Mr Paulson Goes to China

It is a measure of the shock and awe with which the US currently views China that six members of President George W Bush’s cabinet plus Federal Reserve Chairman Ben Bernanke are in Beijing this week. But quite what this blockbuster approach to China is supposed to achieve is hard to tell.

If it is supposed to add yet more weight to the incessant appeals for faster yuan revaluation, it is doomed to be counter-productive. Indeed, Beijing said as much beforehand. If it is supposed to impress on China the seriousness with which it is now taken by the US the delegation may have some success. Those accustomed to flattery – all authoritarian rulers – will doubtless feel flattered that Bush should give them so much face. No other country on earth could expect such a delegation of supplicants. The Middle Kingdom is again in the tribute-receiving business.

But Beijing may not feel quite so flattered. Is this not just more pressure from an increasingly hostile Washington where the post-election political climate makes being pro-China almost as popular as holocaust denial? Is the size of the delegation intended to show how many interests the US and China have in common? Or how many bones the US has to pick?

Even the main goal of Treasury Secretary Henry Paulson, the leader of the pack, is unclear. He is smart enough to know that the harder he pushes the currency issue the harder China will resist, but domestic politics may demand that he make futile gestures in that direction.

More likely his focus will be on the aspect of commerce closest to his heart – financial services. He wants to persuade China to live up to the various promises it made as the price of WTO entry and Western bankers are still dumb enough and greedy enough to imagine that they can clean up once allowed to compete more openly with mainland dinosaurs. Paulson & Co may have forgotten how banking liberalization and bone-headed foreign bankers helped create the 1997 Asian financial crisis. But they live in hope, forlorn though it may be, that financial services can do much to bridge the overall trade gap, or at least keep the protectionists at bay.

But can they be kept at bay with Susan Schwarz, who as US Trade Representative seems keener to throw anti-dumping measures at China and make assorted claims of non-WTO compliance than to seek China’s cooperation in a last minute bid to rescue the Doha Trade round?

As for Commerce Secretary Carlos Gutierrez, he has plenty complain about to the Chinese legitimately. But if he imagines that putting them right will do more than cut a few billion off a $700 billion annual trade deficit he must be living in the GW Bush world of illusions.

If they truly believed in free trade, Gutierrez and Schwarz could do everyone a favor by agreeing a moratorium with the Chinese to end the rush to sign bilateral so-called free trade deals which are in practice just politically motivated preferential arrangements and an excuse for not taking Doha and global trade liberalization seriously.

Labor secretary Elaine Chao can, if she wants, find all kinds of reasons China’s armies of non-unionized, low paid workers are an “unfair” threat to American jobs. However, she might be better off going to Korea and finding out why the exodus of low and middling-skill manufacturing jobs to China has neither created long-term unemployment nor a trade deficit there.

Energy Secretary Samuel Bodman ought to have lots to agree with China about. How they could both drastically cut reliance on imported and carbon emitting fuels, and lead the world in tackling global warming. Having once regarded Kyoto and emissions reductions as a western ploy to slow China’s growth, Beijing now realizes the enormity of the problem. But given the Bush state of denial and the influence of the oil lobby, this looks like being a missed chance for cooperation.

As for Mr Bernanke, one might ask why is he there at all? The US has long backed the IMF in insisting that central bankers, though unelected, should be independent of governments and political pressure. So what is Bernanke doing on such an overtly political delegation and acting as a support to Paulson? If he thinks there should be a major fall in the US dollar against Asian currencies – not just the yuan – perhaps he could say so. That at least might deter his hosts from buying yet more of the green notes that flow so freely from the Federal Reserve’s printing presses. Given the Fed’s years of monetary ease while tolerating the creation of an unstable mountain of derivatives, he is scarcely in a position to lecture China on central banking practices or market regulation.

That such a huge delegation should go to China but not to any of the other major trading partners in Asia is itself rather extraordinary. It suggests that these policymakers understand little of the dynamics of trade and manufacturing in Asia and their relationship to the markets of America. They seem not to comprehend the integration of manufacturing systems, or the roles of east Asian and US capital in creating these systems, and how the value added is apportioned between the different players be they laptop, toy or sneaker makers with final assembly in China and marketing through the likes of Dell and Wal-Mart.

Focusing on China makes it all the more likely that it will become a scapegoat for the much bigger and more complex problem of the US trade imbalance and the globalization of manufacturing systems.