Why the U.S. Needs to Get Tough on China

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Mr. Krugman agrees with me on the subject of China manipulating its currency:

"Serious people were appalled by Wednesday’s vote in the House of Representatives, where a huge bipartisan majority approved legislation, sponsored by Representative Sander Levin, that would potentially pave the way for sanctions against China over its currency policy.

But serious people, who have been wrong about so many things since this crisis began — remember how budget deficits were going to lead to skyrocketing interest rates and soaring inflation? — are wrong on this issue, too. Diplomacy on China’s currency has gone nowhere, and will continue going nowhere unless backed by the threat of retaliation. The hype about trade war is unjustified — and, anyway, there are worse things than trade conflict. In a time of mass unemployment, made worse by China’s predatory currency policy, the possibility of a few new tariffs should be way down on our list of worries."

Those "serious people" who cried out when we finally got a little tough on China are probably supporters of free trade and liberalism and believe in the goodness of China as a soft power with budding economic potential. Some hope that China will eventually make the transition from autocracy to democracy. This, of course, is all nonsense and all in the past. The China of today is lot more powerful than President Clinton's China. It's economic power has matured to the point where it's becoming more nationalistic and possibly more militaristic.

China cares so much about itself as an emerging, possible revisionist power that it's willing to be selfish when it comes to the fate of the global economy:

"Major advanced economies are still reeling from the effects of a burst housing bubble and the financial crisis that followed. Consumer spending is depressed, and firms see no point in expanding when they aren’t selling enough to use the capacity they have. The recession may be officially over, but unemployment is extremely high and shows no sign of returning to normal levels.

The situation is quite different, however, in emerging economies. These economies have weathered the economic storm, they are fighting inflation rather than deflation, and they offer abundant investment opportunities. Naturally, capital from wealthier but depressed nations is flowing in their direction. And emerging nations could and should play an important role in helping the world economy as a whole pull out of its slump.

But China, the largest of these emerging economies, isn’t allowing this natural process to unfold. Restrictions on foreign investment limit the flow of private funds into China; meanwhile, the Chinese government is keeping the value of its currency, the renminbi, artificially low by buying huge amounts of foreign currency, in effect subsidizing its exports. And these subsidized exports are hurting employment in the rest of the world."

The people who desire for us to go soft on China do not realize how much China is playing games with the U.S:

"They deny that they are deliberately manipulating their exchange rate; I guess the tooth fairy purchased $2.4 trillion in foreign currency and put it on their pillows while they were sleeping."

The Chinese were allowed to join the WTO and were allowed to rise on our MFN status. But China is no longer a soft power and it's never going to become a democracy. So it's time for the United States to start treating China like threat instead of the possible ally we thought it would grow up to be.

It's not about us maintaining our role as a status quo power and the world's only regional hegemony. It's not about us trying to keep China down or apply different rules to China than the ones we apply to ourselves. But even if we were it would not matter because despite what anyone tells you, the U.S. is not on the same level as China. China has an authoritarian government who plays dirty and manipulates its currency so its poor people working in factories and denied the vote do not revolt. As they greedily devour foreign currency to keep themselves afloat, jobs in the democratic United States of America are being lost.

This Lewin bill should be the beginning of the American defense:

"For the truth is that U.S. policy makers have been incredibly, infuriatingly passive in the face of China’s bad behavior — especially because taking on China is one of the few policy options for tackling unemployment available to the Obama administration, given Republican obstructionism on everything else. The Levin bill probably won’t change that passivity. But it will, at least, start to build a fire under policy makers, bringing us closer to the day when, at long last, they are ready to act."

The U.S. obviously has a ways to go before becoming adequately tough on China. Perhaps we'll need sanctions but more importantly we'll need to drop our free-trade fantasy of a one-day cooperative, democratic China. The era of kindly diplomacy with China is at an end.

- Ryu