April 3rd 2010


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Articles from this issue:

COVER STORY: How toxic culture exploits our children

EDITORIAL: Stern Hu trial: implications for Australia

CANBERRA OBSERVED: PM Rudd kicks off a very long campaign on health

NATIONAL AFFAIRS: $16 billion education fiasco traps Julia Gillard

PAID PARENTAL LEAVE: Voters want equality for all mothers: Galaxy poll

SOUTH AUSTRALIA: Rann hangs on after big anti-Labor swing

BORDER CONTROL: Rudd's time bomb on a boat: asylum-seekers

FOREIGN AFFAIRS: Behind the US-China trade dispute

LEGAL AFFAIRS: Human rights legislation through the back door

EAST TIMOR: East Timor - the quiet revolution

SCHOOLS: New national English curriculum scores only C+

SCHOOL FUNDING: Governments should support parental choice

UNITED STATES: Is Obamacare destined to be a disaster?

UNITED NATIONS: UN feminist gab-fest gets up steam

Firemen hose down political correctness (letter)

Gigantic scam (letter)

Atheistic arrogance misplaced (letter)

Too tough on Tony Abbott? (letter)

AS THE WORLD TURNS: Turkey's 100,000 Armenians; Al-Qaeda nuclear threat to Britain; Can Christian organisations survive in a 'tolerant' age?

CINEMA: Hollywood perplexed by family values - The Blind Side, rated PG

BOOK REVIEW: ISLAM AT THE GATES: How Christendom Defeated the Ottoman Turks, by Diane Moczar

BOOK REVIEW: THE AMERICAN CIVIL WAR, by John Keegan

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FOREIGN AFFAIRS:
Behind the US-China trade dispute


by Peter Westmore

News Weekly, April 3, 2010
Trade relations between the United States and China have deteriorated seriously as a result of China's refusal to revalue its currency, the Renminbi (also known as the yuan), facilitating the flood of Chinese manufactured goods onto world markets, and China's massive trade surplus with the rest of the world, including the US.

The massive trade imbalances in the world have created huge trade surpluses, generating the capital flows which financed the junk-bonds boom whose collapse triggered the global financial crisis.

Efforts by successive US administrations to persuade China to adopt Western-style currency policies, which would involve permitting the Renminbi to rise, increasing imports into China and reducing Chinese exports, have been completely unsuccessful.

Despite the global financial slump, China's economy continues to grow as a result of the low cost of Chinese manufacturing exports, while the US economy remains in trouble with American manufacturing industry in steady decline.

The United States ran a deficit of $US226.8 billion with China last year, the largest deficit ever recorded with any country.

A recent letter signed by 130 members of the US House of Representatives urged the US Treasury department to list China as a currency manipulator, and called on the Commerce Department to impose tariffs on Chinese manufactured goods.

The letter to Treasury Secretary Timothy Geithner and Commerce Secretary Gary Locke declared: "The impact of China's currency manipulation on the US economy cannot be overstated. Maintaining its currency at a devalued exchange rate provides a subsidy to Chinese companies and unfairly disadvantages foreign competitors."

One of the letter's signatories, Democrat Mike Michaud, said, "If the Administration fails to act on this issue, it will hold back our economic recovery and hurt the ability of American small businesses and manufacturers to increase production, keep their doors open and create jobs."

The Chinese Premier, Wen Jiabao, rejected American pressure for a revaluation of the currency, arguing that such efforts amounted to trade protectionism, a policy rejected by successive US administrations for the past 30 years, and proscribed by the World Trade Organisation, of which the United States is a leading member.

Recently, China has reduced its holdings of US government bonds, although it still holds about $US889 billion, far higher than Japan, which holds $765 billion. In January, Chinese holdings fell $US6 billion.

The United States is dependent on foreign capital to bankroll both its massive trade deficit, and its federal government deficit, which was $US1.4 trillion in 2009, and is expected to be $US1.56 trillion this year.

The Chinese Government itself has denied that the decline in its holdings of US government bonds is directed at the US economy. Beijing spokesmen have pointed out that China's foreign reserves grew from $US286 billion in 2002 to a massive $US2.4 trillion in 2009, to becoming the world's largest.

As US Treasury bonds are regarded as the safest in the world, and are readily tradable, it stands to reason that China will have substantial holdings in US dollars.

However, the Nobel Prize-winning American economist, Paul Krugman, who is very concerned about China's under-valued currency, argues that Americans should not be concerned if China sells US dollars. He has said recently, "We don't need the Chinese to keep interest rates down. If they decide to pull back, what they're basically doing is selling dollars and buying other currencies - and that's actually an expansionary policy for the United States." (New York Times, March 16, 2010).

Professor Krugman argues that the real problem is the value of the Chinese currency, not China's purchase of greenbacks. He states, "Tensions are rising over Chinese economic policy, and rightly so: China's policy of keeping its currency, the Renminbi, undervalued has become a significant drag on global economic recovery. Something must be done."

He says that the huge Chinese surpluses are creating corresponding deficits in developed nations around the world, causing a shortfall in liquidity which is preventing a recovery from the global financial collapse.

Krugman adds: "Most of the world's large economies are stuck in a liquidity trap - deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can't offset."

Krugman points out that, in 1971, the United States, when faced with a similar currency misalignment, unilaterally imposed a 10 per cent surcharge on imports from some European nations, which was removed once their currencies were realigned.

But in 1971, the United States provided the security guarantee for Europe and held the economic whip-hand. In 2010, China is bankrolling the United States' national and federal government deficits.




























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