Mr. Speaker, I rise today to share with you an article written by Scott Lilly, the former Democratic Staff Director to my distinguished colleague and Ranking Member of the Committee on Appropriations, David Obey. Scott, a longtime friend…
Mr. Speaker, I rise today to share with you an article written by Scott Lilly, the former Democratic Staff Director to my distinguished colleague and Ranking Member of the Committee on Appropriations, David Obey. Scott, a longtime friend and valued resource to Members and staff on both sides of the aisle, left Capitol Hill last year after 32 years of distinguished service. His departure was and continues to be deeply felt by many of us, but as the article below reveals, Scott remains a tremendous resource for this institution as we work to deal with serious policy issues that impact our constituents, our communities and our nation.
In this article, How Much to Feed a Dragon, Mr. Lilly discusses the extremely important issue of the threat of China to the United States as an economic and world power. As Scott articulates so well, the time to act
against China and its currency undervaluation is now I urge my colleagues in the House to heed the warnings detailed in this article and to stop the rhetoric. We must act immediately and decisively to address the serious risk China poses to the American way of life--our nation's future depends on it.
How Much To Feed a Dragon
A few weeks ago the Bush administration took action to cap
the growth of Chinese textile imports to no more than 7.5
percent a year, professing grave concern for what is left of
America's textile industry. The controversy generated by that
move largely obscured a far more profound decision by the
administration only a week earlier. In a formal report to
Congress, Treasury Secretary John Snow refused to designate
China as a currency manipulator despite massive evidence of
China's continuous intervention in global currency markets-
keeping the yuan at levels far below what most economists
believe is its true value. Snow stated that Chinese officials
``have repeatedly vowed'' to move toward ``a more flexible''
currency. When they will move or how far they will move is an
issue that Snow will apparently continue to leave to the
discretion of China's central planners.
While this issue sounds arcane, it may also rate as one of
the most important economic issues of this generation. The
intense manipulation of the Chinese yuan impacts greatly on
numerous problems facing American households, ranging from
high gas prices to weak job growth and stagnant wages. It has
materially contributed to the problem of our growing foreign
debt, the weakness of the dollar and a potential worldwide
currency crisis that could lead to global depression. In
addition, it has serious implications for the balance of
global power in the decades ahead.
How has China impacted U.S. gasoline prices? World demand
for energy grew by more than 3.4 percent last year-the
largest yearly increase since the gas lines of the 1970s and
more than twice the average yearly growth over the past two
decades. Furthermore, it is clear that the big players in
world energy markets see this spike in demand as anything but
temporary. They are not only buying up oil futures and the
shares of companies that own and sell oil but companies that
explore and drill for oil as well.
The reason for this rapid growth in oil demand is
attributable to one single fact: Oil consumption in China is
growing at astronomical rates. During 2004 Chinese
consumption of oil averaged more than one million barrels a
day above the previous year, an increase of 19.3 percent, or
eight times faster than the growth of energy consumption in
the rest of the world. Without China, the global growth in
oil consumption during 2004 would have been just 2.2
percent--a rate that the normal expansion of world oil
exploration and production can accommodate without
significant upward pressure on oil prices. Even in per capita
terms, China's oil consumption is growing three times faster
than the rest of the world.
Why is China guzzling so much petroleum? China's
skyrocketing demand for energy is largely a function of the
nation's skyrocketing rate of economic growth. For several
years China has been growing at a rate of more than 9 percent
per annum even after accounting for inflation. Some experts
expect growth in the 8 to 10 percent range for the indefinite
future. This rate of growth drove China last year to consume
40 percent of the globe's increased demand for crude oil in
2004--more than the rest of the developing world combined.
How can China maintain such a rapid pace of growth? The
answer to that is also relatively simple. According to a
report released in Beijing last month by the State
Information Center, foreign trade is the major driving force
of China's economy. In particular, China's net exports, or
trade surplus with the rest of the world, are credited with
bringing strong growth to the nation. The report discloses
that Chinese exports totaled $156 billion in the first
quarter of 2005 while imports totaled only $143 billion. More
than 60 percent of Chinese surplus came at the expense of
the United States. Last year, the U.S; bilateral trade
deficit with China exceeded $162 billion, while the rest
of the world actually ran a trade surplus with China. As a
result, it is almost entirely the Chinese trade surplus
with the United States that is providing the country with
this extraordinary pace of expansion.
What makes China so competitive with U.S. and other foreign
producers? It is important to remember that China is not a
market economy. Prices in a particular sector can easily be
manipulated by central economic planners. This goes for all
inputs: labor, land, capital and energy. If China wants to
compete and be the low price producer for a particular
product, no other producers functioning in a market economy
with fixed prices can match the price at which China will be
able to sell.
But even more important has been China's manipulation of
its currency, the yuan. The central government has gone to
extraordinary lengths to cap the value of the yuan to no more
than 8.3 to the dollar. As Secretary Snow points out, leaders
in Beijing have talked at great lengths about future plans to
allow the yuan to trade more freely on world currency
markets.
But they have taken no such action and the rapid export-led
growth of the Chinese economy would drop back to more normal
levels if they did. Since rapid growth is seen by the
leadership in Beijing as central to the nation's economic,
political and geopolitical goals, it is hard to imagine that
significant change will occur without strong external
pressure. Since the United States alone represents nearly all
of China's net trade surplus, the lever to force revaluation
of the yuan is almost entirely in the hands of the United
States.
Isn't China's growth good for the world? It depends on what
part of the world you are talking about. Oil producing
countries are having a bonanza. Saudi Arabia, a country in
danger of not being able to make payments on its foreign
debts just a few years ago, is now raking in revenues at a
rate that dwarfs even the oil price boom of the 1970s.
Oil executives in this country are also prospering. The 3
million shares of Exxon Mobil held by Board Chairman and CEO
Lee R. Raymond are now worth about $170 million, up more than
$62 million or about 59 percent from the level such shares
would have sold for only 18 months ago. Raymond is only one
of thousands of oil company executives enjoying the new
prosperity that China's demand for petroleum has created for
the industry.
There are also other domestic winners in the unbalanced
trade relationship between the U.S. and China--at least over
the short term. Companies ranging from Mattel to Boeing have
increasingly moved production operations from the U.S. to
China in recent years. They reap two benefits in such
transactions. First, the lower wages paid in the Chinese
factories provide savings that go largely to the bottom line
on corporate balance sheets. Chinese workers make about one-
twentieth of what U.S. workers make.
But secondly, the mere threat of moving more production to
China keeps downward pressure on wages paid to U.S. workers.
Since 2001, the hourly output of U.S. workers has increased
by more than 16 percent, but the average wage production and
non-supervisory worker wage remained virtually flat after
adjusting for inflation. Corporate profits, on the other
hand, have jumped by about 58 percent since the beginning of
2001 despite slower than normal economic growth. Not since
the 1920s have workers' wages fallen so far behind their
increases in productivity and at no time in the post-World
War II era have corporate profits accounted for such a large
portion of the growth in national output.
So while American corporations have at least thus far been
winners in U.S. acceptance of China's trade and currency
policies, U.S. workers have been major losers. Not only have
wages been stagnant, but so have the number of jobs. The
number of Americans with manufacturing jobs has dropped by
2.8 million, or 16 percent, since January of 2001. At the
same time, the U.S. population has continued to grow. About
12 million more individuals are now being supported with
paychecks that are no bigger in either size or number.
Whether or not U.S. corporations--outside the oil patch--
will be long-term winners in this arrangement is a matter of
increasing concern on Wall Street. Many on the street are
expressing concerns that U.S. corporate profits cannot grow
over the long term if American families have less and less
income with which to make purchases. Since production and
non-supervisory workers make up about 80 percent of the total
workforce, the long-term health of the U.S. consumer is
inextricably linked to the earning power of the U.S. worker.
There are also losers in other countries around the world.
Underdeveloped countries with large pools of low-wage and
underutilized labor are among those who suffer the most.
Their dreams of development have been stymied by China's
export gluttony and they have not only lost out in the
struggle to attract industry and earn hard currency, but they
now live in a world where the winner has driven the cost of
energy they need for their own development to prices they can
no longer afford.
But there are implications to our unbalanced trading
relationship with China that may be grimmer than the impact
it is having on the U.S. and world economy. Those
implications involve China's geopolitical ambitions, which
are clearly less benign than proponents of unbridled U.S.-
Chinese trade would want us to believe.
While the CIA may have overestimated Iraq's military
capabilities, it has consistently underestimated (at least
until recently) the pace of Chinese military modernization.
China has taken the politically painful steps of slimming
down its uniform forces to levels compatible with high-tech,
modern, Western military doctrine. It has invested heavily in
the development of highly capable fighter planes, air-to-air
missiles, radars, landing craft and other military resources
needed to confront U.S. forces in the Formosa Straits and
eventually in other parts of Asia.
China now has hundreds of nuclear weapons which are both
strategic and tactical in type. It maintains at least twenty
intercontinental ballistic missiles capable of hitting
targets in the western United States and is believed to have
recently recommissioned a submarine capable of launching
nuclear missiles from waters off U.S. coasts. China is
working on the DR-41 missile, believed to have greater range,
accuracy and a shorter launch time than existing Chinese
ICBMs. They are believed to be working on between four to six
new submarines capable of launching nuclear armed missiles.
As Thomas Kane wrote last year in Parameters, a publication
of the U.S. Army War
College, ``Nuclear weapons allow the People's Republic of
China to take diplomatic and military positions with a much
greater level of confidence.''
China's booming economy also has geopolitical implications
beyond the mere contribution it makes to military
modernization. If China's economy continues to experience
real growth in the 9 percent range, it could surpass the
United States as the world's largest economy within a single
decade, even if GDP growth in the United States remains
relaively strong. As the magnitude of China's economy grows,
so will its geopolitical will. One does not need to go to
Asia to find examples. Brazil has become a major source for
Chinese raw materials and in turn China is discussing
financing the construction of a long sought after road from
the Amazon basin across the Andes to ports on the Pacific.
Korea is becoming something of a ``Silicon Valley'' for
Chinese industry, and even old adversaries such as India and
Japan have to rethink how to accommodate the new reality that
a rapidly growing China presents.
Some of these changes are inevitable. China needs to grow
and will grow almost regardless of U.S. policy. But does
China have the political maturity to absorb such a rapid
increase in economic, political and military power and use it
wisely? Its record on human rights, democratic reform and the
treatment of its own citizens should raise serious doubts. We
should want a growing economy and rising prosperity for the
world's most populous nation, but we should question whether
the current torrential rate of growth--growth driven almost
entirely by huge net export surpluses with the United
States--is a positive for the economic well-being of our own
citizens or the prospects for world peace over the coming
decades.