If Obama Wants to Get More, He Should Give More

The U.S. Treasury reported on October 15 that China has not, in fact, manipulated its currency’s rate of exchange with the dollar. In its Semi-Annual Report to Congress on International Economic and Exchange Rate Policies, the Treasury announced that none of the U.S.’s most significant trading partners, China included, have manipulated exchange rates in order to gain unfair trade advantages.

The author of the report did note that floating exchange rates are a standard economic strategy employed by most nations and that, given this fact, the U.S. is in no position to judge whether or not China has wrongly manipulated exchange rates. But the author asserted cautious support for the U.S.’s nearsighted policy on this issue. China is the United States’ biggest trading partner. If the Americans want to ignore the global trends and stick intransigently to old strategies, they themselves will be hardest hit. In this era of prolonged economic crisis, economic wars, be they trade wars or exchange rate wars, will inflict nothing but harm on the majority of the world’s nations.

The author’s support for U.S. international trade policy was indeed cautious. This caution may indicate that the U.S.’s critique of China’s exchange rate policy is baseless. Or it may indicate that the U.S. is attempting to appease China, with the expectation of reciprocation, as preparation for Obama’s visit here in November.

The U.S. is well aware that, prior to his visit to China, Obama must make a few eye-catching gestures. For example, certain politicians and media representatives are making a fuss over this exchange rate issue. We should be pleased by this. Since taking office, Obama has been everywhere — Western Europe, Africa, Latin America, the Middle East, and Russia. Only after all of these visits is he ready to go to China. The U.S. has evidently learned that in order to solve many global problems, including problems central to America’s own interests, China’s support is crucial.

It is just as the famous American sociologist Peter M. Blau asserts in his theory of contemporary exchange: in any romantic relationship, the person who expresses his or her feelings first cannot be passive and rather must spend a little more energy in pursuing the other. The same logic can be applied to two countries. If one nation wants a little more from another, then this first nation must extend itself further in order to persuade the second to accommodate its interests.

Obviously, we have entered an era in which the U.S. wants more from China than China wants from the U.S.

One year ago, China was still the world’s second largest exporter and its third largest economy. Over the course of a year, China has already become the world’s largest exporter and very soon will become its second largest economy. This shift has taken place many years sooner than was predicted.

The United States has already racked up a one hundred billion dollar trade deficit with China. But if you look at the goods China exports to the U.S., you will find that the majority of them are low-priced consumer goods and daily necessities. These are the types of items whose necessity increases as the recession deepens, and the types of items that the U.S. needs in order to emerge from economic crisis.

This is an example of the so-called “lipstick effect.” The lipstick effect is an interesting economic phenomenon. In the U.S., whenever the economy is doing poorly, the sales volume of lipstick actually rises sharply. Why is this? During good economic times, Americans viewed lipstick as a relatively low-value consumer good. During bad economic times, they buy more of those low-value goods. This phenomenon can also explain why U.S. imports are declining overall, but, oddly, market shares of Chinese-made goods imported to the U.S. are actually on the rise.

China now holds eight hundred billion dollars of American debt. China has bought American bonds through every available channel. But the U.S. still hopes that China will buy even more American bonds, which are fated to depreciate in value, in order to help the U.S. weather the subprime mortgage crisis the U.S. brought upon itself.

Looking back, we will refrain from mentioning the names of certain Chinese leaders who, prior to visiting the U.S., made a few extremely pragmatic conciliatory gestures — buying up American goods, making diplomatic accommodations — in order to help U.S.-China relations along.

If this precedent is any indication of the future, perhaps we will see more conciliatory gestures from the U.S. as Obama prepares to visit China. Perhaps, for example, the U.S. could make a few concessions on the question of technology export limitations, or on the issue of exchange rates, or on the subject of trade protectionism. Maybe we’ll see some changes that are in keeping with global trends.