Obama Giving U.S. R&D to China

The United States and China are involved in a trade war, the outcome of which will determine who gets America's remaining manufacturing industries and research and development centers. The Chinese are actively fighting; President Obama is actively talking.

The Chinese government fired a huge broadside in December when it issued new rules requiring that American corporations doing business in China move their research and development centers and patents to China as a condition for selling goods and services to the Chinese government.

Nineteen trade groups that represent America's largest corporations responded with a January 29 letter to several U.S. government officials. Here is a selection:

Of most immediate concern are new rules issued by the Chinese government in November to establish a national catalogue of products to receive significant preferences for government procurement. Among the criteria for eligibility for the catalogue is that the products contain intellectual property that is developed and owned in China and that any associated trademarks are originally registered in China. This represents an unprecedented use of domestic intellectual property as a market-access condition and makes it nearly impossible for the products of American companies to qualify unless they are prepared to establish Chinese brands and transfer their research and development of new products to China.

These organizations concluded their letter with the following request:

We respectfully request that your agencies make this issue in particular a strategic priority in your bilateral economic engagement with China; develop, in consultation with the business community and like-minded foreign governments, a strong, fully coordinated response to the Chinese government; and raise this issue with your Chinese counterparts in all appropriate unilateral and bilateral settings and forums.

The Wall Street Journal reported on February 16 ("U.S. Expected to Press China on Yuan") that in response, the Obama administration took the following action:

In an unusually broad response, U.S. officials from several government agencies have approached the Chinese to relay concern over the proposed rules, according to people familiar with the situation. "We are expressing our serious concerns with all appropriate counterparts in the Chinese government," said Carol Guthrie, a spokeswoman for the U.S. Trade Representative's office.

However, the Obama administration has not responded with anything stronger than an expression of concern. A commentary by Kendra Marr in The Politico ("White House takes tougher tone with China") reports Peterson Institute for International Economics Senior Fellow Nicholas R. Lardy saying that the Obama administration's "tougher tone" with China is mainly for public consumption":

For now, however, these moves are just "trying to head off critics in Congress who think the administration is lying down in front of the Chinese,' Lardy said.

The Peterson Institute is an international economics think-tank with close ties to the Obama administration. This is not the first time that they have approvingly pointed out that Obama's tough trade rhetoric is phony. Just after President Obama was elected, Senior Fellow Gary Hufbauer correctly told Reuters:

As strong as Obama's [campaign] rhetoric on China has been, he'll probably moderate his stance as president to head off any bill that opens the door for "an avalanche of countervailing duty cases."

The February 16 Wall Street Journal story reported that the Peterson Institute currently advises multilateral diplomacy at June's G-20 meeting:

"If the administration is going to be serious about putting pressure on China, it has to be multilateral," said Nicholas R. Lardy, a senior fellow at the Peterson Institute for International Economics, who pointed to the G-20 meeting in June as an important forum where Obama can rally world support against Chinese practices.

Lardy hopes that President Obama gets another communiqué passed in June like the ineffective one the G-20 passed at their September meeting, which urged "adequate and balanced global demand." But China, so far, has been very good at resisting international peer pressure.

Perhaps Obama is afraid to take action against Chinese mercantilism (the strategy of maximizing exports and minimizing imports) for fear of losing the Chinese loans that help finance his budget deficits, which are projected by some to total over a trillion dollars per year throughout his presidency. The Chinese hinted that they might stop financing the U.S. budget deficits when they sold $34 billion of U.S. Treasury Bonds in December.

When the Chinese government sells U.S. Treasury Bonds, it tends to drive up the interest rates that the U.S. government pays, but the effect is muted if China simply moves money from one U.S. asset to another. The fact that the dollar-yuan exchange rate hasn't changed in nineteen months shows that the Chinese government is still converting its trade surplus with the U.S. (more than $200 billion in 2009) into dollar assets. It has not wanted to diminish the value of the dollar relative to the yuan because that would raise the prices of Chinese goods to Americans and reduce the prices of U.S. goods to the Chinese.

The U.S. government should not fear Chinese threats to bring about a dollar collapse today. With the Greeks making sure that the euro does not provide an immediate threat to the dollar, the Chinese government would probably not be able to cause a dollar collapse now even if it wanted to. And there is little chance that China will dump the dollar while America still has lots of industry and research and development left that China wants to steal. If it were to crash the dollar, it would cause investment in the U.S. manufacturing sector to come roaring back, which would wreck its plans. The U.S. should, however, fear the Chinese government's threats to bring about a dollar collapse in the future.

That future is becoming clear. Now we are losing our good-paying blue collar manufacturing jobs to China because of our unwillingness to require balanced trade. Soon we will lose our good-paying white collar research and development jobs to China because of our unwillingness to require balanced trade. When the dollar collapse comes, we will have nothing left but agriculture, service industries, and scrapyards.

But this grim future can still be avoided if we are willing to invoke the WTO rule which lets trade deficit countries require balanced trade. For example, we could impose a tariff on Chinese products in proportion to the trade deficit. When the U.S. trade deficit with China goes up, the tariff rate goes up; when the trade deficit goes down, the tariff rate goes down. When trade reaches approximate balance, the tariff disappears. If the Chinese government continues to exclude American products from its markets, it would be excluding Chinese products from American markets. A proposal by Warren Buffet to use import certificates to balance trade would work in about the same way.

But President Obama's solution has been just to take a "tougher tone" in order to keep Congress from acting. The United States and China are fighting a trade war which will determine America's economic future, and we don't yet know which side President Obama is on.

The authors maintain a blog at idealtaxes.com and co-authored the 2008 book Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.