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Alarm bells on China

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Release of International Monetary Fund economic growth projections for 2007 set off a rash of misleading headlines. Many claimed that because China will lead the world with a national gross domestic product growth of 11.2 percent, it is the "engine of the global economy." This implies what is happening in China benefits the rest of the world, when in fact it is really only empowering China. Its impact on other countries is problematic.

The "global economy" is not based on the "harmony of interests" once envisioned by 19th century classical liberals, but on cut-throat competition. Winners and losers in these commercial contests impact the national societies in which they operate. Where factories and research labs are located, where high-skilled jobs and workers reside, where income is earned, spent and invested and where education and enterprise are fostered make all the difference in the world. There is no world community in any meaningful sense. Energetic nations rise, complacent ones decline. If globalization is anything more than a catch phrase, it means the age-old struggle for wealth and power is now waged worldwide. It matters more than ever who comes out ahead.

The IMF data show that among the advanced English-speaking countries, which Americans are accustomed to thinking are the basis for international security and progress, the United States, United Kingdom and Australia are all running large current account deficits. Only Canada is in rough balance. This means they are losing the economic contest to more vigorous rivals elsewhere.

A common failing in all these states is the continued embrace of 19th century "free trade" theory — largely conceived in the British Isles, which has disarmed them in the global struggle.

One would have thought the role of this "dismal science" in the decline of the British Empire a century ago, and the rise of the United States on the basis of the very different principles of economic nationalism, would have led policymakers to take the better route. Yet, over the last few decades, Washington has abandoned its successful approach of Alexander Hamilton and Teddy Roosevelt for the failed "ideals" of David Ricardo and Richard Cobden.

Meanwhile, China, Japan and the rest of Industrial Asia run large trade surpluses. Their capacity to produce is supported by the ability to add foreign markets to domestic demand on a net basis.

Exporting to the United States is most vital to China, which actually makes the American market its "engine of growth." Meanwhile, GDP growth in the U.S. (a mere 2 percent) languishes at the bottom of the list for advanced economies, as wealth and industry are outsourced overseas. Consumers try to live high as debtors rather than producers — an unsustainable decadence.

The growth that China generates in Africa and Latin America is just as deceptive. Countries that export oil or raw materials to feed Chinese industry are doing well, but this is the old colonial pattern. As China pays for these commodities with manufactured goods, local economic development is stunted.

Beijing has offered investments in infrastructure, but aimed at making shipments of oil and metals out of these countries easier. To smaller countries with financial difficulties, these deals seem attractive but will not generate real long-term growth across society.

Brazil, which a few years ago was seduced by Chinese promises, has had second thoughts. It sees itself as a rising industrial economy, but has been swamped by Chinese imports that have hurt local manufacturing. In early July, Brazil agreed to join the United States in protesting China's currency manipulation at the IMF. Beijing sets the value of the yuan by fiat, at an exchange rate that makes its exports more competitive.

The need to persuade China to revalue the yuan was made apparent in the IMF's World Economic Outlook published in April. The IMF calculates that "The U.S. trade balance may be more responsive to changes in the real value of the U.S. dollar than often assumed." This has been seen in regard to European exchange rates that move in a market environment. Since Chinese rates are not set by the market, it will be necessary to adopt other measures, such as the countervailing duties used to offset other subsidies.

Mr. Cobden was wrong when he claimed with trade, "the motive for large and mighty empires, for gigantic armies and great fleets would die away." History shows ambitions expand with economies. Beijing is pouring its gains into increased military power and diplomatic clout. This is particularly true in electronics, a commercial industry the IMF says is the principle growth area for Chinese exports, and which defense experts (like the Rand Corp.) cite as the main source of increased Chinese military capabilities.

While some heedless business interests see China as a partner that will share the spoils in its rise to great-power status, Beijing is a strategic rival to the United States. The IMF report is an alarm bell, not a dinner bell.

William Hawkins is senior fellow for national security studies at the U.S. Business and Industry Council.

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