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Trade War Is Here -- and We've Disarmed

American industry is so far into the tank with the Chinese, and the U.S. government is so heavily dependent on the Chinese to buy our bonds, that the administration can't imagine taking a hard line against Beijing.
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Last Wednesday, by a wide bipartisan margin of 348-79, the House passed a bill giving the executive branch authority to impose retaliatory tariffs on a wide range of Chinese exports. The bill was intended to give the Obama Administration leverage (which the White House seems quite disinclined to use) in continuing talks with Beijing about China's manipulation of its currency.

The usual suspects made alarmed clucking noises about jingoism and impending trade war. Writing in the New York Times op-ed page, Steven Roach, a senior executive with Morgan Stanley, contended that the real problem is the low US savings rate, which supposedly leads America to over-consume and pull in imports. This has been used as an alibi for decades, but the fact is that our savings rate bounces around while our trade deficit with China moves only in one direction. Global mega-banks like Morgan Stanley profit from the US China trade, even if America gets rolled. Even the Financial Times, usually pretty sensible, warned against a more assertive stance.

In truth, a trade war already exists, and it is being unilaterally waged by China. The entire Chinese industrial system uses a wide range of subsidies that violate both the letter and the spirit of the World Trade Organization. As the US-China Economic and Security Review Commission has long documented, China subsidizes exports, provides bank loans to industry at zero or negative interest rates, and either bribes or coerces US industry to locate production in China for export but not for China's internal market. All development land in China is owned by the government, which means that China can subsidize favored projects at will.

Supposedly, state socialism failed, but the Chinese have created an improbable combination of a one-party socialist state and predatory capitalism. American industry is so far into the tank with the Chinese and the U.S. government is so heavily dependent on the Chinese to buy our bonds that the administration can't imagine taking a hard line against Beijing. Our diplomats behave more like a client power genuflecting before the might of the imperial master than the dominant nation that the U.S. is supposed to be.

The Chinese system has succeeded in giving China a growth rate in excess of ten percent a year. It has created a new capitalist class, a burgeoning middle class, and an urban proletariat that lives relatively better in sweatshop conditions than in rural destitution.

The system works, sort of, for China. But it doesn't work for China's leading trading "partner" -- the United States.

It would be far better if China focused more in its own internal market, and paid its people wages commensurate with their rising productivity, so that they could import more from the rest of the world. Wages count for only about 32 percent of total GDP in China -- in most of the West, the figure is double that. So the Chinese governments keeps its own people poor and uses the fruits of their labor to invest in expansion, including many billions of dollars in illegal subsidies to industry, and then lends America the money to buy subsidized products.

An artificially cheap currency, which has gotten most of the attention, is only one part of Chinese mercantilism. It gets the focus, because even the free-market crowd find it hard to defend. But China could let its currency values be set by market forces tomorrow morning and the rest of its mercantilist system would remain intact, as a real menace to what's left of US manufacturing.

Interestingly, some improbable commentators, like the Washington Post's Robert Samuelson, usually a defender of the free-trade orthodoxy, are recognizing that we have a real problem. Much of the fault lies with our own leaders, and the fault is bipartisan. Both parties have refused to commit the US to an industrial policy of its own. The Democrats under Clinton (Bob Rubin, to be precise) let China into the WTO without asking for any serious reforms in return. The indulgence of Beijing continued under Bush, and continues to this day under Obama. The Chinese make vague noises about currency revaluation, and the administration immediately backs off.

These people are cleaning our clock. The one card we have to play is that they desperately need the big US consumer market. For the moment, there is a two-way codependency. It's not in China's interest for America to go broke. But in another few years, we will have squandered whatever leverage we still have left.

For once, Congress did the right thing. The administration should follow. If China wants the benefits of an open trading system, it should start playing by the rules. And our own executive branch should pay more heed to jobs for our people, and less to profits for corporations that move work offshore and banks that profit from alliance with China's mercantilism.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.