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Shelve Diplomacy, Mr. President: Get Tough on China

Peter Morici, professor, Smith School of Business, University of Maryland
Friday, 7 Jun 2013 | 5:59 AM ET
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As presidents Barack Obama and Xi Jinping meet this weekend, China's aggressive actions and halting cooperation on a growing list of issues undermine the U.S. economy and national security.

Diplomacy has not yielded satisfactory results.

Beijing has not stopped manipulating its currency, pirating intellectual property or handicapping U.S. private investment in China. As a consequence, the United States has a whopping $320 billion trade deficit with China, which costs American workers about 5 million jobs and slows U.S. growth by about 50 percent.

China's actions violate its international obligations. However, American advocates of finger-pointing—such as formally calling China a currency manipulator—and of more diplomacy—such as establishing yet another framework for bi-lateral talks—fail to recognize that China won't change behavior that advantages its economy but entails few risks of retaliation.

When confronted, Beijing alibis, as an emerging economy,that it should not be required to offer U.S. exports and investment reciprocity in China. For example, to obtain U.S. food processing know-how, Shuanghui International Holdings is purchasing 100 percent of Smithfield Foods; whereas Ford Motor and General Motors are permitted only limited stakes in their Chinese joint ventures.

Yet, on major geo-political issues and even regional conflicts, such as North Korea's nuclear program and China's territorial aspirations in the East and South China Sea, Beijing expects the United States to treat it as a co-equal superpower. American recognition of such status is what President Xi is most seeking from President Obama.

To respond to Chinese challenges to the interests of Asia allies, such as Japan and the Philippines, President Obama is shifting U.S. naval resources to the Pacific. However, American influence in the region and money are necessary to implement this policy.

Asian states see the success of Chinese state-directed capitalism, relative to the floundering American performance, and that will make them increasingly reluctant to afford the U.S. Navy the bases and cooperation ultimately needed to succeed. And with the U.S. economy growing so slowly, the United States will not be able to afford the naval resources needed to counter Chinese challenges stretching from the Eastern Pacific to the Indian Ocean.

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The huge sums of dollars China acquires through its trade surpluses with the United States are permitting purchases of oil and other natural resource assets in Australia, Africa and the Middle East—with ownership come influence and that is tough to counter.

Now, having consistently violated U.S. intellectual property rights by pirating patents and designs, China has upped the ante with cyberpiracy of U.S. companies and by developing the capacity to threaten U.S. infrastructure and military capabilities.

Again, the Obama Administration turns to diplomacy, and China responds with denials.

If not to change China then at least insulate the U.S. economy and national security from reckless and cynical behavior, the Obama Administration needs to act more aggressively.

Moderate and progressive economists, such as Fred Bergsten and Paul Krugman, as well as this conservative voice, have advocated direct action on the currency issue: U.S. market intervention to raise the value of the yuan, slash the bilateral trade deficit, boost manufacturing and accelerate growth.

Limit Chinese investments to those sectors posing no security threats and to only minority stakes—no wholesale purchases of U.S. assets without reciprocity for U.S. businesses seeking to participate in the Chinese economy.

If China wishes to engage in cyber warfare, after fair warning and without not much delay the United States should do more than harden defenses, but rather go after China's commercial secrets and security defenses as well.

Be plain, demand transparency and engage in talks from a position of strength.

Through fruitless diplomacy U.S. presidents have permitted China to become stronger and bolder—the lessons of history regarding appeasement are clear.

Only stronger recognizable actions that impose costs on China may bring real change in its conduct and cultivate Beijing to act more responsibly and constructively.

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Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. Follow him on Twitter at @pmorici1.

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