The coming trade wars with China

The author of this column makes a sobering and convincing case that China is rapidly gaining leverage over the U.S. in dangerous ways. Peter Navarro, professor at the University of California in Irvine, says China is taking its surplus greenbacks and investing them in the U.S. bond market, keeping our interest rates low. At the same time, China is keeping its exchange rate artificially low, fueling an unabated export boom to the U.S.

Today, as a result of its currency manipulation, China has become the largest monthly net buyer of US securities. More than two-thirds of its massive and highly undiversified $1 trillion in foreign currency reserves are estimated to be invested in US bonds. China will very shortly eclipse Japan as America's largest creditor. And its foreign currency reserves are projected to double within a few short years.
Here's the clear and present danger: What may have started out as a simple mercantilist currency gambit for China to sell its exports cheap and keep imports dear has morphed into a powerful weapon to hold off any effective US response to China's unfair trade practices. And make no mistake: Such practices run the gamut from a complex web of illegal export subsidies and currency manipulation to rampant piracy and woefully lax environmental, health, and safety standards.
From time to time, US politicians have railed against these practices – and the collateral hollowing out of America that China's "weapons of mass production" have brought about. However, any time that the Bush administration or Congress threatens any kind of significant and tangible action – as opposed to simply beating its chest – China can now credibly threaten to stop financing US deficits and start dumping greenbacks.
This is a very credible threat. If executed, inflation, the costs of imports, and interest and mortgage rates would skyrocket. With higher housing costs leading the way, consumers would soon be overburdened. The result: a nasty stagflation shock.

TK: The author predicts the long term picture is even "scarier," if that is possible. In five years, the Chinese government may orchestrate an accelerating acquisition of strategic U.S. companies, thus silencing more voices against Chinese mercantilism. Perhaps one of the most costly parts of the Iraq war is that Congress may not see the warning signs in our one-way trade with China.