Bush Administration Mortgages U.S. to Red China Over NAFTA Trade

Under the Bush Administration, the U.S. trade deficit with Communist China has expanded dramatically, increasing our dependency on China as a source of foreign exchange currency into which the U.S. Treasury sells debt to finance the large and seemingly endless Bush Administration budget deficits.

Meanwhile, as we have already discussed, Red China is positioning increase its penetration into the NAFTA marketplace, planning now to operate several Mexican seaports to move an increasing volume of containers with cheap Chinese goods into the U.S. along proposed NAFTA super-highways and railroad corridors.

Since 2000, our trade deficit with China has grown from $83.8 billion to a 2005 total of $201.6 billion. This reflects imports from China growing nearly 250%, from a 2000 total of $100.1 million to a 2005 total of $243.5, while U.S. exports to China in 2005 stood at only $41.8 billion, despite a nearly 400% increase since 2000. A Congressional Research Service (CRS) report presenting these data in May 2006 concluded that the “U.S. trade deficit with China is now larger than that of any other U.S. trading partner, and in 2005 it was nearly equal to the combined U.S. trade deficits with Japan, China, and Mexico ($209 billion).” Moreover, the gap is widening. As the CRS report noted, the “U.S. trade deficit with China in 2005 was about 24% higher than it was in 2005.”

The CRS in evaluating the trade deficit with China noted the competitive advantage China’s under-market labor force has over U.S. labor markets. Writing in March 2006, the CRS reported:

China has a poor record of adopting or enforcing internationally recognized standards for working conditions and environmental regulation which, in addition to violating human rights and harming the environment, may provide PRC (People’s Republic of China) businesses with unfair competitive advantages.

Since 2000, the U.S. manufacturing sector has lost 3 million jobs, although economists insist that shifting manufacturing to the lower labor cost environment in China is not the sole contributing factor in an emerging global production market.

Still, the CRS warned that backlash from Congress is inevitable:

The continued rise in the U.S.-China trade imbalance, complaints from several U.S. manufacturing firms over the competitive challenges posed by cheap Chinese imports, and concerns that U.S. manufacturing jobs are being lost due to unfair Chinese trade practices have led several Members (of Congress) to call on the Bush Administration to take a more aggressive stance against certain Chinese trade policies deemed to be unfair.

The CRS continued, gently suggesting that Bush administration should take active steps to reduce our trade imbalance with China, anticipating adverse congressional reaction otherwise.

For example, some Members argue that China manipulates its currency vis-à-vis the dollar to make its exports cheaper, and imports more expensive, than they would be under a floating system. The threat of congressional legislation led China in July 2005 to appreciate its currency by 2.1% and to switch to an exchange rate system based on a basket of currencies (including the dollar). However, many U.S. policymakers charge that these reforms have not gone far enough and have warned of potential congressional action if China fails to make further reforms.

We need look no further than the website of Sen. Charles Schumer to find charges that China is unfairly manipulating the yuan for trade advantages and that the Bush administration is responsible for a growing number of manufacturing jobs lost to China.

Currently, China holds the world’s largest accumulation of foreign exchange currencies, valued at $941 billion in July 2006, expected to reach $1 trillion by year-end 2006, replacing in February 2006 a top position previously held by Japan (with $817.94 billion in foreign exchange reserves in July 2006).

As reported by Reuters in July 2006, the White House is still projecting a 2006 budget deficit of $296 billion, despite increased tax revenue exceeding initial estimates. The U.S. current account deficit for 2005 reached a record $805 billion, or 6.4% of GDP, up 21% from 2004.

Our growing foreign trade deficit with China plus our continuing budget deficits put the Bush administration in an uncomfortable position. Increasingly the goods being sold by our top mass merchandisers are made in China, while at the same time we have to turn around and go into debt to China, forced to sell Treasury debt to China to subsidize our entitlement-payment heavy budget shortfalls.

Of outstanding marketable Treasury securities at the end of June 2006 totaling $4.254 trillion, approximately 49% were in the hands of foreign holders. Currently, China still holds approximately 70% of their foreign exchange dollar-denominated assets, including $327.7 billion invested in U.S. Treasury bonds as of Aug. 1, 2006, making China the second largest lender to the U.S., right after Japan (with $635.3 billion of foreign exchange holdings in U.S. Treasury bonds).

Yet, China has been reducing the percentage of their foreign exchange currency assets held in dollars, since a 2003 high when 83% of China’s foreign exchange currency assets were in dollar holdings. China has moved away from foreign exchange dollar holdings seeking to buffer the impact of a dollar that depreciated 12% against the euro between November 2002 and August 2005. Should China decide to reduce the percentage of their foreign exchange currency held in dollar assets to some 65% or lower, the U.S. Treasury could have a more difficult time subsidizing our budget deficits.

China, instead of Mexico as originally promised, seems the clear winner in the NAFTA marketplace. That Mexico has not developed economically since NAFTA is evidenced by S. 3622, introduced by Sen. John Cornyn (R.-Tex.) to develop a North American Investment Fund. Cornyn decided to sidestep his own bill when his office realized that the proposal mirrored a key recommendation advanced by American University professor Robert Pastor, whom we have characterized as the “Father of the North American Union.”

The Bush Administration has followed the theory that allowing China free and open access to penetrate (and perhaps dominate) the NAFTA marketplace will engage the Chinese such that their political allegiance to the U.S. is more firmly secured. Yet, China continues to engage in a military buildup, with U.S. intelligence failing to realize the importance of several key military developments in China over the past decade. Then, in August 2006, the U.S. intelligence community concluded that China has equipped and launched the first Type 94 submarine ballistic missile, giving China a second-strike nuclear capability. Additional friction with between China and the U.S. can be anticipated as Taiwan bids once again for UN membership when the 61st session of the General Assembly convenes on Sept. 12, 2006.

President Bush is taking a big gamble that cheap goods from China and unrestrained NAFTA free trade, all across wide-open borders with Mexico and Canada will continue to fuel economic growth.

Should we experience a market downturn from a continuing Federal Reserve determination to control inflation by tightening interest rates, the Bush administration may experience a November 2006 electoral reversal greater that already anticipated. In an economic downturn of any severity, those Americans who have lost manufacturing jobs while China is gaining manufacturing jobs are unlikely to be assuaged that the real culprit is low productivity gains in the U.S. manufacturing sector, rather than a perceived Bush administration policy to favor potential foreign enemies at the expense of the U.S. worker at home. Yet, as the mid-term elections approach, the Bush administration seems set in a determination that unrestrained free trade is a solution for all problems economic.

The Bush Administration is running the risk that voters will conclude that the U.S. is broke while China is awash in dollars, all for the price of cheap sneakers and electronic games bought at Wal-Mart. How ironic it would be in world history if Red China comes to dominate an emerging North American Union without firing a shot, simply by the force of numbers and the power of harnessing unimpeded a 21st century slave trade?