(06/16/05) Clyde Prestowitz quoted in the Christian Science Monitor
2005 WLNR 9506936
Christian Science Monitor (USA)
Copyright © 2003 Christian Science Monitor. All rights reserved.
June 16, 2005
Section: FEATURES, PLANET
US AND CHINA: A TRADE WAR BREWS
By David R. Francis
Within 20 years, the Chinese economy will probably be larger than that
of the United States. Already China's geopolitical influence has grown
along with its economic might.
Now come signs of a trade war.
What's happening is that the US is pressing China to revalue its
currency by at least 10 percent, as a first step to a larger
revaluation, and to clean up "unfair" trade practices. The Chinese
government hasn't yet made such changes. And the US clamor doesn't
help. Chinese leaders do not want to appear to be kowtowing to the US.
Neither side seems to grasp the dangers of such a deterioration in relations.
"The White House doesn't have a handle on it," says Harald Malmgren, an
economic consultant in Washington, D.C. It's an "out-of-control issue."
The issue is important for Americans, and not just for those buying
Chinese-made clothes at Wal-Mart. A major economic slowdown in China
would hurt the world economy, slowing US economic growth and cutting
Moreover, the Chinese central bank is financing the massive US trade
deficit by $1 billion a day. Without those loans, US interest rates
would spike upward. Interest rates on mortgages would rise, hitting
housing sales, and raising costs for millions of homeowners.
"This is a huge deal," says Clyde Prestowitz, president of the Economic
Strategy Institute in Washington. "We are on life-support from China's
Both sides believe the other side has too much to lose to permit a
trade fight, says Mr. Malmgren, who helped negotiate the Kennedy Round
of world trade liberalization decades ago.
The US figures China needs access to American consumers for the host of
manufactured goods it exports and will make concessions to safeguard
that arrangement. On the other side, China sees the US wanting to
continue to supply Chinese consumers with its farm products, and to
protect its huge corporate investments already in China.
But Malmgren figures both Washington and Beijing assessments hinge on
major miscalculations. Top Chinese officials have minimal knowledge of
economic issues, he says. They aren't aware of the political dynamics
in Washington. Moreover, they are preoccupied with keeping their
capitalistic boom going at home and keeping a lid on domestic dissent.
But pressures are building in Congress to force the Bush administration
to confront China in a tough way. Anti-China sentiment is rising among
both Democratic and Republican legislators in Congress. But the US may
not carry the economic clout it once had, experts say.
"The US will have to adjust to deal with another major power," says Mr. Prestowitz. "So far we are in a kind of denial."
In his new book, "Three Billion New Capitalists," he warns of
developments that threaten to end 600 years of Western domination. They
include the rise of Asia, unsustainable US trade deficits resulting in
a buildup of dollar reserves in China and elsewhere, and the entrance
of 2.5 billion Chinese and Indians into the world's job market.
The more immediate danger is a tit-for-tat trade fight. The US has
already put quotas on imports of some Chinese textiles. China hints it
might buy farm products such as soybeans from Brazil rather than the
In the US, Democrats charge the Bush administration with insensitivity
to concerns of average working people by letting manufacturing jobs go
As well, the emotional level on China is "running surprisingly high"
among congressional Republicans, holds Malmgren. They worry about the
safety of their seats in the 2006 election. So they take a strong
stance against China and the "outsourcing" of work to China. They
complain about Chinese piracy of US intellectual property, disputes
with Taiwan, and inadequate Chinese pressure on North Korea to restrain
its nuclear ambitions.
"China has not as much influence on North Korea as we think," cautions Prestowitz.
For a long time, the Bush administration has followed a policy of
gentle, quiet efforts to persuade the Chinese to deal with currency and
trade issues. But the US position has become "schizophrenic," according
to Prestowitz. For instance, on June 4, Defense Secretary Donald
Rumsfeld strongly criticized China for "its continuing large and
expanding arms purchases."
Last Friday, China and the European Union reached a friendly agreement
curtailing certain Chinese textile exports. Chinese negotiator Bo Xilai
indicated China's preference for such a negotiated deal, rather than
the US unilateral caps on China's textile exports. He reportedly cited
a Chinese saying: "If you respect me by an inch, I'll respect you by a
Both the Bush and Clinton administrations kept various issues with
China - trade, currency policy, security, human rights, democracy,
environment - on separate tracks. To Malmgren, that policy seems to
have broken down. That's reflected in Congress where 67 Senators voted
last month to call for a 27.5 percent tariff on all imports from China
if it failed to alter its exchange rate substantially. That legislation
is scheduled to come up again this summer, with a surprised
administration trying to quell the uprising.
On the currency side, the US Treasury has sought to avoid designating
China as a nation that manipulates its exchange rate to gain unfair
competitive advantage in trade. If it did make such a designation,
under existing legislation, it would be required by law to prepare
sanctions or countermeasures.
The Treasury implied that China would have to revalue by the next
semiannual currency report to Congress in October. China hasn't yet
(c) Copyright 2005. The Christian Science Monitor