Smith Faculty Opinion Article	September 12, 2007
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

Henry Paulsons Fear Mongering

Recently Treasury Secretary Paulson warned that legislation moving through Congress to address the harm imposed by Chinese protectionism could set off a trade war and unsettle global markets. Such fear mongering places the U.S. economy at grave peril.

Since joining the World Trade Organization in 2001, China has failed to honor many commitments to stop subsidizing exports, requiring foreign investors to source products locally, and manipulate its currency.

To keep its currency undervalued and products cheap on world markets, Chinas central bank prints yuan to purchase, annually, more than $250 billion worth of U.S. and other western currencies. In 2006, China spent 24 percent of its export earnings on currency shenanigans.

All together, protectionism creates at least a 50 percent artificial price advantage for Chinese products competing on world markets. Artificial because these advantages are above those Chinese businesses rightfully enjoy from abundant, inexpensive labor. Hence, it is no surprise that since 2001, the U.S. trade deficit with China has jumped from $83 billion to about $250 billion. European nations have similar trade woes with China.

Other developing countries have no choice but to follow Chinas lead, lest they lose western markets to its steroid-jacked manufacturers. In 2006, Brazil, India and Russia, spent 24, 23 and 36 percent of export revenues, respectively, to boost central bank foreign currency holdings, and keep their currencies and products cheap on world markets.

Import restrictions and regulations on foreign investors that boost exports are legend in these places, and it is no surprise that since 2001 the overall U.S. trade deficit has jumped from $365 billion to about $710 billion. Each year, the U.S. trade deficit results in foreign borrowing equal to about 5 percent of GDP.

The Congress has grown impatient with the growing trade deficit with China and other mercantilist copycats, and the Bush Administrations failure to obtain results from China or anyone else through six years of negotiations, such as the Strategic Economic Dialogue with Beijing.

Legislation is emerging that would permit U.S. industries harmed by subsidized imports to petition for tariffs that would just offset currency subsidies. Such countervailing duties are permitted by the World Trade Organization, because its treaties recognize the destructive consequences of excessive subsidies, and such WTO compliant duties are hardly protectionist as Mr. Paulson often claims.

If enacted, these changes in U.S. trade law could not start a trade war, because we already are in a trade war. Mr. Paulsons attempt to paint earnest Congressmen and Senators as protectionists is demagoguery.

Turning to global financial markets, these are on the precipice of collapse, because of irresponsible lending practices, conflicts of interest and petty corruption among mortgage brokers, investment banks, realtors, appraisers, bond rating agencies, and others that form the credit supply chain from the families that buy homes to the investors who purchased now, near-worthless collateralized debt obligations.

Over the last several years, anyone who went to a cocktail party in Washington or New York, and we can safely assume Mr. Paulson has been to a few, heard of the irresponsible lending practices that were overwhelming U.S. mortgage markets, inflating home prices and facilitating reckless consumer borrowing.

All the while Mr. Paulson, and his predecessor John Snow, behaved as if nothing was wrong, endorsing a be happy, live for the moment, isnt America great approach to national economic strategy.

If Mr. Paulson wants to discover who is creating threat of global financial collapse, he should spend more time with his shaving mirror instead of tarring members of Congress with baseless charges.

The United States faces enormous economic challenges. It cannot prosper much longer borrowing from foreigners at an annual pace of five percent of GDP and with financial markets that increasingly stink of poor judgment, dishonesty, and corrupt stewards.

Painting members of Congress as reckless may distract attention from the failings of Bush Administration economic policies, but it is a grand disservice to the nation.

If Mr. Paulson lacks the stomach and ideas to address the nations economic problems, he should make way for someone who has those attributes.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission. ►More Faculty Opinion Articles