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Trade With China is About More than Money

Many are asking whether China is playing by the rules.

12:00 AM, Sep 18, 2010 • By IRWIN M. STELZER
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Chinese citizens can’t vote in national elections. Not at home. And, of course, not in America. American citizens can. That combination of circumstances is likely to have an effect on U.S. trade policy as Congress settles in for the final weeks before the November 2 elections. President Obama and the Democrats have promised that their new trade policy—a muscular approach to unfair trading partners, a tax crackdown on companies “exporting jobs,” and vigorous promotion of made-in-the-U.S.A. products—will create millions of jobs. And jobs are what this election is all about.

Trade With China is About More than Money

With domestic demand likely to remain weak while consumers rebuild their recession-shriveled balance sheets and businesses ponder the likely next turn in government policy, the billions of customers overseas beckon. Or should. But don’t. At least not sufficiently to offset the flood of imports that continue to fill the shelves of Wal-Mart and the stocks of builders and other American firms.

Protectionist talk in pre-election years was more for voters’ ears than in anticipation of results; this year, congressmen mean to pass legislation that will bring to an end what voters’ see as China’s unfair trade practices. Congress this week made life miserable for Treasury Secretary Timothy Geithner by demanding that he force China to abandon its “manipulation” – the very word sets the Chinese regime’s teeth on edge – of the yuan. That many experts doubt that a rise in the yuan would do very much to reduce China’s trade surplus with America is irrelevant. Politicians have to be seen as vigorous, preferably belligerent, defenders of U.S. jobs.

Except when meeting face-to-face with the Chinese. President Obama’s most recent emissary to Beijing, U.S. National Economic Council director Larry Summers, spent three days discussing areas of mutual interest, except that both sides agreed not to raise the question of China’s failure to honor its promise to allow its currency to rise against the dollar – unless you consider a 1 percent increase a significant move. And Geithner refused to promise congressional committees that he would take some retaliatory action if China persists with its current policy. He seems to believe the spokesman for China’s foreign ministry, who announced, “Our exchange-rate reform can’t be pressed ahead under external pressure.” Of course, Summers, Geithner, and their boss doesn’t have to face the electorate in November.

Meanwhile, demands for a rebalancing of trade with China mount. There are the usual suspects: The steelworkers’ union has asked the U.S. trade representative to file a complaint with the World Trade Organization to halt alleged illegal subsidies to, and protection of, China’s manufacturers of green-tech equipment. Even the staunchly free-trade and union-unfriendly Wall Street Journal concedes, “The union’s complaint isn’t necessarily crazy.” Which just might reflect something new – a feeling in the business community that something must be done to get China to play by the rules that govern international trade.

Until now, big business, hoping for access to a vast new market, has been the equivalent of a China lobby in Washington. More important to retain good commercial relations than to castigate the Chinese for supporting North Korea’s nuclear ambitions, or trading with Iran, or violating the human rights of various ethnic and dissident groups. All those Chinese, becoming rich enough to buy a car from an American company (made by Chinese workers, of course), or perhaps even a fridge (yes, made in China).

The Chinese, however, have a different idea, one consistent with their longer-term interests. They will allow American companies to build factories to tap the Chinese market only if the deal includes access to American technology. The latest example is a ten-year plan designed to make China the leader in producing battery-powered cars by limiting American firms to minority interests in ventures in China, and requiring them to share their technologies in return for market access. Just as post-World War II Japan moved from exporting shoddy products to capturing world markets for high-tech cameras and world-class cars, China is moving from trainers and t-shirts to sophisticated high-tech products.

With intellectual property rights either non-existent or not enforced – a point made forcefully by Japan’s then-foreign minister Katsuya Okada at a high-level meeting in Beijing earlier this month – this ten-year plan is part of China’s new form great leap forward – moving from manufacturing low-end products to producing high-tech equipment using American know-how. This has the U.S. business community somewhat less enthusiastic about speaking out in favor of Chinese interests than it has been in the past. Ford, General Electric, and Microsoft are among those moving into the anti-China camp. My own guess is that in the end most U.S. companies will cave and, to paraphrase Lenin, sell China the rope with which to hang them, using as their excuse the conciliatory attitude toward foreign investment expressed by Xi Jinping, heir apparent to President Hu Jintao.

The Chinese know that trade is no longer solely about economics. While American politicians concentrate on jobs today – or in the case of the Obama team, jobs by 2012 – the Chinese take a longer-run, geopolitical view. Someone once said that we Americans tell time by our watches, while other nations tell time by the calendar. China needs exports to keep its economy growing at close to double digits, creating the millions of jobs it needs to prevent social unrest, or at least minimize it, and the revenues to fund an expanding military. Meanwhile, to the extent that America’s trade deficit reduces incomes and the flow of tax revenues, it puts pressure on the military budget. China has a long way to go before it can match America’s military capabilities, but that is a road it has chosen to travel, especially by creating a deep-water navy.

But it gets worse, from America’s point of view. China has two uses for its earnings from trade. One is to lock up the vast variety and amounts of natural resources it needs to maintain its economic growth. It is constructing the Superporto do Acu in Brazil, the largest port complex of its type, aptly named the Highway to China, to accommodate the millions of tons of grain, ore, oil, soy and other products it plans to import from Brazil. That and other deals have enabled China to displace America as Brazil’s largest trading partner, one of the things that enabled the regime to thumb its nose at President Obama on the question of sanctions on Iran. Similar investments are being made in other resource-rich countries in an effort to obtain preferential access to their raw materials. Nothing wrong with increasing the flow of such goods in international trade, of course, except that in this case the upfront investment made by China is possible because of the large pool of funds earned by currency manipulation, sterilizing foreign earnings so that they do not result in an increase in the money supply and rising prices, and the theft of intellectual property. Not precisely what Adam Smith had in mind when he preached the mutual advantages of free trade.

Then there is the question of all those American dollars stored in the vaults of China’s banks. Yes, it would be economically irrational of China to dump those on the market, driving down the dollar and the value of its remaining holdings. But it might suit a broader purpose: to drive up U.S. interest rates and slow the growth of the American economy, even perhaps tipping it into recession. The mere threat of such an action is already inhibiting the vigor of American response to China’s trade policies. Which is still another reason that thoughtful defense analysts in the Pentagon are fretting about the continued deficit in our trade with China.

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