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A Balancing Act With China

Action on the U.S. trade deficit needs to be more broad-based than a punitive tariff and a yuan revaluation, a think-tank analysis says.

May 21, 2006|Edward Luce | Special to The Times

If America's angst about globalization could be reduced to one word, it would be "China." Walk around a Wal-Mart Superstore, and every other product is made in China. Ask why Americans are so jittery about their job security -- despite near full employment in the U.S. -- and most give the same answer.

The data bear out many of these fears. China's $202-billion trade surplus with the U.S. accounted for 27% of America's current-account deficit in the last year, up from 18% in 2000. China's heavy intervention in the currency markets to stem the rise of the yuan against the dollar is almost as widely cited on Main Street as on Wall Street. When China's reserves hit $1 trillion later this year, late-night talk shows will probably cite that number in their jokes.

So it is unsurprising that Capitol Hill, which faces midterm elections in November, is threatening retaliatory measures against Chinese exports unless Beijing acts to reduce its growing trade surplus.

But the steps under consideration by Congress, which include a punitive 27.5% tariff on Chinese imports unless it sharply revalues its currency, would probably not achieve the intended results. As pointed out in "China: The Balance Sheet: What the World Needs to Know Now About the Emerging Superpower" -- a timely book published by two leading Washington think tanks -- most of China's exports to the U.S. originate from other low-cost economies. China is the final point of assembly. Almost two-thirds of China's exports to the U.S. have an import component.

If Hu Jintao, China's president, were to accede to Washington's demands, China's revaluation would simply divert America's deficit to other Asian exporters, the book contends. To stand any chance of denting the deficit and preserving China's competitiveness, there should be a broad-based currency realignment incorporating Japan, South Korea, Taiwan and Hong Kong. Even then, the authors say, a 20% coordinated appreciation would reduce America's deficit by only about 10%.

The more closely the problem is dissected, the more distant a practical solution becomes. At its root is the fact that America's net domestic savings rate is hovering at just above 1% of gross domestic product while China's is above 40%.

In the absence of counterbalancing Chinese measures, any action by the U.S. to raise its domestic savings -- by cutting its budget deficit, for example -- would risk a U.S. recession.

Embarking on mutually balancing steps, in which China imports more U.S. goods to ease the corresponding reduction in U.S. demand, would work only if it were sustained and far-reaching.

Leaving aside the irony in a Republican administration's urging higher welfare payments on a communist government, China, in any case, would need to create a social safety net to alleviate growing inequality.

But it is one thing to recommend that China boost domestic demand by raising social spending. It is quite another to expect China to be easily persuaded to take the huge dollar losses that would result from a sharp revaluation of the yuan.

Likewise, Washington has legitimate concerns that an abrupt dollar depreciation could pop the U.S. housing bubble. Rising home prices have underpinned America's robust levels of domestic consumption, which in turn have sustained economic growth.

Against this, the authors have some reassuring insights. They dispute, for example, the widespread view that U.S. interest rates would shoot upward if China sold off a large chunk of its Treasury bonds. They estimate the net effect of Chinese dollar purchases on U.S. long-bond yields at only 0.25 point.

They also remind us what happened the last time America got steamed up about unfair competition, during the "Japanic" of the late 1980s. Since 1994, Japan's share of world manufacturing has fallen from 24% to 21%, while that of the U.S. has stayed constant at 24%.

That U.S. protectionists cried wolf before does not mean they are wrong about China on all points. But as this book persuasively argues, it is in America's interest to coax rather than confront China. The two share a strong interest in reducing global imbalances together in an orderly and calm fashion.

*

Asia strategy

* "China: The Balance Sheet: What the World Needs to Know Now About the Emerging Superpower"

* By the Center for Strategic and International Studies and the Institute for International Economics

* PublicAffairs, $25, 256 pages

Source: Publisher

*

Edward Luce is a Washington-based columnist for the Financial Times, where this review first appeared.

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