With the World Economy on the Brink, America Must Start Producing for Itself Again

The world economy is on the brink again, facing a crisis of epic dimensions for reasons largely obscured by the inflamed politics of 2010. Against their wishes, the United States and China have been drawn into an increasingly nasty and dangerous fight over currencies and trade. American politicians, especially desperate Democrats, have framed the conflict in familiar moral terms -- a melodrama of America wronged -- and demand retaliation. Other nations, sensing the risk of a larger breakdown, have begun to take protective measures. Every man for himself. The center is not holding.

The political fray obscures the fact that the basic economic problem is larger than any single nation and stalks the global trading system itself. There is a huge hole in the world -- a massive loss of demand. Think of the trade wars as the largest producers fighting over an abrupt shortage of buyers. Financial collapse and recession, with falling income, defaulting debt and rising unemployment, made the hole. In other times, Washington would have stepped in to impose policy solutions and create market demand as the global system's buyer of last resort. This time, Goliath is gravely weakened, both in economic strength and political authority.

The political push-pull zeroes in on China. Beijing is accused of playing dirty, stealing jobs, production and wealth. Washington imposes a penalty tariff on Chinese tires and tubular steel. Beijing pushes back with a tariff on US poultry. President Obama once again urges China to stop manipulating its currency to underprice Chinese exports and stymie US goods going the other way. China once again blows off his request. United Steelworkers ups the ante by filing a 5,800-page complaint detailing how China is scheming to corner the global market in green technologies. Obama promptly orders an investigation. "What do the Americans want?" asks the vice chair of Beijing's National Development and Reform Commission. "Do they want fair trade? Or an earnest dialogue?... I don't think they want any of this. I think more likely, the Americans just want votes." He has a point. But so do American politicians, who think China's hardball industrial strategy has had something to do with America's anemic recovery. The House, divided on everything else, voted 348-79 in September to authorize tariffs on nearly all Chinese imports if Beijing does not relent in its currency game.

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The US public seems to agree with the harsh stance. A Wall Street Journal poll found that 53 percent (including 61 percent of Tea Party adherents) think free-trade globalization has hurt the US economy. Only 17 percent think it has helped. But the trouble with Americans claiming injured innocence is that it blinds them to the complexities of the predicament. The fact is, the United States and China, motivated by different but mutually reinforcing reasons, collaborated to create the unbalanced trading system. American multinationals eagerly sought access to China's market. The Chinese wanted factories and the modern technologies needed to develop a first-class industrial base. American companies agreed to the basic trade-off: China would let them in to make and sell stuff, and they would share technology and teach Chinese partners how it's done. Not coincidentally, US corporations also gained enormous bargaining power over workers back home by threatening to go abroad for cheaper labor if unions didn't give wage concessions.

Washington blessed the deal. Both parties were convinced decades ago that improving the fortunes of globalizing banks and businesses was in the broad national interest. The Clinton administration capitulated to Chinese negotiators in 2000, admitting China to the World Trade Organization while giving up legal tools that could have controlled China's appetites.