HOW HE SEES IT It's time to adjust approach to China

WASHINGTON -- There's a Chinese dragon thrashing around in Asia, and the rest of the world had better pay attention. A country of 1.3 billion people, enough to make it a political power, is about to become an even greater economic power as well. For several years, China has been averaging 9 percent economic growth. This started from a very low base, but it doesn't take long for 9 percent compounded to produce spectacular results:
China has become the world's second-largest consumer of oil. Its oil imports increased about 40 percent in 2003, and it is actively competing with the U.S. for foreign oil supplies in the Middle East, Sudan, Canada, and Venezuela. If it has not already, this is likely to become a factor in keeping oil prices high.
Chinese foreign trade has grown so much, so fast, that it has created a world shipping shortage. China is investing $4 billion in shipbuilding facilities and aims to be the world's largest shipbuilder by 2015.
China may well already be the world's largest clothing manufacturer. Factories along a narrow strip of land curving around China's coastline produce prodigious amounts: neckties (300 million a year), socks (9 billion pairs), underwear (969 million pieces), and jeans (225 million), among others.
China is becoming a foreign investor, including investments in high-tech industries -- an auto assembly plant in Iran, a cellular network in the United Arab Emirates, and cement plants in Saudi Arabia.
This growth is altering China's place in the world. It is something to which both China and the rest of the world need to adjust.
For the short term, something needs to be done about international currency exchange rates. A considerable amount of the growth comes from the Chinese policy of tying the yuan to the U.S. dollar. This has the effect of undervaluing the yuan, thereby making Chinese goods cheaper for foreigners and U.S. goods more expensive. Result: In 2004 (January through November) the U.S. spent $1.3 trillion importing Chinese goods while earning only $745 billion exporting U.S. goods to China.
Economic growth
For the long term, China needs the political institutions generally associated with free-market economies. Following the death in 1976 of revolutionary and longtime dictator Mao Zedong, Mao's successors began slowly and cautiously to experiment with lifting some of the political and economic restraints that Mao had imposed. So far, the ruling elite -- that is to say, the Communist Party -- has managed to give the country the benefits of economic growth without coming to grips with its political implications. The central dilemma remains: How can a free market work without, for example, an independent judiciary and independent labor unions? The prospect of such institutions scares the party, with good reason. The Chinese wonder whether modernization means Westernization. The Japanese example says no; but thanks to the American occupation after World War II, Japan has adopted some Western practices.
The rich-poor gap in China is growing. This provides an almost endless supply of cheap labor as peasants move to the cities. China is undercutting the low-wage production of some of its Asian neighbors, notably Bangladesh and Cambodia.
China and the U.S. approach the question of how to adjust to these changes from different world views. They have been hostile and suspicious of each other for most of the time since World War II. These differences are illustrated by the United States' recent imposition of sanctions on eight Chinese companies for exporting missile technology to Iran.
The extent of Chinese economic growth adds new meaning to globalization. It may require the U.S. to change some of its domestic policies in ways that will encounter fierce political resistance. Adjustment will almost certainly require U.S. companies to become more competitive in the ways they do business.
On balance, it seems better to include China in world economic activities than to exclude it or to discriminate against it. The time may soon come to consider making China a member of the elite G-7 group.
It is not inconsistent to think of China as simultaneously an economic competitor and a political ally.
X Pat M. Holt is former chief of staff of the Senate Foreign Relations Committee.