By Henry C K Liu

For decades, the United States, a self-professed evangelist for free trade, has been paranoid about other nations manipulating the exchange value of their currencies for trade advantage with counterproductive distortions in global free trade. Such apprehension has even been institutionalized into law.

Section 3004 of Public Law 100-418 (22 USC 5304) requires, inter alia, the secretary of the Treasury to analyze annually the exchange-rate policies of foreign countries, in consultation with the International Monetary Fund (IMF), and to consider whether countries manipulate the rate of exchange between their currency and the US dollar for purposes of preventing effective balance-of-payments adjustment or gaining unfair competitive advantage in international trade. Section 3004 further requires that if the secretary considers such manipulation occurring in countries, such as Japan and China, that (1) have material global current-account surpluses and (2) have significant bilateral trade surpluses with the US, the secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the IMF or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the dollar to permit effective balance of payment adjustments and to eliminate any unfair advantage.

Section 3005 (22 USC 5305) requires, inter alia, the secretary of the Treasury to provide each six months a report on international economic policy, including exchange-rate policy. The reports are to contain the results of negotiations conducted pursuant to Section 3004. Each of these reports bears the title "Report to Congress on International Economic and Exchange Rate Policies".

Unfortunately, the underlying implication of the law assumes erroneously that current-account surpluses can be by themselves evidence of currency manipulation by the surplus country. In fact, as trade imbalances are the structural effects of fundamentals in the terms of trade, attempts to correct them with exchange-rate adjustments are by definition currency manipulation.

Exchange-rate policies cannot be substitutes for structural economic adjustments necessary for mutually beneficial trade between two economies. Nor can exchange-rate policies be substitutes for sound domestic monetary or economic policy. When two economies are at uneven stages of development trade, a trade surplus in favor of the less developed economy is natural and just until the less developed economy catches up with the more developed one. Otherwise it would be imperialistic exploitation, not trade.

A protectionist nation in free-trade clothing

That the United States, by its unilateral trade policies, has really been a nation of protectionists in free-trader clothing was again highlighted by a hearing of the Senate Committee on Banking, Housing, and Urban Affair on January 31 headed by its new chairman, Senator Christopher J Dodd, whose Democratic Party won control of the Congress in last year's mid-term elections. The hearing was on the Treasury Department's Report to Congress on International Economic and Exchange Rate Policy and the US-China Strategic Economic Dialogue. Hank Paulson, the 74th treasury secretary of the nation, was the lead witness.

The target of the hearing was China, which has replaced Japan in recent years in the eyes of the US as prime suspect of being the world's leading currency manipulator. Yet as Stanford economist Ronald McKinnon argues in an April 24, 2006, op-ed piece in the Wall Street Journal, China's motivation for pegging the yuan is to secure monetary stability rather than achieve an undue mercantile advantage in world export markets. He pointed out that persistent Chinese trade surpluses and US trade deficits reflect mismatches in saving in China and the US, an imbalance that exchange-rate changes might mask but cannot correct. McKinnon concluded, "China is not a currency manipulator, and the yuan/dollar rate is best left more or less where it is."

The twice-yearly high-level US-China Strategic Economic Dialogue is a brainchild of the new treasury secretary. The first meeting, headed on the US side by Paulson, with the participation of Federal Reserve Board chairman Ben Bernanke and several other cabinet secretaries, and on the China side by State Counselor Wu Yi, supported by Chinese counterparts of US officials, was held in Beijing last December, with the second meeting scheduled to take place in Washington in May.

The Senate Banking Committee, pursuant to statute, annually receives exchange-rate reports from the Treasury, taking testimony from the sitting treasury secretary, and exercises oversight on government exchange-rate policy, which has become of critical concern for US businesses and workers who seek a "level playing field" to compete in global markets. The Treasury Report is the only report to Congress that directly addresses international economics, exchange-rate policy, and currency manipulation by other national governments. Testimony from the treasury secretary to Congress, if requested, is required by law.

In his opening statement as committee chairman at the January 31 hearing, Senator Dodd expressed dissatisfaction with US government policy for its "inability to secure opportunity and prosperity for working Americans". Policies put in place by the administration of President George W Bush well before the appointment of Secretary Paulson have turned record surpluses left by the previous administration of president Bill Clinton into record deficits, leading to under-investment in important national priorities, such as health care, schools, infrastructure and targeted tax relief for threatened businesses and struggling working families, even as the nation fell deeper in debt, while producing growth only to select economic sectors such as financial services and prosperity only to the rich segment of the population.

Median family annual income has declined by nearly US$1,300 over recent years as income disparity widens. More than 3 million US manufacturing jobs have been lost since 2001, the steepest and most prolonged loss since the Great Depression. The current US economic recovery is the first in which manufacturing jobs lost have not returned. Dodd decried the fact that "for millions of Americans, the recession has not ended, but goes on and on", and has done so for more than seven years. The statement was a fair summation of neo-populist sentiments against the adverse domestic effects of two decades of globalization.

Yet the Democratic senator is only half right. While American workers have lost jobs, the US economy has not really lost these jobs, only relocated them. The US economy has merely expanded globally and moved jobs overseas to take advantage of low-wage workers in the employ of US capital, in what economists call cross-border wage arbitrage.

Economic imperialism in the age of industrial capitalism provided employment at the core to produce exports to the colonies to earn gold for the home economy. Neo-imperialism in the age of finance capitalism relocates jobs to the periphery and imports products manufactured by low-wage labor paid for with fiat currency (paper money) issued at the core, the surplus of which can only be reinvestment in the issuing economy. Dollar hegemony emerged as the US dollar, a fiat currency since 1971 when president Richard Nixon took it off gold. The dollar continues to assume the role of prime reserve currency for international trade, anchored by transactions in key commodities such as oil being denominated in dollars. US neo-imperialism is intermediated financially by dollar hegemony.

A selective level playing field

Cross-border wage arbitrage is a subset of financial arbitrage in which investments are made in low-cost countries to produce goods for sale in high-income countries. Interest-rate arbitrage is another subset in which funds are borrowed in low-interest currencies to lend in high-interest currencies, a routine transaction known as "carry trade" in international banking parlance. The complaints about cross-border wage arbitrage by the US, a clear beneficiary of global finance arbitrage, amount to blatant selectivity in its professed commitment for a "level playing field".

What Senator Dodd leaves unspoken is that the old slogan "what's good for General Motors is good for America" has been

Five more pages at the link

The world does seem to be growing weary of trading their natural resources and labor in exchange for green pieces of paper. One would think the people living in the US would grow weary of sending their labor abroad in order to improve the bottom line for the multi-nationalists. Not sure what the US hopes to accomplish with a higher valued Yuan, the d0llar has fallen over 30% in value in the last five years and exports certainly haven't increased, there is no capacity here in the US for exports to increase until we figure out how to export burgers and haircuts.

One more section from the article.

China needs to wean itself from export addiction
On the other side, China needs to stop neglecting domestic development merely to support export growth and to wean itself from the enslavement of dollar hegemony, freedom from which will allow China to utilize sovereign credit instead of foreign capital denominated in dollars to finance much-needed and currently underfunded domestic construction and economic development.

With a limited-convertibility currency and a shift from export dependency, China can finance with sovereign credit full employment with rising wages through government domestic spending on infrastructure, health care, pensions, education, environmental restoration and other growth-inducing undertakings. Such sovereign credit can be serviced and amortized by rising tax revenue from high-growth economic expansion. China has no need for currency flexibility unless it opens up to freely flowing cross-border short-term capital, commonly known as "hot money", which not even the IMF, the World Bank, or the US Treasury is recommending for China.

Things to keep an eye on, social credit or chartalism because that does appear to be the direction the world is headed.
Hot money, ie George Soros and some of the other bloodsuckers.