Wednesday's article in the Daily Telegraph
Threatens 'Nuclear Option' of Dollar Sales" strikes a raw political
and emotional nerve in the U.S. – coming just a day before stock markets around
the world dipped
– and sets the stage for another demon to accompany terrorism in the minds of
The "nuclear option" of dollar sales would be devastating for China
to actually implement. And so this option has always been held as a threat,
a political flag to ensure a better position when bargaining with U.S. Treasury
Secretary Henry Paulson over tariffs, investment regulations, WTO requirements,
currency flexibility, and a host of other issues. According to the Telegraph,
China has suddenly waved the flag in Paulson's face.
Paulson is an old
China hand who, like many who have spent a while here, finds
an absolutist, black-and-white approach to anything quite inappropriate.
That approach is wildly successful in Germany and perhaps Japan. But not in
China, where many things, especially business, are made into a longer and more
convoluted process than otherwise necessary.
The Chinese love Paulson. He apologizes for their step-by-step approach to
the RMB issue and criticizes
hawks within the U.S. establishment calling for tariffs to force China's
hand. Paulson's accommodating approach allows Beijing to move at its own pace
and provides them with the chance to throw out a threat – global financial collapse,
for example. Anyone who has done business in China knows that one needs both
the Buddha Palm of soft negotiation and the Iron Hand of hard threats and shoves
to get things going. Paulson represents the Palm. Who wields the Hand?
There is constant
and sharp debate
sides of the Pacific concerning China's huge trade surplus and America's huge
trade deficit. China's undervalued currency is often
described as the most vital link between the two – and therefore a call
for an appreciation of the RMB is touted as the solution, if there is a solution
at all. America's fiscal
failure may be a moot point.
The current political debate hinges on Apocalypse Now-style proclamations
and simultaneous posturing for advantages at the economic table. The reality
is that China's mercantilist, export-oriented economy is in the midst of a progression
we have seen before in Asia. Virtually all of the Asian tigers began their economic
miracles as kittens suckling at the teat of the American consumer. The more
successful of the tigers developed their own industries and global companies
and in turn found undeveloped markets of their own to exploit. All of them are
sitting on vast stores of dollars. The addition of China has made the issue
Over the past year, in a series
of government-sponsored stories
in the China Daily, Beijing has pledged
to appreciate the RMB steadily over a longer period and eventually create a
exchangeable currency. At the same time, China's manufacturing base is moving
away from the coast and into the hinterland. The wave of export-based riches
moves west and is, in theory, replaced by service-based industries. China hopes
to stall the RMB adjustment until it is completely ready.
This development is visible here in Chengdu, capital of Sichuan province.
Intel, IBM, Agilent, Motorola, Microsoft, Oracle – all have set up manufacturing
and outsourcing operations of some kind, and a slew of smaller manufacturers
– metal stamping from Yonkers, electric bikes from Berlin, printing presses
from Japan – have set up shop here. Sichuan province is investing billions of
RMB in the IT, education, and tourism sectors to help keep the ball rolling.
They have a lot to learn here about BPO,
even new teaching methods. But in Chengdu the powers that be are charging headlong
Determining China's geopolitical and national goals can help predict whether
or not Beijing will cooperate with U.S. Treasury officials and reevaluate its
currency, thereby making Chinese exports more expensive and lowering U.S. debt.
Almost 200 years ago, China played the same game with the British empire, which
resulted in the Opium Wars
and the occupation of key Chinese ports. The humiliating defeats led directly
to a national leadership crisis and the disintegration of the Chinese nation.
A weak China was easy prey for Japan.
With the British, the Chinese too stalled and stalled, building up a large
trade surplus through protectionist and mercantilist policies, until the imbalance
in silver led to war. The Chinese repeatedly appealed to Britain's morals but
never gave the British what they truly wanted: market access. Will history repeat
itself with the American empire? It already has, but the conditions
are much different and so is the outcome.
The U.S., too, should have the foresight to avert an economic collapse and
adapt to a changing world. But the Bush administration will press for protectionist
tariffs and an appreciated RMB before it reconsiders its expensive war-making
and addresses America's true needs. It is in no one's interest to have the American
economy melt down and take half the world with it. China must develop away from
mercantilism and cheap exports, and the U.S. must curb its credit-mad consumption
culture and expensive adventures abroad. For the sake of world peace, let's
hope they do.