Merry economic war

December 20th, 2007 — Wordman

You don’t have to look very far to find dire warnings about Chinese goods these days. For several months, the focus has been on toys with lead paint in them. Before that, however, there were beads containing GHB, toothpaste containing diethylene glycol, and poisonous petfood. If you think back to this same time last year, I don’t remember any such thing being so prevalently in the news, even though it is difficult to imagine that these goods went from being perfectly safe to the deadly poisons the news harps about in twelve months. It’s possible that these stories have reached the mass consciousness organically, feeding on each other to dominate mind space. Maybe they are sort of a fad, where the U.S. media (ever hungry for stories to scare the crap out of you) finds they consistently sell better when China is trying to kill everyone. Yet, when you think about the fairly rapid rise of these stories, the broad range of their repetition, and the staying power they seem to have, I wonder if there isn’t something a bit more to it. I’m wondering if it’s an American attack in an economic war between China and the United States.

Honestly, I hope it is. It should be. In the first place, there is some reason to believe that China has been conducting large scale industrial espionage against the U.S. for some time. More troubling, China has been accumulating a vast reserve of U.S. dollars for years. The quantity of this horde seems far in excess of Chinas needs, and opens the possibility of China using this reserve to intentionally manipulate American economic policy for its own benefit, largely through a kind of economic blackmail. In August, coincidentally close to when the poison goods stories kicked into high gear, a number of Chinese officials began hinting they they would do exactly that if negotiations didn’t go their way. As early as 2002, China was also the second largest holder of U.S. bonds, which likewise frightened people, although some called China a scapegoat (Communism was just a Red herring).

This year saw another new development as well. Long content to let others come to it, China began seriously reaching out into the world. They recently bought a large chunk of Morgan Stanley, have a large and growing influence in Africa, and will be hosting the Olympic Games in less than a year. A few months ago, an author being interviewed on NPR (I can’t remember who, sorry) made the observation that, when you look at most of written history, the economic dominance of China has been the “natural state of the world”, with recent centuries being the fluke.

In October, both Japan and China started selling U.S. bonds for the first time. This is troubling because it can have cascading effects, since, in economics, perception of reality often causes a belief in that reality, which can easily cause that reality to occur. Laurence Kotlikoff, in his book The Coming Generational Storm, warns that the logical conclusion of present US economic policy is an inevitable collapse which, most likely, will be forced on us by just such an event, where the collective market suddenly stops believing in U.S. creditworthiness.

So, many punches come at America, but few were going the other direction, at least until the “China is trying to kill us” furor began. As a weapon, I’m not sure how effective it is, though. There have been some costly recalls, but these tend to hurt American companies as well (just ask Mattel). Other than an object lesson to companies to (unrealisticly) seek other partners, that doesn’t seem to do much good. As propaganda designed to rouse “don’t buy China” sentiment, catered to mess with Christmas sales as much as possible, it succeeds a bit better, but to what end? As a negotiation ploy? If that’s the plan, it doesn’t seem to be working.

Talks with China recently failed to accomplish much. According to that story, chief negotiator Henry Paulson thinks that:

The biggest issue we have with China right now is economic nationalism, the problem of its domestic industries welcoming competition. In China, what you find is that you’ve got an increasingly powerful domestic industry that is a strong lobby.

Trying to penetrate the Chinese market is an extremely old tale. So far, there seems to be little the U.S. can do to accomplish it. Here’s hoping we’re actually trying.

Update: not surprising.