China gambles, thinking it holds all the cards

China gambles, thinking it holds all the cards

Anyone who hoped that President Barack Obama’s visit to China would result in concessions from Chinese leaders on trade and currency issues that continue to work to China’s advantage was disappointed — but shouldn’t have been surprised.

China’s economy continues to grow, spurred by the enormous imbalance in trade that it enjoys, especially with the United States. And as long as China can continue to drive various manufacturing sectors out of business in other countries, its leaders are going to continue to do what’s working for them.

At the beginning of Obama’s trip to China, Xue Chen, a researcher on strategic affairs at the Shanghai Institute for International Studies, said: “The U.S. has a lot to ask from China; on the other hand, the U.S. has little to offer China.” And that arrogance from an academic was reflected by China’s rulers in dealing with Obama.

America has “little to offer” because China has come to accept as its due a balance of trade that is so lopsided that to call the relationship a trade partnership is a bad joke.

Dangerous imbalance

It’s an 80-20 relationship, and China has been on the high end of that equation since 1995. The last time trade was even between the two countries was 1985. Within a decade it had reached the 80-20 mark. The imbalance reached its peak in 2000 when U.S. consumers sent $6 to China for every $1 in U.S. goods bought by the Chinese.

So far this year, the ratio is about 4.5 to 1, slightly better than 4.9 to 1 in 2008.

Such an imbalance is unsustainable. In the first nine months of this year, the imbalance has been $165 billion in China’s favor. Last year it was $268 billion in China’s favor.

Since 2005, Americans bought more than $1.1 trillion from China; the Chinese bought about $272 billion worth of goods from the United States. It is no coincidence that the difference between those figures approaches $800 billion, which is the amount of U.S. Treasury notes now held by China.

And it is that debt which China views as the hammer it holds over the United States. And so when the United States (or, for that matter, the chief of the International Monetary Fund) suggests that Beijing should let its currency, the yuan, rise to a level that more accurately reflects its value, China responds with a simple, no.

Beijing broke the yuan’s direct link with the dollar in mid-2005 and it rose by more than 20 percent against the U.S. currency over three years. But when exports began to slip, China put on the brakes.

False sense of security

China is confident that no U.S. administration is going to take aggressive action and risk a trade war. And it is probably right. But it should not be so confident about the U.S. Congress, especially as unemployment here continues to climb. While no nation wins a trade war, members of Congress are sometimes just as concerned about winning political battles of their own.

One of the co-sponsors of legislation that would penalize China for currency manipulation is Tim Ryan, D-17th. Ryan released a statement saying: “Economists have made clear that America’s economic situation will continue to grow worse without a revaluation of China’s currency. Yet our last administration and the current administration got nowhere in trying to shame China into doing the right thing. For the sake of American jobs, it’s time for Congress to take action and give President Obama the tools he needs to stand up to China’s unfair trade practices.”

China is an emerging economic superpower that appears to be willing to protect its growth rate at almost any cost. The United States is battling a weak dollar, no growth, high unemployment, trade and budget deficits and the draining effects of pursuing two wars. China may believe these U.S. burdens put China in the cat seat. But as troubled as the U.S. economy may be, it remains true that American consumers are keeping a lot more Chinese at work than vice versa.

Before China allows its hubris to get the better of it, China’s leaders should remind themselves that no one wins a trade war.