The China Syndrome

As Americans continue to brace themselves through the worst economic recession in recent history, they are consumed with thoughts of fear of the economic unknown.  As the federal government continues to try to “cure” the market of this ill, lawmakers are pointing fingers to where they believe the problem all began.

In recent years China has been the scapegoat for America’s economic woes.  Many blame China for the decline in American exports and the loss of American manufacturing jobs. Retiring Senator Arlen Specter, D-Pa., said, “We have lost 2.3 million manufacturing jobs as a result of the trade imbalance with China between 2001 and 2007.”  But Daniel Ikenson, Associate Director of the Center for Trade Policy Studies at the Cato Institute, in his paper, Manufacturing Discord: Growing Tensions Threaten the U.S.-China Economic Relationship, paints the picture of the economic relationship between China and the United States quite differently.

Many associate the decline in U.S. manufacturing as being a direct result of the rapid growth of the Chinese economy.  Ikenson explains that America actually benefits from the economic competition with China.  He writes, “Though the focus is typically on American workers who are displaced by competition from China, legions of American workers and their factories, offices, and laboratories would be idled without access to complementary Chinese workers in Chinese factories.”

Americans today think that everything they purchase is foreign-made and that nothing is produced in the United States anymore.  He says, “The fact is that American factories make lots of things—in particular, high-value products that are less likely to be found in retail stores—like airplanes, advanced medical devices, sophisticated machinery, chemicals, pharmaceuticals, and biotechnology products.”  He adds, “American factories are the world’s most prolific, accounting for 21.4 percent of global manufacturing value-added in 2008, while China accounted for 13.4 percent.”

For the past few years there has been talk that the Chinese are manipulating their currency to serve their own interests.  Many economists believe that the renminbi (RMB) is indeed undervalued but they do not know to what extent, according to Ikenson.

Much to everyone’s dismay, Ikenson writes, “Recent evidence suggests that RMB appreciation will not reduce the U.S. trade deficit.”  To illustrate this Ikenson cites the Federal Reserve Foreign Exchange Rates, “Between July 2005 and July 2008, the RMB appreciated by 21 percent against the dollar—from a value of $.1208 to $.1464.  During that same period (between full year 2005 and full year 2008), the U.S. trade deficit with China increased from $202 to $268 billion.”

It appears that China is adverse to RMB appreciation.  Ikenson says, “Another reason China may be adverse to rapid RMB appreciation is that it owns around $800 billion of U.S. debt.  A 25 percent appreciation in the RMB would reduce the value of those holdings to approximately $640 billion.  That’s a high price for China to pay, especially in light of the fact that U.S. inflation is expected to rise in the coming years, which will further deflate the value of those holdings.”  In the end, Ikenson admits, “Compelling China to revalue under threat of sanction could produce adverse consequences—including reductions in Americans’ real incomes and damaged relations with China—without achieving the underlying policy objective.”

There are still some trade issues that violate China’s commitment to the WTO.  Ikenson writes, “One of the costs of bringing cases against Chinese market barriers of policies that favor domestic firms would be the exposure of U.S. hypocrisy.  The U.S. government subsidizes chosen companies and industries, too.  The past 18 months is littered with examples, such as General Motors and Chrysler.”

“But recent Chinese actions and policies have given the U.S. press a lot of ammunition to make the case that China is cause for concern,” he says.  “This seems a pretty bad time to be raising the stakes with the U.S. economy in the doldrums, U.S. confidence on the ropes, and politicians looking for scapegoats.”

“A change in policy toward a more strident tack is likely to provoke reactions that will be costly without achieving resolutions to legitimate issues,” he says.  “Policymakers should take a collective breath, distill the substance from the hype, and recognize that issues related to currency, antidumping, intellectual property, and market access can all be resolved or alleviated with the current framework.”

Emily Jaroma is an intern at the American Journalism Center, a training program run by Accuracy in Media and Accuracy in Academia.