China’s Unfair Trading Practices Are Ruining The U.S. Recovery

The U.S. economy grew at an annualized rate of 1.6% in the second quarter, far below the pace seen in previous recoveries. Republicans are predictably blaming the Obama Administration’s “tax and spend” fiscal policies, which they say are stifling economic activity. But that isn’t the real reason for anemic growth. The real problem is a trade deficit that is siphoning dollars and jobs offshore. The Washington Post reports that if the trade deficit hadn’t increased in the second quarter, the growth rate would have been 5%. Imagine what the rate would have been if there were no trade deficit at all.

The U.S. has been incurring massive trade deficits throughout the current decade, without governing elites grasping what was really going on. But now the leaders of both parties are beginning to realize what ails America isn’t some nebulous abstraction like “declining competitiveness” or “high labor costs,” but a calculated policy of mercantilism on the part of the world’s biggest exporter. Since China joined the World Trade Organization in 2001, it has systematically violated global trading standards in pursuit of unilateral advantage, and the biggest loser has been the country with the most open economy — America.

The first step in seeing the pattern of Chinese transgressions is to look at the numbers. In 2009, the U.S. had a trade deficit in goods and services of $381 billion. That’s only half the trade deficit of $763 billion accumulated in 2006 because last year the economy was mired in recession, but it’s still over a billion dollars per day (about 3% of GDP). Now look at the trade flows between the U.S. and China in 2009. The U.S. exported $69.6 billion in goods and services to China, while importing $296.4 billion from the country. That yields a net deficit of $226.8 billion, meaning the imbalance with China was bigger than the deficit that America ran with every other country combined.

A similar pattern is apparent in the second quarter of this year, when U.S. recovery was so anemic. The bilateral trade imbalance favoring China was $22 billion in May, $26 billion in June, and $26 billion again in July. Each month, China exported about $30 billion in goods to the U.S. while buying less than a quarter of that amount from U.S. sources. This chronic imbalance explains why China has over a trillion dollars in dollar-denominated foreign exchange reserves, enabling it to be a big lender to the federal government.

Of course, there are plenty of homegrown reasons why the U.S. might not be able to compete with China, like onerous environmental regulations and the world’s second-highest corporate income tax. But a look at China’s economic behavior since joining the WTO strongly suggests that much of the trade deficit is traceable to improper behavior on Beijing’s part. For example, the subsidy conferred on Chinese exporters by manipulation of the yuan’s value has been estimated as high as 40%. A host of other practices like the pirating of intellectual property and insistence on local partnering further diminish the ability of U.S. exporters to penetrate Chinese markets.

That, however, is just the beginning. If you look at Chinese behavior sector by sector, the pattern of state-based intervention becomes all too clear. For instance, the reason why 97% of all rare earths mined in the world come from China is because of a deliberate policy of lowball pricing that forced other producers out of the market. Those minerals are essential to the manufacture of a broad range of military and commercial items, and China has now begun leveraging its monopoly for economic advantage. Similarly, China targeted the market for precursor chemicals used in antibiotics early in the decade, and as a result it is no longer possible to produce drugs such as penicillin in the U.S. without getting supplies from offshore sources (mainly China).

This pattern has repeated itself in virtually every industry from steel to paper to cement to aluminum to glass. The year China joined the WTO, it was producing about as much steel as America. Today, it produces eight or nine times as much. Not surprisingly, Washington now brings trade complaints against China on a monthly basis accusing it of dumping every kind of steel product imaginable from tubular products to tires, and the Chinese are usually found culpable. By the time the verdict is rendered, though, thousands of Americans have often lost their jobs. The cumulative impact on the U.S. economy has been huge, which is why today, finally, U.S. leaders are beginning to ask some pointed question’s about China’s whole approach to trade.