Diplomacy not the answer to China's bad behaviour

The Irish Times - Saturday, October 2, 2010

OPINION: Legislation potentially paving the way for sanctions is a step in the right direction, writes PAUL KRUGMAN

SERIOUS PEOPLE were appalled by Wednesday’s vote in the House of Representatives, where a huge bipartisan majority approved legislation, sponsored by Representative Sander Levin, that would potentially pave the way for sanctions against China over its currency policy.

As a substantive matter, the Bill was very mild; nonetheless, there were dire warnings of trade war and global economic disruption. Better, said respectable opinion, to pursue quiet diplomacy. But serious people, who have been wrong about so many things since this crisis began – remember how budget deficits were going to lead to skyrocketing interest rates and soaring inflation? – are wrong on this issue, too. Diplomacy on China’s currency has gone nowhere, and will continue going nowhere unless backed by the threat of retaliation.

The hype about trade war is unjustified – and, anyway, there are worse things than trade conflict. In a time of mass unemployment, made worse by China’s predatory currency policy, the possibility of a few new tariffs should be way down on our list of worries. Let’s step back and look at the current state of the world. Major advanced economies are still reeling from the effects of a burst housing bubble and the financial crisis that followed. Consumer spending is depressed and firms see no point in expanding when they aren’t selling enough to use the capacity they have.

The recession may be officially over, but unemployment is extremely high and shows no sign of returning to normal levels.

The situation is quite different, however, in emerging economies. These economies have weathered the economic storm, they are fighting inflation rather than deflation and they offer abundant investment opportunities. Naturally, capital from wealthier but depressed nations is flowing in their direction. And emerging nations could and should play an important role in helping the world economy as a whole pull out of its slump.

But China, the largest of these emerging economies, isn’t allowing this natural process to unfold. Restrictions on foreign investment limit the flow of private funds into China; meanwhile, the Chinese government is keeping the value of its currency, the renminbi, artificially low by buying huge amounts of foreign currency, in effect subsidising its exports. And these subsidised exports are hurting employment in the rest of the world. Chinese officials defend this policy with arguments that are implausible and wildly inconsistent. They deny they are deliberately manipulating their exchange rate; I guess the tooth fairy purchased $2.4 trillion in foreign currency and put it on their pillows while they were sleeping. Anyway, say prominent Chinese figures, it doesn’t matter; the renminbi has nothing to do with China’s trade surplus. Yet this week China’s premier cried woe over the prospect of a stronger currency, declaring, “We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs.”

Well, either the renminbi’s value matters, or it doesn’t – they can’t have it both ways.

Meanwhile, about diplomacy: China’s government has shown no hint of helpfulness and seems to go out of its way to flaunt its contempt for US negotiators. In June, the Chinese supposedly agreed to allow their currency to move toward a market-determined rate – which, if the example of economies like Brazil is any indication, would have meant a sharp rise in the renminbi’s value. But, as of Thursday, China’s currency had risen only about 2 per cent against the dollar – with most of that rise taking place in just the past few weeks, clearly in anticipation of the vote on the Levin Bill.

The Bill empowers US officials to impose tariffs against Chinese exports subsidised by the artificially low renminbi, but it doesn’t require these officials to take action. And judging from past experience, US officials will not take action. They’ll continue to make excuses, to tout imaginary diplomatic progress, and, in general, to confirm China’s belief that they are paper tigers.

The Levin Bill is, then, a signal at best. It is at least as much a shot across the bow of US officials as it is a signal to the Chinese. But it’s a step in the right direction. US policymakers have been infuriatingly passive in the face of China’s bad behaviour – especially because taking on China is one of the few policy options for tackling unemployment available to the Obama administration, given Republican obstructionism on everything else.

The Levin Bill probably won’t change that passivity. But it will, at least, start to build a fire under policymakers, bringing us closer to the day when, at long last, they are ready to act.

Brawl in Beijing

Critics of Chinese researchers targeted in physical attacks.

Published online 29 September 2010 | Nature 467, 511 (2010)

David Cyranoski
Former biochemist Fang Shimin has made enemies after scrutinizing scientists’ reputations.FANG SHIMIN

Science can be a rough game in China. On 29 August, on his way home from a tea house in Beijing, Fang Shimin was assaulted. The former biochemist — who for the past decade has run a website exposing scientific fraudsters — was chased by two men, caught and attacked with a hammer.

"I believe they planned to kill me," he says. "The only way to shut me up is to kill me." He escaped with only minor cuts and bruises. In June, Fang Xuanchang, a journalist who had reported on corruption in science in China, was left with more serious injuries after two men assaulted him with steel rods.

On 21 September, police arrested Xiao Chuanguo, a urologist at Tongji Medical College in Wuhan, on suspicion of master minding both plots. Xiao could not be reached for comment, but has confessed his involvement to Beijing's police. Fang Shimin says Xiao could face 3–10 years in prison — or more if the charges become attempted murder.

Xiao and Fang Shimin have never met or spoken, but their paths have crossed on the Internet — and in court. Xiao's clash with him, and with Fang Xuanchang, revolves around a surgical procedure devised by Xiao that aims to restore bladder and bowel funct1on in patients with spina bifida or spinal-cord injuries. Xiao reported an impressive 87% success rate for the operation, which involves re-routing nerves1,2. In 2005, he was nominated for membership of the Chinese Academy of Sciences, the elite body of the Chinese scientific world.

Following his nomination, people started posting questions about Xiao's claims on Fang Shimin's website (China's Scientific & Academic Integrity Watch). Then in September 2005, Fang Shimin published an essay in Beijing Sci–Tech Report, which said that Xiao was not an associate professor at New York University as he states in his CV, but only an assistant professor. Furthermore, the article said that only 4 of the 26 English-language publications Xiao listed were journal articles — the rest being abstracts from conference proceedings.

It is not known if Fang Shimin's article affected the academy's decision, but Xiao was not made a member and has since sued Fang Shimin for libel five times. Fang Shimin, whose site has been criticized for giving contributors a platform for unjustified attacks on their enemies3, lost one case and won two, with the other two undecided. Meanwhile, criticism of the 'Xiao procedure' has continued. Last year, Fang Xuanchang published a series of articles questioning its efficacy, which may have prompted the attacks on him.

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Beijing-based lawyer Peng Jian says he has interviewed 20–30 patients who have experienced side effects after undergoing the Xiao procedure, and who are seeking compensation. This summer, the first US trial of the treatment reported ambiguous results in The Journal of Urology4, and two journal editorials said it should be considered experimental4.

Fang Shimin, meanwhile, is unfazed by the attack. "It won't stop me," he says. "I will continue to do what I am doing."

References
1. Xiao, C.-G. Proc. Int. Conf. Urol. Shanghai, 2–4 July (2005).
2. Xiao, C.-G. Eur. Urol. 49, 22-29 (2006).
3. Cyranoski, D. Nature 441, 392-393 (2006).
4. Peters, K. M. et al. J. Urol. 184, 702-708 (2010).