Shanghai's World Financial Center - - China's tallest building

Dr. Peter Morici: Facing up to China: In 1876, Europeans visiting the Philadelphia Centennial Exposition were astonished by American industrial prowess. In two generations, the United States had progressed from a simple agrarian society to challenge the most advanced European economies. Now, China confronts America in an historic test transcending commerce.

Americans believe individuals, each defining their own lives, best chart the progress of the nation. Governments draw legitimacy from collective approval - - citizens are the sovereign.

Markets and democracy define America. Our institutions cultivate competition among individuals and ideas that shape our common material and civic lives.

Recently, Democrats and moderate Republicans lost sight of those fundamentals, and imposed health care reforms, bailouts and huge deficit voters simply don’t want. They were soundly defeated in mid-term elections.

Markets and democracy are mutually reinforcing. Markets work best when personal freedoms are protected, and democracy best safeguards those liberties. Free markets give individuals a strong interest in securing democracy.

Since World War II, the United States has worked with allies in Europe and elsewhere to build international institutions that promote open markets, human rights and democracy.

China is no champion of those values.

The Communist Party imposes an authoritarian regime and assumes parental authority over its citizens. It prefers state capitalism to private enterprise, and embraces market reforms only as needed to participate in global commerce on terms unfairly tilted to China’s advantage. Unless compelled by necessity, it will not adopt market reforms that could instigate popular sentiment for democracy.

China is no 19th Century America.

Nineteenth Century America made pioneering contributions to steam, railroad, telegraph, and electrical technologies. Wages were higher than in Europe and attracted skilled immigrants. Considerable resource wealth powered development.

China accomplishes growth with appropriated technology and cheap labor, and is desperately dependent on imported oil and resources. It compensates for shortcomings by compelling western companies to transfer knowhow and with an undervalued currency that subsidizes exports and suppresses the real wages of industrial workers. Its middle class prosperity is built on exploited factory labor.

During the Cold War, U.S. moderates advocated engagement with the Soviet Union. They believed, through our example, its citizens would see the power of individual liberty and compel change. Subsequently, Washington adopted that strategy toward China.

That is folly.

The Soviet Union collapsed, not because it bought into Jeffersonian ideas, but because its economy failed. China's economy is succeeding. Don't look for its leaders to call for free elections anytime soon.

To sustain the Communist Party, Beijing has a strong interest in selling its brand of authoritarian capitalism to others and redefining international institutions that promote open global markets and human rights.

To secure oil and other resources and enhance global influence, China is investing abroad, building a blue-water navy and modernizing its army.

Through mercantilism, China has accomplished huge trade surpluses and breakneck growth, imposed on the United States huge trade deficits and high unemployment, and made American free market prescriptions for the global economy appear foolish and outdated.

Through diplomacy, the United States has failed to persuade China to abandon currency and other mercantilist policies that harm the US economy.

At the IMF and G20 meetings, German and other key Western allies abandoned the United States, leaving it to fend for itself.

America stands on a lonely perch, and the time for talk is over. Washington must respond to Chinese mercantilism with actions, not words.

China’s purchases of dollars and foreign securities to maintain undervalued yuan come to 35 percent of exports. Washington should impose proportionate tax on purchases of yuan used to buy Chinese goods or invest in China, and intervene in currency markets to push up the value of the yuan.

Washington should place limits on Chinese technology sales and investments in the United States that mirror the restrictions China imposes on imports and foreign investments.

Across the board and without exception, the United States should decisively answer Chinese protectionism.

Failure to act aids China's success. It is appeasement and courts disaster.

Insight on who is the real currency manipulator: China or the U.S., with Prof. Peter Morici, of the University of Maryland and Zachary Karabell, River Twice Research: