Smith Faculty Opinion Article - October 3, 2005

President Bush and the China Challenge
By Dr. Peter Morici, Professor of International Business

Monday, The Wall Street Journal reported that Chinese efforts to leverage its economic clout into broader diplomatic influence are upsetting the Bush Administration. In a nutshell, China has signed or is negotiating trade agreements with many countries in Asia, the South Pacific and a few elsewhere, escalating the risk that its brand of state managed capitalism will gain greater influence and acceptance among our allies and become permanently entrenched in China and elsewhere.

In many ways, President Bush and his advisors have no one to blame but themselves. The Administration has a naive view of commercial diplomacy, which Beijing has been all but to happy to exploit. The Administration has failed to see current controversies over exchange rates, intellectual property and the like as part of a broader competition between the emerging Chinese model of authoritarian capitalism and our brand of market capitalism that empowers the individual rather than the state.

China has accomplished a good deal of its economic miracle through exports, in particular to the U.S. market, by maintaining an undervalued currency. This creates an annual subsidy on exports of about $250 billion or 12 percent of Chinas GDP. In addition, through its banking system, provincial governments, tariffs, and regulations China provides all manner of subsidies and protection that have fostered rapid growth in industries, from automobiles to steel, where China has little comparative advantage and should be a large importer.

Yet, the Bush Administration has failed to label China a currency manipulator or embrace proposals for direct action with teeth. It does not apply U.S. WTO compliant subsidy and countervailing duty laws to imports from China or other centrally planned economies, and it seems intent on abandoning these valuable laws in the Doha Round of WTO negotiations.

White House policymakers seem intent on pursuing only those Chinese trade practices that support U.S. multinational corporations invested in China. For example, the Administration aggressively pursues China on intellectual property, as this serves the interests of U.S. software and media companies seeking to boost sales in China, while it ignores Chinese subventions and protection in automobiles which coincidently aid U.S. firms with investments in China to service domestic markets. Mr. Bushs flexible views on free trade may support his domestic political agenda but they do great harm to the U.S. economy.

Meanwhile, the Administrations indiscipline on the budget deficit, ill-conceived energy policies and malicious neglect of skyrocketing health care costs have only exacerbated U.S. trade woes by pushing up the U.S. appetite for foreign savings, and tragically boosting energy and employment costs to the point that firms must leave the United States when they might be otherwise be competitive here.

The hard fact for Chinas apologists to accept is that about half of the U.S. trade deficit is manufactured in Beijing, and the hard reality for the Congress and White House to admit is about half of the U.S. trade deficit is made in America on Pennsylvania Avenue. In the end, we must address the world as we find it, not as we wish it would be.

The U.S. ability to win support in international bodies like the IMF and among coalitions of developing countries has been wholly undermined by the Bush Administrations inconsistency toward China, ballooning budget deficits, protectionist hypocrisy on sugar, cotton and so many other agricultural issues, and bungled international diplomacy on issues ranging from global warming to nuclear proliferation.

Sadly the Bush Administration seems wholly unaware, as it lurches in one direction and then another, failing to recognize that the world notes its actions, keeps careful score and links issues together.

Even before Katrina and Rita, the economy was slowing and the inflation adjusted incomes of ordinary workers was stagnant or falling. Unemployment has fallen but so has job market participation among prime working age adults and the quality of jobs The galloping trade deficit, trade relations with China, and a mismanaged domestic economy have a lot to do with those conditions, and now things seem likely to get worse.

All of this is going to make U.S. efforts to check Chinas growing influence much harder, and we can count on China to press the advantage. If nothing, China is consistent in its goals and strategies, and Mr. Bush, if anything, is quixotic.

If America is going to sell democratic capitalism to the world, we need to do a better job of making it work at home, be more consistent in our own actions as they affect trade and other international issues, and address Chinese protection directly and consistently, and not just when it serves Mr. Bushs political interests.