Mutual dependency can guarantee a certain amount of pragmatic behavior by both sides, but there should be no romantic illusions about how the Chinese communists feel about America. “We hate you guys,” China Banking Regulatory Commission Director General Luo Ping fumed about the PRC being forced into buying U.S. Treasuries to protect Beijing’s massive U.S. debt holdings. “Once you start issuing $1 trillion-$2 trillion … we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”
He says there is nothing they can do because Beijing needs Americans to keep buying their consumer goods. Approximately 20 percent of imports into America come from the PRC, and that percentage is on the rise. China’s huge pool of cheap labor means the country can produce more stuff at lower cost than anyone else. As if the peasant advantage weren’t enough for its production facilities, Beijing has pursued monetary policies to keep the yuan artificially low to guarantee that its products can undercut any competitors’ prices even more.
This is a mixed blessing, or mixed curse, depending on one’s point of view. With a flood of inexpensive products coming from China, American homemakers can spend less on most household goods, which leaves more income to save, invest, spend on luxury goods, or dedicate to children’s education. On the downside, artificially low prices for Chinese goods create an unlevel playing field on which U.S. companies can’t compete, a situation that unquestionably led to millions of U.S. jobs being sent overseas and the resultant collapse of America’s domestic manufacturing base.
There is an uneasy alliance of some political factions on the left and right on this issue. Even devout free-traders agree that a working system of free trade depends on a regime of rules that prohibits uncompetitive national practices that prop up or unduly support domestic industries. A May 2011 editorial in the New York Times offers a critique of Beijing practices with which almost anyone on the ideological spectrum can agree. “The list of complaints is long: 80 percent of the computer software in China is counterfeit. Beijing just published a new investment catalog that keeps a long list of industries off limits for American firms,” the old Gray Lady protested. “It changed the investment vetting process to allow Chinese companies to recommend barring acquisitions by foreign rivals. It has done nothing to reduce the enormous subsidies in the form of cheap credit to favored state-owned firms.”
The catalog of Beijing’s sins goes on and on, but the point is that the People’s Republic can essentially do what it wants and it gets away with it. As Thea M. Lee, policy director for the AFL-CIO, testified before the Commission on U.S.-China Economic and Security Review, “Enforcement of wages, hours and health and safety rules is lax or nonexistent in many areas of the country, and forced and child labor are prevalent in some sectors.” It’s no surprise many U.S. labor unions have staked out a tough stance on the PRC, and some of it for good reason. Along with child labor, Beijing has a penchant for openly pursuing unfair trade practices and violating international trade rules. One of the most common practices is direct government financial subsidies for PRC industries so they can sell goods below the price of production, thereby stealing market share.
The other major way Beijing cheats to get its companies ahead is by forcing state-owned banks to provide low-interest loans to businesses and making these financial institutions absorb losses by exporters. Chinese businesses have a significant and unfair competitive advantage by not having to pay market-priced interest rates on borrowed money and not having to cover losses on their books. As Republican Rep. Duncan Hunter put it succinctly, “China is cheating on trade.”
At the center of the PRC’s trade strategy are machinations to keep their currency undervalued, which makes the price of their exports cheaper in relation to products from nations with stronger currencies. Washington’s sale of so much U.S. debt to Beijing unwittingly strengthens this communist ploy. “Because of their undervalued currency (and large trade surplus), abundant U.S. dollars are officially overpriced in China,” Jonathan Rothwell, a research analyst at the Brookings Institution, explains. “Chinese banks take deposits from exporters in dollars, convert them to yuan, lend them out, and get artificially high returns by virtue of the enhanced buying power of yuan.”
In effect, the Chinese get more bang for the buck than Americans do by using the relative high value of the dollar in their own markets, where prices are low because of the artificially depressed value of their own currency. To keep the value of the yuan low, China has bought more than $3 trillion in foreign currency reserves. “Its reserves are the world’s largest, accounting for 31 percent,” according to BusinessWeek. “China still closely manages the level of its exchange rate and restricts the ability of capital to move in and out of the country,” U.S. Treasury Secretary Timothy Geithner complained in January 2011. “These policies have the effect of keeping the Chinese currency substantially undervalued.”
The Obama administration is crying wolf about Beijing manipulating its currency, but so what? Secretary Geithner has insisted that Beijing strengthen the yuan to help improve U.S. price competitiveness, but this clearly isn’t in China’s interest, and the U.S. Treasury has little leverage with its biggest creditor. It’s hardly China’s fault that we’re so dependent on their largesse that fluctuations in the yuan are dangerous at home in the place formerly recognized as the Land of the Free. In no uncertain terms, America is not free if we’re shackled to the economic policies and monetary decisions of a communist state.
Mr. Geithner has warned that President Obama believes the PRC is “manipulating” its currency, but there is nothing the United States can do about it because we depend on the PRC continuing to prop up our markets. As the Augusta Chronicle of Georgia put it so aptly, “If you took out a sizable loan from your neighborhood bank, you’re not likely to strut into the bank president’s office and tell him how to run the place.” But that’s what Obama and Geithner are doing, or at least doing for the cameras. They don’t have a leg to stand on.
America’s addiction to cheap Chinese consumer products, as well as our reliance on a constant flow of Chinese loans to buy the junk, stem from economic indiscipline and weak political leadership in Washington. At the root of the problem is an obstinate refusal to live within our means. While both political parties have had a poor recent track record on spending, it appears that Republicans now understand the imperative to mend our ways while Democrats are bitterly resisting change in a more responsible direction.
This standoff was painfully obvious during budget battles in 2011 over raising the debt ceiling so government can continue to borrow from future generations to pay today’s bills. President Obama and Democratic leaders in Congress resisted any Republican attempts to tie an increase in the debt ceiling to corresponding cuts in federal spending or entitlement reform. On April 11, 2011, just a few days before tax payments were due to the IRS, White House spokesman Jay Carney said, “We believe that we should move quickly to raise the debt limit and we support a clean piece of legislation to do that.” Translation: give Capitol Hill big spenders a credit card with no limits.
House Speaker John A. Boehner, a Republican, insisted that any increase in the debt ceiling must be equaled or surpassed by corresponding cuts in government spending, but he was ignored in the other chamber by Democratic Senate Majority Leader Harry Reid. So the cycle continues: A U.S. government on the verge of insolvency spends more than it has on big government programs it cannot afford. The sugar daddy underwriting the spending spree lives in Beijing. Eventually those bills will come due.
Brett M. Decker is editorial page editor of The Washington Times and a former Hong Kong-based editor and writer for The Wall Street Journal. William C. Triplett II is former chief Republican counsel to the Senate Foreign Relations Committee and bestselling co-author of “Year of the Rat” (Regnery, 1998).
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By Rand Paul
Obama acts as though we no longer have a Constitution