China and Our Economic Future?

China and Our Economic Future?
By Armstrong Williams
11/16/2010

When times were good, it was easy for America to overlook the effects of China’s currency manipulation. U.S. unemployment hovered around 5 percent, and growth averaged about the same. Even though U.S. jobs got shipped overseas, cheap Chinese imports flooded the markets and softened the impact of declining consumer purchasing power. China helped to further bolster our consumption by purchasing more than a trillion dollars in U.S. debt.

Times have changed. With official unemployment hovering at around 10 percent, and inflation near zero, China’s currency manipulation poses a severe problem to the U.S. recovery. Cheap Chinese imports — cheapened by the subsidies China gives to its producers — prevent U.S. manufacturers from producing and selling goods in the United States. This makes a recovery in domestic employment all the more difficult.

It appears the two nations’ interests have diverged to the point where a trade war is almost inevitable. We see the opening salvos already. China’s recent announcement that it will restrict rare earth mineral exports is basically a move against Japan, a U.S. ally in the G-20 coalition of industrial economies. The Chinese premier is going around embracing the Greek government, offering to buy worthless Greek bonds — again to try to weaken the U.S. coalition within the G-20. In a further saber-rattling maneuver, China banned imports of chicken feet from the U.S. — a food considered a delicacy in China, but a useless byproduct of poultry production in the U.S.

For its part, the U.S. has signaled that it is willing to do whatever it takes to cheapen the value of the U.S. dollar. The Federal Reserve has significantly increased its production of money in the past two years. As a result, the purchasing power of the U.S. dollar has plummeted versus other world currencies. The value of all the Treasury bonds the Chinese purchased has similarly plummeted. The Chinese government grumbled early this year — encouraging the U.S. to be a more responsible debtor. The west countered by awarding the Nobel Peace Prize to a jailed Chinese dissident.

Neither side wants to resort to the nuclear option — outright trade restrictions. Banning Chinese imports would have immediate and drastic effects on the Chinese economy. Factories would close. Millions of people would become instantly unemployed. And a rapidly developing Chinese consumer base would essentially disappear overnight.

On the U.S. side, further reductions in the value of the U.S. dollar would hurt savers, especially seniors who have saved for retirement by investing in U.S. bonds. Furthermore, U.S. retailers would see a drastic increase in costs. Inflation would rise rapidly, and consumer purchasing power would plummet.

Both sides would suffer bitter losses, and the question arises as to who could outlast the other. Arguably the Chinese have less to lose. They already experience a relatively low standard of living. But that standard has been improving of late, and many Chinese could be loath to return to the days of mass starvation they experienced under previous governments. Americans by comparison are spoiled. Could we really do without our creature comforts and endure a bare level of subsistence? The recent declines in employment and housing may have conditioned us for such a reality.

It also comes down to which economy is more nimble. Both are like huge aircraft carriers, and turning on a dime is impossible. China is riding the tiger of growth, and holding on for dear life. It’s not a beast that’s easily tamed in a country of more than 1 billion people. The best the government can do is to attempt to guide it in the right direction. America, on the other hand, has tried to use government policy to waken a slumbering bear. If it succeeds, the bear may wake up angry and strike at whoever’s around. Thus, artificially stimulating growth may have destructive inflationary effects.

This does not have to be a zero sum game however. China faces difficulties in growing its domestic economy if it does not open up to other ideas. Its Draconian government policies — the one child policy, restricting free speech and political organizing — won’t work in the information-based economy of the future. Perhaps they could do well to import some of our social and political freedoms. They also have to begin stimulating internal demand — and that requires the higher wages that would result from a realistic currency policy.

On the other hand, the law of consumption has all but derailed the U.S. economy. Consumers up to their necks in debt will soon drown if they do not spend less and produce more. Perhaps we can learn from China’s example of prolific productivity gains. That requires paying down our debts, retooling the work force with better education and reinvigorating the spirit of creativity and innovation that got us to the moon and back in record time. How will these competing aims translate into a viable trade policy that averts a destructive conflict? The answer is not easy, but it starts with communicating and fostering mutual long term interests. A strong U.S. economy is arguably in the long term interests of China.

Could it make some sacrifices in the short term that would aid in the U.S. recovery? The answer seems fairly obvious.
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To read another article by Armstrong Williams, click here.