US feels heat of dragon's breathA dragon's breath of apprehension is blowing through the imperial complacency of Washington. What used to be the "US Trade Deficit Review Commission" of the Congress has morphed from a general question into a particular one: it is now the "US-China Economic and Security Review Commission", tasked with examining "the national security implications of the bilateral trade and economic relationship" between the two countries.
The annual report it presented to Congress on June 15 read uncannily like the reports of the British House of Commons on the upstart economy of the German empire at the end of the Victorian era. It certainly belies the complacent Panglossian optimism of the administration of President George W Bush about the present and future of the US economy.
What makes it worse is that while anxious British imperialists were simply competing on gross domestic product and share of world trade with their German rivals, in the case of the US, the commission is moving towards fingering China as part of the problem for the American economy.
In contrast, as Britain's relative position in the world declined, it was in competition with Germany: it was not in debt to its rival, nor were British manufacturers busily closing down their factories and investing in the Ruhr. In fact, they were investing in the US, which was the major beneficiary of the Anglo-German military rivalry.
The commissions' worried tone suggests that while there may be dissent about the degree of rivalry between the People's Republic of China and the US, and what should be done about it, it is causing sleepless nights, at least in some parts of Washington.
However, while the report shows a remarkable degree of realization of the dire position of the US economy in relation to China, it is equally remarkably a product of American self-centeredness. Nothing in it suggests that it is in the hands of the US itself to reform its industries and financing. The implication is that the Chinese are somehow being sneaky and unfair in taking the US at its word on free markets and beating it at its own game.
'China harming US economy, national security'
Commission chairman Roger Robinson put it politely: "A number of the current trends in US-China relations have negative implications for our long-term economic and national security interests, and therefore that US policies in these areas are in need of urgent attention and course corrections."
The report's key findings are that the US trade deficit with China is of major concern because:
These findings will hardly come as a surprise to anyone who has been watching.
"It is the United States' most lopsided trade relationship, with US imports from China [US$152 billion] outpacing exports to China [$28 billion] by more than 5 to 1 ... At the same time, US firms continue to invest heavily in China, moving manufacturing capacity and, in some cases, research and development along with this investment," the report says.
It goes on to point out that Chinese firms are also raising capital in the US, without the transparency that would be demanded of their American equivalents and it really sees a direct challenge from China's rapid technology development.
Eighteenth century English novelist, pamphleteer and journalist Daniel Defoe once presciently referred to how financial and economic development affects military capability, and the commission assesses the economic threat in just such terms.
In response, the commission is almost calling for a trade war with China, with references to the World Trade Organization, examination of subsidies, trade practices, intellectual property rights and transparency of corporate governance. It also demands that Congress should "direct the administration to develop and publish a coordinated, comprehensive national policy and strategy designed to meet China's challenge to the maintenance of our scientific and technological leadership and competitiveness in the same way it is presently required to develop and publish a national security strategy".
US sees threat in China's demand for oil
The US even sees China's growing dependence on international oil markets as threatening US supplies and their prices and wants to cut US investment in enterprises engaged in security-related technology.
Several other studies that emerged last week reinforced the commission's overall message. One showed that it was not just low labor costs, but also that in many Chinese high technology enterprises labor productivity was surprisingly high, approaching US levels and exceeding European levels.
US Treasury reports last week also showed that in the second quarter, more than half of US Treasury bonds were held by foreigners, mostly Asian, and increasingly by China. But it is not just treasury bonds. Foreign central banks spent $125.2 billion on US assets in the last quarter, which helped finance the record $136.9 billion balance of trade deficit.
It is not Beijing's fault that foolish policies in Washington have created a consumer boom that is drawing in imports more than stimulating domestic production. Beijing did not create currency policies that allow Americans both as individuals and as a nation to live on debt.
So despite all that bluster from the commission, Congress is highly unlikely to act in the aggressive and assertive way the commission suggests, unless Beijing does something silly like disband the Hong Kong government or attack Taiwan, almost certainly not.
Simply put, there are too many companies in the US, from Wal-Mart onwards, making a lot of money by selling Chinese products. They are hardly likely to call for protective tariffs when they are designing, ordering and importing their products from China. Indeed, they will lobby and have lobbied strongly and successfully against any restrictions on outsourcing. And no one is going to stifle credit or increase taxes when there are closely contested and highly partisan elections in the offing.
China and the dollar-bonds link
On the other hand, for the foreseeable future, China is tied in more ways than it need be to the US and the dollar. It is enough to make you believe in the virtues of private enterprise when you consider that foreign governments such as China and Japan have been buying US treasury bonds on such a scale while the dollar itself is plummeting, and when there is almost certainly an impending rise in interest rates, which will knock down the dollar value of their holdings.
Apart from being a bad investment in economic terms, in the long run such a recycling of the trade surplus is likely to be unsustainable for other reasons, such as China's demand for raw materials and energy from abroad.
Ironically, instead of being grateful for these ill-advised purchases, the commission's report blames China for its refusal to adjust the renminbi or yuan upwards, or to float. While those complaints about China's currency policy have some ground, Beijing can point to the US administration policies that have progressively weakened the dollar.
Even so, in the long run, in so far as there are any iron laws in that most flexible of arts, economics, the two currencies have to adjust their nominal values to match reality. The yuan has to revalue, the dollar devalue even further, or some combination of the two.
With the sums involved, and the volatility of world finance markets, it is in everybody's interests that China stops pandering to US profligacy and helps bring Washington and the dollar back onto solid ground - in a gentle way, so the splash does not drown everyone.
The longer that readjustment is postponed, then the more seismic the shift when it happens. Neither party is acting totally rationally in this strange partnership, and when two irrationalities collide there is plenty of room for surprises.
In any case, China can hardly be blamed for following the road of developed nations. Surprising as it may be to the members of the commission, few people outside the US really think that the country has a perpetual prior lien on the world's energy supplies, nor a permanent place at the top of the economic ladder. In fact, Washington would do well to get some therapeutic chat from its special relations in London about what it's like to be on a slide as others are soaring up the scale.