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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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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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