China's (Petty) Fiscal Crimes

By Sebastian Mallaby
Monday, June 6, 2005

For an example of what stokes anti-Americanism, consider the current tone on Capitol Hill toward China's economic policies.

China is getting hammered for its currency peg, its violation of intellectual property rights and its bad habit of supplying Americans with cheap clothing. All this is supposed to be sinister, evil and unfair. Fully 67 senators back a bill that would impose a 27.5 percent tariff on all Chinese goods unless Beijing ups the value of its currency. Bowing to congressional pressure, the Bush administration recently announced quotas on imports of Chinese clothing.

This is crazy. China's political system is odious, and its arms buildup is menacing. But its economic performance is neither sinister nor evil: It lifted 400 million people above the $1-a-day line between 1981 and 2001, a period when the net progress against poverty in the rest of the world was zero. And China's growth is not unfair. To the contrary, China has become a better global economic citizen than reasonable observers could have predicted.

You think China does not abide by international rules? To meet the terms of its accession to the World Trade Organization, China abolished or amended 2,600 legal statutes and regulations, as Neil C. Hughes notes in the latest issue of Foreign Affairs. The compliance continues: China is pressing ahead with its WTO commitment to open its capital markets to foreign competition by 2007.

You think China discriminates against imports? Between 2000 and 2004, China's imports from the United States doubled. China imported 60 percent more American goods than France last year, although the French economy is bigger.

You think China discriminates against foreign investors? In the past 25 years, China has taken in 10 times more foreign investment than Japan did between 1945 and 2000. As a result, more than half of China's exports are made by foreign subsidiaries.

You think China nonetheless contributes in a major way to the U.S. trade deficit? Actually, China's current account surplus (trade plus a few other cross-border payments) last year was just over half the size of Germany's, although it's true that China's is expanding quickly.

Look, the U.S. current account deficit with the rest of the world came to $666 billion in 2004. There's no way this can be blamed on the Chinese surplus, which came to a mere $56 billion. Members of Congress who worry about the world's unbalanced trading pattern should paint those numbers on their walls: China's contribution to the imbalance last year was one-twelfth the size of America's.

Congress is beating up China for its clothing exports because of a surge early this year. Fair enough, you might suppose; surges suggest cheating. But this particular surge happened because Chinese exports had previously been suppressed by protectionist quotas. Now the Bush administration is reimposing quotas all over again. If anyone can be accused of distorting markets in an unfair way, it's the United States rather than China.

Congress is also beating up China for its currency policy and its piracy of U.S. intellectual property. Yes, China pegs the yuan to the dollar, a policy that keeps its value artificially low and its exports artificially competitive. And yes, Chinese pirates rip off American music and software. But Congress should keep this misbehavior in perspective.

China's cheap currency, like America's budget deficit, contributes to a lopsided global economy. But neither the United States nor China is going to change unless change serves its own interests. The cheap currency policy creates inflationary pressures in China, and at some point it should go. But the Chinese have kept the lid on inflation so far; meanwhile, it creates manufacturing jobs for the millions who are deserting the countryside or leaving inefficient state-run enterprises.

Besides, even if the Chinese revalued the yuan substantially -- say, by 10 or 15 percent -- and even if other Asian exporters followed, the result would be a fairly modest dent in the U.S. current account deficit. China's currency policy is an economic misdemeanor rather than a felony.

Equally, Chinese piracy is real, and it presents a bigger threat to the United States than exports of T-shirts and bras: The clothing industry is marginal to U.S. prosperity, whereas intellectual property is central. But some level of piracy is endemic in all developing countries, which have an interest in spreading software around cheaply rather than rewarding the foreigners who invented it. Given this logic, it's striking that China does have good anti-piracy laws on its books. Although enforcement remains a problem, the Chinese are at least working on it.

To put these quarrels in perspective, Congress should recall its debates over China's WTO membership five years ago. Then, it seemed reasonable to predict that Chinese cheating would create a flood of complaints to the WTO's dispute-settlement tribunals, causing the system to grind to a halt. The really big news is that this has not happened. Relative to older Asian tigers, notably South Korea and Japan, China has developed in an open, import-friendly way. It is trying to play by global economic rules, even if its record isn't perfect.

But who does have a perfect record, anyway? Not the Europeans, whose inflation-fighting sado-monetarism holds back global growth. Not the Japanese, who are the kings of farm protectionism. And not, for that matter, the U.S. Congress itself. What's Congress doing about the U.S. budget deficit, about egregious farm subsidies or about the scandal of U.S. anti-dumping laws that are rigged against foreigners? No more than China is doing about its problems, actually.

© 2005 The Washington Post Company