Stop Those Foreigners from Giving Us Such Great Deals!!!

by Don Boudreaux on November 21, 2009

Here’s a letter that I sent to the Wall Street Journal:

Peter Navarro asserts that “China mops up vast sums of export dollars through sterilization efforts that are tantamount to forced saving. In the process, Chinese consumers lose significant purchasing power because of the undervalued yuan – and Americans lose millions of jobs” (Letters, Nov. 21).

Ignore the question of whether or not Beijing’s commitment to peg the yuan to the dollar really is currency manipulation. Instead, suppose the Chinese people truly did – voluntarily – have a very high savings rate. Would Prof. Navarro argue that trade with the Chinese under those circumstances would cause Americans to “lose millions of jobs”?

If not, why does Prof. Navarro believe that “forced saving” by the Chinese depresses American employment? From Americans’ perspective, the particular reasons why the Chinese people save as much as they do are economically irrelevant.

But if Prof. Navarro does believe that even voluntarily high savings by the Chinese makes U.S. trade with that country a source of higher unemployment in America, then Prof. Navarro must believe that America’s best trading partners are those foreigners who are most profligate – in which case Prof. Navarro should also believe that he is better off trading with individuals who are profligate than with individuals who save and accumulate capital. I wonder if Prof. Navarro trades only with mall-rat teenagers and other irresponsible spendthrifts. Given his economic ideas, he should seriously consider this course of action.

Sincerely,
Donald J. Boudreaux

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Bill Stepp

If the Fed and the Treasury are not manipulating the dollar (through the blunt instrument of manipulating interest rates, praytell what exactly are they doing?

Mike from Greece

Donald J. Boudreaux wrote

"Ignore the question of whether or not Beijing’s commitment to peg the yuan to the dollar really is currency manipulation. "

This IS the question. So why ignore it? The answer is fairly simple. It IS manipulation. The impact is tremendous. Why ignore a fact with a tremendous impact relevant to the issue at hand? Why kind of thinking this is?

steve

I don't understand how pegging the yuan to the dollar amounts to forced savings. Isn't the Chinese government forcing inflation on the Chinese?
I guess the Chinese government is accumulating dollars so this is the savings. But, voluntary savings by the Chinese wouldn't cause inflation.
I am confused, this seems like a different effect then savings what am I missing?

I am fascinated how capitalism seems to be making strides in Asia while losing ground in the west. The Chinese should agree to float the yuan with the proviso that the American government's entire gold holdings be sold to them. Not sure this is actually a good idea for China, but I would love to learn what the administrations response to this would be.

LowcountryJoe

Good post. And China does allow their currency to float. They've been doing this for nearly four years now.

bilw

Don,

I really love the plain spoken , no BS approach to your solutions. I guess it is going to take a real long depression to force Americans to awake to the reality that we are competing for jobs in a global market. Our "free" press has been of no help in explaining to the public what that means. We do not lose jobs over the cost of labor. That is one of the big lies that the unions and the media have used for years. We lose jobs overseas because we make it impossible for companies to compete due to our: highest in the world business taxes, most numerous and onerous regulations (EPA, OSHA, IRS, et. al.). Our citizens need to realize that if we want jobs that give us a good lifestyle, we need to create an environment where businesses can grow and create those jobs.

sethstorm

That Southern-inspired cheap shot doesn't hold water when you look at their governments. They remove freedom for the sake of business efficiency. Our First World nation has those regulations so that business cannot revert to imbalanced 19th century labor practices.

Your objection is the Big Lie that you've memorized and recited too well.

Where have we seen this deferment of freedom for business before the Third World picked the practice up?

peternavarro

Type your comment here.http://disqus.com/vidyohs/

This is sophistry at its worst. The facts are clear: To undervalue its currency, China must buy billions in U.S. bonds. To do that, the government must force its citizens to "save" using sterilization techniques. It's obvious that the intent is to bolster the Chinese economy. It does so at America's expense. Condoning this kind of crap with faulty logic is just plain silly.

LowcountryJoe

So, when China buys billions in U.S. bonds, explain how that is hurting the U.S.? Do not answer this question by suggesting that the amount in U.S. bonds that are being issued is a problem -- of course it is; that's a federal government spending issue and it will not answer the question.

Also explain how China's (deliberate) undervalued currency helps their consumers -- both business and end item users who could probably get much lower cost consumption if their imported items were as cheap as you think they should be.

peternavarro

China buys U.S. bonds to keep its currency undervalued. By undervaluing its currency, China sells the U.S. more exports and effectively taxes U.S. exports to China. By doing so, China gains manufacturing jobs at the expense of the U.S., Europe, and many other countries around the world. It is a "beggar thy neighbor" policy that is not intended to help the U.S. finance its budget deficits but rather to increase Chinese jobs at the expense of the U.S. manufacturing base. Please take a deep breath, cast your ideology aside for the moment, and just think about the underlying economics and their implications.

Peter Navarro
Professor, Merage School of Business
CNBC Contributor
(949)-357-9330
http://www.peternavarro.com

DG Lesvic

Prof Navarro,

Congratulations for rushing in where so many others fear to tread, and crossing swords with Monsieur Boudreaux, the greatest swordsman in all of France.

But I hate to tell you this. Your head is rolling around on the floor.

, which is more than most of his subjects will do. So, while I don't agree with you, I respect you.

Gil

Or should that be "China is doing it at the U.S.'s expense but there's nothing wrong with it". Isn't it really akin to a mowing guy who charges $50 per job is going broke because a new guy has moved in charging $20 per job? Creative destruction? The U.S. can't foist its standard of living onto the world anymore as China will deliver the same, if not more, for considerably less and as such the U.S. is losing much business. Just as the $50 per job guy has to charge $20 or less per job and adjust his lifestyle accordingly to get customers back so too must the U.S. drop employment standards so U.S. factories are as cheap as Chinese factories if they want to see employment to return.

peternavarro

Higher wage countries like the U.S. can compete with lower wage countries like China because our rates of productivity are higher. The problem with China is that it uses an elaborate system of mercantilist tools like currency manipulation and high export subsidies to subvert free trade. Don't get hung up on the wage differentials. Focus on what makes free trade work -- floating exchange rates and the absence of protectionist and mercantilist policies. The bottom line is that China cheats and is screwing just about every other country in the world with its undervalued currency -- from Brazil and Peru to Russia and Thailand.

Peter Navarro
Professor, Merage School of Business
CNBC Contributor
(949)-357-9330
http://www.peternavarro.com

sethstorm

That, or he makes it impossible for the $20 guy to continue. No thank you, but you're not going to see despotic slave labor as you so ask.

Bill Stepp

China chooses to buy U.S. bonds, but there's nothing inevitable about this. The Chinese government wants the Chinese economy to grow, but that growth is not at America's expense. After all, trade is a two-way street. Both parties to a trade benefit at least ex ante, or they wouldn't trade.
And if you think their buying U.S. bonds is a problem, maybe the U.S. (government) shouldn't be issuing so many of them. IOW Uncle Sam should get his own house in order and stop trying to burn down everyone else's.
Our economic problems are mainly caused in Washington D.C., not in Beijing.
I read your book If It's Raining in Brazil, Buy Starbucks, and saw no evidence of mercantilism there. You have a nice graph on p. 219 of the growning U.S. federal government deficit, but ducked the question of whether this would be a long-term problem. Well, duck no more, it's a problem.

peternavarro

China's growth IS at America's expense when it undervalues its currency and uses massive illegal export subsidies to dump its exports in the U.S. Free trade only works when both countries fairly compete. China cheaps by undervaluing its currency and the mechanism by which it keeps its hard peg to the dollar is to buy U.S. bonds. If you don't understand the mechanics of that, you can't possible understand the broader problem. So please, take some time to learn about the implications of China's hard peg to the dollar.

Peter Navarro
Professor, Merage School of Business
CNBC Contributor
(949)-357-9330
http://www.peternavarro.com

Mike from Greece

When tax revenues decreases due to high unemployment and reduced economic activity, then the Treasury is forced to issue more bonds to meet obligations, often at higher yields. The Chinese, by subsidizing their exports with an artificially weak currency they drive US economic activity down in an otherwise free-market environment.

This one-sided view of free-markets has been vividly supported by neocons as a means of achieving a solid alliance with China against other fronts at the expense of American jobs and prosperity.

I do not see many of those who are screaming free trade to also scream for free exchange rates. This may be an indications they have a hidden agenda.
To me there is nothing worse from a hidden agenda supported with all sorts of sophistry and twisting of reality. It is the lowest level of intellectual discourse one could get to.

LowcountryJoe

>>When tax revenues decreases due to high unemployment and reduced economic activity, then the Treasury is forced to issue more bonds to meet obligations, often at higher yields...I do not see many of those who are screaming free trade to also scream for free exchange rates. This may be an indications they have a hidden agenda.<<

The Treasury is not forced to do anything of the sort, Mike. The federal government COULD cut spending. Where's YOUR screaming for spending cuts, Mike? Is this an indication of where your agenda lies?

Would love some discourse on this!

Mike from Greece

There is a lower limit to spending cuts. Cutting feet is not a solution for needing bigger shoes.

Which of the propositions below are you denying?

(1) China manipulates its own currency

(2) Jobs in the US are lost to China

(3) There is a huge transfer of funds from US to China

(4) There is a huge trade deficit with China

(5) The Chinese are involved in unfair trade practices by not letting their currency exchange rate determined by the markets.

Please do not comment, just indicate which ones, if any, you believe are false.

LowcountryJoe

>>There is a lower limit to spending cuts. Cutting feet is not a solution for needing bigger shoes.<<

Somewhere under $1 Trillion or is that too much of a sacrifice, Mike?

LowcountryJoe

>>Please do not comment, just indicate which ones, if any, you believe are false.<<

Who are you to tell me what to do? BTW, number three is false. The funds come back to the U.S. while the dollar denominated assets are held by the Chinese.

Now, what is any viable solution to force the Chinese to stop with the rest? Have any suggestions that promote fre(er) trade? Because The Chinese harm their situation far worse than they do ours. But I see that you suffer terribly from a make work bias. Maybe it's because you fret what you kids or grandkids will do since you aspire to have them do the jobs that the Chinese are doing for our consumption; perhaps you wanted them to be stichbitches in a textile mill?

Mike from Greece

This is so obvious but this blogger does not seem to understand it. I wonder why? is it lack of understanding basic arithmetic? Is it inability to think in a proper state of mind? Is it an effort to blindly support a certain agenda? Don't matter, whatever it is, it is obvious even to a 10-year old that free trade must be free on every level including a free exchange rate determined by the markets otherwise it is simply called "wealth transfer", and this is what has been happening in recent years. Immense wealth transfer from America to China with the blessings of American politicians and multinational corporations. Which was also the determining factor in the financial crisis due to the credit imbalances and the current high unemploynment rate.

peternavarro

The problem I see is that most people don't understand the mechanics of currency manipulation and its relationship to China holding vast sums of U.S. debt. China does not do this to help us but rather to screw us by maintaining their hard dollar peg at an undervalued rate.

Peter Navarro
Professor, Merage School of Business
CNBC Contributor
(949)-357-9330
http://www.peternavarro.com

LowcountryJoe

A smart ten year old woud be able to see that when one country sends its stuff and its savings to one country, the recieving country uses the stuff for consumption and the savings to expand. Think of it this way: a bank (China in this example) keeps wanting to loan and this drives down the interest rate; the lenders (people in the U.S.) borrow these funds more and more...if the lenders are able to use their leverage of borrowed funds and produce something with them that returns more than the amount of principle and interest, then who comes out ahead?

Any smart ten year olds in your household?

Mike from Greece

"the lenders (people in the U.S.) borrow these funds more and more"

Do you have anyone in your household that can distinguish between a lender and a borrower?

The lender of borrowed money is a poor borrower himslef. This is all happening with his own money in the first place. The money comes from America and then turns America into a borrower. When in the history of mankind a rich country was turned into a poor borrower by borrowing its own monies back from someone who did not have shoes to wear before that started?

It takes your type of thinking and twisting around of facts to get to that degraded level.

LowcountryJoe

That word "lenders" should be scratched and replaced with the word "borrowers" now that I've re-read it. With that correction made, can you think of an instance when people who have borrowed money use the borrowed funds to create opportunities to make more wealth and then repay the loan, making a net gain? I'm sure you can if you care to admit it [business expansion and property appreciation for examples].

Now, it would be great if this was occuring without a budget deficit but those are two separate issues. What's your thoughts on federal government spending, Mike? Because I'm pretty sure that I know your views on the freedom of people to transact their property across borders.

Seekingexports

LowJoe, as a ten year old, you may not know this but China buys U.S. treasuries as a way to keep its currency valued low. Someday, when you are older, we hope you can bring U.S. dollars into China and buy Yuan. You will learn more of the benefits of markets as you age and hopefully someday there will be a market influenced Yuan price.

LowcountryJoe

>>Someday, when you are older, we hope you can bring U.S. dollars into China and buy Yuan.<<

So that we can send them our stuff for their consumption while funding their expansion? Something tells me that you'd find something to complain about in that scenario, too, perhaps calling youself some such other idiotic name like Seekingimports. And then maybe would agree.

>>You will learn more of the benefits of markets as you age and hopefully someday there will be a market influenced Yuan price.<<

No, I think I'll always remain idealistic and insist that our own government retaliate against any perceived unfairness by meddling in the market as well...you know, to level the playing field. You might not be all the bright so I'll tell you now that this was my way of projecting and creating a caricature of something that MAY be one of your hairbrained ideas.

Seekingexports

Low, as you get older you may develop sound ideas and valid arguments. For now, please practice on the playground and don't be discouraged because the word "caricture" might just impress your teacher.

LowcountryJoe

>>Low, as you get older you may develop sound ideas and valid arguments.<<

I might. I only hope that my development path turns out better than your's has so far.

>>For now, please practice on the playground...<<

Ha! Even away from the playground, you're still getting taken to school but aren't aware enough to realize it.

Seekingexports

Poor Joe,ever the bully and never a wisp of success.

LowcountryJoe

Oh, you feel bullied. For someone who is so prickly, I'd have thought you'd have some thicker skin. To know that I've gotten under yours as much as you did mine [because of your snarky-ass comments above], means that I was successful in bullying the bully.

Charles N. Steele

Navarro really ought to consider a different profession, since he has no idea what he's talking about. Americans don't "lose jobs" to China. Rates of employment & unemployment are largely independent of international trade.

What's *not* independent is our twin deficits -- so long as we insist on using foreign financing our federal spending, these imbalances are inescapable.

sethstorm

Navarro really ought to consider a different profession,

Americans don't "lose jobs" to China. Rates of employment & unemployment are largely independent of international trade.
--
If that drives Navarro to some sort of military job, so be it.

The matter is that we lose work to those Third World nations. They smooth over trade by removing freedom and encouraging corruption.

Seekingexports

It is very simple isn't it? A stronger Yuan gives all people in China a raise. They have more purchasing power to buy foreign goods with a margin of disposable income not available now.

Will the government give consumers a significant raise by allowing a market for the Yuan? Will a market of non-government controlled goods and services be made available to consumers in which to spend their raises begin to develop?