solar panels

Green Jobs and the Chinese Exchange Rate

On the eve of Chinese President Hu's visit today with President Obama, The New York Times ran a revealing story on the decision of America's third largest solar panel manufacturer, Massachusetts-based Evergreen Solar to shutter its US production despite receiving $43 million in aid from Massachusetts.  The company is shifting production to a gleaming new facility in Wuhan province in China largely funded by the Chinese government.  As part of the deal, Evergreen has partnered with a local state-run Chinese authority.  Chalk up another win to China's highly effective business development policy.

Coming on the heels of the decision of venture-backed Solyndra to close one of its two US plants, despite receiving $535 million in stimulus loan guarantees and a publicized visit from President Obama, Evergreen's move showcases the difficulty of manufacturing solar equipment in the US.  At a time when the China price on panels is $1.90/watt and falling, Evergreen's CEO, Michael El-Hillow explains that it cost him $2 to make them in the US.  Until we can change that logic, notwithstanding a modest revival in manufacturing overall, the US is not going to create many clean manufacturing jobs. 

So why is it so difficult to compete in green manufacturing with China which also recently passed the US in the manufacture of wind turbines?  The problem is not low wages as making solar panels and many of the high tech goods China is now beginning to dominate is highly automated. 

As candidly discussed by Evergreen's CEO, the deciding factors for him were cheap financing from the Chinese government together with the low cost of manufacture in China in dollar terms due to the exchange rate.  US solar panel makers have trouble finding money at all to build plants.  When they can find it at all, they must pay double digit rates.  Perversely, in quasi Communist China, capital is cheap and plentiful.  Meanwhile, anything built in China has a cost advantage when prices are transferred into dollars.

It turns out these two things are related.  The persistent trade surpluses that China has run with the US for the last decade have the effect, due to the arithmetic of trade, of flooding the US with Chinese goods but also flooding China with US dollars.  The financial crisis has not changed this dynamic one bit.  China has recycled much of the two trillion in dollars it has taken in from unbalanced trade in to the US economy by storing the money in US government bonds, in effect funding our government deficits.  But the gusher of dollars leaves lots of money left over to fund solar plants and gleaming new infrastructure projects.  Indeed, the surplus explains a good deal of the paradox of how China is able to fund massive new infrastructure projects while the US cannot, though the US is still, for the time being, the richer country. 

Today, President Obama is asking President Hu to open markets, raise the Chinese exchange rate and increase Chinese domestic consumption.  These are all worthwhile objectives, similar to the agenda the US pressed with Japan two decades ago.  In the case of Japan, a slow approach ultimately worked.

However, in the case of China, a slow approach is no longer adequate.  By the time, China accedes to any of these US requests, it may have nipped the next generation of US manufacturing in the bud and totally dominate key future industries. We are not dealing with established industries as we were in the 1990s but with new ones where the US is already behind.  Moreover, in the case of Japan, its currency traded freely and trade issues centered on informal barriers.  In the case of China, the currency peg and trade imbalance are there for all to see.

For the last sixty years, the US led the free trade agenda in the world and prospered thereby.  But it is critical to remember that a key ingredient of free trade is free movement of capital and money.  Unbalanced trade due to exchange rate manipulation is not free trade at all.  Indeed, it can be compared to a hidden tarriff exercised by the country that is preventing its exchange rate from reaching equilibrium levels.  Free trade properly includes not only that in goods, but in capital and currencies as well.  Indeed, exchange rate manipulation, then known as Beggar Thy Neighbor policy, was as detrimental to the world economy in the 1930s as the better known Smoot Hawley tarriff and was one of the reasons for the creation of the Bretton Woods institutions after World War II to prevent disastrous exchange rate competition.

The US is pressing the right agenda.  But it must press harder.  A more muscular approach should include not just asking the Chinese to free up their exchange rate but using our leverage as a huge buyer of goods to ensure they do as part of a broader, balanced trade relationship.

Absent a change in the corrosive dynamic of the US China trade imbalance, the US is likely to lose more high tech jobs.  The Chinese people will suffer too as higher standards of living are delayed.  But the entire global economy may suffer as well if we do not avert the instability this corrosive dynamic is engendering.

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