Just after the ball dropped in New York City’s Times Square to welcome the New Year, I posted my five predictions for China in 2008. Four were exclusively Chinese issues, but the fifth dealt with the country’s relationship with the United States, its largest trading partner. Here is what I said:

2. China Bashing By Presidential Hopefuls: President Clinton did it when he was running for his first term as President, and President Bush did it as well, so expect both the Republican and Democratic candidates, whomever they may be, to talk tough on China in 2008. The US economy may be in recession; GM, Ford and Chrysler have already cut production schedules and predictions are that auto sales will be at their lowest levels in ten years; and oil prices will most likely remain high. China is an easy scapegoat and will be blamed for all of these ills, and more. Expect tough talk on the currency, worker conditions in factories, China’s support for Iran and other rogue regimes, and the environment.

While I of course have my own political leanings, MTD, the site, and Managing the Dragon, the book, are apolitical and refrain from making comments on how China, the United States, or any other country for that matter runs its government. It is therefore with great trepidation that I wade into political waters by commenting on any of the presidential candidates. I do so only because the views and attitude of the next president, whomever he or she may be, towards China will impact those of us doing business here.

At the beginning of this year, Mitt Romney began running an ad that addressed the issue of China as the largest of all Asian Tigers. In the 30-second ad, Governor Romney said that he would “level the playing field with China,” sparking some debate as to what exactly he meant by that statement.

In the run up to the Florida primary last week, he gave some hints as to the measures that he might take to deal with China. In Florida, Governor Romney faced a tough battle with Senator John McCain, a battle which he ultimately lost, and the subject of the economy was front and center. When asked about the economy generally, Romney said that one of the problems is that China is competing unfairly with the U.S. by manipulating its currency and “stealing” the intellectual property on products where the U.S. has a technological edge. When asked specifically about the large U.S trade deficit with China, he repeated these two points. Presumably, his policy as president would be to get tough with China on both issues.

I don’t mean to pick on Governor Romney, but he was the first to make my point in the New Year. All of the candidates have made similar comments with respect to the China currency, and some, like Senator Obama, have made even more drastic statements. (Senator Obama said before Christmas that he would ban all toy imports from China, a statement he later retracted.)

Nonetheless, Governor Romney is a businessman and he should know better than to pin the blame for America’s economic woes on China’s currency policy.
As the election process moves into high gear, the economy promises to be issue number one. So, expect more rhetoric on China in the months ahead, and more assertions that the U.S. trade balance would improve—if only China would stop manipulating its currency.

This assertion - made so readily by many politicians regardless of background - is not supported by any empirical data. In fact, all of the evidence points the other way. From 1985 to 1988, the amount of yen that could be purchased with one dollar dropped from 250 to 121. Despite this significant appreciation of the yen, exports from Japan to the U.S. increased from $69 billion to $90 billion during these three years. The yen continued to appreciate over the next 12 years, with the exchange rate falling to 100 yen to the dollar by 2000. Yet, exports continued to rise and reached $146 billion by the end of the last century.

Experience so far with China is following a similar pattern. China dropped the dollar peg in July 2005 and began allowing the yuan to float within a narrow band. Since then, the yuan has appreciated by about 13 percent against the dollar, with the exchange rate (yuan to the dollar) dropping from 8.3 then to just crossing 7.2 this week. What have China’s exports to the U.S. done since then? They have increased by over 40 percent from $163 billion in 2005 to $233 billion in 2007. In both cases, American imports haven’t decreased when the currencies of its major suppliers have appreciated. American consumers have just paid more for the goods they purchased.

I don’t believe that anyone would disagree with the idea that the U.S. must work closely with China to improve the protection of intellectual property rights. In an election year, however, with each candidate focused on the American audience, it is tempting to use tough rhetoric when discussing this issue. Accusing China of “stealing technology” may play to nationalistic sentiment and pick up a vote or two in the short term, but it won’t play well in Beijing. After all, the Chinese leadership has the same ability as Tim Russert to download videos and printed statements from 10 or 15 years ago, let alone recorded statements made in this campaign. It would be wiser to be a bit more diplomatic and assume that every statement made by a presidential hopeful is heard around the world.