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China: Friend or Foe?

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Americans have grown up with the belief that the United States is the center of the universe -- economically, politically, and militarily. But now we are being challenged in a new global economic battle, one that will take some tricky navigation to lead us to economic success.

Seniors remember winning World War II and the generous Marshall Plan that helped Europe recover. Helping former enemies created global growth that helped America rebound. Baby Boomers remember Khrushchev pounding his shoe on the table and threatening to bury us -- only to watch the Soviet Union capitulate, the Berlin Wall torn down, and the spread of Western economics. Gen X and Gen Y came to maturity in a period of technology expansion that led to increased prosperity.

Only in the past few years has America's bright promise faced challenges, seemingly on all fronts. Our debts are mounting, our jobs continue to disappear, and the costs of fighting a global war against terrorism are impacting our domestic economy.

Plus, on the international front, we have a new economic challenge in the growth of China. Unlike those decades when we fought the Cold War with the Soviet Union, it's not so easy to decide whether we are confronting an enemy or a trading partner or a rescuer.

Perhaps, it's a bit of all three. But we cannot afford to be ignorant of the drama that will be central to determining our future. And we cannot let domestic political considerations override economic reality.

China: Friend or Foe?

The issues of dealing with China were front and center in the recent summit between President Obama and Chinese President Xi Jinping. Here are some of the critical economic issues that must be navigated:

China lends money to the U.S.
The one issue that is not debated, but underlies all other issues is the fact that China now holds more than $1 trillion of our national debt. That is, they are lending us money - and currently, they are lending us money to finance our deficits at a very low rate.

Of course, it may be argued that this is in China's best interests, as well. They keep America's economy going, so that Americans are in a position to buy more "stuff" made in China! That keeps their system growing and creates Chinese prosperity. Still, America is the debtor nation -- and that gives China an unspoken edge that America has never previously had to face.

America needs Chinese economic growth.
Now there's the great irony of our situation. Our stock market reacts as much to reports of Chinese economic growth (or lack of it), as it does to our own economic reports. When it appears China's growth is slowing, our stock market falls. Bad news for China's economy calls into question the growth rate of many American businesses that trade with China, as well as the possibilities for global economic growth. The Chinese have become consumers, as well as producers.

China's currency is not (yet) freely traded.
China is moving toward a freely traded currency, so that future as currency exchange rates will reflect economic differences, adjusting costs of traded products, just as markets now do between the U.S. dollar, the Canadian dollar, the Euro, and the Yen. Eventually freely-traded currency markets will help balance out the cost to America of Chinese imports. Until then, Chinese imports will look "cheap" to American buyers.

But China will not be bullied into allowing its currency to be freely traded. Just as Japan has intervened in its markets to make its currency (and exports) appear "cheap" to global buyers of Japanese products, the Chinese "intervene" by fixing exchange rates, to keep their exports attractive, as well.

China challenges cyber-security and U.S. patents.
That accusation is well-documented. Theft of patented technology, pirated intellectual property, and outright cyber-penetration of government and corporate secrets is well documented. Coming to agreement on these issues requires a common acceptance of basic standards. Even in war, there are global conventions accepted by both sides. But that kind of mutual agreement on the basics has, so far, remained elusive. How can you come to an economic agreement, if you can't find some grounds for trust?

America needs China to create stability in Asia.
Specifically, China is North Korea's largest donor of aid, foreign investor and trading partner. Given the inability of the United States to prevail on North Korea in any meaningful way, it is essential that China become involved. In fact, experts see this week's meeting between North and South Korean representatives -- the first communication in months -- as a direct result of pressure from the Chinese, demonstrating their power in advance of the Presidential summit.

Global trade is truly an American domestic economic issue -- and China plays a far greater role than merely as a producer of low-cost products. Its demands for natural resources, and its Asian presence have a direct bearing on America's economic well-being.

So, is China friend, or foe? Are we rooting for the success of their economy, or their failure? In recent months, we have seen reports that Chinese imports have fallen, reflecting a slowdown in domestic demand. If China slows, do we cheer and claim victory -- or suffer along with them? If their credit bubble bursts, do we worry that their domestic economic problems could cause them to withdraw their bids for global companies, resources and products?

As in all generations, America will be tested by a new global configuration. And unless we get it right economically as well as politically, the outcome will be costly. That's the Savage Truth.