All due praise to Google, which has put principle above money by refusing to censor search results in China. We can’t recall the last time an American company publically took the high road, ethically and morally speaking – especially when billions of dollars of potential revenues were at stake as they are in this case. More often, we read about bribery scandals abroad and cynically assume it’s the cost of doing business in the ethical swamps that lie outside of Europe, Canada and Japan. China is much worse than merely corrupt, however, and that’s why it was an ideal place for Google to take a principled stand.
In fact, China is a place where dissenters disappear from their homes in the middle of the night, and whose authoritarian government has embraced a particularly brutal form of genocide to achieve its goal of subjugating Tibet. Since invading the country in 1949, imperial China has killed nearly a fifth of Tibet’s population and destroyed 6,000 monasteries. Concerning China’s sway over a supposedly free Taiwan, the Chinese government has threatened would-be interlopers, including the U.S., in the bluntest terms.
Writing Off the U.S.
And yet, with the singular, praiseworthy exception of Google, corporate America seems to have no qualms about doing business with China. The hope – or excuse, perhaps – is that by engaging China in trade, we stand a better chance of drawing the country into the community of nations that recognizes basic human rights, private property and the rule of law. While this calculation may have seemed persuasive ten years ago, it has been weakened by China’s emergence as a dominant economic power. Granted, they have not yet told the U.S. to take a hike. But they are very nearly in a position to do so, since they could easily destroy our economy by, for one, swapping their dollar reserves for gold.
You say they would never do so – at least, not precipitously — because it would hurt them as badly as it would us? That is true. But they at least know they could recover, while we would not. Anyway, to be brutally realistic about it, it must be assumed China knows the U.S. is headed into an economic Depression. As such, they undoubtedly have written off the nearly trillion dollars of reserves that they currently have stashed in U.S. Treasurys. That will be quite a blow when it finally happens, as it must, but it will be more our loss than theirs.
In the meantime, it is clear that China no longer kow-tows to U.S. demands. The opposite is true, actually, even if the White House would have us believe otherwise. In the case of Google, the officially sanctioned white lie — from sources both in China and the U.S. – is that China’s door is open not only to Google, but to investment in general. This cannot possibly be so if China’s door is not also open to the free flow of information. The Chinese know this, and so do we. It is the key question that China will have to confront if it is to emerge from the xenophobic mindset that built the Great Wall. For now, we owe a debt of gratitude to Google for sharpening the ideological boundary line between countries that are truly free and those that are not.
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Posted by Rick for Brian Benton:
First, I am with you on Google’s stand. Kudos to them.
I wanted to address your following comment …
“Granted, they have not yet told the U.S. to take a hike. But they are very nearly in a position to do so, since they could easily destroy our economy by, for one, swapping their dollar reserves for gold. You say they would never do so – at least, not precipitously — because it would hurt them as badly as it would us? That is true.”
China swapping its US Dollar reserves for Gold would completely defeat the purpose of why it acquired those reserves in the first place. China acquired those US Dollar reserves because they wanted to weaken the Yuan relative to the Dollar. They could have chosen to simply allow the Yuan to rise in value (due to the trade surplus net demand for Yuan). Instead, they made the explicit choice to “print” Yuan and buy Dollars … thus building US Dollar denominated foreign reserves So, until China adopts a different stance w/respect to the Yuan vs. the Dollar …
The following is something I sent to my private Financial mailing list a few months ago (while there was still a significant trade gap), entitled “Currency Wars” …
I often get two specific questions concerning the US trade relationship with China. One concerns the claim made by some that China manipulates its currency (it does retain a peg to a trade weighted index of currencies, with the significant currency being the US Dollar). The other concerns China being vocal about the stability of its vast amount of US Dollar based foreign reserves and its publicly voiced apprehension to its purchase of more US debt. As usual, there are two sides to every story. The below provides a synopsis of how this plays out and fills out what is not being admitted by either side.
When the US pays for Chinese exports (and it purchases much as China still maintains a large trade surplus with the US), it does so by purchasing Yuan (using Dollars) on the foreign exchange market (see Note: below). This results in a rising Yuan … which makes sense since a net trade surplus results in net demand for the net trade surplus currency (in this case, the Yuan). But the Chinese want to keep their export sector growing (they are still an export driven economy) and this will not happen with continued growing strength in the Yuan (trade would eventually balance back as Chinese exports to the US become more expensive and Chinese imports from the US less expensive), especially relative to the US Dollar. So, the Chinese central bank intervenes and creates (“prints”) Yuan to buy US Dollars. This artificially devalues the Yuan and provides an artificial boost to the Chinese export sector (keeping the value of their currency lower than it would normally be without the intervention). This is why the Chinese central bank has so many US Dollar denominated foreign reserves … they created them. Now that they have created them, they are stuck trying to determine the best investment choice for them. It was once a mix of US treasuries, Agency MBSs, and Agency debt. But with the nationalization of the Agencies (Fannie Mae, Freddie Mac, etc.), China has shifted the majority of its US dollar denominated foreign reserves to US treasuries.
So on one side, you have the US complaining (legitimately) about the Chinese manipulating their currency. But in the same breath, the US is lobbying for more investment in its debt (sorry, cannot have it both ways) as the amount of debt issuance required of the US Treasury has grown to unsustainable levels.
On the other side, you have the Chinese complaining (legitimately) about the US devaluing its currency and making Chinese investments in US Dollar denominated assets less stable. But in the same breath, the Chinese continue to print Yuan to buy Dollars due to their trade surplus and their desire to artificially support their export sector. The Chinese can solve their own problem by not printing Yuan to buy Dollars (devaluing their currency relative to the Dollar). But like the US, they want it both ways.
Note: Even if a Chinese exporter accepts US Dollars without first converting to Yuan, the result is still the same … these Dollars will be subsequently exchanged for Yuan on the foreign exchange market.