Sunday, September 18, 2011

WSJ Blunders over Romney smack-down on Free Trade


Open letter to WSJ over Romeny free-trade put-down

Dear sir,

Your asserting that Romney has made a blunder ( WSJ September 17, 2011 “Romney’s China Blunder”) is supported by the most vacuous logic.

You take Romney to task for not assesses the facts you then address those facts then dismiss them.

You say:

Any serious argument that China is running a mercantilist trade policy needs to look at the Chinese trade surplus with the rest of the world. That has grown dramatically over the last decade, due to policies that we have criticized. The crux of the issue is not the value of China's currency—every country has the right to pursue exchange-rate stability, and dozens of countries peg or somehow adjust their currencies to the dollar.’ (Emphasis added)

This is the warped logic of ‘free trade’ that actually undermines free trade.. For trade to be ‘FREE” and for the good things that flow from FREE TRADE to occur, exchange rates must be at their proper parity values not arbitrary or self-selected levels. Countries really DO NOT have the ‘right’ to choose any stability system they wish to choose or to peg to the dollar. This notion is sheer folly. It may be current practice but it still is folly. How can a competition-loving paper like the WSJ endorse national ‘price fixing’ as a means to free trade? What more important price to ‘fix’ than the exchange rate? The international trade literature is replete with papers about the damage from misaligned exchange rates and yet you dismiss it with a few taps on your keyboard and proceed to ignore all the evidence that misaligned trade is causing damage..

I’m sure after a few nanosecond of thought this is a position you will want to ‘re-think.’

Want more facts to support Mr. Romney? Exchange rate fixing is why developing nations own three-quarters of the world’s foreign exchange reserves. They buy dollars and other currencies to keep their own currencies competitive. This is why the US Current Account averages a deficit of 2.1% of GDP since 1971 when Bretton Woods collapsed, and why the US current account has not been in surplus in any quarter since 1991. If you believe in markets how is such a result consistent with exchange rate equilibrium?

Romney has a Tiger by the tail. Your lot would be better cast by getting on his side. The argument that China’s own domestic monetary policy has to blow up to get the Journal to realize that China (and others) are engaged in anti-competitive practices that WTO does not even address - practices that have helped to prevent the US current account from ‘ever adjusting’ - is an idea that stretches the limits of credulity. Free trade and exchange rate alignment are worth thinking about especially by a candidate for the office of president..

So many want to ‘perish the thought’ (actually, perish any thought) about the dollar because at the end of the day it leads to the conclusion that they do not want to make: that the dollar is STILL too strong. Or, put another way, US productivity is not high enough for the dollar to stay at this level. But these persisting current account deficits are signals from the marketplace. Do not ignore a lump in your breast or a persisting hacking cough or sustained current account imbalances: they all are valid signals of something gone wrong. Moreover, do not deny all the investment in China and the rest of Asia over the past twenty years that clearly has raised their productivity and should therefore raise the values of their respective currencies (and lower that of the dollar by implication).

This language that the WSJ uses that is dismissive in nature about how US firms have subsidiaries abroad to get the lowest prices is all just an end run around reality. Why aren’t those operations instead in AMERICA? That’s the real question! That they have to be overseas is the exact thing that is at issue here. That is not a part of the argument to ‘take for granted.’

Why do US firms have $2tln on their balance sheets they will not spend with US unemployment over 9%? Why do they invest overseas instead of in the US? Why does China have $3trln of foreign exchange reserves? And why did they raise those reserves by 30% over the past year all the while complaining about the dollar? SNL had some great skits about their dollar-investment angst yet they pilled on more dollars. Why doesn’t China, a poor country, spend those vast reserves at home and raise living standards? Why do countries pour $500-$600 bln into the US as capital flows each year while US banks have billions in excess reserves they can’t find borrowers for? What do foreign investors ‘know’ that our banks do not?


Give up the fantasy that the dollar is properly aligned ( and the yuan and so on…) and these question begins to have answers. Do that and many of our ‘vexing problems’ have solutions.

The drop off in US manufacturing output is the start of severe crisis. The US needs to pay for its foreign exchange and we will never do that even if services jobs come back. The US needs to export to earn its foreign exchange (that’s how it’s done) and that means manufacturing. Pretending that trade restrictions are the only impediment to better US trade performance just stands in defiance of the sorts of huge numbers we need to marshal to solve our current account financing problem. The real problems is competitiveness.

If the Journal really supports free trade it needs to support the formation of a world environment in which truly free trade can blossom- not a system in which China and other developing nations suckle at the teat of US wealth until it runs dry. Because it will run dry. No country can run current account deficits forever. Foreigners are not running up what may prove to be a stack of ‘worthless IOUs’ instead they are starting to OWN us. And that can’t be good

America needs to be competitive. Let’s BRING BACK free trade!

Mr. Romney is much more right in this debate than he is wrong. You, sir, need to look closer at the arguments that you make to dismiss him - and to look harder at the facts, even when that is uncomfortable. Intellectual honesty is not about comfort. It is often painful. But in the pain is often wisdom and that, too is a lesson from markets.

5 comments:

AnnArborGuy said...

Bravo, Bob!

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