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No More Mr. Nice Guy With China?

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HAY MAKER

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US changing view of China?



No More Mr. Nice Guy With China?

Washington is likely to step up pressure on Beijing to revalue its currency

April 25, 2005



Ever since the terrorist strikes of September 11, 2001, the Bush Administration has stressed cooperation, not confrontation, in its dealings with China. Eager to secure Beijing's help in combatting terrorism and trying to defuse the nuclear threat posed by North Korea, the Administration played down concerns over China's mercantilist policies and its ballooning trade surplus with the U.S. Advertisement



That may be about to change. Infused by a new lineup of officials at the Treasury and State Depts. and facing mounting pressure from Congress and Wall Street over the soaring global trade deficit, the Bush team is taking a fresh look at U.S. relations with China. What's likely to emerge, some officials say, is a more aggressive approach toward the Asian giant that places a higher premium on righting the lopsided trading ties between the two countries. Among the possible options: stepped-up pressure on Beijing, both bilaterally and multilaterally, to let its undervalued currency rise, and increased use of U.S. trade laws to counter damaging increases in imports from China. The Administration already took a step down that path on Apr. 3, when it launched an investigation into whether to re-impose quotas on surging imports of Chinese clothing following the end of a global textile pact last year.



To be sure, no one is talking about a return to the early days of the Bush Administration, when the President called China a "strategic competitor" and the two countries were at loggerheads after a U.S. reconnaissance plane collided with a Chinese fighter jet sent to intercept it. Indeed, Washington and Beijing agreed on Apr. 13 to the formation of a global issues forum to try to coordinate their efforts in a wide range of areas from the environment to infectious diseases.



Administration officials admit they have limited leverage in pushing China on the currency and trade fronts, given how interdependent the two countries' economies have become. "It's tricky," says one senior official. "They do hold $200 billion of our Treasury bonds." There's also the risk that aggressive action against China could backfire and lead to an escalating economic dispute. Responding to Congressional calls that Beijing revalue its currency, Chinese Foreign Ministry spokesman Qin Gang told reporters on Apr. 7 that the U.S. should look at correcting its own policies, including its big budget deficit, if it wants to narrow its global trade gap. And in what some U.S. officials see as a snub, China decided against sending its senior economic officials to the Apr. 16-17 meeting of the International Monetary Fund and World Bank in Washington.



But that hasn't stopped some in the Administration from thinking that it may be time for a different approach. After all, they say, it's not clear that the strategy of cozying up to China has yielded much in the way of benefits. During the 2004 Presidential election campaign election, the Bush team eschewed tough anti-China rhetoric even though that would have played well in such key swing states as Ohio and Michigan. The aim: to give China time to prepare its economy and financial system for a change in its rigid currency peg.



Yet the election has come and gone and the U.S. has yet to see the payoff from its go-easy approach that some in the Bush camp hoped for. Despite two years of quiet economic diplomacy by Treasury, Beijing shows scant signs of acceding to the substantial revaluation of its currency that many experts reckon is needed to rein in its bulging trade surplus with the U.S., which rose 30% in 2004, to $162 billion.



At the same time, China has not made the sort of progress U.S. State Dept. officials hoped for in dealings with North Korea. Combine that with recent saber-rattling by China over Taiwan -- it passed a law last month authorizing an attack should Taipei declare independence -- and the communist nation's continued double-digit increases in defense spending, and Washington has less reason to overlook its trade disputes with Beijing.



EXTERNAL PRESSURES

New personnel could make the difference in deciding what the U.S. stresses in its relations with China and how it goes about achieving its aims. Officials say the accession of former U.S. Trade Representative Robert B. Zoellick to the No. 2 post at the State Dept. ensures that economic issues won't get short shrift there. While not known as a hard-liner, "there's never been a Deputy Secretary of State with the knowledge of trade that he has," says National Association of Manufacturers Vice-President Frank Vargo.



At the Treasury Dept., former Bush campaign official Tim Adams is also expected to take a tougher line toward China and its currency peg than did his predecessor, outgoing Under Secretary for International Affairs John B. Taylor. "He's much more hawkish on China," says a former U.S. official who knows both men. "He also has a different style." Adams has more of a background in financial markets from his days as a market consultant than the academic Taylor. And he has closer ties to the White House, which could give him added clout within the Administration.



External pressures also argue for a tougher U.S. approach. So far, America's skyrocketing trade deficit with China and the rest of world has not caused any disruptions in the world financial markets. But the bigger the global gap gets -- it rose 25% to a record $617 billion last year -- the greater the risks. That was the message U.S. investors delivered to George W. Bush's National Economic Council Director Allan B. Hubbard at a private meeting earlier this year. The investors, including some top hedge funds, urged the Administration to act quickly to reduce the U.S. trade deficit, particularly with China, or risk a debilitating dollar collapse.



"SEA CHANGE"

Congress, too, is agitating for a tougher stance. On Apr. 6, the Senate, by a 67-33 margin, took China to task for using its cheap currency to fuel exports by refusing to kill a proposal to slap huge import tariffs on Chinese goods if Beijing didn't adjust its exchange rate. Analysts say the bill, which is vigorously opposed by the Administration, is highly unlikely to become law. But, as Senator Lindsey O. Graham (R-S.C.), co-sponsor of the bill notes, the vote shows "a sea change in the way the Senate looks at China." Adds Charles E. Schumer (D.-N.Y.), Graham's co-sponsor of the bill: "This is a shot across the bow not only to China, but to the Administration."



The Bush team is listening. Given the increasing irritation in Congress and the swelling trade deficit with China, the Administration team may have little choice but to ratchet up its pressure on Beijing and hope for the best.







By Rich Miller and Stan Crock, with Paul Magnusson in Washington and Dexter Roberts in Beijing





businessweek.com
 

Cal

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I would say that my worry of China is focused more on the possibility that they could attempt to militarily regain control of Taiwain at any given time.
 

Cal

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The China mess
Larry Kudlow

April 19, 2005

There’s a lot of bad political and economic blood developing between China and Japan, and China and the U.S. None of it is going to lead to any good.

Anti-Japanese demonstrations have broken out in Shanghai and Hong Kong, with Chinese authorities looking on with winks and nods. The Chinese want Japan to apologize for aggression in the 1930s and 1940s, although Japan has done so about forty times in recent years. The Chinese also claim not to like Japan’s newly revised history textbooks on the subject. Then there’s the ongoing squabble about oil and gas reserves on some offshore islands.

But the problems here run much deeper. China doesn’t much like the fact that Japanese Prime Minister Koizumi is pulling his country even closer to the U.S. in the world terror war. This renewed U.S.-Japan alliance also implies that a free and democratic Taiwan will be protected against Beijing’s new “anti-secession” law.

Japan is also firm in supporting U.S. efforts to stop North Korea’s military and nuclear buildup. China dominates North Korea, so it could really put the pressure on Kim Jong Il to renegotiate a nuclear agreement. But China only says it will help with the North Korea problem and never seems to do very much.

China shows its two faces all the time. It praised the late Pope John Paul II upon his passing and then promptly jailed a Catholic bishop and a priest. It has been liberalizing its economy and reforming local government, but it is still a dictatorship without free national elections. Though it has taken steps to join the community of nations, it now appears to be launching a newly militant program of nationalism. Japan is the proximate target, but one ultimately suspects that all this is aimed at the U.S.

The U.S., however, isn’t helping matters by threatening to launch a currency- and trade-protection war against China. The U.S., Japan, and the rest of the G-7 nations are putting the heat on China to revalue, or “up-value,” the yuan and end its peg to the U.S. dollar. This is allegedly to correct global trade imbalances and stop “cheap” Chinese exports from flooding U.S. and European markets. But any meaningful currency adjustment would have to be a yuan revaluation of at least 25 percent. That would require significant tightening of Chinese monetary policy, which, in turn, would cause a big slowdown in Chinese economic growth.

Is that what we really want?

The threat of a currency war could be an unnoticed factor in the recent U.S. stock market plunge. A much slower China economy would take a percentage point or two off U.S. economic growth, especially in areas like commodities, cyclical industries, tech, transportation, shipping, and trucking. These are the exact market sectors that are getting hammered on Wall Street.

Have the U.S. Treasury, the G-7, and the IMF forgotten the recent history of misbegotten currency manipulation? When several Asian currencies were forced to de-link from the U.S. dollar in the 1990s, world deflation followed. Floating exchange rates were a big mistake then, and could be a big mistake now.

Treasury man John Snow insists on floating rates worldwide, but he forgets that emerging-country currencies don’t float -- they sink. Aren’t we yet persuaded that nations cannot devalue their way to prosperity? Or that currency stability is better than currency chaos?

China, remember, has a shaky banking system plagued with bad state-sponsored loans made to failing nationalized companies. A floating yuan might rise in the short run, but it could crash in the medium term as foreign investors withdraw their capital flows for fear of instability.

Fortunately, when Secretary of State Condoleezza Rice visited China recently, she avoided any mention of forcing a currency change. But John Snow, encouraged by Republicans, keeps pressing the unpopular point. Where’s the policy coordination inside the U.S. government?

Protectionist pressure on the Chinese is also rising. A trade-opening textile agreement has resulted in a temporary burst of Chinese clothing exports to the U.S. American clothing makers have had years to prepare for this, but instead they’re suing the U.S. government on so-called “anti-dumping” grounds. The Chinese government is meanwhile accusing the U.S., and rightly so, of reneging on the free-trade textile deal.

Why is the U.S. threatening economic warfare against China? Currency protection and trade protection not only blunt economic growth, they sour international political relations. If you add in the vexing problem of nuclear proliferation in North Korean and the historic ill-feelings between China and Japan, you’ve got a real geopolitical and economic mess brewing in northeast Asia. With no apparent solution in sight.
 

HAY MAKER

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Cal said:
I would say that my worry of China is focused more on the possibility that they could attempt to militarily regain control of Taiwain at any given time.

I believe you are right CAL,IM sure we are going to have big trouble with the chinese,just a matter of when................good luck
 
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HAY MAKER said:
Cal said:
I would say that my worry of China is focused more on the possibility that they could attempt to militarily regain control of Taiwain at any given time.

I believe you are right CAL,IM sure we are going to have big trouble with the chinese,just a matter of when................good luck

And when that day comes we'll probably discover they are the subcontracted producer of many of our necessary products :? .... Wonder how much of our military necessities come from there :???:
 

Maple Leaf Angus

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Just the sheer, massive potential of the military, economic or cultural potential of that many people under one banner is enough to give any thinking mind something to chew on.

They are a giant that is beginning to wake up.

Better to not make them wake up grouchy!
 

Cal

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Maple Leaf Angus said:
Just the sheer, massive potential of the military, economic or cultural potential of that many people under one banner is enough to give any thinking mind something to chew on.

They are a giant that is beginning to wake up.

Better to not make them wake up grouchy!

Don't you think they're still tickled about the missile guidance technology that they gleaned from Bill Clinton in exchange for campaign contributions, as well as not being burdened by KYOTO?
 

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