America’s Strange Economic Policy toward China

Obama has publicly put pressure on China to re-evaluate the renminbi exchange rate, and at least 100 members of Congress have used even more forceful words to discuss the issue. Since the summit in Pittsburgh last year, Obama has emphasized that an error occurred and it needs to be fixed. That is, the international import and export balance needs to be re-evaluated. The low value of the renminbi has caused China to gain a large trade surplus; as a result, the only way for China and its international trading partners to equalize the international balance of payments is to let the renminbi appreciate. This pressure is ultimately put on China to avoid a financial crisis, and it directs an attack straight at Sino-American trade and China’s core interests. One has to admit that this is an unconventional method, a method used to gain the upper hand by surprise.

Soon after Obama took office, he announced the national export strategy, which promised to double America’s exports within five years. The promise would expire on the first year of his second term of office, so of course it puts his re-election at stake. Whether or not this strategy is effective depends on the efficacy of American domestic economic policies and the ability of the American economy to return to a healthy state. This strategy points a sword at China. It makes Sino-American trade responsible for stimulating exports and expanding jobs, and it uses China’s core interests as bargaining chips. In reality this is transferring the burdens of domestic policy onto Chinese exports.

The deadly weapon in the hands of the Obama administration is the renminbi exchange rate issue. Getting a grip on this issue would have two positive effects. First of all, the political risk is minimal. If China does not concede, then the blame can be transferred to China. If China cooperates, then it improves Obama’s political track record. Second, forcing the renminbi to appreciate has a long-term effect on America’s strategy with its own currency. America can continue to maintain the hegemonic status of the dollar as well as stimulate exports. Japan’s lesson of the 1980s reminds us that the American government is never worried about the value of the dollar; rather, it worries about who will finance the national debt or pay for inflation.

However, Japan’s history is not totally applicable to the relationship between America and China. Japan’s persistence in buying American debt is considered market behavior because Japan is not considered by America to be a market economy. More importantly, Japan is one of America’s allies, so buying American debt has no political risk. There is no fundamental trust between America and China, so when China’s central bank decides to raise the issue about American debt, it’s not a political question, just a kind of wishful thinking. Chinese Premier Wen Jiabao summarized the situation well. The only exports that America sends to China are soybeans and airplanes, and China cannot possibly fly on airplanes and eat soybeans forever. America should recognize the status of the market economy in China and start exporting high tech goods to China.

One of the main reasons for America’s trade deficit is America’s own apprehension of its strategy. America has only two real ways to reduce the trade deficit: it can either export high technology goods and technology to China or it can make the Chinese people addicted to some consumer good. In the 19th century, England used opium to destroy China’s trade surplus. Before the Opium War, the Chinese government was not deeply involved with the opium trade, which caused a large trade surplus to turn into a trade deficit and resulted in a huge loss in international hard currency.

The era of using boats and cannons to trade illicitly is gone forever. Today, America can only use its dominance of the international monetary system to bring down our country’s trade surplus. The victim of the 1980s was Japan; now America has targeted China, which is easy to understand. All of the following actions are closely linked: selling arms to Taiwan, meeting with the Dalai Lama, reporting Chinese human rights and talks about Internet freedom. They all serve to promote the strategy of attacking China. China is at a disadvantage due to its misunderstanding of international financial politics. After being influenced by liberal economic theory for such a long time, China misunderstood international financial operations, thinking they had market characteristics. The U.S. Treasury, on the other hand, has never excluded political considerations from its fiscal and monetary policies, so it has a broad range of tactics to choose from. The European Union is well aware of how America tweaks the rules of the game, so even though it faces a lot of pressure about the value of the euro, it can effectively respond to this pressure.

China’s policy toward Obama’s unconventional methods should be to ease on the brakes, stay on the defensive and wait for the right moment to attack. For example, if America claims that China’s currency is being manipulated, there is no need to make a big fuss because China can always let the International Monetary Fund’s exchange rate monitoring principles oppose America’s unilateral action. Furthermore, America is not the one who decides whether or not China has used market intervention methods to protect its current exchange rate. At the same time, one cannot forget the political power China has because it owns some of America’s debt. America’s unconventional methods use a novel sort of swordplay but at the same time, are primarily an open attack. The attack is threatening and full of momentum, but it is unwieldy. It might scare the adversary, but overall its power is limited, like Chen Yaojin’s three axes.

[Translator’s note: Chen Yaojin is a lucky general mentioned in Chinese novels, who always fought with three axes. Since his martial arts skill was poor, he could only beat a few adversaries. If his adversary was weak, he could win with three axes. If his adversary was strong, he could not even win with thirty-six axes.]