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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
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
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
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:
Professor, Robert H. Smith School of Business, University of Maryland,