Watch Out for the China Bashers

Watch Out for the China Bashers
By ZACHARY KARABELL
September 5, 2007 - WSJ

The recent outcry over poisonous pet food and the recall of lead-tainted toys sourced by Mattel in China proves one thing: We have a China problem. It is not, however, a China problem in the way most people think. It is not a problem with safety standards that threaten our children and our pets. It is a problem with the very fact of China
as an emerging force on the global economic stage, and it underscores a profound and worrying trend in American political and economic life. For half a century we fought for the creation of a global capitalist system. Now that we have one, we seem to have forgotten one little thing: Capitalism means competition, and we are acting like we can't handle it.

To understand that the uproar over the toys isn't really about product safety, we need to look back at the past few years and see that the current hullabaloo is just the latest incarnation of our simmering China problem.

The rumblings began during the election of 2004, with accusations that U.S. companies that outsourced work to China were traitorous and being led by "Benedict Arnold CEOs." Never mind that most of the jobs outsourced to China had already been outsourced to Mexico a decade ago. The chorus grew two years ago, when one of China's state-owned energy companies attempted to buy Unocal. That led to a strenuous and
yes, bipartisan, position in Congress that allowing the deal to go forward would jeopardize national security and unfairly benefit China. Democratic Sen. Ron Wyden declared: "I don't think being a free-trader is synonymous with being a sucker and patsy." The Republicans were no better. The deal was scuttled.

Then last year, the sharply rising trade deficit and current account deficit with China generated pressure in Congress to force China to allow its currency (the yuan) to appreciate more rapidly against the U.S. dollar. The first proposal was sponsored by Sens. Lindsey Grahamand Charles Schumer and would slap China with a 27.5% tariff unless it allows for an immediate and sharp revaluation. The second is working
through the Senate this summer and is sponsored by Sens. Charles Grassley and Max Baucus. It would force the Treasury Department to label China a currency manipulator based on the fact that China doesn't allow the yuan to float freely. That in turn would lead to series of procedural moves with escalating penalties.

Never mind the fact that even a substantial rise in the currency wouldn't change the dynamics of U.S.-China trade. China is appealing not just because of costs but because of a reliable infrastructure and a proven ability to produce. Never mind that sourcing in China has direct benefits for hundreds of millions of Americans in the form of less expensive goods, from appliances to entertainment. Never mind that China partly subsidizes U.S. spending and consumption by purchasing hundreds of billions of dollars worth of U.S. Treasuries.

And never mind that China has become an integral market for U.S. goods and companies, as the purchasing power of Chinese consumers rises rapidly. Macau is already a larger market for U.S. gaming companies than Las Vegas, and multinationals such as Proctor & Gamble and GE are seeing some of their fastest, most substantial growth from selling to China, not from sourcing in China.

While the rhetoric in Congress and on the campaign trail isn't likely to derail these trends, the unwillingness to acknowledge the benefits of China's rise is part of a pattern of China bashing that raises questions about the ability of the U.S. to compete in the global economy that it did so much to create.

The issue of safety needs to be seen in this context. There is no question that standards in China are less rigorous than they should be. But consumer concerns over product safety long predate the current scare, and only a severe case of amnesia can turn this into a China issue. Remember Ralph Nader in his 1960s heyday? How about the global recall of Perrier water (made in France) in 1990 because of fears of benzene contamination? Or the rollover problem of the Ford Explorer in the same period? What about the recall of halogen torchier lamps in 1997 because of an unfortunate tendency for the bulbs to explode?

Read the annual report of the U.S. Consumer Product Safety Commission in 1990, which pointed to the recall of infant "bean bag" cushions made in the U.S. that caused 30 deaths. Moreover, given the recent outcry over dangerous tires made in China, we should remember that this pales in comparison to the 88 deaths attributed to defective Firestone Tires in the late 1990s that led to the recall of 6.5 million in 2000.

This is only a small sample of product recalls in the past 20 years that had nothing to do with China. While this year China is a major source of product defects, the actual number of faulty products is, regrettably, normal -- proportionate to how much it produces and comparable to the safety issues that have bedeviled manufacturers of
all nationalities in past decades. Companies, not countries, bear ultimate responsibility for what they sell under the label, and it says something about current attitudes that so many have collectively forgotten the recent history of product safety concerns and turned it into a China problem.

Chinese officials recognize that reason and rationality aren't at work here. Zhao Baoqing, a Chinese trade official in Washington, recently attacked the quality of U.S. goods sold in China, and pointed to cranes and to generators made by General Electric as posing serious safety hazards. Most Americans will, in this climate, probably dismiss his claims as so much empty rhetoric, but the record of safety issues with U.S.-made products should give anyone pause before doing so.

As we plunge into this long election season, China is a convenient bogeyman for all sorts of ills and fears. Without question, China presents an unparalleled challenge. At various points in the 20th century, the U.S. faced military and ideological threats. But since the dawn of the American republic, we have never faced the kind of
economic challenge that China presents. It is playing the game of global capitalism almost as adeptly as we are, and our response for now seems to be a mixture of fear and disbelief.

Rather than seeing China as adding to an expanding global economic pie, we treat its ascendance as a zero-sum proposition for our workers, our companies, our currency and now even our health. While the evolution of China and the U.S. is anything but certain, and while each face internal issues that could derail the steady move forward, one thing should be fairly clear: Our China problem is going to harm
us more than it will derail China.

It is perfectly legitimate for us to demand that Chinese companies and authorities attend to product safety and to a level playing field in terms of trade. That, after all, is the guiding spirit of the World Trade Organization. It is perfectly legitimate, as both Hillary Clinton and Barack Obama have said, to treat China as a competitor and press the Chinese for greater access, more transparency, and assorted
reforms. But much of the rhetoric and cultural undercurrent these days casts China as the on-deck enemy should al Qaeda not prove up to the task of long-term adversary.

Like it or not, China is going to be a force to contend with, just as the U.S. was a century ago. Already, we are more linked to China than most of us realize or than many would like. If China-bashing becomes the prism through which China is viewed, the recent turmoil in the markets caused by the subprime mortgage mess will seem placid by comparison.

Mr. Karabell is executive vice president and chief economist of Fred Alger Management.