Trade progress is a mirage

You may remember that the U.S. government and the global media uniformly hailed the progress achieved at the U.S.-China Strategic and Economic Dialogue completed on May 4 in Beijing. China’s agreement to allow foreign financial firms to increase their share of ownership of Chinese firms from 33 percent to 49 percent was cited as a ...

Justin Sullivan/Getty Images
Justin Sullivan/Getty Images
Justin Sullivan/Getty Images

You may remember that the U.S. government and the global media uniformly hailed the progress achieved at the U.S.-China Strategic and Economic Dialogue completed on May 4 in Beijing. China's agreement to allow foreign financial firms to increase their share of ownership of Chinese firms from 33 percent to 49 percent was cited as a major element of this progress.

So why was there no announcement of regression last week when Beijing suddenly announced that the China branches of the Big Four global accounting firms must be headed by Chinese nationals and have 80 percent of their accountants be Chinese nationals within five years? In view of a recent string of accounting scandals that have raised serious international doubts about the quality of Chinese auditing, this is only likely to complicate the task of understanding what is really going on in China. What difference does it make to own 49 instead of 33 percent if you don't have any idea of what you own?

You may remember that the U.S. government and the global media uniformly hailed the progress achieved at the U.S.-China Strategic and Economic Dialogue completed on May 4 in Beijing. China’s agreement to allow foreign financial firms to increase their share of ownership of Chinese firms from 33 percent to 49 percent was cited as a major element of this progress.

So why was there no announcement of regression last week when Beijing suddenly announced that the China branches of the Big Four global accounting firms must be headed by Chinese nationals and have 80 percent of their accountants be Chinese nationals within five years? In view of a recent string of accounting scandals that have raised serious international doubts about the quality of Chinese auditing, this is only likely to complicate the task of understanding what is really going on in China. What difference does it make to own 49 instead of 33 percent if you don’t have any idea of what you own?

Much more important than this, however, was the release last week of the March trade statistics which showed that the U.S. trade deficit for the month jumped 14 percent to $51.8 billion as imports rose 5.2 percent to a record $238.6 billion. On an annual basis the trade deficit is on track to rise by 7 percent to over $600 billion or about 4 percent of GDP. In view of the fact that economists generally consider any trade deficit over 3 percent of GDP to be unsustainable for the long term, this increase is a seriously troubling development. The more so because President Obama recently emphasized that his administration is on track to reach its goal of doubling U.S. exports over five years.

He is correct. Indeed, the March export performance was quite good with total exports up 3 percent and shipments to Europe rising over 11 percent to an all time high of $25.1 billion. Great, except that imports from Europe were up by more than 22 percent to an all time high of $35 billion.

I hate to have to keep saying this, but the president’s goal of doubling exports is a stupid, meaningless goal as long as imports are absent from the equation. The only meaningful goal would be a goal to cut the trade deficit in half, or, better yet, to eliminate it all together. That would mean not only exporting a lot more but also importing relatively a lot less and producing domestically a lot more of what we consume. That’s what rebalancing has to mean. We will not be able to rebalance simply by exporting more.

In this context, one development last week was most disheartening. California’s BART (Bay Area Rapid Transit) system has been considering bids on 775 new light rail cars. Of the two final bidders, Canada’s Bombardier came in at $1.54 billion versus $1.72 billion for Alstom of France. But the French company was promising 95 percent U.S. content while Bombardier could only offer 66 percent U.S. content, meaning that its bid would actually create fewer jobs and add less to the U.S. economy than that of Bombardier. BART announced that it will be going with the Bombardier bid. Alstom is offering to revise its bid which it says is a perfectly valid procedure under the terms of the bidding contracts. But it is not clear that BART will go along with that.

Of course, one can sympathize with BART since the Bombardier bid would save it money. But for the U.S. and California economies, it would be nice if Alstom could get its price down while maintaining its high U.S. content offer. Someone in a high place should be leaning on BART to let Alstom revise the bid.

Otherwise this will become another example of the problem of demand leakage. Paul Krugman is out with a new book called End this Depression Now. In short, it argues that there is not enough demand in the U.S. economy and that government should step in to correct that with a good old Keynesian stimulus program to pump up demand and consumption. The notion is that if consumption rises, it will spark more production to meet the demand and the new production will create jobs and prosperity. The problem with this is that if the consumption is primarily of imports then the demand leaks out of the U.S. economy to places like Japan, South Korea, Germany, and China. If we pump up demand only to have it supplied from abroad, our problems will only get worse. The great problem of the U.S. economy is not so much a lack of demand as a lack of production. Were our trade in balance instead of in deficit, unemployment would be at about 4 percent.

Which leads to my last point. An industry that should be booming in the United States is that of solar panels. I don’t mean installation of solar panels. That is booming. I mean production of solar panels. The United States has a huge market. The industry is not labor intensive like apparel or shoes. Rather it is more technology and capital intensive like semiconductors and steel. It is the kind of industry economists say America should be good at. In fact, America is good at producing solar panels. But China has been both directly and indirectly subsidizing its industry heavily as part of its targeted industry strategic development program. Chinese products have been aggressively dumped into the U.S. market with the result that the U.S. based industry is barely holding on.

The president has said he will insist on a level playing field for U.S. industry and has said that America always wins when the playing field is level. Well, this week is the week when the administration must decide how to respond to China’s industrial policy for solar panels. This decision will tell us whether Obama means business or whether all the activity around the creation of a trade enforcement unit is just a mirage.

Clyde Prestowitz is the founder and president of the Economic Strategy Institute, a former counselor to the secretary of commerce in the Reagan administration, and the author of The World Turned Upside Down: America, China, and the Struggle for Global Leadership. Twitter: @clydeprestowitz

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