China as Scapegoat

August 24, 2007 | by | Topic: The Global ChallengePrint Print

Recently (“Exchange-Rate Politics,” July 23), I warned that U.S. senators were playing with fire by trying to strong-arm China into speeding up the rate at which the yuan strengthens vis-à-vis the dollar. On August 8, the Chinese responded. In dignified terms (a stark contrast to our senators’ crass public denunciations of China) a senior Chinese official indicated that new U.S. tariffs might impel the Chinese to liquidate $900 billion of Uncle Sam’s debt that they own. In this high-stakes political poker game, they have called the Senate’s bluff and raised them.

This dangerous situation is primarily our side’s fault. Essentially, we are trying to make the Chinese scapegoats for our own deficiencies.

Before I elaborate, let me share a few criticisms of China so that nobody accuses me of being a pro-China apologist. Despite selective liberalizations, China is still a one-party state that brutally suppresses individual rights when it suits the Communist Party rulers. Air pollution kills 750,000 Chinese per year. Piracy of U.S. intellectual property persists. And I don’t know about you, but after recent incidents involving contaminated pet food, tooth paste, etc., I’m not about to put anything in my mouth that says “Made in China.” (The immorality underlying such heartless actions, contrasted with the higher ethical standards that he believed were the key to America’s prosperity, reportedly caused the late Chinese leader, Zhao Ziyang, to wish that Christianity were China’s state religion.)

Despite China’s considerable flaws, China should not be made the scapegoat for our economic problems. The senators currently demanding that China alter its monetary policy are blaming China for our trade deficit. But think how much lower the trade deficit would be if Uncle Sam hadn’t suppressed the development of domestic energy for decades, forcing us toimport massive quantities of oil instead. As for the large trade deficit we have with China, is it the Chinese government’s fault that Americans are spend-a-holics while the average Chinese citizen saves over 30 percent of his much smaller income?

The trade deficit issue is just one aspect of an overall anxiety many Americans have about the rise of China. It gives me no pleasure to say this, but China’s economic growth prospects are brighter than ours. Why? Because it has an abundance of the two key factors that generate prosperity—impressive capital formation, resulting from their exceptional thrift, and a large, talented, motivated labor pool.

The Chinese have always been gifted entrepreneurs, and now that the Communist Party is allowing—nay, encouraging—them to get rich, they are flourishing. Chinese college students may work full-time while going to school, postponing dating until after graduation. For admission into college, they must first learn English. Are our young people this committed?

Thrift and hard work were what made the United States of America the global economic superstar for over a century. We excelled economically in the past, and the Chinese excel today. Instead of resenting China’s growth, we should get our own house in order.

Publicly denouncing the Chinese and threatening them with punitive tariffs was a huge tactical blunder by the Senate. Saving “face” is central to oriental culture. The Chinese would never humiliate themselves by kowtowing to the Senate’s demands; in fact, those demands virtually guaranteed this month’s ominous response about possibly dumping U.S. debt.

What would be the consequences of such massive selling? One possible outcome would be a huge Chinese spending spree, buying up American assets. Then there is the problem of who would assume ownership of what the Chinese sell. Who else has an extra $900 billion lying around? And who would even want to make a major investment in a depreciating currency? The most likely buyer, I think, would be the Federal Reserve System. It would monetize the debt, thereby igniting domestic inflation. Ouch.

How did we get into this precarious predicament? Don’t blame the Chinese. The massive federal debt which now gives the Chinese such powerful leverage over us is the result of chronic overspending by our own government. The federal debt was 100 percent “made in America.” Of course, it’s a lot easier for politicians to scapegoat foreigners than to accept responsibility for the results of their own policies, so expect to hear about how mean the Chinese are—the very Chinese who have been willing to finance our government’s profligacy.

Historically, the U.S. stock market often has swooned when antitrade legislation has been brewing in Washington. Combine congressional threats of punitive tariffs against the Chinese with the ongoing subprime financial shakeout, and you have a potentially devastating one-two punch. Politically, this is perfect for the Democrats. In pushing for tariffs against China, they present themselves as true friends of American workers. If they succeed, and the stock market tanks as a result, George Bush will be blamed, paving the way for a Democratic landslide in 2008. Amazingly, some Republican senators want these tariffs, too, raising the question of whether they are brain-dead or simply have a death-wish for their party.

For the record, I’m not sure that the Chinese would retaliate against U.S. tariffs with the “nuclear” (their term) monetary option of mass-dumping dollars, because the resulting financial fallout could derail their own economy, as well as ours. Right now, both sides are playing “chicken.” Let’s hope that a few dozen grandstanding senators have the wisdom to back down before they trigger a chain of events that would hurt millions of innocent people.

Mark W. Hendrickson

Mark W. Hendrickson

Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and fellow for economic and social policy with The Center for Vision & Values at Grove City College.

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