An odd fixation on China
SCMP December 18 2006
It is hard to believe that much good has come from the mission that US Treasury
Secretary Henry Paulson has just led to Beijing. Sitting in Hong Kong, one
may miss benefits seen in Washington. Just possibly, the sight of six Cabinet
secretaries and the Federal Reserve chairman being assertive with China may
keep at bay the protectionist sentiments, boosted by the results of last month's
election, in the US Congress.
But, viewed from here, the event looks to have reinforced prejudices
on both sides. The US is more than ever convinced that China is
the main source of
its trade imbalance. And Beijing is ever-more determined not to be seen to
succumb to US pressure on currency and other economic issues, even if that
might actually be in its interest.
The Chinese may have privately taken away the message that they must
do more to appease US complaints, whether on the currency or trade
issues such as intellectual property. If that helps slow the protectionist
push, some benefits may result.
But one could equally well argue that, by sending such a high-powered
delegation, the US has raised unrealistic expectations of what China
can be persuaded to do - and the impact that will have on the trade
The size and weight of the delegation suggests an obsession with China
that displays a dangerous ignorance in Washington of the dynamics of
global trade and investment. China is only one part of a system that
reflects the growing dominance of East Asian economies in global manufacturing.
Mr Paulson's obsession with China seems to stem from his many visits
there drumming up business for Goldman Sachs. But the two-dimensional
view that investment bankers have of the world is ill-suited to the
complexity of international trade and payments.
The headline US trade deficit may be bigger with China than with any
other partner. But it is only part of a mammoth East Asian surplus,
and cannot realistically be separated from the surpluses of Taiwan,
South Korea and Japan. They are the principle investors in China's
exporting industries, and the suppliers of the more sophisticated components.
Nor can it be separated from the profits of US middlemen and retail
One should ask why Mr Paulson did not also take his delegation to
Tokyo, whose currency on a real, effective exchange-rate basis has
fallen 40 per cent in the past decade. Or to Taiwan, which has kept
its currency almost as tightly pegged to the US dollar as has Beijing.
He could have gone to Seoul and learned how accepting a steep currency
appreciation - as South Korea's has done over the past three years
- does little for the US trade imbalance with that country.
Concerns about the size of China's foreign exchange reserves also
seems rather strange coming from a delegation headed by Mr Paulson
and US Federal Reserve chairman Ben Bernanke. Most of the increase
in reserves over the past two years has come not from the trade surplus,
but from capital flows of the sort that the likes of Goldman Sachs
If anyone should be complaining about China's excess foreign exchange
reserves, it is the Chinese themselves: they are acquiring low-yielding
assets in a currency whose own masters want it to decline! East Asia
generally could benefit from a currency realignment that reflects the
region's economic strength. It would be of even more benefit if the
adjustments were led by the giant economies - China and Japan - rather
than by the smaller ones (South Korea, Thailand and Singapore) as has
been the case so far.
But none of this detracts from the facts that Mr Paulson's team seems
quite unwilling to face: the US deficit is a global one, deriving from
inadequate savings, excessive consumption and cheap money.
Singling out China for blame is a diversion from the real issues,
domestic and global. The US does have legitimate grievances over intellectual
property rights, service-sector access and so forth. But these are
still marginal in the overall trade context.
The Iraq war started with the notion: identify a bogeyman and go for
him. Spare us a trade version of a policy that upset America's friends
more than its enemies.
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