berlin

It’s nice to see the long-stewing Chinese currency manipulation pot bubbling a bit again, thanks to China’s latest blatantly disingenuous move to allow a token fluctuation or two of the yuan. And it’s great that Sen. Debbie Stabenow’s currency bill is inching towards the floor of the Senate. (The underlying idea, giving American industries formal trade remedies against currency manipulation by foreign governments, was actually thought up several years ago by Kevin Kearns, president of my organization, the U.S. Business & Industry Council.) Passing this bill would be a very useful and encouraging step. Currency manipulation and related trade chicanery have gone on long enough. It’s especially encouraging that the bill’s sponsors grasp — as the trade-clueless Obama administration doesn’t — that trying to change China’s behavior is a losing game. So this measure wisely dispenses with preaching reform to Beijing and simply authorizes the use of sanctions in particular cases to provide trade relief to victimized American industries. Preaching reform to China is a complete waste of time for a number of reasons. First, China is making such enormous profits off of what it’s doing that its government would have to consist of saints for them to change anything because of some idea of what’s “right” or good for the rest of the world economy. If Beijing cared about any of this, it would not be manipulating its exchange rate in the first place. Among other legal strictures, the Articles of Agreement of the IMF (Article IV, revised, which went into effect in 1978) prohibit members from manipulating their exchange rates. Second, with the U.S. having just survived one economic crisis and quite likely drifting paralyzed towards another, we’re not especially credible right now giving anyone else economic advice. If we’re so smart, and free trade is so good, then why are we the ones in crisis while some of our adversaries enjoying double-digit economic growth rates? That’s not a question most Americans want to face, but make no mistake, everybody’s asking it, behind closed doors, all around the world. Third, if the Chinese leadership knows any economic history–and they seem to–then they know that the policies China is pursuing today are, in essence if not in detail, precisely the policies the US itself pursued in the 19th century to wrest economic leadership from the then-dominant economic power, Great Britain. So from Beijing’s point of view, we necessarily look like a bunch of decadent hypocritical whiners. (This doesn’t make them right, but it certainly helps explain their lack of interest in our complaints.) The strange thing in all of this is that the US, which has no difficulty playing hardball when it comes to its military relations with the rest of the world, remains stuck in a dreamily idealistic Wilsonianism when it comes to international trade. In our government’s free-trade fantasy world, everything is going to be fine because the sheer truth of the free trade ideal will persuade everyone else in the world to embrace it. Any hardball we do engage in is confined to helpless Third World nations and is done only because they don’t know what a big favor we’re doing in imposing free trade on them. The fundamental premise here is that the whole world will embrace free trade, and fairly soon. But the reality is that the world is not embracing free trade. It is embracing a construct called FreeTradeTM, which amounts to 99 percent free trade on America’s part plus completely different policies elsewhere. Among these are: Mercantilism on the part of shrewd governments from Berlin to Taipei. Imitations of American-style free trade among those dumb enough to believe in it (like the UK) or bullied into it by the economic gunboat diplomacy of the IMF in the Third World. A charade called the WTO which enforces free trade on nations in category #2 and props open export markets for nations in category #1. Would the Stabenow currency-reform bill get us out of this trap, if it passed? As noted, it’s definitely a positive move, but it’s still just a start. Its key limitation is that its approach is gradualist and, above all, reactive, because it depends on victimized industries filing lawsuits under the trade laws. So it will ultimately need to be supplemented with a much more comprehensive strategy. What America really needs to do is impose an across-the-board tariff on Chinese goods sufficient to offset not only the effects of currency manipulation, but also all the other tricks Beijing has pulled in the past and will continue trying to pull in the future. What kind of tricks? Not only obvious policies like tariffs and quotas, but also local content laws, import licensing requirements, and subtler measures–some of them covert, hard to detect, or infinitely disputable–such as deliberately quirky national technical standards and discriminatory tax practices. Then there are policies that involve outright skullduggery, such as deliberate port delays, inflated customs valuations, selective enforcement of safety standards, and systematic demands for bribes. It follows that any American response to all this must be broad-based and agile enough to prevent these various forms of circumvention. Some Americans are still dreaming that a boom in American exports to China will save the day. The reality is that the dream of selling to the Chinese functions primarily as bait to lure in American companies–which are then forced by the government to hand over their key technological know-how as the price of entry. So the China market remains the mythical wonderland it has been since the 19th-century era of clipper ships and opium wars. Beijing didn’t invent any of this mischief, by the way. It is operating from the standard 400-year-old mercantilist playbook, albeit implemented with the exceptional cynicism of a Leninist one-party state running a capitalist economy. Similar tactics are used–in less aggressive, less disingenuous, and less illegal ways–by governments all around the world. The two regions where this is most clear are Germanic-Scandinavian Europe and “Confucian” Asia (China, Japan, Korea, Taiwan, Vietnam, Singapore). Nevertheless, even most trade critics in Congress still shy away from the sweeping measures America needs to blunt this strategy. A large part of their reluctance to deal with the problems posed is due to special-interest pressures: many of the largest American companies are now so dependent on their overseas operations, and thus so vulnerable to pressures by foreign governments, that they have become outright Trojan horses with respect to American trade policy. As former congressman Duncan Hunter (R-CA), for years one of the outstanding critics of trade giveaways in Congress, once put it, “For practical purposes, many of the multinational corporations have become Chinese corporations.” Over time, this will probably change, as Beijing repeatedly disillusions those who hope for it to change. China right now is doing what the Soviet Union did over the decades after WWII, as its repeatedly obnoxious international behavior relentlessly chipped away at the not-inconsiderable sympathy it had once enjoyed. Eventually, one simply must assume, America will lose patience. One hopes that by then it is not too late to solve America’s trade problem without an economic debacle of some kind. Ian Fletcher is the author of the Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95) An Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council , a Washington think tank founded in 1933, he was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.