Obama's Takedown of Industrial America

Obama's industrial policy is designed to make America non-competitive in the world economy, destroy millions of jobs, and devastate our manufacturing and industrial capacities. No one will want to invest here, and fewer and fewer U.S. companies will be exporting goods "Made in America." And we have a fierce competitor called China.

How far down this road we already are can be seen in the following data:

During this ten-year period, total exports from the United States to China totaled $424 billion, while exports from China to the United States totaled $2.163 trillion, resulting in a U.S. net trade deficit with China of $1.793 trillion. A symbol of China's takeover of manufacturing is Wal-Mart, one of the largest U.S. importers of Chinese-made goods. 

... US based Wal-Mart was responsible for $27 billion dollars in U.S. imports from China in 2006 and 11% of the growth of the total U.S. trade deficit with China alone eliminated nearly 200,000 U.S. jobs in this period. 

But how has China accumulated such a large trade surplus with the U.S.? To answer this vital question, it's critical to understand the currency exchange market's impact on trade. Suppose you want to buy something from China. You need to first buy some of their currency, called the yuan. Now, suppose thousands of people want to buy goods from China. So a whole lot of people start to exchange dollars for yuan in order buy Chinese goods. The same thing happens here: if you and all your neighbors try to buy the same currency, its price increases.  If you are on the other side of this, such as a Chinese citizen holding his or her currency in the yuan, and you want to exchange the yuan for dollars, then you will be able to get more dollars for your yuan as it increases in value. This increase in the value of the yuan makes American goods priced in dollars cheaper for the Chinese to purchase.

As we are increasingly surrounded and overwhelmed by the "Made in China" label, we have come to understand that China's principal economic advantage is "cheap labor."

And it is also clear that they are using this cheap labor to acquire world-class manufacturing and industrial production facilities to help export more and more of this "cheap labor." Thus, they create a virtuous cycle that continues as long as their labor remains cheap.

Here is some data on the long-term growth or decline of manufacturing as a percentage of gross domestic product of the two nations:

This data shows that Chinese manufacturing increased as a percentage of GDP from 37% to 41%, while the United States manufacturing sector decreased as a percentage of GDP from 24% to 13%.

Normally, economic forces of trade surpluses and deficits tend to cause a self-correction of either condition. With respect to America, the more we buy from China, the more their currency increases in value, and therefore, the higher and higher go the prices in dollars of what you want to buy in China. Eventually it goes so high that you no longer want to buy it there. Maybe it becomes so high that it is cheaper just to buy goods that are "Made in America."

If you are in China and the yuan keeps increasing in value compared to the U.S. dollar, then the price of American goods becomes cheaper, and it's more likely that someone from China will buy goods imported from America.

All the long-term data we have presented suggests that the self-correcting mechanism is not working as it should, or maybe not at all. What is the reason behind the failure of the system to correct itself?

Here is how China attacks our manufacturing economy and destroys jobs, if they are not already destroyed by the Democratic Party's industrial policies. The Chinese government never allows the increasing value of the yuan to reach the hands of its labor forces and/or the consumers of their economy. Thus, wages don't go up, purchasing power doesn't go up, and the Chinese consumer doesn't get an increase in spendable income.

To prevent all this from happening, the Chinese government strips off the appreciated value of the yuan and retains control over it. The most important technique they use is currency sterilization. 

But surging capital inflows can also be something of a double-edged sword, inflicting rather less welcome and destabilizing side-effects, including a tendency for the local currency to gain in value, undermining the competitiveness of export industries and potentially giving rise to inflation.

To ease the threat of currency appreciation of inflation, central banks often attempt what is known as the "sterilization" of capital flows. In a successful sterilization operation, the domestic component of the monetary base (bank reserves plus currency) is reduced to offset the reserve inflow, at least temporarily. The classical form of sterilization, however, has been through the use of open market operations -- that is, selling Treasury bills and other instruments to reduce the domestic component of monetary base.  

With comparatively little expansion of the Chinese domestic economy because of the appreciation of the yuan not being passed through very far as increased wages, prices tend not to rise as much as they otherwise would have if the appreciation had reached the Chinese consumers. And likewise, because prices tend not to go up, Americans continue to see cheap "Made in China" goods and continue to purchase them to the detriment of "Made in America" goods.

The Chinese permanently suppress the cost of labor in the export sectors of their economy to achieve a permanent cost advantage in pricing their export goods.

This scheme produces another very considerable side-effect. The Chinese use the appreciated value of the yuan that is stripped off from consumers to buy United States Government Treasury Securities. By doing this, China has become America's largest foreign creditor. They are buying our rapidly increasing government debt with the surplus value of yuan which results from all our purchases of Chinese exports.

Yes, China's policy of artificially suppressing the cost of Chinese labor helps China destroy the manufacturing sector and manufacturing jobs in America and subsidizes China's acquisition of U.S. Treasury Securities -- approximately $800 billion's worth. 

This is like having a double-barreled gun at your head. If the Chinese ever get unhappy about holding all these Treasury Securities and start to dump them on the open market, they could make interest rates soar in America. This would impose a terrible burden on our economy and result in even more job losses.

So the suffering American economy and its workers are facing four grave threats simultaneously. 

First, U.S. industrial policies by the radical Democrats have imposed terrible burdens on the U.S. economy that are making it more and more inefficient through high non-competitive labor costs, carbon regulation, artificially high energy costs, and numerous government mandates.

Here is a summary of recent aspects of our industrial policy as proffered by the ruling Democratic Party:

●Huge and ineffective stimulus expenditures

●A 3.0-trillion-dollar increase in our national debt in two years

●Unemployment at 9.6%

●A job-killing moratorium on drilling for oil in the Gulf of Mexico and Alaska

●Adoption of a tax on energy use called Cap and Trade

●The EPA aggressively regulating emissions resulting from the combustion of carbon fuels

●The EPA working to regulate fluids used in the production of abundant shale-sourced natural gas

●Elimination of the secret ballot (card check) in proposed unionization to increase union power and high-cost labor in our economy

●Imposition of costly health mandates on small businesses

●Increasing domestic taxes on business earnings made and taxed in foreign countries

This list is sufficiently comprehensive for anyone to get the picture, especially if he or she is in business. 

Second, industrial policies by the Chinese government to permanently suppress their labor costs to subsidize the growth of their manufacturing sector have resulted in an ongoing disadvantage for the American manufacturing sector. 

Third, the fiscal policies of the radical Democrats have resulted in massive deficit spending which has increased the U.S. national debt to over $13 trillion from over $10 trillion in just two years. And there is the certainty of more deficit spending to come as long as they control government. They haven't even passed a budget for the current fiscal year. All of this spending will eventually put tremendous upward pressure on interest rates. You only have to review the economic history of the period of the late 1970s and early 1980s, when rates on U.S. Treasury Securities peaked at over 15%. Rates anywhere near this zone will crush the economy because of the much greater proportion of government debt to GDP that exists today as opposed to the earlier period.

Finally, policies of the Chinese government that transfer the appreciation of the yuan into purchases of more U.S. government debt gives them the capability to hold America hostage to any and all of their policies.

We were the world's greatest economy when the only thing we bought from the Chinese was "firecrackers." Why are we doing this?

There is no free trade in manufactured goods unless there is free trade in the corresponding currencies of the trading partners. Without free trade in the yuan, the Chinese are effectively imposing a huge tariff on the American economy and its workers by artificially suppressing the prices of Chinese exports to America. And the radical Democratic government doubles this burden by crushing the economy with mandated costs and inefficiencies. 

Are we going to let both of them get by with it? If the Chinese don't freely float their currency, we need to impose a currency equalization tax to offset their subsidized low export prices. 

Fred N. Sauer is an American patriot, St. Louis resident, and businessman whose blog can be found at www.americasculturalstudies.com.