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News&Views Feb 2010 Economics/Politics USA- China

Updated on February 12, 2010

News&Views Feb 2010

Economics/Politics - USA

China Rejects USA Complaints on Its currency

(see link below from NY times)

Are decision makers in USA finally waking up and getting courage to face reality? Signs are still not clear. President Obama has made a statement “to make sure our goods are not artificially inflated in price and their goods are not artificially deflated in price; that puts us at a huge competitive disadvantage.”

According to WTO agreements a country has to provide essentially similar subsidies for manufacturing trading etc. falling under WTO, to its own organizations or foreign organizations. China has kept its foreign exchange rate practically constant against US dollar for years, while its currency should surely have much better rate according to any reasonable calculations. It should perhaps be at least 40% more. Thus essentially China is subsidizing its own manufacturers to the extent of 40%.

But rulers in USA and Western European countries do not seem to have will to handle this properly. They fear it may cause a big inflation. As far as I see effects of such a change will be felt much less for average person in USA and some countries in Europe, simply because percentage of household income spent on goods or food items spent in USA is perhaps not more than 15-20%. But it may affect big organizations of USA, who have invested a lot in China to create their manufacturing etc. In fact they must also be with USA government in evading this issue.

Fear among USA elites and rulers is so much that they do not even want to utter word China about this practice alone. They talk in generalities, as Obama has done in the current statement. Generally they unnecessarily try to hyphenate China with India, when they have to talk about these issues. While by no means situation in India or other countries is similar. Percentage of exports from India to USA is negligible for USA. So is the case about job-losses due to such exports. Unlike China, over all drive for Indian economy being a bit better now is mainly because of internal demands generated in India. Indian currency is also more attached to a basket of currencies. India also has adopted a path to make its currency free and open one in a few years. Workers who account for exports to USA, in India are mainly from IT or auto part sectors who have salaries among highest in India. While I am not happy about American rulers bringing India unnecessarily to avoid their fear of China, I feel India should any way take further steps on its own to decrease any effect of currency manipulations in its own manufacturing or trading to a minimal level. I also feel that by now China is strong enough to take up a similar path. In some ways it has already achieved a lot more than India. It can also reform its system to make sure that it is not at the expense of others.

It is true that both China and India have a large population and a large work force of well educated people. At the same time current level of their economy does not provide enough for such a work force to have a minimal living standard. This will continue to give them advantage of more human competition and a population ready to work harder for less money at least for a few years. That part should surely be counted time being while calculating foreign exchange rates etc. USA and European countries should ensure that they do not ask for distroying this advantage. Current PP index which measures such aspects is not a very proper index.How ever it can be made a more reasonable one and calculations based on such indexes should be used to arrive at a reasonable mechanism to fix up foreign exchange rates. This should be made a part of WTO calculations under current agreements itself.

However time being India is too poor, very marginal and not well organized to influence such decisions. It should not even try. It should only concentrate on improving standard of life of its own working people. I think average people as well as rulers and decision makers in India realize this and wish that India does not fall into any power game and just concentrates on this improving life style task.

As far as I see China should also have more or less the same path to follow for some time. But you hear very harsh statements from Chinese ruling class often which sort of creates an intimidation "Oh! It wants to run towards becoming a global power" etc. I hope this is not the feeling of average person. I wonder what do average middle class people in China feel?

It is really for Americans to take a lead in these issues, unless China itself changes its attitude. But they seem to be lost in their own quagmires with China. Their own wealth is getting reduced because they have replaced a lot of their own manufacturing and servicing by just financial games. Then they see no options but not to talk directly about China but hyphenate it with India or others.

Even on dealing with terrorism they seem to be lost in a similar quagmire. It is quite clear by now that the top army rulers and elites of Pakistan and Saudi Aarbia are quite involved in encouraging spread of such activities. They and similar other groups must be the ones who have hold over groups like Taleban or Al Qeda. But instead of confronting them, time being Americans seem to see that only option for them to support these ruling classes by arms, ammunition and financially, since they (Americans) are lost in fighting foot soldiers of these violent elites. Again they find it much easier to evade actual issues and hyphenate India with Pakistan. They declare every alternate day that since Pak rulers and army consider India as their security problem, India should address problems of these rulers.

Let us see whether Obama Administration can come out of these useless games and takes some steps bringing some long and short term real changes leading to better economic and security conditions for its own people and others.

China Rejects American complaints


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