Is China Replacing Japan as U.S. Scapegoat?:

	Is China Replacing Japan as U.S. Scapegoat?: William Pesek Jr. Aug. 4 (Bloomberg) -- Times were when corporate America loved to hate the Japanese. Tensions hit a fever pitch in the 1980s when Japan's boom seemed destined to bankrupt U.S. automakers and suck up every skyscraper, Warhol painting, movie studio and golf course in sight. Nowadays, the fear is that Japan is sliding into a deflationary spiral. Japan lost its footing, and the U.S. lost its scapegoat. Paranoia was waning by the time Michael Crichton's novel ``Rising Sun'' hit bookstores in the early 1990s. As Japan morphed from superpower to troubled economy, U.S. manufacturers couldn't blame it for their deficiencies -- they had to admit their own faults. Enter China, which is suddenly the biggest predator on U.S. radar screens. A growing chorus of politicians and manufacturers is pointing fingers at China's currency policy, which executives believe gives Asia's second-biggest economy an unfair advantage. Is China replacing Japan as the U.S. scapegoat of choice? It sure seems to be. Efforts to push Beijing to alter its yuan policy -- letting the currency rise -- may backfire. Validity and Hypocrisy There's more than a hint of hypocrisy here. Multinational companies have rushed to China in recent years because of its cheap labor and land costs. It resulted in a ``giant sucking sound'' not unlike the one H. Ross Perot predicted would come from Mexico during the 1992 U.S. presidential election. U.S. companies, like their counterparts in Asia and Europe, have pumped up profits by firing workers and moving jobs to China. The cheaper yuan allows them to set up plants, buy machines and hire staff more cheaply. And now, businesses are upset that, well, China is stealing U.S. jobs. It's hard to keep a straight-face reading about their sudden plight supposedly at the hands of Chinese officials. China may treat its own citizens and investors with contempt, and its economy is big on spin, small on transparency. And China should let the yuan rise against the U.S. dollar, to which it is pegged at about 8.277. As the dollar falls, and the yuan slides with it, other Asians are feeling more pressure to devalue currencies. But the U.S. slowdown, the real force hurting U.S. businesses, isn't China's fault. U.S. manufacturers have lost 2.6 million jobs since 2000 not only because companies are shifting production to China, but also because economic policy makers have failed them. Buckling Under Blaming China won't make U.S. Federal Reserve or White House policies more potent. Nor will it comfort investors still rattled by accounting problems at Enron Corp., WorldCom Inc. and elsewhere. Moreover, efforts to prod China to revalue the yuan could fail exporters in the world's biggest economy. If Beijing were to alter its currency stance, it would appear to be buckling to demands from Washington. So each time U.S. Treasury officials call on China to let the yuan rise, they make such an outcome less likely. Here, Treasury Secretary John Snow must avoid backing China into a corner. Snow last week said the Bush administration is using ``quiet diplomacy'' to encourage Beijing to allow its currency to strengthen by widening its trading band against the dollar. Then, in the same breath, he said China ``ought to be moving to a broader band and we're going to encourage that.'' Private Discussions Quiet diplomacy means discussing the issue privately with Chinese officials, not repeatedly raising it in speeches. Jawboning China won't work. That's especially true when the risks of letting the yuan rise are greater for China than the benefits. There are broader issues at stake. Badgering Beijing into a major economic decision may hurt efforts to win its help in resolving the dispute with North Korea over that country's nuclear weapons program. China needs a competitive currency to keep itself stable. While trade groups dismiss this argument as propaganda, there's validity to it. China must keep growing about 8 percent a year to create jobs for the millions of workers that will be displaced as competition opens its economy. Say, for example, analysts are right and China's currency really is undervalued by as much as 40 percent. Could China withstand that kind of loss of competitiveness if you the yuan strengthened to its market value? Maybe, but it may not. China, it's important to remember, is still a developing country. State spending, exports and foreign investment drive its economy. The nation boasts little household wealth and only nascent domestic demand. A jump in the yuan could really hurt and cause social instability. Manila Meeting That's hardly in the best interest of Asian economies, which are selling a growing share of their exports to China. Still, Asian governments -- especially Japan's -- are pushing Beijing to boost the yuan's value. It will be a hot issue this week when Southeast Asian finance ministers meet in Manila to discuss economic trends. Yet Beijing is likely to act in its own self-interest. Japan's example may be important here. At the Plaza Accord in 1985, Tokyo agreed to a rapid rise in the yen. It has spent the last 13 years regretting it; once its financial bubble burst a few years later, Japan was left with an overvalued currency. On economic grounds, China sees little reason to let the yuan rise. It may see even less if the U.S. doesn't stop forcing the issue.