China’s Dilemma

April 19, 2006 • Commentary
This article appeared in the Baltimore Examiner on April 19, 2006.

The central issue for U.S.-China relations is whether China will be a constructive partner or an emerging threat. China’s economic liberalization since 1978 has led to rapid economic growth and has provided millions of individuals with new opportunities to acquire property and wealth. But it has also allowed Beijing to increase military spending and has preserved the Chinese Communist Party’s monopoly on power.

The dilemma facing the party in the 21st century is how to continue to liberalize economic life and sustain development without losing control over political life. If China fails to create the institutions needed to support its emerging market system — especially rule of law and protection of private property rights — development will falter and the party’s survival will be tested. On the other hand, if liberalization continues, the growing middle class will demand political reform.

It is therefore imperative that when President Bush meets with China’s head of state Thursday at the White House, he should first and foremost tell Hu Jintao that our policy of engagement will not be overturned in favor of protectionism. But he should also make it clear that China must adhere to international norms, provide market access for U.S. goods and services, protect intellectual property rights, and allow capital freedom by making the renminbi fully convertible.

Congress should be patient during China’s transition to a freer society. Threatening to impose punitive tariffs on imports from China if Beijing fails to significantly revalue the RMB against the dollar, as proposed by Sens. Chuck Schumer and Lindsey Graham, would be economic suicide. It would impose a large tax on U.S. consumers, harm multinational companies like Wal‐​Mart that employ thousands of American workers, invite retaliation, and diminish the doctrine of free trade that must be at the center of a vibrant global economy.

U.S. protectionism would play into the hands of hard‐​liners in China and do nothing to advance liberalism. It would inflame anti‐​American sentiment and engender crude nationalism, especially among the younger generation who have benefited most from the increase in economic freedom.

Moreover, even if China revalued it would not have an immediate impact on the large U.S. trade deficit with China, $202 billion in 2005, or on the overall U.S. trade deficit, which reached a record $800 billion last year. So long as America remains an attractive place to invest and U.S. consumers have a strong demand for foreign products, we will continue to run trade deficits with China and other countries.

When China is willing to undervalue its currency and hold billions of dollars of U.S. Treasury debt, it means that consumers and Congress can continue their spending spree. Such behavior, however, cannot last forever. At some point, both China and the U.S. will have to face reality and make a choice between freer trade or destructive protectionism.

China, on its part, has opened its collective checkbook during President Hu’s visit and contracted to buy an additional $16.2 billion from the U.S. Beijing has also promised more progress on IPRs, greater market access, and a further opening of its capital account to allow individuals and businesses the opportunity to invest abroad. Combined with its more flexible currency regime, instituted last July, these are positive steps.

Although economic liberalization is not a sufficient condition for China’s “peaceful rise,” it is a necessary condition. What China — and the U.S. — needs is less government and more markets. Bush should keep that in mind tomorrow when he meets with Hu.

About the Author
James A. Dorn

Vice President for Monetary Studies, Senior Fellow, and Editor of Cato Journal