Commentary

A China Policy in America’s Interest

By Daniel Griswold
This article was originally printed in The Hill on Sept. 13, 2005.
Along with cleaning up after Hurricane Katrina and filling two Supreme Court vacancies, the Bush administration must find a way to restrain the impulse of many in Congress to all but declare a trade war against China.

China’s currency reforms announced in July temporarily turned down the heat, but the pot of anti-China sentiment in Congress still simmers.

The next flashpoint will be an October report from the Treasury Department on whether China has been a “currency manipulator.” In the report, the administration should continue to encourage the Chinese to move toward a free-floating currency, but without precipitating a showdown that could lead to self-damaging trade restrictions.

If the purpose of China’s fixed currency has been to discourage imports into China, as critics in Congress allege, it has been a spectacular failure. China’s rapid growth has fed a voracious appetite for goods—imports to China rose by 40 percent in 2003 and another 36 percent in 2004. China is now the world’s third leading importer, behind only the United States and Germany.

China’s growing demand for imports includes a broad range of U.S. products, from wheat, soybeans, and raw cotton, to plastics, semiconductors, and industrial machinery. Since 2000, U.S. exports of goods to China have more than doubled to $35 billion while U.S. exports to the rest of the world have grown a paltry 2 percent. Last year, China was the fifth largest market in the world for U.S. exports.

China’s fixed currency cannot be blamed for recent troubles in U.S. manufacturing. U.S. manufacturing output is actually 45 percent higher than it was when China first fixed its currency to the dollar, in 1994. Manufacturing employment has fallen in the United States in recent years not because we are manufacturing less but because our workers are so much more productive. The textile and apparel industries, which compete most directly with Chinese imports, have been shedding jobs for decades, long before China emerged as a global competitor.

The goods that tens of millions of Americans buy from China—clothing, shoes, toys, household electronics and other consumer good—make our lives better every day. Last year, total imports from China reached nearly $200 billion, but at the same time Americans were producing $11.7 trillion in gross domestic product. There is nothing alarming in the fact that we spent less than 2 percent of our GDP last year on products made by one-fifth of mankind that lives in China.

The United States runs a huge bilateral trade deficit with China, in the neighborhood of $160 billion last year. However, the Chinese did not just stuff those dollars under mattresses. That money comes back to the United States, mostly to buy U.S. Treasury bonds. In turn, this puts downward pressure on U.S. interest rates, delivering more affordable capital for U.S. businesses and lower mortgage payments for U.S. households.

Within China, economic growth has brought greater independence and freedom for individuals. The number of Chinese with cell phones, Internet access and the freedom to travel abroad has been growing exponentially. Restrictions on religious worship and family life are gradually loosening. As we have seen in Taiwan, South Korea, Chile and elsewhere, there is hope that economic reforms and a rising middle class in China are steadily undermining the authority of the communist regime while tilling the soil for a more benign and representative government in the future. The Bush administration should keep a diplomatic spotlight on human-rights abuses in China while letting the marketplace work its subtle subversion.

China’s government is certainly no ally in the mold of Japan or South Korea. The administration should take steps necessary to protect our national security from any potential military threat from China. Export controls already exist to deny China certain goods and technologies with direct military applications. But neither should we jeopardize our own economic interests nor needlessly alienate a regional power that can help us contain North Korea by picking a trade fight with China.

The challenge for the Bush administration in the months ahead will be to keep the pressure on the Chinese government to continue its economic and trade reforms while fending off—with a veto if necessary—any legislation in Congress that would disrupt normal and growing trade and investment ties between our two countries.

China’s emergence from centuries of isolation and stagnation is one of the great stories of our time. The world’s most populous nation is finally rejoining the global economy. Hundreds of millions of its citizens are beginning to taste the rewards of middle-class life—a home or business of their own, a telephone, appliances, a car, foreign travel, college for their kid—that most Americans take for granted. It is profoundly in our economic and security interests to nurture that progress.

Daniel Griswold is director of the Cato Institute’s Center for Trade Policy Studies.