Monday, March 21, 2005


Stateswoman Vanilla Rice breaks it down for the Chinese.

A few weeks ago when Condoleezza Rice was nominated to be Secretary of State, I quoted Michael O'Hanlon's predictions of her efficacy:

"I think if she...sort of...has a backbone she could be an effective Secretary of State..."

Well, Condi is in China this week, and it appears she has misplaced her backbone in standing up for Americans on trade issues.

Condi told the FT:

“It is really critical that people know China is acting within the recognised rules of the international economy and there is an understanding of the responsibility that comes with rapid economic growth.”

Apparently she doesn't understand. China is not acting within the recognized rules of the international economy. More than just skirting common courtesy, China is violating the terms of a number of international economic agreements that it is bound to uphold.

First is the whole exchange rate thing. According to both the IMF Articles of Agreement and the WTO prevent, this is a big no no. Economists from a broad political spectrum estimate that China's currency manipulation is undervaluing the Yuan by some 25-40 percent against the US dollar. This makes US exports to China more costly and US imports from China much cheaper to buy. It also makes for a big bilateral trade deficit financed largely through purchases of US government debt by the Chinese central bank. Essentially, the Chinese are loaning us money to keep buying their exports, and making a little bit of interest on the side.

Then there is also the whole labor rights dealie. As Rich Trumka puts it, "China has emerged as a chief violator of workers’ rights, and its workforce is so large and its labor repression so comprehensive, that it is dragging down standards for the entire world." Contrary to popular belief, the WTO agreement does provide prohibitions against some forms of labor rights abuses. Rice should know a good deal about this topic. Every year her own State Department documents such abuses in rather precise detail. Her Deputy, former USTR Robert Zoellick, also knows quite a bit about them. As USTR, he rejected a few trade remedy petitions highlighting China's labor and human rights abuses. Remember when Zoellick told the Jordanian Ambassador, "My Government would not expect or intend to apply the Agreement's dispute settlement enforcement procedures to secure its rights under the Agreement in a manner that results in blocking trade." Here we see precedent of willfull indifference of (now) State Department officials to violations of international economic agreements that hurt Americans.

To be fair, Condi certainly has her hands full in China. The nascent dragon sits amidst two tinderboxes.
Moreover, recent rumblings that Asian central banks might diversify out of the US dollar finally alerted the administration to the rather precarious US net international investment deficit position, for which China is our Atlas.

With China, the Bush administration is more focused on the former with a pensive eye to the latter. It's really a question of priorities and values. While the public rhetoric chimes all is well with the China economic relationship, the Bush administration simply does not value the dammage being done to American workers and the long-run competitiveness of the US economy as technology and productivity capacity set sail for China.


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