- The Washington Times - Monday, March 29, 2010

“Shocked, shocked, I tell you!” Beijing’s original legal charges against four executives of Anglo-Australian mining giant Rio Tinto Group could have meant the death penalty. But blowing hot and cold, China’s courts now have convicted the defendants of bribery and purloining proprietary secrets. The charges left more than one businessman snickering, so endemic is bribery to doing business with China’s “state-operated enterprises” - or, for that matter, for anyone operating anywhere in “the world’s factory.” Rio Tinto, which once rejected the charges out of hand, has publicly washed its hands of its China team while simultaneously moving on to new joint deals with Chinese metals companies. Is there a deal?

Whatever the fate of these men, the trial reflects rising hostility toward foreign capital in general, the motor of the China boom. Foreign companies are finding that, as the old saying has it, when you sup with the devil, you need a long spoon. The case of Google, which the search engine leader has sanctimoniously dressed up as rethinking its collaboration with Beijing’s censors, is very much a case in point. Not only did China’s leaders see to it that Google’s principal Chinese competition carved out an overwhelming market share, but someone - it couldn’t possibly be the Chinese “security” apparatus! - used leaks of technology to hack Google’s best customers in the West. The handle on that spoon ought to have extended outside the tent, to mix metaphors a bit.

That’s where the larger economic slanging match between Washington and Beijing comes in. The conflict between the two capitals has reached a level that can no longer be dismissed as mere rhetoric. Both sides are rapidly backing themselves into a corner, which for domestic reasons - quite different in each country but equally compelling - could lead to major trade disruptions at a time when both face horrendous economic challenges.

President Obama has twice come close to labeling China “a manipulator of currency” - an official charge to be reviewed April 15 and one that, by law, would require Treasury action. China’s trade surplus has taken what could be a temporary dip, but one official after another has plunked himself down, pledging not to permit the re-evaluation of the yuan that U.S. critics are demanding.

In fact, the Chinese face a huge dilemma. The longer they wait to float their currency - market value estimates range from 20 percent to 60 percent above the official quote - the more they encourage speculators. Beijing’s capital controls, however draconian, aren’t impregnable. Estimates of “hot money” inside the system, anticipating a currency hike, are all over the lot. But those who know the Chinese businessman’s proven ability to skirt controls can guess that under-invoicing, over-invoicing, using Hong Kong as a base for “foreign investment” and other subterfuges make the yuan a leaky ship indeed. And parking a large part of what the government intended as overall economic “stimulus” in a real estate bubble and the casino stock market is part of this speculation. Beijing has now had to slam on the brakes as “nonperforming loans” zoom at state-controlled banks.

More worrying for Washington are Beijing’s myriad export subsidies. The multinationals have taken full advantage of them, accounting for something like 65 percent of exports. Even if Chinese authorities agree to a modest one-time currency re-evaluation to defuse the situation, as some analysts suggest, that poses two new questions: Would the move not just whet speculators’ appetites? And given the exquisitely small margins for most Chinese subcontractors, even with government subsidies, would the problem really go away?

As the need for jobs becomes an increasingly charged issue in American politics, the widely held belief that the U.S. “exported” some 2.4 million jobs to China during the boom years will only turn up the heat on the Obama administration. The Democratic president already is besieged by demands for action from some of his most loyal followers on Capitol Hill.

Jobs are equally the issue in China. Beijing projects an 8 percent rise in gross domestic product this year - a minimum target that pundits say is necessary to maintain stability. But the half-trillion-dollar “stimulus” in China worked no better than did a similar program in the U.S. And despite reports of rising wage rates in the recovering Pearl River Delta export center, there is little sign that demand in U.S. and EU consumer markets will return to their former bonanza levels.

Even if China’s mercantilists give ground on import restrictions - earlier minor concessions were wiped out in 2008 - it is not clear how much advantage American exporters would have. There would be a hell-for-leather competition to unload U.S. and European subsidy-produced food stocks, for example, in the unlikely prospect that Beijing devoted some of its $2.3 trillion reserves for its consumers. And the import rush would further devastate China’s depressed rural sector and could prove highly inflationary at a time of rising prices.

Winding down the U.S.-China trade and financial imbalance isn’t going to be easy - or even something both sides seem prepared to accept. So far, there has been no progress in examining the possibilities of a truce. Is a trade war just around the corner?

c International Business Editor Sol Sanders, veteran foreign correspondent and analyst, writes weekly on the convergence of international politics, business and economics.

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