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 Richmans' Trade and Taxes Blog

Obama correctly identifies one of the reasons for his economic failure!
Howard Richman, 9/12/2011

In his jobs speech, President Obama inadvertently identified one of the reasons his recovery plan failed. Here is the relevant part of his statement:

And we're going to make sure the next generation of manufacturing takes root, not in China or Europe, but right here, in the United States of America. If we provide the right incentives and support — and if we make sure our trading partners play by the rules — we can be the ones to build everything from fuel-efficient cars to advanced biofuels to semiconductors that are sold all over the world. That's how America can be number one again. That's how America will be number one again. 

One of the chief rules of trade is written into the IMF charter. Specifically, Article IV of the International Monetary Fund Articles of Agreement requires that countries "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members." President Obama has let many U.S. trading partners violate this rule. The worst offender has been China.

According to statistics reported by the Asian Development Bank, When President Obama took office at the beginning of 2009, the Chinese government had $1,946 billion worth of foreign exchange reserves which it had accumulated in violation of this rule of trade. These reserves have increased during Obama's presidency:

• During 2009, China accumulated an additional $453 billion.
• During 2010, China accumulated an additional $256 billion.

In addition to manipulating exchange rates by accumulating foreign exchange reserves, as listed above,  many of these governments, inluding China's govenrment, have also manipulated exchange rates by accumulating other U.S. assets through their sovereign wealth funds. President Obama has permitted these accumulations as well.

These currency manipulations prevented the yuan-dollar exchange rate from adjusting to an exchange rate which would balance trade. As a result, America's net exports to China have fallen dramatically during President Obama's presidency, as shown in the following graph:

As President Obama himself points out, countries that require their trading partners to play by the rules "can be the ones to build everything from fuel-efficient cars to advanced biofuels to semiconductors that are sold all over the world." His decision to let China violate those rules insures that China, not the U.S., will be the country that builds everything from fuel efficient cars, to advanced biofuels to semiconductors.