What do we do about China?

In response to my latest anti-China screed, commenter Jollygreen asks:

How do we go about getting China to do anything? It seems like they're holding all the cards in this game. How, for instance, could we possibly force China to float the yuan? Protectionist tariffs will hurt us more than them, in fact, it seems like any move we make could spark a trade war that we'd inevitably lose. We can protest their human rights record and scold them for being brutal, intolerant, oppressive totalitarian meanies, but the Chinese government has shown that it's even less vulnerable to public opinion than BushCo (and that's sayin' something).

Not that I'm pro-China, I just don't see that we have any bullets in this particular gun. Give us your ideas, oh sage.

Ouch! OK, I was probably blowing just a bit of hot air when I suggested that we "give [China] something to worry about." Also, I might have noted the fact that the yuan is already appreciating against the dollar, at about a 15% annual rate - still slow, but enough so that it isn't worth risking any kind of trade war over. Of course, the dollar's international slide, combined with the slow pace of yuan appreciation, means the yuan is still depreciating against the euro and yen, flooding those markets with Chinese goods, so the yuan-policy ball is kind of in Europe and Japan's court now.

Jollygreen is also right to note that we don't really "have any bullets" when it comes to making China change its internal policies. And even though I hate those policies, I'm not sure intervention is a wise move even when we do have bullets. Although the Westphalian system of national sovereignty has its downsides, it seems better than the alternative of constant intervention by strong countries into the affairs of weak ones. If China's people want freedom, they are going to have to fight for it themselves, and if they want our help, they are going to have to ask for it.

The one exception might be environmental policy; Chinese greenhouse gases will eventually flood our cities as well as theirs. China can get away with burning ten kabillion tons of coal in dirty power plants because doing so allows it to undersell countries that enforce environmental protections. A carbon tariff, which Canada is contemplating, would work against that incentive. Yes, a large carbon tariff would hurt our economy, but a small one, with hints of more to come, might induce China to take a hint and clean up its factories.

To me, a more important goal should be to contest China's influence in the world. Even if China's people do turn out to be content with a quasi-fascist system, we can't let it happen here. The best thing we can do is get together a gang of countries that oppose Chinese supremacy, and simply resist China's efforts to encourage authoritarianism outside its own borders. This is why it's so important to maintain and improve our alliances with India and Japan, and create new ones with Indonesia, Vietnam, and other Asian countries, as well as to repair our relations with Russia.

So that's what I think we should do.

(As an addendum, if we really really want to get China to float its yuan, there is one big bullet we do have in the gun - we just drop interest rates through the floor. That means the People's Bank of China (their Fed) will be sitting on huge losses from all those U.S. government bonds they had to (and still have to) buy to keep the yuan cheap. It'll also raise the price of oil and many other commodities, which are priced in dollars, which will A) cause inflation in China (and elsewhere), and B) cause oil exporters to drop their own dollar pegs (as Kuwait did), which will in turn force China to drop its own. Now, dropping interest rates just to force policy changes in other countries, it's a very messy form of economic warfare, and not worth it, because it hurts our allies and us as well. But sometimes - in a financial crisis, for example - we have no choice but to drop interest rates anyway. So now you see oil and food prices going through the roof, inflation in China and elsewhere, and the Chinese government increasing the rate of yuan appreciation. Problem solved, right? Gulp. Another even nastier thing we could do is massively subsidize production of biofuels, driving up the price of grains, without actually changing the price of oil because biofuels are so inefficient. As soon as the food riots started in China, they'd revalue their yuan in a big hurry. Again, this is something that I'd never advocate, but it looks like something we've done anyway, in order for Bush to buy Republican votes. Stay tuned for worldwide mayhem...)