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Answering China

By Peter Morici
web posted July 23, 2007

The rash of dangerous Chinese imports, ranging from defective tires to tainted toothpaste, makes apparent the perils in U.S. and EU policies toward China.

Since President Nixon, the United States has sought constructive engagement to encourage economic and political reform. By opening commerce, the United States seeks to expose Chinese citizens to democratic values, instigate systemic change, and eventually add another responsible, prosperous state to the community of western nations.

The United States is betting that opening American markets to China's products, through membership in the World Trade Organization, will lift millions from poverty and create a government that respects human rights. The Communist Party is betting it can manipulate WTO rules to its unique advantage, accomplish export-led growth, and deliver prosperity that allows it to hold on to power indefinitely.

China's economic miracle is giving capitalism a bad name. By offering manufacturers export subsidies through a 40 percent undervalued currency, cheap bank loans, generous tax rebates, lax product-safety and environmental enforcement, and technology extorted from western multinationals seeking Beijing's permission to sell products in China, China is flooding U.S. and EU markets with artificially cheap, and too often dangerous, products.

Aside from wholly corrupting the notion of free trade based on comparative advantage, these policies have created a profits-at-any-cost culture.

Chinese factories exploit workers, purposely endanger consumers, transform lakes and rivers into noxious reservoirs of industrial waste, and create the filthiest air on the planet. Lacking the accountability imposed by open elections and a free press, Beijing ignores these abuses until U.S. public outrage occasionally puts an export markets at risk. Even worse, provincial governments encourage this degradation.

China has tough national environmental laws, but Communist Party officials in Beijing and the provinces are rewarded for meeting growth targets, not enforcing abatement standards, and the resulting corruption offers them great opportunities to amass personal wealth.

To limit dissent, Beijing censors the internet, with the cooperation of principled western companies like Google. It jails political activists and members of "subversive religions," such as Falun Gong. Prison and military hospitals harvest organs for the lucrative transplant market. The atrocities Beijing encourages are endless and beyond shame.

China, with the third largest GDP among nations, holds $1.2 trillion in hard currency and securities. Yet, Beijing says it is too poor to provide clean drinking water, sewers and decent housing for its rural population. The income gap between rural areas and large coastal export centers grows each day, as sure as the pollution and poisons spewed from its factories multiplies.

All we get from Beijing are vague promises, vacant of transformative actions. Meanwhile, leaders in Washington counsel diplomacy instead of concrete steps, and apologists among U.S. multinationals profiting from the China's criminal behavior warn against disruptive consequences of curbing the peculiar enterprise called U.S.-China free trade.

China's behavior is not without its consequences for U.S. and other western economies. Its
export juggernaut is closing factories in the United States and EU, and casting into unemployment workers that would be competitive but for China's mercantilism. For example, technology-intensive autoparts factories, semiconductor plants and software development labs moving to China gain little from cheap labor. The resulting lost productivity in the United States comes to nearly $2000 each year for every employed American, has helped create a $6 trillion foreign debt, and is lowering sustainable U.S. GDP growth from about 4 percent a year to about 3 percent.

By 2008, China will be the world's largest source of greenhouse gases, and its reckless industrialization strategy is adding the equivalent of one new Japan to the global warming equation every two years. At that pace, the United States and EU, even by adopting the most aggressive emission curtailment programs, could do little to derail global warming.

It is high time for the United States and EU to exclude, on a broad and comprehensive scale, Chinese products that are heavily subsidized, that are made in factories that poison the atmosphere, or that are potentially dangerous to consumers regardless of where they live. Only then can the West hope to instigate positive change in China.

If the Americans and Europeans do not act, eventually China will become too strong to resist, and our shared future will darken.

Civilizations do not collapse under the weight of age. They fail when they become too complacent to act on real threats. 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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