A Winter of Discontent?

To live in Washington this fall, you would think there was a crisis coming in US-China relations. Bill after bill, resolution after resolution pops up in Congress, blasting China for alleged "manipulation" of its currency to cheapen its products on world markets and deprive US companies and workers of opportunities and jobs. In manufacturing-heavy states, where unemployment is high and plants are shutting down, politicians are being subjected to "all China all the time" from angry and worried constituents. The US-China trade relationship, at least inside the United States, is now a point of friction at the political level. US business is divided, with thousands of smaller domestic firms already on the warpath about the China threat driving the big trade associations toward protectionism, while large international firms with major China operations lie low to avoid the familiar political dangers of demagogic denunciation and populist reaction.

Outside of trade, the United States and China seem to be managing their official relations reasonably well. The visit of Premier Wen Jiabao to the United States in early December, the expected meetings of presidents George W. Bush and Hu Jintao at the Bangkok Asia-Pacific Economic Cooperation meetings, the visit of the PRC Defense Minister Cao Gangchuan to the United States, and the visits of the whole top echelon of the Bush Administration's economic cabinet (Treasury Secretary John Snow, US Trade Representative Robert Zoellick, and Commerce Secretary Donald Evans) suggest that mature government-to-government contacts at the highest levels are now routine—as they need to be, if problems in the US-China relationship are to be managed successfully.

Aside from the lurking possibility that some uncontrollable chain reaction arising from the politics of Taiwan's March presidential election could put the United States and China at loggerheads, trade friction is the potential collision du jour.

The animus, for the moment, is on the US side. The pressure to "do something about China" is coming from small businesses and manufacturing interests increasingly concerned about Chinese inroads into the US market and Chinese competition on price in third-country markets—all facilitated, they argue, by an RMB-dollar exchange rate that renders China's goods artificially cheap. China surely has a list of dissatisfactions with US treatment, ranging from antidumping and safeguard cases against Chinese imports to security controls on US dual-use exports, but for the moment China is not initiating conflict with the United States.

That could change. One bill now before Congress, for example, would slap a 28 percent tariff on all Chinese imports if China failed to revalue its currency to suit US tastes. That would likely initiate a cycle of retaliation that would not only corrode trade ties, but would pollute the broader US-China engagement in which both sides have invested heavily over the past several years, especially since September 11, 2001.

In a US election year, there's always the possibility of unexpected mayhem on international affairs. Hammering one's political opponents for not dealing properly with foreign miscreants is a staple of the campaign season. It has happened on China before. It could happen again.

When all is said and done, though, I remain cautiously optimistic that we'll get through the coming year without a trade-focused China eruption. Here is why.

1. The central case in question is not open and shut

On the debate over the value of the renminbi (RMB, or yuan), the focal point of US political energies directed at China these days, Congress's own research arm, the Congressional Research Service, in a brilliant and succinct report dated September 29, 2003, China's Currency Peg: Implications for the U.S. and Chinese Economies, says:

In the medium run, an undervalued yuan neither increases nor decreases aggregate demand in the United States....[I]t is expected to have no medium or long run effect on aggregate US employment or unemployment. As evidence, one can consider that the US had a historically large and growing deficit throughout the 1990s at a time when unemployment reached a three-decade low. However, the gains and losses in employment and production caused by the trade deficit will not be dispersed evenly across regions and sectors of the economy.

Another acute observer, economist Arthur Kroeber of China Economic Quarterly, cuts to the bone on the notion that the RMB should be valued at a particular level against the dollar, a concept that drives much of the fiery animus in the Congress:

Every time you see a currency analyst announcing that the "true" value of a currency is such-and-such, ask yourself why that person is toiling at an investment bank rather than sitting on the beach at Bora Bora counting his or her winnings from the currency trading casino. The fact is that no one knows what value the RMB would have if it floated tomorrow, and there is even less way of knowing what its value might be six months out.

On the merits, then, the furor over the Chinese currency lacks persuasive power. In the end, substance does matter; "politics" alone will not be determinative.

2. The political realities

One could argue that a big congressional dust-up over China, fed by the anti-PNTR (permanent Normal Trade Relations) coalition of 2000 and a new array of trade associations driven by angry constituents, offers political temptations.

Hitting alleged foreign mischief-makers for harming the US economy beats trying to come to grips, for example, with the colossal budget deficit that leaves Uncle Sam dependent on infusions of capital from hard currency holders like China and Japan.

Throwing a nearly 30 percent tariff on a hundred billion dollars' worth of imported products going to US consumers might look more politically palatable than just raising taxes forthrightly.

Whacking at foreign trade offenders might also prove easier than trying to deal with perennial questions of workforce training or structural economic adjustment, at a time when public schools are closing early for lack of funds and community colleges are shutting the door on young Americans' hopes for self-betterment because there is no money for staff and equipment.

Nevertheless, my hunch is that the China fury won't fly.

For one thing, a number of congressional leaders have already displayed little enthusiasm for legislating China's international monetary policy, and, equally important, many other congressional leaders have paid no attention to the China currency issue at all. There is a big difference between introducing legislation and steering it through Congress to final passage.

For another, much of the rising congressional chorus on China aims primarily to pressure the executive branch to "do something," and the executive branch normally has a more measured approach to frictions with China. No one really expects Congress to make a difference through constructive contact with China on outstanding economic issues; one does expect that from the Bush Administration.

Third, there has been no media feeding frenzy on the central issue, i.e., the alleged Chinese "manipulation of the currency." The media don't exactly drive the government, to be sure, but it is revealing and significant that major daily newspapers like the New York Times and the Wall Street Journal, and magazines like Business Week, have refused to jump on the punitive bandwagon. Quite the contrary: These mainstream publications have questioned the validity of the accusations against China on the currency issue and have counseled against confrontation on the matter.

3. The benefits of engagement

The potential for a corrosive degeneration of US-China relations over trade and economic frictions over the next year cannot be dismissed. Advocates of the benefits of expanded trade and investment have been loath to stand up and argue for the benefits of their already huge engagement with China, for a variety of reasons. The strength of their message is undercut by China's continuing failure to deliver on some of its key WTO market-opening promises. One of America's enduring "culture wars" leaves US multinationals open to withering political assault if they point out the benefits to US corporations derived from their activities in China, even though China's contribution to corporations' global competitiveness merits recognition in the United States. Popular disenchantment with large corporations in the wake of repeated scandals drains any potential reservoir of sympathy for firms defending their decisions to operate in or import from China. Politically, the voice of the production worker whose job is in doubt always trumps the voice of the consumer whose household budget benefits from economically priced imports. Facing this maelstrom, American corporations engaged in China have so far tended to remain above the fray. Retailers whose existence depends heavily on the availability of Chinese products have been equally quiet.

Such reticence may stand them in good stead, but it may not. If we are to navigate the turbid waters of US-China relations over the next year, those with the most at stake in a growing bilateral trade and investment relationship will need to remind the key forces in US politics of the benefits that already flow from engagement with China. And they will need to work vigorously with the international business community, the US government, and the global trading system to ensure that China lives up to its key WTO commitments. Without that progress, the prospect of political conflict with China over trade policy will rise measurably.

Perhaps this just boils down to more shadow play. The United States, at the broad national-interest level, simply does not need a corrosive conflict with China over politically volatile but substantively shaky claims of Chinese currency manipulation. We have pressing global concerns and domestic difficulties, to which China is not a party or in which it is only marginally involved. China certainly doesn't need a major economic conflict with the United States as it struggles through unending domestic economic reorganization, banking problems, unemployment, and a whole host of familiar economic dilemmas. Perhaps, then, both sides will engage in a game of mutual accommodation aimed not so much at final resolution of incendiary domestic issues but rather at averting irreversible bilateral conflicts.

But the Coalition of the Raging exists, at least in the United States, as winter comes. Whether that coalition can force confrontation in the name of victory on its own powerfully felt agendas is the question of the season.