Obama finds deep resistance to monetary, trade policies

by Andrew Pollack

Barack Obama is beginning to take on an eerie resemblance to Rodney Dangerfield—“I get no respect!” First, his party suffers massive midterm election losses, followed soon thereafter by more in a long series of embarrassing revelations about his puppets in Baghdad and Kabul. Then Benjamin Netanyahu, his partner in the Middle East “peace process,” turns a usually amicable charade into a Punch ’n’ Judy show.

As a last resort in his pursuit of some respect, the president went to the G20 meeting on trade in Seoul, South Korea. But there’s no solidarity among thieves, and he was met with hoots from an audience shouting, “No, you can’t!”

This farce would be amusing if it were not the potential prelude for a larger tragedy: a global trade war in which the world’s workers would be the cannon fodder. And it can’t be a good sign for global peace that tensions in the Koreas have burst out into an actual exchange of gunfire, at the same time as economic relations between the U.S. and North Korea’s main backer, China, are steadily worsening.

The trip was supposed to have been the occasion for finalization of a long-awaited free-trade agreement with Seoul, a key goal in Obama’s plans to revive the U.S. economy by doubling exports (the fallacy behind such plans is addressed below). No such agreement was reached.

Obama’s attempt during the trip to continue bullying China into strengthening its currency, another measure that would supposedly boost U.S. exports, also fell on deaf ears. The hypocrisy of his rhetoric in the face of the Fed’s recent devaluation of the dollar by pumping $600 billion into circulation was too much even for normally diplomatic heads of state to ignore.

In fact, China has little choice but to go its own way in response to heightened economic difficulties. While the U.S. and other Western economies are tightly dependent on an ever-expanding Chinese domestic market, China must either rein in its economy or fall prey to rampant inflation. Recognition of these contradictory interests has pummeled world stock markets whenever they get news of fiscal tightening by Beijing.

China has also recently announced new limits on foreigners’ ability to buy residential or commercial property, part of an effort to curb speculative money inflows and ease inflationary pressures.

But by the same token, the U.S. and other Western powers have no choice, from their own narrow perspective, but to keep grumbling at the Chinese state’s intervention in its economy—although in the interests of historical fairness, one can’t ignore the fact that each of them have done the same at each crucial turning point in their own evolution in order to bolster key industries and fend off competitors.

Typical of the grumbling was a Nov.
16 Wall Street Journal survey. Noting that “Western anger with China has focused on Beijing’s cheap-currency policy,” The Journal detailed the other mechanisms used to support its industries and the stability of its state finances: “Central to China’s approach are policies that champion state-owned firms and other so-called national champions, seek aggressively to obtain advanced technology, and manage its exchange rate to benefit exporters. It leverages state control of the financial system to channel low-cost capital to domestic industries—and to resource-rich foreign nations whose oil and minerals China needs to maintain rapid growth.”

Yet despite the grumbling, were it not for the industries and domestic markets created by this state policy, the consumption-fueled U.S. “boom” of the 1990s would have collapsed long before the onset of the 2007-8 “financial crisis.” Similarly, the financing of America’s trade deficit by Chinese foreign exchange would have been impossible, removing another crutch from a tottering U.S. economy.

But the ever-ungrateful U.S. government never ceases to whine about the alleged undervaluation of China’s currency, a key tool in making these imports and exchange crutches possible. While many U.S.-based multinationals join the whining chorus, others know that without the Chinese market, they would long ago have run up against the brick wall of U.S. consumption limits.

It’s particularly ironic that the latest outlet for U.S. frustrations is China’s state sponsorship of “green technology” through offers of cheap land for factories, export tax breaks, and other subsidies—making Obama’s alleged support for similar policies look embarrassingly stingy.

Not only does China help prop up the U.S. foreign debt but, as The Journal had to admit, it provides direct financing to Western corporations. The case study in The Wall Street Journal article revolved around privately held telecommunications equipment maker Huawei Techologies, whose expansion was supported by China Development Bank, which in 2004 extended a five-year, $10 billion credit line “and routinely lends money to foreign buyers to finance their purchases of Huawei products.”

But as always, the declining economic power clings to the Holy Writ of the outdated religion on which it rose to power: “Our competition has gotten tougher during a period for the U.S. of profound economic weakness that magnifies any perceived threat,” said Charlene Barshefsky, a leading trade official under President Bill Clinton. There is a “significant and profound—almost theological—question about the rules as they exist.”

She could have added, though, that the “profound economic weakness” she refers to has an impact on losers and winners in a global crisis this deep—thus, China’s has an immediate need for the measures so widely denounced.

Will QE2 float?

When his Federal Reserve pumped $600 billion into the U.S. monetary veins, Obama hoped a side benefit would be expanded exports due to the cheapening of the dollar. But the Fed’s action, dubbed QE2 for Quantitative Easing Two, is likely to resemble more the Titanic than the cruise ship its moniker mimics. The impact on U.S. exports of the Fed’s action will be lessened by the unprecedented presence of U.S. manufacturing and service facilities in other countries.

Companies such as GM and GE increasingly make goods in the same countries where they are sold, effectively taking exchange rates out of the equation. In addition, companies that do export goods, and might benefit from the devalued dollar, often get imports from abroad and will thus pay higher prices for them due to the new exchange rate.

What’s more, companies supposedly able to hire more workers thanks to devaluation, and thus exporting advantages, will mostly turn to heightened productivity through automation coupled with draconian anti-labor practices to boost output.

Nigel Gault, chief U.S. economist at IHS Global Insight, pointed out that the dollar has been falling for years anyway, dropping by 31% against major currencies since 2001. During that time, American exports increased by 45%—but manufacturing employment dropped by nearly a third in that time, to 11.7 million workers from 16.4 million.

Even Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, who expects a weaker dollar to lead to a $100 billion increase in American exports over the next two years, and a resulting addition of 500,000 jobs, noted that this would barely put a dent in the figure of almost 15 million without a job.

In any case, it’s unlikely much of the $600 billion will go to productive investment, given the still limited absorption capacity of consumers still reeling from unemployment, mortgage woes, and other setbacks.

Not surprisingly, Washington’s economic rivals also took a dim view of Obama’s currency fix. In Seoul, leaders of the G20 (the world’s 20 most important economies) turned a deaf ear to U.S. appeals to join the denunciation of China’s allegedly undervalued currency, the renminbi. Most of them pointed out the hypocrisy of such an appeal coming from a president whose central bank had just dramatically weakened his own currency.

China itself reacted with bitter, if diplomatically phrased, resentment—especially as it has been attempting to bolster domestic consumption, just as Obama demands.

In fact, some see this as an explanation for the relative lack of repression against mass strikes in the last year, mostly against Japanese-owned companies in China. The idea is that Beijing sees such strikes for higher wages, if properly contained, as one of many weapons to boost the consumption capacity of its own workers.

Developing countries such as Brazil, Thailand, and Indonesia told Obama in no uncertain terms that they fear his $600 billion in monetary expansion could lead to asset price bubbles as part of a flood of “hot” money onto Third World markets. Their economies, unable to channel the floodtide into production and consumption, could find themselves to be the plaything of global investors who would briefly sink the newfound funds into speculative investments within their borders and then just as quickly pull out, leaving them vulnerable to a crash.

The dispute over currencies, and trade policy in general, is heightening already-existing worries of a resurgence of the type of protectionist policies that exacerbated the Great Depression of the 1930s.

The director general of the Chinese Ministry of Finance’s international department said major reserve-currency issuers such as the United States “should not only take into account their national circumstances but should also bear in mind the possible impacts on the global economy.” But given the way the economic system works, and the policies dictated by that system to each nation’s rulers, such cooperation is inherently hamstrung.

Another goal of the G20 meeting was to even out “trade imbalances.” Here too Obama met defeat. He had wanted specific numerical targets on trade surpluses and deficits. But what he got was a final accord that said “persistently large imbalances” would be measured by what it called “indicative guidelines” to be determined later.

The final language was seen as a victory for China, as well as Europe’s biggest economy, Germany, whose officials insisted that imbalances must be rectified not just in trade but in fiscal, monetary, labor, and other policies. Germany, joined by France, berated Obama for relying on currency manipulation instead of imposing draconian austerity plans on the scale increasingly used in Europe.

On a lighter note, the champ did have one chump in his corner: Bob King, the United Auto Workers president, praised Obama for his close consultation with the union and automakers: “They kept everybody in the loop. It was a great example of how you work together. They had (automakers) in the loop. They had labor, the unions in the loop.”

Said King: “I am hopeful that working together we can expand global trade, because that’s important to our economy and to world peace, but it has to be done in a way that’s fair to our membership. We’re showing—with the new General Motors, with Ford, with Chrysler—we’re showing that we can compete with anybody in the world. We’ve got the best quality products. We’ve got the highest productivity in our facilities. We’re working on continuous improvement everyday.”

This statement comes as dissidents in his union gear up for a widely expected sellout by King in bargaining with U.S. automakers next year.

> This article was originally published in the December 2010 print edition of Socialist Action newspaper.

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