America needs a scapegoat for its economic troubles, and China is the perfect punching bag. Experiencing 8% GDP growth for the last several years, the communist regime has been outcompeting other low-end manufacturing nations and has contributed to job loss in the United States. US, Japanese and EU finance ministers have called in recent months for China to reevaluate its currency, the yuan, which has been pegged to the dollar for the last nine years.
In the name of free trade, Treasury Secretary John Snow visited Beijing a few weeks ago, urging the People’s Republic of China to let market forces decide the value of the yuan, 8.28 to the dollar since 1994. China, not surprisingly, has rebuffed American requests.
It seems clear that Snow and President Bush are attempting to placate domestic manufacturers in anticipation of the 2004 election. Written complaints have been filed to the US government by the National Association of Manufacturers, a powerful lobby, accusing its eastern competitors of unfair trade practices. In good political fashion, a task force has been set up for the sole purpose of picking out China’s violations of trade practices as stipulated by the World Trade Organization. In Congress, a bill that would add a 20% tariff on Chinese imports is under consideration, although even the bill’s sponsor, Rep. Phil English (R-PA), acknowledges that it is not likely to pass.
Rising unemployment rates in the domestic manufacturing sector is a politically sensitive issue, and will most definitely be brought to the fore by Bush’s rivals in the 2004 election campaign. Despite the impressive consensus among economists and analysts supporting China’s decision to stabilize the yuan for the sake of economic stability, congressional leaders, along with Snow, have attempted to browbeat the Chinese leadership into acquiescence. Appearing tough on this issue seems to help the nation’s image, not to mention Bush’s. Global economic growth and stability, however, require a stable yuan, and America’s leadership should act in accordance with this bigger picture.
The arguments for floating the yuan seem justified prima facie. A fixed currency, especially when it is as strong as the yuan, means that an American dollar buys relatively few Chinese yuan and, consequently, that Chinese goods are relatively expensive in America, whereas American imports are relatively cheap in China. Proponents argue that manufacturing jobs in the United States need to be protected from Chinese imports which are produced at relatively low cost (average wages are 2-3% of those in the US). Outsourcing from China by US businesses has also increased, further exacerbating domestic unemployment rates. Hard-liners claim that China is manipulating the market by selling yuan and buying dollars from private owners and by placing stringent restrictions on capital outflow in order to alleviate the pressures of foreign goods and hence yuan appreciation.
These claims crumble under closer inspection. First, while manufacturers complain, American consumers benefit from the lower prices. Perhaps more importantly, America’s labor productivity rate and the manufacturing rate as a portion of gross domestic product have been shuffled under statistics of high unemployment rates-– which may in fact be less significant. The former figures indicate more accurately the health of the country’s manufacturing sector. Since 1940, manufacturing has been stable at 40% of the total GDP. According to the Bureau of Labor Statistics, the average American worker is the most productive laborer internationally, producing around $72,000 in 2002. The manufacturing sector seems to be doing quite well without the protection that the National Association of Manufacturers is clamoring for. The current troubles are a reflection of across-the-board unemployment and cannot be blamed on cheap Chinese imports.
It is true that employment is hurting in the United States; however, it has been hurting for the past two decades as companies have been taking advantage of lower labor costs in Mexico, China, India, etc. That is a natural economic occurrence. As these nations become wealthier and wages increase due to net exports, companies will again seek cheaper resources in other third-world regions. What is to be learned from this fact? Nations must find ways to take advantage of general market trends, not seek increased protection.
As for the claim that China is manipulating its markets, it is doing what it can to relieve appreciation pressures on the yuan, and for good reason. At this moment, the state-owned banks of China are ill-equipped to handle the volatility that would accompany a freer exchange rate and unrestricted capital outflow. The 1997 Asian financial crisis was largely due to uncontrolled capital outflow that caused massive domestic deflation. Japan has yet to crawl out of its recession. China, which controlled its currency and capital accounts, came out of the crisis largely unscathed.
This does not mean that China wants to continue its exports-oriented growth indefinitely. Mercantilism as a permanent economic policy is doomed to fail. China knows this, and has been gradually lifting capital account restrictions on the United States and its neighbors, Hong Kong and Taiwan. It is initiating programs to help private banks compete against the large state-owned banks whose nonperforming loans total nearly 50%. These trade and banking reforms are extremely necessary if China is to open its borders to foreign banks by 2007 as per WTO regulations.
Stability coupled with economic growth is China’s main priority. It is working towards opening up its markets and privatizing business-– activities explicitly prohibited only 25 years ago. To many free market absolutists and laissez-faire idealists, China’s gradual liberalization is not good enough. China’s successes and the failure of other industrialized nations, however, fly in the face of a completely hands-off policy towards the economy. Its recent surges in economic growth can be attributed to a command economic system gradually letting go of its hold.
Transforming from a nearly pure communist society to a capitalist society does not happen overnight, and a country as large and varied as China cannot afford a major setback similar to the 1997 crisis. Lessons were learned from the dismal economic situation of Russia when the “shock therapy” approach to liberalization failed because competitive institutions weren’t put in place.
Instead of pushing for abrupt liberalization of the Chinese economy, as Snow and others have done by urging China to leave the value of its currency up to market forces, the American leadership should focus its efforts on gradually opening up China’s capital accounts. Naturally, demand for foreign goods will appreciate the yuan. Instead of pandering to the short-term interests of manufacturers who whine about competition, the government should urge them to expand their businesses elsewhere and to the mainland, as many have done, where potential markets are thriving. Manufacturers should seek competitiveness through means such as increased quality, not domestic pricing power.
Unlike many who believe that America has no interest in China’s prosperity, I see economic progress as the key to further political freedom. Ascension to the WTO has increased transparency in China’s financial system to promote fairness in trade, and it is not a quantum leap to suggest that this transparency will spread into the realm of China’s judicial system. China is on an irreversible path toward economic liberalization, and the United States can either attempt to resist the irresistible, or profit from the growth. China is not Iraq, where sanctions were needed to empty a tyrant’s piggy bank, and the days of Chairman Mao are long gone. Privatization is rapidly increasing, and the interests of the Chinese government coincide to a significant degree with those of the United States and the global community.
Eric Tung is a sophomore in Branford College.