Microsoft's decision to stay doing business in China, in contrast to Google's stand on censorship, is attacked by Rep. Chris Smith as "enabling tyranny." But the company's stance is perhaps more straightforward than that of Google's. China is important to Microsoft, and the company is not about to give up on deep pockets of cheap labor, and on a vast market of consumers.
Microsoft's action also reveals a wider truth. It tells us a great deal about America's real relationship to China, as opposed to the Congressional spin currently placed on that relationship.
Above all, it exposes the flaw in arguments by economists and trades unionists calling for a 25% surcharge on Chinese imports, and for China to be deemed a currency manipulator.
The fact is this: China's surplus owes more to American activity in China than to Chinese companies.
American consumers and trans-national corporations like Microsoft have helped create China's massive surplus, by investing in China, or by spending their incomes (and/or borrowed money) buying Chinese and other Asian goods.
In other words, the causal direction of China's surplus starts in the USA as expenditure, and ends in China as income. If China's surplus is to be reduced, America will have to cut back on its own expenditure and investment policies in China.
To understand the causes of these imbalances we need to ask: How did China's surplus build up? Who is largely responsible for it? Who gains? And who loses?
Looked at this way we quickly discover that the surplus is down to the actions of American and other OECD companies.
For it is American, and foreign TNCs - not the Chinese - that are responsible for most of the expenditure, investment and exports that boost the Chinese surplus. Some argue that over 50% of Chinese production for exports is by foreign companies.
For evidence see this chart below from Natixis. It shows that between 1996 and 2010 foreign-owned companies and joint ventures were responsible for a much larger proportion of China's exports, than were Chinese state-owned or private companies.
China's surplus can also be traced back to the 'Nixon Shock' of 1971 when the President unilaterally dismantled the Bretton Woods system - an international financial architecture designed to discipline both deficit and surplus countries, and maintain the balance of trade. By abandoning the system, President Nixon laid the foundations of the US deficit and the Chinese surplus.
In addition, Nixon's actions in 1971 unilaterally removed gold as the world's reserve asset. Later, US Treasury Bills - IOUs issued by the US Treasury - replaced gold. Today any country with a surplus has no choice but to hold Treasury IOUs, as evidence of the health of their economy.
So, largely thanks to Nixon, the US now acts as the world's banker, and can issue Treasury Bills freely to finance its deficit.
It's as if one nation in the world holds a credit card without a limit, or without an effective repayment date, and has used it to go shopping in China and the rest of Asia. And now blames China for generating income from that expenditure!
And so, looked at in this different way, we can conclude that China is managing its surplus in the interests of Americans: especially TNCs like Microsoft.
Attacking China's surplus is, therefore very likely to damage American TNCs - as well as the USA as a whole.
Having helped create the massive Chinese surplus, and having benefited considerably from trade arrangements with China, American congressman are now looking for a scapegoat for high levels of US unemployment.
They have been joined by the respected economist, Paul Krugman. His complaint that China is "engineering an unwarranted trade surplus" and his call for a surcharge of 25% on Chinese goods is worrying as it reinforces protectionist tendencies, and helps ratchet up tensions between the US and China.
Somewhat implausibly Fred Bergsten of the Petersen Institute denied that such actions could be construed as protectionism: "Currency manipulation equals protectionism," he said. "That being the case, reaction to it should not really be thought of as protectionism."
No, Mr. Bergsten, reaction to it is better known as 'tit-for-tat' - or 'beggar-my-neighbor' policies: policies that attempt to remedy economic problems in one country in ways which tend to worsen the problems of other countries.
As a result of these rising tensions, Congress could impose sanctions on Chinese imports, which will anger the Chinese. According to Nouriel Roubini's report of a high-level meeting in Beijing, sanctions will almost certainly trigger retaliation by the Chinese against American interests in China.
This rise in tensions, egged on by economists, could lead to a major dispute between two powerful nations, worrying enough in itself. From the point of view of the United States, retaliation by China could damage the interests of those very American companies, like Microsoft, that have helped create the surplus, and that are doing very well in China.
What is the solution?
The righteous anger that middle-class Americans feel at the failure of their economy, at the trade deficit, and at high rates of unemployment - is utterly justifiable. And yes, Americans are right: massive surpluses, like massive trade deficits are bad for the global economy. Surpluses drain demand from other parts of the world economy, and lead to a rise in unemployment.
The solution is to 'engineer' a return to balance in world trade.
To do that the United States will have to lead the world in re-introducing a Bretton Woods-type system: Bretton Woods ll.
In other words, a system that restrains capital flows between nations, and obliges countries to structurally adjust their economies periodically, to reduce deficits/surpluses, and return their economy to balance.
This will mean that Americans will have to cut back on expenditures in China, until their economy is restored to balance.
That will also likely mean that companies like Microsoft will have to leave China, return to the USA to invest and create jobs here, and help reduce the US deficit.
Exercising world leadership - not engaging in 'tit-for-tat' policies- is a proper role for the United States.
And ultimately it's only such leadership, the design of a new Bretton Woods- type system and the restoration of balance to the global economy, that will help America recover, and protect American companies and jobs.