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West's China-bashing is not the answer

Free trade is easier in theory than in practice. Four years after welcoming China into the international market-place, rich Western nations are waging a war of rhetoric against the rising economic power of Beijing.

The presence of Chinese ministers at the G7 summit in London this weekend was a sign of Beijing's increasing importance since it joined the WTO in 2001; but it also underlined the West's determination to push the communist state into playing by the rules of the global game.

Finance Minister Jin Renqing (金人慶) has repeatedly been urged by his G7 counterparts to allow China's currency, the yuan, to appreciate against the US dollar on the foreign exchanges. He no doubt heard the same arguments again at their breakfast meeting yesterday.

Under pressure from trade unions, manufacturers and a group of 35 congressmen calling themselves the China Currency Action Coalition, Treasury Secretary John Snow has accused Beijing of gaining an unfair advantage, and of contributing to the vast US trade deficit, by pegging the yuan against the US dollar. The Senate will vote next month on a bill which would slap punitive tariffs of 27.5 percent on Chinese goods unless the currency is floated within six months.

Distant, mysterious and authoritarian, China is an ideal scapegoat for politicians hoping to distract attention from the shortcomings of their own economic policies. Washington has preferred to blame China for the gaping US current account deficit instead of cutting back on government spending.

Slow growth in Japan and the eurozone, and the insatiable appetite of the US consumer, are as much to blame for the unprecedented US deficit of more than 6 percent of GDP, which is expected to drive down the US dollar over the next year. And since China holds billions of dollars' worth of US assets, which have helped to fund the US spending spree, the interests of the two trading powers are less opposed than the angry rhetoric on Capitol Hill suggests.

Stephen Roach of Morgan Stanley has warned that if Washington antagonizes China with tariffs, Beijing could retaliate by dumping US Treasuries, unleashing a "full-blown dollar crisis."

Trade campaigners are nervous that what Roach calls "the drumbeat of protectionism" has come at the worst possible time. Global leaders have set themselves a deadline of December, at WTO talks in Hong Kong, for concluding the Doha round of negotiations, which are aimed at giving developing countries a fairer share of global markets.

A frosty atmosphere between the economic powers of the US and China is hardly likely to encourage a radical deal.

The China-bashers do have cause for concern. Manufacturing sectors in many of the world's richest nations have already been seriously hollowed out, hit by cheap overseas production.

The pace of China's rise is not unprecedented. Janet Henry, global economist at HSBC, points out that its GDP growth rates over the past decade or so have been similar to those of Japan during its growth spurt in the 1980s, when Tokyo was the favored target for protectionist rhetoric in Washington.

But its sheer size, with a population of 1.3 billion, means that China's effect on the global economy is potentially huge.

"There is a legitimate question about how you integrate such a large developing country," said David Webb of the Economist Intelligence Unit, who warned that the spike in global oil prices over the past year, largely driven by strong demand in China, could be repeated in other commodities, potentially sparking new outbreaks of protectionism.

Floating the yuan, as Washington is proposing, could help China's domestic economy, rebalancing growth from the vibrant export sector towards consumers. But it would be unlikely to help tame the US deficit. Either spendthrift US consumers would switch to buying goods from other low-cost countries, such as India or Malaysia; or Chinese firms would cut wages to keep their goods competitive.
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