It is de ja vu time for the famous Abbott and Costello routine of who is on first base, what is on second, I don't know who is on third and I don't give a darn on fourth. The bases are loaded nevertheless. Remember the old days when the trade imbalance with Japan led to carping about closed markets, pressure for the Japanese government to allow foreign companies to bid for government construction projects and revaluing the yen upwards. The same tactics have begun with the Chinese who announced a new policy of pre-loading new computers with non-pirated software, new intellectual property rights enforcement, a future large order of Boeing planes, raising domestic consumption and allowing Chinese citizens to take twenty thousand dollars out when going abroad. The trade summit between the US agriculture and commerce secretaries, trade representative and Chinese Vice-premier Wu Yi was televised by C-Span and while she was poised and poked fun at the American officials, their attitude varied from mildly submissive to meekly cordial with an occasional mildly critical posture by the trade representative Mr. Portman. Senator Hilary Clinton on a weekend Bloomberg TV interview when asked about becoming tough with China, conceded the difficulty of threatening one's banker.
Both Chinese and Japanese dollar reserves are approaching a trillion dollars each and they are satiated with having most of their eggs in one basket. It is to counter this risk and to remove some irritation prior to Hu's American visit, that China in typical fashion announced these sops and put in a futile standard appeal to lift the US ban on high tech exports. Other sources have tallied that the denied Chinese requests for high tech goods if granted would not have amounted to more than five billion dollars in all of 2005. Thus they are unlikely to put a dent in the American trade deficit with China, that is running twenty billion dollars each month. In another conference hosted by the Center for Strategic and International Studies, Fred Bergsten said that the Yuan was 20 to 40% undervalued and China should begin gradual progressive revaluation upwards. This would mean that China and Japan would lose 200 to 400 billion dollars each, 20 to 40% of their reserve value. To sterilize the foreign reserves Chinese Central Bank has bought the dollars from exporters by issuing Yuan and then sold Yuan bonds to take the excess Yuan out of circulation.
Obstinacy without a co-ordinated policy towards North Korea and Iran has led to their nuclear proliferation, partly out of insecurity and partly because they can push the envelope with America in a quagmire in Iraq and Afghanistan. Deteriorating US ' South Korea relations and its refusal rightly so to consider a military option, makes America dependent on Chinese goodwill to bring North Korea back to the six party talks. Similarly to put partial sanctions on Iran, China has to agree to abstain from using its veto in the UN Security Council. On top of all this America is at the mercy of China to finance its trade and current account deficits. While it is true that tariffs on Chinese goods or switching away from Chinese imports would hurt Chinese workers, economy and the CCP plans to reduce economic disparity, Hu and his cohorts are totalitarian rulers and they have used massive force in the past and diverted public attention by appeals to jingoism.
China on its part has two demands. It does not want a re-armed non-pacifist Japan but Bush can't persuade Koizumi to roll over and play dead as his annual trips to the Yakasuni shrine prove. There is also a sizable militant faction chomping at the bit in Japan already. So the only pawn that can be offered up in gambit is Taiwan which would mollify the Chinese and offer America more slack on the rope till the Chinese demand a larger chunk of flesh in the future and convert the rope into a leash or noose.
The problem is that the neo-liberal policies of the neo-cons to appease their multinational corporation financial backers have hollowed out American manufacturing and reduced America to an exporter of commodities, arms, planes and services, and dependent on cheap labor China for everything from toys, textiles, electronics and even Christmas ornaments. Adam Smith's prescient comments come to mind. America has ignored them and China has learnt its lessons well.
Adam Smith over two hundred years ago made a poignant observation about merchants equally applicable to multinational corporations today. He said, a merchant is not necessarily the citizen of any particular country. It is in a great measure indifferent to him from what place he carries on his trade; and a very trifling disgust will make him remove his capital, and together with it all the industry, which it supports, from one country to another. No part of it can be said to belong to any particular country till it has been spread, as it were, over the face of that country, either in buildings or in the lasting improvement of lands. No vestige now remains of the great wealth said to have been possessed by the greater part of the Hanse Towns (trading towns of the Hanseatic League of merchants), except in the obscure histories of the thirteenth and fourteenth centuries. It is even uncertain where some of them were situated, or to what towns in Europe, the Latin names given to some of them belong.
China has realized that it cannot buy important companies in America as the Unocal, Dubai Port Authority debacles and the Lenovo sale of IBM computers to the US government brouhaha have shown. So what is the point in amassing over a trillion dollars that are likely to finance American profligacy and lose intrinsic value? As many economists have pointed out, most currencies are fiat currencies and thus mere paper without intrinsic value. This is why gold is above six hundred dollars, oil is making new highs and the dollar index chart has formed a top. Any further steep fall in the dollar will result in at least a partial bailout by many Asian countries before the exits are barred. It is already impossible for Japan and China to bail out completely but they can minimize the damage. Japan is beholden to America for military protection and the nuclear umbrella and may desist but China has little love lost for America. Its relationship is a matter of temporary convenience and the present amity is a mere suspension of hostilities as Napoleon told the Archduke of Austria after his conquest of the Plains of Lombardy. This is why both China and America target each other in their nuclear war games.
Thus it is about time that Bush and Cheney realize that Hu's on first base and worry about what's on second and abandon their comic farce routine of Abbott and Costello.