In response to the manufacturing recession that has slowed the U.S. economy, and cost the country 2.5 million factory jobs in the last three years, Commerce Secretary Don Evans, Treasury Secretary John Snow, and Labor Secretary Elaine Chao have been holding roundtable discussions with business and labor leaders outside the Beltway. In the Washington Post on August 1, Steven Pearlstein reported on the tour’s hottest topic, “It came up at every stop on this week’s Cabinet-level bus tour through the Midwest. Business lobbyists say it’s all their members want to talk about….We’re talking here about China, now on the fast track to becoming a dominant player in the global economy and causing major disruptions along the way.”
What is being said outside Washington mirrors what has been going on in Congress all summer. On July 17, Republican Senators Elizabeth Dole and Lindsey Graham, and Democratic Senators Evan Bayh and Charles Schumer, cosigned a letter asking Treasury Secretary John Snow to investigate whether China is manipulating its currency to gain a trade advantage in the American market. The day before, Federal Reserve Chairman Alan Greenspan had warned China on the same issue while testifying before the Senate Committee on Banking, Housing, and Urban Affairs.
The House Appropriations Subcommittee on Commerce, State, and the Judiciary held a hearing on “How Trade with China Affects American Manufacturing” in May. At that hearing, the National Association of Manufacturers projected that in five years, the U.S. trade deficit with China would triple to over $330 billion if current trends continued. Based on the first half of this year, the 2003 deficit with China will reach $120 billion, the largest and most lopsided deficit in the U.S. trade accounts. For every $1 worth of U.S. exports to China, $5 worth of Chinese products are sold in America.
Since 1997, the U.S. trade position has deteriorated dramatically. 1997 was the year of the global financial crisis that started in Asia, then spread to Russia and Latin America. That crisis threw many countries into recessions from which they have not recovered. The result has been smaller export markets for American goods and more aggressive efforts by distressed foreign producers to dump their goods into the U.S. market. China, however, has escaped the global downturn. In June, Chinese exports rose 33 percent from a year earlier to $34.5 billion, while production increased by 17 percent, according to Beijing. The median forecast for the Chinese economy reported by Bloomberg News was for growth of 27 percent in exports and a 13 percent rise in factory output. China’s export boom is generating an expansion of domestic production, but not reciprocal imports.
China set world events in motion when it devalued its currency in 1994, giving it a decided advantage over its trade rivals on the Pacific Rim. Driven to the wall, a wave of devaluations swept through these other states, but in a disruptive rather than a planned fashion. Ernest H. Preeg, of the Manufacturers Alliance and the Hudson Institute, has estimated that the Chinese yen is as much as 40-percent below market value. But Beijing has intervened on a massive scale to keep the yen from being valued by the market.
China is able to use the profits from its successful trade policy to maintain its advantage. Its trade surplus gives it the dollar reserves it needs for financial intervention. Between 1997 and March, 2003, its dollar reserves grew from $140 billion to $316 billion.
And when China is involved, the dangers are not just commercial. Beijing is still ruled by a Communist-party hierarchy that thinks in geopolitical terms. Its strategy is to undermine American and rival Pacific Rim industry while building up its own manufacturing base so as to shift the balance of power in Asia. The Chinese term for this approach is “comprehensive national power.”
In the seminal Chinese treatise on modern strategy Unrestricted War by People’s Liberation Army Senior Colonels Qiao Liang and Wang Xiangsui, published in 1999, the unfolding financial crisis is compared to military conflict: “Economic prosperity that once excited the constant admiration of the Western world changed to a depression, like the leaves of a tree that are blown away in a single night by the autumn wind. After just one round of fighting, the economies of a number of countries had fallen back ten years. What is more, such a defeat on the economic front precipitates a near collapse of the social and political order. The casualties resulting from the constant chaos are no less than those resulting from a regional war.”
It is also argued in Unrestricted War that to attack another country’s economy, the aggressor “must adjust its own financial strategy, use currency revaluation or devaluation as primary, and combine means such as getting the upper hand in public opinion and changing the rules sufficiently to make financial turbulence and economic crisis appear in the targeted country or area, weakening its overall power, including its military strength.” A weak American economy and the resulting budget deficits make it more difficult to provide the funds to modernize or expand the overstretched U.S. military, or to pay for overseas combat operations, or to finance national building in places like Iraq and Afghanistan.
Indeed, if economic troubles can bring “a near collapse of the social and political order” would it not be to Beijing’s benefit to see the assertive President George W. Bush — who pledged the defense of Taiwan, defeated for reelection in 2004? Despite winning the 1991 Gulf War, the senior President Bush was defeated for reelection because of a recession. His defeat brought forth President Bill Clinton, who followed an appeasement policy towards China. Beijing’s strategists may have more in mind than just the economic gains from trade.
Unfortunately, despite the increased attention being paid to the impact of trade on the American economy, there has yet to be the kind of integration of international economics into U.S. global strategy that is found in Chinese writings. Until that happens, American officials will find it difficult to do more than voice complaints. Effective counteraction will require the imposition of countervailing duties to offset Beijing’s currency manipulation and put some teeth into U.S. diplomacy, but few seem ready to confront Beijing on its own terms.
— William R. Hawkins is senior fellow for national-security studies at the U.S. Business and Industry Council, Washington, D.C.