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Don't blame China

January 13, 2006

CHINA IS AN EASY TARGET for our economic grumbling. It is ruled by a Communist Party. Its currency, the yuan, does not float freely. It often looks like a monolithic machine, with factories of assembly-line workers churning out low-cost goods to fund its march toward world domination. It has about $800 billion in foreign reserves stashed away.

A popular item in the "blame China" basket is our trade imbalance, and a chorus of howling will no doubt be renewed in Washington now that Beijing has announced that its trade surplus with the U.S. grew considerably in 2005, to $114 billion. The U.S. Commerce Department, when it submits its own numbers, is likely to say the true deficit is closer to $200 billion, as it includes exports through Hong Kong.

Max Baucus, a Democratic senator from Montana, happened to be in Beijing this week, and he reacted immediately: "U.S. politics on China will become unmanageable if China's trade deficit with the U.S. continues to grow."

Baucus and others in Washington should get used to a considerable bilateral deficit for some time. And they should stop pointing to it as a sign of impending doom. America's economic relationship with China is a win-win symbiosis, not some mugging by a sneaky competitor unbound by our rules of fair trade, as some of our politicians suggest.

Americans love a bargain. We revel in our ability to buy affordable electronic goods and household items at Costco and Wal-Mart, regardless of the "Made in China" sticker affixed to most of them. Importing manufactured goods from China has hardly stalled America's economy, and the willingness of China's central bank to buy U.S. Treasury bills effectively allows this country to live beyond its means. The arrangement is hardly the result of an inflated yuan, as many U.S. politicians have suggested. China adjusted the value of its currency by 2% last year, but it is loath to do so again because of the implications for its fragile banking industry. Regardless, there is no economic reason to believe that a different valuation of the yuan would seriously affect the galloping trade between China and the U.S., which has grown at the expense of trade with other Asian countries.

Most of the goods China sells to the U.S. are made with some components that China imported before assembly, further complicating the black-and-white tale often peddled about these figures. Moreover, the fact that China has a significant trade deficit with some other nations belies the caricature of a closed economy eager to engage solely in one-way trade.

The real cause of grumbling about China is probably the remarkable phenomenon that the world's most populous nation has been booming steadily for 15 years. It's true that the U.S. economy's lessened reliance on manufacturing has created anxiety and plenty of dislocations for some industries, but China shouldn't be blamed for engaging the global economy in a way that benefits us all.

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