In 1876, Europeans visiting the Philadelphia Centennial Exposition were
astonished by American industrial prowess. In two generations, the United
States had progressed from a simple agrarian society to challenge the most
advanced European economies.
Now, China confronts America in an historic test transcending commerce.
Americans believe individuals, each defining their own lives, best chart the
progress of the nation. Governments draw legitimacy from collective approval -
citizens are the sovereign. Markets and democracy define America. Our
institutions cultivate competition
among individuals and ideas that shape our common material and civic lives.
Recently, Democrats and moderate Republicans lost sight of those fundamentals,
and imposed healthcare reforms, bailouts and huge deficit voters simply don't
want. They were soundly defeated in mid-term elections.
Markets and democracy are mutually reinforcing. Markets work best when personal
freedoms are protected, and democracy best safeguards those liberties. Free
markets give individuals a strong interest in securing democracy.
Since World War II, the United States has worked with allies in Europe and
elsewhere to build international institutions that promote open markets, human
rights and democracy.
China is no champion of those values. The Chinese Communist Party imposes an
authoritarian regime and assumes parental authority over its citizens. It
prefers state capitalism to private enterprise, and embraces market reforms
only as needed to participate in global commerce on terms unfairly tilted to
China's advantage. Unless compelled by necessity, it will not adopt market
reforms that could instigate popular sentiment for democracy.
China is no 19th century America. Nineteenth century America made pioneering
contributions to steam, railroad, telegraph and electrical technologies. Wages
were higher than in Europe and attracted skilled immigrants. Considerable
resource wealth powered development.
China accomplishes growth with appropriated technology and cheap labor, and it
is desperately dependent on imported oil and resources. It compensates for
shortcomings by compelling Western companies to transfer know-how and with an
undervalued currency that subsidizes exports and suppresses the real wages of
industrial workers. Its middle class prosperity is built on exploited factory
labor.
During the Cold War, US moderates advocated engagement with the Soviet Union.
They believed, through the example of the United States, its citizens would see
the power of individual liberty and compel change. Subsequently, Washington
adopted that strategy toward China.
That is folly.
The Soviet Union collapsed, not because it bought into Jeffersonian ideas, but
because its economy failed. China's economy is succeeding. Don't look for its
leaders to call for free elections anytime soon.
To sustain the Communist Party, Beijing has a strong interest in selling its
brand of authoritarian capitalism to others and redefining international
institutions that promote open global markets and human rights.
To secure oil and other resources and enhance global influence, China is
investing abroad, building a blue-water navy and modernizing its army.
Through mercantilism, China has accomplished huge trade surpluses and breakneck
growth, imposed on the United States huge trade deficits and high unemployment,
and made American free market prescriptions for the global economy appear
foolish and outdated
Through diplomacy, the United States has failed to persuade China to abandon
currency and other mercantilist policies that harm the U.S. economy.
At meetings of the International Monetary Fund and the Group of 20 countries,
Germany and other key Western allies abandoned the United States, leaving it to
fend for itself. America stands on a lonely perch, and the time for talk is
over. Washington must respond to Chinese mercantilism with actions, not words.
China's purchases of dollars and foreign securities to maintain undervalued
yuan come to 35% of exports. Washington should impose proportionate tax on
purchases of yuan used to buy Chinese goods or invest in China, and intervene
in currency markets to push up the value of the yuan.
Washington should place limits on Chinese technology sales and investments in
the United States that mirror the restrictions China imposes on imports and
foreign investments.
Across the board and without exception, the United States should decisively
answer Chinese protectionism. Failure to act aids China's success. It is
appeasement and courts disaster.
Peter Morici is a professor at the Smith School of Business, University
of Maryland School, and former Chief Economist at the U.S. International Trade
Commission.
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