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From The Editor
James M. Borneman, Editor In Chief

Competition In Goods And Currency

James M. Borneman, Editor In Chief

C ompetition is a basic principle of sound capitalism. Throughout US economic history, every time an industry giant generates a healthy whiff of monopoly or market domination, the US government has responded by trying to break things up. Think Ma Bell, Standard Oil, Microsoft or the scrutiny major corporations go through when they merge.

It seems that competition is integral to the way the US economy works. So why, in a time of mass globalization, does the US government fail to see the importance of maintaining a competitive business environment globally?

Competitive fairness in a global economy should appeal to the most ardent free-trader. Free trade is dependent on free markets — not markets that will be free. The law of comparative advantage — the basis for most free-trade arguments — was cast in a competitive marketplace. The World Trade Organization supposedly promotes this idea. However, something is lost in translation — maybe courage?

The basic concept of market-determined value for currencies is difficult to explain. Capitalists assume it to involve the simple process of exchange. When you think about it, currency only exists for exchange — it is difficult to haul livestock around. But in a capitalist economy, even the livestock’s value as currency is market-determined.

In recent months, the US dollar has lost value in most of the world. The United States has been importing a tremendous amount of product. As the dollar has weakened, imports and the prospect of future imports should ebb, and the atmosphere for US manufacturers of all types should improve.

But, not so fast — with European currencies consolidated into the euro, Europe will feel the brunt of this currency slide. The sticking point is that the Chinese currency (yuan) has declined with the US dollar. This infers that the US economic climate that caused the dollar’s slide is also apparent in China — not so.

Since 1994, China’s currency has been artificially fixed, or “pegged,” to fluctuate with the dollar. As the US trade balance has chased away demand for US dollars, the dollar’s value has dropped. Demand for US exports should rise — putting US-made goods “on sale” around the world. China’s failure to float its currency derails the process. If the dollar fell against the yuan, US goods would be in a competitive position to export to China, while stemming imports from China. Fair yuan valuation would reflect China’s amazing economic growth since 1994.

If China floated the yuan, its estimated adjustment of 15 to 40 percent would raise the yuan’s value — and global competitive free trade would benefit. China also would face slower growth and increased unemployment. Even with bipartisan efforts by Senators Schumer, Dole, Bayh and Graham in asking the Treasury Department to take action, political will must build further to address the issue effectively.

US manufacturing is competitive. What is needed is fairness. If the US government is willing to sue Bill Gates, how about some action on global competitive fairness?

August 2003




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