Last week, Li Ruogu, deputy director of China's central bank, scolded
the United States for its trade deficit and added that we "spend too
much and save too little."
What's more, Li said in an interview with the Financial Times, high
labor costs in the United States have made it so uncompetitive globally
that it should "give up textiles, shoemaking and even agriculture
probably."
Li even offered his own prescription for the U.S.
economy: "They should concentrate on sectors like aerospace and then
sell those things to us and we would spend billions on this. We could
easily balance the trade."
Does all this sound familiar? Li's
comments were like an echo of the 1980s, when an ascendant Japan used
to lecture the United States about its budget and trade deficits.
Of course, that was just before one of the greatest economic booms in
America's history and Japan's descent into a 15-year economic slump.
This is not to suggest that China is headed for a similar collapse, but
Li is as wrong about global trade realities now as Japan was two
decades ago.
In truth, the last thing China wants is a
reduction in the U.S. trade deficit. China relies on exports to the
United States to keep its potentially huge economy developing and its
people employed. China's trade surplus with the United States this year
is likely to be well more than $150 billion, up at least 20% from 2003.
If China were serious about changing that, it would increase
the value of its currency, the yuan. That would make its exports more
expensive and theoretically reduce the U.S. trade gap. But Li said last
week that China had no immediate plans to do so — although China has
hinted that in April it could boost the value of the yuan 10% or so.
China keeps its strictly controlled, nonconvertible currency pegged to
the dollar so that no matter what happens with the buck, China's
exports are unaffected.
And clearly a lot has been happening
with the buck lately. World markets are in a tizzy, with the dollar
declining almost daily against the euro and the yen. The dollar has
slid 20% against the euro in the last two years, and experts look for
it to drop an additional 10% or so — to about $1.50 to the euro.
Why the plunge? Experts point to the trade deficit — now more than $500
billion, which means that the United States pays out that much more for
imports each year than it takes in from selling goods and services to
other countries. That floods the global economy with dollars, making
them relatively cheap compared with other currencies.
In turn,
the central banks of China, Japan and other countries plow the dollars
they receive in trade back into investments in U.S. Treasury bonds and
other securities. Such investments allow the U.S. economy to keep
bubbling along, with American consumers able to go on buying imported
goods. The investments also help finance the government's budget
deficit, which keeps U.S. interest rates low.
By living off
the investments of foreigners, the United States appears to be
borrowing its way into unsustainable debts and gigantic future interest
obligations. As the amounts "borrowed" have grown larger, experts have
grown more nervous over the downward spiral of the dollar.
But the experts are confused. The world economy doesn't work the way it used to.
Although central bank governors like Li fret about deficits, it is more
useful to focus on the concept of "interdependence," or as economist
Catherine Mann of Washington's International Institute of Economics
calls it: "codependence." Either term can be used to describe a global
economy that for more than a decade has been reliant on selling goods
to one big customer: the United States.
"To an inordinate
degree," Mann says, "all countries and regions in the rest of the world
have depended on net exports to the United States for economic growth."
In the last 10 years, U.S. imports of goods and services have
risen 67%, reaching $1.5 trillion last year. But exports have gone up
only 29% to a little more than $1 trillion.
Was this because
U.S. producers were uncompetitive? Not at all. It was because potential
customers of American goods have not expanded their economies. Japan's
has sputtered for more than a decade. The European Union, now 25
countries with a combined market comparable to that of the United
States, has had scarcely any growth. And it is likely to remain stalled
as long as the higher euro makes its products less competitive.
Without a doubt, playing the role of big customer to the world has
changed the U.S. economy. Manufacturing jobs have disappeared, but the
nation has adapted and created other jobs, many geared to foreign
trade. The economy is strong today, with forecasts of 4% growth in the
year ahead — which would add $500 billion in goods and services to U.S.
living standards.
Some U.S. companies that struggled to compete in the 1980s are now doing well all over the world. Manufacturers such as Cummins Inc., a maker of truck engines and power generators, and Caterpillar Inc. and Deere
& Co., makers of construction equipment and farm gear, are having
buoyant success practically everywhere. Caterpillar, for example, saw
sales rise 48% in Asia in the last year, compared with 40% in North
America.
"Changes in currency no longer affect us as much,"
says Cummins spokesman Mark Land, because the company has factories in
many countries where it sells its products and, consequently, uses
local currencies.
The world economy has changed since the
1980s, yet fluctuations in currencies and concerns about trade and
budget deficits go on.
Just the other week, Federal Reserve
Chairman Alan Greenspan added his significant voice to the world's
worriers. If U.S. trade and government budget deficits continued for
years ahead, Greenspan said at a conference in Berlin, investors would
"seek higher dollar returns" — meaning higher interest rates on U.S.
bonds, thereby hurting the U.S. economy.
So what is really likely to happen after the present squall of anxiety eases?
Currencies, for one thing, will settle down. When traders who are
moving money into euros "see so little economic growth in Europe,"
funds will move back into dollars, economist Mann predicts. Indeed,
last week the president of the Organization of the Petroleum Exporting
Countries gave the greenback a vote of confidence by saying the cartel
would not adopt the euro to replace the dollar as the currency for oil
sales.
China-U.S. trade will continue to grow. Even a 10%
revaluation of China's yuan next year wouldn't have much effect on the
trade deficit. Producers in China who want to sell in the U.S. market
will absorb small currency increases instead of raising prices.
In any case, many of the products coming from China are not "exports"
in the classic sense of the word. Some are the result of collaborations
— toys or clothes, for example, designed in Southern California,
produced in China and then "imported" here.
The real problems
facing the world are long term. Europe and Japan must open their
economies to take in more of the goods of China, India and other
emerging countries. And the United States must correct its budget
deficits.
If those challenges are met, global trade will be
more balanced and the U.S. dollar and economy will be seen again as
towers of strength rather than sources of anxiety and confusion.
James Flanigan can be reached at jim.flanigan @latimes.com.
