Trade war ahead?

Why Hu Jintao’s state visit to Washington could be pivotal for the world economy

Trade war ahead?

Where’s a good Oriental villain when you need one? Back in the 1930s, Fu Manchu fitted the bill to perfection. Created by author Sax Rohmer, Fu was a criminal mastermind, intent on world domination. And notably Asian in his dastardly deeds too (enemies faced “death by silk rope”, for example), which fitted contemporary prejudice about “the Yellow Peril”.

At least that rather kitsch view of the Middle Kingdom and its mysterious ways is largely a thing of the past. But notions of China as a national foe turn out not to have disappeared completely, as witnessed in the recent US mid-term elections. Last month the New York Times reported: “With many Americans seized by anxiety about the country’s economic decline, candidates from both political parties have suddenly found a new villain to run against: China.” It added that – in a single week of the campaign – at least 29 candidates ran advertisements suggesting that their opponents were too sympathetic to China, and that as a result Americans were suffering.

“It’s gotten so that even the normally chest-thumping American public is feeling a bit insecure,” says Jodie Allen of the Pew Research Centre. She then cited a Pew poll that found by a 44% to 27% margin that Americans were naming China, and not the US, as the world’s leading economic power.

Premature and rather ill-informed, of course. But not that it stops Congressmen from listening in. They’ve been ratcheting-up the rhetoric about Chinese trade practices and raised tariffs on Chinese tyres and steel pipes. Most explosively Senator Charles Schumer proposed a bill that could see China labelled a ‘currency manipulator’ – laying the ground for a wider range of export tariffs. Many believe it could set-off a trade war, although some are prepared to risk it. Fred Bergsten of the Peterson Institute recently wrote in a Financial Times op-ed that “America has no alternative but to put China on notice”.

The Obama administration has made its own threatening noises about China’s trade practices, but thus far Treasury Secretary Geithner has worked to turn down the volume. So the next event that we all need to watch is Hu Jintao’s trip to Washington in January – his first state visit to America since 2006.

The Chinese are teeing up their president’s trip as significant: the Foreign Ministry has said it will be “profound and far-reaching for bilateral ties” and even referred to “a new era”. Those are expansive words for Foreign Ministry types, although WiC notes that they are open to interpretation in negative, as well as positive, terms.

So far China has delayed making major concessions masterfully. But knowing the mood in Congress – and wanting to avoid any threat of a wider trade conflict – Hu’s visit offers a set piece moment for a grand Could a clearer timetable for yuan appreciation be on the cards?

A more uncomfortable truth for the average American may be that even a ‘fairer’ exchange rate is no silver bullet for the US economy. It will help some local manufacturers, sure, but as Sara Bongiorni’s book A Year Without Made in China makes plain, the American consumer will find it hard to find homegrown substitutes for a lot of Chinese goods.

Can America export more, and reduce the deficit that way? Again, it’s no given. US companies that are doing well in China – Mars, KFC, Nike and Coke etc – are doing so in spite of current exchange rates. Agricultural exports – such as soyabeans – are also doing well (the Americans’ other major exports to China are electrical machinery, power generation equipment and aircraft).

But as Britain found pre–Opium Wars, what if the US simply makes a lot of stuff the Chinese don’t want? That’s particularly evident among more affluent shoppers. Go to a shopping mall in China, and you will find very few aspirational American brands. Once they have the cash, the Chinese want a Swiss watch, a German car, Italian shoes, an English suit, French first growth wine and Scotch whisky. Their first home entertainment system could well be Korean or Japanese. But for China’s new rich, only a few US branded products resonate. Yes, Apple is a worthy exception. But iPads and iPhones can’t fix the US deficit by themselves…

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