Editor's Note: Stephen S. Roach, a member of the faculty at Yale University, is Non-Executive Chairman of Morgan Stanley Asia and the author of The Next Asia.
By Stephen S. Roach, Project Syndicate
For seven years, the United States has allowed its fixation on the renminbi’s exchange rate to deflect attention from far more important issues in its economic relationship with China. The upcoming Strategic and Economic Dialogue between the US and China is an excellent opportunity to examine – and rethink – America’s priorities.
Since 2005, the US Congress has repeatedly flirted with legislation aimed at defending hard-pressed American workers from the presumed threat of a cheap Chinese currency. Bipartisan support for such a measure surfaced when Senators Charles Schumer (a liberal Democrat from New York) and Lindsey Graham (a conservative Republican from South Carolina) introduced the first Chinese currency bill.
The argument for legislative action is tantalizingly simple: the US merchandise trade deficit has averaged a record 4.4% of GDP since 2005, with China accounting for fully 35% of the shortfall, supposedly owing to its currency manipulation. The Chinese, insists a broad coalition of politicians, business leaders, and academic economists, must revalue or face sanctions.
This reasoning resonates with the US public. Opinion polls conducted in 2011 found that fully 61% of Americans believes that China represents a serious economic threat. As such, the currency debate looms as a major issue in the upcoming US presidential campaign. “Enough is enough,” President Barack Obama replied, when queried on the renminbi in the aftermath of his last meeting with Chinese President Hu Jintao. Obama’s presumptive Republican challenger, Mitt Romney, has promised to declare China guilty of currency manipulation the day he takes office.
But, however appealing this logic may be, it is wrong. First, America’s trade deficit is multilateral: the US ran deficits with 88 nations in 2010. A multilateral imbalance – especially one that it is traceable to a saving shortfall – cannot be fixed by putting pressure on a bilateral exchange rate. Indeed, America’s major threat is from within. Blaming China merely impedes the heavy lifting that must be done at home – namely, boosting saving by cutting budget deficits and encouraging households to save income rather than rely on asset bubbles.
Second, the renminbi has now appreciated 31.4% against the dollar since mid-2005, well in excess of the 27.5% increase called for by the original Schumer-Graham bill. Mindful of the lessons of Japan – especially its disastrous concession on sharp yen appreciation in the Plaza Accord of 1985 – the Chinese have opted, instead, for a gradual revaluation. Recent moves toward renminbi internationalization, a more open capital account, and wider currency trading bands leave little doubt that the endgame is a market-based, fully convertible renminbi.
Third, there has been significant improvement in China’s external imbalance. The International Monetary Fund estimates that China’s current-account surplus will narrow to just 2.3% of GDP in 2012, after peaking at 10.1% in 2007. American officials have long bemoaned China’s saving glut as a major source of global instability. But they should look in the mirror: America’s current-account deficit this year, at an estimated $510 billion, is likely to be 2.8 times higher than China’s surplus.
Finally, China has evolved from the world’s factory to its assembly line. Research shows that no more than 20% to 30% of Chinese exports to the US reflect value added inside China. Roughly 60% of Chinese exports represent shipments of “foreign invested enterprises” – in effect, Chinese subsidiaries of global multinationals. Think Apple. Globalized production platforms distort bilateral trade data between the US and China, and have little to do with the exchange rate.
Rather than vilifying China as the principal economic threat to America, the relationship should be recast as an opportunity. The largest component of US aggregate demand – the consumer – is on ice. With households focused on repairing severely damaged balance sheets, inflation-adjusted private consumption has expanded at an anemic 0.5% average annual rate over the past four years. Consumer deleveraging is likely to persist for years to come, leaving the US increasingly desperate for new sources of growth.
Exports top the list of possibilities. China is now America’s third largest and most rapidly growing export market. There can be no mistaking its potential to fill some of the void left by US consumers.
The key to realizing that opportunity lies in access to Chinese markets – all the more significant in light of China’s upcoming pro-consumption rebalancing. Historically, China has had an open development model, with imports running at 28% of GDP since 2002 – nearly three times Japan’s 10% import ratio during its high-growth era (1960-1989). As a result, for a given increment of domestic demand, China is far more predisposed toward foreign sourcing.
As the Chinese consumer emerges, demand for a wide variety of US-made goods – ranging from new-generation information technology and biotech to automotive components and aircraft – could surge. The same is true of services. At just 43% of GDP, China’s services sector is relatively tiny. There is enormous scope for America’s global services companies to expand in China, especially in transactions-intensive distribution sectors – wholesale and retail trade, domestic transportation, and supply-chain logistics – as well as in the processing segments of finance, health care, and data warehousing.
The US needs to refocus the US-China trade agenda toward expanded market access in these and other areas – pushing back against Chinese policies and government procurement practices that favor domestic production and indigenous innovation. Some progress has been made, but more is needed – for example, getting China to join the World Trade Organization’s Government Procurement Agreement. At the same time, the US should reconsider antiquated Cold War restrictions on Chinese purchases of technology-intensive items.
For a growth-starved US, the opportunities of market access far outweigh the currency threat. The long-dormant Chinese consumer is about to be unleashed. This plays to one of America’s greatest strengths – its zeal to compete in new markets. Shame on the US if it squanders this extraordinary chance by digging in its heels at the upcoming Strategic and Economic dialogue.
The views expressed in this article are solely those of Stephen Roach.
© 2012 Cable News Network. Turner Broadcasting System, Inc. All Rights Reserved.
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They used conservative and republican in the same sentence!!! Since when have republicans EVER been conservatives??? Hahahahahahahahaha
This is the response of an Internet Troll and should be deleted.
Reblogged this on iLook China and commented:
Stephen S. Roach writing for CNN.com says, "America’s trade deficit is multilateral: the US ran deficits with 88 nations in 2010. A multilateral imbalance – especially one that it is traceable to a saving shortfall – cannot be fixed by putting pressure on a bilateral exchange rate. Indeed, America’s major threat is from within. Blaming China merely impedes the heavy lifting that must be done at home – namely, boosting saving by cutting budget deficits and encouraging households to save income rather than rely on asset bubbles."
Amazing, logic and truth for a refreshing change instead of demonizing China with more political/media propaganda, which is norm during the run up to a national election in the US.
_________________
Lloyd Lofthouse is the award-winning author of The Concubine Saga. When you love a Chinese woman, you marry her family and culture too. This is the love story Sir Robert Hart did not want the world to discover.
Lloyd: you seem to need attention by writing in your own answer that you are an award winning author. Poor man.
its simple, if you want American households to save more, two things have to happen. Companies need to start hiring people and paying them decent wages, and second the interest on savings has to exceed the rate of inflation or you end up losing money by saving it.
There's another choice. Have you heard of Annette and Steve Economides (known as America's 'cheapest' family?
You may want to Google their name, find their Website and read their story about frugality, spending less and saving more on what many in the US believe is a low income. The Economides have five children and their average annual income was less than $35,000. With that many children and that income, they bought a first home and paid it off in nine years.
The real secrete is learning how to say "NO" to spending money when you don't have the cash.
Then I found a Post on another Website, "Living Well on Less Than $10,000 a year..."
Then there was a story in US News and World Report on "The Secret to Living Well on $11,000 a Year. The story ran October 19, 2011.
In the US News piece, "Glenn Morrissette, 42, wrote in to say that he lives on just $11,000 a year, and he does it by living full-time in an RV."
International business with China is growing 10% a year in Chinese RMB. Soon US dollars will not be that irrelevant to Chinese anyways.
Thank you for setting the record straight. It's about time the US stops looking for others to blame for problems that were created at home. The US must accept responsibility for the economic mess it created by fostering a Wild West mentality in its financial sectors and do something constructive and logical to fix the problem even if it means cutting the federal budget across the board for every department while raising taxes on the wealthiest Americans.
Sadly, China will be to blame for this. Both on the other hand, US did not prepare and prevent it. Someone had to know China was going to dilute the labor market with cheap labor. Its our fault for allowing China to partake but at the same time is was generous. China, however, needs to mature a bit. I don't think they understand economics as best as they think and really need to heed the advise from the west. Afterall, China is a young and naive economic country. Yes, we (the west) should take responsibility, because we were the ones who should have saw this coming. However, they should also listen. This is not a zero sum gain here, it will literally send the world in chaos, like a world stock market crash of everything. If no one still understand this, then look a little further. China opens its borders to US companies. US companies are not allowed to out source manufactoring to China. What it normally cost to produce a product now costs 1/1000. Labor has now become cheaper. Consumers no longer have as much money. No one is buying. production decreases and on the downward spiral we go. We are starting to see this now. Now, because is not listening to the US, US has no other choice but to sanction them. However, there is one thing US could have done to prevent this. US companies could use the extra money saved when expanding to cheap labor and apply it to more high technology and design jobs at home... this is called trickle-down and it never happened. Government should of been more hard pressed on this scenario. Instead government is trying to China to step in but we were fools in trusting them... believing an 8 year old could drive a car with getting into an accident.
Who has earned the most profit by turning China into the world's factory floor? China or global/US corporations as they increase their profit margin by using cheap labor? Has anyone done any work on this to see who benefited the most?
For example, I read that China earns about $6 for each iPad that is assembled/manufactured in China while Apple earns more than $100 in profit for each unit sold.
After the 2007-2008 global financial crises (which was caused by Wild West atmosphere of US financial markets), GM almost went out of business and lost money in the US while continuing to make HUGE annual profits from sales of GM vehicles sold in China.
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What does this have to do with the topic of this post?
Nothing. Neither adding to your post that you are an award winning author has nothing to do with the subject at hand.
Congratulations. You have finally proven that your mind is smaller than a pea, that an emu is more gifted than you are and that, when God distributed intelligence, you were shopping
Ah, another Internet Troll!
"you are an award winning author has nothing to do with the subject at hand."
TRUE!!!!!
So let's stick to the topic of the post and deal with facts such as, what do you say about, "America’s current-account deficit this year, at an estimated $510 billion, is likely to be 2.8 times higher than China’s surplus."
In addition, the current total US deficit (national debt) as of today is more than $15.5 trillion and the average credit card debt per household based on 609.8 million credit cards held by US consumers is almost $16,000.
However, in China the household saving rate - "Chinese households save a large share of their disposable incomes and their average saving rate has increased over the last decade and a half (Figure 2). This pattern is particularly pronounced for urban households, which account for about two-thirds of national income. After remaining relatively flat during the early 1990s, the average saving rate of urban households relative to their disposable incomes rose from 18% in 1995 to nearly 29% in 2009."
Indeed Mitt Romney et al have been too obsessed by the strength of the Renminbi and irked China with hostile rhetoric. Fortunately the Chinese are pragmatic and don't dwell on misgivings. They might let America exploit their under-developed service sector.
Strength of Renminbi? you mean weakness of Renminbi. That is problem here, Renminbi is too weak. It is under valued. And technically, it is correct. China should have been sanctioned a long time ago. It is only fair. I think we did them a big favor. Should be thanking us and I am sure they are. I don't think its the US's intent to see China fail. I do believe US does want them to succeed.
Wow! A balance article!
If you have facts that refute what this article says, then show them. Otherwise, "That's not True" is only your individual opinion.
IF ROMENY TO WIN THE ELLECTION HE SHOULD PICK MCCAIN FOR A VICE PRESIDENT
Everyday do China bashing and ask cooperation from china. What a Looser !!
Poorly done! In 'The Wealth of Nations' Adam Smith delineated the method by which we can do business the world over. Part of the nature 'balance' method is that as major exporting countries ship out more and more, their currency needs to appreciate with respect to other currencies. Stop this process, and a level of pressure builds up to move the currency in the appropriate direction. Unrelieved, this pressure turns into inflation in the exporting country. When the pressure is finally relieved, it causes a massive change in both the importing and the exporting countries. If the RMB had been allowed to float freely, we would have fewer imports from China, more production at home, less unemployment and China would have less inflation. China labor inflation runs 20-100% per YEAR. When the crash comes, it will be brutal for the Chinese and massively inflationary for us. I wonder at the motivations of the (ignorant) author...
Americans doesn't have a fixation on the rembini. They have a fixation on china. I guess deep in their unconscious they know that china will be there master for their new role as servant.
Viewing china only as a cure for the economic slump maybe the US's biggest folly yet.
I do not see China as becoming America's master. However, I do see China as being strong enough to stand on its own feet with no master bulling it to do as another nation wants such as the US does to so many nations today.
Of course we wouldn't be having these discussions if China was a better trade partner. China wouldn't have gotten into this currency spat had the central government:
1) Enacted IP protection schemes to stem the tens of billions of losses resultant from pirated goods and industrial espionage
2) Reduced barriers of entries (regulations, tariffs, cronyism, whatever you want to call it) so that foreign companies can compete fairly and have access to markets just as Chinese companies do
3) Fixed their legal framework so that businesses have a fair recourse to pursue in the event of legal disputes
Not too hard, I understand why the Chinese don't want to do any of those things, but then they just have to deal with the noise from Washington and not have to rely on shills such as the author of the article.
my buddy's step-mother makes $86/hr on the internet. She has been unemployed for 7 months but last month her paycheck was $14809 just working on the internet for a few hours. Read more here NUTTYRICHdotcom
You would make more money working with your mom rather than posting on CNN.
I disagree that US should break this cold war mentality with China regarding giving high technology to China. Considering they are still communist, I disagree. Until communism falls, and maybe 10 yrs there after, then we can start seeing it happen.
Wal-mart shoppers do NOT care if all the stuff they buy "cheap" is made by communists using slave labor. They just don't. Americans, for the most part, are selfish, stup!d and oblivious to anything beyond their paychecks.
It's why we elect people with no economic expericence...or worse, people who have they houses forclosed on, etc...to Congress because they are a "Republican" or "Democrat" and the clueless lemmings know nothing more than pull the lever of the left or the right.
Most people don't understand that by making RMB strong you make USD weak. A weak USD makes Americans poor. A CNN reporter in China paid in USD will take a 30% haircut if RMB is to increas value by 30%. I have never seen a group of less selfish people, LOL.
A weaker dollar makes American goods very attractively priced and will boost our exports and balance our trade.
"Opinion polls conducted in 2011 found that fully 61% of Americans believes that China represents a serious economic threat."
Also, in related news: 61% of Americans don't know anything about economics.
good point – thanks
Hey Lloyd... 1995 called and wants its web page back.
At least you did not use blink and play midi files.
The real problem is that workers can be treated like near-slaves in China and workers in the USA can't compete unless we continue to destroy the Middle Class. I've been in factories in Shanghai, Chongqing, and Beijing and have seen where workers are worked for $3/day until they're incapable of producing results then thrown away with no severance or benefits or ability to seek compensation for work-related injuries. For example, there's a silk thread sorting factory in Chongqing when the several hundred women working on the factory floor are ALL under age 30. By that age, the 12-hr/day, 6-7 day weeks have robbed their eyes of the ability to sort the thin thread's quality. The same is true in other industries. Meanwhile, the company my brother handles the shipping for used to make display cases for Walmart, etc. in Maryland. But now they're made in China. China can ship 50 chrome edges to the company's Maryland plant for specialty or repair work for the cost of making 6 of them in the USA. Isn't it at the point where we should penalize countries that engage in near slave labor? Or is the far right simply hoping that's what happens here?
You do realize that it was Clinton, and not the far right, who removed the tariff policies regarding China's slave labor goods and gave them the "Most Favored Nation" trading status....right?
Prior to Clinton, imports from China were subject to tariffs which helped level the playing field and prices between products produced there with slave labor and products produced here with "minimum wage" requirements, environmental laws that manufactures have to follow but the Chinese don't, etc etc etc.
Free trade agreements f'k us...we can thank Clinton for getting NAFTA signed when Bush Sr with a GOP Congress behind him couldn't even do it.
I agree. That is how the globalist magnates have been acting since the Industrial Revolution. They had created the Banana Republics to pay dollar a week salaries. In a hundred years, they did raise the salaries to one dollar a day. I remember working for them in Argentina, in the 60's. My "salary was a half-mortadella a day, and not a penny more. No monetary remuneration at all. We slept in the mud at night, and made mud bricks in the day! There were zero benefits. Then, in the 90's, I still remember the fish-processing job which I held one Summer in Alaska's Bristol Bay. We were paid well ... until we dropped half dead, with injured hands by the effects of fish poisoning. When our hands became wounds, we were dismissed with no compensation! Just like blind dogs are dismissed! Think, this goes on even today, each Summer at Bristol Bay, not far away from the Wasilla Lake Lucille's home of Sarah Palin! Did she protest this labor practice? There is no record, to my knowledge, although she should have as the Governor! The truth is: the world is run by the rich and for the rich! All governments are run by the rich and for the rich! This is most keenly true of our relationship with China!
It's hard to see how we could have a 'fixation' on something that few of us have ever heard of before.
"Rather than vilifying China as the principal economic threat to America, the relationship should be recast as an opportunity."
Exactly! Let's recognize the danger, seize the day and ban Chinese imports! More jobs, more growth, more recovery!
When China can feed its own people call me and I'll care. East coast of China is an economic boom, central/western China. . . . third world is a fairly fitting description. Really feel free to look up some photos. How's that Middle Kingdom thing going?
Signed the Gwai
China is feeding its people. However, droughts have caused water shortages that are causing crop losses. It's India where people are starving by the millions each year and India has more land under cultivation than China does.
I can see your point about India. In India, people who are poor are valued less than monkeys and cows. China, while she has no such culture, it's not much different. The Chinese respect the poor as a revolutionary force to reckon with. If the Chinese poor are unhappy, good-bye Politburo! Fortunately, if the Great Depression occurs in China, she has enough savings to buy the American grain for ten to twenty years. But, by that time, the Politburo will most certainly be history.
Groan,
In addition, the World Food Pragramme says, "China's success in economic development is nothing short of extraordinary and has been the subject of countless studies. Relatively little attention, however, has been paid to the fundamental role that improvements in agriculture and nutrition played in lifting hundreds of millions of people out of poverty and hunger."
Groan,
Global Issues says, "It appears that much of the poverty reduction in the last couple of decades almost exclusively comes from China: China’s poverty rate fell from 85% to 15.9%, or by over 600 million people. China accounts for nearly all the world’s reduction in poverty. Excluding China, poverty fell only by around 10%"
Groan,
According to the Global Hunger Index in 1990-92, 15% of China's population was undernourshed. In 2004-2006, that number dropped to 10%.
For a comparison, India's 2004-2006 hunger index was 22% of the population as undernourshed. Haiti was 58%. Kenya was 30%. Angola was 44%. The Dem. Rep. of Congo was 75%.
Then "Feeding America" says that 1 in 6 American's struggle with hunger–that is 16.6% of the population in the U.S.
"In 2010 48.8 million Americans lived in food insecure households, meaning they were hungry or faced food insecurity at some point during the year. That’s 12 million more people than faced hunger in 2007, before the recession, and represents 16.1 percent of the U.S. population."
This article largely overlooks the mechanisms used to keep the dollar high versus the renminbi: purchase of U.S. dollar denominated debt by the Chinese government, using money skimmed off of sales to the U.S. When China threatens to stop buying U.S. debt the dollar plummets – against _all_ currencies. China's currency will gradually appreciate against _all_ currencies – but ultimately the renminbi-dollar will be solved, and then some, when China cannot or will not buy as much U.S. debt.
Fixation??????????? Most have never even heard of this. Also-try to say renminbi 10 times fast...
Try Yuan instead of Renminbi
China is run by a syndicate of thugs, good businessmen, but thugs, nonetheless, just as Mr. Putin and Mr. Medvedev runs the Russian Federation with a mob-like mentality. Hence the Russian-Chinese joint military exercises as a small anecdote to the larger theme of what both these nations are up to in the geo-political framework as they try to exert their influence in Eurasia and across Central Asia, and less towards South-East Asia and South Asia where the U.S. and India, among other nations, await them.
What about you, American made BS artist?
oh i forgot exxon and goldman sachs are the paragons of virtue and social consideration lol
Mathew Philips,
The CCP has more than 80 million members and they vote to see who moves up to the next level of the Party. These people are spread across China and historically, power is not centered in the Beijing (and never has been) but is mainly run from the provinces and largest cities.
In rural village elections, 600,000,000 Chinese elect who is the head of the village and candidates do not have to belong to the Party to run for a political office in a village.
In addition, the decisions made by the CCP come about due to consensus so the majority decides the direction the country moves and there are dissenting minority factions within the Party.
In fact, merit is a major factor that decides who moves up. In "The Party – the secret world of China's Communist Rulers" Richard McGregor said even if a Party official is morally/economically corrupt that does not mean he or she is incompetent at their job because of the merit based system that decides who gains rank.
A gang of thugs, not by a long shot.
Great article. Perfect message. If "America" really wanted to DO SOMETHING, all it would take is the application of TARIFFS to equalize the ALLEDGED currency rigging. OF course, other than stage a public rant nothing will happen.
P.S. AMERICAN Corporations love the currency right where it is – and they don't want tariffs, or anything else done.
That is exactly what I have just said. The buddies of Zacharia love the renminbi where it is! That is how they pay the salaries of their Chinese workers, who are in the millions! They do not wish to pay them in dollars, nor that the products they manufacture in China be bought in dollars! They want the status quo on the backs of the American taxpayer! In the meantime, the U.S. trade deficit keeps rising, for we do pay the Chinese in dollars, not in renminbi. I say, demand that all goods bought from China be repaid in renminbi, so our trade deficit become , guess what, in renminbi!If the Chinese refuse, we must stop buying their goods!
I agree with the article. I have not read any really good article on why Renminbi exchange rate is manipulated to be too low except "things cannot be that cheap in China". But things are that cheap in China because labor is so much cheaper in China. If the U.S. sanctions China, U.S. companies will just moving their factories or suppliers to Vietnam or other developing countries. Those manufacturing jobs are not coming back to the U.S. ever. I don't get why Americans keep complaining that the goods they get from China are too cheap. Isn't that a good thing for the U.S. consumers? It does not make any sense for the U.S. government to create a self-induced inflatioin on its consumers by sanctioning cheap goods from China.
Lets get the facts straight. America does not have fixation on China and reminbi, IT IS CHINA WHO HAS FIXATION ON US$ WITH REMINBI! Ha ha. I think Stephen Roach should reveal if he has received any support financially or in kind from China, its agents, or lobbysts, for trips to China, honorariums, or in other ways.
Handy Anderson,
Roach was right. Check out The New York Times -
As China's Currency Rises, U.S. Keeps Up Its Pressure
http://www.nytimes.com/2012/02/16/business/global/appreciation-in-chinas-currency-goes-largely-unnoted.html
"In his Oval Office meeting on Tuesday with Xi Jinping, China’s vice president and likely next leader, President Obama discussed the currency as one of the trade practices that concerned the United States."
"As the Chinese consumer emerges, demand for a wide variety of US-made goods – ranging from new-generation information technology and biotech to automotive components and aircraft – could surge, Zacharia says. Garbage! Every demand that may arise, "shall be filled up by the Chinese industry." That is straight from the Politburo Manifesto! I don't know what Zacharia has been reading. He probably is listening to the few U.S. magnates now investing in the Chinese industry! I grant, they may benefit. But he is forgetting the millions of unemployed Americans, who will need another American Revolution, to restore their families' American Dream!
We must all accept that China is now in a position to do what it thinks is right politically and economically.
Nothing, not even any threat of any trade boycotts or sanctions on Chinese products can change this fact.
The Chinese Government has, I think, work out a self reliance contingency plan, just in case the global economy goes into a tailspin, like when the US $ collapses.
And I think it will work for them, because they have the money and a big population. China can afford to open or shut their doors at their own will.
I have just read your article Mr. Roach and it hits a home-run in bringing the quintessential issues of US-China relations to the table. It removes the economic smoke that our government has painted for election purposes and logically drives home the overwhelming need to focus on the market opportunities that exist in China for the US. With China being the US’s third largest export market with US exports to China up 53% since 2007, I think your point is made well on the importance “access to the China market”; however, on the same note, my book that I published in February of this year, “Doing Business with China: Dancing with the Dragon” focuses on the next logical issue…”How to Access the Chinese Market”. One of my chapters, “Creating Your Own Access to China” tells owners how to do this, but stresses that our real opportunities in China cannot be achieved unless our Federal and local government start working closely with business to create real long-term strategies to support this effort. It’s funny…after all my years of doing business with China, I see the Chinese government putting in these supportive functions in their government to assist their businesses to expand to the US (and other markets!) and their efforts have really worked…why are we not doing this too in the US? (I see small glimmers of this but no real strategy).
If Washington could just stop running for the next election and pandering to every special interest group, and start being proactive and focusing on implementing long term strategies instead of being so reactive...then we could drive a whole new export market to create jobs and opportunities for the US… my book goes into great detail on this matter as well. Your article should be placed in the Wall Street Journal for free… as it could serve as a real public service announcement to wake our country up…Great article.