Garlic wars

Some dinosaur US Congressmen evidently believe China will kowtow to crude pressure by revaluing its currency and accepting deep curbs on its textile exports.

Perhaps they should brush up on some contemporary history. Beijing has shown a marked tendency to respond in kind when countries throw road blocks in the way of their trade.

In 1999, Korea slapped a 315% tariff on imports of Chinese garlic. In what became known as "the garlic wars" China told Seoul to restore access to the pungent plant, or face a total ban on exporting mobile phones and polyethylene to China. The then Minister for Trade, Han Duck Soo, quickly caved in, and opened the doors to cheap Chinese garlic. Curiously, he tried to keep the deal secret – a decision that cost him his job. Japan similarly tried to block imports of Chinese mushrooms and onions, but had to back-pedal furiously when faced with stiff tariffs imposed on Japanese cars and mobile phones.

Throughout the Asian financial crisis, many market economists trumpeted that China would be obliged to devalue its currency to remain competitive. The Beijing authorities saw no imperative to do so. By standing firm on the renminbi, pegged at 8.28 to the US dollar, they did their regional neighbors a big favor.

Now we are hearing noisy rhetoric from the US blaming China for its ugly and ballooning trade deficit. A growing number of lawmakers and manufacturers claim an undervalued renminbi, and a flood of cheap Chinese clothing imports are causing the problems.

Neither proposition survives close scrutiny. It is not China's exchange rate that is the main difficulty but a voracious American demand for foreign goods bought with borrowed money. The US runs big deficits with virtually all its trading partners, including even the clapped-out Eurozone.

Besides, this time China is doing the US consumers a favor. In shopping malls throughout the land, there are youngsters clad from the soles of their sneakers to the peaks of their baseball caps in goods carrying "made in China" tags. Households are replete with widescreen TVs, DVD players, computers, toys, and a host of cheap merchandise almost all from the same source. That is a major factor in holding down the real cost of living while oil is near US$60 a barrel.

The opening up of China was seen as a golden opportunity to sell superior products to a grateful populace. It did not altogether work out that way. The US trade deficit with the Middle Kingdom has climbed 20-fold in 14 years to over US$260bn. Now direct investment flows are starting to shift. In recent months, China has nonchalantly bought out IBM's personal computers business and put a bid on the table for the century-old Maytag appliance group. The state-owned CNOOC energy group is girding up for a takeover battle with Chevron for the Unocal oil company.

This development is creating the sort of paranoia which marked the Japanese economic invasion of the 1980's when many US icons were gobbled up.

Nevertheless, it was astonishing that the Senate Finance Committee was convened to discuss a proposed bill to impose a 27.5% tariff on Chinese imports unless it changes its currency policy. Federal Reserve chief Alan Greenspan, who does not have to run for election, has felt free to point out that such a move would simply boost imports from other low labor cost countries, do little or nothing for the job market, and probably lower the standard of living. A higher renminbi would mean dearer prices in America. It would also increase operating costs for US companies that own factories in China.

China has settled the dispute with the European Union over its surging textile exports. The mutual agreement allows for gradually raising limits in Chinese exports over three years until 2008. Vice-Premier Wu Yi and Commerce Minister Bo Xilai praised the EU stance, and contrasted the accord with the unilateral decision by the US to impose a 7.5% cap on textile exports immediately – with threats of more restraints on the horizon.

China is becoming increasingly assertive and is in no mood to be bullied or commercially discriminated against. It is rapidly growing in confidence as a very important player on the economic and military stage. Its major holdings of US dollar debt paper, and the billions of dollars in US aircraft on order underline the former. And the recent test firings of the long range JL-2 missiles are a reminder of the latter.

The dynamic economy is sucking in oil and pushing up global commodity prices. Now Beijing wants to own the sources of production. The purchase of share stakes in Australian oil and gas companies was a precursor of the apparently unwanted bid for Unocal "all the oil in China" as The New Yorker wittily put it.