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| May 19, 2001 | atimes.com | ||
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China
US trade vote on China: Will money talk? By Francesco Sisci BEIJING - This week's cut in interest rates by the US Federal Reserve and President George W Bush's determination to secure a deep cut in taxes make it very unlikely the administration will now be willing to back plans to impose high tariffs on Chinese imports, a move that could trigger inflation. Such would happen if the US Congress were to oppose renewal of Permanent Normal Trade Relations (PNTR) with China when it votes on the issue in Washington next month. Economic factors, in fact, dictate different strategies to America than what the strategic planners of the China bashers' "Blue Team" would like to see. The US economy is faltering, but no other economy appears ready to carry forth the difficult task of promoting global growth. In Japan, new Prime Minister Junichiro Koizumi has pledged far-reaching economic liberalization that could boost the economy, which has been sagging for more than a decade. However, it is not clear when these measures will start working, and some critics doubt whether they will ever work. In any case, it seems very unlikely that in the next six months to a year we will see a full recovery in Tokyo. Things are not much better in Europe. With a clear mandate to fight inflation, the European central bank has been dragging its feet even as America tries to stimulate economic recovery through interest rate cuts, out of fear that too much money in the market could actually ignite high inflation in a very short time. And on this side of the world, there are very few signs of massive economic growth. But conversely, precisely that can be expected in China, given that in the first quarter the country posted an 8.1 percent increase in gross domestic product (GDP), 0.1 percent higher than the already strong showing at the end of last year. Still, export growth in the first quarter slid by 25 percent from the same period last year, to 14.7 percent, while exports to the United States increased by 11 percent in the first quarter, compared to 32.8 percent in the same period last year. China has thus also been affected by the general global economic slowdown, but its goods are still driving growth and are ever-more present in the US market. In fact, their cheap prices and comparatively good quality make them an even better choice for US consumers with less money to spend. Furthermore, China, with an economy larger than the rest of all of East Asia (excluding Japan), has been the driving force in the region ever since the 1997 financial crisis. This engine-of-growth role of China is reflected through American and Japanese investors - the two major investors in China - who have been pouring their money into the country. In the first quarter of this year, investment from the United States and Japan climbed by 35.6 percent and 18.32 percent respectively. In the face of a global slowdown, it is especially important that US and Japanese companies not adversely affect but conversely prop up any ongoing, vibrant economies. These, in turn, can provide some stimulus to all parties concerned and certainly furnish cheaper consumer goods, which help keep inflation under control while stimulus policies are being implemented. The collapse, or even a serious slowdown, of the Chinese economy now would be in no one's best interests. It would drive down growth in East Asia and push prices up in developed economies. Furthermore, China has the strength to push its internal economy. The rise of exports and the on-going growth of internal demand (about 10 percent a year in volume in the past three to four years), coupled with low or negative inflation, proves that Chinese enterprises are now able to produce their goods at lower costs. In other words, State Owned Enterprises (SOEs) have largely shed their liabilities and thus can cut production costs. On the other hand, services such as education, housing, health, pensions and job security have been slowly brought out from under the guise of public protection and the Chinese people have accepted this real growth in the cost of living (which doesn't show up in the official statistics) without excessive reservations. The challenges to modernize these services and make them become a large part of the GDP is both a challenge and an opportunity for further growth. The government has been directing this development without the tool of central interest rates, but with what has been called a proactive fiscal policy that saw 360 billion yuan (US$43.5 billion) of treasury bonds injected into the economy. An additional 100 billion yuan will be issued this year, bringing the total to about $56 billion, or about one-third of the national reserves. The fact that SOEs appear largely off the hook, and that banks had a 2.3 trillion yuan surplus of deposits over outstanding loans (about 20 percent of deposits over loans), makes it very likely China can maintain its high growth rate for several years. Many problems remain and here that list would just be too long to run through. But it is safe to say that the main hurdle of the past, the inefficient SOEs and their massive bad loans, are now a thing of the past. The new challenges are very delicate. For example, in the financial and insurance sectors it involves a lack of managerial expertise which will require years of training to overcome. With agriculture, the stumbling block is a massive social problem that implicitly requires the urbanization of hundreds of millions of peasants. However, neither touches on the delicate issues of internal power struggles that were at the core of the SOEs issue, and thus are easier to tackle in Beijing's politically sensitive atmosphere. The strength of the Chinese economy is further buttressed by the growth of income for farmers and urban residents (4.8 and 4.7 respectively in the first quarter) and which is sufficiently widespread to guarantee growth in consumption. Further, this economy is integrated into the world's, as 43 percent of China's GDP derives from foreign trade. In this situation, not only it is unwise to contain China, as all countries have an interest in trading or in investing there, but it is also extremely dangerous trying to tamper with its trade and economy without making the world economy pay a very dear price. These costs are different in nature from the price paid by the free world in its Cold War fight with the Soviet Union. At that time, Moscow and Washington were the capitals of two largely mutually independent economic empires, so much so that it was no coincidence that the collapse of the Soviet bloc at the beginning of the 1990s coincided with the beginning of a boom in the American economy. If the two economies had been economically integrated to any extent, then the Soviet collapse would have dragged America down along with it. Furthermore, the costs that the United States paid for its military build-up against the Soviet Union were largely a boost for the military industry which spins off many products for civil industry, and thus those expenditures were not wasted but actually kindled internal growth. Vice versa, any real containment against China would require shutting the country out of global markets, a move that would hurt all parties concerned - and thus is not at all feasible. A far subtler move would be to attempt to diplomatically isolate Beijing by trying to force her into an arms race that would bleed her to death. This move has the apparent advantage that it would leave Beijing with its back against the wall. If China takes the bait of an arms race, it will die of diplomatic isolation. If it doesn't, the US administration will anyway work on withdrawing from her the card of political reliability, which, as Pansak Vinyaratn said in a recent article in the magazine Heartland, provides the political predictability necessary to doing business with any country. But to enforce this plan, weakening the political predictability of China and thus increasing what the banks call the sovereign risk, is a very long-term and very difficult approach. This, very importantly, runs against the desires of many multinationals, which financially supported Bush's run for the presidency, and which are more than willing to come to China to do business. But certainly doing business with China defeats both the purpose of confronting China and the Bush policy that solemnly announced the strategic competition between the two countries. In these circumstances, there are two main issues at stake in the present US policy with China. One is concerned whether China grows or collapses, as Defense Secretary Rumsfeld recently said. The other needs China to make money. Thus, the question becomes this: is the US willing to lose money now to forestall the distant ghost of a possible Chinese global challenge to US supremacy? The upcoming PNTR vote will cast some light on this. ((c)2001 Asia Times Online Co, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.) |
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