The Winds Are Blowing From the East As Well

In the past weeks, the commentariate has been focused on the weather. Two major stories have dominated the agenda – hurricanes in the Gulf and the political winds in Washington, buffered by two Supreme Court vacancies and by the political storm that followed the first actual storm – Katrina.

Both of these storms deserve attention; so do larger issues of the United States in the world, the on-going war in Iraq, and the shifting sands of the questionably named “war on terror.” But I suspect that years from now, the story we will tell will be less about the stories we are telling and more about the ones we aren’t.

While we expend our energy on the composition of the court and our ability to deal with natural disasters, we are letting at least one issue recede: China. In the wake of the first storm, Katrina, President Bush’s meeting with Chinese leader Hu Jintao was downgraded from a state visit to quick press conference. This week, as eyes turn to Rita, the G7 summit of finance ministers is meeting in Washington to discuss trade and the Chinese currency. I know, I know, really exciting stuff; journalists love to write about floating exchange rates, especially given a choice between discussing the relative value of the dollar and writing about a Category 4 hurricane.

Without downgrading the significance of natural disasters – and to be fair, they deserve and demand attention - what is happening in China will probably affect our lives more than anything currently dominating the news. There was an inkling of that this summer, with the brouhaha over the proposed purchase of the energy company Unocal by the Chinese company CNOOC. The reaction of Capitol Hill was one of frenzied alarm. Democrats and Republicans, in a rare demonstration of bipartisan hyperbole, were equally outraged. Typical of the responses was Congressman Richard Pombo (R- CA), who in late June urged the Bush administration to block the deal, warning that it could have “disastrous consequences for our economic and national security.” Not to be outdone, Sen. Ron Wyden (D- Oregon) told Treasury Secretary Snow that it was imperative to review the deal closely. “I don’t think being a free-trader is synonymous with being a sucker and patsy,” he declared.

As it turned out, the deal collapsed, in no small part because of the vitriolic reaction. The last time we heard such apocalyptic rhetoric about an economic challenge was in the late 1980s. Then it was Japan, which not only excelled at making and selling cars and consumer electronics, but which then began to use the profits to purchase American assets such as Rockefeller Center, Sony Pictures, Pebble Beach Golf course, and U.S. Treasuries. But just as quickly as Japan rose, it collapsed, and the United States entered a long decade of unchallenged economic dominance.

Both then and now, the response to an economic challenge has been to raise trade barriers and retreat behind them. The problem now is that it’s too late for barriers, and unlike Japan, China is not likely to wilt anytime soon. It’s also too late to recreate a mercantilist American empire that uses the government to protect U.S. businesses to the detriment of competitors. It’s not too late, however, for misguided, knee-jerk reactions to damage the ability of U.S to compete in global markets.

Once the weather calms down, I expect that these issues will heat up again. When they do, we need to stop and remember that we made this bed. Throughout the 1990s, U.S. policymakers and business leaders were almost unanimous in their calls for more trade, fewer barriers, and active partners. Remember NAFTA? Remember the early days of the World Trade Organization? The reasons were simple: the U.S. economy cannot be the sole engine of global capitalism, and 200 million U.S. consumers cannot be the buyers of last-resort for a planet of 6 billion people. In order for the U.S. economy to thrive and grow, other countries and other people around the globe have to participate.

The United States is now confronted with a rising China that is rapidly embracing capitalism. To date, the emergence of China as a dominant and efficient producer of goods has given U.S. consumers access to inexpensive appliances, computers, games, clothing, and furniture and helped keep inflation in check. And the emergence of China as a consumer of energy, goods, and services has revitalized hundreds of large U.S. companies and thousands of smaller ones who have been meeting China’s needs.

Rarely does great change happen without pain. The ability to arbitrage labor, and to source goods and even services globally helps companies manage costs, as does the ability to sell into any and all markets without punitive tariffs. The plus side is that we get cheaper products. But the process often hurts workers and causes disruptions to established businesses, everywhere. The backlash in the United States represents the pain and anger of those who are harmed by these trends.

It is one thing to recognize the disruptions. But erecting walls and trying to prevent foreign companies from purchasing U.S. assets is the national equivalent of sticking our head in the sand. Worse yet, the only thing we are likely to accomplish is to undermine our ability to meet the challenges posed not just by China, but by the very global economic system that we helped create.

What is happening with China will likely happen soon with India. Already, India is carving out a competitive edge in software and services. The British were appalled in the mid-20th century when their former colonies of Pakistan and Australia began routinely beating them at cricket and rugby. Having committed ourselves to a global economic system and crafted its rules, we are suddenly confronted with the possibility that someone else might come along and offer real competition.

To those who say that China doesn’t play fair, that’s not the point. Almost no one plays fair when it comes to international trade, America included. Hidden costs, veiled or not-so-veiled subsidies, tax-breaks for exports, all are standard practice. The point is that we face a new challenge, and rather than rise to it, we seem to be trying to deny it or stop it.

Now that the world is embracing the system we have spent so much time trying to create, too many of us seem to be questioning whether it’s the world we want instead of figuring out how to remain prosperous and competitive in it. There’s no guarantee that we will be winners in the global economy ten, twenty, or fifty years from now, but if we go too far down the backlash path, we will almost certainly be losers.