The New York Times, Washington Post, and others today ran front-page stories on economic and political disagreements the U.S. has with China. The headlines mostly distract from the real issue.
China is nowhere close to a global military power but it is becoming a global economic power. It is therefore almost inevitable that the U.S. and PRC will clash more often over economic matters. The goal in managing those disputes must always be more open international markets, or the result will be that both sides lose.
The next month in particular is going to be a loud one for Sino-American economic relations. On the front end we have a press conference today by Premier Wen Jiabao, number three in the Communist Party hierarchy. Among other things, Wen repeated what are now standard Chinese accusations of American trade protectionism.
On the back end, exactly a month from now a report is due from the Department of the Treasury determining whether any American trading partner is manipulating its currency. The likelihood that the PRC will be cited is the highest in over a decade.
Wen’s remarks in Beijing were tired and often hypocritical. Chinese diplomacy seems to have degenerated into finding new excuses for harmful policies. China’s trade surplus with the U.S. last year again topped $200 billion. If the U.S. is being protectionist, it is doing a remarkably poor job.
At the other end, the Treasury decision is being granted far too much importance. The value of the Chinese currency, the yuan, is just a symptom. The illness is broad Chinese government intervention in the market, led by subsidies for state firms. From mid-2005 to mid-2008, the yuan appreciated 20 percent against the dollar and the bilateral trade deficit still rose 50 percent. Forcing a yuan revaluation will likely yield nothing at all.
Nonetheless, it is true that China’s broad state-led development often hurts its economic partners. What is not true is that American protectionism is a solution.
A hefty tariff on Chinese goods will not create American jobs. Instead, production will just move out of China to Vietnam, Mexico, Bangladesh and elsewhere. With less Chinese competition due to the tariff, other producers can safely raise prices, making goods more expensive here. Protectionism is just households paying more than they should in order to subsidize companies. Seems like we’ve had enough of that the past 18 months.
A much better alternative is to use the June meetings of the Strategic and Economic Dialogue with the PRC. The U.S. should put forward a few, very explicit American demands for less Chinese government intervention in the market. By then, the U.S. would do well to have demonstrated resolve on its runaway budget deficits, something that legitimately concerns the Chinese and much of the rest of the world. This could increase American access to the Chinese market while strengthening the domestic American economy. Not as satisfying as sticking it to Beijing, but far better for the United States.
The PRC announced this past week that the People’s Liberation Army (PLA) budget would increase by about 7.5% in 2010. This marks the first time that the PLA budget has had an increase of less than 10% in nearly a decade. But don’t jump the gun. It is far from clear that it represents anything with implications for China’s long-term challenge to US predominance in the Asia Pacific.
Chinese defense spending figures are notoriously unreliable, important more for the political signals they send than actual spending. The scale of the announcement, roughly halving the rate of increase for this year’s defense budget compared with last year, is perhaps no more than a signal the Chinese government will be spending noticeably less on specific defense-related projects than it has in previous years.
Consistent with this possibility are two other recent announcements. One is that the launch of the Tiangong-1 (Heavenly Palace) spacelab would be delayed from 2010 to 2011. While this might be due to technical difficulties, it might also reflect a scarcity in resources sufficient to impinge upon the high visibility (and high prestige) manned space program. Furthermore, the PRC also announced the passage of a national defense mobilization law. This much delayed piece of legislation, several years in the making, will allow the PLA to legally draw upon the resources of the larger civilian economy in event of crisis. In combination, these various developments could suggest that the PLA is being asked to make trade offs, including curtailment of highly visible programs, and be prepared to draw more upon the civilian economy.
Certainly, worth noting, but hardly a sea change. If China’s defense spending growth is slowing, it’s still increasing.
The implications are uncertain; so is the motivation. On the one hand, it may be a domestic political move. There is apparent concern about the need to increase social spending to bridge the growing gap between rich and poor—and defense spending may be where it comes from. Alternatively, it may be that the Chinese economy has slowed so appreciably, it requires belt-tightening even in the Ministry of Defense.
Whatever the Chinese tea leaves may say, it is important to keep in mind that a reduced rate of growth for one year does not equate with cut-backs. It remains to be seen whether the PLA will actually turn inward in the coming year, or whether it will continue to expand its areas of operations and improve its array of equipment.