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In January and February, the U.S. trade deficit with China jumped 50% from a year earlier. China now accounts for about 25% of the total U.S. trade deficit.

With the trade deficit hitting a new record in February at $61 billion, something has to be done.

Unfortunately, all the "somethings" being proposed in Washington and on Wall Street won't do anything to fix the problem. At best, they're like spitting in the ocean. At worst, they're the first step to setting off the kind of retaliatory trade war that produced the Great Depression.

But don't worry. I've got the answer. What China needs -- and what would close the U.S./China trade gap most expeditiously -- are unions. Nothing would close the gap in wages and benefits between China and its trading partners in the developed world faster than giving Chinese workers the right to form truly independent unions.

Overcoming the Cost Gap

Why won't current proposals work? Because they rely on increasing production costs in the hope it will curb demand. This won't work because the cost differential between China and its trading partners in the developed world is just too big.

Politicians, of course, like the demand-side solutions because they sound good. For example, a group of U.S. senators has called for imposing a 27.5% tariff on all U.S. imports from China unless China lets its currency, called the yuan, float higher. (The yuan is currently pegged to the U.S. dollar.)

A bill in the U.S. House of Representatives would define the yuan/dollar peg as currency manipulation and call it an illegal trade subsidy. Under current world trade rules, that would entitle the U.S. to retaliate or force the Chinese to pay huge penalties. The White House has agreed to consider a petition from U.S. textile manufacturers to put higher tariffs on seven types of Chinese-made clothing imports.

This posturing may play well to politicians' constituents, many of whom are feeling true pain as their jobs move to China. But very few politicians actually expect these proposals to be adopted; rather, they are being used to apply pressure on the White House.

The Bush administration wants to avoid a trade war, because it needs China to help prevent the spread of nuclear weapons in North Korea and Iran. The best it can hope for is for China to react to the trade-war saber-rattling by allowing the yuan to float. A stronger yuan would make Chinese goods more expensive for U.S. consumers and would make U.S. products cheaper for Chinese buyers.

Why China Will Go for the Float

I think it's likely that China will give ground on the yuan relatively soon. The Japanese have added their urging to that of the U.S., and with Europe pressing the Chinese hard on textile imports, letting the yuan strengthen would ease China's relations with its major trading partners.

And then there are the purely domestic arguments for allowing the yuan to appreciate. To keep the yuan pegged to the dollar, the Chinese central bank has to buy a big chunk of the dollars flooding into the country to pay for exports in exchange for yuan.

Then, to keep that increase in the yuan money supply from igniting inflation, Beijing has to sell bonds. (Selling bonds has the effect of taking money out of circulation since investors give up yuan and get bonds in return.) That gets expensive, especially because the Chinese central bank has had to pay higher interest rates to get investors to buy recent offerings.

Wall Street currently believes that the only thing preventing the Chinese from revaluing the yuan is a desire not to reward the currency speculators who have made big yuan buys in anticipation of a currency appreciation.

How much of a jump in the value of the yuan is Wall Street projecting? Merrill Lynch is among the biggest yuan bulls. It predicts a 10% increase. Other analysts project smaller gains against the dollar of roughly 3% to 5%.

Why It Won't Matter Much

Even a 10% rise wouldn't make much difference in the U.S./China trade deficit. Like all other "solutions" that are built on reducing the demand by U.S. and other developed-world consumers for Chinese goods, the yuan-appreciation solution founders on the size of the difference in costs, especially labor costs, between the U.S. and China.

Let's take a look at wages and benefits around the world in the car industry. Germany tops the scale at $49.60 an hour. (Remember, these are wages and benefits, so health care and pension benefits are included in this hourly figure.) Japan is one step down from the top at $40.96. (And here, remember that these are just for Japanese auto plants in Japan.) The U.S. comes in third at $36.55 an hour.

Go scrolling down the list looking for China. Pass Brazil at $5.87 and keep going until you get to China at $1.96 an hour. Wages and benefits. Think a 10% or even a 30% jump in the value of the yuan against the dollar is going to close that gap? A 100% wage-and-benefit increase won't even bring Chinese wage and benefit costs up to the level of Brazil.

Is it any wonder that in the first two months of this year, China's automotive exports, mostly auto parts right now, exceeded imports by nearly $1 billion? That marks the first time in three years the Chinese auto sector has exported more than it imported. The Chinese Commerce Ministry projects that Chinese auto exports, still likely to be mainly auto parts, will rise $70 billion to $100 billion by 2010. Exports last year were just $12 billion.

The Real Solution

The solution isn't in trying to reduce demand for cheaper Chinese goods by somehow raising the price of these goods enough so world consumers stop buying them. Even if that were a good idea in itself (and I don't think trade wars are ever good ideas), the cost gap is so huge that I don't think there's anyway to shrink it enough to reduce demand for Chinese goods.

Instead, we should be going after the other end of the trade deficit by increasing the demand for goods from the U.S. and elsewhere in the developed world. We can't achieve that by putting the currency markets on the job. Private consumption in China last year averaged $520 a person. Think that average Chinese spending $520 a year is going to fill a trade gap running at $170 billion a year if there's a 10% drop in the price of U.S. goods?

To get that average Chinese to spend more, period -- and to spend more on U.S. goods -- he or she has got to make more money. Average real wages did climb 11% in 2004, and that did increase labor costs per hour by roughly 15% in 2004. But that only took the national average labor cost per hour to $1 from 87 cents.

At this rate, in five years, the Chinese average labor cost per hour will have doubled from $1 in 2004 to $2.01. That sure won't stop a lot of U.S. jobs from being shipped to China, and it sure won't provide a lot more demand for U.S. imports.

To do that -- to slow the move of U.S. (and Japanese and European) jobs to China and to increase Chinese demand for U.S. goods -- we should be doing everything we can to help Chinese workers get higher wages.

The Challenge

They do need help. The official Chinese rate of unemployment is about 4.5%. Outside estimates put it closer to 10%. And that's after years of better-than-9% economic growth. One problem is that even with China's drastic but successful population-control measures, the Chinese population added 149 million people, 10% more people, from 2003 to 2004. At 9% growth, the Chinese are basically adding enough jobs to stay even with population growth.

The problem is bigger than that, though. Many of the Chinese now counted as employed are working at jobs in money-losing state-run companies. These jobs are really just a state-run "make work" program. Other Chinese, especially in the countryside and smaller towns and cities, are underemployed. Estimates put as many as 100 million in this category.

It's tough enough to get your wages up if there are 80 million unemployed and 100 million underemployed workers in the national labor pool. It's even harder if you aren't allowed to organize in order to demand higher wages and higher benefits.

China's 'Unions'

Following the path blazed by Lenin and the Bolsheviks after they seized power in Russia, one of the first tasks of the Chinese Communists after they gained power was to abolish all independent trade unions. Chinese workers can join unions, but only official unions backed and controlled by the Communist Party.

Workers who try to organize independent unions, or to stage protests to demand higher wages or better working conditions, are liable to find themselves in a state-run psychiatric hospital or facing long prison terms.

That hasn't ended protests, however. It's just made them more ad hoc, as demonstrators with a grievance, but without a formal organization that would challenge the Communist Party's monopoly on power, come together to confront factory or government officials. Estimates from within the Communist Party itself put the number of such protests at 60,000 in 2003, and that number shows an annual growth rate of 17% during the last decade.

These protests often result in a one-time payment -- in effect, a bribe to the demonstrators so they'll go home. They have been much less successful at tackling some structural issues, such as severance pay when a state-owned factory closes down, or health and safety issues in China's notoriously polluted industrial sector, or unemployment benefits that can be as low as $20 a month.

A Long Road Ahead

After the U.S. emerged as a global economic power in the years following the civil war, U.S. workers fought, often in violent pitched battles against corporate goons and government soldiers, for the right to organize and for a bigger share of the economic pie. It took a good 60 or 70 years for workers to win that battle here. It's a measure of the success of those workers that today so many of us can think of unions as dinosaurs that have outlived their usefulness.

Chinese workers are just at the beginning of that battle for recognition and better pay. They've got a long way to go, and in many ways they face a tougher battle against their own economic system than U.S. workers did in the 19th century.

Anything we can do to speed them along that path is not only an act of altruism but also an act of pure selfishness. The faster the Chinese get rich, the better off those of us who live in the U.S., Europe and Japan will be.

The AFL-CIO has petitioned the Bush administration to impose trade sanctions against China if the country does not enforce workers' rights, and to negotiate an agreement with China that would reduce those sanctions if China complies. It's a start.

Changes to Jubak's Picks

Sell Tejon Ranch:

If I owned

Tejon Ranch


in the real world, I'd take some profits off the table here and hold on to the rest of my position. For long-term investors, this play on one of the few big undeveloped parcels of land north of Los Angeles is a long-term hold. But in Jubak's Picks, it's all or none, so I have to take my profits by selling the entire position.

The stock has climbed above my $47 target price, and it has actually sold off after the company's very solid first-quarter earnings announced on May 5. The stock's chart has looked increasingly shaky since the middle of February, and now the 50-day moving average is in a clear downtrend. I think this signals a correction in the shares to be followed by base-building and then, finally, another advance. I'm going to let that play out over the next few months and see if I get another entry point into the stock. I'm selling with a 28% gain since I added the shares to Jubak's Picks on Oct. 3, 2003.

A correction:

In my May 4 column

Five Oil Stocks for a Dividend Bonus, I cited

St. Mary Land and Exploration


as an example of an oil stock that paid "nothing" in dividends. That was a mistake. St. Mary Land and Exploration, as a number of people at the company have been good enough to point out, pays a semiannual dividend of 5 cents a share. I regret the error.

At the time of publication, Jim Jubak did not own or control shares in any stock mentioned in this column.