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					                                                 China trade a boon to US
                                                 Geoffrey Garrett
SUMMARY                                          South China Morning Post
Instead of pandering to the insecurities         March 19, 2008
of the middle class, U.S. leaders need to
articulate a new vision for economic             In the heat of the Democratic race for the presidential nomination last
relations with China. Three key points           month, Senator Hillary Rodham Clinton summarized well the prevailing US
should inform a “straight talk”                  sentiment about China: “China’s steel comes here and our jobs go there.
revolution in Washington about China.
                                                 We play by the rules and they manipulate their currency.”

ABOUT THE AUTHOR                                 But in reality, China is actually doing what America has long demanded on
                                                 trade and exchange rates. In addition to reducing barriers to imports and
                          Dr. Geoffrey
                          Garrett                export subsidies, Beijing has allowed the yuan to appreciate significantly
                          is president of the    against the dollar – by more than 14 per cent since the middle of 2005.
                          Pacific Council on
                          International Policy   So why isn’t the Bush administration silencing the Democrats’ China bashing
                          and professor of       by trumpeting this apparent exchange rate victory? It’s because the bilateral
                          international          trade deficit with China, which a stronger yuan was supposed to reduce,
                          relations, business    continues to hit all-time highs – US$256 billion last year, a 10 per cent
                          administration,        increase over 2006.
& law at the University of Southern
California. An expert on the causes and          But playing to American insecurities about China is not the way to stabilize
consequences of globalization, he was            what will be the US’ most important bilateral relationship over the next
previously founding dean of the                  several decades. What the US needs is a new vision for its relations with
International Institute and vice provost         Beijing, one based on further economic integration, not protectionism. This is
of international studies at UCLA and             the best way to sustain America’s long 20th century economic boom well into
director of the Program in Ethics, Politics      this century.
and Economics at Yale University.
                                                 Here are three trade secrets that should inform a “straight talk” revolution in
Dr. Garrett is author of Partisan Politics
                                                 Washington where China is concerned. First, the trade deficit with China will
in the Global Economy and coeditor of
The Global Diffusion of Markets and              not go away soon. But this has more to do with macroeconomics than trade
Democracy. He is currently working               barriers in China.
on two books: What China Means for
America explores the leading edge of             Chinese domestic investment has boomed over the past decade, while the US
globalization for contemporary America,          economy has been driven by consumer spending. China has bought hundreds
the economic rise of China, through the          of billions of dollars to keep its currency down. But this has helped keep US
lens of major US corporations;                   interest rates low, allowing Americans to buy homes and to borrow against
Globalization’s Missing Middle                   the real estate appreciation they expected.
demonstrates that middle class
countries, like the American middle
                                                 All these trends have now been reversed. Beijing has allowed the yuan
class, have been globalization’s principal
losers because they cannot compete               to appreciate against the dollar. It has also put the brakes on domestic
on either low cost or high skill.                investment for fear that its economy is overheating. In the US, the
                                                 subprime melt down has brought the economy to a near standstill in

3520 Trousdale Parkway, SOS B15         Los Angeles, CA 90089-0035   T: 213.740.4296   F: 213.740.9993
Page 2

                                           growth terms. The combined result of these abrupt macroeconomic reversals
   About the Pacific Council               is that US exports to China have grown twice as quickly as Chinese exports
                                           to the US in the past two years.

   The Pacific Council on                  So why does the US-China trade deficit continue to climb? The US exports to
   International Policy is a               China less than one-fifth as much as it imports from China. The much faster
                                           growth on the much smaller exports base is still overwhelmed by the slower
   non-partisan organization               growth in the much larger import volume. Even if US exports continue to
   headquartered in Los Angeles            grow twice as quickly as imports from China, the bilateral deficit will increase
                                           for years to come.
   with members and activities
   throughout the West Coast of            But the rapid growth in US exports to China should be cause for celebration
                                           in the US. And rising Chinese imports provide affordable goods to Americans.
   the United States and                   Focusing on the trade deficit conceals this fact.
   internationally. The Council is
                                           A second secret is that the bulk of Chinese exports to the US are not really
   governed by a Board of                  made “by China.” They are not even really “made in China.” The Chinese
                                           economy today is in large measure an assembly platform for foreign firms to
   Directors co-chaired by John
                                           turn components designed and made elsewhere into final products, and then
   E. Bryson, Chairman and CEO             to export them to the rest of the world. More than 60 per cent of Chinese
                                           exports are in fact the sales outside China of multinationals operating in
   of Edison International, and
   Warren Christopher,
                                           Consider the iconic Apple iPod. Every iPod shipped from China and sold in
   former U.S. Secretary of
                                           the US adds to the country’s trade deficit with China. But what Apple says on
   State. Founded in 1995 in               the back of every iPod is true: “designed by Apple in California, assembled in
                                           China” from chips, hard drives and screens made in the US, Korea and Japan.
   partnership with the
                                           Chinese assembly adds only a tiny amount to the value of each iPod.
   Council on Foreign Relations,
                                           US manufacturing jobs are no doubt lost as a result. But these are in assembly
   the Pacific Council is a 501c(3)        – the lowest tech part of the production process. Jobs are also created, and
   non-profit organization whose           they are in the highest tech and most innovative parts of the American
                                           economy – design, marketing, finance and logistics. This is not only a positive
   work is made possible by                trade-off for the US economy, it is also positive for the US labour force.
   financial contributions and
                                           A final secret is that the US has benefited from the vast quantities of dollars
   in-kind support from                    and Treasury bills (estimated at three-quarters of a trillion dollars) China has
   individuals, corporations,              purchased in recent years to manage the dollar-yuan exchange rate. Ample
                                           China-funded credit kept US interest rates low after September 11 and the
   foundations and other                   dot-com bust, fuelling both consumer spending and the run-up in housing
   organizations.                          prices.

                                           It is time for US leaders actually to lead on China, rather than pander to
                                           understandable insecurities in middle America. Turning trade secrets into
                                           widely understood factsof life is a very good place to start.

                                            The Pacific Council on International Policy takes no institutional positions on specific
                                            policy issues. All statements of fact and expressions of opinion contained in its
                                            publications are the sole responsibility of the author or authors.

3520 Trousdale Parkway, SOS B15   Los Angeles, CA 90089-0035      T: 213.740.4296      F: 213.740.9993