Obama vs. Romney: Who’s Right on China?

The most shocking part of the third debate between President Barack Obama and Republican presidential nominee Mitt Romney on Monday was how little attention they paid to China. I counted an hour and 15 minutes before the subject even came up in earnest. That’s not to say the other topics discussed — terrorism, the Middle East, Afghanistan — aren’t important as well. But looking out over the next several decades, the rise of China to superpower status is, in my opinion, the single most important foreign policy challenge facing the U.S. We’re shifting back to a bipolar world from Pax Americana, and whether that results in a new Cold War or a more peaceful, prosperous globe will depend on how Washington handles a richer, more assertive and more powerful Beijing.

That means the China policy of the next President of the U.S. is of crucial importance for the future of America and the economic and political stability of the world. So the big question is: Does Obama or Romney have a sounder, smarter strategy on China?

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It is not an easy question to answer. Both candidates have engaged in rather unproductive attacks on China to score political points with an electorate frustrated by the feeble recovery at home. To both Obama and Romney, China can easily be portrayed as an irresponsible adversary, stealing American jobs and technology through various nefarious trade practices. Each candidate has tried to convince voters he’d be tougher on China than the other guy in protecting American interests and workers. Let’s look at some major issues with regard to America’s economic relationship with China and where the candidates stand on them:

CHINA’S CURRENCY

For me, the most misguided statement on China comes out of Romney’s mouth. That concerns China’s currency. Here’s what Romney said during Monday’s debate:

On day one, I will label [China] a currency manipulator, which allows us to apply tariffs where they’re taking jobs … We have to understand that we can’t just surrender and lose jobs year in and year out.

Romney is really out of date on this one. The whole issue with China’s currency has been overblown for years. Yes, it is true that China does not have a freely traded currency properly valued by market forces, and some believe it should be appreciating against the dollar more rapidly than it has been. But the idea that a stronger Chinese currency can eradicate the U.S. trade deficit with China has been debunked. Since 2005, the Chinese currency (the yuan) has appreciated by more than 30% against the dollar. But the U.S. trade deficit with China increased by 46% from 2005 to 2011. The reasons why the U.S. has a persistent trade deficit with China goes well beyond the value of China’s currency, into the structure of the two economies and how they are connected together. Labeling China a “currency manipulator” won’t do very much to alter the economic relationship between the two nations.

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And it might just make matters worse. Sticking such a tag on China will very likely cause Beijing to retaliate with measures aimed at keeping American goods out of the hands of increasingly wealthy Chinese consumers — something U.S. companies, suffering from feeble economic growth at home and in other markets, can’t afford to have happen right now. If the “manipulator” label ends up resulting in punitive tariffs on Chinese goods imported into the U.S., the prices of those goods will increase for American consumers, further straining the wallets of a workforce already strained by debt and joblessness. Suppressed consumption in the U.S. won’t do any good for American retailers or the many U.S. companies that manufacture their products in China for sale at home.

Obama is much more reasoned on the currency issue. He noted in the debate that the yuan has appreciated, saying that “actually currencies are at their most advantageous point for U.S. exporters since 1993.”

TRADE CONFLICTS

There’s not much space between the two candidates on the issue of trade. Both like to talk tough on this issue; both like to claim that unfair practices by China cost American jobs. Here’s a typical comment, from Romney in Monday’s debate:

We’ll also make sure that we have trade relations with China that work for us. I’ve watched year in and year out as companies have shut down and people have lost their jobs because China has not played by the same rules.

Does China play by the rules? To a certain extent, no. The government does subsidize Chinese industry, both directly and indirectly. Foreign companies face restrictions in accessing the China market. In general, though, both candidates (and the American public at large) have to get beyond the idea that specific trade policies in China have somehow undercut the U.S. economy. The reality is that China has real competitive advantages, mainly a large, low-wage, quality workforce. Companies from the U.S. and elsewhere have moved production to China to capitalize on that workforce, not because the Chinese government fools around with its currency or helps its state enterprises. There isn’t a whole lot trade policy can do to change that equation.

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That isn’t to say U.S. policy can’t assist specific American industries and companies in competing with or benefiting from China. The U.S. needs to press China to open markets more widely to U.S. exporters and investors. China, as Romney continually points out, has to do a much better job of protecting intellectual-property rights. Obama has actually struck upon a pretty good way of pressing China to improve its trade practices — utilizing the World Trade Organization. Here’s what Obama said on this front:

I know Americans had seen jobs being shipped overseas; businesses and workers not getting a level playing field when it came to trade … That’s the reason why we have brought more cases against China for violating trade rules than the other — the previous Administration had done in two terms. And we’ve won just about every case that we’ve filed, that has been decided.

China takes its WTO responsibilities very seriously, and the organization is seen as a relatively impartial arbiter of such disputes. Rather than going head to head with Beijing, using the good offices of the WTO could produce some real results.

JOBS

Both candidates claim that standing up to China will create more jobs for Americans. That may be true in very general terms. Opening up China to American exports and investment would probably create more jobs at home. But Romney takes this too far. He adds “cracking down” on China to his list of methods to create 12 million new jobs. I don’t see how he can promise that taking a harder line on U.S.-China trade can somehow produce a specific number of jobs. Both candidates also have to be wary that efforts to protect jobs — by imposing tariffs on Chinese products, for example — don’t in the end help the U.S. economy. For example, in Monday’s debate, Obama repeated a claim that slapping tariffs on Chinese-made tires helped American workers:

We had a tire case in which they were flooding us with cheap Chinese tires. And we put a stop to it and as a consequence saved jobs throughout America.

Perhaps the tariff helped a few employees of tire companies. But the policy also likely caused Americans to spend more on tires. A study by the Peterson Institute for International Economics figured that Americans spent $1.1 billion more on tires in 2011 because of the tire tariff. That’s the problem with using protectionist policies in an attempt to preserve jobs.

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WHO’S BEST ON CHINA?

Neither candidate impresses me all that much on China. Both seem to suffer from the out-of-date notion that we can “stand up” to Beijing, as if the power balance between the two nations hasn’t drastically changed over the past decade. I find Romney’s rather simplistic approach to China a bit surprising for a guy who claims to be a business guru. Romney morphs from a champion of free markets and private enterprise into a proponent of tariffs and state protection when it comes to China. I fear his combative attitude would sour relations with Beijing and lead to retaliation.

Obama’s rhetoric is not helpful either, but, in my opinion, he does see America’s relationship with China in much broader terms than Romney. Contending with China doesn’t just mean fixing currencies and resolving trade disputes. It requires preparing the American workforce for even more intense competition from a rising China in the future. Here’s what Obama said on Monday:

Over the long term, in order for us to compete with China, we’ve also got to make sure, though, that we’re taking care of business here at home. If we don’t have the best education system in the world, if we don’t continue to put money into research and technology that will allow us to create great businesses here in the United States, that’s how we lose the competition.

Obama realizes the U.S. will need all the advantages it can get in order to maintain its competitiveness. Romney seems to believe all the U.S. requires to maintain its competitiveness is tax breaks. Both candidates talk about creating a level playing field with China. Obama has a stronger, wider vision of how to make that happen.

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