Tuesday, November 6, 2012

Ms Menez's Question: What tools does the US have vis-a-vis China?

Ms Lisa Menez asks:
I would like to know what is the real room of maneuver for the new President against Chinese policies . . . [both candidates argue China uses unfair competitive practices] . . .but what kind of measures can be taken against the country which provides you capital and which is one your best business partner ?
 A fantastic question, and a tough one to answer in this the next few minutes . . . but I will try.  

Ultimately, we're in a bit of a pickle.  China owns a substantial amount of both American debt and American currency as part of its national reserves.  This means they have a bit of an ax over our necks - if they were to demand monies owed and/or try to rapidly transfer all of their currency to other forms of reserve they could cause an economic disaster in the United States.   This is a powerful disincentive for the United States to engage in a trade war with the PRC.  China's position is further improved by the fact that our incomes, as Americans, are functionally subsidized by the fact that China produces so many consumables at a very low cost to the United States.  This means our wages purchase more.  We start a trade war and the real value of American wages drops radically.  

On the other hand, we have some cards in our hand too.  Specifically, the United States is a driving force behind Chinese development - not only because of our vast consumption of Chinese goods and our substantial investment in the infrastructure of that state, but also because our sponsorship of Taiwan, Hong Kong, Japan, and South Korea has helped those states to remain both able and disposed to supporting Chinese development.  Break with the United States and not only will American capital fly, but most capital from East Asia as well.  Furthermore, China (kinda') trusts the United States.  The US is not a nation that is particularly unpredictable in its international relations and we have never fought a war with the PRC.  Sure, we have our tiffs, but they are what they are.  Thus, the American presence in East Asia is seen as handy in so far as it prevents an arms race in the region.  Think about it.  China destroys the US economy. The US decides to withdraw most of its overseas troops back to its borders.  The South Koreans, Japanese, Taiwanese, Filipinos, Thais, Indonesians, and Pakistanis all respond by radically increasing their available forces.  The counter-response is increases in military spending by Russia, India, China, the Central Asian states, Bangladesh, the remaining Southeast Asian states, and of course North Korea.  This results in a reflexive cycle of arms build-ups that destroys the regional economy of not just Asia, but likely Eurasia and the Middle East as a whole. This is particularly problematic for China - consider its location - right now in an arms stable Asia China not only can focus its military spending on improvement of quality, rather than maintenance of quantity, it also can spend a comparatively low proportion of its income on its military.  Change that and you get the hard truth of political-economic development - every yuan spent on military affairs is one not spent on infrastructure development, education, or research.  Chinese growth would radically decline and, probably, the state would become substantially destabilized.  

So, what tools do we have?  Not many, but neither does China.  Our best bet then is to do what we've been doing - support the expansion of rule-of-law in China, support the establishment of a true regulatory state in China, encourage educational exchanges, and of course push for unified, interstate fronts that demand Chinese economic, legal, and environmental reform using intergovernmental bodies like the WTO and IMF.  

Finally, we do have to accept something - we have a China that is developing along roughly capitalist lines - we got what we wanted - but now we are seeing the cost: an environmentally dirty, economically chaotic and wild-west-esque political-economy.  China is a huge, developing political-economy - to expect it to be a huge, developed political-economy is to demand the impossible.