A New U.S. Strategy in the Global Economy?

America's banker isn't happy.

At the World Trade Organization, China's representatives call on the U.S. to halt the decline of the dollar that has contributed to the rising price of food and oil (and racked up staggering losses in the value to China's $1.5 trillion in dollar reserves). China's leaders blame Washington's "warped conception" of market deregulation for the financial crisis that is rattling the world economy. Liu Mingkang, the chairman of the China Banking Regulatory Commission, scorned distorted US policies: "Does moneymaking or doing business justify the regulators in ignoring their duty for prudential supervision and their job of preventing misbehavior?"

Perfect. The Bush administration is so lame, it is getting lectures from the communist governors of China on how best to regulate the market.

And when China talks, the U.S. better start listening. Our trade deficit with China last year jumped to an all-time high of $256.2 billion, the largest deficit ever recorded with a single country, and the equivalent of nearly one third of America's total trade deficit. The Chinese have over $1.5 trillion in U.S. dollar reserves, and are now creating sovereign investment funds to purchase U.S. companies and properties at bargain level prices. China's willingness to lend us the money we use to buy the goods they make with the jobs our companies have taken there enables us to spend far beyond our means. When your banker calls, you answer the phone.

This week, Treasury Secretary Paulson meets with his Chinese counterparts in Annapolis for what is called the Strategic Economic Dialogue. Generally the U.S. comes with a list of complaints about Chinese mercantilist economic policies—the manipulation of their currency, the violation of copyright and patents, the protection of their markets. The Chinese deny or ignore the accusations, offer a few criticisms of the U.S. and go on with business as usual.

As Annapolis will once more demonstrate, U.S. policy toward China is simply befuddled. The problem is that while the Chinese have a clear economic strategy, the U.S. global strategy is the byproduct of corporate lobbies and Wall Street political muscle.

The Chinese routinely flout the rules of the global marketplace, but under the Clinton administration, the U.S.—driven by companies eager to set up shop in China and bankers eager to cut the deals—gave China permanent most-favored-nation trading status and then let them into the World Trade Organization without insisting on reforms or setting up decent enforcement mechanisms for standards everyone knew the Chinese did not and would not follow. About the only thing the U.S. pushed for in the negotiations was to try to open up Chinese financial markets to U.S. banks, a clear reflection of a trade policy that, in Illinois Sen. Barack Obama's words, has been made for "Wall Street, not Main Street."

It isn't clear how long the old game can last. The dollar has lost about half its value to the Euro, and U.S. exports are beginning to rise. But the Chinese (and the Japanese) have pegged their currencies to the dollar and not allowed a similar adjustment (The Chinese have allowed the renminbi to rise only about 20 percent to the dollar since 2005). The result is that the U.S. trade deficits with China keep rising; the Chinese keep pocketing more and more dollars. The Chinese are importing inflation that is ever more difficult to control. And the U.S. is exporting manufacturing jobs, and now service jobs, generating a backlash against trade generally that could grow much uglier.

What America needs is a clear strategy to sustain its middle class in a global economy that has just integrated over 2 billion workers in China, India and the former Soviet Union. Neither the Bush administration nor Arizona Sen. John McCain shows any sign of having ever thought seriously about this fundamental challenge to U.S. security. McCain seems satisfied to prate about the benefits of free trade, and accuse Obama of believing America can't compete.

This week in Flint, Mich., Obama called [1] for the U.S. to develop its own national economic strategy, and began by putting forth elements of a "competitiveness agenda" for the U.S. He vowed to raise taxes on the wealthy, capture some of the money now being squandered in Iraq, and invest in a concerted drive for energy independence, seeking leadership in the green industries of the future; in education and training, from pre-school to affordable college; in a world-class modern infrastructure from broadband to fast trains; in research and development to keep the U.S. the world leader in science and invention. While conservatives were grousing about "tax and spend," sensible observers might be more worried about whether his commitments were commensurate with the size of the challenge. ($10 billion a year in an investment bank for infrastructure won't build many bridges, much less seed modern transit.)

On trade itself, Obama called for "strong and smart trade policies," promising enforceable protections of labor rights and the environment, insisting on enforcement of current accords, saying "we need tougher negotiators on our side of the table -- to strike bargains that are good not just for Wall Street, but also for Main Street"

Obama argued that "allowing subsidized and unfairly traded products to flood our markets is not free trade... We cannot stand by while countries manipulate currencies to promote exports, creating huge imbalances in the global economy. We cannot let foreign regulatory policies exclude American products." China was not mentioned by name.

With the depreciated dollar, U.S. trade would move toward relative balance with two major exceptions—the rising cost of imported oil and trade with China. The former requires a concerted drive for energy independence, which both Obama and, less credibly, McCain have called for. The latter requires a serious strategy toward a country which is now our leading creditor.

"Our cooperation is an irreversible and unstoppable current," China's new Vice Premier Wang Oishan said. "China needs the United States and the United States needs China." That is surely true—but the current current is unsustainable.

How can America benefit from the expanded trade and opportunity of a global economy, while avoiding a race to the bottom that erodes the American middle class that is the pride and the foundation of our democracy? How do we balance our relationship with China, even while engaging that country to join in the effort to address global warming? These are far more fundamental challenges to our security than the threat posed by the scattered extremists of al Qaeda.

While McCain is simply out of touch, Obama has put forth essential elements of a different course. He's called for the U.S. to get serious about developing a national strategy for the new global economy. But that can't be done without a much more candid debate about the big gorilla in the room —China, whose communist governors are happily lending us the rope to hang ourselves with.