More and more, I think, China will be the defining issue of the 2012 presidential campaign. This Weekly Standard piece by Irwin Stelzer is a must-read on the topic:
The Communist regime sees trade policy as merely one weapon in a war aimed at overtaking the United States as the world’s preeminent economic and, by extension, military power. The undervaluation of the renminbi is a necessary means of keeping China’s export machine running at full tilt so as to create jobs for the millions who are moving from the country to the nation’s cities. Lacking democratic legitimacy, the regime’s principal claim to the loyalty, or at least the submission of its people, is its ability to provide jobs and a rising standard of living, doubly important in this period of transition to a new generation of leaders in 2012. Americans chortle: that mercantilist program of subsidizing exports cannot be sustained forever, as the inflow of dollars will sooner or later trigger inflation. Right: indeed, that is already happening, and forcing the regime to adopt a variety of measures to curb credit and inflation.
But largely irrelevant in the longer term on which the Chinese are focused. By the time the Chinese decide they will have to allow the renminbi to appreciate, they will have accomplished two long-standing objectives. First, their vaults will be stuffed with an even larger hoard of American IOUs, enough to give them an important influence over U.S. foreign policy. “How do you deal toughly with your banker?” asked Hillary Clinton of the then-prime minister of Australia, Kevin Rudd, at a luncheon last year. His answer is not recorded.
It is true that if the Chinese start to dump U.S. Treasuries and dollars, the value of their own piles of dollar-denominated assets would decline. But if the broader geopolitical objective were served, that would merely be a cost to consider as part of the military budget.
Second, by then the Chinese will have copied enough American and Western technology to be in less need of an undervalued renminbi—they will have made-in-China products that can dominate world markets even if their currency approximates its market value. The camels that trod the old Silk Road laden with spices and porcelain will have been replaced with air and sea freighters hauling solar panels and all sorts of goods based on copied technologies and purloined intellectual property. To cite just one example, the high-speed trains that China is now selling worldwide are based on technology brought to China by French, German and Japanese companies.