The New Economic Warfare


Wall Street Journal
Opinion – by Holman W. Jenkins, Jr.
August 11, 2009

Both the U.S. and China are practicing it.

China is being China. That’s the prevailing view of the Rio Tinto controversy, in which Beijing has accused executives of a big Australian company of industrial espionage.

Rio Tinto is one of three companies (two Australian, one Brazilian) that supply about half of China’s iron ore, the raw material of its industrial revolution. In the latest weird twist, a Chinese official briefly floated allegations that Rio’s misbehavior had cost China $102 billion over six years. That claim may or may not resurface in a future trial that may or may not take place.

Paying the alleged inflated prices, which were actually international market prices, is a sprawling mainland steel industry, which even today continues to frustrate central planners in Beijing by consuming “irrational” volumes of imported ore and bidding up spot prices. Behind the Rio allegations, then, many see a typical Chinese impulse in times of economic crisis to recentralize control over its economy. Fair enough. But also behind the Rio allegations is a novel and aggressive attempt by Beijing (which has demanded a 40% cut in contractual ore prices) to dictate the price of an internationally traded commodity, based solely on Beijing’s clout as the biggest buyer.

Into this unique international gambit, moreover, are injected tactics that an authoritarian regime would typically use only on its own citizens, such as arrests and strong-arm intimidation.

Let it be quickly added that this gambit only followed an attempt by China to play the game by proper international rules, buying a major investment stake in Rio Tinto. That proposal met withering political opposition in Australia and was later scuttled by Rio’s shareholders.

It should also be noted that China’s tactics, while rougher, are part of a megatrend that didn’t begin with China.

Recall that the U.S., in introducing its own stimulus program, included a “Buy America” provision. Recall that a live issue in the current congressional climate debate is the potential use of carbon tariffs against Chinese imports. Nor would it have escaped China’s notice that, under political pressure from Washington, GM recently abandoned plans to import a new fuel-efficient small car from China and agreed to build it in Michigan instead.

Under the lash of its own stimulus efforts, China just surpassed the U.S. as the biggest market for new cars, and Chinese auto makers are looking, as the Japanese and Koreans did before them, to break into the U.S. market. Yet any newcomer must face not only newly politicized and subsidized competitors in GM and Chrysler. Washington has also been busy handing out preferential loans to help incumbent auto makers meet onerous new U.S. fuel-mileage requirements—i.e., loans available only to those already building cars in the U.S.

What’s more, the new fuel-mileage rules themselves have a discreet protectionist cast, as Stephen Beatty, head of Toyota’s Canada business, intimated last month before an audience at the University of Windsor. He said Toyota believes the strict mileage standards rolled out by President Obama in May will now indefinitely delay the arrival of cars in the North American market from Chinese and other upstart auto makers. Those auto makers, he explained, “simply don’t have the base technology to meet” the new mandates.

Even before the meltdown, protectionism masquerading as regulatory standard-setting was becoming a noxious global habit. At best, once their various “stimulus” and bailout campaigns have run their course, top governments will have a tall job to rebuild respect for the global trading order.

At worst, their attempts to fight off the effects of the downturn will do more to foster stagflation than growth, and the slide into economic warfare will accelerate. Unhappily, such is the scenario we’d put our money on.

China, for one, has looked upon the global trading system as serving mainly as a receptacle for its exports. Yet the real solution to its dependence on imported ore is to open up its economy more, to imports of steel and finished steel products. Many of the world’s steelmakers, including America’s, have their own local ore deposits and don’t depend on the costly internationally traded variety.

Secondly, there’s no growth in the long run without the shifting of capital and labor from mature industries to novel ones.

Both Washington and Beijing are treating economic survival as a matter of propping up the most troubled of existing industries (which naturally have all the political power). China’s obsession with ore prices arises from concern to protect jobs in its vast, rickety steel sector. The Obama administration’s preoccupation with Detroit can be explained in three letters: UAW.

Such calculations are irresistible to politicians, and why realistic pessimists now talk about a decade or more of lackluster growth. Recall that the deepest damage in the 1930s was not done by a misallocation of capital during the bubble years, but by the destructive political imperatives unleashed in the bubble’s aftermath.

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