By Tucker Herbert
Nothing could be further from the truth than the statement that “China is functioning under a communist system” except for the claim that “China has embraced American-style free-market capitalism.” Right now China is in transition from a state-controlled economy which, at least in theory, sought to bring socialist equality to a less-regulated system where fierce competition determines survival. One could describe the current state as corporate fascism; one could also call it quasi-anarchy. In some ways China functions as a massive conglomerate, heavily regulated by the government bureaucracy, but in other respects it appears that much of the country is beyond the government’s control; and rather than the government controlling the economy, the economy has taken control of the government. These factors certainly make for a formidable challenger on trade issues.
Most obvious of contentions is the enormous trade deficit that the United States has with China. A quick glance at the labels in just about any store demonstrates this point. China’s export-driven economy has led to a tremendous accumulation of capital and growth in productive capacity. A large portion of the trade imbalance can be explained via cultural characteristics. Chinese workers save a very large portion of their income; Americans do not. Hence, we buy more of their products than they buy of ours. The long-term effect of Americans’ high level of consumption and low level of investment will be economic growth that is lower than its maximum potential. But this is fine—if Americans are comfortable with their standard of living, it is understandable that many individuals would be unwilling to make sacrifices in the short term to increase their future level of prosperity. And so, America’s trade deficit to China can be explained as a composite sum of personal choices and value judgments.
Recently a number of U.S. members of Congress have criticized China for managing its currency at an artificially low rate. They claim that this makes Chinese products appear more attractive (and cheaper) to American consumers, thereby exacerbating the trade deficit. They have threatened to pass a bill in Congress that would level a tariff on Chinese products equal to the level of distortion, if the Chinese government does not remedy the situation. There are a number of problems with this demand. First of all, it demonstrates ignorance of the Chinese financial system, which is extremely weak and could not handle a free floating Yuan without great risk of a financial crisis. The Chinese government will continue to allow the Yuan to appreciate slowly; they certainly wish that their banking sector was not so immature; but reform will be a long process. Furthermore, China keeps down its currency by buying U.S. government treasury bonds. The American government depends on China to finance its own spending spree. Without these “loans” from China, the U.S. government would have to solve the budget deficit or pay a higher interest rate on its bonds. Are Americans willing to pay the cost of fixing the federal budget deficit? This would require higher taxes, and a decrease in transfers—Medicare, social security, and welfare programs would all be likely to be cut in order to bring the budget out of the red—not a popular position for any politician to campaign on.
The currency issue aside, there do exist other matters on which the Chinese government ought to better adhere to its obligations to the global trading system. Deputy U.S. Trade Representative Karan Bhatia recently made it clear that the U.S. will “use all tools at its disposal to ensure that China lives up to its commitments, including dispute settlement at the WTO or the use of trade remedies within our own legal system.” This includes providing freer market access to U.S. companies and removing non-tariff trade barriers. The Chinese government could do more to reduce violations of intellectual property rights, copyrights, and piracy. Strong words came from Commerce Secretary Carlos Gutierrez when he bluntly stated that “if China ever aspires to be a legitimate, respected worldwide player and a key component of the world community, they have to play by the rules.” The European Union has also run into conflict with China regarding intellectual property, market access, and anti-competitive dumping.
There are also a number of human rights issues associated with trade with China. Labor and environmental standards are far lower than those of western democracies. Thousands die every year in the coal mines. Prison camps continue to employ forced labor. The length of the workday is not quite French. America and Europe are both guilty of turning a blind eye to human rights violations and egregious political suppression by the Chinese government. Former U.S. President Bill Clinton claimed that by engaging China, the US would positively influence democratic reform. Google has used a similar strategy to justify its censorship for Chinese market access. But the fact remains that America’s growing dependency on China could sway U.S. foreign policy.
As globalization continues to increase the liquidity of assets across international borders, global wages, especially for low-skilled labor, will have a tendency to converge. For developed countries, this equals a fall in income, until the salaries hit the minimum wage. At the point where the wages cannot go lower or there are not workers who will accept a lower wage, the job will simply be outsourced, and unemployment in the affected developed country will increase, at least temporarily, for the given sector. Under the current capitalist system, this phenomenon cannot be avoided, and so this prospect underscores the importance for strong educational investment in the United States. The government can provide retraining programs for outsourced workers and can increase funding to educational programs across the board, but again, it is the sum of personal choices--of how much value each individual American gives to their own education--that will determine how effective any educational program is at maintaining America’s competitive edge.
Tucker Herbert is the Foreign Affairs Editor of the Stanford Review.
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U.S. Secretary of the Treasury Henry Paulson initiated the U.S.-China Economic Strategic Dialogue in Beijing, with Chinese Vice Premier Wu Yi. |
