The War We're Losing Without A Whimper

Seeking more than trade favors


By William R. Hawkins



On July 17, Republican Sens. Elizabeth Dole of
North Carolina and Lindsey Graham of South
Carolina and Democratic Sens. Evan Bayh of Indiana
and Charles Schumer of New York, co-signed a letter
asking Treasury Secretary John Snow to investigate
whether China is manipulating its currency to gain a
trade advantage in the American market. The day
before, Federal Reserve Chairman Alan Greenspan
had warned China on the same issue while testifying
before the Senate Committee on Banking, Housing,
and Urban Affairs.
The House Appropriations Subcommittee on
Commerce, State and the Judiciary held a hearing in
May on "How Trade with China Affects American
Manufacturing." At that hearing, the National
Association of Manufacturers projected that in five
years, the U.S. trade deficit with China would triple
to more than $330 billion if current trends continued.
Based on the first half of this year, the 2003 deficit
with China will reach $120 billion, the largest and
most lopsided deficit in the U.S. trade accounts.
Since 1997, the U.S. trade position has deteriorated
dramatically. That was the year of the global
financial crisis that started in Asia, then spread to
Russia and Latin America. That 1997 crisis threw
many countries into recessions from which they
have not recovered. The result has been smaller
export markets for American goods and more
aggressive efforts by distressed foreign producers
to dump their goods into the U.S. market.
China, however, has escaped the global downturn.
In June, Chinese exports rose 33 percent from a year
earlier to $34.5 billion, while production increased 17
percent, according to Beijing. The median forecast of
economists surveyed by Bloomberg News was for
growth of 27 percent in exports and a 13 percent rise
in factory output.
China set world events in motion when it devalued
its currency in 1994, giving it a decided advantage
over its trade rivals on the Pacific Rim. Driven to the
wall, a wave of devaluations swept through these
other states, but in a disruptive rather than a planned
fashion. Ernest H. Preeg of the Manufacturers
Alliance and the Hudson Institute has estimated that the Chinese yuan is as much
as 40 percent below market value. But Beijing has intervened on a massive scale to
keep the yuan from being valued by the market.
China is able to use the profits from its successful trade policy to maintain its
advantage. Its trade surplus gives it the dollar reserves it needs for financial
intervention. Between 1997 and March, 2003, its dollar reserves grew from $140
billion to $316 billion. It can invest these funds in U.S. Treasury debt, which is
being issued at a brisk pace due to the expanding federal budget deficit. The
budget deficit is largely the result of the slow American economic recovery, which
in turn is hampered by the trade deficit. Thus the "twin deficits" (trade and
budget) work together for Beijing's benefit.
And when China is involved, the dangers are not just commercial. Beijing's
strategy to undermine American industry while building up its own manufacturing
base also works to shift the balance of power in Asia. So does undermining U.S.
finances with the "twin deficits" and beating down neighboring states in trade
battles.
In the seminal Chinese treatise on modern strategy "Unrestricted War" by
People's Liberation Army Cols. Qiao Liang and Wang Xiangsui published in 1999,
the unfolding financial crisis is compared to military conflict: "Economic prosperity
that once excited the constant admiration of the Western world changed to a
depression, like the leaves of a tree that are blown away in a single night by the
autumn wind. After just one round of fighting, the economies of a number of
countries had fallen back 10 years. What is more, such a defeat on the economic
front precipitates a near collapse of the social and political order. The casualties
resulting from the constant chaos are no less than those resulting from a regional
war."
It is also argued in "Unrestricted War" that to attack another country's
economy, the aggressor "must adjust its own financial strategy, use currency
revaluation or devaluation as primary, and combine means such as getting the
upper hand in public opinion and changing the rules sufficiently to make financial
turbulence and economic crisis appear in the targeted country or area, weakening
its overall power, including its military strength." A weak American economy and
rising budget deficits make it more difficult to provide the funds to modernize or
expand the overstretched U.S. military, or to pay for overseas combat operations,
or to finance nation-building in places like Iraq and Afghanistan.
Indeed, if economic troubles can bring "a near collapse of the social and political
order," would it not be to Beijing's benefit to see the strong and assertive
President George W. Bush defeated for re-election in 2004? Despite winning the
1991 Gulf war, the elder President Bush was defeated for re-election because of a
recession. His defeat brought forth President Bill Clinton, who followed an
appeasement policy toward China. Beijing's strategists may have more in mind
than just the economic gains from trade.
Unfortunately, despite the increased attention being paid in Washington to the
impact of trade on the American economy, there has yet to be the kind of
integration of international economics into U.S. global strategy that is found in
Chinese writings. Until that happens, American officials will find it difficult to
move beyond just voicing complaints to taking effective counteraction.