Here is some brief China analysis. John and Andrew feel free to jump in with comments or follow-up posts.

The Fourth Rail has a nice post about Nancy Pelosi’s (D-California) recent comments regarding our “China Policy”.

She makes the following points:

WASHINGTON (AFP) - The leader of Democrats in the House of Representatives denounced US China policy as a “total failure,” particularly with respect to the upward-spiraling US trade deficit.

“There has never been any good faith on the part of the Chinese to act in a way that is fair, that honors the opportunity that we give them to grow their economy by using our markets for that growth,” said Minority Leader Nancy Pelosi.

“As a result, much sensitive technology, some of it related to weapons of mass destruction, was exported from China to unsafe countries.”

Because of misguided US trade policy “the trade deficit has soared, and religious repression continues, and we are up the creek,” she told reporters at a press conference.

“The China policy of the United States — Democrats’ and Republicans’ alike — has been a total failure,” the Democratic leader said.

Pelosi said US officials missed a golden opportunity to wield influence on China in the area of human rights and trade a decade and a half ago, when the trade deficit was not as large.

“Going back 15 years when it was two to three billion dollars in a year, I thought it gave us tremendous leverage to stop the Chinese government’s proliferation of weapons of mass destruction, to stop their unfair trade practices, and to stop their human rights violations,” she said.

“Today the trade deficit with China is two to three billion a week — not a year, a week,” she said.

“Today they rule the roost. They have over 150 dollar billion trade deficit a year with us. … If they decided, for a day or two, to think about whether they were going to purchase our bonds, we would have a problem in our economy,” she said.

Pelosi had particular words of scorn for “all those geniuses who told us that if we just continue to engage in the same trade relationship with China that there would be freedom in China, and it would stop the proliferation of weapons of mass destruction, and they would stop engaging in unfair trade practices.”

“The United States had much more leverage early on with the Chinese … before we gave them Most Favored Nation status permanently with nothing on their side …. before we smoothed the way for them to go into the WTO.

“Our leverage is greatly diminished because of those decisions,” Pelosi said, lamenting: “I don’t know if you can turn back on it.”

Parsed:

“There has never been any good faith on the part of the Chinese to act in a way that is fair, that honors the opportunity that we give them to grow their economy by using our markets for that growth,” said Minority Leader Nancy Pelosi.

We didn’t give them anything. Our markets are open because we believe in free trade (to a certain extent) and the fact that the Chinese exploited this opportunity is a function of capitalism, not abuse. Afterall, is the minority leader implying that trade with the United States should be a one-way street where we profit, but not the other side?

“As a result, much sensitive technology, some of it related to weapons of mass destruction, was exported from China to unsafe countries.”

Yes much sensitive technology was exported, chiefly by the Clinton administration to the Chinese in exchange for campaign contributions. The fact that they passed it onwards shouldn’t be too surprising; they learned it from the Democrats.

“Going back 15 years when it was two to three billion dollars in a year, I thought it gave us tremendous leverage to stop the Chinese government’s proliferation of weapons of mass destruction, to stop their unfair trade practices, and to stop their human rights violations,” she said.

This ignores the obvious fact that human rights abuses are much less common in China today than they were 15 years ago. I wonder why that is? It couldn’t have anything to do with China’s growing dependence on America for economic growth could it? Their trade practices are much more regulated today under the WTO than they were when China was freewheeling it under its own trade policies 15 years ago.

“Today the trade deficit with China is two to three billion a week — not a year, a week,” she said.

“Today they rule the roost. They have over 150 dollar billion trade deficit a year with us. … If they decided, for a day or two, to think about whether they were going to purchase our bonds, we would have a problem in our economy,” she said.

Pelosi had particular words of scorn for “all those geniuses who told us that if we just continue to engage in the same trade relationship with China that there would be freedom in China, and it would stop the proliferation of weapons of mass destruction, and they would stop engaging in unfair trade practices.”

China rules the roost? Yeah they wish. The fact is the situation is the opposite of what Pelosi describes. China is bicycle economy, if they stop pedaling (growing) at a certain speed the whole thing will collapse. This collapse would be social as well as economic. The people are only satisfied living in a nationalistic dictatorship as long as their lives are comfortable (stable) and there is plenty of opportunity (relatively speaking) for their children.

The key point to remember is that the deficit is only 150 billion a year because we have the economic power to buy these goods from China, what if we bought them elsewhere? China is not the only low cost provider in the world, but it is currently the most convient. Imgaine 150 billion dollars suddenly absent from the Chinese economy. We can do without the cheap GI Joe toys; can they do without selling them? We hold the trump card here, not China and their only saving grace is people like Pelosi who can’t see the leverage we actually poses.

She mentions the fact that the Chinese purchase our debt in the form of government bonds. So essentially they are financing our government’s spending on the cheap. The question no one asks is, what the hell else are they going to do with all of those excess dollars? Here is the breakdown: they sell goods to America, America pays in dollars. The Chinese aren’t buying nearly as many American goods, so they have excess US Dollars. The only thing they can do with these dollars is buy US debt, which creates demand for our debt, meaning we “rule the roost” not the Chinese.

China today engages in trade much more fairly than it did 15 years ago, it is much more integrated with the American economy than it was 15 years ago (i.e. we have the leverage to press them on their illegal arms sales), and finally they are far more pliable today when it comes to encouraging them to abandon unfair trade practices compared to 15 years ago.