An oracular solution to China trade imbalance

                President Obama was quick to use Warren Buffet’s ideas and credibility when the issue was taxation of billionaires. (Buffet wants to pay more.)

                Our leader, who is not well versed in the world of commerce, should consult the oracle of Omaha just as assiduously on the issue of trade with China. That won’t be the biggest issue in the presidential campaigns, but it will figure prominently into the national debate over the jobless recovery.

                GOP presidential candidate Mitt Romney has already staked out a tough position on China trade, saying, “I have no interest in starting a trade war with China, but I cannot accept our current trade surrender.” He is talking restrictions on Chinese exports to the states.

                Both Romney and Obama need to find an artful way to solve the trade imbalance with China without the negative consequences of an outright confrontation. China owns more than $800 billion of U.S. bonds, so it has a big stake in the U.S. economy. You would think it would be looking for an artful solution, as well.

                Buffet argued seven years ago that trade with China should be balanced on a bilateral basis. It has been anything but balanced, and the nation’s manufacturing base that is centered in the Midwest, has paid a horrific price in lost jobs.

The Alliance for American Manufacturing, an advocacy group, put the loss at 2.8 million jobs over the last decade.  A recent Georgetown University study put the Midwest’s loss at 610,000 since the Great Recession started in 2007.  Those are staggering numbers by any reckoning.

The trade deficit caused by China’s voracious appetite for exports projects to hit a new record this year at about $275 billion. That is more than triple the deficit of $84 billion in 2000. The imbalance has been growing for more than 25 years, ever since China’s leaders decided to use exports as a way of propelling growth.

No administration has figured out how to bend that trend. The second Bush Administration jaw-boned Chinese leaders to let the yuan float so that it would strengthen against the U.S. dollar. Subsequently, since 2006, the yuan has appreciated 16%. That helped U.S. manufacturers, but it hasn’t been sufficient. Many economists say the yuan is still too low, and that debate rages on.

Buffet’s idea, which he articulated in Fortune magazine, was elegant in its simplicity. He proposed that the U.S. would give China “chits” for the imports it buys from America. In short, for every dollar of increase in imports over the current level, China would get a chit to sell an additional dollar of exports to the U.S.

That would allow trade to continue at a high level, but it would put a cap on the imbalance at the 2011 level of $275 billion.

How can China argue against the fairness of that proposition? Once upon a time, a quarter of a century ago, China could make the case that it was a developing country and need unfettered access to U.S. markets to develop its economy. Today, China owns the second largest economy in the world. It is a capable, fierce competitor.

It doesn’t need or deserve special treatment any more.

If China wants to sell more electronic goods to American consumers, who enjoy the low prices that world trade brings, then it should buy an off-setting amount of mining equipment from American manufacturers like Bucyrus International and Joy Global. It would need to stop protecting its local mining equipment companies.

My Wisconsin town is a perfect example of the havoc that unbalanced trade can wreak. Only vestiges remain of The West Bend Company, which once employed more than 3000 people. Amity Leather Products, which employed 800, is gone.  Other manufacturers have sliced local employment by half or more. In the good old days – ten years ago and decades before, recessions or booms – unemployment in West Bend seldom topped 5%. It’s running double that now.

Many factors go into the shrinkage of the manufacturing base in this country. Productivity keeps improving. The Great Recession swamped a lot of boats. But the China imbalance has been a major factor.

At $200,000 of output per manufacturing job, about where my manufacturing company operates, the $275 billion trade imbalance equates to about half of the lost 2.8 million jobs.

A study just released under the auspices of the National Science Foundation showed that parts of the country that were most exposed to Chinese competition (think West Bend; think the Heartland) have taken the biggest hits to their job bases. The study looked at a 27-year period and essentially refuted the time-worn economic theory that unfettered trade works for the best for most people over the long run.

Further, the study made the case that the social costs in the hard-hit communities out-weigh the benefits consumers get from lower priced goods from low cost countries.

President Obama has precious few business people in his administration. On the China trade issue, he should at least listen to his oracle of choice.  Romney has talked tough; he needs a methodology like Buffet’s to put the talk into action.

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