Whiting column: We should use our leverage over China | PostIndependent.com

Whiting column: We should use our leverage over China

First of two parts.

Our economic relationship with China is complex.

Differing political and humanitarian philosophies combined with contrasts between free market capitalism and absolute government control creates conflicts. Chinese strategies designed to benefit central government require increased world market dominance due to lack of resources. Our strategies emphasize economic growth necessary to generate additional jobs required to meet an ever-increasing population.

The recent election brought this relationship from the balcony to the front row. There are numerous areas of conflict but the starring issues, are China’s 1) manipulation of the value of its currency (yuan), 2) artificially low prices for export goods, 3) the Trans Pacific Partnership and 4) buying property and businesses in the United States. This column will address the first two.

Currency value is significant because we export (sell) products to the Chinese and import (buy) their products. In economic theory, this exchange is of mutual value. We buy that which we don’t supply for ourselves and sell beyond what we need. They do the same.

This ideal is derailed when China controls the value of its currency, allowing China to acquire a disproportionate amount of products in relationship to the value of what we acquire. Moving the Chinese from front row to center stage is the economic concern that because they buy our products with yuan, are they giving us anything of value?

They manipulate its value in several ways. One is controlling the amount of currency provided to themselves. They can print more or take it out of circulation, whichever they choose, affecting supply, which influences the currency exchange rate on the world market. They not only print more, they aren’t required to communicate such, consequently controlling perception of supply, again affecting exchange rate.

China doesn’t even have to print the money. Because their financial system is governmentally controlled, they can add yuan to their financial institution ledger sheets and have more money to use. It does not have the checks and balances associated with our system. The Chinese don’t worry about the source of the debit generating a credit or if debits and credits balance. In essence, the Chinese have an unlimited supply of money without any concerns about deficit spending or national debt. They deny this, but we can’t be naïve and think they aren’t doing what is in their best interest.

What do we receive of value when they buy our products? Good question.

The yuan we receive are converted to dollars at the current exchange rate, but their manipulation assures the yuan is worth significant dollars. The yuan is backed only by the good faith and credit of China. It isn’t backed by anything of value. It’s just paper or a number on a ledger sheet. The same is true of the dollar, but we can assure the dollar has a given value.

Is there a solution? Yes, but it isn’t easy nor conventional. China doesn’t have any resources we need, so what does it have? Treasury bills, bonds and notes. As of 2015, China has purchased $1.3 trillion worth, 30 percent of our total obligation. To generate funds without printing more money, we have to sell Treasuries to finance the national debt. China doesn’t because it prints more money or adds to a ledger account.

Instead of giving us yuan, we could require they give us Treasury obligations. The U.S. company selling to China would receive them, which doesn’t relieve our obligation, but is preferable to China possessing them. When paid, the money would be here, spent, circulated, multiplied to our economic benefit. When we pay China for a Treasury, it has our dollars.

Why would the Chinese agree to this? Because we are more important to their economy than they to ours. In 2015, they exported $483 billion to us and we $116 billion to them. Our business is 23 percent of their total economy. Their business is 5.5 percent of ours. Without our business they would have 23 percent fewer jobs. Not an attractive thought even to China.

In addition, they import resources and necessities; we import consumer amenities we are or could produce ourselves. Their main imports are oil, fuel, ore, aluminum, copper, raw plastics, chemicals, corn and wheat. Our imports are consumer electronics, toys and clothing. We have the leverage and need to use it.

Paying for imports exacerbates the problem. We pay with dollars, not yuan. They convert it to yuan, which they manipulate to buy a disproportionate amount of our product in relationship to what we acquired. Again, what are they giving us of value?

They set price wherever they wish because all business is state-controlled and subsidized. Making a profit or covering costs is not a necessity.

This problem expands when employee wages are added to the playbill. Their average wage is 25 percent of ours ($14,000 to $56,000). This enables them to keep prices low, affecting our ability to compete in foreign markets. China’s prices also tempt us to buy their products when we could be buying those manufactured here, negatively affecting employment and handing China more dollars that can’t be multiplied here.

A solution: tariffs as proposed by our new president. Tariffs not only produce income for the U.S. but add to the cost of production, generating a price closer to that of domestic production, making our prices more competitive.

One can argue the Chinese would just add tariffs to our products, but as stated, any stalemate would be more negative to them since they sell four times as much to us as we to them. It could be argued tariffs would not have an effect on Chinese prices to other countries. True. However we have the leverage on these countries, as well. Most of them are dependent upon us for defense, research, a market for their products, significant foreign aid and allowing our citizens to access their country as tourists. We have the leverage and need to use it.

The TPP and Chinese ownership of U.S. business will be discussed Wednesday.

Bryan Whiting believes most of our issues are best solved by personal responsibility and an understanding of nonpartisan economics rather than by government intervention. He is retired after 40 years of teaching marketing, entrepreneurship and economics. Comments and column suggestions: bwpersonalresponsibility@gmail.com.

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