Article 43

 

Wednesday, June 06, 2007

The China Dilemma

The huge dragon, the ancient serpent, who is called the Devil and Satan, who deceived the whole world, was thrown down to earth, and its angels were thrown down with it.
- Revelations 12: 9

By Thomas I. Palley
Tom Paine
June 5, 2007

Vladimir Ilyich Ulyanov, alias Lenin, was the leader of the 1917 Bolshevik revolution in Russia. One of his best-known quotes is, The capitalists will sell us the rope with which we will hang them. Today, Lenin must be chuckling in his Moscow mausoleum as he watches US BUSINESS DEALINGS WITH CHINA.

Lenins sarcastic quip identified how desire for profit can sometimes UNDERMINE class interest. In today’s era of globalization a similar logic can hold for the national interest. Thus, with corporations looking to maximize their global profits, what is good for profit can sometimes be BAD FOR COUNTRY.

U.S.-China relations provide a case study of this PROFIT VS. COUNTRY syndrome. Current U.S.-China economic relations are marked by huge TRADE DEFICITS and a steady MIGRATION OF MANUFACTURING to China. This structure was established in the 1990s at the behest of multi-national corporations and big retailers such as Wal-Mart. The former saw China as providing an unequaled low-cost production platform from which to export to the U.S., while the latter saw China as a SOURCE of low-cost imports.

Together, these business interests pushed permanent normal trading relations for China, and they also account for the U.S. Treasurys willingness to accept China’s under-valued exchange rate. That is because an under-valued yuan holds down the cost of goods sourced from China and increases profits on production exported from China.

For China, the new arrangements have contributed to SPECTACULAR economic success. Companies sourcing and exporting from China have also reaped handsome profits. However, for the U.S. economy it has been a different story. Manufacturing has steadily bled jobs as companies have closed factories in the face of low cost Chinese competition, and production and investment have shifted to China. That has tempered wages and investment spending, which helps explain the weak economic recovery and unsatisfactory expansion. It has also eroded the U.S. industrial base while expanding China’s, thereby creating new NATIONAL SECURITY problems.

Through its trade surpluses, China has accumulated 1.2 trillion dollars of foreign exchange reserves - mostly held in U.S. treasury bills. Recently, China announced it will invest some of those funds in American equities, signaling the beginning of a new chapter that promises to further entrench existing policy. The new initiative will deepen Wall Streets support for current policy by offering the prospect of huge fees and capital gains from re-investing ChinaҒs reserves. Consequently, Wall Street will now throw its full weight behind existing policy since the Street recognizes China needs continuing trade surpluses if it is to invest its foreign exchange holdings in risky assets such as equities. That augurs badly for the U.S. and Main Street.

Wall Streets greatest influence is at Treasury, which has been the leader in designing U.S.-China economic policy. The strong dollar policy originated at Treasury in the 1990s, and Treasury has persistently refused to label China a currency manipulator for fear of triggering irresistible public pressure for real action.

On top of this, Treasury Secretary Paulson - a Goldman Sachs alumnusis actively advocating policies that risk compounding the damage to the U.S. economy. Thus, Treasury has consistently pushed China to open its financial markets and let money exit, and China has been doing just that. This benefits Wall Street since money flows there, but it reduces pressure on China to appreciate its currency. Worse than that, the yuan could even depreciate if enough Chinese wealth holders decide to exit to diversify their portfolios against economic and political risk. That would be disastrous for the U.S. economy, but good news for Wall Street.

The profit vs. country dilemma is compounded by the political power of corporations, which has enabled them to capture policy. In earlier eras such capture promoted domestic monopoly and corruption in GOVERNMENT PROCUREMENT and tax policy. Today, it still does that (look at the Bush administration), but now it also enables CORPORATIONS TO PUSH POLICIES placing THEIR INTRESTS ahead of country. That is the lesson of China.

Free market societies need separation between market and government, intermediated by constitutional democracy. In the 20th century many countries suffered from excessive government control over market activities, and they paid a heavy price. In the 21st century America risks paying a heavy price from the reverse problem of allowing excessive corporate influence over government.

This is a huge DANGER, yet it is off the political radar. One reason is that business funds both Republicans and Democrats, thereby silencing both. A second reason is that much of the public believes businessmen are smart and can run government well - after all, they are rich. Put the two together, and it is easy to see why business executives move seamlessly from Wall Street and corporate boardrooms to top government policy offices on Pennsylvania and Constitution Avenues. That suggests the supply of rope will remain plentiful and Lenin may have the last laugh.

SOURCE

THE RUSSIAN DILEMMA
THE SINO-RUSSIAN DILEMMA
THE SINO-INDIAN DILEMMA
THE UNTHINKABLE DILEMMA
THE UNTHINKABLE DILEMMA PART 2
THE CHRYSLER DILEMMA
THE REST OF DETROIT’S DILEMMA
THE TELCOMM MANUFACTURER’S DILEMMA
THE IT INDUSTRY’S DILEMMA
CHINA’S GROWING PAINS DILEMMA
CHINA FANTASY

Posted by Elvis on 06/06/07 •
Section Revelations
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