A
dragon's breath of apprehension is blowing through the
imperial complacency of Washington. What used to be the
"US Trade Deficit Review Commission" of the Congress has
morphed from a general question into a particular one:
it is now the "US-China Economic and Security Review
Commission", tasked with examining "the national
security implications of the bilateral trade and
economic relationship" between the two countries.
The annual report it presented to Congress on
June 15 read uncannily like the reports of the British
House of Commons on the upstart economy of the German
empire at the end of the Victorian era. It certainly
belies the complacent Panglossian optimism of the
administration of President George W Bush about the
present and future of the US economy.
What makes
it worse is that while anxious British imperialists were
simply competing on gross domestic product and share of
world trade with their German rivals, in the case of the
US, the commission is moving towards fingering China as
part of the problem for the American economy.
In
contrast, as Britain's relative position in the world
declined, it was in competition with Germany: it was not
in debt to its rival, nor were British manufacturers
busily closing down their factories and investing in the
Ruhr. In fact, they were investing in the US, which was
the major beneficiary of the Anglo-German military
rivalry.
The commissions' worried tone suggests
that while there may be dissent about the degree of
rivalry between the People's Republic of China and the
US, and what should be done about it, it is causing
sleepless nights, at least in some parts of Washington.
However, while the report shows a remarkable
degree of realization of the dire position of the US
economy in relation to China, it is equally remarkably a
product of American self-centeredness. Nothing in it
suggests that it is in the hands of the US itself to
reform its industries and financing. The implication is
that the Chinese are somehow being sneaky and unfair in
taking the US at its word on free markets and beating it
at its own game.
'China harming US economy,
national security' Commission chairman Roger
Robinson put it politely: "A number of the current
trends in US-China relations have negative implications
for our long-term economic and national security
interests, and therefore that US policies in these areas
are in need of urgent attention and course corrections."
The report's key findings are that the US trade
deficit with China is of major concern because:
It has contributed to the erosion of manufacturing
jobs and jobless recovery in the US;
Manufacturing is critical for the nation's economic
and national security;
The deficit has adversely impacted other sectors of
the US economy as well.
These findings will
hardly come as a surprise to anyone who has been
watching.
"It is the United States' most
lopsided trade relationship, with US imports from China
[US$152 billion] outpacing exports to China [$28
billion] by more than 5 to 1 ... At the same time, US
firms continue to invest heavily in China, moving
manufacturing capacity and, in some cases, research and
development along with this investment," the report
says.
It goes on to point out that Chinese firms
are also raising capital in the US, without the
transparency that would be demanded of their American
equivalents and it really sees a direct challenge from
China's rapid technology development.
Eighteenth
century English novelist, pamphleteer and journalist
Daniel Defoe once presciently referred to how financial
and economic development affects military capability,
and the commission assesses the economic threat in just
such terms.
In response, the commission is
almost calling for a trade war with China, with
references to the World Trade Organization, examination
of subsidies, trade practices, intellectual property
rights and transparency of corporate governance. It also
demands that Congress should "direct the administration
to develop and publish a coordinated, comprehensive
national policy and strategy designed to meet China's
challenge to the maintenance of our scientific and
technological leadership and competitiveness in the same
way it is presently required to develop and publish a
national security strategy".
US sees threat
in China's demand for oil The US even sees
China's growing dependence on international oil markets
as threatening US supplies and their prices and wants to
cut US investment in enterprises engaged in
security-related technology.
Several other
studies that emerged last week reinforced the
commission's overall message. One showed that it was not
just low labor costs, but also that in many Chinese high
technology enterprises labor productivity was
surprisingly high, approaching US levels and exceeding
European levels.
US Treasury reports last week
also showed that in the second quarter, more than half
of US Treasury bonds were held by foreigners, mostly
Asian, and increasingly by China. But it is not just
treasury bonds. Foreign central banks spent $125.2
billion on US assets in the last quarter, which helped
finance the record $136.9 billion balance of trade
deficit.
It is not Beijing's fault that foolish
policies in Washington have created a consumer boom that
is drawing in imports more than stimulating domestic
production. Beijing did not create currency policies
that allow Americans both as individuals and as a nation
to live on debt.
So despite all that bluster
from the commission, Congress is highly unlikely to act
in the aggressive and assertive way the commission
suggests, unless Beijing does something silly like
disband the Hong Kong government or attack Taiwan,
almost certainly not.
Simply put, there are too
many companies in the US, from Wal-Mart onwards, making
a lot of money by selling Chinese products. They are
hardly likely to call for protective tariffs when they
are designing, ordering and importing their products
from China. Indeed, they will lobby and have lobbied
strongly and successfully against any restrictions on
outsourcing. And no one is going to stifle credit or
increase taxes when there are closely contested and
highly partisan elections in the offing.
China and the dollar-bonds link On the
other hand, for the foreseeable future, China is tied in
more ways than it need be to the US and the dollar. It
is enough to make you believe in the virtues of private
enterprise when you consider that foreign governments
such as China and Japan have been buying US treasury
bonds on such a scale while the dollar itself is
plummeting, and when there is almost certainly an
impending rise in interest rates, which will knock down
the dollar value of their holdings.
Apart from
being a bad investment in economic terms, in the long
run such a recycling of the trade surplus is likely to
be unsustainable for other reasons, such as China's
demand for raw materials and energy from abroad.
Ironically, instead of being grateful for these
ill-advised purchases, the commission's report blames
China for its refusal to adjust the renminbi or yuan
upwards, or to float. While those complaints about
China's currency policy have some ground, Beijing can
point to the US administration policies that have
progressively weakened the dollar.
Even so, in
the long run, in so far as there are any iron laws in
that most flexible of arts, economics, the two
currencies have to adjust their nominal values to match
reality. The yuan has to revalue, the dollar devalue
even further, or some combination of the two.
With the sums involved, and the volatility of
world finance markets, it is in everybody's interests
that China stops pandering to US profligacy and helps
bring Washington and the dollar back onto solid ground -
in a gentle way, so the splash does not drown everyone.
The longer that readjustment is postponed, then
the more seismic the shift when it happens. Neither
party is acting totally rationally in this strange
partnership, and when two irrationalities collide there
is plenty of room for surprises.
In any case,
China can hardly be blamed for following the road of
developed nations. Surprising as it may be to the
members of the commission, few people outside the US
really think that the country has a perpetual prior lien
on the world's energy supplies, nor a permanent place at
the top of the economic ladder. In fact, Washington
would do well to get some therapeutic chat from its
special relations in London about what it's like to be
on a slide as others are soaring up the scale.
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