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Cool The China Demagoguery Until the Crisis Ends, Please

When it comes to China’s purported sins, currency manipulation usually hogs the limelight and this week the US Senate, edging towards a trade war with China, got a nudge from Federal Reserve Chairman Ben Bernanke.  The FT reports:

The chairman of the US Federal Reserve has accused China of damaging prospects for a global economic recovery through its deliberate intervention in the currency market to hold down the value of the renminbi.

Speaking just hours after the Chinese government sharply criticised a US congressional bill that would punish Beijing for alleged currency manipulation, Ben Bernanke told a congressional committee that an undervalued renminbi was preventing the rebalancing of global demand towards emerging market economies.

Chairman Bernanke did not comment on the bill itself, but his accusation was in response to China’s foreign ministry attacking the Senate bill, saying it “escalates the exchange rate issue, takes protectionist measures, gravely violates the rules of the World Trade Organization and severely upsets China-US economic and trade relations”.

While constitutional theory tells us that the Senate is supposed to be the home of calm reflection and the House a den of hotheaded demagogues, in this case it seems to be working the other way.  The House leadership has expressed skepticism about the bill and it is not clear that it will make it to the president’s desk even if it does manage to pass in the Senate.  We can all hope that it doesn’t. With a meltdown looming in Europe and Washington pushing us toward a trade and currency war with China, we are looking down the road to Depression 2.0.

But Beijing’s renminbi peg is only one of many things that keep American policymakers up at night. There’s its military buildup, sometimes aggressive regional posture, its overheating real estate and credit markets, support for countries like Iran and North Korea, and its massive CO2 emissions.

And then there’s the issue of cyber security. For a long time, American officials and corporations have charged that the Chinese government has indirectly sanctioned or participated in cyber espionage, hacking, and probing of U.S. information networks in the government and industry. The problem is hardly new, but it has apparently reached “intolerable levels” (are there tolerable levels?).

Naturally, China denies everything. The Americans aren’t buying, but the nature of cyber attacks mean that there is almost always a layer of plausible deniability for the perpetrators. So how do you respond? As the Washington Post reports:

[House Intelligence Committee Chair Rep. Mike Rogers] said the United States could use trade or diplomatic avenues in response to Chinese cyber-espionage. He and others have suggested pursuing the issue at the World Trade Organization or in other international forums.

He said that although some companies, most notably Google, have come forward to allege that they suffered attacks originating in China, others have stayed silent for fear of provoking further attacks or jeopardizing access to that nation’s vast market.

“When you talk to these companies behind closed doors . . . they describe attacks that originate in China, and have a level of sophistication and are clearly supported by a level of resources that can only be a nation-state entity,” Rogers said.

As regular readers know, I feel there’s a time and a place for everything, and the time for a big fight between the US and China would be sometime when the world economy has settled down and there is less chance that US-China tension would spook global markets.  Let’s argue about whose turn it is to do the dishes after we’ve put out the fire that threatens to burn down the house.

But for those politicians who feel they absolutely cannot live another minute without picking a quarrel with China, I think the question of industrial espionage is a more useful and less damaging argument than a currency war.  Given that the Fed has been doing its best to keep interest rates (and therefore the dollar) as low as possible, we are not in the best of positions to attack China for currency manipulation right at the moment.  We are on stronger ground attacking China for industrial espionage, and we are more likely to get some results.  Going to the WTO and tightening our own laws (and stepping up our enforcement of our own laws) are sensible steps.

In dealing with a country like China it is much better to take control of your own actions than to try to dictate China’s domestic policy.  American tax and social policy has been tilted toward excess consumption for decades; we need to become a thriftier and less extravagant society.  Our government deficits must shrink, and our households need to build up their savings.  We need to spend less time taking our credit cards to the mall, and more time investing for the future.  As we make those changes on our own, our trade deficits will shrink.

Politicians want to point the finger at China because they hope to distract the public from the basic truth that bad policies at home hurt the US economy more than anything going on in China.  We do have some issues with China: economic issues, geopolitical issues, issues of values and governance.  Those need to be dealt with — at the right time and in the right way.  But let’s get our own policy mix right, start the rebuilding of the dynamic American growth machine, get the world economy past the potential for a new Great Depression, and then sit down for some frank talk with the folks in Beijing.

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  • Dave

    Would have been better to act 10 years ago than now, but better to act now than to wait for a recovery that won’t come until China changes its behavior.

  • S.Clark

    Enforcement of existing laws would be easier if there weren’t so many of them to enforce. No one should be surprised at the lack of uniformity in this regard. Your candidates for ones to enforce are certainly good ones to choose, but they have to compete for resources available and the constituency affected by industrial espionage is not particularly vocal, and the populist impulse is hard one to resist with an election cycle about to begin.

  • WigWag

    “Given that the Fed has been doing its best to keep interest rates (and therefore the dollar) as low as possible, we are not in the best of positions to attack China for currency manipulation right at the moment.”(Walter Russell Mead)

    No, not exactly. While the Fed has been doing it’s best to keep short term rates low, it has been getting a major assist in keeping short and long rates low from China itself. China’s currency manipulation, which keeps the renminibi significantly below where it would be if it’s value was set by the market, helps drive China’s massive surpluses.

    It’s China’s need to do something with these surpluses which motivates it to buy the sovereign debt of the United States of various durations even if the return is practically nonexistent. What else is China supposed to do with all those dollars it is accumulating because of it’s massive trade surplus with the United States? Convert the dollars to Euros? Buy non-performing American mortgages? Use the dollar bills to wallpaper the Great Wall of China?

    One of the reasons U.S. Interest rates have been so low for so long and the major reason the ten year note is yielding significantly below two percent is because Chinese surpluses ensure that China has a voracious appetite for U.S. Government debt. Chinese currency manipulation hurts American exports and our manufacturing sector and at the same time drives our interest rates down.

    While these low interest rates may provide our economy with some major benefits, there is no question that they also drive the profligate fiscal behavior of both the private and public sectors in the United States.

    In fact, while those more concerned with ideology than reality like to fixate on the bad behavior of Fannie and Feddie, in fact low American interest rates driven by China’s need to invest it’s surpluses were a proximate cause of the housing bubble.

    Professor Mead may be right that this isn’t the moment to fight with China about currency manipulation, the world economy will never be stable as long as China keeps manipulating it’s currency.

  • Kris

    “I feel there’s a time and a place for everything, and the time for a big fight between the US and China would be sometime when the world economy has settled down”

    Au contraire! According to many, “It was World War Two, not the New Deal, that ended the Depression.” So what better way to get out of this incipient Depression 2.0 than a good ol’ war with China?

  • Jim.

    The media keeps repeating “access to the China market” more as a mantra than an argument.

    Debates like this one would be vastly assisted by a little bit of data about how much we actually export to China — in other words, how much is actually at stake in a trade war?

  • Rifle308

    Dr Mead, you and David Goldman (Spengler of Asia Times and blogger at PJM) should get together by whatever means of communication that is workable to talk and hash out ideas. The cross fertilization of knowledge between you two I think would be of good value to all readers.

    I say this because the both of you have an international perspective with what I would call a true vision of the hard facts of the world.

    I can think of other writer-thinkers I would like to see talk with each other and you, from Jerry Pournelle to Victor Hansen Davis.

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