A marriage made in China

Wednesday, November 18, 2009

President Obama's trip to China has occasioned a spate of articles documenting the increasingly unhappy yet apparently indissoluble marriage between the American and Chinese economies. As The Post's Keith Richburg wrote on Monday, those economies "have become inextricably intertwined, locked in a kind of co-dependency that neither side thinks is particularly healthy."

The ugly goings-on within this marriage are plain for all to see. The U.S. trade deficit with China was roughly $60 billion in 1998, the year before we reached the accord granting China permanent normalized trade relations. Over the following decade, it ballooned to $268 billion, and tens of thousands of U.S. factories closed down. The trade deficit is the major reason China is awash in dollars -- about 800 billion of them -- and has become our largest creditor. And it is the major reason why boosting consumption in the United States, in an attempt to reverse the recession, has the peculiar effect of boosting production and employment in China just as much as if not more than happens at home.

Most reports that mention this defining economic imbalance treat it as a given -- a fact as immutable as the cycles of the moon. In fact, after U.S. Trade Representative Charlene Barshevsky reached an agreement with her Chinese counterpart 10 years ago this week on normalizing trade relations, an intense debate took place in Congress and in the nation. U.S. business leaders, members of the Clinton administration, a majority of congressional Republicans and a minority of congressional Democrats all argued that the deal was a win for the American people.

Cautioning Congress not to reject the pact, Carly Fiorina, then chief executive of Hewlett-Packard, warned, "A vote against trade with China is a vote against U.S. business, employees, citizens and the people of China." Advocates' central contention was that the deal would eventually lead to a political liberalization of China -- which it hasn't -- and would enable the United States to so increase exports to China that our Chinese trade imbalance would end -- precisely the opposite of the effect that normalizing trade relations has actually had.

"The most fundamental thing we get out of this deal is an enormous increase in our access to the Chinese economy," Kenneth Lieberthal, who was senior director for Asia on the National Security Council, said in 1999. Asked on PBS's "News Hour" how the pact would affect the trade imbalance, Lieberthal predicted, "Over time, clearly it will shrink with this agreement."

But even as some American companies contended that the agreement would increase their exports to China, many were planning instead to increase their production in China, where wages were low and the government was eager to help them set up shop. "This deal is about investment, not exports," Joseph Quinlan, an economist with Morgan Stanley, said in May 2000. He was, of course, right: A flood of investment followed the agreement. As of 2007, roughly 60 percent of Chinese exports came from foreign firms operating there. And just as U.S. manufacturers have found China to be an exceptionally low-cost place to make things, U.S. retailers, with Wal-Mart in the lead, have found it to be an exceptionally low-cost place to buy the products they put on their shelves.

The China that has emerged since trade relations were normalized has become not just an economic giant but the planet's leading protectionist power. By artificially depressing its currency and making its exports cheaper, China is compelling other nations to erect trade barriers. In essence, as economist Michael Pettis has observed, China's currency policy is this depression's equivalent of the Smoot-Hawley tariff.

Some foresaw the problems that would be unleashed. By nearly a two-to-one margin, House Democrats refused to ratify the agreement when it came to a vote in May 2000, but enough Democrats aligned with Republicans to ensure passage. (In the Senate, both parties favored it overwhelmingly.) Along with union leaders, many House Democrats predicted that the pact would cost American jobs and deepen, rather than lessen, our trade deficit. That they were right while mainstream economists and representatives of economic elites were wrong has not increased their credibility among mainstream economists and economic elites.

So as we try to rebalance our relationship with China, let's not entertain any illusions that our growing dependence on that nation was the result of an unalterable tectonic shift in global power. Our economic elites wanted the higher profits that came with cheaper Chinese labor. They prevailed, and today we are floundering to clean up their mess.


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