US-China: Free market or statism

Equally astonishing, supposedly orthodox free market economists have joined the chorus of protectionist politicos (like Robert Zoellick, Deputy Secretary of State) in questioning China?s free trade policy and demanding that China abide by US directives instead of the free play of market forces (Financial Times Oct.7, 2005 p5). Worse still, some experts like Fred Bergsten, US director of the Institute for International Economics, are demanding more concessions from China under threat of a major economic confrontation. (Financial Times August 25, 2005, p 11).

Political Myths and Economic Realities

The US yearly trade deficit with China ($186 Billion USD by July 2005) is largely a result of US inefficiencies, not Chinese trade restraints. China has the lowest import barriers of any large developing country. In areas where the US has invested, innovated and is efficient, in agriculture, aeronautics and high tech, the US has a trade surplus. The US trade deficit is largely in the appliances, electronics, clothing, toys, textile and shoe industries where many US corporations have invested in Chinese subsidiaries to export back to the US. Over 50% of Chinese exports to the US are through US multinational corporations. The US trade deficit is in large part between the US state and its own MNC?s located in China.

China?s exports are largely based on imports of parts from overseas, which are assembled and then sold abroad. According to the Financial Times, ??China is merely the last stop for a lot of the goods Asia exports to the US, importing?components from elsewhere in the region ? including Japan. The local value added in its exports is as low as 15% (FT Oct 11, 2005 p5).? In other words China is a huge importer from other countries with which it has a trade deficit, largely with Asian manufacturers, oil exporting countries and Third World exporters of raw materials. China?s overall trade surplus is largely based on its commerce with the US. US tariff and quotas against Chinese goods will prejudice world trade.

Contrary to US political and academic ideologues, China is one of the most liberal economies in Asia. By 2003 the ratio of China?s stock of inward investment (inflows of foreign investment) to GDP was 35% - against 8% in South Korea, 5% in India and just 2% in Japan (Financial Times Sept. 15, 2005 p 11). Moreover, China is the world?s third largest trading nation. In 2004, China?s ratio of trade to GDP reached 70%, far greater than the US and Japan which have ratios to trade to GDP below 25%.

Orthodox economists and US Congressional members argue that China?s currency (renmimbi) is undervalued and that a larger revaluation would reduce the US trade deficit. Over the past several years the US dollar has been devalued in relation to several currencies ? including the Euro, the pound and the Swiss franc ? and yet the US trade deficit has increased. The focus on Chinese currency reform is totally beside the point. The key problem is that US capitalists are not investing in domestic productive sectors, they are not upgrading their productive sites, nor are they introducing technological innovations to lower costs. Instead they are investing overseas, in non-productive sectors at home, speculating in real estate, today (and IT, yesterday), increasing profits via cuts in labor costs ? hardly a sound method to compete with low-cost labor producers.

The failure of the US MNCs to support a universal national health plan and their reliance on private medicine increases the cost of production by 10% contributing to the loss of competitiveness of US enterprises and an increase in the trade deficit.

Chinese economic policy with regard to foreign investment is far more liberal than US policy. In 2004, foreign invested enterprises in China accounted for 57% of China?s exports. In contrast in the US, the Committee on Foreign Investments in the United States (CFIUS), constantly resorts to ?flexible? definitions of ?public interest?, ?national? or ?strategic? interests to prevent foreign investors from investing and acquiring US firms. The highly publicized and successful US political intervention against the Chinese petroleum company, CNOC?s, attempted acquisition of UNOCAL is the most recent example.

Moreover the efforts of New York Senator Schumer and his congressional allies to slap a 27.5% tariff on imports from China would not reduce the US trade deficit as US importers would turn to other efficient Asian producers and Chinese manufacturers could relocate in adjacent countries. The result would be increased consumer costs, adversely affecting US domestic commerce without creating new jobs for US workers.

The ?protected industries? in the US include some of the worst garment sweatshops paying below the minimum wage, some of which can be found in close proximity to Senator Schumer?s offices in New York City. The problem is not foreign competition ? that should be a given in a free market economy ? but becoming efficient, which means investing in high tech and automated production, training, paying highly skilled workers, engineers and designers and providing stable employment so that workers can accumulate the experience and know-how which contributes to greater productivity.

The 1995 Uruguay Round Agreement on Textiles and Clothing (which the US signed) purported to eliminate quotas by January 1, 2005. US textile manufacturers had ten years to upgrade, modernize, and restructure prior to the advent of free trade. Instead they chose to rely on lowering labor cost, subcontracting to sweatshop labor contractors and political payoffs to lobbyists, politicians and labor bosses to impose new restraints on Chinese exports. The US reneged on its agreement to end quotas, pressuring China to limit Chinese exports to the US throughout 2005 and beyond (Financial Times Sept. 1, 2005 p1).

Current US ?quotas? on Chinese exports already affecting textiles, clothing, color televisions, semiconductors, wood furniture, shrimp and steel have only increased the cost to US consumers and domestic sellers and increased profits for US monopoly producers in these same sectors, making them even less competitive. US producers paying monopoly? prices to protected domestic manufacturers are hardly likely to be in a position to export and improve the US balance of payments.

The argument of ?unfair competition? based on cheap labor is not convincing. The cost of labor is not the decisive factor affecting market competition or trade balances. Many low wage labor countries are not competitive. Many high-wage and high benefit Scandinavian and Low Countries compete successfully in the market relying on quality and specialized products, having abandoned production of labor-intensive consumer items. The resort to moralizing about trade terms especially by anti-union employers who avoid pension and health payments and provide the least time off for vacation and maternity in the Western world is pure cant. The fact is that substantial sectors of the US economy are not competitive given the product lines in which they are engaged, the inferior quality of their goods, the lack of long-term, large-scale investments in upgrading technology and productive organization and the siphoning off of profits to speculative sectors or to offshore subsidiaries.

Hiding between tariff walls, quotas and demagogic ?China bashing? is simply an excuse to avoid the harsh discipline of the free market. Facing up to the free market would force the US business and political elite to own up to the fact that we have, in many sectors, a second-rate capitalism directed by a third-rate state.

The Myth of the ?China Threat?

Instead of accepting the economic challenge from China and recognizing the need for re-thinking the misallocations of resources and the over-reliance on the paper economy, retrograde business elites and overpaid trade union bosses have joined forces with neo-conservative ideologues in promoting the idea of China as a national security threat which needs to be confronted militarily. The fusion of militarism abroad and protectionism at home has gained many adherents in Congress and in the executive branch ? setting the stage for a self-fulfilling prophecy. Faced with increasingly bellicose rhetoric from Washington, China looks eastward toward strengthening its military and economic ties with Russia and Central Asia while diversifying its trade with Asia, Latin America, the Middle East and Africa.

US militant ?protectionist militarism? with its confrontational approach to China threatens to block the free market of knowledge and technology. China?s dynamic growth is not primarily based on ?cheap labor? ? it relies on the production of millions of highly trained scientific and professional workers each year. Each year tens of thousands of Chinese students, professors and scientists train abroad ? many in the US. Very few US students pursue advanced degrees in science and engineering, with the result that foreign students ? including Chinese ? are increasingly critical to the US science workforce. In this free flow of ideas and scientists, both China and the US theoretically benefit ? from a ?free market? perspective. But as we have argued the US is opposed to the free market ? especially in the free flow of scientific ?know-how?.

The US is doing everything possible to restrict the exchange of scientists, technology and knowledge ? by a wide-ranging definition of ?national security?. Given their military definition of the China challenge, Washington argues that Chinese students and scholars should be restricted in what they study, what they learn as well as their access to technology. Universities, under Pentagon and Department of Commerce ruling, would have to secure special licenses and mark restricted areas within laboratories to prevent foreign students from using supercomputers, semiconductors, lasers and sensors in their research. The Department of Commerce plans to tighten controls in the export of commercial technologies (Financial Times Sept. 1, 2005 p 11). From a free market perspective US export controls to China are self-defeating, lessening exports thus increasing the trade deficit, and have little impact on China?s access to technology via Japan, Korea and Europe. In contrast, in July 2005 the European Union signed contracts with China to develop commercial usages of the Galileo satellite navigation system.

From a militarist-protectionist perspective the restrictions on ideas and the free circulation of scientists and students can be seen as part of a campaign of political and perhaps military confrontation and encirclement.

?China bashing? is merely a response to the loss of competitiveness. Nationalist demagogy in a declining global power is a compensatory mechanism for the failure of US capitalism to keep up with the competition ? at least from its locus in the US economy.

China?s Competitive Advantages

China not only out-competes sectors of advanced capitalist countries but it competes successfully with low wage nations through the constant application of innovative techniques of production. Moreover China is increasingly competitive at middle and high-end goods that go beyond consumer durables, garments and electronics. The competitive advantages are derived from the priorities designated by the state and the use of financial mechanisms and incentives. The claim that China ?artificially? keeps its currency low thus gaining a competitive advantage is only voiced by the US and some European states. No one in Asia, Latin America, Africa or Oceania is complaining. With many regions of the world, China has a negative balance of payments, so that its overall surplus is much smaller than the China bashers who focus only on US-China bilateral relations would lead us to believe. Japan?s global current account surplus is larger than China?s by $153 billion to $116 billion USD (FT Oct. 11, 2005). There are no complaints from Japan, South Korea, India, Brazil, Argentina, Russia or Iran about an undervalued currency. In global terms, Japan and Germany account for 30% of the global current account surplus (228 billion Euros) and China only 8% ($70 billion USD).

The US trade and budget deficit is exclusively a problem of internal failures: low or negative savings, high speculation, no up grading of backward or uncompetitive sectors, artificial propping up of uncompetitive state subsidized sectors and large-scale, long-term US investment in productive facilities in China. Out of ignorance or cowardice, US Congressional leaders like Senator Charles Schumer refuse to confront the fact that the US trade deficit is in large part a product of the imbalance between exports by US MNCs located in China selling to the US market over exports from US based manufacturers. For US politicians, it is easier to get re-elected by taking cheap shots at an emerging economic power than to confront China-based US MNCs which finance electoral campaigns.

The US Imperial Threat to China

Throughout history, established global states, which are indebted and dependent on rising new powers, generate politicians who react with irrational resentment and belligerence. The gross failure of the Federal Reserve to contain the irrational exuberance in the paper and speculative economy over the past two decades, its complicity in the growth of unsustainable trade deficits, its outrageous support for tax cuts divorced from any link to the export economy marks the Bank and its Chairman as among the principle culprits in the decay of the US competitive position in the world market.

The danger is that as the US competitive position declines, a coalition of backward industrialists and civilian-militarists will try to compensate by provoking political confrontations and even inventing military threats to justify a military build-up. The politics of confrontation however will cause greater harm to the US MNCs than to China. After all it is the US which has imposed political barriers to the entry of Chinese investors in the US, while China has welcomed over 100 billion dollars from the leading US MNCs into the Chinese market. It is China which is financing the US trade deficit by purchasing US T-notes of declining worth, sustaining US over-consumption and under-investment.

In contrast to Washington?s restrictive policies on Chinese investments in US energy companies, China welcomed large-scale investments by Peabody Energy (the world?s largest coal company by sales) in joint venture mines (Financial Times Sept. 21, 2005 p19).

China is increasingly diversifying its trade and sources of energy. Its trade in Asia surpasses that of the US. China has increased its security links with Russia as a counterweight to the bellicose posturing of the US neo-conservative militarists and liberal Democratic ?humanitarian? imperialists.

Washington?s increasing reliance on rearguard statism, whether in imposing tariffs, quotas, political restrictions on takeover bids, or blocking private investments is doomed to failure. Ultimately the US competitive or non-competitive position in the world market will determine who will be the next economic superpower. The only way for US capitalism to answer the China challenge is to save, invest, innovate, produce and compete in a free market ? free of atavistic statism and militarism.

Washington continued effort to weaken China?s export capacity to lower its trade deficit has taken the form of an open-ended crusade. In July 2005, China announced a 2% revaluation of the renminbi and shifted from a peg against the dollar to a link to a basket of currencies. China promised even greater flexibility over time, to allow its exporters to adjust to the more competitive conditions. The US economy, with all its inefficiencies, could not take advantage of this opportunity and demanded more concessions, a bigger re-valuation and less exports, hoping that state intervention would weaken China?s export industries. The escalation of Washington?s demands on China is ?open-ended? ? one concession granted ?confirms? neo-conservatives in the Bush Administration that they can secure others, setting the stage eventually for a ?recovery? of US export competitiveness. Even the US Federal Reserve Chairman recognizes that a stronger Chinese currency (or other Asian currencies) will make little difference to the US trade deficit (FT Oct. 11, 2005 p5). As all G20 countries meeting in Beijing pointed out the problem is the structural weaknesses in the US.

If we blow away the statist froth, propounded by our free-market economists, we would recognize that what China is demanding is that the US really live up to its free market ideology.

US Treasury Secretary John Snow, driven by the protectionist pressures from a Congress responding to backward sectors of the US economy and civilian militarists in the Executive, endlessly seeks to impose diplomatically what the US economically cannot achieve via the market ? a reduction in the US trade deficit. Behind the veneer of diplomacy, Washington threatens a ?trade war? via exorbitant tariffs of 27.5% and a hostile propaganda campaign labeling China a ?currency manipulator?. A ?trade war and demonization? strategy will most likely strengthen the civilian militarists and their campaign of military encirclement and nuclear brinksmanship in the Taiwan Straits. The confrontational strategy will provoke a Chinese defensive response which will lead to major US economic crises ? as China unloads its US Treasury Bonds and reallocates its trade surpluses from the US to internal, Asian and European options. Washington will also see a loss of Chinese markets, investment opportunities leading to an attack on the profit margins of major US MNCs in China as Beijing increases its economic exchanges with Asia, Russia and the rest of the world.

If the civilian militarists? war with Iraq heightened the economic deficits and weakened the US competitive position, a neo-conservative confrontation with China will likely precipitate a deep structural crisis and probable collapse of the US economy, as we know it.

Conclusion

US colonial wars, the re-concentration of income in the upper 1% via tax cuts, the relocation of US MNC subsidiaries as overseas exporters to the US rather than exporters from the US, the dominance of the speculative economy (IT, real estate) and the ascendance of import intensive commercial capital over productive capital are the main reasons for the unsustainable $700 billion dollar current account deficit and the $500 billion dollar budget deficit. The speculator-militarist empire builders seek to divert attention from their failed policies by engaging in blatant deception and falsely blaming the ?devious and threatening? Asians, especially the Chinese. A report published in September 2005 by two leading European think tanks totally demolishes this ideological smokescreen. They point out that the US current account deficit grew by $529 billion between 1997 and 2004 but China accounted for only 7% of this rise, compared to 30% for Russia and the Middle East (Financial Times Sept. 16, 2005 p2). US ?blame the Asians? demagogic calls for Asian currency re-valuation would lead to deflation and economic stagnation without solving the US trade deficit. The key to lowering the trade deficit is for the US to engage in structural adjustments. These include re-introducing taxes on the very rich and developing an industrial and monetary policy that promotes local production for export and penalizes speculative investment and overseas relocation. This would increase local saving and investments, lower imports and stimulate exports.

Given the political ascendancy and economic centrality of multinational capital, the major investment banks and financial houses and the extensive web of real estate-construction and mortgage banks along with militarist neo-conservative control of the White House, there is virtually no possibility that US capitalism can rectify, correct or reform its strategic direction.

In the face of the embedded power bloc, which protects non-competitive producers and promotes US re-location of production abroad, the only logical outcome is the militarist-protectionist amalgam which defines US policy today. The backward sectors of US capital, together with the neo-conservative militarists, and the reactionary trade union bureaucracy promote ?protectionist nationalism? at home and imperialist wars abroad. The competitive free-market multinational corporations promote overseas market openings but rely on a state, which depends politically on the extensive non-competitive manufacturing and subsidized agricultural sectors and the civilian militarists.

The calls by US economists for China to reform its currency, to accept US quotas on its exports, to retain a highly inferior military defense system while facing US power in the Far East is an attempt to forge a hodgepodge ?consensus? between free market manufacturing MNCs and militarist-protectionists. Harmonizing interests between a rising industrial capitalist power like China and a militarist-speculative-commercial power like the US is a difficult chore in the short run and an impossible task in the medium term. China?s booming demand for commodities has helped many Third World countries, while US agricultural subsidies and trade constraints have hurt these countries. US military belligerency in the Middle East has alienated the majority of the Arab and Muslim world, and divided Europe and its own population. Germany and Japan have accumulated massive trade surpluses at the expense of US-based exporters. The US ruling elite?s resort to militarism in all of its brutal, colonial and invasive forms in Iraq and Afghanistan has exacerbated both the external and internal deficits, while demonstrating the strategic military weakness of an empire predominantly dependent on local satraps and military sepoys to sustain it. The US empire emptied of its domestic manufacturing export sector and relying on speculators and commercial importers (compradors) projects a militarist ideology to shore up the empire. These very forces have substantially weakened the competitive position of the US in relation to China?s rising free market technological-industrial power.

The Chinese leaders cannot capitulate to US demands without destabilizing their own rule and the economic model they preside over. Strong capital inflows in 2005 from US, European and Asian speculators are betting on a re-valuation of the renminbi (China?s currency), creating conditions for a financial crisis if the Chinese regime recklessly moves toward an unregulated monetary policy. Secondly the ruling class free-marketeers in command of Chinese policy have gutted the public welfare system in favor of privatization, forcing Chinese workers, employees and shop owners to save to pay for education, housing, health care and retirement and thus have less income for domestic consumption. Chinese savings to pay for basic services limits domestic consumption and forces the Chinese regime to realize profits via exports. Accepting US dictates on reducing exports will destabilize the entire free market model. The elite basis of Chinese rule, in which 5% of the population controls over 50% of all private assets, faces escalating opposition from unemployed workers, exploited peasants and displaced urban and rural dwellers. Between 2001 and 2004 mass protests grew from 4,000 to over 70,000. China needs to create 15 million jobs a year, which requires the GDP to grow at least 8%. The Chinese ruling class believes economic growth will stabilize their rule. Since the growing social inequalities are embedded in the concentration of political-economic power at the top, they can only be changed by socialist movements from below. The rulers? program is to ?increase the pie? hoping the trickle down effect will increase consumption and stabilize their rule and privileges. US pressure on China?s rulers to increase domestic consumption and decrease exports threaten to undermine domestic class relations and undermine the growth and profit rates. The free-market, export-oriented Chinese ruling class, like its US imperial counterpart, is hardly volunteering to sacrifice its class power and privileges to accommodate its economic competitors.

September 2005