Private sector forecasters are now projecting U.S. growth of 2.25% in 2012, which won’t be enough to return 20 million unemployed or under-employed people back to full-time work.
In a U.S. Treasury report on foreign exchange just released, the currency of China – renminbi – is persistently misaligned and remains “substantially undervalued.” This constrains global growth at a time when slumping European economies threaten what Treasury terms is “significant risk” to what is a sluggish global recovery. Forecasts for 2012 have been repeatedly revised downward – in early December projecting just 2.7% global growth in 2012, down from 3.2% that economic soothsayers forecast in September.
In what will undoubtedly become a Presidential campaign issue next year, as a result of the undervalued renminbi, China continues to increase its global export market share, and it remains heavily dependent on exports. Even though currency reform was started in 2005, China “has made little progress in making the required shift to domestic consumption,” according to Treasury. China accumulated $373.1 billion in additional foreign exchange reserves in the first three quarters of 2011 — $88.8 billion more than the $284.3 billion accumulated in the first three quarters of 2010.
This hurts any national economy, including the U.S.’s, that compete with China by exporting goods and services. The U.S. auto industry is being hurt by this. China earlier this month imposed additional punitive tariffs of almost 22% on top of existing 25% taxes on the import of GM, Ford and Chrysler vehicles into China in an apparent violation of WTO rules. The U.S. only imposes a 2.5% tariff on vehicle imports.
U.S. economic growth plunged during the first half of 2011, to just 0.9% at an annual rate, due partly to temporary factors, then picked up in the third quarter to a 1.8% annualized. Private sector forecasters are now projecting growth of 2.25% in 2012, which won’t be enough to return 20 million unemployed or under-employed people back to full-time work. Unemployment is still unacceptably high at 8.6%, although 2.9 million private sector jobs have been added over the past 21 months.
China’s Ministry of Commerce announced that it would begin to impose—effective immediately and continuing for two years—a new duty on cars imported from the United States. The duty, which the Chinese government said is to offset unfair government subsidies and a policy of dumping on the Chinese market by U.S. manufacturers, will affect only vehicles with engines larger than 2.5 liters. The duty will range from between 2-21.5%, with the rate increasing as the size of the vehicle’s engine increases.
Due to China’s pre-existing duty and tax structure (before the recent import duty increase in December), these types of vehicles carried retail price tags that were already 2-3 times higher than the retail price in the United States. For example, a typical SUV that retails for $27,000 in the United States might retail for $75,000 in China.
Second, the Obama administration and U.S. Congress have become more insistent that China open its markets by reducing tariffs and policy barriers, and let its currency float rather than peg its value to the dollar. The U.S. maintains that China’s currency is undervalued by 20-30%, which gives Chinese manufacturers an advantage in export trade, while making imports less price-competitive in China. As a result, some in the U.S. Congress have been clamoring for regulations to impose higher duties on Chinese-made goods imported into the U.S., or an appreciation of the Chinese yuan.
It is not clear what the U.S. response to China’s higher duty on U.S.-made vehicles will be. Some U.S. trade representatives are already saying that the new Chinese legislation contravenes World Trade Organization (WTO) rules, and are threatening to file a complaint with the WTO. If they do, any resolution in the dispute could take months or years to hash out. In the meantime, the uneasy tit-for-tat trade relations between the U.S. and China will likely continue