By Peter Navarro
How do you say “utter failure” in Chinese?
Stripped of rhetoric, the recent trade summit between top U.S. and China negotiators was a complete and utter failure.
This failure of the Bush administration’s best and brightest blows open the door to a protectionist trade war triggered by an emboldened Congress in 2007.
The summit immediately got off on the wrong foot when China’s tough-talking “iron lady” Wu Yi administered a stern lecture about America’s ignorance of the need for a China mired in poverty to gun its export machine.
But even as the iron lady was letting it fly, Treasury Secretary Henry Paulson kept a tight muzzle on the usually highly outspoken U.S. Trade Representative Susan Schwab and Commerce Secretary Carlos Gutierrez.
The only U.S. candor came from a surprising quarter,Federal Reserve Chairman Ben Bernanke. In his written speech, Bernanke bluntly criticized “the effective subsidy that an undervalued currency provides for Chinese firms that focus on exporting rather than producing for the domestic market.”
Even this hawkish statement couldn’t survive Paulson’s political filtering as Bernanke excised it when delivering the speech.
What we are left with is a large U.S.-China trade gap and an infinitely deeper philosophical chasm. On the trade gap front, the U.S. trade deficit and Chinese trade surplus are at record highs, while China’s foreign currency reserves now top $1 trillion. It soon will overtake Japan as the single largest foreign holder of U.S. debt.
On the philosophical chasm front, China is utterly opposed to the linchpin of U.S. demands, namely, swift currency reform.
With the yuan undervalued relative to the dollar by anywhere from 15% to 40%, this subsidy is indeed a key driver of China’s export-driven, mercantilist economy,Bernanke’s rhetorical retreat notwithstanding.
A second important U.S. demand is that China stop flagrantly violating World Trade Organization rules. Violations range from outlawed subsidies for energy, water, land and capital to widespread dumping.
That China refuses to accept its culpability is embodied in arguably the most disturbing comment of the entire Beijing summit.
Insisted ministry spokesman Qin Gang: “We have implemented our obligations and commitments earnestly and have abided by the rules of the World Trade Organization.”
Still, a third key U.S. demand involves the protection of intellectual property,a particular peeve with Gutierrez.
While many Americans think Chinese piracy is limited to Hollywood DVDs and faux Louis Vuitton, the reality is this: Just about everything short of jetliners now made in the U.S. is being faked in Chinese factories,from auto parts, batteries and condoms to chips and prescription drugs.
In truth, the Chinese economy is addicted to piracy, which curbs inflation and fuels anywhere from 20% to 30% of gross domestic product activity.
That’s why despite highly publicized Chinese crackdowns, Chinese piracy remains state-sanctioned and will continue to be so for years.
On the U.S. side of the philosophical chasm, the forces of political intransigence are equally formidable.
Consider the U.S. promise to raise its savings rate to reduce the consumption of Chinese exports. It’s a false promise because raising the U.S. savings rate would require either a stiff recessionary hike in interest rates or a big increase in tax subsidies to encourage more savings,laudable perhaps in theory but impractical in the face of large U.S. budget deficits.
China’s other two major demands are even more untenable. China wants to trim the trade imbalance with large purchases of sensitive military technologies and weaponry. This brings to mind Vladimir Lenin’s quip about capitalists being willing to sell the rope used to hang them. But even U.S. policy-makers are not that desperate, greedy or stupid.
China similarly wants a political green light to go on a shopping spree for U.S. companies. As the political firestorm over China’s aborted attempt to buy Unocal illustrated, any such spree will only further inflame political tensions,though selling Wal-Mart to China might provide some high irony and lowbrow comic relief.
With the failure of the Paulson mission, a new Democratic Congress will be champing at the bit in 2007 to impose tough protectionist tariffs. China, in turn, will be equally ready to retaliate against any U.S. protectionism by dumping billions of greenbacks on world markets and thereby destabilizing the U.S. economy.
It hardly takes a political grand chess master to see such moves,and the danger,ahead. That makes this complete and utter failure by the Bush team all the more surprising.
Navarro is a business professor at the University of California, Irvine, and author of “The Coming China Wars.”
