Curious Capitalist

The Only Way to Get China to Act

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I wish there were a class called China 101 that every member of Congress had to attend. This would be the first lesson: if you really want the Chinese to do something, never pressure them about it in public. Loss of face is anathema in the Middle Kingdom. Which is why when the U.S. Senate passed a bill hinting at tariffs on Chinese goods if Beijing doesn’t let the value of its currency rise, the People’s Bank of China promptly and defiantly responded by pushing the value of the renminbi lower.

It’s ironic, because Beijing had been doing just the opposite until politicians like Chuck Schumer decided to start posturing and make China’s currency a proxy for a highly politicized discussion about globalization and unemployment in America. The idea is that if Chinese money was worth more, American firms wouldn’t export so many jobs there (because labor would be more expensive), and the Chinese would be able to buy more U.S. goods and services themselves, thus cutting trade imbalances between the two nations and helping put the global economy back on track.

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Sadly, the Schumer bill doesn’t constructively move the dial on such trade and currency issues at all. The first and most obvious issue is that we really shouldn’t aspire to fix the unemployment situation in America by competing with the Pearl River Delta to make shoes and lighting fixtures. Instead of passing bills threatening at tariffs against countries that have created jobs, how about passing our own jobs bill instead? No chance of that, as President Obama’s jobs bill now seems DOA legislatively.

Secondly, many of the changes that the Schumer bill argues for are already in the works. The Chinese, who know they desperately need to rebalance their economy in order to maintain longer-term growth, have already let their currency appreciate 30% against the dollar since 2005, and a full 10% last year. Wages are rising – in fact, that’s the reason there’s a nascent trickle of higher level manufacturing jobs back to the U.S., as Chinese pay hikes (coupled with higher energy and transport costs) make it less profitable to do business there, relative to the U.S. What’s more, American exports to China are actually increasing. Andy Rothman, a China expert at CLSA in Shanghai, recently pointed out to me that despite all the rhetoric around currency, U.S. exports to China rose 468 percent in the last decade. The next fastest growth rate to a major market was 64 percent, to Germany.

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A richer China is good for us, and good for them. But getting there is a tricky business. Just as there are two Americas, so there are two Chinas. The latest LVMH handbag on the arm of a Shanghai yuppie is a a year’s earnings for a Shaanxi farmer. It’s difficult to set the right speed for economic rebalancing when there’s such a huge prosperity divide. While property prices for luxury flats in Beijing may seem ridiculously high, slamming the brakes on development too fast could result in mass unemployment, and the thing that the Chinese fear most — social instability.

That’s lesson No. 2 in China 101. In America, class warfare involves peaceful protests by crunchy lefties using sign language to keep order. In China, it means angry hordes parading victims wearing dunce caps through the streets before stringing them up in public squares. Congressional leaders should remember that before they try to humiliate Beijing into doing anything.

Rana Foroohar is an assistant managing editor for TIME, overseeing business and economic coverage in print and online. She is also The Curious Capitalist columnist for TIME magazine. You can continue the discussion on TIME‘s Facebook page and on Twitter at @TIME.