America's complex anti-China vote

Political outrage at Chinese economic policies is a hallmark of election-year campaigning in the US. But this time, the politics feel different.

China-bashing was surely one reason why Mitt Romney was able to scrape a cliffhanger victory in Ohio last week and thus retain his frontrunner status. It is a line to which he will probably resort again and again.

Just as deindustrialised Ohio will once more prove a pivotal swing state in the US election, so China will feature increasingly as a bone of contention in the build-up to November. "China steals our designs and our patents and our knowhow,” Romney told Ohioans. "They have walked all over him [Barack Obama]. If I am president that is going to end.”

Conventional wisdom tells us that China-bashing always occurs in even-numbered years and recedes during odd ones – US elections always being even. With an electorate that prematurely believes China is already the largest economy in the world, American politicians reflect that anguish on the hustings. When it comes to governing, however, they quickly grasp that it makes little sense to provoke trade war with the country’s largest creditor. "This year will be no different,” goes the refrain both from US pundits and foreign observers. "Elections are America’s way of letting off steam.”

Such complacency is fortified by the mood on the stockmarket, which is more concerned about a potential Chinese slowdown and by the improving US labour market, which is now steadily adding more than 200,000 jobs a month. The optimists also point to manufacturing, where almost half a million US jobs have come back in the past 18 months. Meanwhile, China continues to allow the renminbi to appreciate – it has risen by roughly 20 per cent against the dollar in the past four years. Whatever voters tell pollsters about China, the underlying trends are good, they say. No need to take Romney or Obama at face value.

There are three problems with this argument. First, it cannot see beyond its nose. Everything about a presidential election is geared towards the short-term mood of the voters. If the economy is going in the right direction, presidents get re-elected. Perhaps because of the minefield-strewn condition of the Republican party, the bien pensants are more euphoric about the economic data than is merited (partly because the trends improve Obama’s re-election chances). Yet this remains a tepid recovery. At the current rate it will take another four years to return to 5 per cent unemployment.

The recent upswing offers a methadone rush that has blinded people to the more fundamental trends the other way. One of these is the rapidly growing US trade deficit with China, which jumped by more than a tenth to nearly $300 billion last year. So too are US median weekly earnings, which have fallen by 3 per cent since 2009. Almost 6 million manufacturing jobs have been lost since 2001 – 2.3 million since Obama took office. Of the few that have trickled back, many pay at less than half the old rate. Last month General Electric advertised 400 new jobs in Kentucky at $13.50 an hour. It received 6,000 applications in 50 minutes before its server shut down.

Second, in spite of all the chatter about reshoring, US competitiveness continues to slide. When Obama came to office, the US had a $60 billion deficit in advanced manufacturing goods, which is where the most valuable innovation takes place. Last year that rose to $99 billion – an increase of almost two-thirds. Again, in contrast to the conventional patina, which notes China’s growing wage inflation and reassures itself that jobs will return to the US, wages in China represent only a fraction of the cost of investing there. Intel recently opened a plant in China. Jeff Immelt, General Electric’s chief executive, who doubles up as chairman of Obama’s jobs and competitiveness council, recently set up a joint venture between GE’s avionics division and a Chinese state company.

China’s secret – and that of many other countries – is that it offers huge tax breaks to lure high value-added investors. The US is never likely to match China’s largesse, or even to try. Even the modest measures Obama recently proposed have been criticised by friendly economists. Christina Romer, a former senior economic adviser to Obama, said that consumers "value haircuts as much as hair dryers”. She did not add that hair dryers are imported, while haircuts remain unexportable.

Finally, this time the politics feel different. Usually the Democrat bashes China on trade while the Republican holds back. But in 2012 it is the Republican who has taken the lead. Obama will have to parry as the election gets under way. Romney has promised to brand China a currency manipulator "on my first day in office”. He would not easily be able to wriggle out of this. Obama will do well to avoid matching it.

What is missing is a realistic prospect that either will be able to tackle the problems that actually do sap US competitiveness (as opposed to worrying about the exchange rate, which is a red herring). Obama, who has a clutch of solutions, some of them good, says "we can’t wait” to a Congress that is resolutely blocking measures that would help spruce up the US as a better place to make advanced products. The concern is that America will be waiting long after November for the politics to change. In that respect the fear is that 2013 will resemble the odd years that preceded it.

Copyright The Financial Times Limited 2012.

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