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How to deal with China

By Peter Morici
web posted June 4, 2007

U.S. efforts to persuade China to be a responsible player in the international community have failed. The May installment of bilateral talks, which under various names have spanned the Clinton and Bush Presidencies, failed to persuade China to alter its mercantilist economic policies and act responsibly on environmental problems.

Thanks to a purposefully undervalued yuan and huge export subsidies, China enjoys a trade surplus equal to 8 percent of its GDP, mostly with the United States. This permits China's economy to grow at more than 10 percent a year but it accomplishes this miracle by crowding out exports and stealing growth from many smaller and poorer developing countries.

By compelling other Asia economies to follow similar strategies, lest they lose their remaining opportunities in U.S. markets to China, Beijing's selfish policies are costing the United States $250 billion annually in lost productivity and 2 million high-paying manufacturing jobs. Most of those are in technology-intensive industries, where cheap Asian labor offers little competitive advantage.

On the environment, China is equally uncooperative. Soon, China will be the largest global source of green house gases. The annual growth of its emissions overwhelms what western economies could reasonably accomplish by adopting stricter controls.

No solution to global warming is possible without strict emissions standards in China, but it refuses to entertain the idea. Despite its economic prowess, China argues it is too poor to participate in a responsible regime to address global warming.

Chinese manufacturers make shoddy toys that endanger innocent children, export tainted drugs, and sell poisonous foods and personal care products in the United States and elsewhere. Surely, with its huge trade surplus, Beijing could import western methods of quality control. Instead, China arrogantly denies responsibility and blames bargain hunting retailers for those abuses. This illustrates Chinese indifference and the central problem with U.S. policy toward the Middle Kingdom.

European and American foreign policy experts have suggested engaging China in multilateral talks, perhaps in the G8 club of large industrialized countries, to resolve currency and trade issues. The Bush Administration has proposed a similar big power dialogue to strike a deal on green-house gas emissions. Such proposals have little chance of succeeding, because China's leadership simply does not share the same outlook and values as the large western democracies.

Western economic powers participate in international commercial and environmental agreements, because they wish to jointly manage a mutually beneficial international economy and protect the global commons, whose integrity is essential to human survival. The Europeans and Americans believe, while differing on the details, reasonably open markets and joint sacrifice will facilitate a more prosperous and secure world for all.

The Chinese Communist Party sees western-style commercial and environmental cooperation as imposing inconvenient constraints on its economic development strategy and threatening its grasp on power. Since the Chinese government lacks the legitimacy free elections anoint, it must deliver hyper growth to keep the Chinese people content, even if that means stealing prosperity from others and destroying the global environment. Hence, China eschews the international obligations its economic success should require, and it exploits loopholes in the rules and the absence of western consensus about how to address its renegade behavior.

Offering China major power status by engaging it in multilateral dialogue will accomplish little, because the Communist party is much more concerned about maintaining its grasp on power than becoming a respected stakeholder in the global community. Western democracies must recognize this unpleasant reality and deal with China differently than they do one another.

For example, China's undervalued yuan provides a 24 percent subsidy on exports, as measured by Beijing's purchases of dollars and other currencies in foreign exchange markets to maintain an undervalued yuan. The EU, United States and others should simply levy a tariff equal to that amount on imports from China. If China reduces currency purchases, reduce the tariff. If China increases those purchases, raise the tariff accordingly. Level the playing field for western based businesses, and let the market sort out the winners and losers.

To combat global warming, the United States, EU and others should adopt tough auto emissions, power generation and other industrial activities. Then Chinese products made in ways that do not meet those standards should be excluded from industrialized-country markets.

These actions would slow the Chinese economic miracle, but special treatment and endless talks will not move China to act responsibly.

A bit less prosperity would erode the Communist Party's grip on power and perhaps instigate democratic change. That would be better for everyone. ESR

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.


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