The Daily Demarche
Wednesday, June 29, 2005
China Again
Regular readers will know that we organized a joint blog project on China some time ago, and that many excellent bloggers offered up their ideas- see here and here for more links to these posts. Well, the topic is still a hot one- for example Simon at Simon World has a great post on what the next government in China (post communism) might look like. In addition, the other day I had lunch with my father and he mentioned a colleague who travels extensively and frequently in China for matters of trade and pleasure. This colleague is of the opinion that China is headed for civil war, as the "haves" and "have-nots" grow further apart from each other and the communist regime struggles to maintain control over an ever increasingly capitalistic economy. His opinion is that should China fall into chaos Latin America would become the "next big thing." While I am largely of the opinion that our neighbors to the south are already in chaos, I can see his point about China.

The conversation with my father covered a lot of ground on this topic, but centered on two ideas. The first supposes that the peasant class in China, encouraged and perhaps armed/led by the new capitalists were to stage a swift and unexpected revolt. The second scenario imagines a slow simmering buildup of revolutionary fervor in China with the eventual peaceful toppling of the Communists.

The question is what would we, and the world, do in each of these instances? We have a huge stake in what happens in China- all one need to do is look around their house and see how many items have the Made in China legend on them. A sudden, violent revolution that killed many, destroyed property and brought a halt to exports from China would have a strong, and not so positive, effect on our own economy. As companies that have moved production to China faced the loss of investment capital and the decline of stock they would be forced to cut jobs at home- the precious few that remain in many cases. Imports of low cost items which many households are accustomed to, if not reliant on, would be become scarce. The trickle down effect would be a tough wave to ride out. This line of reasoning brought me to a rahter disturbing thought- is our balance of trade and ratio of debt owed with China so precarious that we might find ourselves in the awkward, to the say the least, position of one day being forced to prop up the Chi-Com government to avoid financial collapse at home? I am not an economist, to be sure, but that thought scares me silly. And I am not alone:

The U.S. trade deficit with China is around $200 billion. Chinese imports are peculiar, however, because virtually all are made by American companies in China, sold in the U.S. and counted as imports just like any others that would be made by foreign companies. To China, these become dollar surpluses. They do not remain idle but are recycled back into the U.S. as purchases of corporate and U.S. Treasury bonds.

So the U.S. public deficit — closing in on $500 billion a year — is underwritten by Chinese surpluses earned from American companies selling production from China in the U.S. In 2004, some $200 billion flowed from China to the U.S. in support of debt, and 2005 is running higher.

Then there is this:

Last year, China ran a trade surplus with us of $162 billion, the largest in history. Almost half of that amount was attributable to China's surplus in trade in electrical equipment and computers. Since June 1995, the cumulative U.S. trade deficit with China is nearly $900 billion.

What has China done with the hoard? Bought T-bills to give her a claim on all future interest payments on the U.S. debt, begun to buy up companies like Unocal, Maytag and IBM's PC business, and bought weapons from Israel and Russia to prepare for the ultimate showdown with the United States.

China is behaving as we did in the 19th century. We used tariffs to protect U.S. markets and give our manufacturers a huge advantage over foreign producers. China does the same through currency control. Where Hamilton encouraged British textile makers to steal their secrets and come to America to set up shop, China is saturating this country with spies and thieving intellectual property from U.S.-built factories.

So the question is- if the Chinese people rise up in search of liberty, freedom and democracy in a sudden and violent manner, overthrowing their communist masters and wreaking economic havoc on the U.S. at the same time- what do we do? Do we help them to achieve their freedom? Or do we protect our economic interests? If the Chicom's call in the debt we owe them to fund the repression of a nascent pro-democracy revolution what call do we make? What will the rest of the world do? How will the the EU react if we move to support the Chicoms- since they will be fighting with EU supplied weapons? What would the North Koreans do if U.S. arms and money were used against the Chicoms? How would Japan react in either scenario?

I plan to follow this piece up with my thoughts on these questions, as well as to answer the question of where the investments might go if China becomes a hot bed or revolution- and my answer is not Latin America. In the meantime I'd love to hear what our readers and fellow bloggers have to say about the revolution scenario.

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dé·marche 1) A course of action; a maneuver. 2) A diplomatic representation or protest 3) A statement or protest addressed by citizens to public authorities.

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