Opinion: Trade Lessons Learned from 2008

Mar 31 2015 |
If the U.S. does not address and reverse the trade imbalances in a controlled way, the markets will do so on their own, abruptly. | Photo by flickr user kingair42

Richard McCormack on the threat of currency manipulation.

The post below is an opinion piece written by award-winning journalist Richard McCormack, the founder and publisher of Manufacturing & Technology News. McCormack also served as the editor of the 2013 book on revitalizing manufacturing, ReMaking America. You can follow him on Twitter at @RichardAMc.

There are two words in the English language that elicit a gaping yawn among Washington lawmakers: "currency manipulation."

That needs to change and it needs to change fast. Real fast.

The CEOs of some of America's major industrial companies along with the country's largest industrial union warned Congress on March 26 that the United States’ economy is about to get walloped, due to continued currency misalignment and surging imports.

Similar warnings were issued prior to the economic meltdown of 2008, and they are resurfacing now with an even greater level of fervor. Every American needs to be on alert.

Currency misalignment, surging imports, and the burgeoning U.S. trade deficit are on the verge of throwing the shaky economic recovery into reverse. The February decline of durable goods orders of 1.4 percent is the latest indication that there is no manufacturing "renaissance," a development The Economist magazine calls a "worrying sign" and an indication that "America has not gotten better at producing stuff."

Every member of the House and Senate along with the bankers running the Obama administration's economic and trade policy teams need to be aware that foreign currency manipulation could lead to another economic crisis. But the risks are much higher than they were in 2008; There would be little or no ability for fiscal or monetary stimulus to counter a plunge.

Having just written that last paragraph, let me say this: I have covered currency manipulation actively since the issue was first raised in 2003. I was loathe to write about the dire predictions being made by domestic manufacturers out of my own personal and financial interests. Why would I contribute to the "impending" collapse of the U.S. economy? I am not one who pays much heed to alarmists.

Except, exactly what was predicted by American manufacturers did, in fact, occur.

New trade agreements should explicitly include enforceable disciplines against currency manipulation. Center for American Progress

Before the 2008 collapse, business executives from multinational companies and the finance sector said that the United States should use diplomatic channels to get China to stop its mercantile currency practices. They argued vociferously that China's financial sector was "fragile" and could fail if the United States prevailed on enforcing strong currency measures.

But it wasn't the Chinese financial sector that collapsed. It was America's, leaving the country's economy and society severely compromised.

Today, American manufacturers are issuing a new set of even more troubling warnings. As before, they cite the escalating trade deficit — the strong dollar reducing exports and a growing surge of imports that are rapidly displacing American production.

They note that the shaky recovery has been built on more than six years of a federal fund rate of zero and government spending based on record levels of debt.

But this time around is also different, for an important new group has joined domestic manufacturers in expressing concern over potential consequences of currency cheating by foreign trade competitors. The new contingent is, surprisingly, made up of economists who have been devout free traders.

The most prominent of them is Larry Summers, formerly Obama's top economic advisor and head of the Department of Treasury during the Clinton presidency. "New trade agreements should explicitly include enforceable disciplines against currency manipulation," said a report Summers co-chaired earlier this year for the Center for American Progress.

When he read that statement, economist Jared Bernstein, who worked with Summers in the Obama administration, said that he was "officially stunned."

Arthur Laffer, the "Father of Supply-Side Economics" of the 1980s, has recently produced an equally stunning paper entitled "Currency Manipulation and the Distortion of Free Trade," In it, Laffer states: "Persistent currency undervaluation has benefited the currency manipulators at the expense of countries allowing the flexible adjustment of exchange rates." Though it is difficult to calculate, wrote Laffer, "it is likely that millions of jobs in the U.S. were lost as a result of the current account imbalances that were generated, in part, by currency manipulation." Laffer insists that the Trans-Pacific Partnership address currency manipulation so as to "avoid further harm and ensure the agreement's benefits aren't undermined by countries that have a history of manipulating their currencies."

Free-trader Ernest Preeg of the Manufacturers Alliance / MAPI, is even more adamant. In an upcoming paper ("The Decline of U.S. Export Competitiveness for Manufactures and its Consequences for the World Economic Order"), he writes that the exploding U.S. trade deficit caused by currency manipulation and China's accumulation of $4 trillion in reserves, has led to the "serious deterioration [of the] rules-based multilateral trading system." The United States, Preeg declares, must provide "the sustained leadership for restoring the rules-based multilateral system."

If the United States does not provide this leadership, then "financial markets will gather momentum in judging and acting to anticipate the next turn of events, and disruption of international trade and investment will almost certainly be increasingly painful, including for the United States," Preeg concludes.

Respected economist C. Fred Bergsten of the Peterson Institute for International Economics is also on board, having stated that currency manipulation has cost the U.S. economy up to five million jobs. He says the United States "must insist that other countries stop manipulating their currencies and permit the dollar to regain a competitive level."

The last time we were at these levels of imports, nearly half of American steel companies disappeared. U.S. Steel CEO Mario Longhi

Unbeknownst to many Americans, U.S. industry has entered another period of "crisis." From an already severely weakened position, American companies are in the process of rapidly losing market share in dozens of important industrial sectors.

John Ferriola, Chairman and CEO of Nucor, one of the nation's most respected industrial companies, says his industry "is facing a crisis and we need Congress' help."

U.S. Steel Corp. Chairman and CEO Mario Longhi says that the "the last time we were at these levels of imports, nearly half of American steel companies disappeared. American steel companies are being irreparably harmed by illegal trade practices." If Congress does not take this opportunity to address currency, he went on, "you will condemn American manufacturers to irrelevance — or worse."

American lawmakers are soon to debate "free" trade. There will be arguments made against inclusion of currency provisions in the TPP, or the law providing the president with Trade Promotion Authority. The financial sector, joined by the large multinational corporations that have moved production offshore; the trade associations that represent them; and retailers and importers that benefit from foreign currency practices will raise objections.

These forces have been in control of America's economic policy long enough. The economy has suffered immeasurably under their tutelage. They will need to be countered.

Continued adherence to their dogma will inevitably lead to what domestic producers say is an inevitable, and even larger economic crisis — to use their words — sooner rather than later.

If the U.S. does not address and reverse the trade imbalances in a controlled way, then, as Ernest Preeg warns, the markets will do so on their own, abruptly. Is it worth losing millions of more jobs, the destruction of wealth, and the creation of more misery?

After the crash of 2008, who do you believe this time around? The discredited financial and multinational company executives who focus solely on investment income and profits? Or the CEOs of major domestic American industrial companies who employ American workers?

America did not pay heed to them prior to the collapse of 2008.

This time, there is no excuse.