China's new 'tude

John Pomfret, a veteran China hand, reports:

China's government has embraced an increasingly anti-Western tone in recent months and is adopting policies across a wide spectrum that reflect a heightened fear of foreign influence...

Over the past year, the government of President Hu Jintao has rolled back market-oriented reforms by encouraging China's state-owned enterprises to forcibly buy private firms. In the past weeks, China announced plans to force Western companies to turn over their most sensitive technology and patents to Chinese competitors in exchange for access to the country's markets...

Internally, it has carried out more arrests and indictments for endangering state security over the past two years than in the five-year period from 2003 to 2007, according to a report released Friday by the Dui Hua Foundation, a San Francisco-based human rights organization. China has also reined in the news media and attempted to control the Internet more vigorously than in the past. This month, it announced regulations designed to make it harder for China's fledgling community of nongovernmental organizations to get financial support from overseas...

"This is a fundamental shift, and I've been here a long time," said James L. McGregor, a senior counselor with the public affairs firm Apco China. "It's a change in national attitude."...

The shift does not bode well for U.S.-China relations. The Obama administration entered office with an ambitious China agenda comprising plans to cooperate on climate change, curbing the nuclear ambitions of Iran and North Korea, and stabilizing the global financial system. In China, those plans are generally viewed by the party leadership as a trap to overextend and weaken the country, according to a Chinese official who spoke on the condition of anonymity because he would lose his job if his name were published...

"The Chinese people are no longer embarrassed about being Chinese," said Wang Xiaodong, a leading nationalist writer who has co-authored a series of popular books with titles such as "China Is Unhappy," which capitalized on the growing anti-Western trend. "The time when China worshipped the West is over. We have a rightful sense of superiority."

"People are now looking down on the West, from leadership circles to academia to everyday folk," said Kang Xiaoguang, a professor at Renmin University who studies NGOs and Confucius.

But don't worry! The U.S. will fight back against this increasing aggression with our mighty arsenal of...one short, mousy econ professor...

Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done...

This is the most distortionary exchange rate policy any major nation has ever followed.

And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.

So how should we respond? First of all, the U.S. Treasury Department must stop fudging and obfuscating.

Twice a year, by law, Treasury must issue a report identifying nations that “manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”...In practice, however, Treasury has been both unwilling to take action on the renminbi and unwilling to do what the law requires, namely explain to Congress why it isn’t taking action. Instead, it has spent the past six or seven years pretending not to see the obvious...

Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”

But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

That's right, China. Do not risk the wrath of The Krugman! Become a "responsible stakeholder" in the international system or face the withering heat of his biweekly newspaper column!