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Will U.S. Policymakers Come to Grips With China Before Its Too Late
AmericanEconomicAlert.org ^ | Monday, December 12, 2005 | Alan Tonelson

Posted on 12/12/2005 4:28:39 PM PST by Willie Green

For education and discussion only. Not for commercial use.

If this were also a holiday time in China, it's hard to imagine anyone having a happier holiday season than the leaders of China.

Despite a year of non-stop complaints from American leaders about Beijing's predatory trade policies and especially its currency manipulation, it could not be clearer to China that U.S. policy is at worst – from their perspective – gridlocked. At best, Washington decision-making still may seem to Beijing completely dominated by the outsourcing multinational businesses that benefit significantly from a trade status quo that is devastating so many domestic U.S. manufacturers and American workers.

The latest sign? A stunningly revealing statement by Frank Vargo, a top official of the outsourcing-dominated National Association of Manufacturers. Responding to charges that NAM has been all talk and no action on the China currency front, Vargo eloquently told The Wall Street Journal Dec. 2 that the accusations are "Nuts" and then added, "You can't throw away the world trading system."

In other words, NAM considers a policy of actually doing something to stop the Chinese currency manipulation it keeps whining about as too dangerous to support. Indeed, accepting Chinese mercantilism apparently is the price America must pay to keep the world economy intact.

As a result, the multinationals' power over the administration is so obvious to Beijing that the Chinese feel free not only to ignore official American protests about currency and trade issues. They also perceive no downside to brushing off American concerns about their military buildup. The Chinese realize that their growing strength is financed indirectly but substantially by the hundreds of billions of dollars they earn from the multinationals' favored "free" trade policies.

Not surprisingly, the recent visits to China by Treasury Secretary Snow, Defense Secretary Rumsfeld, and the president himself played out like an updated but even more perverted version of that old Soviet-era joke: America's leaders pretend to push U.S. interests in Beijing, but the Chinese don't even pretend to take them seriously.

The evidence of the latter pretense: After a Bush speech in Japan touting democracy's virtues (and holding up Taiwan as a shining example), the Chinese government reacted by cracking down on dissidents. Then the Chinese trotted out the old trick of announcing new purchases of Boeing jetliners. The hollowness of that public relations move was underscored last week when Chinese Premier Wen Jiabao traveled to Europe and unveiled a Chinese order for Airbus jets more than five times larger than the Boeing sales. In between, of course, the Bush Treasury Department in its new semi-annual report absolved China of currency manipulation charges by pointing to the token revaluation Beijing announced in July.

Coming from a culture that places extraordinary value on "face," China's leaders received a very powerful message from these White House decisions to turn the other cheek and even justify Chinese behavior after these transparent humiliations. It's a message virtually impossible to square with the administration's stated desire to remain the most influential power in Asia and throughout the world – and one more (not less) likely to produce dangerous Chinese miscalculations and even military confrontation.

Congress also seems reluctant to buck the outsourcing multinationals. Although numerous members have complained about the currency problem since 2003, passing legislation that could solve the problem remains a long shot. And the odds may be falling. Following the Treasury Department currency report, the main author of the strongest China currency bill, Democratic Senator Charles Schumer of New York, vigorously denounced the administration's meekness. Then he boldly promised to consider actually seeking a floor vote on his measure – at some point.

Perhaps Schumer is prudently waiting to muster enough support to win the vote – even by a veto-proof margin. Yet his reluctance to pull the trigger after two years of talking about the issue, and presumably lobbying his colleagues, suggests that his leadership skills and influence just aren't strong enough.

Not that Schumer faces an easy task. A huge obstacle to effective action undoubtedly has been the U.S. economy's solidly satisfactory performance since the last brief recession. This performance, to be sure, reflects policy smoke and mirrors, not sound fundamentals. But most important for the short-term and for the politics of U.S.-China trade, economic gimmickry has worked. The record post-9-11 stimulus the White House and the Fed have poured into the economy to prop up growth neutralized pocketbook issues during Bush's reelection campaign, and is still offsetting much of the damage done to U.S.-based manufacturers by predatory Chinese policies. Ironically, this stimulus has been affordable largely because huge purchases of U.S. debt by central banks in China and elsewhere in East Asia have held down interest rates and thus Americans' borrowing costs.

Still, all of the economic and security problems responsible for the China-related ruckus keep growing worse, not better. And even though the Bush administration now acknowledges these dangers, current U.S. policy keeps worsening them.

On the security side, Rumsfeld has begun warning that China's vigorous and secretive military modernization raises questions about its intentions – especially since China faces no threats to its own security. More pointedly, the Pentagon's latest annual report on Chinese military power states that Beijing's new prowess indicates objectives that range far beyond prevailing in a Taiwan crisis, and that could threaten U.S. interests throughout East Asia.

Yet the administration and even many conservative critics of China's military policies still haven't connected the economic and security dots. After all, much of the new wealth funding China's military development comes from record-setting U.S. net imports of Chinese goods. Thus to a great extent the buildup ultimately is possible because of U.S. trade policies that have ignored currency manipulation and China's myriad other predatory trade practices. U.S. trade policies have also buoyed China's earnings by encouraging so many multinationals like the leaders of NAM to supply the U.S. market from factories in China..

Of course, these policies began in earnest during the Clinton years, but under Bush alone, China has amassed $624.5 billion in trade surpluses with the United States. Next year, largely as a result, its foreign exchange reserves will hit $1 trillion.

Just as important, China will keep disregarding American security concerns as long as U.S. controls over militarily relevant technology transfers to China continue weakening. The main reason: heavy lobbying by U.S. multinational companies, which view China as a low-cost, profit-enhancing supplier of advanced as well as labor-intensive products. Consequently, Washington today can't even monitor the flow of U.S. technology to new U.S.-owned laboratories as well as factories in China.

On the economic front, the Bush administration remains behind the curve as well. It has begun to warn about the economic threats posed not only to the United States but also to the entire world by China's rapid integration into the global economy. Yet it still views the only actions capable of addressing the problem as verboten.

As Treasury Secretary John Snow stated during his own October visit to China, China's longstanding strategy of growing mainly by exporting is fueling record U.S. deficits and debts that could produce a dollar crash and a long, deep worldwide downturn.

Yet Snow and other trade cheerleaders still won't admit the fundamental flaws in U.S.-China trade patterns – which were already obvious when the United States began greatly expanding trade with China in the early 1990s: China's very low living standards were bound to limit the greatly hyped growth of China's domestic market for decades. By contrast, China's was already becoming a major supplier to world markets – thanks partly to Beijing's decision to make exporting a top priority.

The bottom line: China's entry into the world economy has generated an immense new source of output whose scale and growth simply dwarf that of its own expanding consumption. On top of the parallel integration into the trading system of many other poor, export-led third world economies, China's emergence is creating economically unsustainable – and therefore unstable – international economic conditions. Too many producers are relying on too few consumers. Even worse, the new producers increasingly make what the consumers – in the wealthy countries and especially the United States – once turned out.

Yet as discussed in my October 27 column, Snow's proposed solution to this looming crisis – boosting domestic demand in China – is sure to be ignored because China lacks the domestic wealth to sustain its progress. Moreover, 20 million job-seekers are entering the labor market each year. Therefore, China's will be hard-pressed to contain – let alone reduce – its towering unemployment by producing much more than its economy can consume and exporting the surplus. That's why the share of China's economy represented by consumption keeps shrinking, while the share accounted for by exporting keeps growing. A quarter century of intensifying engagement with global capitalism was supposed to produce exactly the opposite results.

Thus China will never change its dangerous economic or military policies voluntarily. They are simply creating too many economic and political benefits for Beijing. As a result, Washington must recognize that only new unilateral U.S. trade moves can both limit China's military development peacefully and avert a new global financial crisis.

New tariffs on Chinese imports to offset currency manipulation – as proposed by the Schumer-Graham bill – would shrink the pool of resources available for China's armed forces, and in the process, moderate the trade imbalances. Additional tariffs may be needed if, as in the past, China plays bait and switch by increasing other subsidies as it plays ball on currency.

Alternatively, or along with China tariffs, Congress must begin debating the type of economy-wide tariff being pushed by the U.S. Business and Industry Council on Capitol Hill. Similar ideas have been advanced by the likes of mega-investor Warren Buffett and economists from the New York-based Levy Institute. Unless they quickly develop better ways to resolve the mounting trade crisis, legislators will need to get over their irrational prejudices against such trade restrictions.

Much tighter export controls are needed as well. Going multilateral is the obvious preference, but unilateral sanctions would be highly effective if needed. After all, much non-U.S. high tech investment in China is export-oriented. Without access to the U.S. market, foreign multinationals lose much incentive to place factories and labs in the People's Republic.

The new strategy would run few risks on the security side. Whatever assistance China is offering in the North Korea talks undoubtedly reflects China's desire to de-nuclearize a volatile neighbor, not a determination to please America. If economics trumps Korean issues in China's view, then current U.S. strategy on Korea is bound to fail anyway. Best to learn this ASAP.

Nor is China remotely likely to dump U.S. debt or launch a trade war. Both steps would further reduce access to markets China still desperately needs. Moreover, the Fed has ample reserves of dollars to swamp any Chinese gambit.

Interrupting U.S.-China trade could indeed fatally strain China's fragile banking system and trigger broader economic and political upheaval. Yet much of the cash flow propping up China's bankrupt banks and easing pressure for reform comes from U.S.-generated export revenues. Continuing the status quo for fear of rocking the boat amounts to inflating further a Chinese investment and production bubble that increasingly mirrors America's consumption bubble. The longer they keep inflating, the more damage will result from the inevitable bursting of both bubbles.

Indeed, this is the strongest argument for transforming America's China policy. So many dangerous excesses have been encouraged for so long that entirely painless remedies are no longer possible. The sooner and more decisively the President acts, the more limited the pain, and the more control America will wield over the adjustment.

A pretty grim holiday message to be sure. But an America that faced up to the need for some short-term sacrifices to strengthen its economic future would be giving a priceless gift to its children.


TOPICS: Business/Economy; Constitution/Conservatism; Culture/Society; Editorial; Foreign Affairs; Government
KEYWORDS: china; corporatism; globalism; thebusheconomy
Bush Unravels China Currency Mystery
1 posted on 12/12/2005 4:28:41 PM PST by Willie Green
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To: AAABEST; afraidfortherepublic; A. Pole; arete; billbears; Digger; Dont_Tread_On_Me_888; ...

ping


2 posted on 12/12/2005 4:29:14 PM PST by Willie Green (Go Pat Go!!!)
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To: Willie Green

Whatever is done, if anything, must be guided by the fact that China is no friend, in fact, quite the opposite.


3 posted on 12/12/2005 4:35:53 PM PST by EagleUSA
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To: Willie Green
Will U.S. Policymakers Come to Grips With China Before Its Too Late

In a word, NO! President Bush's senior and junior both have an unexplained soft spot for China which I have never been able to fathom. After Clinton gave all of our secrets to China, I am unable to comprehend why Bush thinks he can make friends with them. Their approach is one of world domination.
4 posted on 12/12/2005 4:52:58 PM PST by DustyMoment (FloriDUH - proud inventors of pregnant/hanging chads and judicide!!)
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To: Willie Green
"They also perceive no downside to brushing off American concerns about their military buildup. "

The neo-cons have persuaded Bush that Islam using local suicide car bombs is the biggest threat to America. Bush has gone along thinking they are 'doable' to demonstrate our 'shock and awe'. The Chinese are unconvinced.

5 posted on 12/12/2005 4:55:51 PM PST by ex-snook ("Come behold the deeds of the Lord, the astounding things he has wrought on earth.")
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To: EagleUSA

China is our enemy. Anyone else who thinks different is only interested in one thing and that is $$.

China = enemy. bottom line.


6 posted on 12/12/2005 5:15:41 PM PST by silentknight
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To: flamefront
An article that crystalizes things. I wonder if our leaders have the ultimate backup plan that pulls the rug out from under the Chinese economy and then ferments civil war there. On the other hand, when you have a leader who cannot utter a complete sentence, one tends to doubt.
7 posted on 12/12/2005 5:44:57 PM PST by Sawdring
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To: EagleUSA
Whatever is done, if anything, must be guided by the fact that China is no friend, in fact, quite the opposite.

Actually it does not matter whether China is a friend or not. USA as each other country should take care of its own interests first. See my tagline.

8 posted on 12/12/2005 6:06:56 PM PST by A. Pole (Lord Palmerston: "Nations had no permanent enemies or allies only permanent interests")
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To: Willie Green

ping


9 posted on 12/12/2005 6:07:36 PM PST by Lancer_N3502A
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To: Willie Green

Thank you NIXON/KISSINGER/BUCHANAN


10 posted on 12/12/2005 6:24:37 PM PST by uncbob
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To: Willie Green
Lost (more accurately, not mentioned) in all the economic/trade banter of the article is that China will eventually surpass the USA in military might. It will take a while longer to match the USA in force projection using conventional means, but long before that, China will exceed the USA in technological supremacy and military might (strategic).

America's days are numbered. Our "leaders" care more about popularity contests and wielding power and holding on to their jobs (their pensions) than they do the future of our nation.
11 posted on 12/12/2005 6:30:04 PM PST by Dont_Tread_On_Me_888 (Bush's #1 priority Africa. #2 priority appease Fox and Mexico . . . USA priority #64.)
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To: A. Pole

Actually it does not matter whether China is a friend or not.
-----
Sorry, but I must disagree. It has a huge impact on national security strategy depending.


12 posted on 12/12/2005 6:42:36 PM PST by EagleUSA
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To: EagleUSA
Sorry, but I must disagree. It has a huge impact on national security strategy depending.

How do you define a friend in this context?

13 posted on 12/12/2005 7:03:33 PM PST by A. Pole (Lord Palmerston: "Nations had no permanent enemies or allies only permanent interests")
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To: Willie Green

American bankers and business people built up Germany and Russia prior to WW2 and now the same interests are at it again.


14 posted on 12/12/2005 7:06:24 PM PST by cynicom
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To: Willie Green
The sooner and more decisively the President acts, the more limited the pain, and the more control America will wield over the adjustment.

That's why, in all honesty, I would liked to have seen Bejing go up in a mushroom cloud years ago.

IF WE SUPPOSEDLY DEFEATED THE SOVIETS BY BANKRUPTING THEM, HOW DO WE EXPECT TO DEFEAT CHINA BY MAKING THEM RICH???

15 posted on 12/12/2005 7:20:19 PM PST by Captainpaintball
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To: Willie Green

If they did that it might interut their corporate bribes, oh sorry campaign contributions.


16 posted on 12/13/2005 1:43:22 AM PST by TXBSAFH ("I would rather be a free man in my grave then living as a puppet or a slave." - Jimmy Cliff)
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