China Over A Barrel

Written by David Frum on Saturday February 21, 2009

If the world is to sustain open trade -- and progress to the even freer trade we need for future prosperity -- China will have to change its ways.

With global markets tanking and unemployment soaring, Canadians are pinching their pennies. But as National Post contributors explain in a new week-long series, economic doom and gloom has its upside.

The editors ask: There must be a silver lining in this recession-- can you find it?

With the price of silver touching nearly US$14 an ounce, up 23% since the start of the year, a silver lining may no longer be realistic. Perhaps a coating, or maybe a dusting.

For the inveterately optimistic, though, here is a thought about a positive side effect of the world's present adversity: Today's crisis creates an opportunity to build a freer and more open world economy.

As China has grown to become the world's number three economy, Beijing's bad trade practices have provoked intensifying protectionism. China sells unsafe products, violates patents and copyrights and manipulates its currency to advantage its exporters. Foreign businesses cannot count on justice in China's corrupt courts, creating opportunities for local businesses to cheat partners and investors.

China's machinations have provoked serious global trade tensions --and wrecked hopes of negotiating better trade rules. The Doha trade round that began in 2001 broke down in final failure in the summer of 2008. Openly protectionist politicians such as Senator Sherrod Brown of Ohio did well in the U. S. congressional elections of 2006. Both Hillary Clinton and Barack Obama sounded protectionist themes in 2008. And now the new Democratic Congress has recklessly inserted "Buy American" measures into its big new stimulus.

If the world is to sustain open trade -- and progress to the even freer trade we need for future prosperity -- China will have to change its ways.

But until now, China has shrugged off all international pressure. China felt rich, powerful, immune to pressure, without any need to compromise.

That was last year.

As the U. S. economy has slumped, China has plunged into the worst economic crisis since it opened its markets in the 1970s. Exports plunged 17.5% in the month of January alone. The government estimates that 20 million workers have left the cities to return home to their rural villages in the past few months. Forty percent pay cuts have become common in Chinese factories -- and in the economic powerhouse province of Guangdong, adjoining Hong Kong, perhaps one-fifth of all factories have closed.

This economic distress presents a political challenge to the Chinese state. In 1989, the demands of a few thousand students led to a crisis at Tiananmen. The state survived because the economy was growing strongly, and most people preferred the security of the status quo to the risks of regime change. Now that security has vanished.

A year ago, Chinese leaders enjoyed speaking at international conferences about the "end of the American era." Very abruptly, they are looking at the end of their own careers, their own fortunes -- and given China's history of political violence, very possibly their lives.

This is the moment to make the offer that China's leaders cannot refuse: more open access to the world's export markets in exchange for better Chinese treatment of its customers and investors, better health and safety enforcement, fairer courts and a less manipulated currency.

Martin Wolf of the Financial Times argues that the root of today's crisis is the imbalance between the Chinese and U. S. economies: The United States consumed too much and saved too little; China consumed too little and saved too much; and bankers then made fortunes financing American consumption with Chinese money. The world needs more American exporting and more American saving -- which in turn means that China has to change its behaviour as much as America.

Why should China do that? Because the gun is pointed much more directly at them than at the United States. The U. S. can gain a few months of hope and renewal by electing a new president. China, without elections, must either deliver results to its people or face street riots.

If the United States offered China a free trade agreement like the one it has with Canada and Mexico, that would be a dramatic gesture that would make big news in China and maybe buy the leadership some time to make reforms. They might pay a high price in return for that relief. Or maybe not. But there will never be a more propitious moment to try.


Originally published in the National Post.