China is nowhere close to a global military power but it is becoming a global economic power. It is therefore almost inevitable that the U.S. and PRC will clash more often over economic matters. The goal in managing those disputes must always be more open international markets, or the result will be that both sides lose.
The next month in particular is going to be a loud one for Sino-American economic relations. On the front end we have a press conference today by Premier Wen Jiabao, number three in the Communist Party hierarchy. Among other things, Wen repeated what are now standard Chinese accusations of American trade protectionism.
On the back end, exactly a month from now a report is due from the Department of the Treasury determining whether any American trading partner is manipulating its currency. The likelihood that the PRC will be cited is the highest in over a decade.
Wen’s remarks in Beijing were tired and often hypocritical. Chinese diplomacy seems to have degenerated into finding new excuses for harmful policies. China’s trade surplus with the U.S. last year again topped $200 billion. If the U.S. is being protectionist, it is doing a remarkably poor job.
At the other end, the Treasury decision is being granted far too much importance. The value of the Chinese currency, the yuan, is just a symptom. The illness is broad Chinese government intervention in the market, led by subsidies for state firms. From mid-2005 to mid-2008, the yuan appreciated 20 percent against the dollar and the bilateral trade deficit still rose 50 percent. Forcing a yuan revaluation will likely yield nothing at all.
Nonetheless, it is true that China’s broad state-led development often hurts its economic partners. What is not true is that American protectionism is a solution.
A hefty tariff on Chinese goods will not create American jobs. Instead, production will just move out of China to Vietnam, Mexico, Bangladesh and elsewhere. With less Chinese competition due to the tariff, other producers can safely raise prices, making goods more expensive here. Protectionism is just households paying more than they should in order to subsidize companies. Seems like we’ve had enough of that the past 18 months.
A much better alternative is to use the June meetings of the Strategic and Economic Dialogue with the PRC. The U.S. should put forward a few, very explicit American demands for less Chinese government intervention in the market. By then, the U.S. would do well to have demonstrated resolve on its runaway budget deficits, something that legitimately concerns the Chinese and much of the rest of the world. This could increase American access to the Chinese market while strengthening the domestic American economy. Not as satisfying as sticking it to Beijing, but far better for the United States.