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December 13, 2006
Dollar Protectionism: It's Never Enough
By Thomas BrayBack in the early 1980s, when the dollar still bought slightly about 240 yen, Detroit's auto companies were clamoring for pressure on Japan to "revalue" its currency. In an interview, the-then chief executive of Ford Motor Co., Philip Caldwell, told me flatly: "If we can get the yen to 180 to the dollar, Ford can do the rest."
Well, today the Japanese yen is about 117 to the dollar and Detroit is still at death's door. Ford and General Motors are conducting mass buyouts of their unionized and white-collar work force in a frantic scramble to get costs under control, and there is talk that Daimler will dump its Chrysler division. But one thing hasn't changed: the American auto companies, along with many other manufacturers, are still clamoring for help on the currency front.
Only this time the Great Currency Satan is China, rather than Japan. The top executives of Detroit's auto companies met with President Bush right after the election to ask for pressure on China to make an upward adjustment in the Chinese yuan. Executives from Caterpillar, Procter & Gamble and others met with Treasury Secretary Henry M. Paulson Jr. recently to demand a hard line on currency when he meets with Chinese leaders this week.
And the National Association of Manufacturers, which is now headed by former Michigan Gov. John Engler - who has long embraced the Detroit view that much of the Asian manufacturing advantage stems from currency manipulation - says its No. 1 goal is somehow forcing the Chinese to revalue their currency. The NAM claims that it is undervalued by as much as 40 percent.
It's déjà vu all over again. But as the Caldwell example shows, it's never enough. The Japanese yen has more than doubled in value against the dollar, yet Detroit's competitive problems remain severe, perhaps fatal. Bankruptcy has scythed through the automotive industry even as Toyota, Honda and others, to hedge against protectionism, have established strong beachheads inside the American market, mostly in right-to-work states.
And when governments start tinkering with currencies, or are even suspected of doing so, the market is quick to react. Think of the stock market crash of 1987, which followed a public spat between the U.S. Treasury and the German Bundesbank over currency issues. (At that point, the yen was about 150 to the dollar.) Only strong intervention by the new Fed chairman, Alan Greenspan, may have saved us from a new Depression. How good were the 1930s for manufacturing?
The current Fed chairman, Ben Bernanke, has been getting strong reviews of late. But he may yet be tested in the marketplace, particular if his decision to travel to China at the same time as Treasury Secretary Paulson is perceived as an attempt to strong-arm Beijing into a major currency realignment. The dollar has been declining for weeks, perhaps in expectation of a devaluation of some sort, Paulson's claim that he favors a strong dollar notwithstanding.
With Democrats in charge of Congress, the forces favoring dollar protectionism may be gaining ground. Michigan Democratic Congressman John Dingell, who will chair the powerful House Energy and Commerce Committee, says he plans to make currency issues a top priority. Translation: there might still be little appetite for old-fashioned trade barriers, such as tariffs, but the premise that the nation's trade deficit - now running at a rate of $229 billion with China alone -- poses a threat to American prosperity will provide plenty of cover for the more subtle poison of dollar protectionism.
The Bush administration needs to be clear: retreat from the global economy, by whatever means, is not an option. Indeed, the trade deficit is a fairly meaningless construct. Maine has a trade deficit with California. What of it? What really counts is a growing American economy, and dollar protectionism - or even the threat of it -- could bring that to a rapid halt.
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