June 20, 2018
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Chinese Capitalism

The chief concern most Americans have about China is that it is now, to use the shorthand of TV pundits, “America’s banker.” China buys U.S. Treasury notes when the federal government deficit spends to fund wars, tax breaks, bank bailouts and stimulus programs. China holds $889 billion in those notes.

When President Richard Nixon took the then-bold step of visiting China, the concerns were that as a communist country, China was on the opposite side of the Cold War. Yet China does not dabble in international politics to the degree the Soviet Union did, nor does it have the same sphere of influence or network of allies.

In 1939, Winston Churchill described the Soviet Union as “a riddle, wrapped in a mystery, inside an enigma.” That image is apt for Americans trying to understand China today.

The most pressing problem China poses for the U.S. is its policy of artificially depressing its currency, the renminbi. Nobel Prize-winning economist and New York Times columnist Paul Krugman asserts that this policy, which makes Chinese products cheaper to buy for those using dollars, euros, yen and other currencies, has become “a significant drag on global economic recovery.” China’s export market has soared, but at the expense of other nations trying to sell their goods globally.

He recommends the U.S. consider what it did back in Nixon’s time. In 1971, Mr. Krugman writes, the U.S. responded to a similar situation with other big exporters to the U.S. by attaching a 10 percent surcharge on imports. It worked — Germany, Japan and other countries raised the value of their currencies. China is unlikely to change its policies, Mr. Krugman writes, “unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.”

There are better ways, as evidenced in Time magazine’s “Ten Ideas for the Next Ten Years” list. Writing for Time, Christina Larson sees the relationship between the U.S. and China as something between the U.S.-Great Britain partnership and the U.S.-Soviet Union standoff. “Rather than being cold war adversaries,” she predicts, “the U.S. and China will form an indispensable axis for global governance. There is no precedent for this unique evolving relationship, one in which the two sides will both compete and cooperate, perhaps simultaneously.”

The fears about China as this nation’s banker is that it may “call the loan,” as bankers (and loan sharks) sometimes do. Mr. Krugman writes that such a scenario is unlikely, because it would hurt China. In fact, he writes that for now, “America has China over a barrel, not the other way around.”

This is not to suggest the U.S. ignore China. That nation is the world’s largest manufacturer (and top polluter). Another Nobel laureate, economist Robert Fogel, predicts China’s economy will represent 40 percent of the world’s GDP by 2040. Ms. Larson concludes that the U.S. must urge China to contribute to making the global marketplace safe, clean and predictable — because it surely benefits from it being so.

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