China, the World, and 08…

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A further thought on 2008, the Olympics and the outside world: one of things Beijing is no doubt grateful for is that China is NOT, at least for now, an issue in the American 2008 presidential campaign. As far as foreign affairs, it’s pretty much all Iraq all the time right now. (If you want evidence of this, listen to Tim Russert’s hour long Meet the Press interview with John McCain yesterday). As far as the US campaign is concerned, Darfur is an issue, but only at the margins. And the same goes for trade.
I wonder, however, whether trade will stay at the margins. US economic growth is slowing; if that continues into next year (admittedly, a big if, some economists expect a US acceleration later this year) and US unemployment ticks up from its current, historically very low levels, the trade issue could gain some traction. China’s gargantuan trade surplus continues to soar, which is only going to increase pressure from both the US and Europe on trade. Some economist believe China’s surplus could hit a mind blowing 12.8 per cent of GDP this year. Some smart people are beginning to wonder whether Beijing might sometime in the next year have to resort to a one off, substantial revaluation of the renminbi against the dollar in order to mitigate some of the pressure, despite the government’s continued insistence that that will never happen.
That pressure will be evident at the next “strategic economic dialogue” confab between Beijing and Washington May 22-24. US Treasury Secretary Henry Paulson views these meetings as a chance to talk about “long term’’ economic issues. But the unalterable fact is China’s trade position with the rest of the world, right now, is unsustainable; it’s a train wreck unfolding before our eyes. Forget the “long run.”
For my part, I don’t see how Beijing blunts the relentless growth of its trade surplus—let alone begins to reverse it– without further revaluation of the RMB. China, in its Olympic year, doesn’t WANT to be part of the US presidential discussion next year. But it may need to do something to make sure it stays blissfully in the background.