They Should Know Better

I wish there were a class called China 101 that every member of Congress had to attend. This would be the first lesson: If you really want the Chinese to do something, never pressure them about it in public. Loss of face is anathema in the Middle Kingdom. Which is why when the U.S. Senate passed a bill hinting at tariffs on Chinese goods if Beijing doesn’t let the value of its currency rise, the People’s Bank of China promptly and defiantly responded by pushing the value of the renminbi lower.

It’s ironic, because Beijing had been doing just the opposite until politicians like Chuck Schumer decided to start posturing and make China’s currency a proxy for a highly politicized discussion about globalization and unemployment in the U.S. The idea is that if Chinese money were worth more, American firms wouldn’t export so many jobs to China (because labor there would be more expensive) and the Chinese would be able to buy more U.S. goods and services, thus cutting trade imbalances between the two nations and helping put the global economy back on track.

It is a good diplomatic lesson to be remembered during future dealings with China: praise in public, reprimand in private. But it’s also unfortunate in that the lesson need not have been learned. China had already allowed the value of its currency to rise.

Many of the changes the Schumer bill argues for are already in the works. The Chinese, who know they desperately need to rebalance their economy in order to maintain longer-term growth, have already let their currency appreciate 30% against the dollar since 2005 and a full 10% last year. Wages are rising; in fact, that’s the reason there’s a nascent trickle of higher-level manufacturing jobs back to the U.S., as Chinese pay hikes (coupled with higher energy and transport costs) make it less profitable to do business in China relative to the U.S. What’s more, American exports to China are actually increasing. Andy Rothman, a China expert at CLSA investment bank in Shanghai, recently pointed out to me that despite all the rhetoric about currency, U.S. exports to China rose 468% in the past decade. The next fastest growth rate to a major market was 64%, to Germany.

Which of the presidential candidates know this? Probably only Huntsman. Which are willing to say it? Probably only Huntsman. Romney may know it, but he’s gone the opposite direction by confronting China and campaigning to wage a trade war. Obama has been too soft, he argues. Does Obama know this? I assume he does, but also assume he’ll ignore the reality. His campaign will be based on two arguments. (It can’t be based on his record.) First, that things would have been much worse without him. Yes, there is 9% unemployment, but had we done nothing like the Republicans wanted we would now be looking at 13 or 14% unemployment. Second, he needs to spread more of the blame. He’s already blamed Bush, the Tea Party and Republicans in Congress, the EU, the Japanese tsunami, the Arab Spring… Blaming China is easy, especially since neither Romney, Perry, or Cain would care to challenge him on this. They will only up the blame placed on China and escape discussing our own faults for our ailing economy.

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Filed under China, Economics

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