Post a Comment On: China Matters

[This article originally appeared at Asia Times Online.  It can be reposted if ATOl is credited and a link is provided.]

Awkwardness seems to be a defining characteristic of the Mitt Romney campaign to be the next United States president and of his China policy, as well as of the candidate himself.

Certainly, Romney does not have an easy row to hoe. A moderate Mormon plutocrat who seems to reserve his passion for the sacred cause of keeping his money safe and happy, in the Cayman Islands if necessary, he can only count on multi-millionaires - with their uncomplicated yearnings for further tax cuts, less regulation, and more complete disengagement from the US government's political dysfunction and fiscal mismanagement - as his genuine core constituency.

Constitutionally ill-equipped to rally the Republican base, Romney[Image] is also an inept, uninspiring, and unempathetic candidate whose stumblings along the campaign trail have prevented the GOP from taking deadly aim on the faltering US economy and President Barack Obama's alleged mismanagement of it.

It is Romney's one good fortune that he is running against Obama, whom an aroused conservative rank and file perceives as unacceptably liberal (and black), an advocate of Big Government (and black), hostile to free enterprise (and black), uncomfortable acknowledging America's God-given exceptionalism (and black), and prudent almost to the point of being apologetic in wielding US power overseas (black black black black black).

Romney appears to have adopted the strategy of pandering to this conservative base while throwing an apologetic shrug to the prosperous, cosmopolitan elites who bankroll his campaign and provide it with its media heat.

However, if Romney's political dalliance with right-wing populism threatens to blossom into a genuine liaison, business and financial elites and their associates in the popular press are quick to object. One of the most interesting illustrations of this phenomenon is China.

China-bashing is underpinned by a broad American unease with the rise of China, an autocratic, independent power that, unlike erstwhile Asian bigshot Japan, is manifestly unwilling to submit itself to US military and economic tutelage. This insecurity gives special intensity to American distaste for China's human-rights, environmental, economic, and foreign policy transgressions against liberal-democratic values.

The Obama administration's "pivot" to Asia - which in retrospect may be remembered most as a sterling opportunity for the United States to hopelessly entangle itself in Vietnam's counterproductive anger toward Beijing and the Philippines' free-form security funk - will provide ample opportunities for continued friction and will institutionalize anti-China hostility in US politics for the coming decades.

Confronting China, like any other polarizing initiative, is a self-reinforcing policy, creating its own momentum out of fear, self-interest, and escalating contingency planning.

Logically, the strategic and diplomatic pivot into Asia requires that the United States field a credible military deterrent in case things with China don't go well. To this end, the Pentagon's Office of Net Assessment came up with a gargantuan war plan - AirSea Battle - based on the worst-case scenario.

And by worst case, I really mean worst case: the People's Liberation Army destroys US military assets in the Pacific by sneak attack and the US is forced to engage in an enormous counteroffensive against targets across China to regain the upper hand.

Fortunately, according to the scenario, the confrontation doesn't go nuclear.

Actually, the confrontation doesn't go nuclear because the scenario refuses to consider it. It simply assumes China won't use its nuclear weapons because a brisk nuclear exchange would render the whole scenario (and the beefed-up US Air Force and naval units eager to demonstrate their mastery of 21st-century tech war against hardened targets in the Chinese interior provinces) moot.

This would be a laughable case of strategic self-gratification by the ONI, a fear-mongering Pentagon operation sometimes called the Office of Threat Inflation, except for the fact that the US Air Force and Navy love the plan (according to the Washington Post, the Army and the Marines are unenthusiastic, for understandable reasons; after all, the plan is called AirSea Battle, not Air-Sea-Ground-Heroic Marines Jumping Out of Helicopters Battle).

Politicians also love it. Per the Washington Post:
The concept… aligns with Obama's broader effort to shift the US military's focus toward Asia and provides a framework for preserving some of the Pentagon's most sophisticated weapons programs, many of which have strong backing in Congress. Sens Joseph I Lieberman (I-Conn) and John Cornyn (R-Tex) inserted language into the 2012 Defense Authorization bill requiring the Pentagon to issue a report this year detailing its plans for implementing the concept. The legislation orders the Pentagon to explain what weapons systems it will need to carry out Air-Sea Battle, its timeline for implementing the concept and an estimate of the costs associated with it. [1] Big-picture military strategist (and no olive-branch or panda hugger) Thomas Barnett wrote in his Time column: AirSea Battle is an exercise in spending fantastic amounts of US taxpayer dollars in certain congressional districts. This is the only reason it flourishes, and the primary reason why a cynical Obama embraces it: it proves his "tough on defense" credentials as he draws down in Afghanistan.

We have no serious leadership in Washington. Strategic thinking has been completely eliminated in the quest for program-preserving rationales. It is a sad time to be in this business. Barnett also makes the point that US military, political, and policy elites won't be the only constituency benefiting from confrontation with China; so will their opposite numbers in the PRC: The worst part? This is a self-licking ice cream cone.

As China's development matures and the government is forced to limit defense spending in deference to the mounting costs associated with environmental damage, aging of the population, rising demand for better healthcare, safer food and products, etc, the People's Liberation Army desperately needs an external enemy image to justify protecting its share of the pie (which is already smaller than the amount spent on internal security).

Thus, the PLA needs the Pentagon's big-war crowd ... as much as the latter needs the PLA.

This is a marriage made in heaven - and pursued with an indifferent cynicism that is stunning in its magnitude.[2] In summary, thanks to internal, Chinese, and regional dynamics, the US popular, political, and military constituency for confrontation with China is growing and the steady-as-she-goes contingent (perhaps soon to be identified as the agents of appeasement) is shrinking into relative insignificance.

Romney and his advisers have read the political tea leaves.

A centerpiece of candidate Romney's surprisingly insubstantial foreign policy portfolio is China bashing, in the form of the crowd-pleasing assertion that, on Day One of his presidency, he will designate China a "currency manipulator" and instruct the Department of Commerce to impose countervailing duties if Beijing doesn't behave. [3] This is meant to make a marked contrast with the Obama Treasury Department, which declined to make the currency manipulator designation this year.

As Scott Lincicome, an experienced international trade litigator (and, it might be noted, a libertarian fan of Romney running-mate Paul Ryan's economic policies) wrote on his blog, the Romney China plank is pure, election-year BS: Treasury's assessment must be done in consultation with the IMF [International Monetary Fund] and pursuant to pretty strict guidelines. In short, the president can't just tell the Treasury to designate a country a "currency manipulator," and he/she certainly can't do it publicly via Executive Order (as Romney's plan promises). To do so would not only violate the letter of the law, but also destroy the Treasury report's credibility.

Second, the president can't just instruct the Commerce Department to begin imposing countervailing duties on Chinese goods. Pursuant to US trade law and regulations, the imposition of countervailing duties on imports requires (i) a petition from an affected industry or self-initiation by Commerce ...; (ii) preliminary and final findings, based on extensive evidence (including rebuttal from Chinese producers, US importers and the Chinese government) ... ; and (iii) preliminary and final findings by the non-partisan International Trade Commission that said imports are injuring the US industry. Each of these steps is required by US law and WTO [World Trade Organization] rules. So Romney's plan to, on the very first day of his presidency, just start imposing CVDs [countervailing duties] on Chinese imports would be in direct conflict with both US law and the United States' WTO obligations. [4]
 A further difficulty for Romney is that the merits of the case against the PRC as a currency manipulator are becoming rather thin, and serve as a rather poor justification (on grounds of cost-benefit as well as principle) for a session of scorched-earth countervailing duty trade warfare.

China has been quietly appreciating the yuan for several years. Government action, combined with domestic inflation, has led to a 40% appreciation in the yuan since 2005 according to Treasury's calculation, thereby significantly eroded the export advantages the PRC enjoyed from its undervalued currency. [5]

The Peterson Institute, which hung its hat on the narrative that China's adherence to an undervalued currency was weaving thecapital account basket that would haul it straight to economic hell, went so far as to take issue with Treasury's rather mild conclusion that China, though not a manipulator, still had a "significant undervalued" currency: [Image]
"Treasury is making a mistake in not giving China more credit for the appreciation that it has undertaken and the large reduction in its global external imbalance," Lardy said in an e-mail. "They should not stick with the 'significantly undervalued' language." [6] Some observers looked at China's shrinking foreign trade surplus and a sustained drop in yuan deposits in Hong Kong and decided that the yuan already reached genuine equilibrium in the fourth quarter of 2011. [7]

There appears to be an expert consensus that further pounding on the yuan valuation is counterproductive, and a distraction from more effective measures like pushing the PRC on the opening of its financial markets, respect for intellectual property, and so forth. [8]

Distaste for pursuing the currency-manipulation chimera is compounded by financiers' desire to get down to the business of trading the yuan, and by a growing squeamishness about pushing a trade war with China while the global economy is gasping for breath.

In Europe, the obsession of US political circles with the yuan is quietly poo-pooed as London positions itself for the possibility that it will soon be trading large amounts of yuan in virtually free-market conditions, hopefully without the ruinous distraction of compulsory appreciation imposed under American pressure. [9]

As China concludes currency swap agreements with multiple partners in an effort to internationalize the yuan and reduce its reliance on the dollar (and remove its banking relationships from the baleful influence of US Treasury sanctions), trading bands have been widened and the yuan is beginning to behave like a real currency.

In fact, as the Chinese economy slows and the US becomes the safest haven for investors spooked by the travails of the euro, the yuan has shown a perfectly rational trend to depreciate.

Thereby, a significant historical threshold has been crossed: holding the yuan is no longer considered a sure, one-way bet on appreciation, and international hot money - parked in China in the guise of real estate and other investments while waiting for an easy forex payday - has started to flow out of China instead. [10]

While depreciation of the yuan provides the volatility that currency speculators adore - and is the prerequisite for an exciting and profitable global market in the currency and its derivatives - it is also an unwelcome symptom of a weakening global economy.

Xinhua reported the grim numbers for July 2012: "The July data were poor indeed," said Zheng Yuesheng, head of the GAC [General Administration of Customs] statistical department. "It will be an arduous task to fulfill our foreign trade target, as external demand is weak."

Wang Tao, chief China economist of UBS Securities, saw increasing downside risks in exports in the third quarter due to sagging US and European markets.

China's exports to the EU, its largest trading partner, slumped 16.2% year on year in July, GAC figures showed.

Exports to the United States, the country's second-largest trading partner, edged up 0.6% year on year, compared with 10.6% growth in June. [11] Now we enter into ironic territory.

Continuing to allow the yuan to appreciate to benefit foreign exporters distressed by weak economies and China's trade surpluses, and to strengthen the hand of outgoing Prime Minister Wen Jiabao and the reformers, who are trying to restructure the Chinese economy away from export processing, real estate speculation, state enterprises, and single-minded investment in infrastructure, would require active intervention and purchase of yuan by the People's Bank of China - the kind of currency manipulation free-market apostles abhor.

Instead, the idealistic desire to see the yuan strengthen is in danger of being overwhelmed by a self-interested desire by many corporations, both inside and outside China, for the PRC to weaken the yuan (through quantitative easing, a type of currency manipulation not unfamiliar to the US Treasury Department) to get exports moving, gun the stimulus engine, and keep the global economy going - inflation and trade surpluses - and distaste for "currency manipulation" - be damned.

In summary, today China might be too big - and the international economy too weak - for the ordinary political rules of China-bashing to apply. And as much as we adore our new not-quite-free-market friends (and useful antagonists of China) in India, Vietnam, and Myanmar, they aren't quite ready to pick up the slack.

The Wall Street Journal's editorial page, no friend of state socialism, and in fact the Great Thunderer of the Republican Party, ran an editorial - not an op-ed - on August 16 titled "China Trade Benefits". It took aim at congressmen pushing anti-currency manipulation legislation, asserted that their districts have benefited enormously from exports to China, and refused to endorse the existence of Chinese currency manipulation, merely characterizing it as "alleged". [12]

The Journal's editorial echoes a recent chorus of disapproving op-eds in the business press from Bloomberg to Forbes to Reuters. [13]

One can draw the conclusion that designation of China as a currency manipulator, a key plank of Romney's platform is 1) factually dubious, 2) practically and legally unfeasible, 3) ineffective, 4) dangerous to the world economy, 5) takes money out of the pockets of masters of the universe looking to profit from the trade in yuan, and 6) is odious to his core supporters, who rely on sustained global economic growth for their continued financial success.

In an oblique nod to the concerns of his backers, Romney has floated plans for a titanic Pacific economic engine to take away the downside of a trade war with China, at least in theory: a confrontational free-trade zone that will boost trade internally while sticking it to countries - like the PRC - that fail to display sufficient allegiance to open-market and free-trade principals.

This initiative appears to be nothing more than a clone of President Obama's Trans-Pacific Partnership. Romney's alternative has, to his mind, one unanswerable advantage: it is called "The Reagan Economic Zone" (REZ), bringing the irresistible posthumous charisma of the Republican Party's Great Communicator to bear on our overawed Asian trading partners.

Reuters veered dangerously close to editorializing in its description of this ad hoc piece of political vaporware, describing the REZ as "a new super-sized free-trade agreement without precise geographic boundaries to act as a counterweight to [China]." [14]

Romney's China economic policy seems to be little more than empty election-season sloganeering. If he is elected president, Romney will probably be most sedulous in his stewardship of the world economy and his own millions, and an antagonistic currency and trade policy will not be at the top of China's list of US-related worries.

That may create some awkward moments with the Republican Party's fire-eating base, but Romney is no stranger to awkward moments.

Notes:
1. US model for a future war fans tensions with China and inside Pentagon, Washington Poast, August 2, 2012.
2. AirSea Battle: The Military-Industrial Complex's Self-Serving Fantasy, Time, August 8, 2012.
3. The Romney Plan For An American Century, Mittromney.com, Jul 24, 2012.
4. On China Trade, Paul Ryan Toes the (New, Fake) Company Line, Scott Lincicome, August 16, 2012.
5. US Treasury's Brainard: Hope For More Yuan Adjustment, Wall Street Journal, May 8, 2012.
6. Obama Shunning China Yuan Manipulator Tag Gets Romney Ire, Bloomberg, May 26, 2012.
7. Yuan Continues Its 2012 Decline, Caixin, June 4, 2012.
8. Romney Refuses to See China Progress on Yuan, Bloomberg Businessweek, May 2, 2012.
9. A Yearning for the Yuan, Caixin, May 2, 2012.
10. Ibid.
11. China's July exports slow sharply, outlook grim, Xinhua, August 10, 2012.
12. China Trade Benefits, Wall Street Journal, August 16, 2012.
13. See: Don't Blame China's Currency for US Trade Deficit, Bloomberg, Apr 20, 2012; Leave China Out of It, Mr. Romney, Forbes, July18, 2012; Romney Refuses to See China Progress on Yuan, Bloomberg Businessweek, May 2, 2012.
14. Rhetoric aside, Obama and Romney not far apart on trade, Reuters, August 16, 2012.