If Obama is elected, what might China do?

US presidential candidate Barack Obama is trying to use the economic nosedive as a campaign tool, and that means tough talk on China.
"It's the economy, stupid" was the phrase that helped Bill Clinton beat George Bush Snr in the 1992 election.

The expression coined by Clinton campaign strategist James Carville implied that Clinton was a better choice because Bush had not adequately addressed the economy. The trying economic times that we are seeing now, barely two months before the 2008 presidential election, may once again help a Democrat sweep into office.

In a CBS News/New York Times poll conducted among 1,133 adults in the US between September 11 and 16, Barack Obama took a 48% to 43% lead over his Republican rival.

Sure that advantage is narrow, but John McCain had a two percentage point lead among registered voters in a CBS News poll released on September 8, just after the Republican national convention. The shift over the past few days appears to be due to the economy. In the most recent poll, only 22% of the respondents say the condition of the national economy is even somewhat good, and 60% think the economy is getting worse, not better û and some of these respondents would have been polled before Lehman Brothers filed for Chapter 11.

Who is elected has implications for China and its economic policies. Both Democratic candidate Obama and Republican candidate McCain laid out their views on Beijing's rising diplomatic and economic power in position papers published by the American Chamber of Commerce in China last Monday (September 15).

They both claim that ChinaÆs currency is artificially low; but Obama is far more strident about it. "I will use all the diplomatic avenues available to seek a change in China's currency practices," Obama said, going on to note that China pegs the renminbi at an "artificially low rate", making its exports unfairly cheap. He has also backed legislation that would define currency manipulation as an illegal subsidy so that the US could slap duties on more Chinese goods.

McCainÆs view is more measured. He notes that ChinaÆs "commitment to open markets must include enforcement of international trade rules, protecting intellectual property, lowering manufacturing tariffs and fulfilment of its commitment to move to a market-determined currencyö.

The renminbi has appreciated a further 18.5% since it was revalued by 2.1% to 8.11 per dollar in July 2005, and freed from a dollar peg to float within a managed band against a basket of currencies. One US dollar currently buys about 6.85 renminbi.

For the moment, Beijing is making sure it remains competitive. To that end, China's central bank early last week cut its lending rate for the first time in six years, a move aimed at bolstering the economy and the battered stock market. Analysts say this is smart: remain focused domestically and don't take the offensive û even to comment on the wobbliness of US financials at the moment.

One long-time China analyst said that of the original candidates, Hillary Clinton was the most palatable not only because she came across as knowledgeable, but because Beijing had a sense of what her policies would be, if only by forecasting they would be the same as her husbandÆs. McCain and Obama are unknowns. ChinaÆs game plan now consists of studying both candidates and preparing to engage either one in a relationship that encourages business. The lesson from the previous two US administrations, say analysts, is that it took too long for US-Sino relations to warm up to neutral. Aside from the fact that the US remains ChinaÆs biggest consumer, Beijing doesnÆt need political unrest on the back of an economic slump.

The hope is that if Obama is elected, he will tone down his rhetoric on China, particularly once advisers remind him that US consumers donÆt want to pay 25% more for their shampoo from Walmart and he doesnÆt have to join in the China-bashing bandwagon because he is already president. But he, perhaps more so than McCain, will also strive to bring employment back to the US and reduce the trade deficit with China, which hit a record $256.3 billion in 2007. And if the US economy remains in the doldrums, finding a scapegoat is convenient. That puts China squarely in the target range.

So China does need to prepare for a possible trade war from the US, born out of an economic downturn in America that is kept at the front of peoplesÆ minds thanks to political campaigns. Consider that there have been 45 separate pieces of anti-China legislation proposed in the past three years. At some point one of these pieces of legislation could become law.

While most China analysts say that China wonÆt take the first step, it would respond. One option would be a "US export tax" as a counterbalance to any such levy the US might have in mind. Such a tax would be on its own manufacturers, but since this cost would be passed on, it would really be a tax on the US buyer. The government could easily refund a large portion back to the manufacturer just like VAT works.

And then weÆd be in a trade war, which neither government wants because, as mentioned, it raises the prices of everyday goods in the US and could lead to civil unrest in China.

So what could China be doing right now? It should continue its Olympics efforts, and work on shining up its image. While it's not likely Beijing will do so, it should hire a good public relations agency. It should be going on a subtle PR offensive that points out why US manufacturers are struggling û that itÆs down to high taxes, employee benefit costs, liability protection, and unions. It should be questioning if Americans really want to make toys, T-shirts and CD players for a living anymore? And of course, it needs to make sure that scandals like contaminated milk, or lead-laden toys, cease to be a problem with its own goods. It also needs to make sure that its own new laws, such as the anti-monopoly law, arenÆt applied disproportionately to foreign companies, thus fuelling an anti-China fire.

These are all steps it could be taking now, before January 20, 2009 û the date of the next US presidential inauguration.
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