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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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There is an even greater constraint on the president’s perceived freedom to get tough with the Chinese. Respected historian Arthur Herman (author of histories of the Royal Navy and the Scottish Enlightenment) reports that China might dump dollars even if such a move wipes out billions in the value of their holdings. “On an issue like Taiwan or Japan, rational judegment can take a backseat to national pride, and the desire to reverse old humiliations,” he writes in the New York Post. In a Pentagon simulation of an economic war with China held last March, “China won,” reports Herman. Which may explain why senior Chinese military officers last week took to a state-run weekly magazine to call on China to respond to the U.S. decision to sell arms to Taiwan by “using economic means," such as dumping some U.S. government bonds as part of “a strategic package of counterpunches.” The Washington Times quotes John Tkacik, a former State Department China expert as observing, “The Chinese military now believes that China has tremendous economic and financial leverage, especially over the United States, and they are giving fair warning to the world that they will use it when they can.”

China clearly considers itself to be on a roll. It has so far emerged relatively (only, relatively) unscathed from the recent world recession. One (unnamed) Chinese official told the Financial Times, “We used to see the US as our teacher but now we realize that our teacher keeps making mistakes and we’ve decided to quit the class.” Or as The Economist put it, a “Beijing consensus’ has been gaining ground, extolling the virtues of decisive authoritarianism over shilly-shallying democratic debate.” Market capitalism is so yesterday, state capitalism is so now, new role-model for the developing world in search of material advance. That gives impetus to the Franco-Chinese demand that the dollar be replaced as the world’s reserve currency by a new global currency.

Before consigning the American economy and the market-based capitalist system to the dustbin of history consider this. First, America is once again reforming its system, as it did during Franklin Roosevelt’s New Deal, and is likely to emerge from its current difficulties with a financial system less prone to systemic collapse. Second, a populist wave is rising against borrow-spend-tax, and if it crests during the November elections, a very different congress will convene in 2011. Third, America’s trade deficit and dependence on Chinese credit are now recognized as a national security problem, rather than merely an economic problem. Winston Churchill’s repeated calls for “action this day” on a variety of issues might be too much to ask of this president, not known for rapid decision-making, but action soon on an issue of national security, or at least some day, might be a reasonable goal.

Perhaps most important, poorer countries are also finding it difficult to compete with China’s undervalued currency: Chinese exports to India, Brazil, Mexico, and Indonesia have been growing by between 30 percent and 50 percent in recent months. This gives the U.S. and the E.U. new allies in their trade battles with China.

Best of all, President Obama is stiffening his spine. He told members of his party that he plans “to get much tougher” on currency rates “to make sure our goods are not artificially inflated in price and their [China’s] are artificially deflated in price.” He is going ahead with $6.4 billion in arms sales to Taiwan, plans to welcome a visit from the Dalai Lama next week, and has the State Department siding with Google in its dispute over censorship and cyberattacks. Next might, only might, come a decision to declare that the Chinese are indeed currency manipulators. If this risks a trade war, so be it. Pentagon simulations have been wrong in the past. We do hold an important trump card: We are China’s most important customer. 

Irwin M. Stelzer, a contributing editor to The Weekly Standard, is director of -economic policy studies at the Hudson Institute and a columnist for the Sunday Times (London).

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