- The Washington Times - Tuesday, July 29, 2003

On July 17, Republican Sens. Elizabeth Dole of North Carolina and Lindsey Graham of South Carolina and Democratic Sens. Evan Bayh of Indiana and Charles Schumer of New York, co-signed a letter asking Treasury Secretary John Snow to investigate whether China is manipulating its currency to gain a trade advantage in the American market. The day before, Federal Reserve Chairman Alan Greenspan had warned China on the same issue while testifying before the Senate Committee on Banking, Housing, and Urban Affairs.

The House Appropriations Subcommittee on Commerce, State and the Judiciary held a hearing in May on “How Trade with China Affects American Manufacturing.” At that hearing, the National Association of Manufacturers projected that in five years, the U.S. trade deficit with China would triple to more than $330 billion if current trends continued. Based on the first half of this year, the 2003 deficit with China will reach $120 billion, the largest and most lopsided deficit in the U.S. trade accounts.

Since 1997, the U.S. trade position has deteriorated dramatically. That was the year of the global financial crisis that started in Asia, then spread to Russia and Latin America. That 1997 crisis threw many countries into recessions from which they have not recovered. The result has been smaller export markets for American goods and more aggressive efforts by distressed foreign producers to dump their goods into the U.S. market.

China, however, has escaped the global downturn. In June, Chinese exports rose 33 percent from a year earlier to $34.5 billion, while production increased 17 percent, according to Beijing. The median forecast of economists surveyed by Bloomberg News was for growth of 27 percent in exports and a 13 percent rise in factory output.

China set world events in motion when it devalued its currency in 1994, giving it a decided advantage over its trade rivals on the Pacific Rim. Driven to the wall, a wave of devaluations swept through these other states, but in a disruptive rather than a planned fashion. Ernest H. Preeg of the Manufacturers Alliance and the Hudson Institute has estimated that the Chinese yuan is as much as 40 percent below market value. But Beijing has intervened on a massive scale to keep the yuan from being valued by the market.

China is able to use the profits from its successful trade policy to maintain its advantage. Its trade surplus gives it the dollar reserves it needs for financial intervention. Between 1997 and March, 2003, its dollar reserves grew from $140 billion to $316 billion. It can invest these funds in U.S. Treasury debt, which is being issued at a brisk pace due to the expanding federal budget deficit. The budget deficit is largely the result of the slow American economic recovery, which in turn is hampered by the trade deficit. Thus the “twin deficits” (trade and budget) work together for Beijing’s benefit.

And when China is involved, the dangers are not just commercial. Beijing’s strategy to undermine American industry while building up its own manufacturing base also works to shift the balance of power in Asia. So does undermining U.S. finances with the “twin deficits” and beating down neighboring states in trade battles.

In the seminal Chinese treatise on modern strategy “Unrestricted War” by People’s Liberation Army Cols. Qiao Liang and Wang Xiangsui published in 1999, the unfolding financial crisis is compared to military conflict: “Economic prosperity that once excited the constant admiration of the Western world changed to a depression, like the leaves of a tree that are blown away in a single night by the autumn wind. After just one round of fighting, the economies of a number of countries had fallen back 10 years. What is more, such a defeat on the economic front precipitates a near collapse of the social and political order. The casualties resulting from the constant chaos are no less than those resulting from a regional war.”

It is also argued in “Unrestricted War” that to attack another country’s economy, the aggressor “must adjust its own financial strategy, use currency revaluation or devaluation as primary, and combine means such as getting the upper hand in public opinion and changing the rules sufficiently to make financial turbulence and economic crisis appear in the targeted country or area, weakening its overall power, including its military strength.” A weak American economy and rising budget deficits make it more difficult to provide the funds to modernize or expand the overstretched U.S. military, or to pay for overseas combat operations, or to finance nation-building in places like Iraq and Afghanistan.

Indeed, if economic troubles can bring “a near collapse of the social and political order,” would it not be to Beijing’s benefit to see the strong and assertive President George W. Bush defeated for re-election in 2004? Despite winning the 1991 Gulf war, the elder President Bush was defeated for re-election because of a recession. His defeat brought forth President Bill Clinton, who followed an appeasement policy toward China. Beijing’s strategists may have more in mind than just the economic gains from trade.

Unfortunately, despite the increased attention being paid in Washington to the impact of trade on the American economy, there has yet to be the kind of integration of international economics into U.S. global strategy that is found in Chinese writings. Until that happens, American officials will find it difficult to move beyond just voicing complaints to taking effective counteraction.

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


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