China, the Renminbi, and Stability

Years ago, when I first read The Tragedy of Great Power Politics, I was somewhat surprised by John Mearsheimer's insistence that China and the United States will sometime in the future be embroiled in conflict. As the years went on, and I absorbed the lessons of that book, I found it to be less and less unlikely, the unfortunate fact being that conflict is sometimes an inherent property of growth, China is large and continuing to grow, and the even more unfortunate fact that China is likely to be a regional hegemon in the coming years.

I count these facts as unfortunate because China and the United States are unlikely combatants. Neither is really interested in conflict with the other, and peace is, I think, generally in the interests of the leaders and the peoples of both great nations. However, conflict is inevitable when interests do not coincide. And in this case the economic interests of China and the United States do not coincide. Strangely enough, it is the political interests of China's elites that cause the economic interests of the two countries to conflict.

China is focused on stability. So much so that rising in the Communist Party is in many ways dependent on how stable you can keep those areas under your control. Social stability is paramount, because without it, the Communist Party would be unable to govern a nation of a billion souls. And this stability is kept in the economic sense, largely by making sure that everyone is employed. To do that, China has been growing its economy at fairly large rates, rates that have been allowed because of export driven growth. This export driven growth has been necessary to keep China stable. Employed people are happy people. Unemployed people are not happy people. Thus, any fall in employment would cause a great amount of instability in China.

China, however, is having trouble keeping people employed. It is having trouble because the population is so big that very large rates of growth are necessary to keep everyone employed, because the number of people entering the work force increases every day. It is also having trouble keeping everyone employed because there is not enough internal demand for goods and services. Many people in China are not wealthy, and the Chinese social safety net is not very good. Like responsible people around the world, that means that many Chinese individuals save their money for a rainy day. They are thrifty and industrious. But the problem is that this industriousness means that there is an excess of Chinese goods, goods that cannot (or will not) be bought by Chinese consumers. Thus, a market has to be found for Chinese goods. If Chinese goods aren't bought, Chinese workers won't be employed, and there goes social stability.

So China tries to make its goods more competitive by keeping the Renminbi at an artificially low level against the U.S. dollar. In usual times, this isn't so bad. The U.S. market takes these goods, Chinese workers are happy, U.S. consumers get cheap goods, and overall, everyone seems to benefit. It's a win-win situation. We live in unusual times, however, so this usual arrangement is not so useful to the U.S. Because the U.S. economy is in a depression right now, U.S. workers are out of work. U.S. consumers want to save. So the only way that U.S. workers could move into certain manufacturing areas would be if they could compete against the cheap Chinese goods. But they can't, because those cheap Chinese goods are artificially cheap, because of Chinese currency manipulation. So U.S. workers lose out, because they can't move into manufacturing areas because there aren't any jobs because U.S. made goods wouldn't be competitive, and Chinese workers win. This is a win-lose situation, and this is the conflict.

Some U.S. economists, like Paul Krugman, have been discussing this issue, and why the U.S. should just go ahead and confront China over this issue. But few of the economic commentators have been mentioning the political reasons why China won't budge on this issue. China wants stability. China needs stability. And if that comes at the price of American, or European workers, that's just fine with Chinese elites. This is why the U.S. will have to confront China, and do so very publicly, and very messily. This is how trade wars start, and if China continues its policies of currency manipulation, it will be responsible for the results.