Monday, May 19, 2008

McCain knows that China manipulates its currency, but thinks that talk can change that

Senator McCain has been advertising that his economic plan will be to negotiate new trade agreemenst in order to increase US exports. Here is what he said about trade with Asia on February 23, 2007:

As China, Japan, and the European Union pursue closer trade ties with the rest of Asia and among themselves, the United States should set the standard for trade liberalization in the region. We need to conclude the ongoing free trade negotiations with Thailand and Malaysia, and then expand these benefits to other ASEAN states, which together constitute America's fifth largest trading partner. India's economy may grow faster than China's in 2007, illustrating the importance of securing greater U.S. market access to this economy of a billion consumers. A new economic partnership initiative with Indonesia would help spur growth and strengthen market institutions in the world's largest Muslim country. And the U.S.-South Korea Free Trade Agreement, which is currently under negotiation, promises not only economic benefits - South Korea is our seventh largest trading partner - but political ones as well: a bilateral FTA will help give economic ballast to our strategic relationship and thereby strengthen America's security posture in Asia.

Completing FTAs with Thailand, Malaysia, and South Korea, in concert with the agreements we have already struck with Australia and Singapore, should set the stage for an ambitious Pacific-wide effort to liberalize trade. Such efforts have very tangible impacts. As this audience knows well, wheat farmers in eastern part of this state, fruit and vegetable growers throughout Washington, manufacturing giants like Boeing and software titans like Microsoft - all of them benefit from and depend on foreign markets. By concluding bilateral and regional trade agreements, by revitalizing the Doha round of global trade talks, and by ensuring that America stands on the cutting edge of global commerce, we can ensure that the benefits of open markets reach all 50 of our states.

And to talk about the Asian economies is to speak of China. I know some of our citizens fear the specter of Chinese economic growth, worrying that it will result in the loss of American jobs and the inability of our economy to compete. Others take the opposite view, trumpeting China's vast market potential, low labor costs, and exports, which allow American manufacturers to move up the value chain. America benefits from China's economic growth. But by the same token, its rising prosperity also raises legitimate expectations that China will behave as a responsible economic partner.

As Chinese businesses 'go global,' we must insist that they operate in an open, fair, and transparent manner, with sound, internationally-accepted standards for corporate governance. We should push Beijing to adopt a market-determined value for its currency, ensuring that trade is conducted on a level financial playing field. We need to convey to China that its go-it-alone approach to locking up energy supplies is unlikely to be either effective or sustainable, and that its environmental stewardship cannot fall prey to its economic ambitions.

In these cases, there is significant room for economic cooperation. The U.S. and China have a mutual interest in developing new and diverse energy supplies, improving energy efficiency, and developing environmentally sustainable energy alternatives. U.S. trade and investment in China's undeveloped rural areas can help create the broad-based growth Chinese leaders seek. China's rapidly aging society would benefit from U.S. private-sector involvement in building health care and pension systems, while Beijing's steps toward banking and financial reform will, if fully implemented, create new business opportunities for American companies. Finally, China's desire to construct a "knowledge economy" implies a mutual interest in protecting intellectual property and preventing counterfeiting.

As important as all these steps are, the future trajectory of our economies lies not only in effective economic policymaking, new business opportunities, and the management of financial risks. Security and economic growth are intimately connected, and a threat to peace is a threat to prosperity. The overarching security challenge in Asia today is to preserve and extend American leadership, and to do so in a way that promotes the emergence of freer and increasingly open societies.

I have boldfaced the relevant passage in the above quote. It shows that over a year ago, Senator McCain realized that China was manipulating its currency in order to steal American industry, but he thought that this strategy was a very small issue. Moreover, he didn't realize that every one of the Asian countries that he was mentioning were following the same strategy.

Apparently, he did not understand that these currency manipulations are the lynchpin of their mercantilist strategies, designed to increase their exports and restrict their imports with the United States so that they can steal our industries.

If all he is going to do is "push Beijing" to end this practice, he won't even succeed with China. His policy will end in failure, just as President Bush's "jawboning" ended, just a little over a month ago, in complete and utter failure.

Incidentally, this quote suggests the possibility that McCain doesn't even realize that the yuan-dollar currency exchange rate is already determined by markets. If it weren't, there would be a currency black market. The Chinese government buys a massive amount of dollars in order to manipulate the prices of the two currencies. It may be true that he doesn't understand economics.

The key is not flexible exchange rates. The key is a gradual end to Chinese government dollar purchases. The Japanese government allows a completely flexible exchange rate between the yen and the dollar, but still manages to manipulate that exchange rate by buying massive amounts of dollars.

The only way to prevent all of the Asian currency manipulations, as well as their other restrictions on their imports of American-made products, is to impose Import Certificates on every country that has been accumulating dollar reserves. Otherwise, the mercantilist governments would continue to manipulate exchange rates in order to expand their exports while limiting their imports from the United States.


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