Business Maverick

Business Maverick, Politics

US and China square off to fight about really important issues

US and China square off to fight about really important issues

What with the “sturm und drang” about US arms sales to Taiwan, the Dalai Lama's off-again-on-again visit to the White House, allegations of unfair trade of exported chicken meat or tyres, the fears of American defence strategists about the possibilities of a Chinese “blue water navy” operating in the Pacific, and the question of what, exactly, China is doing here in Africa, it is almost refreshing – and certainly clarifying - to see US-China trade relations boiling down to two fundamental issues of freedom: free exchange rates for the Chinese currency and Internet freedom inside China.

After years of treating China as something of a unique case, America seems to be girding its loins to tell China what it will, or will not accept on the currency exchange front. For decades, in the name of political and trade stability, and as part of an effort to knit China ever more tightly into the international economy, American economic policy leaders, both Republicans and Democrats, accepted the Chinese government’s undervaluing of the renminbi’s exchange rate with the dollar as the price to be paid to bring China deeper inside the trade tent and for them to begin to follow the rules. In return, China was allowed to undervalue its exports, earn oodles of foreign exchange, shift that new wealth to create its new middle class, and build stable, long-term markets abroad for its toys, appliances, textiles, clothing and, well, now, at least, practically everything.

In recent weeks, however, the gloves have come off, but it apparently took the Great Recession to do it. Now leading the charge, The New York Times’ redoubtable economics columnist, Paul Krugman, wrote this week that he’s basically changed his mind about China. He wrote that “Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.”

After giving the scary figures on the foreign exchange reserves piling up in China, Krugman added, “It’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.”

Krugman then closed in for the kill, saying the US government must “stop fudging and obfuscating” and name names and state facts in a treasury report due next month – and then take action. Krugman argues that, contrary to the usual view, China doesn’t have the US over the proverbial barrel because it owns all those US treasury bonds. Rather, it is the other way round – what would happen if China actually tried to sell those bonds? Who would buy them at fire sale prices? Krugman’s solution, besides calling out the Chinese serial currency manipulators in public, is to propose American import surcharges because “Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.” Wow. No “on the one hand, on the other” for this Nobel laureate!

Meanwhile, a bipartisan group of more than 100 American congressmen and senators has also demanded treasury secretary Tim Geithner designate China as a currency manipulator in its annual report on currency exchanges due to Congress on 15 April. And, just a few days ago, a bipartisan group of senators introduced a bill in congress to force the Obama administration’s hand on this issue with a call for imposing retaliatory trade barriers against Chinese goods.

Beyond Krugman’s own column, The New York Times added its own considerable heft to the debate as well. (Don’t they read that paper on Wall Street, at the Fed and in every capital in the world?) In its editorial, the Times joined the growing chorus for real action as China continues “to base its economic growth on exporting deliberately undervalued goods threatening economies around the world. It is fuelling huge trade deficits in the US and Europe. Even worse, it is crowding out exports from other developing countries, threatening their hopes of recovery.” Unlike Krugman and the gaggle of congressmen, the Times says the way to lay into the Chinese is via the International Monetary Fund, because “the more countries that say this, the more likely Beijing will (be to) consider changing course.” Or, in other words, let’s all of us – vs. you – fight it out.

Meanwhile, over on the freedom of the Internet front, there are new developments in Google’s efforts to break free of Chinese restrictions and interference. Attentive readers will remember that some weeks ago, in the wake of a cyberhacking scandal and increasing Chinese government insistence that Google must follow legal limits on offering access to web sites, Google announced it would withdraw from the Chinese market – rich as it already is, still richer that it might become in future – if the Chinese government harassment, the shadowy cyberhacking and the government restrictions on Google users didn’t end.

Now, the latest wrinkle is that (just maybe, it might be true that under pressure from the Chinese government) some of Google’s Chinese business partners now insist Google must come clean about its future plans in China – or its off we go to the lawyers. The advertising partners are muttering darkly that if that agreement on compensation doesn’t happen, they’re going to insist on oodles of compensation from Google if it disappears from the Chinese landscape.

The market place is obviously the big kahuna here as the letter insists Google has a plan to explain how customer pre-payments for advertising will be repaid, how employees of the advertising agents thereby out of work will be compensated and how the companies themselves will be compensated for investments. Hmm… there’s nothing like the raw pressure of the markets to motivate people and businesses and governments.

In a letter purportedly issued by 27 Google-authorised sales representative companies, the businesses say they have been waiting for far too long for clarity; hey, it’s bad for their businesses; it’s chasing away employees and trashing their big investments. Sounds just like capitalism, doesn’t it? The letter says, “We see a constant stream of information, but cannot predict the future, we see business sliding, but there is nothing we can do. We are waiting now in incomparable pain and disquiet.” Then it adds demands for redress that could tighten the economic and political screws on Google if it shutters its website and claws back from other operations from China.

That said, at least one major Google partner, Shenzhen Winkee Networking denied it was involved in the letter. The company’s sales rep responsible for all its Google ads said, “I have checked with the head of the company and other relevant officials and found out we haven’t sent or signed any such letter. Google has not officially announced that it would quit China’s market so we do not think this is the time to make such demands.”

The Daily Maverick is prepared to wager a really good lunch that none of the 27 companies so listed will admit publicly it was involved in this letter – until a minute after Google announces its plans for a pullback.

Google’s CEO, Eric Schmidt, meanwhile, says he’s still looking for an outcome from the company’s talks with Chinese officials about offering a complementary, uncensored search engine – this in a country of close to 400 million Internet users.

Many experts don’t believe, however, that China will compromise on censorship, although company spokesmen insist it simply cannot – at least it can no longer – accept self-censorship as a way of operating its business in China. Commentators such as Tom Friedman have stressed that this issue is a phase shift moment for China – will it follow continued censorship and centralised planning or increasing market and social freedom?

UBS research analyst Brian Pitz has told bank clients that Google has until Saturday, 20 March to renew its Internet Content Provider License — a certificate required to operate a website in China. Pitz estimated that shutting down could cost Google up to $500 million in revenue this year. (Google pulled in nearly $5 billion in net revenue in its fourth quarter to December last year.) But Google has only about a third of the Chinese browser portal market in China – trailing its indigenous rival, Baidu by a significant margin.

With the currency markets, and with the Internet, China and the west are beginning to suss out just where their really vital interests lie, where push will come to shove and who it is that will push and who will shove. Strange how the future always depends on it.

By J Brooks Spector

For more, read Marketwatch, the New York Times, the New York Times

Photo: U.S. President Barack Obama and China’s President Hu Jintao shake hands after making a joint statement at the Great Hall of the People in Beijing November 17, 2009. REUTERS/Jason Lee


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