2010-06-21

Anti-China Rhetoric in Congress

In US anti-China rhetoric at danger level, Benjamin A Shobert discusses the current debate. With socionomics as the frame, the why of the issue becomes clearer than Shobert sees it, but there's lots of specifics in the article too.
During last week's USCC testimony, Senator Charles Schumer (Democrat, New York) provided in written testimony a very specific insight into the grievances of many Americans and, as a consequence, the powerful politicians who represent them: "China's policy of large-scale intervention in the exchange markets and the significant undervaluation of its currency also subsidize Chinese exports to the United States and, at the same time, make US exports to China more expensive. Thousands of US factories have been shuttered and millions of jobs have been lost or displaced over the past decade as a result."

He went on to share that, "There is no question that this is what one might call a 'put-up or shut-up' moment for US lawmakers. American jobs and wealth are flowing out of the US, across the globe to China and other countries with cheap labor, lax environmental standards, and no compunction about flouting WTO rules to gain an unfair competitive trade advantage. This has got to stop."
Americans are angry at Congress and an election is coming up. Schumer has been anti-China for much longer, but he was unable to forge a majority when the economy was growing. He has a much better shot today and that's why we saw China adjust its currency policy over the weekend.
This week, during a separate congressional hearing of the House Ways and Means Committee, Republican Congressman Dave Camp (Michigan), asked whether "enough was doing to push China ... on its egregious economic barriers" specific to its currency manipulation, the country's "Indigenous Innovation" policies, and ongoing intellectual property compliance with WTO rules.

...During this week's House Ways and Means Committee hearing on "China's Trade and Industrial Policies", chairman Sandy Levin (Democrat, Michigan) said simply but forcefully " ... China must change its ways". Straight-forward words certainly, but important coming from an influential congressman long known for his reputation of urging caution and balance in America's relationship with China.
Lots of Michigan in there, as well as Ohio. Manufacturing regions that have lost many jobs. Anti-incumbent sentiment will cross party lines in November and even Republicans in these hard hit states will need someone to point a finger at.
Senator Debbie Stabenow (Democrat, Michigan), provided in testimony to the USCC panel her plan to introduce the "China Fair Trade Act, legislation that will prevent Federal taxpayer dollars from being used to purchase Chinese products and services until they sign on to and abide by the WTO Agreement on Government Procurement, which will allow American companies to export into their government markets." This sort of move, while it remains uncertain as to whether it will be advanced in the House, does represent the sort of escalation between two countries that tends to indicate a looming conflict over trade that could, given the present economy, too easily get out of hand.

During last week's USCC hearing, Congressman Tim Ryan (Democrat, Ohio), a long-time critic of China's currency policy and one of the first to propose legislation attempting to address the matter, echoed the concerns of his colleagues but perhaps most importantly hinted at deeper concerns which are too often glossed over by those who suppose such critics want to simply hit rewind on the global economy: "Several years ago, progress toward further market liberalization began to slow and it became clear that some parts of the Chinese government did not yet fully embrace key WTO principals."
Emphasis mine. Socionomics says bullseye to that comment.
It has been quite literally several decades since the interests of the working class and the ownership class have been so front and center in Washington as they are now. The still-powerful pro-business lobby will push back against bills like those mentioned earlier, but unless the American economy begins to show additional life, even organizations like the critical Business Roundtable may be ineffective at limiting a political retaliation against China.

During last week's testimony, this was communicated most eloquently by James Bacchus, formerly a two-term chairman of the Appellate Body of the WTO and a former Special Assistant to the United States Trade Representative in the Executive Office of the President. "I worry when I hear other Americans describe China as a 'threat' to the United States," he said. "I am reminded at such times of the warning of Thucydides in his history of the Peloponnesian War - that a belief in the inevitability of conflict can become one of the main causes of conflict. Trade disputes between the United States and China are inevitable. Conflict is not."
Here's where the rubber hits the road. It is likely the case that American workers have lost their jobs due to globalization. China is just one piece of the puzzle. Consider this article China lassoes its neighbors
But is the Chinese locomotive really pulling the rest of East Asia along with it, on the fast track to economic nirvana? In fact, China's growth has in part taken place at Southeast Asia's expense. Low wages have encouraged local and foreign manufacturers to phase out their operations in relatively high-wage Southeast Asia and move them to China.

China's devaluation of the yuan in 1994 had the effect of diverting some foreign direct investment away from Southeast Asia. The trend of ASEAN losing ground to China accelerated after the financial crisis of 1997. In 2000, foreign direct investment in ASEAN shrank to 10% of all foreign direct investment in developing Asia, down from 30% in the mid-nineties.

The decline continued in the rest of the decade, with the UN World Investment Report attributing the trend partly to "increased competition from China". Since the Japanese have been the most dynamic foreign investors in the region, much apprehension in the ASEAN capitals greeted a Japanese government survey that revealed that 57% of Japanese manufacturing transnational corporations found China to be more attractive than the ASEAN-4 (Thailand, Malaysia, Indonesia, and the Philippines).
Prechter's call for a sub-1000 Dow hit the media rounds last week. I'm not convinced that it will be as bad as he predicts, but if he's right, then it's obvious where protectionism will lead. Eventually, WTO membership and globalization will be on the table, as it will become clear that China is not the whole problem. Or, if China remains the focus, bilateral relations will deteriorate to their worst in 40 plus years.

For more on Prechter's thinking, last week he did an interview with Jim Puplava on the Financial Sense Newshour.

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