Trade creates a win-win
At a playground in Boston I visited this weekend, there were several very cool toy vehicles -- including a construction truck and a police car -- meant to be shared. But much to my embarrassment, my son at one point refused to allow other kids to play with any of them (none of which were his!). Sebastian's tantrum is reminiscent of how too many Americans -- and too many American politicians -- view China.
There is widespread resentment that the world's most populous nation is taking its place in the world and aspiring to enjoy some of the development we have attained in this country. It's a petty resentment, and wrongheaded even if you want to be selfish, because the world economy is not some zero-sum game where Chinese gains come at our expense.
Quite the contrary: The current U.S.-China relationship is a symbiotic win-win for both countries and a locomotive for global stability and growth. China combines a capable and lower-cost labor force with highly efficient infrastructure, which is why so much manufacturing has been outsourced there from other Asian nations and Mexico. The hysterical complaints in Washington about our "unsustainable" (how long have we been hearing that?) rising trade deficit with China is overheated for many reasons. For one thing, those amounts reflect existing exports to the U.S. being sourced from China, as opposed to somewhere else. Second, while the trade deficit is talked about as proof of some evil communist plot to take us over, it largely reflects internal company sourcing decisions. Et tu, Wal-Mart?
We're talking at the end of the day about a commercial dynamic that makes more goods affordable to more Americans and helps keep inflation in check in this country. The food and toy safety scare of recent months is yet another form of over-the-top, ugly scapegoating of China.
It was rather amusing in the end that even while politicians in Washington were still lambasting the regime in Beijing last month for all those recalled toys, Mattel itself apologized to that country for damaging its reputation and acknowledged that its own "design flaws" were responsible for the recall of about 18 million playsets containing dangerous magnets.
Yes, the regulatory regime in China and plenty of other countries should be better, but U.S. companies themselves should take responsibility for overseeing their overseas manufacturing. But because the recalled imports came from China and not Germany, folks here lashed out at the Chinese government more than they lashed out at Mattel.
The benefits of the bilateral financial relationship are insufficiently appreciated as well. One of the reasons China has attained remarkable stability for an emerging market is because its monetary policy is set by the dollar, and it has pegged its currency to our currency. This presents another win-win, as China constantly needs to buy our Treasury bills to maintain that peg. So you have the irony of a communist regime helping to subsidize our standard of living, and helping to finance our purchases of Chinese imports.
Again, to scaremongers in Washington and in the media who see a (racially tinged?) plot and peril in the making: The fact that the Chinese central bank is sitting on a trillion dollars is somehow proof of that country's perfidy. Does this keep you up at night, Joseph? I've heard plenty of otherwise reasonable people argue that we are now hostages to China because any day now those commies are going to revert to form and stab us in the back by selling all their T-bills at once, thereby destroying the U.S. economy. Unless you believe that China wants to hurt the United States so badly that it would commit suicide in the process, this is silly stuff. The point is that both nations now have a vested interest in each other's welfare.
What's the old joke in banking circles? Owe the bank $1 million and they own you, but owe the bank $500 million, and you own it. No one should be more interested in American well-being now than China because its savings are tied up with our future prospects. I for one am relieved that China continues to bet on the U.S. and buy dollars rather than invest elsewhere.
As for the currency peg, railing against the "undervalued" yuan became one of trendier causes on Capitol Hill in recent years, with Sen. Charles Schumer (D-N.Y.) and others threatening that if China doesn't let its currency float freely, we'll slap massive tariffs on its imports (talk about suicide!). The issue became trendy because of its suggestion that those commies must be cheating; but most economists are quick to point out making Chinese goods 10% or 20% more expensive by appreciating its currency would hardly alter the trade flows between both countries (which, again, don't really need altering).
Further, there is an element of hypocrisy in the overheated calls for abandoning the fixed peg -- back during the late 1990s' Southeast Asian economic crisis, the U.S. begged China not to abandon its fixed exchange rate and to buck the regional trend of devaluing its currency. We were then very grateful that China stuck to its policy.
And we preached to plenty of other countries -- Argentina comes to mind -- that they peg their currency to the dollar in the way we used to adhere to the gold standard. Yes, in the long run, as China's financial system matures, it is desirable that its currency trade freely, but the gradual transition to that day presents pros and cons for both China and the U.S.
There is an element of "be careful what you wish for" on this currency issue. First, a freely fluctuating exchange rate could lead to a great deal of speculative instability in China's financial system. And second, as many respected economists -- including Robert Mundell at Columbia and Greg Mankiw at Harvard -- have pointed out, another reason this is a bogus issue is that we don't even know whether a yuan set entirely by market forces would actually rise in value. What often gets lost in the debate is the fact that, under this scenario, plenty of Chinese households would rush out to buy dollars themselves, which would create a new downward pressure on the yuan's value.
I know, I know ... lots of nuance. Not as fun as ranting about the devious commie plot to take over the world. Bring it on.