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Trade Is About More Than Money

We are China’s most important customer.

12:00 AM, Feb 12, 2010 • By IRWIN M. STELZER
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“When some foreign nation restrains … the importation of some of our manufactures … revenge … naturally dictates retaliation.” Some trade union protectionist? A politician backing restrictions on imports so as to “save jobs for American workers?” Actually, this was written by Adam Smith in Wealth of Nations, the bible of free traders. And once restrictions are installed, “freedom of trade should be restored only by slow gradations” to avoid throwing lots of people out of work.

Trade Is About More Than Money

Smith, of course, saw retaliation as a means of forcing a trading partner to end its own restrictions in a process of bilateral mutual disarmament. Now, battles over trade policies gets played out in the World Trade Organization, and against a background of mounting Sino-U.S. geopolitical rivalry.

After a 17.7 percent jump in its exports in December, China surpassed Germany as the world’s largest exporter. A 15 percent increase in imports from China helped to drive the U.S. trade balance to the unexpectedly high level of $40.2 billion, up from $36.4 billion a month earlier. Both the E.U. (imports from China up 10 percent in December) and the U.S. reacted with import restrictions, the U.S. on tires, the E.U. on shoes. To which China responded by barring imports of U.S. poultry and auto parts, and hiring some of the world’s top trade lawyers to complain to the WTO about the special 16.5 percent anti-dumping tariff the EU has imposed, at Italy’s insistence, on shoe imports from China.

On one level this is all about jobs. Despite an emerging recovery, almost one in every four American workers remains unemployed, working only part time, or too discouraged to continue looking for work. President Obama and Congress are cranking up another stimulus package and a series of tax incentives to encourage small businesses to hire. But the president says more must be done: He wants to double U.S. exports in the next five years to create two million good, new jobs. 

Some, but only some, experts think this goal is attainable, among them C. Fred Bergsten, director of the Peterson Institute for International Economics. But only if, among other things, the president can persuade a reluctant Congress to approve the trade deals languishing in its inbox, which to this observer seems highly unlikely, either because the Obama heart just isn’t in it, or because he won’t be able to persuade incumbents that they can afford to antagonize their trade union masters right before the November elections.

Another thing: The president will achieve his goal, says Bergsten, only if the Chinese allow market forces to correct the “undervaluation of at least 25%” in their currency. Fat chance. The Chinese halted even a modest rise in their renminbi when the recession hit. Recession-offsetting exports took precedence over peace on the trade front. And now China’s authorities say that if their imports continue to boom they would contemplate a 3 percent rise in their currency sometime later this year, no more. So much for Treasury Secretary Tim Geithner’s statement to a Senate committee, “I think it’s quite likely they will move” on the currency issue -- unless Geithner, an old China hand, considers 3 percent a significant move.

One thing is certain. China’s continued rapid economic growth, combined with slower growth in the West, will increase pressure on Obama to have China declared a “currency manipulator,” and take the issue to the WTO. But whether Obama responds to that pressure will depend on more than the trade deficit.  It will depend on his judgment about our overall relationship with the Chinese regime.

The president feels he needs China, which is why he abased himself before his hosts on his visit to Beijing and allegedly allowed a low-level Chinese bureaucrat to stab his finger at the president of the world’s only superpower in Copenhagen. He still hopes the Chinese will go along with meaningful UN sanctions on Iran, although most observers see this as many see second marriages, the triumph of hope over experience. He needs the Chinese to continue to buy the IOUs he is grinding out to support the spending programs he insists on increasing even as he himself predicts the debt: GDP ratio will approach the 90 percent level that experts say will stifle growth. He still hopes that China ($789 billion), which has surpassed Japan ($769 billion) as our biggest lender (Britain is third at $277 billion), will allow its currency to appreciate by a meaningful amount, even though it should be clear to him that a regime with no democratic legitimacy can avoid threats to its existence only by offering its masses improved material well-being. That means keeping the export machine running at high speed to create jobs.  

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