China's invisible hand

Shanghai Star. 2003-11-06

By Nick Land

As this page has already noted on more than one occasion, China-bashing is emerging as a major theme among neo-protectionists, both in international trade diplomacy and in the heated rhetoric of the US electoral process.

After whining about Japanese manufacturing prowess in the 1980s and Mexican competitiveness in the run-up to NAFTA, US enemies of free trade are now consistently turning their fire on the Chinese economic miracle (with Indian software engineers also coming under criticism for being too good at what they do).

This entire economically-illiterate pantomime is thoroughly depressing. Not only has the pitiful free-trade record of the Bush administration been consummated by the recent WTO debacle at Cancun, but super-protectionist Richard Gephardt, marginalized as a cheap populist under Clinton's pro-globalization regime, has emerged as a major challenger for the Democratic presidential candidacy, attesting to the renewed acceptability of economic isolationism within the US opposition party.

For all these reasons it is worth placing the recent spectacular US growth spurt - of over 7 per cent - in its proper context, which is that of deep and deepening mutual advantage, based on trade integration, of the US and Chinese economies.

To begin with the most straightforward - or at least widely perceived - aspect of the relationship, supporting China's economic expansion is of immense benefit to the entire world economy, including prominently the US. With the Eurozone and Japanese economies serving as seemingly bottomless reservoirs of disappointment, China's supercharged growth now provides the second-largest contribution to (fresh) global demand - after only the US itself.

The Chinese export machine is supporting the most thoroughgoing economic reform process the world has ever seen, directly lifting a fifth of the global population out of poverty, while offering a uniquely powerful lesson in economic good sense to the whole of the developing world. This lesson has already helped to guide India and Viet Nam in the direction of market-oriented growth-positive policies.

The US also benefits even more directly from its bilateral economic relation with China, in ways essentially linked to the current revival of growth, since the Bush administration's born-again "Reaganomic" recipe of low-taxes and high government deficits is massively dependent upon US openness to Chinese trade.

As the "Walmart revolution" in US retailing demonstrates, highly competitive Chinese imports are reshaping the US economy by stimulating consumption while holding down inflationary pressures. Since much of this import-supported retail revenue is captured by US companies (whether through overseas operations or by adding value in the supply chain) the result is an injection of adrenaline into US business and new jobs in dynamic sectors.

Perhaps most importantly, without the influence of cheap Chinese imports, inflation would force interest rates upwards at a far earlier stage of the business cycle, choking-off recovery. Furthermore, US government deficits are directly financed by China's trade surplus (accumulated in US dollar reserves), cancelling out the other major inflationary threat to sustainable US growth.

Far from posing a threat to US economic prospects, China is reaching out an invisible helping hand.

Copyright by Shanghai Star.