As I've chronicled abundantly in previous diaries (click on my name and scroll down), China's emergence as a major trading power is
the economic story of this decade, and the noxious US-China trade patterns are at the core of many of the current global unbalances which threaten US economic growth, fuelled by Bush's reckless busget deficit and "Bubbles" Greenspan lax monetary policy.
Today, a number of apparently disparate stories have come up on this topic which I'd like to bring to you in an unified narrative, which show that US policy is pretty confused on the topic, after a new U-turn by Bush.
US trade nominee takes hard line on China
Treasury feels White House heat on policy
How the Fed is doing China a favour (Stephen Roach) (See also an earlier version of that article in free access)
Current US policy on China is wracked by contradictory trends:
- the need to keep in good terms with what has become a major creditor, a country which is also a favorite destination for investment by US companies, and a major geopolitical player (not least in the difficult talks with Noth Korea)
- the increasing domestic pressure to do something about the runaway trade deficit with the country, and about the mounting job losses in industries that face the full brunt of Chinese competition on prices
Again, we get back to the fact that the US-Chinese co-dependency (cheap dollars and cheap Chinese labor fuelling US consumption and Chinese growth) is now creating increasingly untolerable unbalances on the debt markets, money markets and in whole industrial sectors in the Western world and even in the third world (in the textile sector).
Stephen Roach, usually a pessimist, is unusually positive about one aspect of current US policy: the decision by the Fed to progressively increase interest rates should end up being a good thing viz. China, by helping to support the Chinese authorities' attempts to reduce their own domestic imbalances:
[T]his underscores an important strategic challenge that China must address in the not-so-distant future -- the need to have a more balanced economy and a more flexible policy regime to go along with it. While its special requirements of infrastructure, urbanization, and industrialization are all supportive of a high-investment growth dynamic, China is in danger of pushing this unbalanced growth model to excess.
Unfortunately, the currency peg constrains Chinese policymakers from using traditional macro stabilization tools to rein in these excesses by controlling the price of credit.
Instead, the authorities revert to their central planning heritage and deploy administrative measures that control the quantity of credit. (...) However, courtesy of the peg and its linkage to a still-accommodative Fed, speculative capital inflows are powering a persistent upsurge in the Chinese liquidity cycle that may overwhelm the impacts of administrative measures.
Do note that important point: by pegging its currency to the dollar, China gets the same artifical boost than the US from excess liquidity, but at the price of losing control of its domestic economy. I wrote earlier that there are also increasingly strong voices inside China to stop focusing on the export sector (controlled by foreign multinationals and start focusing on domestic demand and domestic-oriented production.
Unlike America, which is a consumer-driven spending machine, exports and export-led investment remain the name of the game in China.
Personal consumption in the US currently stands at a record 71% of US GDP, whereas in China the share of household consumption stands at a rock-bottom 42%. Chinese exports have grown from 20% of GDP in 1999 to 35% in 2004, while the fixed investment share is now approaching an astonishing 50%. And, of course, China's biggest export market is the United States, destination for exactly one-third of overseas Chinese shipments in 2004. By implication, that puts an externally-dependent Chinese economy very much in the cross-hairs of a Fed tightening that is now taking dead aim at the American consumer.
Little wonder that China appears reluctant to impose new tightening measures on a still seemingly vigorous Chinese economy. (...) With the coming Fed tightening likely to squeeze the American consumer -- the major prop to China's external growth dynamic -- a new round of domestic tightening measures by Chinese authorities would raise the risk of significant overkill. Focused on the always delicate balance between reforms and stability, this is not a risk that China wants to take.
So the Chinese are heavily dependent on policiy decisions made in the US, and happy about those made by the Fed. Ironically, Roach's article implies that the Fed's rhythm of increase of the interest rates is more adapted to Chinese requirements (to cool off) than to US ones (where a stronger does would be necessary to slow down the asset-bubble-fuelled spending). In effect, he is again calling Greenspan a hack.
But what about other branches of government?
Well, the political pressure to limit Chinese exports to the US is building, and the White House is responding to it:
President George W. Bush's nominee for US trade representative on Thursday promised a "more aggressive approach" on China and said he would launch a "top-to-bottom review" of US trade relations with Beijing.
Rob Portman, a Republican member of the House of Representatives, responded to mounting anger in Congress over Chinese trade practices by saying he would go there soon to "deliver a strong message in person to Chinese officials."
(...)
In what one Democrat senator called a "bouquet tossing contest," committee members lavished praise on the Ohio congressman. "Your problem is not with Congress," said Max Baucus, the senior Democrat on the committee. "It's with the administration. The administration needs to get tougher."
Mr Portman, who will replace Robert Zoellick as the top US trade negotiator, tried delicately to balance his support for the trade pacts negotiated by the Bush administration with sympathy for the repeated criticisms from senators that those deals had failed to deliver results for US workers and domestic manufacturers.
According to the Financial Times, what amounts to an "about turn" by the White House on its China policy also signals a tightening of the control of policy by Rove and other political operatives to the detriment of the Treasury department:
The Bush administration's sudden shift on China's currency regime last week came as a surprise to many.
After several years of claiming its "financial diplomacy" was paying dividends, the US Treasury suddenly called for China to move immediately to a flexible currency.
Two senior administration officials said the call to change tactics on China was a political decision made at the White House.
The Treasury's policy - widely supported by China experts who say Beijing is less likely to move in the face of public hectoring - was overturned because of White House concern at rising protectionist pressure in Congress.
The sharp change was the clearest sign yet that economic policy in President George W. Bush's second term is going to be led firmly from the White House. A tight team of close associates of the president is calling the shots, say current and former administration officials.
This group consists of Dick Cheney, vice-president, Andrew Card, the president's chief of staff, Joshua Bolten, director of the Office of Management and Budget, and Karl Rove, the president's political adviser who has assumed a broader co-ordinating role, including overseeing economic policy.
One former administration official says: "The personal relationship with the president is a big deal, which is why the agencies are at a disadvantage."
The White House has played an increasingly dominant role in the administration's economic policy since Paul O'Neill was ousted as Treasury secretary at the end of 2002 for straying too far from the president's line. But overruling the department on foreign exchange matters, traditionally the Treasury's domain, marked a new departure.
It is not clear exactly who made the call on China.
There was increased concern within the White House following complaints from Congress, and the small business lobby, that the Treasury's gentle diplomacy had been ineffective. Mr Card, a former motor industry lobbyist, was a strong advocate of publicly pressing Japan when the US faced similar trade concerns in the 1980s and early 1990s.
This is not a simple call, and I am really torn on this issue:
- I don't personally think that protectionism is a good solution in general (although, as the last article that I quote in my first comment below, it might make some sense in view of China's lack of respect for exisitng rules)
- any policy which is supported by the Bush administration should be suspiciously viewed,especially when such policy is arrived to on the basis of purely political considerations and against more "reality-based" Washington bureaucracies
- any policy which tries to put the blame on China for what is at least a shared problem,
if not one caused fully by US policies (easy money and budget deficits fuelling domestic consumption), should also be seen as a denial of reality.
So, what do you think? Is Bush's U-turn and marginalisation of the Treasury Dept. a good thing as China does not play by the rules and strong safeguards are required?