No Trade War with China, Please

The

re's something deeply nostalgic about watching a U.S. Treasury Secretary fly to Asia to press a nation that is running a massive trade surplus with the U.S. to revalue its currency—and then come home with nothing to show for his trip but soothing waffle. In the late 1980s and early 1990s, the target of U.S. ire was Japan; now it's China, from which Treasury Secretary John Snow has just returned with assurances that the Chinese will soon show "flexibility" in their currency policies. For a while, trade tensions with Japan were a focus of U.S. domestic politics and threatened to damage relations with one of Washington's crucial partners. Now some in Congress are already beginning to complain about China's "unfair" trading patterns. With a U.S. election season upon us, is China's growing economic muscle going to become a political issue?

It shouldn't, although it's easy to see why it might. In 2002 China's trade surplus with the U.S. was $103 billion, twice what Japan's was at the height of Japan bashing 12 years ago. With its abundance of cheap labor, China can undercut American manufacturers of everything from toys to furniture to clothes. China has long pegged its currency, the yuan, to the dollar, and not long ago U.S. policymakers had nothing but praise for the way China managed its foreign exchange. In the Asian financial crisis of 1997-98, China did not devalue the yuan—and hence make its exports cheaper—when other Asian nations did. Had Beijing followed the herd and taken export markets from its Asian competitors, the economic recovery in Asia would have been delayed. But as the value of the greenback has slipped on international markets, Chinese exports have become even cheaper. Hence the clamor from some of those who directly compete with China for the country to revalue the yuan upward—just as there was pressure on Japan to revalue the yen.

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In fact, the two cases are wildly unalike. As Chicago economist and China watcher David Hale points out, there was never a constituency in the U.S. to defend Japan because American companies felt (with some reason) that they could neither sell nor invest there. China could not be more different. Not only are hundreds of American companies investing in plants in China, but they are also diving into the growing Chinese market for consumer goods as if it were going out of style. U.S. firms like Motorola, General Motors and Procter & Gamble can't wait to sell their cell phones, cars and toothpaste to a Chinese population whose appetite for them is insatiable. (Hale points out that the Chinese buy about 2 million cell phones a month.) This division between U.S. companies, mainly large ones, that have taken advantage of the China market and those, mainly small ones, that have not explains why China trade has not yet had the salience that trade with Japan once did.

That, plus the fact that, so far, no Democratic presidential candidate has really made an issue of the trade deficit with China—not even Dick Gephardt, who was never slow to tackle the Japanese. True, Gephardt has called for an "international minimum wage," which free-trade purists (I am one) see as a disguised way to make poor countries' exports more expensive on international markets. Similarly, at the Democrat contenders' debate last week in Albuquerque, N.M., Vermont Governor Howard Dean said "we cannot continue to ship our jobs to countries where they get paid 50¢ an hour." But so far, no Democrat has yet made a full-blown attack on the trade deficit with China or suggested protectionist policies to reverse it. If that position continues to hold, give the last President some credit. Bill Clinton was one of the few politicians (in either party) who truly believed the intellectually unanswerable case that free trade, by encouraging economies to specialize in what they do best, eventually makes everyone more prosperous. One of Clinton's legacies is a Democratic Party that is infinitely less protectionist than it was 12 years ago.

That's good news all round. For sure, China's stupendous economic growth is unsettling. As Washington economist (and former Clinton adviser) Robert Shapiro points out, China's exporters are taking markets away from nations like Mexico, Thailand and Brazil, all of which need to see steady growth to raise their populations' standard of living. But over the coming decade, the U.S. will have a vital interest in maintaining a mature dialogue with China—on what to do about North Korea, the future of Taiwan, global warming and the demand for fossil fuels. The last thing Washington needs is a row with Beijing about trade. If that means more Treasury Secretaries flying back from negotiations with their Chinese counterparts with not much more than a few cheap rugs, too bad.