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4 CHINA AND APPEASEMENT, Part
2 Not much rise,
and even less peace By Henry C
K Liu
development. China has become
a victim of overwhelming trade dependency. This
situation is made worse by the emergence of US
dollar hegemony after 1991 in which Chinese export
paid in dollars cannot be used in the Chinese
economy without creating a domestic monetary
crisis due to financial market globalization and
must be lent backed to the US economy, leaving
China with a permanent structural capital
shortage. The rise in China's foreign
reserves has been paid for
by an 18% rise in the annual growth of M2 money in
yuan in the past few years while real wealth has
been leaving the yuan economy into the dollar
economy. This has caused an overheated yuan
economy while China finances a debt balloon in the
dollar economy, an unsustainable trend that is
destructive to both economies.
Zheng
reports that Chinese policies to meet these three
great challenges can be summarized as three grand
strategies - or "three transcendences". The first
strategy is to transcend the old model of
industrialization characterized by rivalry for
resources in bloody wars and by high investment,
high consumption of energy, and high pollution.
China is instead determined to forge a new path of
industrialization based on technological
innovation, economic efficiency, effective use of
natural resources relative to the size of its
population, drastic reduction in environmental
pollution, and optimal allocation of human
resources. The Chinese government is trying to
find new ways to reduce the percentage of the
country's imported energy sources and to rely more
on China's own. The objective is to build a
"society of thrift".
Yet while the goals
are laudable, current globalization trends that
Zheng urges China to join "fully" move exactly in
the opposite direction, away from such goals.
There is ample evidence that market fundamentalism
encourages individual waste by externalizing
social costs. A "society of thrift" in a free
market is an oxymoron. Fundamental changes are
made by revolution, not by continuing along
well-worn paths. The way to achieve this
"transcendence" is to challenge the current global
economic order by righting its wrongs, not by
joining it indiscriminately.
The second
strategy, according to Zheng, is to transcend the
traditional ways for great powers to emerge, as
well as the Cold War mentality that defined
international relations along ideological lines.
China will not follow the path of Germany leading
up to World War I or those of Germany and Japan
leading up to World War II, when these countries
violently plundered resources and pursued
hegemony. Neither will China follow the path of
the great powers vying for global domination
during the Cold War. Instead, China will transcend
ideological differences to strive for peace,
development, and cooperation with all countries of
the world.
Yet current Chinese appeasement
toward US trade demands to move quickly away from
its socialist market economy and toward a
free-market economy under World Trade Organization
(WTO) terms will again condemn China to a
semi-colonial economy for decades to come.
Economies win in global competition by having
their wages increased, not by pushing their wages
down. Gaining market share by keeping wages low is
self-imposed servitude, not development. Even the
US, the strongest economy in the world since the
end of World War II, is beginning to realize that
economic globalization based on pushing wages down
through international wage arbitrage is not in its
national interest.
Nationalism in 'free
trade' guise As Friedrich List points out
in his National System of Political Economy
(1841), a free-trade political economy as espoused
in England in the 19th century, far from being a
universally valid science, was merely British
national opinion, suited only to English
historical conditions. List's institutional school
of economics asserts that the doctrine of free
trade was devised to keep England rich and
powerful at the expense of its trading partners
and that it must be fought with tariffs and other
protective devises of economic nationalism by the
weaker countries. Secretary of state (1825-29)
Henry Clay's "American system" was a national
system of political economy to free the US from
British economic hegemony. Napoleonic France
opposed British free trade with its Continental
System.
Once it has fallen behind in free
trade, no nation can recover from its
disadvantaged position in a trade regime dominated
by an economic superpower short of victory in war.
The post-Cold War free-trade globalization myth is
US national opinion to keep a small group in the
US rich and powerful at the expense of its own
workers and those of its trading partners, as
described in my six-part series in Asia Times
Online, The Coming Trade War.
Myths about trade imbalance The
US has been putting heavy pressure on China to
open its markets fully, particularly financial
markets, as a way to rebalance China's trade
surplus with the US. Writing in the May 22, 2006,
issue of Business Week, Stephen Green,
Shanghai-based senior economist at Standard
Chartered Bank, suggested that much of China's
trade surplus in 2005 did not come from trade at
all, but rather from capital inflows (perhaps as
much as US$67 billion) disguised as trade. As a
percentage of GDP, China's trade surplus was
actually declining through 1999 to 2004.
The Chinese yuan is widely expected by
currency speculators to appreciate in the years
ahead, and thus has become an attractive
investment for foreign and domestic companies
engaging in export trade. China's capital-account
restrictions make it difficult to bring US dollars
into China, except for Chinese exporters and
trading companies because of the nature of their
business. Exporters, by exaggerating invoices
handed over to local authorities, could bring more
hard currency into the country over the real value
of goods sold outside. This "misinvoicing" of
trade was commonplace in the last decade, but back
then it was a way of getting money out of China to
repatriate profit.
Now it is being used to
bring funds into China for more investment in
anticipation of future yuan appreciation. This
inflates the value of Chinese exports, which also
gets a boost from transfer pricing between units
within multinationals to book the profit inside
China. This trend, multiplied over millions of
price transfers, inflates China's trade-surplus
numbers.
Misinvoicing and transfer-pricing
numbers show that the China's trade surplus could
have been as small as $35 billion in 2005. Trade
could have disguised some $67 billion of non-trade
capital inflows.
The implication for
China's policymakers is that the country's booming
trade surplus is not caused by an undervalued
yuan, but by US pressure to revalue it. As soon as
such pressure eases to eliminate expectations of
appreciation, the trade surplus could suddenly be
sharply reduced, not from trade but from capital
inflow disguised as trade. Yet this new capital,
denominated in dollars, can only enter the Chinese
economy by the Chinese central bank buying the
dollars with more yuan while reinvesting the
dollars in more US Treasuries to fuel a further
rising US trade deficit. In the meantime,
incessant increases in the yuan money supply
overheat the Chinese economy, while the government
tries desperately to cool down with ineffective
macro-measures.
The US Commerce Department
recently imposed countervailing duties to be
applied to economies such as China's on industries
that allegedly receive government subsidies. But
Beijing's sharp response to the latest US decision
to file WTO complaints on intellectual-property
violations in China contrasted with the mild
Chinese response about past US complaints on the
Chinese auto-parts sector and the imposition of
duties on Chinese coated paper, suggesting that
bilateral trade disputes are entering a new bitter
phase that may adversely affect bilateral
political relations. Trade friction is not only
out of sync with recent improvement in US-China
relations, but also defies economic logic. The
trade surplus China enjoys with the United States
is caused also by US export restriction on things
China wants to buy, not Hollywood films and
popular music, but high-tech systems that the US
refuses to sell to China because of their alleged
dual-use nature.
WTO data show that in
2006 the five top exporting nations in the world
were Germany, at $1.1 trillion; the US, $1.03
trillion; China, $969 billion; Japan, $647
billion; and France, $490 billion. China
experienced the highest growth in exports, at 27%,
in 2006. At that rate, China can be expected to
overtake the US in exports this year and Germany
next year. Still, Chinese exports are
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