Watch your flanks, America!

The threat from China's brand of mercantilism is very real. What can Washington do about it?

from the February 26, 2007 edition

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That's the snapshot right now – and it goes a long way in explaining why the Bush administration, and particularly Treasury Secretary Henry Paulson, have taken such timid actions in dealing with this threat.

But the long-run picture is even scarier. In the next five years, as China's foreign reserves hurtle toward the $2 trillion mark (and perhaps as China begins to allow its currency to appreciate somewhat), the Chinese government and its many state-run enterprises will be in a very strong position to go on an acquisition binge for US companies.

So what, you say? Corporations bearing the flags of countries such as Germany, Japan, and France regularly shop for US assets, and no harm has come of it.

This is very different. China's "buying of America" will be largely financed and orchestrated by the Chinese government – not corporations. This means China's acquisition binge will be far more strategic from a policymaking, rather than from a profitmaking, perspective. The likely result: a rapid acceleration in the transfer of sensitive technology, as well as the outsourcing and offshoring of US jobs. Ironically, as more US companies offshore their production – and as more fall into Chinese hands – there will be fewer voices to lobby against China's mercantilism.

To protect against these dangers, Congress must pass a comprehensive bill. The US trade representative and commerce secretary must have freer rein to seek relief from Chinese mercantilism in forums such as the World Trade Organization. More broadly, the Bush administration must work with the many other victims of Chinese practices around the world – from Brazil and Mexico to Europe – to take a much harder line in trade negotiations.

Absent prompt action from Washington, the US will lose this undeclared trade war without firing a shot.

• Peter Navarro is a business professor at the University of California, Irvine and author of "The Coming China Wars."

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