U.S. - China Trade Complications

Chinese President Hu Jintao is in Washington D.C. this week meeting with Barack Obama and other world leaders for the 'Nuclear Security Summit'. While the ominous discussion is likely to be focused on containing the nuclear threat to the world, underlying the meeting between Hu and Obama will be issues of trade. But before the U.S. goes on pushing China to revalue its currency in order to re-balance the trade deficit, the U.S. needs to take a good hard look at itself to understand why there is such an imbalance in the first place.

I am no economist, but I was flabbergasted by Paul Krugman's NY Times Op-Ed piece last month about pressing China over its 'currency manipulation'. It is rather audacious to suggest that the U.S. press China to increase the value of the renminbi (RMB), given that it is U.S. companies that have directly benefited from the cheap cost of labor in China for at least the past two decades. Hypocritical to say the least, that the U.S. press China only now on increasing the value of the RMB just as the country is beginning to enjoy the prosperity from being the 'world's factory'.

One American company that has benefited greatly from China's economic rise is General Motors. GM, headquartered, rather ironically, in the poster-child for American de-industrialization, Detroit, is one of the top selling automotive brands in China. Just this week, the company announced that annual sales may top 2 million in China - 4 years ahead of schedule. This is great news for GM executives and shareholders but meaningless to the average unemployed American auto-worker. Don't think for a second that those millions of new cars for Chinese consumers will be manufactured in America by American workers - nope - they are being made in the same market where they will be consumed. The United Auto Workers have already voiced their lament on this subject (UAW Furious Over New GM Plant in China), but to no avail.

Auto-makers are not the only American companies that have benefited tremendously from the low-cost of doing business in China. Santa Clara, California-based computer chip maker Intel has expanded its base in China to not only include manufacturing facilities but research and development facilities as well. This is unnerving because it means that China is no longer just a 'cheap place to manufacture things' but is also now a cheaper alternative for American companies looking to expand their R&D work. The outsourcing of knowledge work from the U.S. means that even highly-educated engineers and programmers will see their jobs moving overseas.

Outsourcing from the U.S. in search of cheaper labor is not a recent phenomenon but has been going on for some time now. CEO and corporate executives have said the same thing to justify these actions: "It's good for business" and "it benefits the American consumer because we will be able to deliver products at cheaper prices". While the latter statement has some truth to it, I believe that it is no longer a proper justification. How will Americans be able to consume anything if they don't have any money to spend because they don't have any income because they don't have any jobs?!?

Which brings us back to the issue of the value of the Chinese RMB. Currently, 1 U.S. dollar buys 6.85 RMB. Krugman and others suggest that this exchange rate undermines America's ability to compete with China in terms of manufacturing and exports. Well of course! This is an insulting revelation because it did not take a Nobel Prize-winning economist to figure it out - GM, Intel and others already knew this a long time ago. Even if China theoretically did raise the value of the RMB overnight, this would do nothing to bring manufacturing jobs to the U.S. - companies would just go somewhere cheaper like Vietnam, the Philippines or Indonesia.

But China will not do this because it would completely wreck their economic traction. Chinese leaders know this, and are very aware of the threats to social order that a devastated domestic economy would cause within their country. Not only would manufacturing jobs be lost, but a rapid rise in RMB value would inflate an already-shaky real estate bubble to astronomical proportions. Instead, Chinese leaders are doing all they can to keep a steady growth and avert catastrophe. Keeping the RMB valued at a low rate is critical in achieving this goal. If China does raise the value of the RMB in the near future, it most likely will be a just small increase to appease international pressure.

Furthermore, anything coming out of the U.S. Congress or President Obama pressuring China over the RMB value should be viewed by Americans as nothing more than political grandstanding. Indeed, Obama just refused to give a timeframe for China to act on the RMB. This proves that the talk coming out of Washington is nothing more than empty rhetoric meant to appease a clueless American populace looking for an easy scapegoat for their economic woes.

Readers of this blog might be wondering why I am talking about international trade and economics when my focus tends towards architecture and urbanism. The reason is because the the future of American cities lies on the ability of the U.S. to reinvigorate it's economy, and vice-versa. The industrial wastelands of the rust-belt are not an acceptable model for the future of the U.S. - nor are the over-priced consumption playgrounds of the 'luxury cities' like New York or San Francisco acceptable either. But in order to go about improving our cities and economy, we need to first tell the truth about why things are the way they are instead of blaming a straw-man (China, immigrants, terrorism, Iran, etc...) for all of our troubles.