giving US exports a similarly "unfair" advantage in other markets, so what's to stop China or another country from targeting these "subsidized" US exports in a similar protectionist fashion?

Should this really be the platform of the supposedly safe, business-savvy GOP candidate?  Really?

5. Romney's plan is even bad politics.

According to the aforementioned Wall Street Journal editorial, Romney's staffers explained that the China section of his economic plan was inserted at the the insistence of Romney himself, thus indicating that it was far more about politics than economics or good policy.  However, attacking China's currency policies is not a shrewd political move for a GOP candidate for several reasons.
First, the plan is straight out of the DNC's playbook - literally.  Currency/CVD legislation is a pillar of the Democrats' protectionist "Make it in America" agenda, so the idea that aligning oneself with Nancy Pelosi, Harry Reid and Chuck Schumer (and against a large majority of House and Senate Republicans) is a surefire political winner for a GOP presidential candidate seems a tad far-fetched.

Second, the plan undermines Romney's political strengths and accentuates his biggest political weakness.  Romney prides himself on being a pragmatic, "data-driven," businessman with a firm grasp of the global economy, but, as I've explained in excruciating detail above, this plan displays a startling ignorance of the global economy and US law.  Romney also bills himself as being a "safe," moderate pick who can win nervous independents, but instigating a major conflict with one of America's largest trading partners and needlessly exposing US consumers and exporters to possible economic harm is hardly a "safe" move.  Finally, perhaps Romney's biggest weakness is his image as a "fllip-flopper" who will do or say anything to win the election, and his new, aggressive China trade plan will only help to cement that image because it's a 180 degree turn from his 2008 campaign platform that, as the WSJ noted, almost everyone recognizes as politically motivated.

Third, assuming that Romney is the GOP nominee, the plan sets him up for an embarrassing exchange with President Obama in the general election.  The Romney plan is clearly intended to demonstrate that Obama has been "weak" on China trade issues.  And while this general point is certainly debatable, if Romney accuses Obama, as he does in his economic plan, of handling the currency issue poorly, the President can quite easily explain - far more succinctly than I do here - that Romney's alternative displays a serious ignorance of how the global economy, US law and the US-China relationship actually work.  Why expose yourself to such a simple rebuttal instead of hitting Obama on real bilateral issues like our reckless deficit spending, which enables China's continued purchase of US government debt?

Finally, even assuming that the Romney team is just playing politics and doesn't actually intend to follow through with its China currency plans (a valid assumption, I think), the endorsment of the currency/CVD approach by one of the GOP's top presidential contenders could have serious, unintended political and economic consequences before the 2012 election by fueling congressional anti-China protectionism.  Indeed, the plan could unintentionally achieve its politically-motivated goal by leading to the implementation of a US currency/CVD law.  Problematic House legislation (H.R. 639) mandating that the Commerce Department treat "undervalued currency" as a countervailable export subsidy now has over 200 co-sponsors, a large marjority of which are Democrats.  If Romney's indirect endorsement of that legislation lets a few squishy House Republicans join as co-sponsors and thus gets the total number to 218 (an absolute majority), it could lead to a "discharge petition" and force a floor vote on the bill, and there's nothing that sane/resistant GOP leadership could do about it.  Senate Democrats have been itching to vote on similar legislation, and a few Senate Republicans (e.g., Lindsay Graham and the Maine Senators) would certainly join the charge, again with Mitt Romney's implied support.  And does anyone expect President Obama to veto any China currency bill that reaches his desk? 

As explained above, if that bill becomes law, it could have serious consequences for US exporters and consumers.  And its implementation could legitimately be owed - at least in part - to Mitt Romney's economic platform.  That's hardly what one should expect from the "safe" and "moderate" GOP candidate.

*   *   *

So there you have it, folks.  Romney's China trade plan is very problematic from an economic, legal, strategic and political perspective, and in my humble opinion, a serious misstep by the candidate.  Indeed, Romney's manifesto essentially admits the shoddy factual and economic basis for its assertions on China's currency when it states that "the extent and impact of the manipulation is widely debated."  But if that's really the case, then why on earth is he promoting such an irresponsible and potentially damaging course of action?  And can we really trust a candidate that would so imprudently promote such a policy just to score a few, shortsighted political points?

"Safe" candidate, indeed.

NY Fed: Labor Costs & Inflation Drive Rapid Increase in Chinese Consumer Goods Prices

In a must-read article, the NY Fed studies the prices of Chinese imports into the United States and comes to some very interesting conclusions.  First, the basics:

We find that, in a sharp reversal of earlier trends, U.S. import prices for consumer goods shipped from China have been rising rapidly in recent quarters—by 7 percent between 2010:Q2 and 2011:Q1. 

Second, the authors explain that appreciation of China's currency appears to have had a direct and measurable effect on Chinese imports of commodity-intensive industrial supplies (e.g., steel), but had far less (if any) effect on consumer goods like the iPod:

[B]etween 1997 and 2005, when the RMB was pegged to the dollar, prices in all major categories of imports from China were on a downward trend. This trend reversed itself when the RMB was allowed to appreciate against the dollar in 2005.

By separating commodity-intensive industrial supply prices from other categories, we see that between 2005 and 2009 higher import prices of goods from China were mainly driven by jumps in industrial supply prices—goods that rely heavily on commodity inputs. Over this four-year period, consumer prices only increased 7 percent, even though the nominal RMB appreciated 20 percent against the dollar.

This pattern changed in mid-2010, when the RMB started to appreciate again. Import prices of consumer goods rose by 7 percent between 2010:Q2 and 2011:Q1, a period in which the nominal RMB appreciated 4 percent against the dollar and the CPI-adjusted real RMB appreciated nearly twice as much.

Third, the authors explain that labor costs and inflation, not RMB appreciation, are very likely causing the recent price increases for Chinese consumer goods imports:

Sharply increasing wages for Chinese workers and other escalating costs faced by Chinese firms in the country’s coastal manufacturing export hubs may be contributing to the rising prices of consumer goods shipped to the United States. Indeed, heightened unrest by workers demanding improvements in pay and double-digit wage-increase settlements have been making headlines in recent years (see, for example, Economic Times, New York Times, and Financial Times). Although data used to construct manufacturing unit labor costs are far from ideal, we estimate that wage-based unit labor costs resumed their upward trend in 2010 at the fastest pace in at least a decade, after dipping in 2009 due to a softening of China’s manufacturing labor market during the global economic crisis (see chart below). Moreover, the government enacted a major new labor law in 2008 that has likely driven up overall costs for firms.

Fourth, the authors discuss why economic growth and demographic issues will probably cause Chinese labor costs to keep rising, thus jeopardizing China's global dominance as a low-cost manufacturer:

Cyclical and structural factors are likely contributing to the rise in Chinese manufacturing unit labor costs. In particular, strong wage growth has partly reflected the very rapid cyclical recovery of Chinese manufacturing following the post-Lehman global trade shock, as well as the role of stimulus policy in generating greater incentives for migrant workers to stay closer to their home provinces inland rather than move to the coast to find jobs. Structurally, China is generally acknowledged to be undergoing a profound demographic shift to a rapidly aging society at an unusually early stage in economic development. China’s prime manufacturing cohort of people ages fifteen to thirty-nine has already peaked in size, and the United Nations projects that the working-age population as a whole will peak sometime over the next decade (see chart below). This implies that the days of seemingly limitless “surplus” labor supply may be nearing an end. And indeed, anecdotal reports of labor shortages in China’s coastal manufacturing provinces have surfaced periodically since at least 2003 (see, for example, Financial Times and “Chinese Workers Get Perks—Labor Shortage Spurs Firms to Court Factory Employees Pressure on Pay—and Prices,” Wall Street Journal, August 16, 2004)—about the time manufacturing unit labor costs started to rise....

Firms may be able to partially adapt to heightened labor shortages in China’s coastal manufacturing hubs by enhancing efforts to raise productivity and by moving factories inland, where labor remains considerably cheaper. However, over the longer term, the demographic shift facing China is real, as is the government’s desire to encourage faster household income growth, rebalance the economy away from investment and toward consumption, encourage the development of inland provinces, and develop higher-value-added industries. This suggests that while China’s days as the world’s factory may not be numbered, the prospect of continued rising prices of Chinese goods seems highly likely.

Finally, the authors explain what rising Chinese import costs will mean for the American economy (hint: it's not good):

More expensive consumer goods from China would represent a significant shift in U.S. inflation pressures, given China’s history of being a low-cost supplier of consumer goods to the United States. While it is difficult to assess the precise impact of changes in import prices on U.S. inflation, there are a number of channels we can identify. First, higher prices of imported consumer goods contribute directly to the U.S. CPI. Second, imported goods also enter into the production of domestic goods as some of these are intermediate inputs, which contribute directly to U.S. producers’ costs and thus add further pressure to increase the price of domestic goods. Third, higher import prices of Chinese goods may allow competitors, which include other exporters to the United States and domestic producers, to also charge higher prices and thus increase their mark-ups. Alternatively, competitors may try to gain market share by keeping their prices low and thus offset some of the inflationary pressures from the higher import prices of Chinese goods.

In short, higher Chinese import prices mean inflationary pain for American families and companies, and any lost Chinese market share will be replaced not only by domestic producers but also other foreign competitors.

Given all of these facts, why are American politicians attacking China's currency policies again?   To maybe help a few US companies who produce commodity-intensive industrial supplies, while definitely harming many more US companies, consumers and workers who directly benefit from low-priced Chinese imports?

Oh, right: they're doing it precisely because they're politicians.

(h/t Mark Perry)

Tuesday Quick Hits

I'm travelling this week, so blogging will remain light, but here are a few things to keep you going:

• Senate Minority Leader Mitch McConnell (R-KY) takes to the op-ed pages today to explain what many of us have been saying for a month now: President Obama's "blame Congress" strategy for the continuing stagnation of US FTAs with Colombia, Panama and Korea is extremely disingenuous.

• Mitt Romney released his economic plan today, including a detailed section on trade policy (starting at p. 41).  I'll have a lot more on this later, but for now let's just say that, on US-China trade, Governor Romney regrettably appears to have taken a page right out of Donald Trump's China playbook.  (Jon Huntsman's recently-released plan was far less antagonistic.)

• The WSJ today explains how Korea is facing a serious inflation problem because its trying to competitively devalue its currency as in the face of continued easy money policy in the United States.  If this all sounds familiar, it should: China's having the same problem for much the same reason.  Crazy how basic economics works, eh?

• Speaking of China, the WSJ reports that its "low wage export engine" is starting to "sputter" due to labor cost inflation and competition from other low-cost countries like Vietnam.  Shocking, I know.

• The WSJ rightly explains that Asia's impressive increase in high net-worth individuals is a good sign for those economies (and the global economy more broadly), but it's troubling that some of that increase is due to cronyism and government patronage rather than merit.

That's it for tonight, folks.

Right Now, pt. 3 [UPDATED]

It appears that the mainstream media are finally - finally - realizing that, as I've said for the last month, the President's repeated calls on Congress to move pending FTAs with Korea, Colombia and Panama "right now" are more than a tad misleading.  On Saturday, the WSJ editorial board joined me in openly questioning the President's claims:

President Obama says he wants to get the U.S. economy growing, so here's a tip that may help: In order for Congress to ratify free-trade agreements, the White House must first send the signed deals to the other end of Pennsylvania Avenue.

On his three-state tour in the Midwest this week, Mr. Obama repeatedly told audiences that the Korea, Colombia and Panama free-trade deals would all be law by now if not for an obstructionist Congress. Passing the deals is something Congress "could do right now," he said.

Except that's not true. Congress can't pass the agreements "right now" because it doesn't have them. They are still sitting on the President's desk. Seriously.

When finally confronted with this obvious-yet-unreported hole in the President's arguments, White House spokesman Josh Earnest was, well, less-than-prepared to explain:

If you are surprised to learn this, you are not alone. White House deputy press secretary Josh Earnest only learned the news on Friday during a press conference. Asked why the FTAs haven't been sent, he responded, "We have not sent them over?"

That was followed by what might be called an awkward moment. "I will say this—I mean, there has been an active dialogue that's been underway between the United States trade representative, other members of the Administration, with the appropriate Congressional leaders in the committees of jurisdiction. We are in a place where we have seen Republicans advocating for passing these free trade agreements for quite some time," Mr. Earnest explained. He also pointed out that "these three trade agreements combined would create or support about 70,000 jobs here in the U.S."

A reporter persisted and asked, "Well, when are you going to send them over?" "But I can tell you that there's no reason—I mean, there's agreement here about the benefits of these trade agreements getting through the Congress, both here at the White House and Democrats and Republicans on Capitol Hill. Mr. Earnest referred reporters to "Congress or the USTR on the legislative mechanics of this," adding that "there is bipartisan agreement on this and it's something that we should move on really quick."

You have got to be kidding me.  The transcript of Mr. Earnest's revealing comments is available here.  Given Earnest's total ignorance on the process of implementing the FTAs, it's pretty clear that the White House doesn't have a concrete plan on how it will advance and finalize the agreements once Congress returns from recess.

In Mr. Earnest's defense, maybe that's because members of the President's own party are openly bragging about how they're going to submarine the trade agreements:

Sen. Sherrod Brown (D-Ohio) is strongly considering offering his China currency bill, co-sponsored by Republican Sen. Olympia Snowe (Maine), as an amendment to a standalone worker-retraining measure that is expected to begin movement through the House and Senate next month, a Senate aide told The Hill.

Brown would offer his currency legislation -- which would direct the Commerce Department to treat currency undervaluation as a prohibited export subsidy -- to a streamlined version of a Trade Adjustment Assistance (TAA) bill worked out in late June by the White House, House Ways and Means Chairman Dave Camp (R-Mich.) and Senate Finance Chairman Max Baucus (D-Mont.).

“Extending Trade Adjustment Assistance is an important step to respond to job loss caused by foreign competition. But addressing unfair trade practices like Chinese currency manipulation can prevent job loss by ensuring a level playing field for American manufacturers facing a flood of cheap Chinese imports,” Brown said in a recent statement. “With up to 2 million jobs that may be hanging in the balance, Congress must take action immediately.”

The Senate Minority Leader Mitch McConnell (R-Ky.) and Senate Majority Leader Harry Reid (D-Nev.) have agreed to allow amendments to the TAA bill and require a 60-vote threshold for the adoption of amendments, making it more challenging for the upper chamber to change the measure.

Adoption of the Brown-Snowe amendment would further complicate passage of TAA and likely draw out completion of the trade deals with Colombia, Korea and Panama, as the White House hasn't agreed to accept any other changes....

Earlier this week, in a speech to the United Steelworkers, House Minority Leader Nancy Pelosi (D-Calif.) said China's currency manipulation must be addressed before sending the trade deals up to Capitol Hill....

Other lawmakers and U.S businesses have expressed concern about the currency issue, which they say China deliberately undervalues to benefit Chinese exporters along with the lack of regulatory transparency, policies that favor Chinese domestic domestic businesses and a lack of protection for U.S. intellectual property....

Earlier this month, the White House and congressional leaders reached a general agreement to pass TAA, an Obama administration demand, along with the trade deals, although there are still several process issues that remain to be worked out.

One avenue is for the House to approve a Generalized System of Preferences (GSP) bill, which expired in December, followed by Senate approval of GSP with the attachment of Trade Adjustment Assistance (TAA), a program that helps workers hurt by trade deals.

That amended bill would return to the House and then Obama administration would submit the three pending trade deals with Colombia, Korea and Panama.

The House would then hold four separate votes, one each on the trade deals and another on the TAA-GSP measure. The trade package also could include the Andean Trade Preferences Act (ATPA), which may wind up in the Colombia accord.

Then the four bills would go to the Senate for final approval.

Given the small number of legislative days in September, this process would likely not be concluded until October.

Clearly, congressional passage of the FTAs will require an airtight plan and strong White House leadership in order parry House and Senate Democrats' attempts to attach a China currency "poison pill" (or anything else) to the TAA, GSP or FTA legislation.  Mr. Earnest's cluelessness on the procedural basics surrounding the FTAs hardly inspires confidence that the President's team has all of these important details worked out.  And unfortunately for US exporters and consumers, the White House is quickly running out of time - Congress returns from recess on September 6.

Hey, remember earlier this month how the FTAs were as good as finished?  Yeah, me neither.

UPDATE:  The Washington Post's Glenn Kessler joins the WSJ in finally noticing that the President's "right now" schtick is misleading, giving his statements "One Pinocchio" in his FactChecker column:

The administration has clearly played a balancing act, trying to attract Democratic support without losing significant Republican backing. We’re not going to judge who is more right on the history leading up to this point, but we do think it is a highly selective recounting of that history for the president to suggest GOP lawmakers are blocking the deal because they are putting party before country. There is actually strong support for these agreements within the Republican Party — just like there is strong support for trade adjustment legislation among Democrats.

There may be a philosophical dispute over aid for companies harmed by free trade, but the administration in the end is responsible for making passage of TAA a condition for submitting the trade deals. Moreover, Obama leaves the distinct impression that Congress is sitting on the bills, when in fact they have not yet been officially submitted for consideration.

Kessler doesn't quite understand that the White House is arguing over the passage of a $1B TAA expansion, not the old TAA program, and he's pretty kind to Obama for giving him only one "pinocchio" for his repeated, and clearly erroneous, claims that GOP obstructionism is holding up the trade agreements.  But it's still nice to see that even sympathetic media are opening their eyes to the administration's rampant FTA distortions.

The China Threat That Isn't [UPDATED]

There few things these days on which both Main Street and Capitol Hill agree, but one of them is undoubtedly the idea that a flood of artificially cheap Chinese imports is bludgeoning the American economy and propelling China to the top of the global food chain, and that our elected officials must "get tough" on the Great Red Menace in order to stop the bleeding.  There are a few of us out there who have tirelessly tried to explain that such hand-wringing and chest-thumping is both unnecessary and counterproductive - that Chinese imports help, not hurt, most American families and businesses, that China's currency and export policies are not destroying the American Dream and inevitably cementing China's future global dominance; and that any US attempts to force China to change its ways will be ineffective and/or self-defeating.  Despite having the facts on our side, we've thus far failed to convince those living on Main Street or Inside the Beltway of these truths, but three new articles on China will certainly help our cause.

First, and following up on my post from Monday, comes the news that China's currency hit a record high against the US Dollar over the last day, and that bigger and faster appreciation is now expected due to concerns about inflation and weak foreign demand (and not political threats):

China's currency jumped to a fresh high against the dollar as authorities announced the country's biggest trade surplus in over two and a half years and amid speculation that Beijing might tolerate more currency appreciation to offset inflation.

The relatively sharp rise in the tightly controlled yuan currency comes amid a backdrop of rising domestic inflation and speculation of new external inflationary pressures if the U.S. Federal Reserve turns to a third round of what's known as quantitative easing to stimulate the flagging U.S. economy.

Some economists have been suggesting that current global market turmoil means that Beijing may be reluctant to use interest rates to counter its problems with inflation, which jumped to 6.5% in July, a three-year high. Strong trade surpluses are setting the stage for China to let the yuan rise faster to take on some of that inflation-fighting role.

"The central bank may speed up the rise in the yuan to alleviate domestic inflationary pressures in the near future, and we maintain our forecasts of a 6% full-year rise in the yuan," said ANZ Bank economist Liu Ligang.

The yuan hit 6.4170 to the dollar compared with 6.4404 on Friday before global markets were thrown into turmoil on the downgrading of the U.S. credit rating by ratings firm Standard and Poor's. The yuan has strengthened every day this week....

China has been concerned that a fresh round of quantitative easing—or massive bond buying by the U.S. Fed—could export inflation to emerging nations such as China, adding to its current price woes....

China is under pressure from the U.S., Europe and other trade partners to let its currency appreciate to help reduce hefty trade surpluses. It has generally chosen a go-slow approach but analysts suggest that inflationary pressure from China's huge pile of foreign exchange reserves is also prodding Beijing.

China has foreign exchange reserves of nearly $3.2 trillion and the nation's rigid foreign exchange regime means much of the nation's foreign currency earnings are added to the money supply, in turn creating inflationary pressure.

If all of this sounds familiar to you, it should: it's pretty much exactly what I said two days ago and many times before that.  And it's definitely something to remember the next time some smarmy politician tries to convince you that pernicious Chinese currency manipulation is crushing the US economy and can be easily solved by aggressive American unilateralism.  (Don't fret: I promise not to tear a rotator cuff patting myself on the back.)

Speaking of the effects of Chinese imports on the economy, next up is a WSJ write-up of a fantastic new study from the San Francisco Fed which analyzes just that very thing.  The results may surprise you (unless you've been reading my blog religiously, of course):

According to San Francisco Fed senior economist Galina Hale and research advisor Bart Hobijn, the share of Chinese produced goods in U.S. consumption is not nearly as high as is widely believed.

Surveying data from the Commerce Department, Bureau of Labor Statistics and the Census Bureau, the pair finds that a full 88.5% of goods and services consumed by U.S. households is produced domestically. Of the 11.5% that is imported, goods made in China account for barely more than a quarter — or 2.7% of total U.S. consumption spending.

Even that overstates the true share of China’s imports. The reason? Almost all consumer goods are the product of many hands, and properly accounting for what is made where further reduces the share of “made in China.”

Hale and Hobijn explain:

Obviously, if a pair of sneakers made in China costs $70 in the U.S., not all of that retail price goes to the Chinese manufacturer. In fact, the bulk of the retail price pays for the transportation of the sneakers to the U.S, rent for the store where they are sold, profits for shareholders of the U.S. retailer, and the cost of marketing the sneakers. These costs include the salaries, wages and benefits paid to U.S. workers and managers who staff these operations.

The San Francisco Fed’s calculations show that on average 36% of the price of imported goods goes to U.S. companies and workers, and for goods imported from China that number is even higher:

“On average, of every dollar spent on an item labeled ‘Made in China,’ 55 cents go for services produced in the U.S.,” Ms. Hale and Mr. Hobijn write. “In other words, the U.S. content of ‘Made in China’ is about 55%. The fact that the U.S. content of Chinese goods is much higher than for imports as a whole is mainly due to higher retail and wholesale margins on consumer electronics and clothing than on most other goods and services.”

It gets more complicated. Chinese made parts also go into the 88.5% of U.S. consumption spending devoted to goods made in the U.S. Adding it all up, the researchers conclude that the total share of “made in China” goods in U.S. household consumption is just 1.9%.

What does it all mean? There’s good news and there’s bad news. The good news is that the China threat that looms so large in U.S. political debate is overstated. China’s exports as a share of U.S. consumption might have grown quickly, but they are still a small fraction of the total. U.S. workers and companies are also taking a fair chunk of change from the process.

The bad news is that hopes of a stronger yuan creating more space for U.S. manufacturers to sell to the domestic market – already overplayed – appear even less credible. If most of the cost of “made in China” imports actually accrues to U.S. workers and companies, yuan appreciation will have only a limited impact on competitiveness.

Great stuff, although one glaringly obvious point remains unsaid: if American workers reap more than half of the benefits of Chinese imports into the United States, then protectionist US policies designed to limit those imports or raise their prices hurt not only the American consumers of those imports, but also the workers whose jobs depend on them.  In fact, even leaving aside their clear consumer harms, anti-China import policies hurt American companies and workers more than they hurt Chinese companies and workers.

Stop for a moment and wrap your heads around that one.  Got it?  Ok, good.  Now let's move on.

Finally comes an eye-opening op-ed in today's WSJ from China economy guru Michael Pettis on China's supposedly inevitable global dominance.  It turns out that - and stop me if you've also heard this one before -  such dominance has been completely oversold. In fact, China's very likely heading for a pretty rough patch due to its longtime adherence to an export-driven economic growth model (including its currency policy):

As China fitfully tries to rebalance its economy, a small but rising number of Chinese economists are beginning to predict sharply lower annual growth rates of 6% to 7% over the next few years. But the arithmetic of adjustment suggests growth is likely to be even lower, perhaps half that level.

China's growth over the past couple of decades was based on large increases in government-directed investment. As a consequence, it had to run large trade surpluses to absorb the resulting excess capacity in manufacturing.

This can't continue. Investment, especially in infrastructure and real estate, is increasingly wasteful. With Europe in crisis, and Japan and the U.S. struggling with their debt, demand for China's exports will stagnate.

Can China rebalance away from investment and toward domestic consumption as the main engine of growth? Yes, but with great difficulty. Chinese households consume only about 35% of gross domestic product (GDP), far less than any other country. Such a large domestic imbalance has no historical precedent.

Some in Beijing understand how lopsided their development has been. So over the next 10 years, policy makers have said they will try to raise consumption to 50% of GDP. Even that is a low number; it would put China at the bottom of the group of low-consuming East Asian countries.

But achieving this goal is problematic, since it requires that household consumption grow four percentage points faster than GDP. In the past decade, Chinese household consumption has grown by 7% to 8% annually, while GDP has grown at 10% to 11%. If one expects Chinese GDP to grow by 6% to 7%, Chinese household consumption would have to surge by 10% to 11%.

Such consumption growth is unlikely because powerful structural factors work against it. The Chinese growth model transfers income from households to the corporate sector, mainly in the form of artificially low interest rates. These sharply reduce borrowing costs for the state-owned companies that funnel this easy money into mega-investments. The easy financing also gooses banks' profit margins and allows them to resolve bad loans with ease.

This cheap borrowing comes at the expense of depositors. Low yields on deposits force them to sacrifice consumption, to save more. This results in a sharp decline in consumption's share of GDP. If China is to replace investment with consumption as the engine of growth, this process of financial repression has to be reversed. Households must get a rising share of overall growth.

This reversal is inevitable, but it will not come easily. Wasted investment and excess capacity translate into growing amounts of bank debt, meaning continued wealth transfers are necessary to keep the banking system viable. But if households continue to pay over the next few years, as they have in the past, China will be stuck in the same model.

The historical precedents of the debt buildup are worrying. Every country in modern history that has achieved many years of "miracle" growth has run into the problem of over-investment and then excessive debt. Just look at Japan. The need to resolve the debt has itself made domestic rebalancing difficult, and it has always taken far longer than even the most pessimistic forecasts.

Still, consider the price of delaying this reversal. Even if consumption manages to keep growing at the same rate it has during the past decade (when Chinese and global conditions were buoyant and debt levels much lower), China's growth must slow to 3%-4% to achieve rebalancing. This is the impact, in other words, of the required reduction in investment, which will have to be sudden and sharp.

In the worst-case scenario, consumption growth slows down to less than what it was in the last decade—perhaps because of slower GDP growth—making rebalancing even harder.

What a mess.  Maybe China will emerge from it unscathed, and some day sit atop the global economy.  But after reading this piece, can we at least all agree that such a fate is far from inevitable?  And can we also agree that we'd be absolutely insane (and, considering the pain intentionally inflicted on households, immoral) to pursue a similar course of action here in the United States?

There is very little question that certain policies by the Chinese government, such as IPR enforcement and market access, are causing real problems for American businesses.  But, as these three articles make abundantly clear, China's currency policies and export-driven growth model are simply not destroying America via cheap imports and thereby ensuring China's future global dominance.  By focusing on these non-issues, we risk missing the the real threats to US-China trade relations and messing things up even more than they already are.

UPDATE: And right on cue, we get this ridiculous headline today (8/11): "Wider US trade gap could propel China currency bill."  You have got to be kidding me.