Learning from History, Rising Superpower Edition

Nobel Prize-winning international economist Paul Krugman has stirred up a debate over China's exchange rate--and specifically, what the United States should do about it. Again, I don't have time to wade into all the details, but it gives me an opportunity to repost a column I wrote for the Hazleton Standard-Speaker. (If you want to dive into the actual debate, you can find informed views here, here, here, here, here, here, here, here, here, here, here, and here.)

This debate follows on the heels of another one that possessed America's chattering classes at the end of 2009: whether the United States is losing its dominance to China and India--and of course, what to do about it. Sadly, few observers have made the connection between the two issues. Recall what I said last week about the long reach of history and the fundamental challenge we face: "how to coexist (and survive) on this planet."

It turns out those British history books are a good place to start, as I explained in August 2007:  

There is a saying that those who don’t learn the lessons of history are bound to repeat its mistakes.

On the other hand, for those who do know the lessons of history and still repeat its mistakes, a definition from Albert Einstein is apropos: “Insanity [is] doing the same thing over and over again and expecting different results."

The story goes like this. Recently, the United States identified tainted Chinese imports as responsible for the death of American household pets, followed by unsafe toothpastes, tires, and seafood. This oversight only exacerbated tensions between the Pacific powerhouses who have been embroiled in discussions over China’s currency manipulation.

For years, the Chinese central bank has intervened in the currency market to keep its yuan artificially low. The results are cheap exports that supplant American goods and a skyrocketing manufacturing industry that endangers American jobs.

Cue Barack Obama and Hillary Clinton.

The two frontrunners for the Democratic nomination can hardly resist the temptation to rally their base against this economic threat, much as Republican candidates can barely suppress the urge to sound the alarm against the Arab terrorist threat. And so, they have jumped on the bandwagon of legislators seeking tariffs on Chinese goods.

You might say they are in good company.

In 1980, Ronald Reagan condemned President Carter for siding with China’s position against Taiwanese independence, only to take a similar approach himself once in office. In 1992, Bill Clinton criticized President Bush for “coddling” the “butchers of Beijing”, only to unconditionally renew China’s Most Favored Nation status. In 2000, George W. Bush denounced President Clinton for seeking a “strategic partnership” with China, only to further that partnership with his ongoing Strategic Economic Dialogue.

In fact, the last seven Presidents all quickly learned that tension and threats are futile, eventually adopting the gentler diplomatic approach of their predecessors. Perhaps the Senators from Illinois and New York have not learned this lesson, but if they do know this history and still pursue such a harsh tone, well, you get the picture.

Like America during the Industrial Revolution, economies that grow as fast as China’s find it impossible to avoid the pirates and robber barons who thrive on the explosive influx of capital. At this point in its development, China faces the same dilemma confronted by Teddy Roosevelt and the Progressives at the turn of the century. Washington Post writer Harold Meyerson poses it to Americans as “a modest proposal for a project that might occupy us for the next century or so: Taking the regulated, more-social capitalism that created mass prosperity in this nation and Western Europe in the second half of the 20th century and re-creating it on a global scale."

Just as last week’s column showcased the European Union as a prototype for a unified global market, today we view the People’s Republic as a test balloon for the industrialization of the entire developing world.

Because this recent spat over product safety damages China’s reputation as an exporter, they are likely to begin adopting regulations and safeguards relatively soon. The most worrisome issue, then, is how the next President will deal with China’s growing economic prowess.

Again, the lessons of history are illustrative. Europe’s reaction to Germany’s rise after 1870 produced World War I. Similarly, Japan’s rise after 1868 provoked war with China and Russia, not to mention the Pacific half of World War II. With China becoming the third largest economy in the world this year, tariffs and trade wars would be counterproductive at best and irresponsibly dangerous at worst.

Put yourself in their shoes. When the United States was developing its economy a century ago, did it want to conform to Great Britain’s wishes? No, we strove to topple the economic order and become the leader of the global economy. Threats from Western Europe would hardly have stopped us—and in fact would only have injured Europe.

Naturally, that ambition did not preclude us from following the same rules as everyone else. The next President must persuade China to revalue it currency through—you guessed it—diplomacy and positive economic incentives. Here, the President can be creative.

Since Congress increasingly leans toward negative measures, the next President can invoke a variation of “good cop, bad cop”. In return for currency reform and a more humane policy on human rights, the White House can offer China admission to the G7 Finance Ministers group, classification as a market economy in the World Trade Organization, and access for their firms to U.S. stock and commodity exchanges. If China spurns these incentives, the President can point to Congress’ harsh anti-trade measures as the alternative.

Meanwhile, America should demonstrate that it is as much an abiding "responsible stakeholder" in the global economy as China. The next President should improve our relations in Asia by negotiating a free-trade agreement with the Association of Southeast Asian Nations.

At this time next year, the press will focus almost exclusively on two events: the Summer Olympics in Beijing and the U.S. Presidential Elections. Hopefully, they will inspire Americans to seek an empathetic policy toward China. If not, we are destined to conjure the same tensions, hoping for different results.

I know what Albert Einstein would say to that.