Trade And the China Card

By Sebastian Mallaby
Monday, March 6, 2006

Globalization scares people. Security threats scare people. By fusing these fears during the Dubai ports flap, demagogues have had a field day. Now, having demonstrated this formula, the demagogues are poised to strike again. Their next target will be arriving soon, in the person of President Hu Jintao of China.

For a fear monger with a club, next month's Chinese state visit is a self-teeing golf ball. China accounts for more than a quarter of America's astonishing trade deficit, and the country has become a proxy for all globalization anxieties: It's painted as a low-wage threat and simultaneously a high-science threat, a piratical menace to technology patents and simultaneously a challenge to America's scientific preeminence. Meanwhile, China constitutes a security threat, too: It's spending billions on an arms buildup, and lying about the real numbers. If demagogues can turn a tiny ally such as Dubai into a villain, you can bet they'll do the same for China.

Politics makes this irresistible. Democrats talk bravely of taking back the House this fall, but they acknowledge that, despite the Iraq mess, Republicans retain an edge on national security. The way to neutralize that advantage is to link security to pocketbook concerns, on which Democrats are more trusted. If security means fighting terrorists, President Bush's credentials remain difficult to challenge. If security means standing up to foreigners despite commercial temptations to make nice, voters are more likely to back Democrats.

So the Dems are going to play the China card, and the Bush administration, which will be in the uncomfortable position of hosting Hu's visit, will be thrust onto the defensive. Congressional Republicans, who have stopped betting their job security on the president's prestige, won't listen to the administration's pleas for statesmanlike restraint. When Democrats attack China, Republicans will scramble to sound equally aggressive.

You can see this process playing out already. Sen. Chuck Schumer, one of the chief brewers of the Dubai storm, is sponsoring a bill that would impose a 27.5 percent tariff on all Chinese goods unless China revalues its currency. This tariff would be illegal under the rules of the World Trade Organization, but Schumer doesn't mind: His bill isn't going to become law, but it will advance the electoral prospects of the Democratic Party. Meanwhile, Republicans are readying their response. Sen. Chuck Grassley, the chairman of the powerful Finance Committee, is cooking up his own anti-China legislation.

So the stage is set for competitive China-bashing, and it's not clear that the administration will be able to keep the lid on. So far the Bush team has been responsible on China, coaxing it to revalue its currency for its own good while holding off Schumer-style pressure for a trade war. But there are signs that this forbearance may be running out. The Treasury may be getting ready to brand China a currency manipulator in a report that's due out around the time of Hu's visit, and the administration recently produced a "top-to-bottom" review of trade with China that was designed to sound macho. The scary thing is that if protectionist pressure mounts, China's response won't follow the Dubai playbook. We're not dealing with a private company that wants to know how high to jump. We're dealing with a brittle dictatorship that has limited space to accommodate American demands, even if it wanted to.

Strange though this may sound, China's policy toward the United States resembles U.S. policy toward China. The Chinese leadership, like the Bush administration, has tried to make economic relations go well, tackling domestic lobbies in the process. Since China's accession to the WTO five years ago, it has changed thousands of statutes and regulations in order to comply with WTO rules, so much so that the United States has brought fewer WTO cases against China than it has brought against Europe.

But there is a limit to what the Chinese regime feels able to do, just as there is a limit to the political risks that the Bush administration will run to head off a trade war. The Bush administration isn't doing the main thing it could do to bring down the U.S. trade deficit: get serious about balancing the federal budget. Equally, the Chinese leadership isn't doing the main thing it could do: allow its currency to rise significantly against the dollar.

There's a powerful reason for China's recalcitrance. The country's technocrats were convinced years ago that revaluation made economic sense. But revaluation would cut the price of food imports, depressing earnings of Chinese farmers. Faced with simmering discontent among rural Chinese who have been left behind by China's coastal boom, the dictatorship fears that currency revaluation could unleash furious protest.

So the United States and China may be headed toward serious trade conflict. Both sides feel they have shown more than adequate good faith; both have political reasons not to make further efforts. Back in the 1980s and early 1990s, similar friction between the United States and Japan created poisonous resentment on both sides: U.S. politicians smashed Japanese products with sledgehammers, and in 1995 an anti-American demonstration in Japan became the biggest protest march in a quarter of a century.

The prospect of a similar trade war with China is unnerving, to say the least. We're not talking about a quarrel with a military ally. We're talking about a fight with an opaque military rival.

mallabys@washpost.com


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