Commentary courtesy of:
Jephraim P Gundzik,
Asia Times, Hong Kong

Nov. 18th - Last week's sweeping victories for Democrats in the US mid-term elections could prompt significant economic policy changes in the United States over the next 24 months.

Boosting US exports will top the Democrats' economic agenda. In addition to stepped-up efforts aimed at prying export markets open, the 110th Congress may pressure the increasingly pliant administration of President George W Bush to reverse course on exchange-rate policy and encourage the depreciation of the dollar. Intensifying trade disputes, the sliding value of the dollar and weakening US demand could produce a sharp slowdown in Asia's export and economic growth next year.

With majority positions in the House of Representatives, in the Senate and among state governors, Democrats are now firmly in control of America's legislative initiative, giving the party a unique opportunity to increase its popular support ahead of the 2008 presidential election.

Democrats are unlikely to challenge the incoherent foreign policies of the Bush administration, which have produced an unwinnable war in Iraq and growing instability in the Middle East, Africa and Asia. As in the Republican Party, there is no consensus among Democrats about the future role of the US military in Iraq and the direction of Middle East and other foreign policies. Only a handful of legislators even recognize that Iraq has already become engulfed in civil war.

Rather than pressuring the administration into changing its foreign policies, Democrats will probably be happy to leave the foreign-policy initiative in the hands of President Bush, who has proved remarkably adept at strangling popular support for his Republican Party in the past two years. Democrats will use their control over powerful legislative committees in the House and Senate to highlight the administration's ongoing foreign-policy catastrophes, further undermining popular support for the Republicans.

Economic policy initiative...
In sharp contrast to foreign policy, Democrats and Republicans are seemingly united in the realm of trade and foreign-exchange policies. Legislation aimed at forcing other countries to open their markets to US exports and revalue their currencies against the dollar, another term for dollar devaluation, have significant bipartisan support in the House and Senate, for good reason.

The US trade deficits with Canada and Mexico, America's top two trading partners, have grown from US$52 billion and $41 billion in 2003 to an estimated $85 billion and $60 billion in 2006, respectively. The US trade deficit with the European Union has increased from $97 billion in 2003 to an estimated $135 billion in 2006. Finally, the US trade deficits with China and Japan have soared from $124 billion and $66 billion in 2003 to an estimated $250 billion and $90 billion in 2006, respectively.

Factors such as rapidly rising energy prices and overly strong growth in private consumption expenditure have boosted US imports in the past four years, contributing to record growth of the trade deficit. Equally important has been the plunging competitiveness of US manufactured goods wrought by an increasingly overvalued dollar. Dollar overvaluation has driven the politically and economically crucial US auto-manufacturing industry to the brink of bankruptcy by making imported autos cheaper for Americans. Dollar overvaluation has also greatly impeded the export growth of US manufactured goods.

In addition to pushing the US trade deficit to stratospheric levels, evaporating competitiveness of America's manufactured goods has contributed to the loss of nearly 3 million jobs in the manufacturing sector since 2000. Growing employment in the service sector has offset these job losses somewhat. However, slowing growth of private consumption expenditure because of the collapse of the US housing market will lead to service-sector job losses and mounting unemployment in 2007.

In addition to pushing the US trade deficit to stratospheric levels, evaporating competitiveness of America's manufactured goods has contributed to the loss of nearly 3 million jobs in the manufacturing sector since 2000. Growing employment in the service sector has offset these job losses somewhat. However, slowing growth of private consumption expenditure because of the collapse of the US housing market will lead to service-sector job losses and mounting unemployment in 2007.

Republicans will contend for the support of manufacturing-sector employers and employees in 2008, making it improbable that the party's legislators will obstruct Democratic trade and exchange-rate initiatives. Republicans have little to lose and much to gain by supporting such initiatives. Strong bipartisan support for trade and exchange-rate policy changes will be very difficult for the Bush administration to resist. As a lame duck, President Bush will have little power and even less inclination to swim against the rising tide of protectionism and dollar depreciation in Congress.

Nothing good for Asia...
Asia's economic giants, Japan and China, are likely to take the brunt of any economic-policy changes engineered in the US Congress. America's auto manufacturers have long argued that undervaluation of the Japanese yen has been behind all of their troubles. Ahead of the late meeting in late June between Bush and the then prime minister, Junichiro Koizumi, Democratic senators from Michigan, where all US auto manufacturers are based, sent a letter to Bush demanding that he address "the deliberate actions of Japanese officials to maintain an undervalued yen" and Japan's failure to open its market to imports of US automobiles.

These demands were reiterated by the heads of America's three largest automobile manufacturers when they met with Bush this Tuesday.

Yen undervaluation is synonymous with dollar overvaluation. Expect the 110th US Congress to produce legislation that calls for immediate action by Japan both to strengthen the exchange rate of the yen and open its auto market to US exports. Such legislation will put enormous pressure on the Bush administration to push the value of the dollar lower.

Like Japan, China has raised the ire of the US Congress over the past several years for so-called unfair trade practices, including exchange-rate manipulation and failure to open its markets to US exports. Proposed legislation including the Schumer-Graham Bill that would slap a 27.5% tariff on all imports from China and the closely related Grassley-Baucus Bill have strong support among both Democrats and Republicans.

More significant, one of America's most stridently anti-China legislators, Nancy Pelosi of California, is to become House Speaker, the most powerful position in the House of Representatives. Over the past year, Pelosi has often asserted that China intentionally manipulates the value of its currency to gain a trade advantage. Expect some type of anti-China legislation to be passed with broad bipartisan support by Congress by mid-2007. This bipartisan support will make it impossible for Bush to veto such legislation.

Legislation in the US aimed at prying open export markets in Japan and China is likely to intensify already-substantial trade tensions, especially between Washington and Beijing. Meanwhile, the implicit change in US exchange-rate policy that will precede such legislation will increase downward pressure on the value of the dollar against all major currencies, particularly the yen.

Escalating trade disputes with the US, the sliding value of the dollar and further weakness of growth in US personal consumption expenditure could produce a sharp slowdown in export and economic growth across Asia in 2007.