- The Washington Times - Tuesday, April 13, 2010

ANALYSIS/OPINION:

Just before my only trip to China, a veteran Asia watcher gave me this invaluable advice: Resist the “ooh-aah syndrome.” However mind-bending China appears, keep your baloney-meter on. Clearly, he’s never gotten through to President Obama or most of the punditocracy. For baloney has abounded lately in the China currency manipulation saga. Consider the main ideas clearly shaping the past week’s decisions:

Public pressure will backfire with China. Maybe — but how does anyone know? Washington has never tried public pressure. The last two administrations have openly broached currency manipulation, but in a “pretty please” way at best.

And behind closed doors, the message could be entirely different, especially since the U.S.-owned multinational companies that dominate executive branch trade policymaking actually love the dramatically undervalued yuan. It’s been a massive subsidy for their Chinese factories and exports to America. As for Congress, some members periodically fulminate about currency manipulation, but no meaningful legislation has passed.

In fact, it’s long past due for Washington to forget about changing China’s behavior and simply to impose tariffs that offset this massive government-financed discount for all Chinese-made goods and services. Chinese output would still remain artificially cheap in China and in third countries. But China would lose huge earnings in the United States — the world’s biggest final consumption market — and U.S.-based producers would be big beneficiaries, especially in the vital capital- and labor-intensive sectors that create the best-paying jobs and foster the most innovation.

A Chinese revaluation won’t matter much economically. It’s interesting that economists worldwide vigorously debate this proposition. What’s actually important is that the Chinese themselves actively reject it. As acknowledged by Commerce Minister Chen Deming in a Washington Post interview, without an artificially cheap yuan, Chinese exporters’ razor-thin profit margins would vanish — along with many of the jobs they create (that’s an open admission that Beijing is indeed manipulating for trade advantage).

A slightly more sophisticated version of this argument emphasizes that many Chinese exports are stuffed with U.S.-made parts and components. So retaliating for currency manipulation also would punish the American economy.

Although the U.S. content levels of Chinese products are not publicly known, here’s what is known: Over the past decade, China’s exports to the U.S. of machinery of all kinds — including capital equipment and precision parts and components — have grown considerably faster than Chinese exports to the United States overall. That’s powerful evidence that these Chinese-made inputs are making up more and more of Chinese-made manufactures.

China’s predatory trade policies must be soft-pedaled to secure Chinese security cooperation. Old Cold War hokum never dies — or even fades away. For decades, American leaders pursued this strategy with Germany and Japan, in particular. Rather than insist on equitable trade arrangements, Washington regularly sold out U.S. producer interests for fear that Bonn and Tokyo would defect to the Soviet camp. Or go neutral. Or vote against the United States at the United Nations.

Not only did Washington never realize that U.S. allies always desperately wanted U.S. protection, it never learned that allies needing to be bought are never reliable. Truly effective alliances are built on common interests. If they’re present, alliances usually will survive quarrels on other fronts. If they’re not, bribery is unlikely to fill the gap when it counts most.

Trying to bribe China — a non-ally that regularly challenges American security interests — makes even less sense. Specifically, if Beijing believes that helping the United States neutralize North Korea or Iran serves Chinese interests, it will cooperate with whatever Washington does about the yuan. Ditto for Mr. Obama’s nuclear nonproliferation agenda.

If the Chinese hold different enough views, then no reasonable U.S. economic concessions will change their minds, and the sooner the U.S. understands China’s real position, the better. In fact, offering this tradeoff to Beijing in effect announces that China can jerk Washington around indefinitely on both issues.

Finally,imports from elsewhere will simply replace Chinese products in America. Such switches may indeed take place in many labor-intensive industries, where factories are lightly equipped and mobile. But factories for capital- and technology-intensive goods are a different story altogether. With currency manipulation tariffs in place, their best relocation bet will be the U.S. And an agile enough U.S. tariff policy can dramatically reduce their non-U.S. alternatives.

In fact, America’s best move is probably imposing across-the-board global tariffs high enough to eliminate U.S. trade deficits altogether, a la Richard Nixon in 1971. For Beijing’s defenders have at least one argument right — America’s trade policy problems hardly stop with China.

Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose more than 1,900 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s Web site, www.americaneconomicalert.org.

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