Will China Knuckle Under? No

“China bashing” has become the rage in the no. 3 and no. 1 nations as measured by gross domestic product. The People’s Republic’s already strained relationship with other large nations has become more strained, and the trend could worsen rapidly. China must decide whether it will compromise with trade partners or risk a breakdown in trade that could further damage its slowing economic activity.

Bashing is part of the election process in the United States, as Obama and Romney try to outdo one another presenting plans to save American jobs hurt by Chinese economic activity. Less than a week ago, the president began WTO action because China allegedly was offering its car makers subsidies on exports. And Japanese leader Yoshihiko Noda told The Wall Street Journal that a dispute between the two countries over the ownership of certain islands may hurt outside investment in China. As for the relationship between the two countries, he said:

Damaging our ties over such things would be bad for not just the two countries’ economies, but for the global economy.

Barely veiled in the comments was the notion that tensions could spread well beyond those between China and Japan and badly damage China’s place in the broad global trade economy.

Backing down from auto export subsidies, even if they are small, would diffuse attempts by U.S. politicians to attack China’s policies, at least somewhat. It would immediately take one issue partially out of the battle for president. China also could agree to some compromise on territory between it and Japan, even if the compromise was slightly in Japan’s favor.

But China will not budge on either charge, in its car export activities to the United States or the dispute over the ownership of what are small and economically useless islands. China’s leverage with the outside world across a number of issues that range from the value of the yuan to the piracy of intellectual property, its control of Internet activity and its human rights policies could slip ever so slightly from its grip. This slip might be only tiny, but China’s government does not believe it can afford one at all. The power of the grip is just too essential to its future governing policies.

Douglas A. McIntyre