When China joined the World Trade Organization, it agreed to let foreign banks come into China and issue credit cards. The nation’s leader announced that the banks would be allowed to operate in China starting on Dec. 11. But just before the deadline, they made up new rules that prevented foreign banks from coming in.

This was the last straw for the Bush administration. Several Republicans had just been defeated in the midterm election by Democrats opposed to completely free trade, especially completely free trade with China. The Bush administration finally woke up to the fact that we have been played for suckers by the Chinese. For years, free-trade supporters have dreamed that the Chinese would eventually open up their markets to American products, such as American cars, but high Chinese tariffs on our cars and auto parts, while the Chinese built their own automobile industry, finally made it apparent that Beijing has no intention of ever doing so. The Chinese are intentionally building up their industrial power and tearing down ours. After surpassing us industrially, they plan to defeat us in a battle for influence in the world.

The Bush administration finally got the message and sent all of their top financial people to China (Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, Secretary of Commerce Carlos Gutierrez, Labor Secretary Elaine Chao and Health and Human Services Secretary Mike Leavitt) to emphasize that we are serious this time. If we cannot get an agreement on the banks and credit cards issue, then we plan to take some action. But the only action that has been publicly mentioned is that we might file a complaint with the WTO. This little stick was tried when the Chinese imposed a tariff on our auto parts. It didn’t work then, and it won’t work now.

The credit card issue is important because it ties directly in to the game that the Chinese have been playing with us. Instead of letting their people borrow Chinese savings so they could buy goods on credit, the Chinese government uses Chinese savings to buy dollars and then uses those dollars to buy American Treasury Bonds, a form of modern mercantilism. This accomplishes three things:

  1. It bids up the price of the dollar so American goods will be more expensive for Chinese consumers.

  2. It keeps down the price of the Chinese yuan so Chinese goods will be less expensive for American consumers.

  3. It bids down American interest rates, so that Americans buy more goods on credit, including more imports from China.

There’s a big stick in the American closet

We are hoping that the Bush administration will find the big stick that is in the American closet. They should be telling the Chinese to voluntarily increase their purchases of American products, or we will reduce Chinese exports to the United States until they are no larger than Chinese imports from the United States. President Bush could announce to the American people that in the future, rights to import from China will be auctioned off in a free market by the U.S. Department of Commerce. To continue their high level of exports to the United States, the Chinese would then have to build up their imports of American products.

Specifically, in 2006 (through October, according to the Census Bureau), we imported $235.8 billion worth of goods from China, and they only imported $45.2 billion worth of goods from us. Thus, we are currently importing 522 percent more from them than they are importing from us. In 2007, the rights to import into the United States should be limited to 400 percent of their 2006 imports from us. In 2008, they should be limited to 200 percent of their 2007 imports from us. By five years, the right to import could be limited to, say, 110 percent of their previous year’s imports from us.

We may also have to temporarily freeze all Chinese funds in the United States so that they can’t respond to our initiative by rapidly selling off their dollars to cause the dollar’s exchange rate to collapse in world currency markets.

The Chinese have been fighting a one-sided trade war against the United States. It is time that we join the fight. Free trade is a wonderful ideal because when trade is balanced, both countries benefit by producing those goods that are to their comparative advantage. However, when trade is out of balance because one side deliberately sends its savings to the other to prevent its people from buying the other country’s products, then one side is deliberately building up its industry at the expense of the other.

Why stop with China?

The Chinese are not the only country that is deliberately sending its savings to the United States to build up its industry at our expense. Japan has been doing so since World War II; South Korea has for over a decade, and India just joined the fray. Although China is not the only offender, it is the only one that has been pursuing anti-U.S. policies in its dealings with countries in Latin America, Africa, Asia and the Middle East.

Because of the strength and stability of the American economy, foreign central banks maintain their reserves in the form of U.S. government bonds, contributing to the trade deficits. We ought to discourage that practice. Their bank reserves should be maintained in non-interest bearing securities or deposits with the Federal Reserve Banks. Our current policy is just the opposite. Foreign governments pay no tax on holdings of U.S. government bonds or other securities or deposits in banks in the U.S. American citizens enjoy no such subsidy.

The economics profession, of which we are part, is largely to blame for the current decline in American manufacturing. Our belief in free trade has blinded us to the fact that free trade is only mutually beneficial when it is balanced. Our government has failed to protect our industry from the foreign government strategy of sending their people’s savings to the United States to increase their exports to the United States and to prevent their people from buying our exports to them. Just as economists learned in the 1930s that the government should take responsibility for maintaining a steadily growing money supply, economists of the 21st century need to learn that the government should take responsibility for making sure that trade is reasonably balanced.

As we bring trade toward balance, we shall be shutting off the flow of foreign government savings to the United States. In order to provide the relatively low interest rates necessary for economic growth, we will have to build up our domestic savings. The following steps could be taken by our government to do so:

  1. Shift our federal budget from deficit to surplus.

  2. Shift our tax code from income taxes that tax savings to consumption taxes.

  3. End the use of wealth-based means-testing in government programs (such as Pell grants that penalize those college students who have saved for college).

The end of the trade-deficit era will bring about a new blossoming of American manufacturing if Americans can provide the savings necessary for investment and economic growth.



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Howard B. Richman is an economics teacher and executive director of the Pennsylvania Homeschoolers Accreditation Agency. His father, Raymond L. Richman, is professor emeritus of Public and International Affairs at the University of Pittsburgh with a Ph.D. in economics from the University of Chicago.

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