Faculty Opinion Article
By Dr. Peter Morici, Professor
of International Business
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
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
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
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
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
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
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.