The Magazine

Trading with the Enemy?

China wants to sell to us. We should be happy.

May 29, 2006, Vol. 11, No. 35 • By P.J. O'ROURKE
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I JUST GOT BACK from three weeks in China. So I'm a China expert--by Bush administration standards. Of course, by Bush administration standards, I'm an expert on Iraq strategy, Social Security privatization, and hurricane relief. But even a fellow with a Bush administration level of expertise can take a quick trip to the Mainland and see that America's China policy is ignorant. In the great American tradition of foreign policy bipartisanship, it's stupid too. Howard Dean thinks Hu Jintao wants to steal all of America's jobs and industries. And George Bush can't figure out why his speechwriters keep making him ask, "Who Jintao?" He knows the guy, he just met with him.

The problem with America's China policy is not ideological. True, there is the difficulty of dealing with a single-party state where the entire governmental apparatus is under the control of a small, doctrinaire political elite. But the Republicans are going to lose the House this fall. The problem is that America is wrong about economic principles. And not fancy economic principles such as Income Velocity of Money, which caused some of us to get a D on our Econ 101 midterm. America is wrong about economic principles so basic that even a doddering old Commie with a high school education like Deng Xiaoping understood them.

Economic progress requires division of labor, freedom of trade, and pursuit of self-interest. One person produces one sort of thing--a sack of rice, perhaps. Another person produces another sort of thing--transformation to an ownership society, maybe. Being self-interested, both people want both things, so they trade. The trade may not be a wise one. When Americans traded their rice sack of votes for George Bush's transformation to an ownership society, they got bungled pension and Medicare reforms and a 2006 budget deficit equal to 80 percent of the Chinese government's annual budget. But freedom of trade must be allowed. Taking the sack of rice by force destroys the pursuit of self-interest, which destroys the division of labor, which keeps anybody from doing anything about economic progress. The best minds of the nation join the Red Guards and run wild through the countryside trying to grow rice with Mao Thought while the fat, crazy peasant who had those thoughts in the first place controls the nation's minds.

Trapped in the theater of Maoism, the Chinese finally noticed the emergency exit marked "Adam Smith." China's economy barged though Deng Xiaoping's Open Door. The door smacked American policymakers in the head and they've been wandering around in a daze mumbling nonsense about the unfairness of our trade deficit with China ever since.

But there is no such thing as a trade imbalance. Trade can't be out of balance because a balance is what a trade is. Buyers and sellers decide that one thing is equivalent to another. Free trade is balanced trade. You might as well have free love then claim your partner had sex but you didn't. And a certain American president did claim that. Maybe Monica Lewinsky is in charge of America's China policy.

There is no such thing as a trade deficit. It doesn't matter if America imports all of its goods from China and exports nothing but pieces of paper. The Americans want the computer monitor, and the Chinese want handsome portraits of Benjamin Franklin. No coercion is involved. Nobody is making Americans buy Chinese goods. It's not like the Opium Wars when the British forced the Chinese to accept shipments of, shall we say, pharmaceutical imports. Maybe the Chinese will fight a war with America--the Consumer Electronics War of 2007, with Chinese gunboats cruising the fountains in America's malls. But it hasn't happened yet.

I look around my house, and everything except the kids and dogs was made in China. And I'm not sure about the kids. They have brown eyes and small noses. All the Chinese got in return were those pieces of paper and an occasional 747 and some Microsoft software. Even if the software is illegally copied 1.3 billion times--and it was, I saw it on sale--China is getting the short end of the stick. This is another economic principle that America's policymakers can't get through their lumpy, bruised skulls. Imports are good. Exports are bad. Imports are Christmas morning. Exports are January's Visa Card bill.

This can be seen in the export boom cities of China's east coast, in places like Wuxi--a town of which I'd never heard that has more people than Chicago. Wuxi is full of the holiday decorations of imported capital. Factories have been built by Volvo, GE, Panasonic, Sony, Bosch, Nikon--by seemingly every known corporation and by plenty of unknowns, such as the plant with a sign reading "Nature Factory," in case you're wondering where America gets its outdoors.

The factories are constructed with so much sleek novelty of architecture and lush fancifulness of landscaping that the industrial zones of Wuxi make the Dulles corridor look like I-90 through Hammond, Indiana. The payback is over in Wuxi's worker housing compounds. Not that it's terrible housing. It has plumbing and stuff and only four or six workers to a room. It is the concrete, high-rise version of where pledges live at fraternities, though cleaner, but with not many Volvos parked outside. A good wage is $145 a month.

The locals call the factory employees "foreign workers" or "immigrant workers," which doesn't mean Burmese or Mongolians, it means rural Chinese. If Wuxi folks work in the factories, they're supervisors.

Instead of the luxuries of life, the Chinese import money. There's no such thing as a trade deficit, but there is such a thing as a current account deficit. China holds an enormous amount of U.S. currency. This worries America's policymakers, although I'll be damned if I know why.

A U.S. dollar is an IOU from the Federal Reserve Bank. It's a promissory note that doesn't actually promise anything. It's not backed by gold or silver. If Hu Jintao brought a $100 bill with him to Washington, and if he took the $100 bill over to the Federal Reserve, what he got for it was a hundred dollars. He may have gotten it in twenties, tens, or dimes. But all the Fed will give anyone for their American money is other American money. Hu Jintao is stuck with his IOU.

Maybe America's policymakers are worried that China will spend that cash and this will somehow damage sectors of the American economy. I spent three weeks eating Chinese regional delicacies, and I'll admit that, if the Chinese spend all their U.S. dollars, our pet shops will be stripped bare. But let us consider the parable of Japan in the 1980s. Japan kept giving America radios, TVs, stereos, and cars, and we kept giving Japan money. The Japanese didn't want anything America made except Michael Jackson tapes, and we didn't even make the valuable part--the tape cassette part--of those. So the Japanese decided to buy America itself. They bought office complexes, hotels, and golf courses. The Japanese bid up the price of American real estate until the bubble did what bubbles do. By the 1990s America had all the radios, TVs, stereos, and cars, and all the office complexes, hotels, and golf courses, and all the money.

On the other hand, maybe America's policymakers are worried that the current account deficit will cause the dollar to be devalued. In that case they can quit worrying about Chinese exports because these will be as expensive as hell, which will cause rampant inflation, and the policymakers can worry about that.

The Chinese are doing our work for us, making the things we want. They're giving us zero percent financing on the money we owe them. And, on top of that, the Chinese are underwriting America's national debt. Somebody has to. Between Republican spending and Democratic campaign promises for more spending plus John Q. Public's penchant for saving bupkis, America isn't going to do anything about America's national debt. It's up to China to buy U.S. Treasury securities.

GIVEN CHINA'S ECONOMIC STRATEGIES, what policy should America adopt? We might try a policy of good manners: "Thank you, China!" But, instead, America is upset that China's currency is pegged too low.

When it comes to foreign trade, the other country's currency can't be pegged too low. It's like going to an L.A. real estate agent and being told, "There's a house in Beverly Hills. The price is five million dollars. But the client will take five million Mexican pesos instead."

When America's policymakers are acting really ignorant and stupid about economic principles, the calculated ignorance and stupidity of politics is usually involved. Chinese economic development has cost many American workers their jobs. That's the price of progress. The invention of fire cost many Cro-Magnon workers their jobs--all those people you paid to sit on you to keep you warm. No American policymaker--whether elected, appointed, or sitting on the New York Times editorial board--is likely to go on Hardball and tell the voters that when they lose their job because somebody in Wuxi is willing to do what they're doing for $145 a month, then what they're doing isn't valuable.

When what you're doing isn't valuable you have two options: You can try to do something that is valuable. Or you can try to make everyone else in the world do something that's worthless. You can be Chinese, or you can be French. You can build cars, or you can burn them. We don't want the Chinese doing worthless things like coming across the Yalu in hordes the way they did during the Korean War or crossing the Formosa Straits to belatedly settle Chiang Kai-shek's hash. Let's keep them busy making money.

If America's policymakers insist on worrying about the Chinese economy, what should worry them is the calculated ignorance and stupidity about economic principles among China's policymakers. The Chinese have--let us not forget Tiananmen Square--worse politics than we do.

China still legally limits the movements of "immigrant workers" seeking a job. The majority of the population lives in rural areas where the GDP per capita is $415 a year, one-third of the national average. And that's an official Chinese government figure. God knows what's really in peasants' pockets, if they have pants.

I went by car across 150 miles of the back-breakingly terraced, shank's mare-cultivated midget grain fields of drearisome Shaanxi province. To say that the poverty and suffering were unchanged since the Manchu Dynasty was to pay the countryside a compliment it didn't deserve. Worse things than corrupt court eunuchs and rack-rent landowners have swept through Shaanxi in the meantime. The trees are gone. They went into the backyard blast furnaces of Mao's Great Leap Forward. And lives are gone, from people the worst warlords wouldn't have thought to kill, murdered in collective famine and commune purge. I was told that existence in Shaanxi is a lot better than it was before the Open Door policy. It could hardly help but be.

Forget intellectual property rights. Civilization will survive pirated copies of Syriana DVDs. The Chinese don't have physical property rights. All land is leased from the government. The Chinese have no say in that government. The next landlord may be "Gang of Four--The Adventure Continues." Chinese civil rights don't bear thinking about, not that there are enough of them to warrant much thought. But, just from an economic point of view, putting people in jail for clicking on the wrong website icon is not a great marketing strategy.

China's state-run banking system seems to have been modeled on a combination of 1980s American Savings and Loan crisis and Jack Abramoff. I talked to an official of one of these banks. He claimed the situation was under control, with really bad loans down to 10 percent. He said, "This is an international acceptable level." If what you mean by international is Peru.

And China doesn't seem to have learned much from Japan's experience with export-driven growth. The Japanese ended up spending a decade with their economy stuck where the rising sun never shines. That could be disastrous in a country that, for all its growth, is still poorer in per capita terms than the Dominican Republic. And China now has the kind of income disparities that, a century ago, set off a century of miserable turmoil. Great Leap Backwards.

The U.S. trade imbalance with China is the last thing America should worry about, especially since, as I note, there's no such thing.

Although I could be wrong about that. I could be wrong about everything to do with America's China policy. Those of us with a Bush administration level of expertise have been, on occasion, wrong. China is manufacturing so many products for America and selling them to us so cheaply and helping us pay for them. Why? Maybe it is a plot to harm America. Maybe China will be more successful than Japan was at making us poor by giving us things. Maybe the entire Asian economic boom is a wily Oriental sneak attack on America. But if bombarding America with clothing, housewares, CD players, HDTVs, play stations, and PDAs is an Oriental sneak attack on America, it's certainly an improvement over Pearl Harbor.

P.J. O'Rourke is a contributing editor to The Weekly Standard and author, most recently, of Peace Kills (Atlantic Monthly Press).