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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman. PLEASE... More
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Capitalism and Freeedom
  • Why China Behaves So Badly 0 comments
    Dec 16, 2013 7:49 PM

    Western observers say that China's behavior is "puzzling", and that its policy goals are "enigmatic". In fact, China's behavior is neither puzzling nor enigmatic; its behavior is shrewd, pragmatic and realist. China's internal and external behavior can be explained once one grasps that China is a rational actor operating under enormous economic pressure.

    Below are some of China's sins against the "international community":

    >UN obstructionism on many important matters such as nuclear proliferation;

    >Jingoist, xenophobic ideology at home and abroad;

    >Pursuit of regional hegemony, bullying regional neighbors;
    >Support for the evil Kim regime and its multitude of international provocations;

    >Militarism, military buildup, military threats;

    >Authoritarian domestic policy;

    >Abysmal human rights record: Tibet, Uighurs, Falun Gong, prison factories, etc.

    >Currency manipulation;

    >Threats to stop buying US Treasuries and to dump the dollar;

    >Unfair trade policies, mercantilism, flouting of WTO;
    >Massive intellectual theft.

    All of this behavior can be explained.

    China was a filthy dirt-poor agricultural nation of half-starved peasants when Chairman Mao died in 1976. Looking at China's weak position in the world at that time, Deng Xiaoping made the decision that a poor China could not be a strong China. Under Deng's leadership, the CCP launched a program of export-led industrialization which has continued uninterrupted to this day. Like Japan's a century earlier, China's modernization proceeded at a rapid pace. Starting with modest experiments in Guangdong and Shanghai, China quickly built an industrial economy that is now the second largest in the world, and will soon be the the largest. The success of Deng's plan has been nothing short of amazing.

    The CCP's plan then and now was to free China's one billion peasants from the poverty of low-productivity agriculture, and to channel this bottomless reservoir of low-cost labor into manufacturing. The overarching challenge is to match the constant inflow of low-skilled peasants from the west with the creation of new manufacturing jobs in the east. This is no small task: it requires rapid real growth year in and year out, and massive infrastructure investment. As the model is export-led and focused on manufacturing, it requires ever-higher manufactured exports. And therein lies the world's "China Problem".

    China's manufacturing potential is so huge that within a few decades its output could exceed that of the the rest of the world combined. The world's central problem is that China is simply too big to be neatly inserted into global trading system. When countries like Guatemala or Bangladesh seek to grow exports, they can do so without affecting markets or hurting competitors. By contrast, China at its full potential is a Panzer tank at Tiffany's. For China to succeed in implementing its development plan, it will have to destroy the world. China's national development strategy compels it to wreck everyone else's manufacturing economy. This is economic warfare, with Chinese characteristics.

    China has succeeded in massive export growth without currency appreciation by an idiosyncratic set of economic policies. China has ignored virtually all of the self-serving economic precepts of the West, which prescribe open capital accounts, elimination of currency controls, and freely-floating exchange rates. It was this suicidal advice that caused the East Asian financial crisis of 1997-98, which China survived unscathed.

    China's more prudent policy has been to: maintain very large external reserves; impose capital and exchange controls; peg its currency to the (weak) dollar; and mop up currency inflows and park them in the reserve account. No manufactured imports, thank you, just exports and an ever-greater reserve mountain. This unorthodox policy has enabled one of the greatest growth stories in modern economic history.

    So, an American will scratch his head and ask: Why does the US allow China to undersell its manufacturing sector, and to capture entire markets? How can the US permit the price of its unskilled labor to be globalized? What are American high school graduates supposed to do for a living? Why doesn't the US impose punitive tariffs as punishment for China's mercantilist policies? The answer to these questions is that China has used a variety of geopolitical maneuvers to keep the West off-balance and confused.

    China simply cannot allow the West to focus its attention on China's trade policies. She must do whatever it takes to distract, confuse and otherwise change the subject. China has a myriad of geopolitical levers at her command to divert the world's attention. (which I have listed above).

    The more trouble China creates, the more the West is distracted. When Joe Biden flies to Beijing to talk about trade, China declares an air defense zone in the East China Sea. What does Biden end up talking about? The air defense zone; trade policy is forgotten. The ADIZ crisis was manufactured to prevent trade negotiations.

    China explains its international behavior as anti-hegemonist, but that is a smokescreen for self-interest. China doesn't care very much about peripheral things like Sudan, Iran or the Middle East; what she cares about is international leverage. When western leaders huddle to discuss the latest crisis, what do they usually end up talking about? How to get China to cooperate with the "international community". The inevitable upshot: someone flies to Beijing to beg for China's help. The small price to pay for China's "help": ignore China's trade surplus.

    The EU wants to talk about non-tariff trade barriers? China arrests some hapless poet, which changes the subject. Other available "negotiating" tools: launch a new weapon; stake a new territorial claim; foment anti-Japanese protests; have North Korea shoot a rocket over Japan, or shell a South Korean fishing village. China explains much of its antisocial behavior as a response to domestic "public opinion"--which she manipulates at will. Chinese nationalist fervor serves the state, discourages dissent, and prompts Western "concern": providing yet another reason not to press too hard on trade. North Korea is just an extension of this policy by proxy.

    China pursues a policy of provocation, poking at the rest of the world, particularly the US Congress. Do you want to prevent Iran from going nuclear? Do you want peace in the East China Sea? Do you want to have influence over the Kim Dynasty? Do you want internet freedom? Do you want a free Tibet? Do you want to sell your country's products in China? Then you must go to Beijing and beg. Begging is your only leverage; pleading is your only strategy.

    I offer above an explanation for China's bad behavior. I can also suggest a solution: impose tariffs on Chinese exports. If China retaliates by selling dollars and Treasuries, she will have done exactly what we desire: America needs a stronger yuan, a weaker dollar, and a revived manufacturing sector to employ our unskilled labor. As a society, we cannot allow the price of our unskilled and semiskilled labor to be globalized. (Raising the minimum wage only makes China more competitive.)

    Another benefit to "fair trade with China" is that, by wielding a big stick (tariffs) and playing the international bad boy, America regains geostrategic leverage beyond trade policy. All of a sudden, the Politburo would have to worry about America's behavior. Problems such as North Korea would become more tractable.

    But what about America's treaty obligations under WTO? A "fair trade" policy involves what is known as "national treatment": we will trade with you as you trade with us. To confront China's realpolitik, the US needs to start thinking and acting like a normal country which protects its own interests and makes no pretensions otherwise.

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