September 30, 2003
by Irwin Stelzer
The American economy seems doomed to be bedeviled by twin towers. The terrorist destruction of the Twin Towers at the World Trade Center has left a residue of homeland security costs that will be a drag on the economy for years to come. Then there are those financial twin towers—the trade and budget deficits—that have caused a periodic outbreak of nervousness among policymakers for decades.
Now we have a new pair of threats, the towering pile of U.S. government IOUs held by China, and the increasing number of barrels of imported oil that America needs to keep its factories operating, its trucks rolling, and its citizens on the move from meeting to meeting. Last week the vulnerability of America’s economic recovery to both these threats became obvious.
In an effort to appease industries that have been hurt by competition from imports, the Bush administration concluded that it had to do something about China, which is running a trade surplus with America of well over $100 billion per year. With new polls showing that president Bush is now in a neck-and-neck race with several of his potential opponents, and the unemployment rate failing to respond instantly to an economic growth rate that is now probably approaching 6 percent, the president’s men want to be seen to be tough on countries that are “stealing our jobs.”
That leads them straight to China, and an undervalued currency that makes Chinese goods cheap in America, and made-in-the-U.S.A. products expensive in China. Never mind that the trade deficit issue is more complicated than a quick glance at the balance of trade figures suggests. Take Wal-Mart. The giant retailer imports about $12 billion in goods from China every year, enabling it to sell sneakers, T-shirts, and a host of other goods to American consumers at prices they just love.
So is it costing Americans jobs? Perhaps not. “Since China first pegged the Yuan to the dollar in 1994, Wal-Mart has nearly tripled its workforce from 528,000 to 1.4 million today. And that’s before counting the jobs associated with its plans to add 210 supercenters and 40 Sam’s clubs [Wal-Mart’s bulk discounter] stores this year,” reports Stephanie Pomboy of consultants MacroMavens.
The hundreds of thousands hired by Wal-Mart don’t know that their jobs depend on their employer’s continued access to Chinese goods, but the 300,000-500,000 workers that Goldman Sachs estimates lost their jobs over the past three years as a result of the “relocation of U.S. production to overseas affiliates” are certain that low-cost Chinese labor and the undervalued currency are the source of their woes. And they care not at all that job losses due to such relocations come to only 0.1 percent of employment per year.
For Treasury secretary John Snow, politics trumps economics. So he used the occasion of last week’s meeting of the G-7 industrialized countries in Dubai to persuade his colleagues to endorse a call for a new exchange rate regime that would require China to allow its currency to float to a higher level, making its products more expensive, and therefore less competitive, in world markets. The soft dollar is to replace the strong dollar.
Beware what you wish for. Sitting in the vaults of China’s central bank are hundreds of billions of dollars of Uncle Sam’s IOUs. China uses the mounting pile of dollars from its favorable trade balance to buy U.S. Treasury bonds and notes. Chinese demand for these securities keeps their price up and, conversely, interest rates lower than they would otherwise be. If China were to begin selling its holdings, or even to announce that it has no interest in adding to them, the price of treasuries would fall, interest rates would rise, and the U.S. economy would slow.
Which is why China’s towering holdings of America’s IOUs are a potential constraint on this country’s freedom of action in, among other places, Korea. Worse still, last week America was forced to take note of another hostage to fortune that it has refused to deal with—its reliance on imported oil. In 1972, when an oil embargo first brought home to Americans just how dependent they were on imported oil, imports supplied less than 30 percent of our needs. Today, imports account for almost 60 percent of U.S. oil consumption.
After assuring the world that it would continue pumping enough oil to ease prices from the $30 range, the OPEC cartel surprised world markets by announcing a production cutback of 900,000 barrels per day, effective in November. The production cutback comes at a time when most experts are expecting worldwide demand for oil to increase, with China—which has replaced Japan as the world’s second largest consumer of oil—leading the parade.
The immediate effect of OPEC’s thumb-in-the-eye to America and other oil consuming nations will be to slow the worldwide recovery. But that is less important than the reminder of still another constraint on America’s room for foreign-policy maneuver. The need for imports, especially from low-cost, swing producer Saudi Arabia, undoubtedly has more than a little to do with Bush’s reluctance to press the Saudis to stop financing and exporting terrorism, and may well explain his refusal to publish the recent report detailing Saudi complicity in terrorism. The War on Terrorism apparently stops at the Saudi border.
So we have Beijing in a position to effect U.S. interest rates, and hence the strength of the economy, and Riyadh in a position to determine just how much of Bush’s stimulating tax cut will be offset by higher oil prices. In these circumstances, markets might trump military power in setting limits on the actions of the world’s only superpower.
This article appeared in London’s Sunday Times on September 28, 2003.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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