China’s economic strategy may be outsmarting Hank Paulson and his US colleagues. Tariffs on steel exports will disarm critics in Congress, but they will also make Chinese steel products more competitive. Meanwhile, its stake in Blackstone, while questionable on investment grounds, buys Beijing more influence in Washington. This looks like a good example of guanxi—the Chinese technique of using connections to achieve one’s ends—in action.
Conventional economic theory holds that to maximize economic growth and raise the living standards of its people, a country should allow free movement of capital, permitting the exchange rate to float upwards, while removing subsidies and tariffs, domestic and international, which distort the price mechanism.
China is not doing that. Instead, it keeps the yuan exchange rate artificially low. Although the currency has climbed somewhat against the dollar, its trade-weighted exchange rate has devalued in recent years. That has caused an excessively large trade surplus, which would normally bring retaliation from trading partners. China is now engaged in a two-pronged strategy to lessen the chances of a sharp US response.
First, Beijing has imposed tariffs on steel exports. At first glance, this move looks as if it is intended to disarm the lobbying of the politically powerful US steel industry. The effect will be to raise world steel prices. But this could actually help China’s domestic manufacturers, which will enjoy lower steel costs. This should benefit its fast-growing automobile industry.
Second, the Chinese government is engaged in a “strategic dialogue” with treasury secretary Hank Paulson. This dialogue should reinforce Paulson’s own anti-protectionist beliefs. Moreover, Beijing’s substantial stake in Blackstone could turn out to be a smart move. The buyout firm’s partners are major donors to New York senator Charles Schumer, who is the strongest advocate of tariffs on Chinese imports. Neutralizing Schumer is well worth $3 billion.