China - The Ultimate Protectionist

When you hear how the United States doesn't want to be protectionist, please remember that's just spin to ensure we do the will of China.

A new 2009 annual report by the U.S.-China Economic and Security Review Commission is out. Below are selected excerpts that should make the hair on your head stand on end in OMG panic.

China encourages foreign manufacturing to relocate to China and uses strict capital controls to keep the value of the RMB artificially low.

China’s industrial policy is also aimed at promoting the manufacture of higher-technology products, replacing lower valued-added and labor-intensive products.

Indeed, Beijing’s industrial policy was a contributing factor to the imbalances that led to the global financial crisis that affected the economies of rich and poor nations alike.

Get that? Now have we heard a word in the press that China's policies helped create the global financial crisis? No.

China now has $2.27 trillion in foreign exchange reserves, most in U.S. dominated bonds, the worlds largest cache. Now that China cannot dump out it's holdings of U.S. dollars without lowering their value, we see China trying to internationalize the RMB and have influence with the IMF.

In July 2008, China once again, pegged the RMB, the Chinese currency to the U.S. dollar. Hence it is significantly undervalued.

So how exactly did China contribute to the current Financial crisis?

Firstly they created massive economic imbalances by stealing our manufacturing base and exporting those old products into this country and buying our debt. They amassed $2.27 trillion in foreign exchange reserves.

This created a Vicious Cycle. According to the report, we're in a vicious cycle of China exports, the profits which China saves. China then turns around and lends those profits, which used to be ours, to the United States as super cheap money while we go further into debt. Without our income producing industries, which China now has, America has no real future to pay off that debt.

From the report:

  • The policies that China adopted generated a huge flow of liquidity—or money that can be easily lent to borrowers—into U.S. markets. This excess liquidity created perverse incentives in the United States that encouraged banks to make risky loans to U.S. households, which in turn grew ever more indebted. High U.S. demand for imports allowed China to save even more, creating a vicious cycle and laying the foundation for the current crisis.
  • In response to the crisis, China introduced a fiscal stimulus package, raised rebates to exporters, and introduced other measres supporting the manufacturers in the export sector. This will only exacerbate overcapacity, aggravating the overall problem. China has also taken some steps to increase domestic consumption, but they are far outweighed by measures supporting exports.

Now that we see how China helped create the Financial Crisis of 2008, read some report facts on how China stole and keeps our U.S. manufacturing base. In particular how China is busy capturing advanced manufacturing and technology sector jobs. Nice huh. Recall those were the jobs of tomorrow peddled during the Clinton administration. Little did you know they would give those very jobs and industries to China.

China’s Industrial Policy and its Impact on U.S. Companies, Workers, and the American Economy

  • China’s economic reforms were not based on traditional free market principles. China’s policy during the past 30 years has instead relied on a government-directed industrial policy to promote certain segments of the economy over others and to bolster export-led growth.
  • China’s more recent Five-Year Plans have shifted the emphasis away from labor-intensive operations and toward increasing the production of high-technology goods. China has matured as a manufacturer and assembler of advanced technology products and as a consumer of electronics and information technology products. The low cost of labor along with government investment in high-tech industrial parks—and a variety of direct and indirect subsidies—created an attractive environment for foreign companies to invest in China, particularly after China joined the WTO in 2001.
  • China provides subsidized land, energy, and water to many foreign manufacturers who relocate their operations in China. By providing these benefits, along with a cheap labor force without the ability to bargain collectively or join independent unions, the Chinese government has created a low-cost haven for foreign manufacturers. China’s subsidies have grown over the years and now include tax incentives and preferential loans, which further reduce the cost of investing in China.
  • China has consistently used a 17 percent value added tax (VAT) as an instrument of industrial policy. China selectively rebates the VAT when a domestic manufacturer exports but imposes it on imports. The United States, on the other hand, does not use the VAT and is not allowed by WTO rules to rebate income taxes on exports. China’s VAT policy therefore places U.S. exports at a distinct disadvantage.

See why China really is the ultimate protectionist? See why rhetoric claiming the U.S. should not engage in protectionist policies is pure spin and bunk?

Look at this situation. China has the United States by the short hairs in holding so much debt, yet their policy ensures even more manufacturing will locate in China, further condemning the long term prospects of the U.S. economy.

What was that about capitalists? If you sell them enough rope they will hang themselves? If there is one overriding proverb that could describe China's policies towards to the U.S., this has to be it.

On industrial espionage:

China is the most aggressive country conducting espionage against the United States, focusing on obtaining U.S. information and technologies beneficial to China’s military modernization and economic development.

On cyberwar:

The quantity of malicious computer activities against the United States increased in 2008 and is rising sharply in 2009; much of this activity appears to originate in China.

The Commission has 42 policy recommendations for Congress. A few of critical importance economically are listed here:

  • Employing World Trade Organization trade remedies more aggressively. The Commission recommends that Congress urge the administration to employ more aggressively all trade remedies authorized by World Trade Organization rules to counteract the Chinese government’s practices. The Commission further recommends that Congress urge the administration to ensure that U.S. trade remedy laws are preserved and effectively implemented to respond to China’s unfair or predatory trade activities.
  • Responding effectively to China’s currency manipulation. The Commission recommends that Congress urge the administration to press China to allow the RMB to become flexible and responsive to market forces, thereby contributing to the correction of global economic imbalances. The Commission further recommends that Congress consider legislation that has the effect of offsetting the impact on the U.S. economy of China’s currency manipulation.
  • Evaluating the impact of China’s value added tax. The Commission recommends that Congress urge the United States Trade Representative to evaluate the use of selective value added tax rebates by China and their trade-distorting effect and determine what steps, if any, should be taken to address the issue.
  • Reporting on the implications of Chinese subsidies to the U.S. clean energy sector. The Commission recommends that Congress urge the Department of Energy, in consultation with other appropriate agencies, to report to Congress on the impact of Chinese subsidies and other elements of China’s industrial policy on U.S.-based companies manufacturing clean energy products.
  • Ensuring adequate funding to limit China’s antiaccess capabilities. The Commission recommends that Congress assess the adequacy of planning and resourcing of Department of Defense programs that would limit China’s antiaccess capabilities. In particular, Congress should focus on antisubmarine warfare and ballistic missile defense programs. Congress should also assess the adequacy of funding and resources for the Department of Defense’s Pacific Command. of Defense’s Pacific Command.
  • Meeting the rising challenge of Chinese espionage. The Commission recommends that Congress assess the adequacy of resources available for intelligence, counterintelligence, and export control enforcement programs to ensure that U.S. government agencies are able to meet the rising challenge of Chinese human intelligence and illicit technology collection.
  • Ensuring adequate funding to respond to computer exploitation and computer attack. The Commission recommends that Congress assess the effectiveness of and resourcing for law enforcement, defense, and intelligence community initiatives that aim to develop effective and reliable attribution techniques for computer exploitation and computer attacks.

Here is the USCC's complete report.

This is beyond outrageous, it's frightening as hell. There is no other nation which threatens the economic future of the United States than China. It's clear America must confront these economic attacks directly with strong policy changes and stop ChinAmerica's interlocked we spend, they save vicious cycle right now. Americans are tapped out and we want those jobs back.



China RMB re-evaluation

Chin, on Econbrowser, has a quantitative post running the math.

here. This contradicts the earlier EPI study that said pretty much the entire trade deficit could be leveled if China floated their currency.

New Deal Dem. ‘Blinks’ – oh…ooh!

New Deal Dem. ‘Blinks’ – oh…ooh!

I’m never sure if I understand the substance of New Deal Democrat. His data is massive and, to my mind, esoteric. But, there is never any doubt about his conclusions. Metaphorically he is the quintessential ‘Green Shooter’.

He buries you in positive correlates of previous recession ending growth; he ignorers negative correlates which he thinks is the stuff of ‘doom and gloom’ analyst; and he never deals with macro questions like what industries are going to lead us back to ‘full employment?’

Well today all that changed. And call me ‘chicken little’ if you will. But, now I think the economic sky is really falling.

He writes:

“John Maynard Keynes famously justified a change in opinion by saying, "When the facts change, I change my opinion. What do you do?" Well, a critical fact in my analysis has changed.

"Three indicators -- ISM manufacturing, Initial Jobless Claims, and Industrial Production -- are now at levels typically associated with actual job growth in previous recoveries. All three of these series exceed their growth in the two "jobless recoveries" of 1992-3 and 2002-3.

"The "Holy Grail," however, Real retail sales, is only trending sideways or slightly higher albeit for unique reasons (cash for clunkers). The substantial downward revisions in real retail sales in August and September call into question when the overall jobs number will turn.”

I respect him for ‘facing facts’. Indeed, I respect him for the magnitude of his research. However, it seems to me that he never accepted what I believe is an unequivocal correlate of retail sales, growth and jobs – CREDIT. The credit bubble of recent decades created demand and therefore jobs. Today, people are tapped out. No jobs or jobs with marginal income, no credit cards and no home equity loans.

I think, VERY subjectively, that NDD “could not see the trees through the forest.” He is so steeped in the minutia of the data that he missed the economic ‘big picture’ – i.e. the role of the credit bubble in previous post recession growth.

New post WW II economic theory, it seems to me, has to consider: Is it possible to grow an economy without a credit bubble? Empirically, are there any paradigmatic examples of economies growing without a credit bubble; e.g. China?

Robert Oak may be correct that we are victims of China’s protectionism. I can’t say because the economics is beyond me. But, while we confront, we may want to learn. China’s success, I don’t think, is solely the result of ‘taking advantage.’ But, I think (what is unthinkable in our culture) the most important line in Robert’s post is:

“China’s economic reforms were not based on traditional free market principles. China’s policy during the past 30 years has instead relied on a government-directed industrial policy to promote certain segments of the economy over others and to bolster export-led growth.’

I think we are at an historic cross roads: can a ‘market economy’ compete with a ‘government directed economy’? We think we won the cold war because our market economy is superior to a planned economy. We ignore all the other variables that led to the collapse of the Soviet Union. We missed the fact that while the Soviet Union was collapsing China was growing. And, we still don’t understand why. China was growing before it was in a position to cause US economic troubles. I think protectionism is one variable, but complex economies are multi-variable phenomena. We need to look at all of them if we are going to understand such economies.

This in no way is a challenge to Robert's very interesting and informative post. Rather, a tangental thought stimulated by the post.

Ah, interesting

You realize NDD used to post here, proclaimed us Doom & Gloom and moved over the Bonddad's blog at which point we got the "V" recovery and "V" jobs recovery posts which most of us here believe are off the mark.

So, maybe NDD has returned to planet Earth, reality is sinking in and he will return to writing those great posts which I frankly miss.

I don't know what happened really. Maybe he just got so sick of the depressing news, it affected him and he went on some joy ride searching high and low for something positive.

It is very depressing and knowing that our lovely policy makers and government have directly caused this, it did not have to happen at all, is even more depressing.

It's probably even the emotional bomb for all of those who worked, volunteered to get Obama elected thinking they would get some real change...

Seriously. Else, I cannot explain that cherry pick hunt by not just NDD, but Bonddad, trying to claim that recovery is around the corner.

Maybe the ghost of Hoover took over their brains for awhile and they were possessed.

:) But if he's returning to planet Earth it would be nice to see some of his older style, feet firmly planted in the ground type of writings.

The fundamentals

I told NDD months ago that he was ignoring the fundamentals, thus his comparisons to other recent recessions was flawed.
I wonder if he's bothered to take into account that the manufacturing numbers were also influenced by the cash4klunkers?

The government stimulus spending has peaked. Q3 is going to be revised lower. Technicians like NDD and Bonddad are missing the big picture: the credit-based economy is broken and will never come back as long as the massive amounts of debt in our society aren't defaulted on.

Q3 will be revised lower because of net exports

Amazing. The leakage continues. Even with lower dollar we can't get positive net exports. This shows how powerful China's currency peg truly is - in my opinion. - Financial Information for the Rest of Us.

I think both believe in business cycles

But to me, the technicals, and I'm writing 'em up and looking at them, didn't add up and they went cherry pickin'.

Like the entire slope on the jobs thing. I know on this score we pointed out over and over, so what the slope has improved from an Armageddon clive dive...they are still massive, ain't gonna get a V out of that puppy.

But it still doesn't make much sense to me, hunting in spread sheets for happy talk....
because I know NDD at least is very aware there are structural problems with the U.S. economy and have been for some time...i.e. chickens coming home, roosting, laying big fat eggs on us.


On Stimulus spending, they've only paid out 22% of it, so there is more to come. But will just "spending money" claiming that's going to correlate to some GDP growth happen?

As Rebel notes, here comes China with their export driven world economic domination agenda....that's going to pull down GDP, no jobs has to be pulling down GDP, consumer spending, hey man, we ain't got any $$!!!!

So, and considering we have this report on how screwed up any reports are, who really knows what's the next 78%? Where it's going?

We know in terms of infrastructure jobs it's going overseas, being offshore outsourced.

oh great!

Beijing not the problem – rather Washington

Beijing not the problem – rather Washington

Reciprocal trade polices between countries cannot be ignored and are subject treaty and other international contract negotiations. If the US is at a disadvantage visa vis China or any other country, then it is a function of our economic policy makers. Disadvantage trade relations are not ‘acts of god or nature! They are the results of conscious decision-making.

We need more specific historic data about who decided what and when, if we are going to understand were we are and what to do. For example, we know virtually (literally) nothing about what Obama and his advisers agree to in China last week. All we can do is wait and reap the whirlwind.

When Nixon went to China the media coverage was phenomenal; but all fluff. About a week or two after he returned, the Wall Street Journal printed a small paragraph in the middle of the paper: “David Rockefeller chairman of Chase Manhattan Bank flew into China on his private jet plane.” To my mind, Nixon behind closed doors made agreements, which were then executed by Rockefeller. I can’t help but wonder who is going to go to China (metaphorically speaking) next week and how it will impact our economy?

Robert and Rebel refer to “China with their export driven world economic domination agenda”. Well shouldn’t we be considering the US ‘military driven world domination agenda’ and the economic implications of it? In all the talk about economics in the past year by politicians, academics, media and prominent bloggers, there has been virtually no analysis of our military expenditures and polices, and the implications they have for the economy. There has been some ‘whining’ about it by liberal bloggers, but little if any anecdotal analysis.

Where are the charts showing the correlates of military budgets and the civilian economy? I once did a ‘back of the envelope’ calculation indicating that a day in Iraq was equal to all the student loans outstanding. Seemingly, we could have a free university system for a fraction of one war. And, yesterday students in New York and California are protesting 35% increases in tuition on top of tuition that already can’t afford, and no jobs after they graduate ‘to boot’.

I say forget about blaming China. Let’s clean up our own act. In short, our problem is not in Beijing it’s in Washington.

China is a problem

Yes the U.S. gave away our economy to China by refusing to act. The Bush administration did pretty much nothing. Clinton push for and signed the China PNTR. So, yes action needs to come from D.C. but I think the first step to action is to cut through the denial. If people realize what China is doing and how bad it is of a problem for the U.S. economy, never mind the U.S. worker, maybe they will demand more action. It's bad enough one of the campaign promises was to get China to float their currency and of course that campaign promise was broken.

China is not to blame. But let's be clear China is NOT...

a 'free trade' (let alone a 'fair trade') partner. And yes, the problem is in Washington.

I have argued (as well as others here) that neo-liberal policies that have dominated our economic policies in Washington are the cause of the predicament we face today. And unfortunately for us these neo-liberal policies are influencing the current administration.

As I said in a previous thread, don't give us this bullsh*t about budget deficits and mounting federal debt until completely withdraw from Iraq and Afghanistan. - Financial Information for the Rest of Us.

China is to blame, yes indeed it is

I don't get why you guys are going off on this.

Of course China is to blame. They are manipulating their currency, manipulating their VAT tax almost daily, have strong restrictions, requirements of foreign companies operating in China and prop up our debt which creates super cheap money to buy their products.

What is not to blame?

If you're trying to say D.C. is the ones who let all of this happen, of course this is true...

but you've got a country who is literally putting thousands of spies for industrial espionage in our universities and companies....

Of course the U.S. doesn't lift a finger to stop this.

So, if you're trying to say the U.S. is the real culprit because they signed onto this in the first place, the ultimate being the China PNTR agreement then that answer is yes and it's D.C. fault because they refuse to do anything about this myrmid of activities by China, of course D.C. is to blame...

but D.C. does not control the RMB and it's peg. They can enact policies, even tariffs to deal with this peg and I think they should, just simply do an across the board tariff equal to whatever the real RMB value should be.

But trying to imply China doesn't have a major responsibility in this mess I think is a mistake.

But we knew this going into PNTR

We knew that China was an authoritarian government with a centralized economy. What policy makers wanted for them and their multi-national corporation benefactors was a place for cheap labor.

And even look at the past 16 years where China was allowed to dump products at will into U.S. destroying U.S. industries w/out consequences. Who's to blame for that?

China is doing capitalism much better than we are. Is it fair? Hell no but that is the engagement with China that we instigated and China is taking advantage of it 100%. - Financial Information for the Rest of Us.

We can't go back in time

and bitch slap Bill Clinton (btw, notice how it never is mentioned by pundits that perhaps the reason Clinton lost the House and Senate in the GOP 1994 takeover was not due to Hillary care, but due to his signing of NAFTA?)

Well, why not blame China? Yes, they sure are doing capitalism better than anyone else and this is kind of interesting. Their economic strategy team is loaded with engineers.

Anyway, I think the "blame" thing is we're really saying the same thing, which is U.S. D.C. get moving and DO SOMETHING about China right NOW.

Did you see this commission report recommending a U.S. VAT? I was kind of surprised by that. I "defended" a VAT just for this reason about 8 months ago.

Maybe I need to put up some animated game or gif or something that says "bitch slap Bill Clinton for the China trade agreement" in the columns. ;)

Looks like they are going to ram through "health care" and a few economists I think are credible are saying it's another huge hand out to big Pharma and the health insurance industry and is going to hit us ....surprise, surprise, in our pocket books and deficit. It's so depressing I don't even want to look. My God, they could have reduced costs by half, increased quality to the EU level easily if they were not so bought and paid for.

Why did you have to mention health care?

Did you know China has universal health care? I thought I mentioned that because there is another thing that U.S. businesses trying to compete with China are up against.

The only reason we don't have some form of single payer coverage is because congress and White House are bought and paid for by big pharma and private health insurance industry.

There is NO good reason to preserve the employer sponsored health care system we have today. - Financial Information for the Rest of Us.

sorry to depress you

midtowng is getting depressed about this too. I imagine all of America is at this here we go, Dems sold out American down the river to corporate lobbyists', they all vote GOP who....sell America down the river per the demands of corporate lobbyists.

Swing state? Ha ha. The same corporate lobbyists keep their seats no matter what the country thinks.

I get this terrible feeling that we ain't seen nothin' yet on an implosion for these corporate lobbyists destroying the country. I used to not think that, but today I'm a little on that 2012 viewpoint.

The only good news is the Sunday Morning Comics will be titled "Palin FreeZone Edition".

forget blame think cause

From my point of view the trouble with this dialogue about China is the word 'Blame.'

Blame is a moral term, and morality is largely relative and subjective - point of view - value judgement, etc.

I'm more comfortable with the word 'cause'. That's scientific -objective and subject of proof or probabilistic judgement.

My hypothesis is that the 'causes' of the present economic situation generally and visa vis China in particular are to be found in decisions of the American financial and political oligarchy.

For example, a particular hypothesis may be that the peg of the RMB has been agreed to in Washington in return for reciprocals such as China supporting Treasury issues. I'm not saying that is the case. I'm saying is the type of 'causality' that should be researched empirically.

Do the science! Find the cause and then argue the morality.

That's my value judgement.

good point

I often forget that sometimes words matter and assuredly, trying to analyze objectively, from the facts, stats and theory is the point.

We have way too much moral outrage and not enough verifiable fact.

ZeroHedge, China floating the Yuan is a joke

history China's Forex reserves.

and even worse, here is a post saying China will devalue the RMB.


Note, because China has no plan B, it is true that if they kill their unfair trade practices, exports, their economy will implode.

But I guess that's just too bad frankly, they should have considered developing their own domestic consumer economy and not done this 1 trick pony to it's ultimate conclusion...wiping out the U.S.

Still, they could put together a staged plan to not have sudden jolts.

The life of the ruling class in China depends on peg

and export driven economy. If they failed to employ people they know that they would be hung. They have no choice. We just have to realize that there is NO such thing as 'free trade' with China. - Financial Information for the Rest of Us.

Did you know China has

Did you know China has universal health care? I thought I mentioned that because there is another thing that U.S. businesses trying to compete with China are up against.


Relocating one's factories, production facilities and sundry other service industries to China (or any other country) for purposes of cheaper labor, lack of benefits, lack of taxation, and lack of anti-pollution laws (subject to change), isn't "competing."

Where did you learn your primary language at?