China has become the second largest economy in the world, but this ascent is also leading to accusations of unfair trade practices, largely related to its deliberately undervalued currency. The inflated Chinese trade surplus does not appear to be a fair practice, but then, by now, Chinese economy is just too big for the rest of the world to handle.
Export Promotion by Undervalued Currency
Everything is fair in love and war, but other than that everyone needs to follow certain acceptable code of conduct, in whatever sphere it may be, and trade is no exception. The whole idea of freeand fair trade is based upon the notion that when two parties trade, each one of them becomes better off. This happens only when the forces of the market are allowed to operate unhindered by the interference of government intervention. Unfortunately, the reverse is true in case of China, where the government controls the whole economy in a way that promotes its exports and minimizes its imports, using a highly undervalued currency that makes its exports incredibly cheap for other countries, while making imports equally expensive for its own people. The result is a huge trade surplus, which leads to a continuous flow of wealth from the rest of the world to China. It is a model followed earlier by many other Asian countries including Japan, but China has taken this art to a new height, resulting in enormously swollen trade surpluses, unprecedented foreign currency reserves, and incredible capital inflows.
How China Gets Away With It
If this can be done by China, then other governments, including those of more developed countries, may also want to choose this model. If they do not, it is only because it is just not accepted as a fair practice. To be matter of fact, no other country can get away with this kind of a strategy for long, except, of course, China, with its great wall encircling a communist political system and government, and a very long history of inflexible and rigid international posture that has not flinched an inch during the last six decades or so. It is more an outcome of international politics, where China has occupied a unique and absolutely crucial space, first in the middle of cold war manipulations that prompted Nixon to embrace it, and lately the US war on terror, which has held the US back from confronting China directly, in view of its strategic importance as a permanent member of UN Security Council, as the most populated country in the world, and now also as the next superpower in a very foreseeable future. It is this inability of the US led committee of developed countries that has allowed China toget away with what no one else can even dare to try, and in all probability, it is this very attitude that will lead to the final shift of global power balance within the next decade.
The Strategy of Engagement
The United States initially adopted the strategy of engaging China instead of confronting it, to ensure that the communist block remains divided. It was a political strategy, and allowing it to continue with its unfair economic practices was the cost of this strategy. Even as capital flows to China blossomed in the nineties, there was little to worry about till the turn of the millennium, but in the last few years, matters have changed dramatically. At the cost of the United Status, the trade surplus of China has grown exponentially to nearly a quarter of a trillion dollars per annum, and threatens to derail the US economy altogether, a phenomenon nobody could have imagined even as late as circa 2000 A.D. Over the next decade, the United States seems to have realized the threat to its economy, the ultimate source of its power, and begin deliberations, but it is unlikely that mild diplomatic deliberations alone can achieve much.
It is a self-woven trap that the United States allowed itself to be caught into, in the belief that it was too big and too powerful for a third world economy, even if that happens to be the most populous one. Now that this illusion is breaking fast, there is considerable anxiety, but there are very few ways out of it. The geo-political balance of power is unlikely to allow any radical shifts in attitude, and US will have to confront itself on the question of hardening its stance against China very soon. It may be a matter of trade, but is deeply interwoven in politics, and any tough stand will require an even broader coalition of forces across the globe than the one required against the war on terror.
It is a difficult decision to make. Here the United States is not dealing with a terrorist outfit, but an organized government of the largest country in the world, a permanent member of the UN Security Council and the next super power that is likely to take over from US as the biggest economy in the world. No one refutes the argument that China should not be allowed to get away, but there is one question that really needs to be answered first. Is it too late for action?