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Sleeping With a Tiger
Heide Malhotra, The Epoch Times
4/7/2007

"The truth is, producing in China is not terribly profitable for a host of reasons, and the capital markets are not terribly safe," said Grant Aldonas, Chairman of International Business at the Center for Strategic & International Studies, a U.S. non-profit organization. Aldonas spoke during the U.S-China Economic and Security Review Commission hearing earlier this month.

Politicians should "focus on what really matters and on building the political consensus needed to tackle those problems [facing the U.S. economy]," proposed Aldonas. "Never, ever sell the United States short."

Although the United States has a huge trade deficit with China, it by no means suggests that the United States is losing its competitive edge to the Chinese markets. The U.S. trade deficit with China actually declined in November of last year by $1.5 billion, or 6.2 percent.

Trade statistics indicate that the United States economy in 2006 produced close to 6 times more goods and services than China—there were $12.5 trillion of goods produced in the United States compared to $2.2 trillion in China.

"[The U.S.] manufacturing sector alone would amount to more than half of the Chinese economy as a whole and would represent the eighth largest economy in the entire world," said Aldonas.

Barking Up the Wrong Tree?

The U.S. government has held the belief that if China develops its economy, many of its other problems will resolve themselves.

"Trade freely with China, and time is on our side," said George W. Bush in a November 1999 foreign policy speech.

A few years earlier, former President Bill Clinton told Americans that trade is the key in transforming China. "I just think it's inevitable, just as inevitably the Berlin Wall fell."

However, Bush, his advisors, and many China experts have gotten it all wrong, suggested James Mann, author-in-residence at Johns Hopkins University and panel member at the Commission hearings.

Many experts think that if this "wait and see" strategy of democracy worked for Taiwan and Korea many years ago, it should also work for China. Mann argues that China cannot be compared to Korea or Taiwan, both smaller nations with prevalent Western influences.

Besides its authoritarian ruling regime, China is wrought with numerous social problems, including labor strikes, peasant protests, riots over environmental degradation, and ethnic strife, emphasized Mann.

The most pressing problem is that the majority of Chinese citizens are poor and live well below the poverty level. This problem is exacerbated by depravity and corruption at all levels of government, along with a weak and arbitrary judicial system. This makes dangerous ground for foreign investment.

However, when business, political, or world leaders travel to Shanghai or Beijing, the above is not what greets their eyes. Instead, one witnesses modern skyscrapers, cosmopolitan affluence, and the hustle and bustle of large global metropolitan cities.

"[The U.S.] policy towards China simply operates with the wrong paradigm," says Mann. "Our policy and our public discourse about China are often affected by ideas, assumptions, rationalizations, and phrases that we fail to examine."

Time will tell—despite the "good news" one hears in the media about China—that increased trade with China will not affect change in Chinese Communist Party dominance.

Many countries make the assumption that trade will be the catalyst that changes China, a strategy that has not worked and judging from current developments, may not work in the future.

The Achilles Heel

Americans are partly responsible for the U.S.'s massive trade deficit.

The U.S. government, businesses, and consumers have racked up vast amounts of debt—a deficit between earnings and expenses, or the difference between our production and our consumption.

There are two choices facing consumers—spend less or save more, and it is a dilemma. When consumers buy a car, the money is gone. However, if the car is bought on credit, the interest payments can be tax-deductible. On the other hand, if one saves and earns interest on the savings, one must pay more taxes.

The same is true for businesses and governments. For example, Social Security and many defined-benefit corporate pension funds are vastly underfunded. Many organizations turn to borrowing.

The federal government borrows from the Social Security pool to fund other projects, and then borrows to keep Social Security from defaulting on its payout obligations. The same theory is applied to corporate pensions. America keeps borrowing, and China keeps snapping up U.S. debt.

There are also problems with the Chinese economy that affect the United States and the world at large.

"[One can't] say that there are not massive distortions in the Chinese economy and that those distortions do not have deleterious effects on the United States and its economic prospects," said Aldonas.

The Chinese government constantly interferes in the market to peg its currency to the U.S. dollar. The truth of the matter is that China has to export to earn foreign currency and to keep its constantly growing workforce busy. By manually deflating the yuan, foreign consumers can get more Chinese goods and services for their money, making Chinese-made goods artificially cheap.

"They have to create many millions of jobs every year just to keep up with the growth in their population," said Aldonas.

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