Since the beginning of this century the US has pushed for a liberalized trading system with progressively fewer and fewer controls.This system works well with democratic nations with free economies.But China is different;it has neither a democratic political system nor a free market economy.The net result is that its trade surplus is rising by the day on the back of a manipulated exchange rate and artificially controlled labor costs.In 2006 it enjoyed a surplus of $230 billion with the US.The surplus this year promises to be even higher.Not only is the trade surplus a problem but the Chinese dumping of goods in the US has led to widespread job losses in this country.
So what can the US do about it?Since US policies have failed to convert China into evenly a remotely democratic society why should it continue with policies that only favor China and a few US corporations.
To start with the US should pressurize China into allowing its currency the yuan to appreciate significantly.The US must understand that the yuan is the most manipulated currency in the world.Simply allowing the dollar to depreciate against every currency in the world is not very sensible and will have serious economic and political consequences elsewhere.A case in point is its likely impact on NAFTA.If the US dollar were to depreciate significantly from present levels then Canadian and Mexican goods would lose their cost advantage in the US.As a result they would be compelled to look for other markets.In the case of Mexico it would lead to a drastic decline in the living standards of its people and the resultant political instability could have far reaching consequences for the US in the long run.
It is clearly time the US made a detailed examination of why the Chinese are able to outsell everybody else.The examination should cover all goods produced in China and if it is found that any of them are being unfairly subsidized the US should not hesitate to slap them with stiff anti-dumping duties.It is difficult to understand why the US is afraid of being called protectionist even in the face of unfair competition.After all the the government has a duty to protect the economic interests of its own citizens.So far the US has mustered the courage of banning the imports of some tainted chopsticks and toothpaste only.Critics of such a course of action suggest that that the trade deficit is due to a lack of savings by the people.This argument is flawed.Trade balances are determined by exchange rates and not by a lack of savings or otherwise.If the exchange rate were proper then people would not find US goods very expensive in comparison.
They would buy sufficient US made goods to prevent a huge trade deficit and more importantly keep US jobs in the US. Temporary jobs here and there which are used to depict a low job rate are no good.What is needed are solid long term jobs in financially strong corporations.The government would do well to accept that the present sub-prime crisis is also a result of this trend,that is fewer and fewer people having solid long term jobs and predictable income streams.The strategy of hiring temps and outsourcing on a large scale makes people more vulnerable to minor shocks such as a slight increase in interest rates.
This is not a call for protectionism but a call for sensible economics which benefits the people at large and not just a few.Its clearly time for the US to act and act fast before most of its financial institutions are permanently weakened.