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China: An Unlovely but Necessary Trading Partner?

12:00 AM, May 12, 2012 • By IRWIN M. STELZER
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So cut through China’s tetchy insistence on its sovereignty and America’s at-times bellicose statements, and you have mutual interdependence, something Obama has learned, and Romney has so far refused to admit, perhaps even to himself. Which is why at the height of the Chen controversy Prime Minister Wen chose not to stomp out of his meeting with Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner, and announced that the conference had produced “some important breakthroughs,” while Geithner reported “very good progress” at the fourth round of the U.S.-China Strategic and Economic Dialogue. The regime’s attitude, Geithner later announced to an audience at the Brookings Institution, “signals a continued commitment by Chinese authorities to a broad change” in economic strategy.

Well, yes and no. It is true that China’s trade surplus is declining. Worker shortages and dissatisfaction are forcing labor costs up, to which add a 30 percent real increase in the yuan relative to its trading partners’ currencies since 2005 (40 percent against the dollar). That makes Chinese goods less competitive in world markets. In 2007, China’s excess of exports over imports came to 10 percent of its economy; last year that figure was less than 3 percent. But the relative decline in its surplus with the world might be a temporary phenomenon. The recession has reduced consuming countries’ demand for all sorts of made in China goods, while China’s anti-recession infrastructure construction stimulus is sucking in imports.

It is also true that our exports to China are increasing. But China’s trade surplus with us hit a record $202 billion last year. Despite the authorities’ claim that the yuan is now at its fair market value, it is clear that without strenuous efforts by the regime to keep the currency undervalued, it would rise further. It is also clear that China is not prepared to open key markets to foreign firms. At the conclusion of the latest U.S.-China Dialogue, Beijing announced that foreign banks will be allowed to increase their stakes in investment banking joint ventures from 33 percent to 49 percent. A few days later, with Clinton and Geithner safely on their way back to America, the National Development and Reform Commission released a ruling, drafted before the American duo’s visit, that overseas equity firms that invest in China must raise all their funds from Chinese investors if they are not to be treated as foreign, and hobbled in their competition with what The Wall Street Journal describes as “a flood of new Chinese competitors.” For example, foreign funds are forbidden to invest in defense-related industries, and face restrictions on their investments in the telecoms and Internet industries, among others.

Retaliate for this restriction on American firms, as Adam Smith recommended in similar cases? Certainly not. Instead, the Obama administration late this week approved the Industrial & Commercial Bank of China’s application to purchase an American bank, thus, in the words of the Financial Times, “marking a watershed moment for Chinese lenders looking to gain a U.S. foothold. … The approval follows the U.S.-China Economic Dialogue. … [and] was a ‘slam dunk, said Ernie Patrikis … who acted for ICBC [and] predicted more acquisitions.”

There’s more, but you get the idea: I am told that Chinese tourists who visit Britain now trek to Kirkcaldy, in Scotland, to visit the birthplace of Adam Smith in greater numbers than those who visit London’s Victorian Highgate Cemetery to pay homage at the grave of Karl Marx. But that doesn’t reflect any devotion to the great Scot’s views on free trade. Or any enthusiasm for free and open competition.

In the end, a market economy trading with one dominated by state owned enterprises to which it can funnel covert subsidies including cheap capital, and controlled by a regime that sees trade as one weapon in a battle for geopolitical supremacy, remains at a serious disadvantage.

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