The China edge

April 06, 2006

Commerce Secretary Carlos Gutierrez was in Beijing last week warning that America could return to economic isolationism. Our question is, who is threatening whom?

Protectionism remains a disastrous course for the world's dominant economy. Even Sens. Charles E. Schumer (a Democrat) and Lindsey Graham (a Republican) must know that. They're sponsoring legislation to slap a retaliatory tariff of 27.5 percent on all Chinese goods if Beijing doesn't allow its undervalued currency to appreciate. Last week, after their own trip to China, they put on hold for six months a vote on the tariffs - keeping the threat in play. But of course, it is pretty much a hollow threat - or, worse, a case of Washington holding a gun to its own head.

An across-the-board tariff of that scale would certainly raise the cost of low-cost imported goods, on which U.S. shoppers have become reliant, but would do little to raise the value of the renminbi. Indeed, it likely would make it politically impossible for China to be seen as caving into Washington by letting its currency float sharply upward.

Nevertheless, look for such threats to become even more prominent this month - with Chinese leader Hu Jintao paying a state visit about the same time as the U.S. Treasury Department's annual currency report is to be released. An official U.S. finding that China is manipulating its currency would set off howling on both sides of the Pacific - and a dangerous game of counterthreats. At stake would be a trade war between the world's largest and soon-to-be second-largest economies - a sure route to a worldwide recession in no one's interest.

There's little question that China intervenes to depress its currency (by 20 percent to 40 percent). Its domestic policies favor saving over spending. Its economy still has too many barriers to international involvement. Its trade policies are mercantilist, and a result of that has been that Beijing recently passed Tokyo as the world's foreign-reserve leader (with more than $850 billion stockpiled, much of it invested in U.S. Treasuries).

But just as in the 1990s, when Washington tried to use Sino-American trade to move Beijing forward on human rights, its ability to pressure China is more limited than most anyone within the Beltway is willing to admit. If China is slowly evolving a political system more to U.S. liking - and the evidence for that is scattered - that has certainly not been the result of trade pressure.

Rhetoric on China's undervalued currency is perhaps to be expected. But substantive efforts in Washington ought to focus on what can actually be controlled - steps to lower U.S. overconsumption and undersaving, starting with the record federal deficits. Publicly and privately, this country is spending a lot more than it's taking in, and Beijing has taken full advantage of that. Before Americans demand action from China, they need to stop giving Beijing that edge.

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