Lost in the Nobel hoopla yesterday was this fascinating New York Times story by Michael Wines about the ways in which China's economy and foreign economic policy are vexing its neighbors. 

China has long claimed to be just another developing nation, even as its economic power far outstripped that of any other emerging country.

Now, it is finding it harder to cast itself as a friendly alternative to an imperious American superpower. For many in Asia, it is the new colossus.

“China 10 years ago is totally different with China now,” said Ansari Bukhari, who oversees metals, machinery and other crucial sectors for Indonesia’s Ministry of Industry. “They are stronger and bigger than other countries. Why do we have to give them preference?”

To varying degrees, others are voicing the same complaint. Take the 10 Southeast Asian nations in the Association of Southeast Asian Nations, known as Asean, a regional economic bloc representing about 600 million people. After a decade of trade surpluses with Asean nations that ran as high as $20 billion, the surplus through October totaled a bare $535 million, according to Chinese customs figures, and appears headed toward a 10-year low. That is prompting some rethinking of the conventional wisdom that China’s rise is a windfall for the whole neighborhood.

Vietnam just devalued its currency by 5 percent, to keep it competitive with China. In Thailand, manufacturers are grousing openly about their inability to match Chinese prices. India has filed a sheaf of unfair-trade complaints against China this year covering everything from I-beams to coated paper.

Read the whole thing -- Wines does a nice job of contrasting China's policy responses in 2008 to what it did a decade earlier.  To sum up:  those dogs that were not barking previously are starting to growl. 

This problem is not going away anytime in the near future.  The problem for the rest of the Asia/Pacific is that their comparative advantages (labor costs, process innovations) are also China's comparative advantages.  Unless China starts acting as an important consumer market as well -- which admittedly might be happening as I type this -- then China's mantra of being a "responsible power" is going to meet a greater level of static very, very soon.   

UPDATE:  The Chicago Council on Global Affairs' Tom Wright has a report on how the financial crisis has affected China's soft power in the Asia/Pacific region that buttresses the Wines story.

Apparently the Chinese premier feels like everyone is picking on his country and that's not fair: 

China’s premier Wen Jiabao on Monday lashed out at the growing number of countries pressuring Beijing to strengthen its currency, making it clear that European officials made little headway in their efforts over the past two days to persuade the country to allow the renminbi to appreciate. 

Speaking at the conclusion of an EU-China summit in the eastern Chinese city of Nanjing, Mr Wen said: “Some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China. This is unfair. Their measures are a restriction on China’s development.” (emphasis added)

Wen has a legitimate complaint here about the rise in protectionism directed against China in particular.  Of course, this begs the question of whether maybe, just maybe, the undervalued yuan might be driving some of that protectionist sentiment. 

It would be interesting for the U.S. Trade Representative and the EU Trade Directorate to make the following proposal: 

Hey, Wen, you're right about the unfair tire tariffs and the like.  Let's make a trade deal:  you allow the yuan to appreciate, say, 20% against the dollar over the next twelve months.  In return, we will announce a voluntary two-year moratorium on any new anti-dumping and escape clause measures targeted against Chinese imports.  What do you say?

To be honest, I'm not sure if this is legal, but it would be an interesting gambit. 

Question to readers:  which side would blink first at this deal?   

In his New York Times column today, Paul Krugman writes about the problem of macroeconomic imbalances between China and the United States.  Which is fine, except he wrote the exact same column last month.  Just like last month's column, this one makes some good points and fails to mention some important dynamics.  Beyond the inclusion of a useful footnote, however, there's nothing new here. 

As part of an ongoing public service to busy readers of Foreignpolicy.com, the hard-working staff here at the blog is ready to help you bypass the chore of having to read the same Krugman column time and again with this handy-dandy crib sheet.  My guess is that the next six months' worth of Krugman columns will boil down to the following assertions:

1. The root of macroeconomic imbalances is the Chinese (undervalued) peg to the dollar;
2. Obama and Geithner should be "tough" on China's dollar policy;
3. Concerns about incipient U.S. inflation are... er... inflated;
4. That goes double for long-term concerns about rising debt levels;
5. The February 2009 stimulus was too small;
6. The Republicans are blinkered;
7. The Obama administration should act in a more partisan and progressive manner. 

Now, let me stress that I agree with 1, 3, and 6 at this point, and I'm agnostic on 4 and 5, so it's not like Krugman is wrong in what he's saying.  It's just that he's saying the same damn thing over and over again. 

My latest column in The National Interest online is up, and it sounds a warning about the Obama administration's policy malaise on both the Asia/Pacific region and the #1 issue to countries in the Asia/Pacific region -- namely, trade:

Obama’s policy malaise on trade will not win him friends in a region hell-bent on deepening economic integration. U.S. policy on trade liberalization has stalled out so badly that rumors are swirling around the Beltway that U.S. Trade Representative Ron Kirk is contemplating resignation. Meanwhile, countries in the region are signing free-trade agreements with each other at a record pace. The European Union has inked a free-trade deal with South Korea, and is negotiating one with Japan. In contrast, the chances of the Korea-United States free trade agreement passing this Congress is hovering around zero. The comparison with China is particularly dispiriting....

The United States has not been eclipsed yet—the bevy of activity in the Pacific Rim is a lot more about hedging than balancing against the United States. Nevertheless, if President Obama wants to be taken seriously in the region, he needs to take the region’s issues more seriously. Trade is not merely about economics—it’s about foreign policy too. Just because Washington ignores a policy issue does not mean others do not think it important. As we are learning, some regions can bypass America altogether if they so choose. 

In a very disturbing sign of the times, I see that former State Department official Evan Feigenbaum has written something similar for the Financial Times: 

[T]he business of Asia is business. Without more vigorous trade engagement, such diplomatic efforts cannot secure America’s position in a changing Asia. The US could soon face a region less willing to accommodate its commercial and financial interests.

Many eons ago in graduate school Only recently Evan and I woul talk about the Asia/Pacific when we were matriculating in graduate school together -- and, more often than not, we disagreed with one another.  The only times we agreed was when some serious s**t was going down.  So take this consensus for what you will. 

Following up on my dollar post from earlier this week, I see that Paul Krugman is talking a related issue in his New York Times column today -- the refusal of the renminbi to depreciate against the dollar:

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

Krugman then goes on to excoriate the U.S. Treasury department for not upbraiding the Chinese more on this. 

Fair enough, but the thing is, the United States is not the country that's hurt the most by this tactic.  It's the rest of the world -- particularly Europe and the Pacific Rim -- that are getting royally screwed by China's policy.  These countries are seeing their currencies appreciating against both the dollar and the renminbi, which means their products are less competitive in the U.S. market compared to domestic production and Chinese exports. 

This leads to the title of this post.  Krugman presumes that the U.S. has the strongest incentive to talk to China about this issue.  If one thinks of the U.S. acting as the hegemon, that's possibly true.  As a matter of direct economic interest, however, why haven't the Europeans and East Asians been screaming bloody murder about this?  China's policies are forcing them to take actions they don't want to take -- so why aren't they complaining more loudly about this? 

Why? 

My latest column for Newsweek International is now available.  It looks at optimistic and pessimistic modes of thought with regard to China's future, and suggests that they can both be right: 

I belong to the third camp—the one that believes that the Bubblers and the Extrapolators can both be right. My camp looks at China and sees the parallels with America's rise to global economic greatness during the late 19th and early 20th centuries. From an outsider's vantage point, America looked like a machine that could take immigrants and raw materials and spit out manufactured goods at will. By 1890, the U.S. economy was the largest and most productive in the world. As any student of American history knows, however, these were hardly tranquil times for the United States. Immigration begat ethnic tensions in urban areas. The shift from an agrarian to an industrial economy led to fierce and occasionally violent battles between laborers, farmers, and owners of capital. With an immature financial sector, recession and depressions racked the American economy for decades.

It is not contradictory for China to amass a larger share of wealth and power while still suffering from severe domestic vulnerabilities. From the perspective of the rest of the world, however, this is not a good thing.

As for why it's not a good thing, well, you'll have to read the whole article. 

In a legen -- wait for it -- dary blog post, Belle Waring mentioned the pony problem in public policy.  Namely, "an infallible way to improve any public policy wishes. You just wish for the thing, plus, wish that everyone would have their own pony!"

I bring this up because of David Sanger's New York Times story about the prospects of imposing a gasoline embargo on Iran:  

The Obama administration is talking with allies and Congress about the possibility of imposing an extreme economic sanction against Iran if it fails to respond to President Obama's offer to negotiate on its nuclear program: cutting off the country’s imports of gasoline and other refined oil products....

But enforcing what would amount to a gasoline embargo has long been considered risky and extremely difficult; it would require the participation of Russia and China, among others that profit from trade with Iran. Iran has threatened to respond by cutting off oil exports and closing shipping traffic through the Strait of Hormuz, at a moment that the world economy is highly vulnerable.

The rest of the story is kind of irrelevant -- because without China and Russia, this is just a theoretical exercise.  In fact, here's a good time-saver:  if you read any story about a gasoline embargo o Iran, just scan quickly and get to the part where the reporter explains how and why Russia and China would go along.  If it's not mentioned, the story is inconsequential. 

If you want China and Russia to agree to sanctions, should you wish for the free pony as well?  Here the growth of dissent in Iran complicates an already complicated picture.  I'm betting that Moscow and Beijing have observed the "Death to Russia!" and "Death to China!" chants among the protestors.  This is likely going to make them even more reluctant to do anything that undermines the current regime (even if this hurts their long-term interests).  Which a gasoline embargo would most certainly do. 

Do I think a gasoline embargo is a good idea?  Absolutely.  Do I think it will happen?  No, I don't. 

UPDATE:  Spencer Ackerman reacts the same way I do.  The Weekly Standard's Michael Goldfarb is more optimistic. 

The Financial Times' Peter Garnham reports that China is getting serious about internationalizing the use of the renminbi:

China has kick-started a major plan to internationalise the renminbi and the process is likely to be faster than many expect, according to HSBC....

“China is beginning an ambitious scheme to raise the role of the renminbi in international trade and finance and to reduce reliance on the US dollar,” said Qu Hongbin, China chief economist at HSBC.

“This will likely be a multi-year and gradual process. Yet, we believe the pace is likely to be faster than many expect.”

HSBC said the internationalisation of the renminbi was long overdue, given China’s rising economic power relative to the limited use of the renminbi overseas.

If you read the whole story, you discover that the FT's evidence for this assertion rests entirely on assertions by HSBC officials.  Which leads one to wonder whether maybe, just maybe, the FT should have checked to see whether HSBC has any financial stake in globalizing the use of the renminbi. Crazy talk, I know...

Loyal readers are surely aware that this is not the first time the Financial Times has hyperventilated over Chinese moves that don't necessarily amount to all that. 

Now before anyone accuses me of going all Brad DeLong on the FT, I think a lot of their China coverage (particularly by Jamil Anderlini and Geoff Dyer) has been very informative.  That said, this kind of thinly sourced story does lead one to wonder just how much of the coverage of China's financial moves is hype from financial players with a vested interest in feeding the China bubble. 

Readers -- am I underreacting to this? 

In the past 24 hours, there's been some interesting stuff coming out on both North Korea and Israel. 

On the North Korea issue, Bob Gates' chat with an FT reporter is worth reading just to savor the man's obvious efforts to signal to the North Koreans that they can't control the agenda.  However, Mark Landler and David Sanger's New York Times story today suggests that China is thinking about putting the economic and financial hurt on North Korea. 

Meanwhile, the United States and Israel appear to be at loggerheads on the question of West Bank settlements.  This is particularly interesting: 

[T]he tenor of Mrs. Clinton’s comments Wednesday indicated to some analysts that the Obama administration was unlikely to budge from its position, even at the risk of putting Mr. Netanyahu’s government into jeopardy.

“She is stripping away whatever nuance, or whatever fig leaf, that would have allowed a deeply ideological government to make a settlement deal that is politically acceptable at home,” said Aaron David Miller, a public policy analyst at the Woodrow Wilson International Center for Scholars. “They’ve concluded, ‘We’re going to force a change in behavior.’”

Within the Israeli government, however, there is a consensus that the ever-growing settler population must be accommodated.

No one is talking about sanctions just yet on Israel, but the historical precedent here is telling.  The last time the U.S. sanctioned Israel was in 1991 on the question of housing settlements.  The eventual result was the fall of the Yitzhak Shamir government. 

So China is contemplating sanctions against North Korea, and the United States a step away from doing the same thing vis-a-vis Israel.  This highlights a cruel irony when it comes to the use of economic pressure -- it works on your friends a lot better than it does against your foes. 

[I see where this is going.  Stop it!--ed.]  Of course, countries are understandably more reluctant to pressure their allies than their adversaries.  [I'm warning you!--ed.]  Why, it's almost like there's a paradox when it comes to economic sanctions.  [All right, that's it, this ridiculously self-promotional blog post is over!!--ed.]

UPDATE:  Ed Morse and Michael Makovsky have an excellent essay in The New Republic on the prospects of sanctioning Iran. 

It turns out that Zhao Ziyang, China's Communist Party chief during the Tianamenn massacre (and who was outsted for opposing a violent crackdown), secretly recorded a memoir of his time in power.

This is very exciting -- as the New York Times' Erik Eckholm observes, "In a sharp break with Chinese Communist tradition, even for dismissed officials, Mr. Zhao provides personal details of tense party sessions."  In other words, there's some good dirt here for China scholars. 

One little thing nags me about Eckholm's story, however: 

One striking claim in the memoir, scholars who have seen it said, is that Mr. Zhao presses the case that he pioneered the opening of China’s economy to the world and the initial introduction of market forces in agriculture and industry — steps he says were fiercely opposed by hard-liners and not always fully supported by Mr. Deng, the paramount leader, who is often credited with championing market-oriented policies....

Roderick MacFarquhar, a China expert at Harvard who wrote an introduction to the new book, said it had given him a new appreciation of Mr. Zhao’s central role in devising economic strategies, including some, like promoting foreign trade in coastal provinces, that he had urged on Mr. Deng, rather than the other way around.

“Deng Xiaoping was the godfather, but on a day-to-day basis Zhao was the actual architect of the reforms,” Mr. MacFarquhar said in an interview.

I'm not a China expert, but I am a seasoned reader of political memoirs.  And, in my experience, memoirists do tend to paint a picture of their deeds that magnifies their accomplishments at the expense of others.  I see no reason why Chinese political memoirs should be any different from American political memoirs on this score.  So I'm going to take Zhao's claims on this point with juuuust a small grain of salt.

[Hmmm.... note to future version of you -- compile top ten list of best political memoirs--ed.  So noted.]   

Earlier this week, I pointed out that American higher education was not like the American auto sector, because it's actually quite competitive in the global marketplace.

I see that the Washington Post's Susan Kinzie has a story that nicely illustrates this point: 

Until fall 2007, the number of Chinese undergraduates in the United States had held steady for years, at about 9,000, according to the Institute of International Education, which promotes study abroad. But that year, it jumped to more than 16,000.

Experts say China's increasing wealth, fewer delays in obtaining visas and technology that makes it easier for Chinese students to learn about U.S. schools have helped fuel the boom. It shows no sign of letting up.

"People just think the education offered in the U.S. is undoubtedly the best in the world," said Betty Xiong, 20, a U-Va. junior from Shanghai....

Historically, students have been more likely to come to the United States for advanced degrees and research opportunities. The dramatic shift is in the rising number of undergraduates.

"In China, because so much of the growth is tied to international trade and multinational corporations with investment in China, the value of U.S. higher education is clearly understood and worth the investment of cash on the other side," said Peggy Blumenthal, chief operating officer of the Institute of International Education. Students started arriving about 1980, after the normalization of relations. There was a dip in applications after the Tiananmen Square crackdown in 1989, Blumenthal said, because the Chinese government made it more difficult for students to leave.

FP readers have no doubt discerned that your humble blogger's #1 topic of interest for 2009 has been the relative rise of China, the relative decline of the United States and the effects of these power shifts on the global political economy.

That said, an emerging subtheme will be breathlessly hyped reporting that melodramatically exaggerates either shifts in China's power or shifts in Chinese preferences. 

For exhibit A, I give you the Financial Times Jamil Anderlini and Javier Blas , who report, "China reveals big rise in gold reserves."  Let's go to the lede:

China has quietly almost doubled its gold reserves to become the world’s fifth-biggest holder of the precious metal, it emerged on Friday, in a move that signals the revival of bullion after years of fading importance.

Gold rose to a three-week high of more than $910 an ounce after Hu Xiaolian, head of the secretive State Administration of Foreign Exchange, which manages the country’s $1,954bn in foreign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.

The news could spark interest in gold among other central banks. “When the largest holder of foreign exchange reserves discloses an increase in gold holdings, other countries may decide to think more carefully about underweight gold positions,” said John Reade, a precious metals strategist at UBS.

The increase in China’s gold reserves has come primarily from domestic production and refining. However, the news raises questions about the future of Beijing’s foreign reserves policy.

Ooooh.... this could be a Very Big Deal!!  Gold could supplant the dollar!!  Hide the children in the basement!!

Well, let's crunch the numbers first.  Unless MS Excel's my math is way off, China's gold reserves are now roughly worth $30 billion.  Which means they constitute less than two percent of China's total reserve holdings.  Furthermore, China's doubling of its gold reserves in the past five years actually means that Beijing has diversified away from gold, since the total value of China's foreign exchange reserves has increased tenfold during the same period of time. 

No wonder, therefore, that buried deep down into this story you see the following passage: 

Paul Atherley, Beijing-based managing director of Leyshon Resources, said that even after the latest purchases China had a very small percentage of its reserves in gold, far below the US or other developed countries.

“Those [gold] holdings are still too low in terms of the size of its economy and the growing significance of its currency,” he said.

China's power is undoubtedly increasing.  Not every action by Beijing, however, is indicative of attempts to alter the current global political economy. 

As one reads what the Chinese economic elites are saying about the rest of the world's economies, one begins to wonder why they don't start blogging.  The snark level is rising fast. 

Consider China Investment Corporation head Lou Jiwei: 

Lou Jiwei, head of China Investment Corp, said he was pleased he did not make a single trip to Europe in 2008 after EU officials expressed concerns about his fund’s transparency and intentions.

But speaking at the Boao Forum for Asia, China’s riposte to the annual World Economic Forum meeting in Davos, he said he was considering investing on the continent again, now that European officials have been humbled by the global financial crisis. “I have to thank these European officials,” Mr Lou said. “They saved me a lot of money. Now they come to me without conditions and I am beginning to consider making investments in Europe again.”

Mr Lou did not mention CIC’s experience in the US, where the fund made controversial – and costly – investments in Blackstone, the private equity group, and Morgan Stanley on the eve of the crisis.

Actually, Lou could probably retort that since CIC held a lot of their overseas assets in liquid dollar investments, they did surprisingly well in the past year. 

To the wise investors, go the snark. 

Your humble blogger is listening in to a Q&A with Treasury Secretary Timothy Geithner, courtesy of the Council on Foreign Relations, which has said, "Chatham House Rules be damned" and is allowing bloggers like me to prattle on.  This post will be updated through the next hour.  On to the show!!

9:15 AM:  We're also allowed to e-mail questions.  I resist the temptation to write, "Just how much do you want to gut-punch Paul Krugman?" and instead submit a question about China.  Let's see if it gets in the queue! 

9:20:  Roger Altman is moderating, and opens by noting that the Fed has provided an estimated $14 trillion in various of guarantees and injections of capital into the global financial system.  Gulp. 

9:22:  Geithner opens with a shout-out to his old staff at the New Yor Fed.  This is one reason why past staffers like him so much. 

9:23: Quotes former Mexican president Ernesto Zedillo:  "Markets overreact, so policy should overreact."  Says we've borowed too much, taken on too much risk, and ordinary Americans are now bearing the cost, which makes it fundamentally unfair.  American people are justifiably pissed (he did not use that word).  Notes that the absence of a serious recession over the past two decades created false expectations of continued prosperity. 

9:24-9:31:  Basically a reprise of his testimony from yesterday. 

9:31:  Now pushing for global coordination of standards at the G-20. 

9:32:  OK, let's get to the actual Q&A!!

9:37:  Altman asks about the future of the plan if Congress does not authorize any additional TARP funds.  Geithner tap-dances, basically says that they would need to muddle through. 

9:43:  Oh, sweet Jesus, Benjamin Barber is asking a question.  And Timothy Geithner just said he sounded like an economist!!!

Seriously, Barber asks a semi-decent question about whether the bank plan socializes losses and privatizes the benefits.  Why not nationalize? 

Geithner responds by saying that governments, in a time of crisis, have to be prepared to assume risks that private actors cannot absorb -- but still have o avoid assuming too much risk.  The complexity and scale of these financial institutions would force the government to assume way too much risk if nationalized. 

9:46:  A lawyer asks whether the Treasury has an estimate of the value of the toxic assets held by the ten largest financial institutions.  Geithner responds :  "If that was a knowable, high enough number, we wouldn't have a crisis."  Then says that they're relying on a range of public sector and private sector estimates.  States that the market value of these assets now is probably much less than they might be in a less panicked future. 

9:52:  Geithner is asked about China (not my question) and the IMF's new proposals for expanded lending.  He responds by praising Zhou Xiaochuan, China's central bank governor, but claims that he hasn't read his proposal in detail.  Geithner makes it clear that he is quite open to expanding the IMF's Special Drawing Rights for less developed countries.  Still, he wants it to evolve and be integrated within the current international monetary system -- as opposed to the de novo creation of a new global currency. 

I've read the report (Tim, it's not that long, take a look!) and Zhou is not proposing anything so radical so soon, so this is a bit of a red herring.  Still, Geithner's statement here carries the same kind of firm pushback that Obama gave yesterday about any move ending the dollar as the global reserve currency.   

Geithner follows up by saying that the future of the dollar in the international system is really a function of long-range U.S. fiscal policies.  Wants to keep U.S. debt-to-GDP ratio stable, and asserts that there is now a consensus in Washington about fiscal rectitude.  This is juuuust a little strange to hear given this year's fiscal balance sheet.

10:00:  Asked a question about what he expects from the G-20.  Boilerplate response, which is not encouraging.  Wonder if he's read the Czech PM's recent statements. 

10:08:  A good follow-up to the G-20 boilerplate, asked about the Scandanavian plan to rescue banks.  Geithner's response:  "We are not Sweden," though looking at the  Seems his chief concern is that there will be a premature withdrawal of rescue efforts

10:09:  Herb Levin asks the extent to which exchange rates play a role in these decisions.  Geithner:  "Is this a trick question?"  and laughs it off.  A little too much tap-dancing here.

10:10:  Asked if there is a limit to the Fed's balance sheet, and Treasury's ability to backstop that balance.  Geithner punts it to Bernanke, then references this joint Treasury/Fed statement. 

10:13:  Asked what headline he wants from the upcoming G-20 summit, and he replies something like "Broad, coordinated action across range of issues by G-20."  And this is why Geithner is not in the newspaper industry. 

10:14:  Last question.  Roger Altman asks Geithner "on behalf of the markets" to clarify his response to the PBoC plan on the future of the dollsar.  Says he continues to see the dollar as the world's reserve currency for both the short-term and the long-term.  Also stresses the need for macro-fundamentals to be strong enough to ensure that this continues to be the case. 

That's a wrap!