commentary

(International Herald Tribune )

January 22, 2004

It's So Easy to Blame China for Everything

by William H. Overholt

The world's scapegoat

SANTA MONICA, California China is becoming the all-purpose repository of the world's hopes and fears - sometimes a scapegoat for economic ills, sometimes the answer to geopolitical prayers.

The European Central Bank blames China for Europe's sluggish growth and persistent unemployment. The Japanese finance ministry blames Japan's deflation on China's currency policy. Americans protesting the loss of manufacturing jobs and declining wages blame China's currency.

Such views have inflamed both diplomatic exchanges and domestic politics in several countries. American public concern about China has made both President George W. Bush and his Democratic Party opponents more protectionist than their predecessors.

The latest variation on the view of China as preternaturally potent is an argument by some French commentators, including François Heisbourg (IHT Views, Dec. 27), that U.S. dependence on Chinese bond purchases will limit U.S. global power in the future and that this dependence was behind Bush's recent rebuke of Taiwan's leader, President Chen Shui-bian. "China," Heisbourg wrote, "holds the fate of America's economic recovery in its hands."

All these arguments about China share two qualities. First, they collapse under economic analysis.

In reality, Europe's sluggish growth is largely caused by inflexible labor markets and an excessively tight money policy; China could be causing no more than 0.1 to 0.2 percentage points of Japanese deflation; U.S. manufacturing job losses are largely caused by U.S. productivity improvements in a weak economy.

An authoritative Chicago Federal Reserve Board study shows the Chinese currency has negligible impact on American jobs. And the decline of basic U.S. manufacturing wages is largely caused by immigration.

The French theory of China dominating U.S. policy by threatening to dump U.S. bonds is equally flawed. China, Heisbourg says, is not Japan, the subject of earlier fears about U.S. financial dependence. He paints the United States as the "weaker party" in the economic equivalent of a nuclear standoff with China. But China is far more financially fragile than Japan was when similar arguments were being made about U.S. dependence on Japanese financing.

The catastrophic loss of value for Chinese reserves if China suddenly sold U.S. bonds would hurt China far more than the United States. And depriving Americans of funds to purchase China's exports cheaply would hamper China's growth.

Second, these views just project our own frustrations abroad. The European Central Bank weakens growth with tight money, then diverts blame to China. To the extent that Asian currency controls cause excess appreciation of the euro, Japan's influence overwhelms China's but it's easier to blame China than Japan, Europe's ally.

Japan's Ministry of Finance doesn't want to bankrupt dead companies, so it subsidizes their survival, creating overcapacity and deadly price competition, then blames the resulting deflation on China. Similarly, Americans project employment and wage problems onto China rather than confronting immigration and adjustment.

Reflecting French desire to limit American power, Heisbourg conjures an imaginary China that overshadows the United States financially. But China's economy is only the size of America's largest state, California, and the unfunded liabilities of China's banks, pension system, medical system and unemployment system exceed its gross domestic product.

Yes, China's heroic restructuring creates high growth, enormously benefiting the Chinese people, but it won't make China the arbiter of U.S. manufacturing or wages or power, or of Japanese deflation or European growth, in the foreseeable future. Yes, U.S. domestic and international debt will eventually constrict U.S. power, but not because Beijing will commit financial suicide to confront Washington.

And, yes, President George W. Bush changed his perspective on Taiwan, but not because of finances. So did President Ronald Reagan, who came to office promising to upgrade relations with Taiwan and two years later promised drastic limits on military sales to Taiwan - when China owned few U.S. bonds. So did President Bill Clinton, who came to office denouncing China's trade privileges but later called China a "strategic partner" - when the U.S. government ran enormous surpluses.

These presidents all sought to avoid war, not to sell bonds. All knew little of China before becoming president and changed their views about the path to peace, not to bond sales, when they gained experience.

A decade ago I published a book, "The Rise of China," which started as an article in 1990 for the International Herald Tribune. There I argued, against that time's conventional wisdom, that Chinese development policy would succeed, that Mikhail Gorbachev's Soviet Union would fail and that China would again become important. But never did I imagine the extent to which intellectual and political leaders would find it convenient to treat Chinese influence as omnipotent.

China is a very poor country that has struggled heroically to overcome two centuries of mismanagement and disorder. It might succeed, benefiting the whole world, if its leaders retain their reformist courage and if we can relate to the real China rather than to projections of our dreams and nightmares.

The writer holds the Asia policy chair at Rand Corp., a nonprofit research organization.

This commentary originally appeared in International Herald Tribune on January 22, 2004. Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.