Of course, if secure private property rights and low marginal tax rates attract foreign investors to the United States, and U.S. productivity is strong, then the United States can run healthy current account deficits. But if foreign investors are holding large amounts of U.S. government debt, and that debt is financing current consumption rather than productive investment, U.S. current account deficits will not be so healthy. Yes, voluntary exchanges in both the market for goods and in the market for government securities will yield net benefits for current consumers and investors, but only at the expense of future taxpayers who will receive no net benefits.
Unlike special interest groups that are harmed by trade, no one represents future generations who will have a lower standard of living because of present government profligacy. And when problems arise, it is easier for Congress to shift blame to the Chinese who do not vote in U.S. elections, rather than accept full responsibility for government failure. Doing so, however, fans the flames of economic nationalism. The Chinese see U.S. efforts to politicize trade as a threat to future economic growth and to China’s aspiration to be a normal rising power, while many in Congress see China’s rise as a threat to U.S. economic and national security.
Although China has allowed the yuan to appreciate against the dollar by 20 percent since July 2005, Congress has done little to cut the growth of the federal government and increase the savings rate. Paulson correctly notes, “The yuan exchange rate has become a touchstone for broader anxieties about competition from China. As globalization advances and economies become more tightly integrated, worries about the effects of foreign competition have fueled economic nationalism and protectionist sentiments.” The truth is that neither China nor the United States “can protect its way to prosperity.”
The policy of engagement has worked well to bring about mutually beneficial gains from trade with China. Upon joining the WTO in December 2001, China made major concessions to demands for safeguarding special interests in the United States and Europe. Even before joining the WTO, China had made significant progress in reducing tariff and non‐tariff barriers. That progress should not be minimized. The United States should practice what it preaches by adhering to market‐liberal principles. Keeping our markets open sends an important signal to the rest of the world, and getting our fiscal house in order‐by trimming the size of government and by real tax reform‐would show we mean business.