Geithner's China blunder could spark trade war

Tim Geithner has by now settled into his new job at the Treasury. It no longer matters that he was the Fed’s man on Wall Street while the excesses and chicanery reached their peak.

Or that he decided to avoid paying his income taxes, despite repeated notices of his liability from his then-employer, the International Monetary Fund. Or that it was Geithner, along with Hank Paulson, who decided to let Lehman Brothers go under, bringing the financial system to the verge of collapse. That’s all behind him.

What might be ahead is a trade war. At least, that’s what many observers believe Geithner had in mind when he brought smiles to the face of New York senator and China-basher Chuck Schumer, by telling the Senate during his confirmation hearings that he believes China is “manipulating” its currency to maintain it at a low value so as to stimulate its exports.

“Manipulate” is the word that upsets the Chinese, and imports are the things that most upset the trade unions and congressional Democrats who see them as destroying jobs in America -- never mind the benefits to consumers as they prowl the aisles of Wal-Mart.

This was no casual blunder by Geithner. The administration rushed out a statement that Geithner was saying no more than President Obama had said on the campaign trail. And Geithner was reading from a prepared statement. Premeditation matters.

Geithner is well aware of Chinese sensibilities. He and his family have a long association with, and knowledge of, the politics of Asia and China. It would have been unusual in past years for any important Chinese official to visit the U.S. and not have a private tête-à-tête with Geithner, who has studied Chinese and Japanese, and lived in India, Thailand and Japan, as well as in China. Tim Geithner knows just what will set the Chinese leaders’ teeth on edge.

Which he most certainly did. China’s communist leaders, lacking democratic legitimacy, know that unless they can keep job losses down as their economy cools, they will face even more social unrest than has been bubbling to the surface in recent years.

They know, too, that the recession in the U.S. and Europe is cutting into their exports, causing factory closings and lay-offs. The last thing they want is to see the yuan appreciate further against the dollar, reducing the competitive advantage that made-in-China goods have in U.S. markets. In short, Geithner’s charge is not without substance. And it resonates.
With the economy in recession, and the taxpayers about to spend perhaps $1 trillion to get it moving, the notion that the money will end up buying goods made-in-China-by-Chinese-workers is increasingly unpalatable.
Voters are not economists, and few have plowed through Adam Smith’s defense of free trade. Besides, the long-run inefficiencies created by protectionism pale by comparison with the jobs lost here and now, especially in the minds of trade union leaders and the Democrats they have helped to elect.

These visceral protectionists are not alone in criticizing our trade policy. Robert Cassidy was President Clinton’s assistant U.S. trade representative for the Asia-Pacific region, and the man who put together the deal that persuaded Congress to normalize trade relations with China and permit China to join the World Trade Organization (WTO).

He is no protectionist. Yet, regrets, he now has a few. Earlier this week he told an audience at the liberal Economic Policy Institute that China’s manipulation of the yuan is making American goods uncompetitive in China, and inducing U.S. companies to close factories here and move production to China. That’s not what he had in mind when he supported a trade deal with China.

For the past decade, China has shipped us goods, in return for which we have shipped China bits of paper with pictures of American presidents. China has shipped trillions of those dollars back to us to buy the IOUs our deficit-ridden government is selling.

Now, the Treasury is stepping up its borrowing to fund the stimulus, the auto industry, the banks, a partial government takeover of the health care industry, and items long on liberals’ wish lists.

If China, already angry at the losses it has incurred on its American investments, decides it doesn’t want to buy the new IOUs, interest rates here will climb, offsetting the effects of much of Obama’s stimulus package.

Geithner might find that he can’t peddle the billions in IOUs he will soon be issuing, and regret sticking a thumb in his Chinese friend’s eyes.

Examiner columnist Irwin Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Studies.