The recent cratering of the Chinese stock market left some scars on our 401(k) plans and dominated recent headlines. Some called it a correction. I tend to think of it as another glimpse into the crazy house-of-cards economy in China.
Earlier in August, China devalued its currency, the yuan, resorting to an old mercantilist policy trick to offshore economic problems to other places - in this case, to American factories. A few weeks have passed, and the Chinese government may be literally trying to bail out its stock market. These actions aren't surprising if you've watched China closely over the past few decades. China will always act in its self-interest. But there's still an important lesson to be learned from this most recent shudder from the world's second-largest economy.
The lesson isn't that the technocrats who run the country by diktat might not be the economic sages the world took them for - though that's also a takeaway.
It's this: America's economic relationship with the world's second largest economy is big, complex, and deeply flawed. Yes, trade is an important form of diplomacy. But the wisdom underpinning our entire bilateral economic entanglement - that American consumers will endlessly buy what the Chinese are selling, and all will benefit as a result - is increasingly suspect.
The proof is measured in hundreds of billions of dollars of annual trade deficits, as well as thousands of shuttered factories and millions of pink slips - all of which amounted to a lost decade for American manufacturing.
Fifteen years ago, a bipartisan coalition in Washington bestowed Permanent Normalized Trade Relations status upon China, which removed much of the annual threat of tariffs from incoming Chinese goods in exchange for promises of democratic and economic reform.
That turned out to be a one-way windfall. Beijing has used its exploding wealth to fund the world's largest police state, and the only Chinese democracy we've seen came in the form of a Guns N' Roses album.
Instead, we got marginally cheaper goods at big box stores, the evaporation of a third of our manufacturing jobs, and a debilitating trade deficit with China that outdoes itself each year. In 2012, the trade deficit with China was $315 billion. In 2013, it was $318 billion. In 2014, $343 billion.
Look for a repeat in 2015.
China could have avoided the mess it currently finds itself in. It could have long ago made real attempts at market transparency, raising the value of the yuan to increase consumer purchasing power, or it could have stopped relying heavily on its state-owned enterprises - precisely the kind of actions that would lead to a more equitable trade balance with its largest trading partner.
Instead, one of its major responses to this crisis was to slash the value of the yuan - precisely the kind of action that boosts China's already sky-high export margins and makes competing American goods pricier by comparison.
The result? A domino effect in Asia.
Malaysia and Vietnam moved to shore up their own economies by devaluing their own currencies - precisely the kind of action that a rule governing currency manipulation in the upcoming Trans-Pacific Partnership (TPP) would have discouraged.
That push for such a rule died during a Senate vote in May.
Meanwhile, stateside apologists say it's unfair to criticize the yuan's drop and that, with a little patience, we'll see it swing back the other way in a few weeks.
I'll believe that when I see it, because American businesses and workers have been paying for state-funded growth in East Asia for far too long. It's past time we do something about it.
I suggest using all of the tools at our disposal to make China play by the rules.
Here are an immediate few, off the top of my head:
- The Treasury Department could correctly label China a currency manipulator in its biannual report on exchange rates, and clear the way for Congress to apply responding trade sanctions.
- The Obama administration could still negotiate an enforceable currency rule in the TPP, which would help deter copycat devaluations.
- Congress could agree to a bipartisan bill already passed by the Senate that would permit trade law cases against China based on currency manipulation.
- Or, to really get China's attention, the administration could insist on China honoring its past commitments to reform instead of engaging in its usual futile exercise of inking new (and repetitive) commitments while giving away more market access. When Chinese President Xi Jinping next visits Washington, we shouldn't be afraid to walk away from the table.
Severe? Maybe. That job-draining trade deficit could crack $350 billion this year. And it'll be more of the same until our economic relationship with China drastically changes.
Lots of candidates - see Donald Trump, Scott Walker, and Marco Rubio, for example - are offering bromides about China this campaign season, just as Mitt Romney did in 2012 and Barack Obama did in 2008. But don't be fooled by tough talk; actions matter the most. Trump's clothing line was mostly made in China, Walker's trade policy shows no real variation from the norm, and Rubio votes the wrong way on currency manipulation.
But it's only President Obama who can make a difference right now. The question is this: Are China's latest actions enough to prod the president to reverse six-plus years of his administration's reluctance to protect America's economic interests?