Knitpicking the Chinese

By Michael Elliott

It seems to be part of the job description of the U.S. Secretary of Commerce that every so often--usually just as an election season gets under way--the holder of the office should give an economically illiterate speech to an American business audience in some part of the world where the local economy is said to be threatening ours. But even by the dismal standards set by Commerce Secretaries in the past, the extraordinary recent performance of Donald Evans before the American Chamber of Commerce in Beijing set a new low. What's more, Evans' speech turned out to be a precursor to action: in mid-November the Administration imposed quotas on Chinese-made bathrobes, bras and knit fabrics. Washington said it was merely enforcing a safeguard provision that China had already agreed to, though that was 2.7 million lost jobs ago. Now the fragile recovery of the global economy--and Washington's burgeoning partnership with Beijing--has been imperiled for no good reason.

Let's return to the illiteracy of Evans' speech. "China," he said, "is moving far too slowly in its transition to an open, market-based economy." Hello? In the past 20 years China has surely moved more people--both in crude terms and as measured as a share of global population--from a premarket economy to a market-based one further and faster than any other society has done since the dawn of time. This, like all economic transformations, has come at a wrenching human cost. In China's case, that cost is measured in the loss of millions of protected jobs in inefficient state-owned enterprises. To imagine that the change could or should have been brought about more quickly is to argue that China's internal stability is of no concern to the U.S., a judgment less illiterate than irresponsible.

But that's not all. "We have been patient, but our patience is wearing thin," said Evans. So is the President's approval rating in textile states, for it is hard to see what else could explain the new quotas. "U.S. imports from China," Evans said, "are five times greater than our exports." The illiteracy here is the assumption that imports are bad and that the purpose of trade between nations is to expand exports--a fallacy that was exploded, oh, sometime in the 1830s. The point of free trade is to allow economies to specialize in what they do best. Neither imports nor exports are intrinsically good or bad, though hard-pressed American consumers could be forgiven for wondering what a Commerce Secretary who wants to increase the prices of their shopping baskets at Wal-Mart has been smoking. (The giant retailer expects to buy $15 billion of products from China this year.) If the quota limits Wal-Mart's supply of goods, then the Chinese-made robe you were going to buy Aunt Jane for Christmas might not be there.

China's exports to the U.S. have increased, as economists like Morgan Stanley's Stephen Roach and David Hale, the chairman of ChinaOnline, have tirelessly argued, not because China wants to steal American jobs and not because its currency is massively undervalued but because American, Japanese and European firms have outsourced their manufacturing there. It is the improving quality and technological sophistication of the Chinese workplace that are behind its export drive. This has raised the incomes of tens of millions of people, who then (wonderful the way economics works) spend more money on imported goods. The consequence is that China's global trading account is roughly in balance. An anxious world awaits the Commerce Secretary's latest revelation on why this is such a catastrophe.

The world, I fear, will be disappointed. In Bangkok recently, I watched Hu Jintao, the President of China, answer unscripted questions from an international business audience. He demonstrated a surer grasp of trade and currency policies than did Evans, though given the traditional economic idiocy of Commerce bosses, this is not so surprising. What is surprising--no, outrageous--is that a Cabinet officer should have lectured the Chinese on economics, without reason, at a time when a mature political relationship between Washington and Beijing is so important. China currently holds some $100 billion of U.S. debt, and its purchases of U.S. paper have helped prop up the international value of the greenback. Beijing's cooperation is vitally needed on everything from North Korea to global warming. Old Chinese proverb: It's always good when one hand knows what the other is doing. Shame nobody in the Bush Administration seems to have heard of it.