In recent articles, [1] I have focused on the need for China to revalue its currency over the near term or else face increased political noise in the United States, which can only intensify next year as the latter country heads for its presidential elections.

While China has apparently targeted the post-Olympics period (after the summer of 2008)for any currency adjustment, that time frame will likely prove too leisurely for US lawmakers. Meanwhile, key figures in the US media have taken to sensationalizing poor-quality products made in China as the debate over outsourcing reaches fever pitch.

Tires, toys and pets

In recent weeks, Chinese-made products were the subject of at least three embarrassing recalls.

The first episode involving contaminated pet food was handled by a comprehensive product recall. As with most things involving American consumers, media focus on safety and quality helped to ensure that the story got more than its share of air time, especially because keeping pets is very much part of the standard American dream. The coverage itself could have been in reaction to Americans tiring about hearing about how they were losing the war in Iraq, thus any news on the failures of other countries, and particularly an emerging superpower like China, would be a welcome distraction.

That coverage of Chinese pet food, however, led to increased media sensitivity on other aspects of the globalization story, especially as US politicians started repeatedly talking up the issue of job losses in the run-up to the Democratic and Republican primaries. China, rather than any other country exporting to the United States, thus found itself in the perfect storm of being perceived not only as a country that steals Americans’ jobs by manipulating its currency, but also one that endangers their dogs and cats.

In that background, when two other stories broke this month, the first involving the use of lead paint in a fairly undistinguished line of toys and the second dealing with poorly made tires for trucks and sport-utility vehicles, it simply became too easy for the US media and politicians to unite in the cause of “helping to improve China’s standards”, which is of course a euphemism for name-calling and worse.

While no one can condone the use of dangerous goods in children’s toys, manufacturing failure on tires is a bigger issue. Danger is almost by definition insidious in such products, as there is no way to look inside a tire to find if the gum strips (the item at the center of the controversy) are correctly affixed and of proper density. By putting doubt into the mind of American consumers on the “Made in China” label, a dangerous path has been signaled.

Old movie

None of this stuff is new. The United States adopted the exact same strategy with Japan during the 1980s.

A number of the stories from that time were chronicled in a nominally fictional book by Michael Crichton [2] that was a best-seller leading to a Hollywood movie. While it fails as any literary reference, as indeed most works by American authors do, Chinese authorities should take the time to read the book and understand the message of media power and its impact on both government policy and public perceptions.

Media power in the United States is nothing to sneeze at, even if it is usually used to promote an atrocious celebrity mania [3] that makes people in the rest of the world wonder about the basic culture of the country. However, when used for “righteous” purposes, it can have the impact of changing Americans’ perceptions.

At risk here is not only the demand for China’s products in the US but, more important, China’s ability to climb the value chain. This means making goods that are labeled with Chinese manufacturers’ names rather than either Westernized or, as is more common, retail stores’ brands. I wrote a while ago about American politicians’ opposition to China buying key US companies [4] even as Indian companies managed such acquisitions successfully.

What we are seeing is the logical next step in America’s efforts to avoid China rising further in the value chain, which as a process would endanger the United States’ two key allies in Asia, namely Japan and South Korea. Thus even as the overall manufacturing quality of China improves along with its access to technology, the country’s products are still overwhelmingly at the bottom end of the manufacturing scale.

Without greater value addition, China will find itself in a painful tradeoff between profit and employment growth. Current stock-market valuations in China argue for substantial growth in profits in coming years, but this process will be imperiled if Chinese factories cannot produce higher-priced goods. That in turn will force the companies to improve productivity, thereby either denying employment growth or, worse, firing people.

China isn’t the only country facing such US push-back, as the media also target India, Mexico and Brazil from time to time. However, it is true that China is more at risk, because the democratic credentials of other targets, as well as their relatively free media, allow for better understanding of those countries by Americans.

A matter of time

As things stand, it appears a foregone conclusion that Beijing would much rather discuss currency adjustments after the Olympics next year. However, that would be an error on many fronts, starting with the basic respect for the country in American minds. Political rhetoric will intensify in coming months and will be directed at China’s currency peg should voters in states with rusting factories pay any attention to China-bashing stories in the upcoming primaries, as that validates a political strategy of being seen as anti-China.

Vice Premier Wu Yi did not appear to have paid much attention to one of her genuine well-wishers, Treasury Secretary Hank Paulson, when he implored China to revalue. Paulson knows the risks of letting the Democrats loose on financial and trade policies, as House of Representatives Speaker Nancy Pelosi threatened to do just last week in pushing through a bill imposing punitive duties on imports from China. Those who still remember the frequent drama around the “Most Favored Nation” status during the Bill Clinton era are probably shifting uncomfortably in their chairs by now.

It is in both the short- and long-term interests of China to let its currency appreciate, and nip in the bud the malignant impact that a peg has had on its domestic economy, including rising inflation [5] and soaring property prices. Waiting too long as the Japanese did would inevitably produce the same kind of economic decline that Japan faced in the 1990s.

Over to Wu.

Notes
1. Pegged problems, Asia Times Online, May 25, 2007.
2. Rising Sun by Michael Crichton. 3. Why Hollywood portrays Muslims as villains, ATol, March 24, 2007.
4. India vs China in the markets, ATol, October 28, 2006.
5. Pork-barrel politics, ATol, June 16, 2007.

https://web.archive.org/web/20081122034018/http://www.atimes.com/atimes/China_Business/IF30Cb01.html

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