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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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.