trade

Perhaps the best way to understand China’s trade policy is to consult professional China watchers who always accuse mere economists of ignoring “context.” The Chinese regime is in transition to a new generation of leaders; a scandal has led to the purging of Bo Xilai and the arrest of his wife in connection with the murder of British businessman Neil Heywood; the children of famed revolutionaries, the so-called princelings, are zipping around China and the environs of Harvard in expensive foreign cars; and the regime is licking its wounds over l’affaire Chen Guangcheng, whom it has had to allow to leave the country for an education in America, or admit to its human non-rights policy. According to Jonathan Fenby, writing in Britain’s Spectator magazine, “China’s authorities … even felt compelled to ban the word ‘coup’ from microblogging sites…”.

That’s the context.

From which some China watchers conclude that the regime is in serious trouble, stumbling, perhaps even to find it prudent to postpone the five-year Congress scheduled for October. That, they say, will make the regime give ground on important trade issues rather than risk a confrontation with America. Unless, of course, this sea of troubles makes the regime reluctant to show any weakness, and toughens its bargaining stance. So much for the guidance provided by sinologists’ context.      

So let’s turn to the politicians, the men on the firing line of trade policy making. Mitt Romney, now matching President Obama’s full campaign mode, has promised to label China a “currency manipulator” on his first day in the Oval Office. That would bring a round of applause from key New York Democratic senator Chuck Schumer and the trade unions that make up such a large part of the president’s constituency. Everyone who has been calling for just such bipartisanship might regret what they have been wishing for.

One problem: if it were all that simple, Obama would have pinned that label on the Chinese long ago. He is, after all, better known for bending a knee to the trade unions than for standing tall and firm when they lay out the quids pro quo they expect for their support. The president knows what Romney must surely also know, but chooses to ignore: China is America’s largest creditor, it is capable of thwarting US foreign policy goals in the Middle East, Africa, and Latin America. It is wooing a Europe that lusts after the cash hoard China has accumulated as a result of a trade policy that includes subsidizing key industries, helping itself to the intellectual property of its trading partners, and enforcing buy-China policies. Indeed, China has acquired so many German engineering firms that there is some call for barring future acquisitions, perhaps along the lines of the restrictions China places on foreign investors.      

So the politicians who call for a get-tough policy, and criticize Obama for failing to come down hard on the Chinese regime, add no more to the debate than the China watchers. Obama knows that although he holds a strong hand as China’s most important customer and powerful military rival, the regime also has some high cards to play if America raises the ante.

Which brings us to the real world of trade policy. The American economic recovery is lackluster, with economists guessing that it is growing at an annual rate of 2 percent or less, and with job creation so anemic that workers in droves are dropping out of the work force. China can easily turn that feeble recovery into a downturn by cutting back on purchases of U.S. treasury IOUs, driving interest rates up.

China has its own problems, even though its growth figures remain the envy of its trading partners. Société Générale economists estimate that growth in its exports dropped from 8.9 percent in March, year-over-year, to 4.9 percent last month, and report that investment growth “is going through a landing that is notably harder than ‘soft’…. China’s economic growth has not bottomed yet…. Property sluggishness is spreading to consumption…” The nation’s leaders, whose authority rests not on democratic validation, but on their ability to create jobs (and repress dissent), have a stake in the prosperity of American consumers, among their best customers.  

In her remarks to the 41st Washington Conference on the Americas this past May, Secretary of State Hillary Clinton declared the Western Hemisphere “vital” to U.S. interests, adding that Latin America and the United States “will rise or fall together in the 21st century.” Unfortunately, the Obama administration has yet to champion a regional initiative that matches Secretary Clinton’s lofty rhetoric.

In today's Wall Street Journal, Dan Blumenthal and Michael Mazza note that the China's growing military might should give American leaders something to think about with regard to our defense budget: