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U.S. Strategy to Change Chinese Currency Will Badly Backfire

The U.S. House of Representatives voted to give the President expanded power to impose tariffs on Chinese goods because China won't revalue its currency. Although it passed 348 to 79 with a fair chunk of Republican support, it's not evidence of resounding political will. Heaven forbid! This is an election year attempt to channel the rage of an unhappy public against a remote and easily caricatured foe.

But playing games is a dangerous pastime when you place heavy bets that you can't afford to cover. That is what the House has done, and should the Senate follow suit -- and there will be considerable pressure on Senators to do so â€"- industry may find itself with some burly and unpleasant bill collectors at the door.

Congress has focused on the opportunity American industry misses because China deliberately undervalues its currency, reportedly by as much as 25 percent. Therefore, so goes the theory, Chinese goods sell for less than they should in any market, including here in the U.S., and displace products that our domestic businesses could otherwise sell.

Ah, the irony, the irony. Forget for a moment that in a global economic environment, there's no guarantee another country, whether a Brazil, India, or Germany, might not snap up the sales instead. If the U.S. thinks that business here is a victim of Chinese predatory monetary policy, it should remember the extent to which companies are sure that they are beneficiaries.

To call U.S. industry dependent on the not-so-sleeping dragon is like saying a junkie needs a regular fix. We have ceded responsibility for our economy. Companies insisted on ridding themselves of the dirty, unpleasant part of manufacturing -- the expense.

It's a mistake to think that they sent jobs overseas. If you literally export jobs, you still have employees, only in another part of the world. And yet, that's not what happens. Rather, too many companies completely abdicated from actually making products themselves and chose to pay others to do so, all the time saying that it was necessary to stay competitive. This is similar to the argument a rich man uses to send the laundry out. After all, his time is so much more valuable than the cost of washing, drying, and folding clothing.

Of course, there is a fallacy in this reasoning. Your time is only more valuable when you have to give up working hours to do a chore. Otherwise, no one is paying you for the quality time you'd otherwise spend with a washer and dryer.

There is a similar mistake in the reasoning of executives. They assume that the comparison of pure manufacturing cost here versus there lives in isolation. It doesn't. Virtually no company large or small looks at the entirety of its operations to see how much the "savings" cost.

The tally is likely to be significant. For example, after spending the better part of two decades trying to get inventory amounts under control, how much in product was uselessly locked in ships for two months at a time?

What was the value of all the intellectual property -- in technologies, working methods, and strategic plans, -- that companies handed to Chinese firms who could easily become competitors? These days, IP is purportedly the basis for roughly 85 percent of the value of a corporation.

Just how much of the counterfeit goods that U.S. firms complain about is made in Chinese factories that learned how to make the products from the companies themselves? (Over the years, experts have told me that the rough answer is "plenty.") How many competitors have U.S. firms created, taught, and essentially put into business?

As importantly, how much risk do companies face because they now depend on overseas manufacturing? What would happen if the value of the renminbi suddenly jumped by 25 percent? Would they really sell more competitively against Chinese counterparts? Or, when you have outsourced so much of the basis of your business, your products, does it really become the Chinese competing against the Chinese, as what the home team sells becomes equally more expensive?

Not to say that China is an economic innocent. Far from it, and that's the other half of the problem. Just in its recent short-term freeze on shipping rare earths vital to high tech manufacturing to Japan because of a dispute, China has shown that it is willing to twist arms. It would be easy for Chinese authorities to cut off rare earths supplies to U.S. high tech manufacturers, whether based in China, Japan, or any other country. Now remember how many products, from industrial controllers and manufacturing equipment to automobiles and household appliances, use chips and circuitry. A large percentage of goods depend on high tech.

Not only does China provide nearly all the world's supply of rare earths, but it produces 60 percent of the world's supply of coke, a form of coal critical to making steel. China is also a big importer of many things, including agricultural goods, and it is unafraid to use tariffs in trade disputes. An example is the recent sharp increase on poultry coming from the US.

Our economy is both dependent on China for imports and vulnerable to the country's actions. What would help far more than rattling an empty protectionist saber sheath would be reforming domestic industrial policy. The chance of that happening? Somewhere next to zero.


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