"Our Country!
In her intercourse with foreign nations may she always be in the right;
but right or wrong, our country!"

    --Commodore Stephen Decatur

Monday, March 15, 2010

Big Trouble in Big China

Yesterday's Telegraph ran an insightful and provocative op-ed about the escalating rhetoric on opposite sides of the Pacific. Mr. Evans-Pritchard observes that the Chinese are so blinded by their ravenous addiction to an export economy, that they cannot see the damage they are inflicting upon themselves.

Beijing is in denial about its own part in the global imbalances behind the credit crisis, specifically by running structural trade surpluses, and driving down long rates through dollar and euro bond purchases. No doubt the West has made a hash of things, but the Chinese view of events is twisted to the point of delusional.

Furthermore, Mr. Evans-Pritchard disagrees with the conventional wisdom that starting a trade and currency war in a time of economic crisis would have disastrous effects for America, as it did in the 1930’s. He argues that if China decides to flood the market with U.S. bonds and shut out our businesses, they will hurt themselves more than they hurt us. Whereas in the days of Smoot-Hawley, America was primarily an export economy, the tables are now turned, making our trade deficit a powerful economic weapon.

By weakening our currency, the Chinese would strengthen their own. Currencies besides the Renminbi are pegged to the dollar, so America would still have other attractive trading partners. Also, with double-digit unemployment, Americans who lost their manufacturing jobs to outsourcing would scramble to re-start the production lines. China would lose its advantage everywhere.

Moreover, as recent farmer and labor unrest in rural China has shown, the Communists rely on growing prosperity to maintain their power. However, that prosperity is based entirely on exports, not internal demand. Without exports to their largest trading partner, China would not have enough wealth to sustain itself.

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