November 30, 2009
by Irwin Stelzer
Odd, that. There is Hu Jintao, the world's leading protectionist, the man who manipulates his nation's currency so as to keep goods and services made in other countries out while Chinese-made goods capture more and more market share, lecturing the American president on the dangers of protectionism. And there is Barack Obama, eyes downcast, supinely playing punching bag to Hu, even though he presides over the country that is China's biggest customer.
If there were to have been a useful outcome of what proved to be a disastrous Asian trip for Obama (see Ross Terrill's article on page 11 of this issue), it would have been to persuade China to abandon the policies that have jobs and investment fleeing these shores for China, to impress upon Beijing that stealing intellectual property "will have consequences," as our president often threatens in other circumstances. The Chinese seem no more cowed at the prospect of being exposed to such consequences than the Iranians, the North Koreans, the Russians, or just about any other adversary who has taken the measure of this administration.
Hu's position is understandable. His regime has no democratic legitimacy, no claim to the loyalty of its subjects--except the ability to provide jobs for the 10 million workers headed to China's cities every year. Fewer jobs might make for unhappy voters here, but in China they mean more riots, of which there seem to have been some 10,000 during the early days of the world economic downturn. The regime's ability to create millions of jobs is no small thing. But much of it is coming at the expense of American workers, and of workers in Europe, in other Asian countries that do not peg their currencies to the dollar, and in Latin America. Perhaps even worse, China's policy of subsidizing exports created and continues to create the imbalances that have done a lot more to fuel the current financial crisis than all the greedy bankers put together.
Free trade, economists like to point out, is not a zero sum game as trading partners benefit from obtaining in trade for their own products the goods they cannot make as cheaply at home. Trade with China bears little resemblance to that idealized description. In 1625, we bought Manhattan for colored beads, cloth, and hatchets worth $24. Almost four centuries later we began selling it to China for cheap sneakers and T-shirts--goods priced so low not because China is an efficient producer, but because it is a currency manipulator. Not only have we stocked up on Chinese products, we have borrowed from China to pay the bills. China now holds well over $1 trillion in American IOUs, which seems to have weighed heavily on President Obama as he met with Chinese leaders to discuss a "restructuring" of the U.S.-Chinese relationship. Hu sent him home with the present structure still firmly in place.
Many free trade proponents urge calm. After all, we survived a period in which our imbalanced trade with Japan handed us their Toyotas and them Rockefeller Center. Their pile of dollar earnings proved unthreatening to American interests. But China is not Japan. The Japanese had no way of parlaying their economic power into geopolitical power. They could not threaten us in the manner in which a creditor can threaten a debtor because they depended on us for their national security. Not so China, which has shown that it is willing to use its economic hold on us to attempt to dictate our foreign policy. In an effort to curry favor with his creditors President Obama refused to grant an audience to the Dalai Lama when the Tibetan leader visited Washington. In China, Obama failed to insist on some token release of a dissident or two. He agreed to address a handpicked audience, rather than demand access to a wider public. Even his cheerleaders in the media are appalled at the extent of the presidential groveling.
So, as Lenin once asked, "What is to be done?" Had the White House not confiscated Larry Summers's dog-eared copy of Adam Smith's Wealth of Nations lest someone learn about how markets work and the importance of keeping government from playing too intrusive a role in the economy, Obama might have found the answer.
The case in which it may sometimes be a matter of deliberation how far it is proper to continue the free importation of certain foreign goods, is, when some foreign nation restrains by high duties or prohibitions the importation of some of our manufacturers into their country. Revenge in this case naturally dictates retaliation. .??.??. There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of.
The great Scot wrote before anyone had heard of the World Trade Organization. Because we sponsored China, it is a member of the anti-protectionist WTO, which sees no harm in the distorting effect on trade of China's undervalued currency, but would never countenance discriminatory tariffs aimed at stuff made in China.
That is hardly an insuperable barrier to policies that would remind China that antagonizing its leading customer is not a good idea, as Obama recognized when he erected barriers to imports of some tires and pipes produced in Chinese factories. It would be a relatively simple matter to troll down the list of goods that we import primarily from China, and levy tariffs on them that would slide downward as the renminbi is allowed to slide up in value. Yes, there would be collateral damage to other nations that make the same goods, but no policy is perfect.
Would a Chinese appeal to the WTO put an end to such retaliation? Perhaps, but only after a long drawn-out set of hearings and appeals. Ah, you say, you are overlooking what was uppermost in Obama's mind when he all but curled into a defensive fetal position during the joint press conference that brought his China visit to a merciful close--a press conference at which no questions from the press were allowed: China might start dumping dollars, selling off all those Treasury IOUs stored in the basement of the central bank. Possibly--if China is willing to wipe a few hundred billion off the value of the assets it will still hold. But the consequences for the United States, which would be higher interest rates and, initially, slower economic growth, must be weighed against the longer term and much larger consequences of maintaining the status quo.
The longer we allow things to stay as they are, with China using its undervalued currency to keep its goods cheap enough to displace American products on Walmart's shelves, the larger will be the stack of our IOUs China's rulers control. The longer we allow China to permit our companies a foothold in their country only if we turn over our technology and intellectual property as part of the price of access, the more likely it is that we will see high-tech Chinese goods doing to our GEs and others what their low-tech stuff has done to our shoe and apparel manufacturers.
There would undoubtedly be a cost to saying enough is enough, but the benefit--even not including the intangible one of showing that it is a bad idea to tug on Superman's cape--would surely outweigh that cost.
Meanwhile, unemployment would be rising in China, and the regime challenged by an emerging army of the unemployed, about which Chinese Communist leaders undoubtedly learned while studying their Marx. That should bring them to the bargaining table.
If not, and in a worst case, America will have somewhat slower economic growth but somewhat more jobs, somewhat more expensive T?shirts, and a great deal more freedom of action in the Asia-Pacific rim. That is a good trade, a price worth paying. Again, consult Smith:
The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods. To judge whether such retaliations are likely to produce such an effect, does not, perhaps, belong so much to the science of a legislator, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs.
Surely, the supply of insidious and crafty animals in this administration is sufficient to give us a good chance of winning a game of chicken with the Chinese. Their insidious and crafty animals would be risking a loss of power and reeducation as manual laborers in some remote agricultural region, ours only an increase in the price of sneakers and slower economic growth, which voters might not even notice or, if they did, might well decide to be a price worth paying to assure we will never again see an American president so shriveled a figure on a visit to Asia.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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