Here is Some Mindsteroid Must-Read from letters@chronicle.utah.edu. There’s little to fear.
As future leaders of the United States, it’s important for students to study historical phenomena. This can educate upcoming leaders on world trends to avoid in the future.
One such phenomenon swept small, yet strategically significant states during the Cold War. The term “Finlandization” refers to the Soviet Union holding power over Finland’s foreign policy during the war.
Moscow used its military power, coupled with the West’s disinclination, to defend small states like Finland, to dragoon Finns into policies that took Moscow’s interests into account.
If the United States is not careful, it risks Finlandizing with respect to China for economic reasons. That is, it risks purporting friendliness toward the Chinese outwardly because it fears China’s power secretly.
China runs stabalization process on its currency, which guarantees that the Yuan trades within certain parameters. This process involves China extracting dollars from its trade surplus. Normally, these dollars would be sold in the foreign exchange market, which would drive down the price of the dollar. However, to counteract this, China eats up U.S. Treasuries bonds. When the dollar decreases in value, China buys Treasuries bonds to reinforce it.
These economic facts permit China to manipulate its currency free from reproach. They conflate to give China a sort of financial nuclear option against the United States, and force the United States into policy making from China’s back pocket.
Congress should enact an excise tax on imported Chinese goods, and should forbid the Chinese government from making further purchases of U.S. Treasuries. These actions would level the playing field in trade practices, crack down on currency manipulation and reduce the risk of Finlandization.
Some forecast a trade war with China in the event that Congress sanctions the state. Others wonder how the United States would be able to finance its debt if China is not there to buy Treasury bonds. As for the latter, according to a World Bank report, China hasn’t bought U.S. Treasury bonds at as rapid a pace in recent years, making it unlikely that the United States would suffer if it forbade China from bond purchases.
The former fear derives from a more basic fear, namely, that China is becoming the world’s economic superpower. It is true that China’s economy could soon eclipse the U.S. economy in terms of gross domestic product. With 1.29 billion people — four times the population of the United States — China should have a larger economy, if it is remotely efficient.
The more relevant figure is the purchasing power parity, which takes into account standard of living and the value of produced goods. Here, the United States, with a PPP of $48,147, is worlds ahead of China, whose PPP is just $8,394.
China’s economic growth is overstated. The country still heavily relies on state-owned industries; that is, it props up certain sectors of the economy while punishing others. It is not sufficiently capitalist to support its current rate of expansion.
China moved precipitately from an agricultural economy to an industrial economy. The same transition made long-term growth impossible for the Soviets. China’s labor laws are lax, as are its environmental regulations. Both workers and the environment are degraded, which affects growth rates, according to the World Bank. China’s economy is export-based, too, and features low consumer demand; slow economies elsewhere in the world or self-sufficient states pose a threat to China’s growth.
Regime type also matters. Daron Acemoglu and James A. Robinson show in “Why Nations Fail: The Origins of Power, Prosperity and Poverty” that economic growth is only sustainable when coupled with democratic political institutions. This is because incentives to innovate are nonexistent when liberties are restricted. China’s central government channels resources away from the people and toward elites while placing burdens on the backs of the people alone.
China looks to follow the trajectory of Soviet Russia. Rather than long-term economic growth and political reform to boot, the Chinese are apt to experience short-term prosperity and eventual decline.
We, as future leaders of America, must understand these lessons of history so that when the time comes to address China’s status on the world stage, we can act from an informed position and end up on the right side of history.
