Sunday, September 26, 2010

Is Congress working on behalf of America's Interest?

As Congress approaches the mid-term election, China bashing has once again proven to be the convenient wool to pull over the voters’ eyes. This time around, Japan got in the act first by literally bashing a Chinese fishing vessel to roil the international waters.

The House of Representatives seems determined to label China a currency manipulator and enact a law that would force the Obama administration to impose a countervailing duty on goods from China to adjust for the perceived undervaluation of the renminbi. So far no one in the bi-partisan effort has seen fit to explain how to calculate the alleged undervaluation.

No one, not even a Nobel Prize winning economist, has presented a case as to how making imports more expensive to the American consumer would create more jobs for America. The last time the US pressured China to take the yuan off the peg, it appreciated over 20% against the dollar and to the law makers’ surprise the trade imbalance didn’t shrink but widened by about the same relative amount.

Premier Wen Jiabao in his speech in New York before attending the UN General Assembly meeting declared that the value of the yuan could not be responsible for the sub-prime mortgage scandal that led to the financial meltdown and the resulting record budget deficit and national debt. He suggested that Congress should be addressing the real root of the problems of America’s economy rather than distracting America’s attention by picking a fight with China.

About three weeks ago there was a collision between a fishing trawler from China and two Japanese naval vessels near the uninhabited but disputed islands off the coast of Taiwan. The Chinese call the islands Diaoyu while Japan called them Senkaku.

China has claimed sovereignty over these islands as part of Taiwan for centuries. Japan came into control of these islands when the US handed them over to Japan along with Okinawa and the rest of Ryukyu chain of islands in 1972.

At the time, mainland China and Taiwan were hostile adversaries not on speaking terms and were not in a position to protest America’s unilateral action. China contends to this day that the islands should have reverted to China after World War II when Taiwan was returned to China.

Since 1972, Japanese patrol boats would periodically interfere with fishing boats from the mainland and Taiwan. Noisy protest from the Chinese in China, Hong Kong, Taiwan and overseas Chinese communities would invariably follow such acts by the Japanese navy. In 1996, David Chan, a Hong Kong activist, tragically drowned while attempting to make a point by swimming to one of the islands.

Contrary to the western media’s notion that conflicting interests in these uninhabited islands stem from possible oil deposits beneath the sea, the feelings of the Chinese are rooted in nationalism based on history and full of passion.

The latest incident raised the bilateral tension to new heights when the Japanese coast guard seized the fishing boat and took the crew into custody. Japan’s action immediately caused protests with increasing stridency as the trawler and crew was held. They were released about a week after the incident but the captain remained in captivity for 17 days before he was let go.

The only explanation offered for this provocative action attributes domestic politics within Japan—an election was going on--as the cause. Beijing repeatedly called in the Japanese ambassador to lodge protest in strongest terms, but Japan insisted that they would charge the captain under Japan’s domestic laws.

Japan finally dropped charges and released the captain after China nipped the tourism bloom in Japan by discouraging travel to Japan and stopped export shipments of rare earth minerals critical to Japan’s electronic industry.

China’s options and leverage to counter US are far more complicated and difficult. Of the hard currency reserve China is holding, more than 1.5 trillion are estimated to be in dollars. Any retaliation that would materially weaken the value of the dollar would not be in China’s interest.

China is already America’s second largest export market. Obama’s recent announced intention to reform the export control process will boost high tech sales and add to the momentum. China could halt imports from the US but China’s vested interest is in a stronger US economy not a weaker one.

The Chinese embassy spokesperson in Washington, Xie Feng, has just publicly confirmed that China’s President Hu Jintao has accepted President Obama’s invitation and will visit the US in January. He added that China considers this visit to be the highest national priority.

Xie also indicated that both sides—meaning Beijing and Obama Administration--expressed confidence that all the thorny issues facing the bilateral relations can be worked out.

Given the Congressional determination to sidetrack the relations, there is always a chance that the January visit will be postponed or cancelled. Or worse, Washington could force Beijing’s hand into making a mutually destructive move in order to get America to focus on the real issues.

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