Getting real on China

Chief Executive, The, June, 2005

THERE IS MUCH empty fulmination coming out of Washington, D.C., these days with regard to China. (See "Where Is Our Economic Policy?" page 30). But there doesn't seem to be any evidence that anyone in our nation's capital really grasps the implications of China's continued economic transformation. Nor do they seem to understand that we have precious little leverage over Beijing because our fiscal deficits are being financed partly by the Chinese.

Hectoring China to revalue its currency is only a tiny piece of a much broader issue. Slapping quotas on textiles is meaningless in the overall context. The real point is that the transformation of China from a Communist economy into a quasi-capitalistic system, which began 25 years ago, is beginning to hit stride. It's going to continue for many more years. By some credible estimates, 40 percent of the world's manufacturing could be located in China in a few short years. And of course, China isn't alone. The U.S. faces an across-the-board manufacturing and technology challenge from India, Japan, South Korea and elsewhere. The tectonic plates of the global economy continue to shift beneath our feet.

The real debate we ought to be having is about U.S. competitiveness. As we ask in "Unlocking Innovation" (page 39), how can companies accelerate the flow of new ideas from universities, research labs and other centers of knowledge into the economy? How can the U.S. create a climate where more people take smart risks with new ideas? That's what it is going to take for the U.S. to retain its historically strong economic position and safeguard the living standards of its people. To pretend that a 10 percent revaluation of the yuan will do it is just wishful thinking.