China’s Not the Bad Guy

Just when you think you’ve seen everything, you get the following: the next leader of China, a nation of 1.3 billion people vying to supplant the United States as the world’s largest economy, flies to America on a goodwill tour and goes to…a farm in Iowa. Yes, Vice President Xi Jinping will spend the evening in Muscatine, Iowa, in the Victorian farmhouse he briefly lived in more than a quarter century ago, when he was an official from the Chinese province of Hebei sent to learn Iowa’s agricultural innovations and bring them back to a China that was then struggling to increase crop yields.

Hardly the familiar stuff of great power politics, yet it’s the most dramatic gesture imaginable, and one that says legions about the true nature of the evolving economic relationship between China and the United States. That relationship is framed in politics as fraught and problematic, even threatening to the U.S. power. But Xi’s visit, not just to Iowa but also to Washington and ending in California, underscores that it is a relationship of immense mutual benefit and deep mutual dependency.

As the American campaign season heats up, so too does the rhetoric that the American economy is being fatally undermined by China and its unfair practices, its undervalued currency, and its closed system. Anti-China policies have become a key element of Mitt Romney’s platform, as he asserts his intention to confront the Chinese and stop them from chronic cheating. China in Michigan or Ohio is pure electoral red meat: the decline of manufacturing jobs in those states is seen as directly tied to Chinese competition.

And yet for Iowa, and for large swaths of the American economy, the story couldn’t be more different. China last year purchased more than $20 billion of American agricultural goods, the bulk of which are soybeans. We hear a lot about how cheap Chinese labor is destroying American industry but considerably less about how hungry Chinese consumers are invigorating American agriculture, or about how an increasing wealthy Chinese middle class is buying American goods and services, everything from Nike shoes to IBM advice to GM cars and Kentucky Fried Chicken, at a much faster rate than Americans are.

The final stop on Xi’s trip is Los Angeles, whose port, along with Long Beach, is vital to trade between the United States and China, both imports and exports, and provides Southern California with legions of jobs. There too the relationship is clearly one of mutual benefit rather than competition, which is a theme Xi intends to highlight on his visit this week.

No doubt this is a fraught and unusual year for the two countries. The leadership of both nations is up for grabs and could change by the year’s end, though President Hu almost certainly will be replaced by Vice President Xi. That makes the landscape especially treacherous. China has its own domestic critics of the conciliatory nature of the relationship, and they interpret American anti-Chinese rhetoric as proof that the United States ultimately seeks to stifle and humiliate China.

The American tendency to blame China for assorted domestic economic ills is one of the more troubling features of contemporary politics and society. Four years ago, the culprit was an undervalued Chinese currency, which was supposedly 25 percent too low. Now the currency has risen more than 25 percent, yet American critics still contend it is far too low. There have been massive and destructive dislocations to the American middle class and to manufacturing jobs over the past decade. During that time, China has become a bastion of low-cost manufacturing. But connecting those dots as cause and effect is largely a mistake.

Manufacturing jobs started disappearing from the American heartland long before the rise of China—to Japan and Taiwan in the 1960s and 1970s, and then to Mexico in the 1980s. China is just the latest iteration, and in the past decade, technology and automation have done far more to eliminate manufacturing jobs. The relentless demand for low-cost goods in the United States, combined with the incentives of capitalism to reduce costs and maintain margins, has propelled these trends, not the rise of China.

What’s more, trade statistics obscure the fact that many of those goods that show up as Chinese imports and add to our trade deficit are American products made in China. Those iPhones and iPads, much in the news because of controversy over working conditions at the Foxconn factories in southern China, may show up as Chinese imports. But those products generate incomes not just for Apple, but for longshoreman at the port of Long Beach, intense 20-somethings working at Apple stores, and American chipset makers such as Broadcom.

Xi arrives saying all the right things about “peaceful rise” and working together and mature, calm management of the world’s most important economic relationship. The Obama administration also has struck a balance between forceful and behind-the-scenes objections to Chinese trade practices, currency levels, and cyber-attacks on the one hand, and more constructive language in public. That may be unsatisfying to those who crave a more muscular stance in politics and international relations, but it recognizes the world we are in as one where suasion and negotiation are more vital tools for managing economic interdependence than bluster.

Finally, China has been and will likely be the largest foreign creditor of the United States, holding in excess of $1.1 trillion of U.S. Treasuries. Many Americans see that as liability, but for now, with the Chinese currency pegged to the dollar and the two markets so interlinked, it is as much of a liability for the Chinese. Put another way, these debts join the two systems. For now, China remains deeply needful of U.S. capital and American innovation, and reliant on American and many other foreign companies for ideas, systems, and investment. Yes, that has changed markedly in the past two years, as Chinese wealth accumulates along with domestic Chinese expertise. And some believe that conflict between an emerging power such as China and an established one such America is inevitable, regardless of how well leaders manage the tensions. But for now, these are still intertwined systems depending on the health of both sides for the health of each side.

Xi clearly gets that. Hence his pre-presidential visit full of symbolism and soothing words. The future of this relationship and whether it benefits the United States, however, will depend not on dulcet tones adopted by China in public or ruthless competition in private. Instead it will rest on whether the United States and the American economy can find a new groove of innovation and competition that renew the competitive edge the United States has enjoyed for the past 60 years. It hardly matters what China does or says, nor whether we get tough. What matters is how the United States manages itself in the years to come. Blaming China may vent some steam, but it will solve those challenges not at all.