Economic Conflicts with China and Class War in the United States Print
Dean Baker
Truthout, December 12, 2011

See article on original website

The Commerce Department’s release of trade figures last week showed another large deficit with China for October, albeit slightly lower than the record hit the previous month. This figure will renew the calls for stronger action against China.

Unfortunately the debate over China is often buried in confusion, leading to a situation that is not conducive to effective action. A major reason for this confusion is that there is not a common U.S. interest against China. The interests of the 99 percent differ greatly from the interests of the 1 percent. Until this fact is recognized more generally, there is no possibility that our economic relations with China will change in a way that benefits the vast majority of working people in the United States.

The central issue with China is the fact that the dollar is over-valued against the Chinese currency. This over-valuation is the result of the explicit Chinese policy of pegging its currency against the dollar.

The peg is often referred to as “manipulation,” but it doesn’t really fit the bill for two reasons. First, it is an official policy. China targets the value of its currency quite openly; it is not doing it in the middle of the night when no one is looking.

The second reason is that China’s mechanism for targeting the value of its currency is something that on alternate days our Treasury actually requests. They buy up U.S. government debt.

If this seems absurd, it should because it is. The way in which China keeps its currency down against the dollar (or keeps the dollar up against its currency) is by buying huge amounts of U.S. government bonds.

The media often tells us that we need China to buy our debt. This is not true. There are plenty of other potential investors, including the Federal Reserve Board. However we cannot both want China to buy U.S. government debt and then complain about China’s currency manipulation. This is how they “manipulate” their currency.

But the currency issue is only one of many complaints that routinely appear in the list of grievances against China. The longer list includes complaints that China doesn’t respect the patents and copyrights of companies like Pfizer and Disney, they don’t grant full access to financial giants like Merrill Lynch and Goldman Sachs, and they put up barriers to retail chains like Wal-Mart who want to open up stores across China. These sorts of items are often lumped together with the undervaluation of the Chinese yuan to make a sort of economic indictment against the Chinese government.

One can argue the merits of each of these issues, but that doesn’t have anything to do with the real world. There is no court where we are going to prosecute China for its economic wrongdoing. China is a huge powerful country. Its GDP is nearly 80 percent of U.S. GDP. By comparison, at its peak the GDP of the Soviet Union may have been half as large as the GDP of the United States.

We are not ever going to be in a situation to dictate to China what it can and cannot do. We are going to have to negotiate with them as the equal that they are. This means that in order to get some concessions from China’s government on issues that we care about we will have to give up on other issues.

From this standpoint, the interests of those yelling about China’s “pirating” of Pfizer and Disney’s intellectual property are 180 degrees at odds with those concerned about the undervaluation of the yuan. If China gives up some ground in agreeing to stronger enforcement of U.S. patents and copyrights, then it is going to give up less ground in agreeing to raise the value of its currency. Similarly, if China agrees to give Merrill Lynch and Goldman Sachs more access to its financial sector, it will be at the cost of progress on revaluing its currency.

The point is that in pushing various demands in its negotiations with China, the Obama administration will be favoring certain interests to the detriment of others. The bulk of the working population has a clear interest in having a lower valued dollar.

If the dollar falls by 20 percent relative to the yuan, this would have roughly the same impact as imposing a 20 percent tariff on importing Chinese goods and giving out a 20 percent subsidy on exports. Since the dollar is likely to fall against other currencies as well, this could go far toward bringing down the trade deficit, creating millions of relatively high-paying manufacturing jobs.

By contrast, Pfizer and Disney will see higher profits if China increases enforcement of their patents and copyrights, but this will provide little benefit to workers in the United States. Similarly, Goldman Sach’s increased access to China’s financial markets is not going to create jobs for workers in the United States.

In short, there is a very clear class divide in U.S. negotiations with China. The 1 percent have their laundry list of special concerns that will make them even richer. The 99 percent care about a lower-valued currency to create millions of manufacturing jobs. We will see which side the Obama administration is on.