Made in China: The U.S. Responds to a Powerhouse

Thirty years ago it would have been hard to imagine that China and the United States would need each other so much.

But in 2006, it’s hard to deny. China and the U.S. are dependent on one another economically, and since the cultures are so vastly different, there is a lot to negotiate.

The U.S. began such negotiations December 14th and 15th, sending top officials led by Henry Paulson the Secretary of the Treasury and including Federal Reserve Chairman Ben S. Bernanke, Commerce Secretary Carlos M. Gutierrez, and Labor Secretary Elaine L. Chao.

By all accounts, the meeting was merely the start of a long series of negotiations, and Bernanke returned hopeful of what could be accomplished in the future.

The meeting itself was an historical shift, since only thirty or so years ago, the United States considered China an enemy and in the last few years, our government has openly criticized the Chinese for unfair trade practices.

Taking a closer look at China

We Americans need to take a close look at China. Many of us seemed surprised at China’s growth and success, as if it happened just recently. But actually, we shouldn’t be surprised. China has a long history of being interested in technology and science.

The Chinese haven’t been sneaking up on America. They have always paid attention to education and teaching and they have been planning to modernize for some time. They actually planned to leapfrog from agriculture to manufacturing to services, and they’re right on schedule. Their leaders planned to use, first, the Soviet model, and then when that didn’t work, they turned to free enterprise and capitalism to make the money needed to fulfill their Communist belief -- that the government is supposed to spread the wealth to the millions who are poor. They take this very seriously.

Deng Xiaoping, the leader after Mao Zedong, made a plan in 1978 and they are following it precisely. The plan was the turn away from the Soviet model to the West and the U.S., to learn English, to travel to the United States, to send thousands upon thousands of students to study here, and to bring them back in order to help teach the others what they needed to know to catch up.

For more on China’s history click here.

Our side - What the Americans want

For our part, we’d like the Chinese to spend more and save less - that way they’ll buy more American goods and create more American jobs.

We’d also like the Chinese to change their currency policy, which American analysts say effectively devalues the Yuan, making their exported goods even cheaper, causing Americans to choose them over American goods.

What does it mean for a currency to be undervalued?

Well, let's start with the U.S. dollar. Our currency is freely traded on international markets, so the U.S. dollar’s relative price is changing all the time in response to news and business events. According to Adam Davidson of National Public Radio, the dollar might go up against the British pound because U.S. unemployment data showed the U.S. economy to be strong, then the dollar might go down because Apple Computer bought several million dollars' worth of parts from Japan. China's currency doesn't work that way.

If not by the market, then how is the value of China's currency set?

Davidson explains that China's central bank declares an exchange rate and forces, by law, all market players to observe that rate. The Yuan is allowed to fluctuate a bit, but not much . The Chinese have pegged the currency so that one U.S. dollar buys a little bit more than 8 Yuan. Put the other way, one Yuan is worth a bit more than 12 cents.

Davidson notes that most economists believe that China's currency would be worth more if it were traded freely. No one can know for sure how much more, but leading economists put it in a range of 10 to 40 percent higher value than it is now.

By keeping the Yuan artificially low in value, China is effectively giving U.S. consumers a discount on all Chinese exports. That's good for U.S. consumers, who get to buy cheaper clothes and electronics and other items, but it's trouble for many U.S. manufacturers who find they can't compete with low Chinese prices. And because the U.S. imports so much more from China than we export to China, we have a trade deficit with them. The economic ideal of every nation, of course, is to export more than you import and have a trade surplus.

For more on this, listen to WomenMatter’s radio show, Facts & Trade-Offs on the U.S. and China.

Their side - What the Chinese want

For their part, the Chinese want America to spend less and save more. They would like us to stop borrowing so much so that the U.S. savings bonds that they buy from us will continue to have some value. Of course the bonds are themselves a loan which we use to pay for our major expenses - especially the cost of our military policy.

What we have in common - environment, energy, and healthcare

Both the United States and China want and need to work towards more effective environment, energy, and healthcare policies.

China’s progress is quickly outpacing its environmental laws. China is facing a challenge in every aspect of its environment, whether you’re looking at the quality of air that the people are breathing, the water that they’re drinking, or the land that they are trying to farm.

China has five of the world’s 10 most polluted cities. About 400,000 people die in China prematurely every year because of air pollution. In terms of water, about 30 percent of China’s seven major rivers is so polluted that it’s not fit even for agriculture or for industry, let alone for human consumption. And about 300 million people drink contaminated water every day.

Only in the past two or three years has the Chinese government really begun to acknowledge that the environmental situation has serious implications such as social stability and even productivity. Their problem is that they are building coal-fired power plants and their citizens want to drive cars the way that we do. Pollution and economic growth go hand in hand in our country and now in theirs. And we compete world wide for oil and gas supplies.

The recent talks with China established study groups for health care, aviation, energy, and the environment. Each country will form groups that will try to clarify regulations and make policy suggestions. But without much of a history of environmental and related health care policy, progress in these areas may be slow.

What do you think?

How do you think that our government should respond to China’s growing economic power? What sorts of environmental laws should Chinese companies follow and how could the U.S. help to make them happen? How many of the goods you buy were made in China?

Tell us what you think on our blog.

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Article Posted on: 12/31/2006