One Loser in U.S. Presidential Polling: China

It’s impossible to know the winner of next year’s presidential race, but there is already one clear loser: China. One Republican presidential hopeful, Mitt Romney, has propelled China into the center of the contest by accusing it of “cheating,” and by threatening to shut down U.S. markets to Chinese goods unless China lets its currency appreciate significantly. President Barack Obama has attacked Beijing for “gaming the trading system.” The Senate last week overwhelmingly passed legislation to penalize China for its currency policy, through trade sanctions. Unless the House Republican leadership continues to block a vote, the legislation would likely pass the House by a huge margin, as a similar bill did last year.

The debate has become so heated that Republican presidential hopeful Jon Huntsman, a former U.S. ambassador to China, said he backs the Senate bill even though he warns that “slapping penalties” on China could ignite a trade war. Much of this can be dismissed as election-year posturing. Every president finds that the U.S. has limited options in getting China, the world’s second-largest economy and the U.S.’s largest foreign creditor, to adopt market-oriented change. The trick is to get Beijing to see the reform as in its interest, and even then the pace of change is slow. But political threats, even if they don’t become law or policy, have consequences in Beijing and can backfire in ways that Americans may not appreciate. Beijing is in the throes of its own 2012 leadership change, with top politicians jockeying for power. There’s no election, but public opinion matters. Being seen as close to the U.S. at a time when Washington threatens to whack Beijing is as much a burden for a Chinese politician as being a pal of China would be for an American candidate campaigning in Cleveland. Mr. Romney, who has taken the hardest line on China among presidential candidates, says U.S. pressure is crucial to get China to change its ways. He says he would name China a currency “manipulator” for keeping its currency undervalued, and hobble Chinese imports by imposing compensatory tariffs. The Senate bill has similar provisions and is championed by lawmakers like Democrat Charles Schumer of New York. No administration since the 1994 Clinton White House has tagged China as a manipulator, out of concern that China would retaliate against U.S. companies there. On Friday, the Treasury Department postponed making a decision on the designation, which it is required by law to make every six months. No White House has ever taken the additional step of imposing tariffs on China because of its currency practices.

Mr. Romney also would bar Chinese firms from bidding on U.S. government procurements until China signed a World Trade Organization accord on fair procurement practices. Even the Alliance for American Manufacturing, a steel industry and labor group, hasn’t endorsed that tactic. In a recent Washington Post op-ed article, Mr. Romney said such steps are necessary to get China to play by international rules and “preserve free trade.” “It’s brilliant politics even though it’s bad economics,” said Republican economist Kevin Hassett of the American Enterprise Institute. “It allows him to be a saber-rattling guy who can appeal to tea party types in the primaries while not alienating people who vote in general election.” But the downside, Mr. Hassett said, is that the policies “would start a trade war.”

Getting the Chinese to boost the pace of their currency appreciation may be beyond the ability of the U.S. alone, which has lost standing internationally since the global recession of 2009. Beijing decided to let its currency float in 2010 before a Toronto summit of the Group of 20 nations, in part to avoid criticism there by a wide swath of nations, not just the U.S. Washington used another G20 session this past weekend to keep up the pressure and will do the same at the G20 leaders’ summit in November. Merely keeping China to stick to its 0.5% monthly pace of appreciation may be a challenge. That’s because China worries about losing jobs as its export sector slows. To understand how China views hectoring by U.S. politicians, imagine the following: Would tongue-lashings from Chinese politicians and threats to sell China’s dollar holdings unless the U.S. got its fiscal house in order prompt Americans to make changes or to dig in and do the opposite?

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