For all the market freedoms that China enjoys, the Communist Party still keeps a grip on basic industries and finance. Last Friday, the US challenged that Marxist idea of state control over the core economy: It set penalties on a Chinese import heavily subsidized by Beijing.
Such a US move might seem minor in comparison to the ballooning trade with China. After all, it simply slaps duties of about 10 to 20 percent on only one product: high-gloss paper. But it is expected to be the start of more US actions against subsidized goods from China – many of which have taken a wrecking ball to US industries and helped eliminate hundreds of thousands of manufacturing jobs.
With this concrete step, the Bush administration has reversed longstanding US policy that treated China as a nonmarket economy, or the kind in which the government's hand is so strong and opaque that it's difficult to calculate subsidies. These days, however, the state largely uses loans to control hundreds of semipublic enterprises, which makes its role more transparent while still distorting global markets. These loans, which still help the party stay in power, are often not repaid, which has left the government with an estimated $1 trillion in bad debts.
This US action may also put a noisy end to the quiet economic diplomacy of Treasury Secretary Henry Paulson. Last fall he launched an effort to persuade Chinese leaders into taking such pro-market steps as freeing up currency controls. But the two sides need not stop such talks.
The Bush administration's get-tough move could be aimed at showing a new Democratic Congress that it will be tough on trade. The president's authority to negotiate trade pacts with other countries and present them for up-or-down votes in Congress ends in July. Democrats, with a wary eye on the rising trade deficit with China, are in no mood to renew that authority without more US steps to "level the playing field" with trading partners.
China's subsidies include rules that force home industries to buy only from other Chinese companies, thus locking out many foreign companies from selling in China. In fact, much of the US complaint about trade in general isn't about underpriced foreign imports as much as it is about American firms not being allowed to sell their highly competitive goods and services in other countries.
The US itself, of course, is no saint on trade-distorting actions, but its bold move against China's subsidies seems more political. It strikes a blow at the Communists' attempt to maintain just enough socialist controls on the economy to help the party keep monopoly power. Reduce those controls and perhaps more Chinese will seek democratic means to challenge the party.
While party leaders have greatly opened up China's economy since it entered the World Trade Organization in 2001, they did so to keep foreign investment flowing as a way to appease restless rural farmers. But that economic opening stops at the core industries.
This fall, the party is expected to change about half of its ruling Politburo and Central Committee. Perhaps putting more US duties on subsidized Chinese imports will help persuade incoming and younger leaders that China needs more economic and democratic freedom