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China: Continued Abusive Trade and Now a "Blue Water Navy"

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Two weeks ago, as the New Year loomed and many people were on holiday, the Obama administration -- specifically Secretary of Treasury Tim Geithner -- announced, as quietly as possible, its decision not to label China as a "currency manipulator" even though in its required semi-annual report it stated that China had not met the statutory requirements to avoid such a designation.

To put this into context, according to Pedro Nicolaci da Costa of Reuters (12-28-11), the value of the Chinese yuan, which Beijing publicly acknowledges that it 'manages closely,' rose only 4 percent against the dollar in 2011 and has risen a meager 7.7 percent since China dropped a firm peg against the dollar way back in June 2010. Most economists believe that the yuan is still undervalued against the dollar on the order of 30 percent, and even the usually conservative Peterson Institute for International Economics recently estimated that the yuan is currently undervalued by 24 percent against the dollar.

The last time any administration -- Democratic or Republican -- labeled a country a currency manipulator was July 1994, when China (surprise, surprise) was so cited. And even though China will likely show a trade surplus with the United States in 2011 on the order of $275 to $300 billion -- another record high figure and virtually all in manufactured goods -- the Obama administration will have formally refused six times to cite China for its currency manipulation.

Treasury Secretary Geithner is on the record saying that the law which requires the administration to determine whether U.S. trade partners are deliberately undervaluing their currencies is, in his opinion, a poor tool to push Beijing on the yuan. So, on his own volition, he's decided not to follow the law. This immediately caused Xinhua, the Chinese state news agency, to call the Secretary's action a "clear and positive signal" that would [further] benefit Chinese trade into the United States -- of course, this can only mean further bad news for America's manufacturers.

Secretary Geithner says he did not follow the law because he decided instead to "tread softly and use diplomacy." But what is "treading softly" getting us?

It is certainly not making American manufacturers more competitive with China nor is it bringing down our massive trade deficit with China, both outcomes being structurally unachievable given China's trade practices and abuses. Right now fully 90 percent of the cost differential between an average good manufactured in China and a similar good manufactured in the United States is due to various Chinese subsidies, most of them illegal under WTO. Only about 10 percent of the difference is due to the differences in wages, which of course is contrary to popular belief and to the contentions of our country's 'free traders,' who it seems like blaming American manufacturing workers for getting paid too much.

The latest noteworthy example of China's protection of its industries -- and its 'rest of the world be damned' behavior -- is it's allowing its steel industry to duck yet another global environmental initiative. In the very same week that Secretary Geithner took the 'soft' (and 'easy') way out on China's ongoing currency manipulation, we were told (Financial Times, 12-29-11) that none of China's myriad steelmakers would be joining the World Steel Association's project to have the world's top makers confidentially provide data to the Association in order to "create a better understanding of technical ways to materially reduce carbon dioxide emissions." This despite the fact that the worldwide steel industry produces, from all of its processes linked to steelmaking, a staggering 2.5 billion tons of total emissions each year. Ironically, the Association's current chairman is CEO of one of China's biggest steelmakers.

The economic advantage which China's steelmakers gain by not being good global environmental citizens, while every U.S. steelmaker is, is the major reason why the new San Francisco Bay Bridge -- one of the largest U.S. civil engineering projects of the last couple decades -- is being constructed with Chinese-made steel. Add to this those pesky 'subsidies' and the currency manipulation which Chinese manufacturers rely on and it's no wonder China can make huge steel bridge structures and ship them clear across the Pacific significantly cheaper than any of our domestic steel companies can make the structures here at home.

In addition to not cooperating with the World Steel Association's well-intentioned project, the Chinese have stayed on the sidelines of carbon dioxide monitoring projects organized by the World Business Council for Sustainable Development on behalf of the cement industry and of a similar project for aluminum run by the London-based International Aluminum Institute. (Financial Times, 12-29-11).

Indisputably, it is mostly these subsidies that China lavishes on its manufacturers -- especially including its currency manipulation -- which have caused at least 6 to 7 million good American manufacturing jobs to be stripped from our shores over just the last decade and offshored to China. And since each direct American manufacturing job carries with it at least 1.5 to 2.0 indirect jobs, something on the order of 18 million American jobs overall have been lost in 10 years due to our "treading softly" with China with regard to trade.

A designation of China as a currency manipulator, if it ever happens, would simply require the United States to step up negotiations with Beijing on the yuan's value -- nothing more. However, because China is the biggest foreign direct and indirect holder of U.S. Treasuries, with around $2 trillion now held in its treasury, the administration's position seems to be that China's 'leverage' is so great that we can't even follow our own law. But with a seemingly perpetual massive trade surplus vis-à-vis the U.S., won't China's so-called leverage be even greater at the end of 2012 and at the end of 2013 and at the end of...?

But increasingly, China's abusive trade practices are almost subtle compared to what is going on in its shipyards and aircraft manufacturing plants. Activity easily paid for out of those trillions of American dollars earned from its unbalanced trading with us over the past two decades.

What better way is there for China to thwart U.S. and international political pressure on its abusive trade policies than with commanding military might? Exhibit A is China's new "blue water Navy" comprised of formidable capital ships that soon will be able to impose China's sovereignty in the Tonkin Gulf over Vietnam's territorial coastal oil reserves and beyond the immediately adjacent Yellow and China Seas into the western Pacific and Indian Ocean.

In 2004, Chinese President Hu Jintao unveiled a new military doctrine calling for the armed forces to undertake "new historic missions" to safeguard China's "national interests." Chinese military officers and experts said then that those interests included securing international shipping lanes and access to foreign oil and safeguarding Chinese citizens working overseas. Lately, this agenda has been expanded to include using China's submarines, fighter planes and guided missiles to force America's Seventh Fleet "back as far as Hawaii." (See Barnes/Hodge/Page, Wall Street Journal, 1-04-12)

A now-updated December 2010 analysis by the Financial Times estimates Chinese overall naval forces to be around 304 vessels, including 79 "principal combatants" -- i.e., major warships -- and 66 submarines (of which at least 29 are armed with antiship cruise missiles). These numbers and capabilities compare favorably -- to no little U.S. concern -- with the 180 mostly major warships in the U.S. Pacific Fleet, even acknowledging that 'ship for ship the American Navy is considered qualitatively superior to the Chinese Navy'. China has also invested heavily in complementary cyber war technologies.

For a country that for centuries was focused mostly on continental Asia and only its neighboring Seas, China's now obvious commitment to a capable submarine fleet, major surface ships, radar-evading fighter jets (called J-20s), and new-generation guided missiles (called DF-21Ds) can't possibly portend well for the United States, Japan and the nations of the Pacific region seeking to remain economically -- and politically -- independent of China. To drive this point home, the ship-to-ship DF-21D missile was specifically built to hit naval targets 1,700 miles away by coming in at an angle too high for U.S. defenses against sea-skimming cruise missiles and too low for defenses against other ballistic missiles. (Ibid.)

For now, China still seems more interested in extending its economic power directly rather than through its military power. However, China's new found capability to project military force is certainly a harbinger of China eventually flexing such power to gain greater economic submission of much of the Eastern Hemisphere, starting with its neighbors Vietnam (especially), Cambodia and Laos.

Whether on a schoolyard or on a continent, "treading softly and using diplomacy" in dealing with a bully seldom promises a happy outcome. Unfortunately, when it comes to trade with China this is a lesson not yet embraced by some in the administration and Congress. Pray this doesn't extend as well to China's increasing military might, although contrary indications already abound.

Leo Hindery Jr. is chair of the U.S. Economy/Smart Globalization Initiative at the New America Foundation, co-chair (with USW President Leo Gerard) of The Task Force on Jobs Creation, founder of Jobs First 2012, and a member of the Council on Foreign Relations. He is the former CEO of AT&T Broadband and its predecessors, Tele-Communications, Inc. and Liberty Media, and is currently an investor in media companies.

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