“There is no doubt this has been a tumultuous year,” said President Obama on Friday as he began his speech at the Washington Navy Yard by talking about the American economy. “We’ve weathered the Arab Spring’s effect on oil and gas prices, the Japanese earthquake and tsunami’s effect on supply chains, the extraordinary economic uncertainty in Europe. And recently, markets around the globe have taken a bumpy ride.”
Each of the events he mentioned lowered growth in America, yet all of them were marginal and temporary. If we want to start a meaningful conversation on the topic, there is one word he needs to utter: “China.”
China, whatever you think about it, is consequential. Like Japan in the 1980s, its rise in the last two decades has been phenomenal. Its effect on America, for good or ill, has been huge, and Obama, once he started listing factors on Friday, was under an obligation to the American people to have mentioned it.
Beijing, for its part, has no trouble mentioning America. For more than a week it has been trying to undermine the dollar with increasingly harsh comments. At the end of July, the official Xinhua News Agency issued a blistering attack on Washington. Yesterday, immediately following Standard & Poor’s downgrading of the U.S. credit rating, Xinhua followed up by calling for international supervision over Washington’s printing of dollars. The official propaganda organ also suggested consideration of a new international reserve currency to replace the greenback “to avert a catastrophe caused by any single country.”
Xinhua also had this to say: “China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.”
There’s no question the United States must reduce its debt load, but at the same time it is issuing its demands, Beijing is making it hard for us to implement necessary adjustments. China, after all, maintains predatory policies designed to take advantage of America’s open economy. So, for instance, the Chinese central government fixes the value of the renminbi at an artificially low level to stimulate Chinese exports and impede imports. It has also been systemically violating its World Trade Organization obligations, especially by blocking imports.
The result of these policies is that China has persistently run large merchandise-trade surpluses against the United States. Last year, for instance, that surplus amounted to $273.1 billion, the largest deficit the U.S. has ever had with any country.
Washington has, for years, been trying to get Beijing to permit more balanced trade and stop buying dollar-denominated obligations, but Chinese officials have refused to take good advice. As a result, their country has become more dependent on the American market. In 2008, 90.1% of China’s overall trade surplus related to sales to the United States. Last year, that number had increased to a simply unbelievable 149.2%.
So China has insisted on accumulating dollars as a direct result of government policies. Apart from violations of their trading obligations, the Chinese have a right to maintain mercantilist practices. Yet we have every right to counter them.
We are not countering them, unfortunately. Instead of dealing with these structural issues, President Obama talks about relatively unimportant ones, like the Japanese tsunami. At the same time, his Treasury Secretary, following in the footsteps of his predecessors, has refused to cite China for currency manipulation in his twice-yearly congressionally mandated reports even though that country clearly meets the statutory definition of a manipulator.
The Chinese will not change their policies, so they are accumulating dollars and therefore forced to reinvest them offshore. That reinvestment is flooding global financial markets with greenbacks. By flooding the world with them, Chinese officials are keeping dollar interest rates abnormally low and therefore making it too easy for the U.S. government to borrow. The U.S., therefore, would not be in such a debt fix if Beijing had allowed the renminbi to float and honored its trade promises, thereby allowing a more balanced trade between the two nations.
The current trading relationship between China and the United States is unsustainable, so one way or another it has to change. The sooner we deal with this, the more likely we will find a solution within the context of the existing international trading framework. In other words, there is a greater likelihood we will adopt a solution without resort to protectionist measures if this matter is resolved soon.
Because Beijing intransigently maintains its policies, America needs an honest national conversation about China—and fast.
Follow me on Twitter @GordonGChang
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