The latest Commerce Department figures on U.S. exports and imports leave little room for doubt that the “Great Recession” in America is coming to a close. The U.S. consumer is finally back in the stores, and buying up imported goods with a vengeance. The latest figures show that the U.S. trade deficit widened more than expected in February, as a very small gain in exports was more than offset by a huge jump in the purchase of importegoods; especially goods made in China. Although the wider trade deficit is a sign of a rebounding U.S. economy, it is also a sign that huge transfers of American wealth to Chinese companies is also rebounding; and this is not necessarily a good thing. In fact, the trade deficit with China will only increase the pressure on the Obama Administration to impose trade sanctions on China unless the country begins to allow its currency to start rising again in value against the dollar. The pressure is primarily coming from U.S. manufacturers who have (rightly)

complained that the Chinese have essentially subsidized their manufacturers by keeping the Yuan artificially cheap, and the U.S. dollar artificially expensive.

By manipulating the value of their native currencies, many countries in the past (and currently) have attempted to protect their own industries from foreign competition, and attempted to accomplish political objectives. In the case of China, the government has established an “official” exchange rate for the Yuan versus the U.S. dollar, rather than letting free markets for the currency determine its value. All economic transactions

by Chinese firms with foreigners must be done at the official exchange rate, and all foreign exchange transactions must be sanctioned by, and cleared through the government. The Chinese government, therefore, has the sole power to determine the dollar value of Chinese exports, regardless of the actual free market value. In actuality, the free market value of the Yuan is considerably higher than the Chinese government’s official rate. For example, at the free market exchange rate, a Chinese-made widget may cost 100 Yuan, or 10.00 U.S. Dollars. The free market has determined that 10 Yuan have a fair value of one U.S. Dollar. However, at the Chinese government’s controlled rate, a widget may cost 100 Yuan, or 8.00 U.S. Dollars. In the second case, the government has kept the value of their export artificially low by “subsidizing” the manufacturer an amount of two dollars.

Eventually, the practice of under-valuing their currency comes back to haunt the exporting country for a number of economic reasons. As their own economy continues to prosper and grow, and as native populations begin to enjoy the blessings of prosperity, the value of foreign-made goods become prohibitively expensive. In the meantime, the Chinese economic model has worked very well for them by significantly reducing world-wide competition, including U.S. manufacturers.

Although American consumers have greatly benefited from relatively cheap Chinese imports, time has come to insist that the Chinese Yuan be “officially” revalued to closely approximate its true market value. The price to the American economy of delaying this action could very well be the loss of millions of American manufacturing jobs, and a perpetually high unemployment rate. If the Chinese fail to take action, then the U.S. government will have no choice but to impose steep tariffs, even at the risk of igniting a prolonged trade war. Enough is enough!

Rich