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Think twice before blaming Beijing

China’s currency and trade practices may be a source of irritation to many, but the country is one of two engines of growth in a global economic recovery that is gaining momentum, analysts say.
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Many Americans have begun to get used to the idea that China is a source for some of America’s biggest economic problems, particularly in manufacturing. But economists identify China’s rapid growth as a leading reason to believe the global economy is finally on a path for a sustainable, lasting expansion.

It was less than two months ago that Treasury Secretary John Snow persuaded his counterparts in the Group of Seven industrialized democracies to approve a statement calling for “more flexibility in exchange rates” in unidentified “major countries or economic areas.” The surprise statement, which roiled global currency markets, was widely seen as an attempt to pressure China to boost the value of its currency, which has been fixed for years to the U.S. dollar.

U.S. manufacturing executives, labor leaders and prominent politicians all have attacked China’s currency policy and other practices they say offer the Asian giant an unfair advantage over foreign competition.

“There is a direct relationship between the rapid growth of imports and the hemorrhaging of American manufacturing jobs,” AFL-CIO Secretary-Treasurer Richard Trumka said last month in announcing a formal complaint calling for trade sanctions if China does not end its “unfair trade practices.”

Just a few days earlier National Association of Manufacturers vice president Frank Vargo told a House committee, “There is no question that the Chinese currency is seriously undervalued and is having a major effect on U.S. bilateral trade and on the trade of other nations as well.”

Yet mainstream economists say that even if China’s economy needs more reform, the country’s steady growth does far more good than harm to the U.S. economy. Now that the U.S. economy is showing clear signs of an accelerating expansion, analysts say, the world has two main engines of growth: China and the United States.

“The two major growth engines in the world now are the United States and China,” said Don Straszheim of Straszheim Global Advisors. “If China’s economy faltered badly, everybody would be hurt.”

In fact demand from China for both raw and finished materials is an important factor fueling optimism about a global upturn. Since mid-August, an index measuring prices for raw industrial commodities like copper, steel, zinc and cotton has surged 14 percent, according to the Commodity Research Bureau. And much of that demand can be attributed to China, analysts say.

“Chinese demand has spurred a recovery in a lot of Asian economies, Japan included,” said Paul Kasriel, economic research director for Northern Trust Co. in Chicago. “Chinese demand has rippled across the Pacific to Latin America. Indirectly that has helped or is starting to help U.S. manufacturing. We may not sell that much to China, but we will sell to the economies supplying China with raw materials and components.”

Of course, to many observers the huge and growing U.S. trade deficit with China is a source of persistent irritation. The United States ran a record $103 billion trade deficit with China last year and is likely to surpass it this year.

U.S. imports from China were up 24 percent through July, while U.S. imports from the rest of the world were up only 4.8 percent, according to the National Association of Manufacturers. Exports to China also are growing rapidly, but because imports are six times bigger than exports, the deficit is on track to keep expanding.

And many Americans will never be able to look past the fact that tens of thousands of jobs, especially in manufacturing, are being lost to cheap Chinese labor. Economists say manufacturing has been declining in its importance to the U.S. economy for decades and that the trend inevitably will continue. The manufacturing sector has shed jobs for 39 straight months and now accounts for about 11 percent of U.S. non-farm jobs, down from 15 percent in the mid-1990s.

“It’s not a new story,” said Larry Horwitz, senior economist at Decision Economics. “A shift in activity to China as long as there are no blatantly unfair trade practices or meddling with the currency is on net a good thing for the United States.”

That condition is big enough for the Teamsters union to drive a convoy of trucks through, and if the U.S. economy fails to create a substantial number of jobs over the next year, political rhetoric about China’s trade practices is sure to heat up. But analysts figure that as China grows into the dominant industrial power of Asia it will change policy at its own pace.

“I think we are trying to find a scapegoat, and China happens to be a convenient target,” said Sung Won Sohn, chief economist for Wells Fargo. He figures much of the antagonism has been misdirected. Many of the manufacturing jobs now going to China, in the apparel industry for example, left the United States years ago for Taiwan, Korea and other countries. And he says that China has comparative advantages besides cheap labor, including a highly educated work force and heavy investment in advanced technology.

Kasriel said many of the complaints about China will subside if the U.S. unemployment rate declines in coming months from its current 6 percent, as he predicts. While U.S. officials may be posturing over China’s currency and trade practices, they have an even bigger interest in making sure China continues buying U.S. government securities, keeping U.S. interest rates low, he said.

“In all candor I think most of the talk was for U.S. domestic consumption,” Kasriel said.