Obama’s Politics of Change and US Policy on China
 
By
Henry C.K. Liu
 
Part I: The Song Stays the Same

 
Part II: US Domestic Politics and China Policy
 
This article apeared in AToL on March 30, 2009 as Obama, Change and China - Part II: A Dangerous Ballance
 
 
 
Since the end of World War II, the issue of China has extended beyond the confines of foreign policy to stay as a prominent bone of contention in US domestic politics. Until Nixon’s opening to China in 1972, the old anticommunist China Lobby was in many ways as controversially powerful as the Israeli Lobby. This state of affair first developed after anti-imperialist revolutionary forces led by the ngerous Chinese Communist Party liberated China in 1949 after which Republicans in US partisan politics accused the Democrats of having “lost” China, as if China was theirs to lose.  

Historical US Proprietary Interest in China  

In a way, the accusation was understandable. The Republic of China under the Nationalist Party (Guomindang – GMD) had been under Washington’s paternalistic umbrella since its founding in 1911. US support for the Nationalist Party further strengthened after the left wing of the Party was purged following the assassination of 48-year-old leftist party leader Liao Zhong-kai on August 20, 1925. During and after WWII, the Republic of China was reduced to the status of a client state of the US.

Dr Sun Yatsen, father of the 1911 nationalist revolution died of cancer at age 59 in March 12, 1925. Six months later Liao, a top comrade-in-arms and political heir to Sun, was assassinated by rightwing forces. Sun had unified all progressive forces in and outside of China to overthrow the 3-century-old Qing dynasty that, in its final decadent decades, had allowed China to fall under the exploitative dominance of Western imperialism since 1840.
 
In less than one century, China fell from the position of a great power with one of the world’s oldest and most advance civilizations and prosperous economies to that of the “sick man of Asia”. China was left helplessly open to Western exploitation that reduced it to semi-colonial status with a bankrupt economy and a decadent government totally unable to protect its national interests or to revitalize its national destiny. Chinese civilization came to be viewed by all in the West except ancient historians as outdated and irrelevant for the modern world. China became an underdeveloped country not only in the eyes of Westerners, but also in the minds of its own people in the modern context. As a result, the United States, with a history shorter than that of the three–century–old Qing dynasty, along with other modernized Western nations, developed an unwarranted sense of superiority over China.
 
Sun spent his youth in the US territory of Hawaii where he attended the elite Punahou School, the alma mater of the young Barrak Obama a century later. Liao, whose father was sent to San Francisco in the employ of the Hong Kong Shanghai Bank, the institution that had financed British imperialism, was born there in 1877, received his early education in the US where he met Dr. Sun before returning to Hong Kong in 1893. Liao then went to Japan in 1903 to study political science and economics at Waseda University and Tokyo University. Liao was a key supporter of Sun Yatsen who founded the Chinese Revolutionary Alliance (Tongmenghui) in 1905 which later became the Nationalist Party (Guomindang) of which Liao was a leading member of the Executive Committee.

Sun modeled his early revolutionary ideas on American democratic values, particularly those of Lincoln from whose Gettysburg Address Sun derived his Three People’s Principles: Of the People, By the People and For the People, while adopting Hamiltonian political economic nationalism updated with Friedrich List’s National System of Political Economy to free China from Western imperialism. Sun became the first provisional President of the Republic of China in 1912 and Liao was the first Finance Minister of China when the provisional government was located in Guangdong.
 
US Open Door Policy for China

By the end of the 19th century, Western imperialism had carved up China into spheres of influence controlled by competing imperialist powers. In 1899, after the US had become a Pacific power through the acquisition of the Philipines, US Secretary of State John Hay proposed on January 2, 1900 the Open Door Policy for China to preserve US interests in the huge Chinese market where the US was a late comer and had not established a sphere of influence. Hay was US ambassador to the Court of St James in 1897 sent by President William Mckinley when he cemmented longstanding community of interests between Britain and the US. In August 1898, Hay was named Secretary of State and continued in that post after Theodore Roosevelt succeeded McKinley, until his own death in 1905.
 
Hay sent Open Door Notes to the major powers with established spheres of influence in China, namely Britain, Germany, France, Italy, Russia and Japan, asking them to declare formally that they would uphold Chinese territorial and administrative integrity and would not interfere with the free use of the treaty ports within their separate spheres of influence in China. The Open Door Policy, in essence a regime to keep the Chinese market open to all foreign powers, thus eliminating the possibility of China playing competitive foreign powers against each other for defensive advantage, gave the US a moralistic claim of having saved China from partition like Africa.

In 1860, during the Second Opium War, British and French expeditionary forces, having marched inland from the coast, reached Beijing. On the night of October 6 French units diverted from the main attack force towards the Old Summer Palace. On October 18, the British High Commissioner to China, Lord Elgin, of Elgin Marbles fame who looted and shipped to London a huge collection of classical Greek marbles sculptures and architectural members from the Parthenon and other buildings on the Acropolis in Athens, ordered the destruction of the palace.
 
The looted artifacts continue to surface in modern times. Two more Qing dynasty bronze animal heads, one depicting a rabbit and the other a rat, following previous sales of five other heads (pig. Ox, monkey, tiger and horse), part of a set comprising 12 animals from the Chinese zodiac that were created for the imperial gardens during the reign of Emperor Qianlong in the 18th century, were put up for auction by Christie in Paris in February 2009. China views the relics as a significant part of its cultural heritage and a symbol of how Western powers encroached on the country during the Opium Wars. The relics were installed as fountainheads at the Old Summer Palace, known in Chinese as Yuanmingyuan, until it was destroyed and sacked in 1860 by British and French invaders who carried off the loot.

The Opium Wars and the Open Door Policy contributed to the rise of xenophobia in China which found expression in the Boxers Uprising against Western inhabitants and missionaries in foreign concessions in Peking. The uprising brought about an eight-nation coalition invasion of China in the summer of 1900 that ended with victorious Allied troops conducted a bloodbath of indiscriminate slaughter, rape, and pillage.
 
The Irony of Most Favored Nation Status
 
The device used to keep China open to indiscriminate exploitation by all foreign powers equally was the Most Favored Nation (MFN) status clause in all unequal treaties imposed on China by Western imperialist powers. Unilateral MFN clauses were first imposed on China by Britian, the most powerful of all Western imperialit countries, in the unequal Treaty of Nanking of 1841 after Britain defeated China in the First Opium War, with the ceding of Hong Kong to Britain permanently as a colony. MFN status setablished a floor on which the most egregious concessions granted by China to any one imperialist power would automatically be granted to all others enjoying MFN status. MFN clauses demanded non-discrimination by the Chinese government towards any competing imperialist countries with MFN status. It effective neutralized any slective protectionist measures on the part of China. A century later, with MFN status having become a prerequsite for application for World Trade Organization membership, the US continued to resist granting China permanent MFN status until 2001 for anti-communist ideological reasons.
 
China Rejected Western Democracy for Socialism
 
After the fall of the Qing dynasty in 1911, a regime of regional war lords each with its own army emerged in China within the separate spheres of influence controlled by foreign powers that styled themselves as democracies. Kuomintang founding leader Sun Yat-sen, assisted by his able comrade Liao Zhong-kai, realized that to unify China against this regional war lords regime, the young Republic of China needed a national military which could only be created by training its own officer corps in a new military academy.
 
The Russian October Revolution in 1917 had profound influence around the world. In 1921, Chinese nationalists, disappointed with the alliance between Western capitalist liberal democracy and imperialism, turned to the new Soviet Union under communism, since it was by default the only anti-imperialist force at the time. The Western democracies were proving themselves to be eager imperialist heirs to the imperial governments they overthrew at home.

In 1923, a joint statement by Sun and a Soviet representative in Shanghai pledged Soviet assistance for China’s national unification. The Comintern sent Soviet advisers such as A A Jeffe (Chinese: Yuefei 越飛) and M.M. Borodin (Chinese: Baoluoting 鮑羅廷) to China to aid in the Nationalist (Guomingdang – GMD) in party building. Chinese Communist Party (CCP) members were encouraged to join the GMD as individuals, forming the First Nationalist-Communist United Front. The CCP was still a small young party at the time, having a membership of 300 in 1922 and only 1,500 by 1925. The GMD in 1922 already had 150,000 members. Today, the Chinese Communist Party has a membership of 70 million. 

In early 1923, Chiang Kai-shek, one of Sun’s young lieutenants in Tongmenghui in Japan, was sent for military and political training in Moscow. Chiang returned to China in late 1923 to participate in the founding of the Whampoa Military Academy (Huangpu Junxiao) as its commandant, with Liao Zhong-kai as political commissar for the GMD and Zhou En-lai, a leading member of the CCP, as the deputy commissar in his individual capacity as a member of the GMD.

In 1924 Sun held the first GMD national party congress (Guomindang diyici quanguo daibiao dahui), during which he stressed the Three People’s Principle (sanmin zhuyi - nationalism, democracy, people’s livelihood - minzu zhuyi, minquan zhuyi, minsheng zhuyi) as a strategy against imperialism. Within the GMD-CCP united front, Sun adopted three major policies (sanda zhengce): diplomatically, alliance with the Soviet Union (lian Su); politically, alliance with the CCP (lian gong), and domestically, supporting peasants and workers (fuzhu nonggong).
 
Split between Nationalists and Communists

Six months after Sun’s death from cancer at age 59 on March 12, 1925, Liao Zhong-kai, Sun’s political heir and leader of the left wing of the GMD, was assassinated on August 20, 1925, at age 48 at the behest of right-wing leaders of GMD. Chiang, as commander-in-chief of the National Revolutionary Army, with CCP support, set out on the long-delayed Northern Expedition against the northern warlords to unite China under GMD control. By 1926, the GMD had divided into left-wing and right-wing factions. Neither wing had any use for Western democracy, which presented itself as an agent of imperialism. The left turned toward communism while the right turned toward fascism with support Nazi Germany which was challenging the British Empire beginning in 1933. In 1937, Japan having shifted from its alliance with Britain to reoriented toward Germany, invaded China to launch the Sino-Japanese War which morphed into WWII after Pearl Harbor in 1941.
 
US Direct Involvement in Chinese Domestic Politics
 
The US became directly involved in Chinese domestic politics as she entered World War II after the Japanese attack on Pearl Harbor on December 7, 1941, as China became a member of the Allies against the Axis Powers which included Japan. For China, WWII which began in Europe on September 1, 1939, was merely a continuation of the Sino-Japanese that had begun on July 7, 1937. After the Tripartite Pact was signed in Berlin by Germany, Italy and Japan on September 27, 1940, China was officially at war with the Axis powers. 

Sun’s approach of revolution through capitalistic democracy had attracted financial and political support from US progressive circles and his personal embrace of Christianity endeared him to US protestant missionary groups active in China. Thus it was natural that the US elite developed a fraternal proprietary interest in China while the predominantly ethnic-European US public continued to wallow in deep-rooted racial prejudice then prevalent in all Western societies. China’s effort to modernize an ancient society received well-wishing support form the enlightened US establishment, as exemplified by influential figures such as China-born of missionary parents Henry Luce in media, John D. Rockefeller in philanthropy, Herbert Hoover in humanitarian relief and Franklin D. Roosevelt in international politics.  

China’s March Towards Socialism Interrupted

By 1924, impressed with the October Revolution of 1917 that eventually led to the establishment of the Soviet Union in 1922, Dr Sun, with the support of Liao, began embracing of socialism as the correct revolutionary path to the socio-economic and political revival of China. The socialist path was interrupted by Sun premature death in 1925 and by Liao’s assassination five months later for a quarter of a century until the Chinese Communist Party led a coalition of all progressive forces to liberated China from Western imperialism by defeating Nationalist forces in 1949 to establish the People’s Republic.
 
The Cold War as a War against Nationalist Anti-imperialist Struggle
 
The premature death of Franklin D, Roosevelt tragically deformed the progressive high purpose of World War II as the war to end all wars by adopting global social justice after victory by the forces of good against the forces of evil. It also turned the US into the main nemesis of China’s path towards socialism. President Truman, unprepared, insecure and inexperienced, allowed himself to be manipulated by the reactionary Winston Churchill, who openly declared that he did not lead Britain into a world war merely to lose the empire after the war, to reverse the progressive international geopolitics of Franklin D. Roosevelt and turned a war-time alliance with the Soviet Union into the Cold War. Truman fell for Churchill’s whitewashing the British and French colonial empires with the high-sounding label of the “Democracies”. The Cold War between two superpowers was in essence a war on national liberation struggling against imperialism.
 
Instead of fulfilling FDR’s promise of WWII as a good war to end Western imperialism around the world, Truman, fell under Churchill’s spell of heroic empire restoration and accepted the view of an Iron Curtain as a battle line for freedom, notwithstanding that the term had been regurgitated by Churchill from Nazi propaganda lexicon developed by Joseph Goebbels.
 
The Truman Doctrine of hard containment adopted a strategy of exploiting residual Western imperialism to hold down Soviet expansion under the banner of anticommunism. Since it is a historical fact that imperialism is the highest stage of capitalism, most anti-imperialist forces around the colonized world were also anti-capitalist. Linking Soviet expansionism to international communism was an oversimplification that allowed collapsing imperialist powers in Europe to drive an anticommunist US to start the Cold War. The mutation of Soviet communism into Soviet socialist imperialism was matched by a counter mutation of US capitalist democracy into US neo-imperialism. This structural geopolitical coincident led a victorious US infested with anticommunist paranoia to treat all indigenous nationalist movements around the world as prime targets of US hostility.
 
Along with the Soviet Union, socialist China became a target of containment of global communist expansion as defined by the Truman Doctrine. The Korean War further fanned US hostility toward communist China, both within the government, in the media and in the general public, as Korea was the first war after WWII that the US failed to win decisively, embarrassingly against an inferior Asiatic race.  No major power had lost a war against decrepit China since 1840, let alone a superpower who had just won a world war. China’s defeat of Japan was accomplished on the coattail of US power in WWII. The Korean War left the US smarting from bitter injury of national pride, something not happily tolerated in the American national psyche, especially having emerged as a superpower after decisive victory in WWII. (Please see my multipart series - China and the US: Part 1: The lame duck and the greenhorn; Part 2: The challenge of unilateralism; Part 3: Dynamics of the Korea crisis; Part 4: Proliferation, imperialism - and the 'China threat'; Part 5: Kim Il-sung and China; Part 6: Korea under Park Chung-hee; Part 7: Clinton's belated path to peace; Part 8: Bush's bellicose policy on N Korea; Part 9: The North Korean perspective; Part 10: The changing South Korean position)
 
Korean War and McCarthyism

After the Korea War, China became the contentious domestic political focus in the McCarthy Era during which Republican Senator Joseph R McCarthy of Wisconsin, having defeated Robert Marion La Follette, Jr., scion of US Progressive politics, became an instant sensation in US political history with an anticommunist witch hunt inside US government, focusing on the State Department and the Army, employing quilt by association methods since having come to be known as McCarthyism.

While MaCarthy focused on the State Department and the Army, McCarthyism infested US society. Fervent anticommunism at the onset of the Cold War poisoned US democracy. The success of communist revolutions against Western imperialism around the world, particularly in China where the People’s Republic was established by the Communist Party of China under the leadership of Mao Zedong, reactivated a general sense of paranoia in the US against communism that began in the Great Depression. In 1949, ten members of the US Communist Party were convicted of advocating the violent overthrow of the government under the Smith Act and were incarcerated as political prisoners. Historians have since compared anticommunist trials in the US with the Witch trials of Salem in 1692 and the Moscow show trials of 1936-38.

The Smith Act and Loss of Civil Liberty

The Smith Act had been passed in 1940 and its constitutionality confirmed by the Supreme Court, making it a criminal offense for anyone to “knowingly or willfully advocate, abet, advise or teach the duty, necessity, desirability or propriety of overthrowing the Government of the United States or of any State by force or violence, or for anyone to organize any association which teaches, advises or encourages such an overthrow, or for anyone to become a member of or to affiliate with any such association.”
 
First used against socialist influence in US labor movements in 1941, the Smith act was invoked again in the Great Sedition Trial of 1944 against pro-fascist elements in opposition to US participation in World War II.  In 1949, members of the Communist Party USA were prosecuted under the law. Over 140 members of the CPUSA, including party leader Eugene Dennis, stood trial during the early days of the Cold War. They were also accused of conspiring to “publish and circulate . . . books, articles, magazines, and newspapers advocating the principles of Marxism-Leninism.” The Communist Manifesto by Marx and Engels, Lenin’s State and Revolution, and Stalin’s Foundation of Leninism were introduced as evidence for the prosecution.

No case involving prosecution under the Smith Act reached the Supreme Court until 1951 when, in Dennis v United States, the Court reviewed the lower court convictions of eleven Communist Party leaders of charges of “conspiracy to violate the advocacy and organizing sections” of the statute. Chief Justice Fred M Vinson’s confirming plurality opinion for the Court applied a revised “clear and present danger” test and concluded that the evil sought to be prevented was serious enough to justify suppression of speech. While the 1950s were officially a time of peace, the Cold War had significantly lowered the threshold of the clear and present danger test, in the same way that the War on Terrorism has since 2001.
 
The Vinson Court coincided with the Red Scare of the 1950s, a period of extreme anticommunist paranoia in the US. The Court ruled in the Dennis petition: “The mere fact that from the period 1945 to 1948 petitioners’ activities did not result in an attempt to overthrow the Government by force and violence is of course no answer to the fact that there was a group that was ready to make the attempt. The formation by petitioners of such a highly organized conspiracy, with rigidly disciplined members subject to call when the leaders, these petitioners, felt that the time had come for action, coupled with the inflammable nature of world conditions, similar uprisings in other countries, and the touch-and-go nature of our relations with countries with whom petitioners were in the very least ideologically attuned, convince us that their convictions were justified on this score.”
 
Justice Felix Frankfurter in concurrence developed a balancing test, which, however, he deferred to congressional judgment in applying, concluding that “there is ample justification for a legislative judgment that the conspiracy now before us is a substantial threat to national order and security.” Frankfurter held the view that the Court should avoid entering “the political thicket.” He reaffirmed this view in a concurring opinion, arguing that judges “are not legislators; that direct policy-making is not our province.” He also recognized that curtailing the free speech of those who advocate the overthrow of government by force, also risked stifling criticism by those who did not, writing that “it is a sobering fact that in sustaining the convictions before us we can hardly escape restriction on the interchange of ideas.” Frankfurter, while defending free speech, was nevertheless saying that the rule of law cannot be expected to derail a political trial.
 
Former Chief US prosecutor at the Nuremberg War Crime Trials, Justice Robert H Jackson’s concurrence was based on his reading of the case as involving “a conviction of conspiracy, after a trial for conspiracy, on an indictment charging conspiracy, brought under a statute outlawing conspiracy.” Here the Government was dealing with “permanently organized, well-financed, semi-secret, and highly disciplined organizations” plotting to overthrow the Government; under the First Amendment “it is not forbidden to put down force and violence, it is not forbidden to punish its teaching or advocacy, and the end being punishable, there is no doubt of the power to punish conspiracy for the purpose.”
 
The legal logic espoused by Jackson was in direct contradiction to that used by him to convict Nazi war criminals for failing to resist the government of the Third Reich. Critics of the Nuremberg trials argued that the “crimes” with which the defendants were charged were only defined as crimes after they were committed and that therefore the trial itself was invalid. The alleged “crimes” charged under the Smith Act were committed by the defendants in the 1920s and 30s before the enactment of the Smith Act in 1940. In Dennis, Jackson concluded that the clear and present danger test should not even be applied, arguing that “when used as part of a conspiracy to act illegally, speech loses its First Amendment protection.”
 
Syracuse University College of Law Professor William M Wiecek, recipient of the John Phillip Reid Prize for the best book in legal history published in 2006 for “The Birth of the Modern Constitution: The United States Supreme Court, 1941-1953”, in an article on the history of anticommunism in the United States, asserts that: “The manufactured image of the domestic Communist, cultivated and propagated by [J. Edgar] Hoover, the Catholic Church, the American Legion, and political opportunists, made of Communists something less than full humans, full citizens, fully rights-endowed. Even sophisticated jurists like … Robert Jackson were captives of that image, anesthetizing [his] sensitivity to deprivation of rights. ... In Dennis and other Communist cases between 1950 and 1956, the Supreme Court overcame the problem of facts not supporting the results it was determined to reach by accepting a generic ‘proof’ of Communism’s seditious nature. Disregarding all evidence of both the Party’s and individual members’ renunciation of violence, the Court substituted literary evidence from outdated classics of Marxism-Leninism, most written by Europeans of an earlier era, and refused to consider whether the living people before them actually subscribed to those doctrines…”
 
Justice Hugo Black dissented on the Dennis ruling, viewing the Smith Act as an invalid prior restraint and calling for reversal of the convictions for lack of a clear and present danger. He wrote: “Public opinion being what it now is, few will protest the conviction of these Communist petitioners. There is hope, however, that, in calmer times, when present pressures, passions and fears subside, this or some later Court will restore the First Amendment liberties to the high preferred place where they belong in a free society.”
 
Justices William O Douglas also dissented, applying the Holmes-Brandeis formula of clear and present danger to conclude that “to believe that petitioners and their following are placed in such critical positions as to endanger the Nation is to believe the incredible.”

In Yates v. United States in 1951, the convictions of several lower level Communist Party leaders were set aside, a number ordered acquitted, and others remanded for retrial. The decision was based upon construction of the statute and appraisal of the evidence rather than on First Amendment claims, although each prong of the ruling seems to have been informed with First Amendment considerations.
 
Justice John M Harlan for the Court ruled that the lower court trial judge in Yates had given faulty instructions to the jury in advising that all advocacy and teaching of forcible overthrow was punishable, whether it was language of incitement or not, so long as it was done with an intent to accomplish that purpose. The Justice opined that the statue prohibited “advocacy of action,” not merely “advocacy in the realm of ideas. The essential distinction is that those to whom the advocacy is addressed must be urged to do something, now or in the future, rather than merely to believe in something.” Second, the Court found the evidence insufficient to establish that the Communist Party had engaged in the required advocacy of action, requiring the Government to prove such advocacy in each instance rather than presenting evidence generally about the Party. Additionally, the Court found the evidence insufficient to link five of the defendants to advocacy of action, but sufficient with regard to the other nine. The accusation was that “they conspired . . . to organize as the Communist Party and willfully to advocate and teach the principles of Marxism-Leninism,” which was equated with meaning “overthrowing and destroying the government of the United States by force and violence” at some unspecified future time.
 
Still, one would be hard put to find any reference to the government of the United States in any original texts of “Marxism-Leninism” any more than one could find it in the Holy Bible.

McCarthy’s Witch Hunts

On February 9, 1950, Senator McCarthy gave a Lincoln Day speech to the Republican Women’s Club of Wheeling, West Virginia, waving a piece of paper that he claimed contained a list of 205 known Communists working for the State Department. The Korean War broke out four months later in June 25, 1950. The accusation immediately attracted national media attention in a heightened incendiary anticommunist atmosphere.   As a response, the Senate created the Tydings Committee to investigate McCarthy’s charges. After extensive hearings, the Committee concluded in its final report that those accused on McCarthy’s list, including many China experts such as Owen Lattimore, John Patton Davies Jr., John Stewart Service, John Carter Vincent and Phillip Jessup, were not communists. But the report was attacked as partisan whitewashing by McCarthy and failed to receive official acceptance by the whole Senate even after three voting tries. All of the accused were thereafter removed by government and black listed for academic employment.
 
Robert McNamara, defense secretary under Kennedy and Lyndon Johnson, attributed the Vietnam debacle to the thorough purge of China experts by McCarthyism. He wrote in 1995: “The irony of this gap - Asian experts - was that it existed largely because the top East Asian and China experts in the State Department - John Patton Davies Jr, John Stewart Service and John Carter Vincent - had been purged during the McCarthy hysteria of the 1950s. Without men like these to provide sophisticated, nuanced insights, we - certainly I - badly misread China's objectives and mistook its bellicose rhetoric to imply a drive for regional hegemony.”
 
McCarthy and Kennedy
 
Being of Irish Catholic roots, McCarthy enjoyed close links with the powerful Irish Kennedy clan which commanded prominent visibility among US Catholics. McCarthy became a close friend of Joseph P Kennedy, an anti-Communist zealot typical of new money in US society, and was a frequent guest at the Kennedy compound in Hyannis Port, reportedly dated two of Kennedy’s daughters, Patricia and Eunice, and was godfather to Robert F. Kennedy’s firstborn, Kathleen. Young Robert F was tapped by McCarthy as a counsel for his anticommunist investigatory witch-hunting Senate Committee, working along side the brilliant and infamous Roy Cohn who had been an important member of the prosecution team for the spy trial of Julius and Ethal Resenbergs. Conservative Jews in the US during the Cold War were eager to prove their loyalty to America and to counter the anti-semantic image of communism as a Jewish conspiracy by their energetic persecution of the Jewish left.
 
Joseph P used his vast national network of contacts to build support for McCarthy among Catholic voters and to raise contributions for McCarthy’s campaigns. He had presidential plans for his sons and saw anticommunism as natural political opening in the 1950s. John F Kennedy served in the Senate with McCarthy from 1953 until McCarthy’s death in 1957 without once criticizing him because “Hell, half my voters in Massachusetts look on McCarthy as a hero,” according to Kennedy historian Arthur Schlesinger.

The controversial conviction of senior State Department official and establishment figure Alger Hiss gave popular credence to anticommunist claims that the New Deal had been tainted with communist sympathizers if not outright car-carrying party members, and that US foreign policy, particularly on China, has been compromised by Communists under Democratic administrations. The blue-blooded effete establishment with its noblesse oblige, traditionally resented by the parvenus and nouveau riches, became the convenient targets of working-class anticommunism all through the Cold War.

Even General George C. Marshall, war hero, Secretary of State under Truman and Nobel Peace Prize winner for the Marshall Plan, who had been sent to China to avert a pending civil war by trying to brokering a coalition government between the Communists and the Nationalists, was attacked by McCarthy of having blocked an imminent Chinese Nationalist military victory over Communist forces. Historians have since recognized the fact that communist victory in China had been fundamentally due to the political responsiveness of the CCP rather than military superiority. Nevertheless, in 1952, Dwight D Eisenhower, while campaigning for president, denounced the Truman administration’s failures in Korea, campaigned alongside McCarthy, and refused to defend Marshall’s foreign policies or personal integrity.

The anti-China Ideological Bias of the Democrats

All Democrat administrations since Truman, from Kennedy to Johnson, to Carter and to Clinton, had been on the defensive against charges of being “soft” on communism. During the 2008 primaries, both Hillary Clinton and Barack Obama showed similar preemptive defensive postures on China, the only communist nation of consequence after the Cold War.  

In his 1960 presidential campaign, Senator John F. Kennedy sent a message to conservative Chinese-American Businessmen’s Committee Meeting in Chicago, part of the China Lobby: “In the words of our Democratic platform, ‘we reaffirm our pledge of determined opposition to the present admission of Communist China to the United Nations’ - a pledge we have made both to the people of the United States, and to the people of China.”

In his inaugural address on January 20, 1961, Kennedy proclaimed: “Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, in order to assure the survival and the success of liberty.” That policy promptly led the US into the Vietnam War which ended up changing US political culture more than assuring the survival and the success of liberty in the world.

As president, Kennedy set a policy that kept China out of the United Nations, thereby greatly weakened the effectiveness of the world organization to keep peace around the world for 12 years.  US foreign policy under Kennedy was driven by a gravely flawed Domino Theory about the spread of communism, denying the indigenous, nationalist struggle about Western capitalistic imperialism in Asia as Chinese communist expansionism.

The Kennedy administration Defense Secretary placed particular emphasis on improving military capability to counter wars of national liberation as its prime anticommunist targets worldwide. As McNamara wrote in his 1962 Defense Department annual report, “The [enemy] military tactics are those of the sniper, the ambush, and the raid. The political tactics are terror, extortion, and assassination.” In practical terms, this meant training and equipping US military personnel, as well as such allies as South Vietnam for counter insurgency operations. Politically, suspension of civil liberty was deemed as a necessary tactic to preserve freedom. US policy in Asia deprived itself of popular support both at home and abroad.

Lyndon B. Johnson, who was trapped into continuing Kennedy’s hawkish foreign policy by the tragic circumstances under which he became president, but adding a Texan macho hubris, allowed a foreign war in a small country in a distant land that most American never heard off to torpedo his liberal domestic programs of Great Society that would move American society closer to its founding ideals. In Johnson’s mind, encouraged by a young strategist named Zbigniew Brzezinski, Vietnam was a necessary proxy war against an expansionist China to disprove Chinese claim that the US was a “paper tiger”. Calling a macho Texan a paper tiger was like waving a red flag in front of a raging bull. LBJ said about Operation Rolling Thunder, a series of sustained air attacks against the Democratic Republic of North Vietnam, the most intensive blanket bombing campaign in history: “I didn’t just screw Ho Chi Minh, I cut his pecker off.” While antiwar activities were heating up on US college campuses, LBJ proudly showed the press he received a telegram from the Hells Angels Motorcycle Gang offering to go to Vietnam to kill Communists.

Nixon’s Opening to China
 
Nixon’s policy on China was pragmatic, realistic and long-range. As executed by Henry Kissinger, the Nixon policy did not try to change China, accepting it as it was, an emerging power with a communist government and socialist ideology, but with a long history and deep national pride. The policy recognized that communist nations of different history and culture are not naturally blessed with solidarity any more than capitalist countries are. The so-called communist block was created more by anticommunist hostility mentality and self-deceiving propaganda in the West rather than by overriding ideological unity. Kissinger engineered a diplomatic path to normalize US-China relations in the context of US-Soviet détente. Nixon in one bold stroke put right decades of wrong Republican policy on China. Tragically, Nixon’s geopolitical opening to China was interrupted by the Watergate scandal. Formal normalization failed to be concluded in Nixon’s second term as agreed to by both sides and had to be left to Carter to complete the process.

Carter’s Dysfunctional China Policy
 
Carter’s foreign policy in general and China policy of 1977-81 in particular was engineered by Zbigniew Brzezinski, the Democrats’ answer to the brilliant Republican geopolitical strategist Henry Kissinger, who under Nixon had consistently left Democratic traditional foreign policy fixations in the ideological dust with path-opening initiatives of Détente and Opening to China. Carter’s diplomatic recognition of China was accomplished on the coattail of the Nixon/Kissinger opening, which could have come to a happy conclusion in Nixon’s second term if not for the tragic events of Watergates.
 
Carter unilaterally withdrew the US from the Mutual Defense Treaty with Taiwan in 1979 to satisfy a Chinese precondition for diplomatic normalization, as agreed to by Nixon/Kissinger. But to placate obstinate Congressional opposition, he put in its place the Taiwan Relations Act. The shift moved US commitment to defend Taiwan from a bilateral treaty to a more rigid framework of US domestic law. The Taiwan Relations Act has since become a major obstacle in further improvement of US-China political relations and a key road block in resolving the Taiwan question peacefully between parties across the Taiwan Strait.
 
Brzezinski and Islamic Terorrism

Carter’s China policy was dominated by Brzezinski’s anti-Soviet fixation. Brzezinski masterminded the arming of the Mujaheddin in Afghanistan to destabilize the Soviet-supported Taliban government to induce Soviet military intervention. Brezezinski conspired to bring about a Soviet invasion of Afghanistan to give the rival superpower its own Vietnam War that would contribute to the dissolution of the Soviet Union. But the strategy unexpectedly created Islamic terrorism that came back to haunt the US in the form of 2001 9:11 terrorist attacks.

It was a classic “blowback”, a CIA term first used in March 1954 in a since-declassified report on the 1953 operation to overthrow the democratic nationalist government of Mohammed Mossadegh in Iran to install the Shah whose aggressive secularization and Westernization programs led to the successful Islamic revolution led by Ayatollah Khomeini. Blowback, a firefighting phenomenon, is a political metaphor for the unintended consequences of US covert geopolitical machination.  Brezezinski now is reportedly again advising the Obama administration on foreign policy, hopefully not with another grand strategy with blowback consequence.

The China Policy of George HW Bush

In 1990, the Republican President Bush Sr. was trying to find a new, meta-Cold War geopolitical rationale for preserving close bilateral ties with China. Bush tried in vain in one press conference the Henry Kissinger theme of China as a counterweight to the growing economic power of an increasing unruly Japan, with whom the US was having economic and trade friction. Ironically, less than a decade later, China replaced Japan as the America’s top interconnected economy with growing trade friction.

On February 7, 1990, Lawrence Engleburger, undersecretary of state in the Bush Sr. administration, testifying before the Senate Foreign Relations Committee, made a landmark public admission that the two-decade-old Cold War basis for strong US-China relations was no longer a dominant or controlling factor, and that the anti-Soviet basis of US policy on China was to be no longer operative. In its place, Engleburger identified cooperation in international problems, such as non-proliferation of weapons of mass destruction and environmental pollution, as the new rationale of close ties between the two countries. He claimed that China’s strategic value to US objectives in international problems had not declined with the end of the Cold War.

The paradox of this new policy was that it became a message to China that non-cooperation in international problems such as non-proliferation could be a way to make the US take China’s national interest more seriously, including the issue of arms sales to Taiwan. However, Chinese foreign policymakers, trapped by their own ingrained Confucian mentality of graciousness begetting reciprocal graciousness, failed to grasp the rules of the Western geopolitical game that bad boys get more attention.

There was also much wishful expectation in misguided US policy circles that the post-Tiananmen Chinese leadership would only be transitional and that the US could adopt a holding mode while waiting for the political dust in China to settle. In the meantime, other hot spots around the globe, such as the Middle East and the Gulf, as well as the Balkans, were keeping both the Bush Sr.and Clinton administrations fully occupied. Later, it was hoped, the US could deal with a new generation of Chinese leaders that were expected to be social democrats.

The Central Intelligence Agency (CIA), embarrassed by its lapse in predicting the collapse of communism in Europe, compensated by becoming overly speculative about the precarious future of Chinese communism. Ambassador Winston Lord testified in Congress along the line he wrote in Foreign Affairs, “The current discredited regime is clearly a transitional one.” He was right when he predicted in early 1990 in testimony before Congress that within three years there would be a “more moderate, humane government in Beijing”, although he was wrong to assume that it would be a different Chinese government.

The granting of Most Favored Nation (MFN) status to China became the focus of Congressional opposition to the White House’s policy toward China. The approach of annual conditional renewal based of documented improvement on human rights was adopted. At the same time, opposition by US labor against Chinese low-price imports pushed the Democrats toward seeing its anti-China posture as a tactic in the 1992 elections. Anecdotal issues such as the use of prison labor were raised as human rights justification for banning Chinese imports, not withstanding the all auto license plates in the US were made by prison labor. Besides human-rights and anti-prison-labor activists, other groups of a wide range of ideology and special interests wanted their own separate pound of anti-China flesh. With the support of Senator Daniel Moynihan, Tibetan separatists succeeded in adding a Tibetan clause in 1991. Senator Joseph Biden, now Obama’s vice president, added the condition of non-proliferation. Even the Voice of America got on the list to demand a halt to Chinese jamming of its anti-communist broadcasts.

Dissident Fang Lizhi, whom Ambassador Lord invited to the US embassy to attend a reception for visiting President Bush, ended up staying inside the embassy for a whole year in political asylum, China’s symbolic decision to allow Fang to go to the US brought about a reciprocal release by Bush of World Bank loans and Japanese credit to China, resulting in a 40% increase of Japanese imports to China in 1991, making a mockery of Bush’s China card against Japan.

The First Gulf War in November 1991 and China’s accommodating vote in the United Nations Security Council provided the basis for Bush to receive foreign minister Qian Qichen in the Bush White House, breaking the post-Tiananmen ban on high-level contacts. China reciprocated in 1992 by indicating its intention to comply with the guidelines of the Missile Technology Control Regime (MTCR) in its arms program.

In the summer of 1992, with Republican incumbent Bush’s geopolitical China policy under attack from Democrat challenger Bill Clinton, election politics forced Bush to reverse a decade-old policy of reducing arms sale to Taiwan by announcing the sale of 150 F-16 fighters to Taiwan. The sale meant jobs for General Dynamics, the planes’ manufacturer in Texas, Bush’s home state. The sale, which strengthened significantly Taiwan air defense capability, was a direct violation of the 1982 US-China Joint Communiqué that “arms sales to Taiwan will not exceed, either in qualitative or in quantitative terms, the level of those supplied in recent years.”

China protested the sale. Foreign Minister Qian warned that it was a “serious incident” and held Washington accountable for “serious consequences”. But China took no visible counter action, for fear of hampering Bush’s chances for re-election which Bush lost anyway over the slowing US economy.  

After the election, China quietly shipped M-11 missiles to Pakistan on the ground that their range fell below MTCR guidelines. In the final weeks of the Bush administration, US trade representative Carla Hills was sent to Taiwan, a first for cabinet-level officials with it since normalization of relations with China, in direct violation of the policy of no official contact with Taiwan.

CIA veteran James Lilley, soon after completing his tour as Bush’s ambassador to Beijing in May 1991, drawing from his past connection to Taiwan as top CIA liaison, challenged the basic underpin of US-China relations. He attacked the Chinese claim of sovereignty over Taiwan as “anachronistic” and declared the three US-China communiqués outdated. Lilley’s views stimulated in the minds of a sizable segment of the US policy establishment the need to review the Nixon US policy on China.

Lilley was the political mentor of Lee Teng-hui, former president of the Republic of China on Taiwan, for whom he had engineered US support as early as the 1980s. Writing in the New York Times in July 1999, Lilley practically claimed credit for tutoring Lee on the provocative “two states” doctrine in defining Taiwan’s relations to the mainland. It was based on the Germany model, with Taiwan as West Germany. The doctrine was a non-starter and was denounced by China as a move toward Taiwan independence.

Clinton’s China Policy
 
During the 1992 campaign, Democratic candidate Bill Clinton accused incumbent Republican president George H W Bush of “cuddling up to the butchers of Beijing”, in reference to Bush policy of maintaining forward momentum in US-China relations after the tragic Tiananmen incident of 1989, which was seized upon by anti-China forces as a convenient pretext to again isolate China. After the election, the incoming Clinton team misjudged US geopolitical position in the post-Cold War world as being secure enough that it openly announced that its first term of office would be focused primarily on the depressed domestic economy and not on global geopolitics following the dissolution of the USSR  in 1991. The Clinton team repeatedly told Chinese diplomats that the new president would have no time for policy initiatives on China until the second term. The real message was that the new president could not garner enough political support inside his own party to build on the Bush Sr. policy on China until the second term. (See CHINA AND THE US - PART 7: Clinton's belated path to peace)
 
Clinton’s neoliberal Globalization
 
Globalization had been engineered by the Clinton economic team. Over the last three decades, globalizatin has created recurring trade imbalances between the US and China for trade to become a major point of conflict. Simultaneously, the US has become addicted to low cost imports from low-waged China to sustain low-inflation growth fueled by low-interest debt funded by the Chinese trade surplus dollars. The irony was that dollar hegemony as worked out by Robert Rubin under Clinton is based on using a trade deficit to finance a capital account surplus denominated in dollars. Rubin, a legendary Wall Street bond trader, figured out that the US can consume more than she produces at the expense of the exporting countries as long as US trade deficit is denominated in dollars that the exporting countries cannot spend at home without monetary penalties and must reinvest in US debts.
 
An accommodating Federal Reserve under Alan Greenspan provided an ever increasing money supply to facilitate serial debt bubbles to keep US consumers spending even with declining real production. Countries exporting to the US had to invest their trade surplus dollars in US sovereign debt to finance the US trade deficit and the expansion of the US economic bubble by providing low cost imports to US consumers and at the same time provide to US consumers low-interest-rate loans collateralized by wealth effects created by serial debt bubbles. The Fed was in fact feeding a global bubble with fiat dollars. (Please see my April 11, 2002 AToL article: Dollar Hegemony has to go)
 
Single-dimensional reaction from the liberal anticommunist left in the US to the complex Tiananmen incident in 1989 created a roadblock in Washington to further improvement in relations with China, notwithstanding that the Tiananmen incident was largely created by the imbalances and inequality resulting from China reform towards market economy.

Clinton campaigned from the Democratic left against Bush for “coddling the Butchers of Beijing,” while Ross Perot, as a Reform Party presidential candidate, attacked Bush with similar polemics on the right for shipping jobs from America to China and Mexico. China became a focus issue in US partisan and presidential politics with a bitterness not seen since the Truman era.

After winning the election, Clinton’s China team, led in the first term by secretary of state Warren Christopher and Republican Winton Lord as Assistant Sectary for East Asian and Pacific Affairs, was single-minded about promoting human rights and democracy for China, while the administration was generally focused on domestic economic issues. In his confirmation hearing, Christopher even formally declared US policy to be seeking to facilitate “peaceful evolution” in China from communism to capitalistic democracy, a direct violation of the Shanghai Communiqué of US non-interference in China’s domestic affairs. Lord, former aide to Kissinger under Nixon, former Ambassador to China (1985-89) under Bush Sr., now as Assistant Secretary for East Asian and Pacific Affairs under Clinton, went even further and advocated a policy of linking human-rights progress in China to US restraint on Taiwan. Clinton and national security adviser Anthony Lake, in response to US domestic politics, reintroduced ideological morality in US foreign policy and adopted what some critics labeled as moral imperialism. Strategic ambiguity over the defense of Taiwan was escalated into legal, political and moral imperatives backed by the Taiwan Relations Act.
 
On May 28, 1993, Clinton signed an executive order on conditional MFN as a compromise to head off new legislation by Democratic Senator George Mitchell, now Obama’s special envoy to the Middle East and Congresswoman Nancy Pelosi, now majority leader in a Democrat controlled House of Representatives. The US business community saw human-rights conditionality as a tool for opening Chinese markets. US companies would lobby against MFN conditionality only if they were promised lucrative deals by China. In 1993, US companies obtained 6,700 contracts from China; it was also the year when Chinese exports of M-11 missiles to Pakistan led the US to invoke sanctions under MTCR, but that proposal faced opposition from lobbyist working for California high-tech companies, such as Hughes, which had contracts with China to launch communication satellites. Meanwhile, Wall Street pushed “rule of law”, “transparency” and “open markets” as being in China’s own economic interest while fraud, opaqueness and monopolistic mergers ran wild on Wall Street.

But the Pentagon wanted a less confrontational policy toward China. The US military needed China’s cooperation in its nonproliferation objectives, particularly preventing a nuclear North Korea. It wanted high-level military exchanges with China to moderate Chinese exports of arms to countries not allied with the US. Above all, the Pentagon wanted to restart military cooperation with China to minimize the prospects of an eventual war with the most populous country in the world, a nightmare scenario for US military planners.  

After the Yinhe fiasco, in which a CIA accusation that a Chinese container ship allegedly carrying chemical-weapons material to Iran was proved false to the whole world through open inspection with Saudi Arabia as an intermediary, the Clinton administration finally conducted a review of its single-dimensional confrontational China policy.

On September 25, 1993, with US-China tensions at an all-time high, National Security Advisor Lake summoned Chinese Ambassador Li Daoyue to inform him of the Clinton administration’s new approach to China, generally described as “constructive engagement”. Under this policy, the US would again engage China on all levels in a broad range of areas and Clinton would meet with Chinese President Jiang Zemin in Seattle in November at the Asia Pacific Economic Cooperation (APEC) conference, a first US-China summit meeting in four years since Tiananmen in 1989.

China saw the US as having explicitly violated all commitments implicit in the three communiqués on the issue of Taiwan. The Tiananmen incident in 1989 and subsequent events, including Taiwan’s move toward electoral democracy, provided the US with a basis to set aside earlier agreements with China to overlook differences in ideology in the interest of geopolitical strategic cooperation. The US visibly replaced geopolitically-induced ideological tolerance with strident criticism of Chinese political culture, particularly on human-rights issues, and Chinese socialist society in general. Ideological confrontation was revived and intensified as the US under Clinton openly practiced what China viewed as moral imperialism.

The China Policy of George W. Bush
 
Four months after Bush entered the White House he touched off a controversy in a morning TV interview on April 1, 2001 when he was asked if the US would defend Taiwan with the full force of the US military. “Whatever it took to help Taiwan defend herself,” he replied.

On the same day, a collision between a US Navy EP-3E spy plane and a Chinese J11 jet fighter inside Chinese air space on April 1, 2001 caused relations between Beijing and Washington to deteriorate sharply. The situation created diplomatic friction as the US spy crew fell into custody in China after an unauthorized emergency landing in a Chinese military air base.  A conciliatory letter from US Ambassador Joseph Prueher to Chinese Foreign Minister Tang Jaixuan stating that the US was “very sorry” for the death of Chinese pilot Wang Wei, and “We are very sorry the entering of China’s airspace and the landing did not have verbal clearance ...” led to the release of the US spy crew from Chinese custody, as well as the return of the disassembled plane. After the US spy crew returned to the US, the White House staged a public reception for the crew as returning heroes and asserted that the two “sorry’s” expressed in Ambassador Prueher‘s letter were distortion in translation from English to Chinese, clarifying the meaning of the term “sorry” as not equivalent to an apology in the English language.
 
In later interviews on US support for Taiwan in the event of an armed conflict with Beijing, Bush said US military action was “certainly an option,” but he also warned Taiwan not to declare independence from China. Since Nixon’s first visit to China in 1972, the US has long supported the “One China” principle without committing itself to the question of with side on the Taiwan Strait is the real China, while insisting that Taiwan and China resolve their differences peacefully. Aides explained that the President Bush’s remarks were not meant to signal a change in policy. Under the Taiwan Relations Act of 1979 signed into law by President Carter, the US is obligated to provide Taiwan with equipment to defend itself. Whatever else the US might do to defend Taiwan has been left deliberately vague by previous administrations in a policy of strategic ambiguity.

In a private interview on Air Force One in August 2008 with Michael Abramowits of the Washington Post, on route to Beijing for the Olympics, Bush offered a mixed assessment of China’s role in the world, praising its efforts to curb the nuclear ambitions of North Korea and Iran, expressing disappointment about its recent move to help scuttle global trade talks at the Doha Round in Geneva over issues of agricultural trade between the US, India, and China and saying that it was “really hard to tell” whether human rights in China had improved over the past eight years. For many in the world, it is not hard to tell that human rights hae been impaired by the US War on Terrorism.
 
Bush had been criticized by some in congress and by human rights groups for his decision to attend the Beijing Olympic Games. He explained his rationale: “One of the reasons I'm going is because I want to show respect to the Chinese people, and this is a proud moment for China.”

China and the 2008 US Presidential Election
 
During the Democratic primaries, Barack Obama called on incumbent George Bush, to boycott the opening ceremony of the Beijing Olympics. In a statement, Obama said a boycott “should be firmly on the table”, but added that a decision should be made closer to the event. “If the Chinese do not take steps to help stop the genocide in Darfur and to respect the dignity, security and human rights of the Tibetan people, the president should boycott the opening ceremonies,” he said. “As I have communicated in public and to the president, it is past time for China to respect the human rights of the Tibetan people, to allow foreign journalists and diplomats access to the region, and to engage the Dalai Lama in meaningful talks about the future of Tibet,” candidate Obama added.
 
His rival for the Democratic nomination, now Secretary of State, Hillary Clinton, also urged Bush to stay away from the Beijing Olympics. Clinton said Bush should use the threat of a boycott to put pressure on the Beijing government. “I believe that the president should not attend the opening ceremonies because that is giving a seal of approval by our government,” she said.
 
After the primaries, several senators, including failed presidential candidate Hillary Clinton, sent President Bush a letter urging him not to attend the opening ceremony, saying that “if the Chinese government is never to treat its people with basic human rights, it must be sent a bold and clear message.”

Hillary Clinton made US dependence on Chinese investment a central theme of her 2008 presidential campaign message. She took to the CNBC airwaves on March 2, 2007 to declare that the US was undergoing “a slow erosion of our own economic sovereignty.” A 9% decline in the Shanghai and Shenzhen stock index a day earlier helped set off a plunge in US equity markets. The news gave candidate Clinton a media opportunity to argue that US economic well-being had become too dependent on what happened in China.
 
In a letter to Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke, Senator Clinton said the March 2 stock market sell-off “underscores the exposure of our economy to economic developments in countries like China. As we have been running trade and budget deficits, they have been buying our debt and in essence becoming our banker.” She argued in her letter to Paulson and Bernanke that Congress and the president had to “ensure foreign governments don’t own too much of our public debt.”  She warned in her letter to Paulson and Bernanke that “if China or Japan made a decision to decrease their massive holdings of US dollars, there could be a currency crisis and the US would have to raise interest rates and invite conditions for a recession.”

However, in her recent post-election speech to the Democratic National Committee, Hilary Clinton told the story of one of her New York constituents who approached her complaining of loss of manufacturing jobs and asked, “Why can’t we get tough on China?” Clinton’s reply was “How do you get tough on your banker?”

On October 29, 2008, a week before election day, Democratic presidential candidate Obama released a letter to the National Council of Textile Organizations in which he said China’s huge trade surplus with the US is “directly related to its manipulation of its currency’s value.” The blunt statement from Democrat candidate with a commanding lead over his Republican opponent was an unequivocal rejection of the Bush administration’s refusal to officially label China as a currency manipulator in the past eight years. It came in a letter to a U.S. textile group concerned about a surge in clothing imports from China when quotas negotiated by the Bush administration expire at the end of the year. “China must change its policies, including its foreign exchange policies, so that it relies less on exports and more on domestic demand for its growth,” Obama said in the letter. “That is why I have said I will use all diplomatic means at my disposal to induce China to make these changes,” Obama said in response to a questionnaire from the group.
 
Obama promised to beef up US enforcement efforts against unfair trade practices and increase resources at the U.S. Trade Representative’s office “devoted to this mission.”

China’s exchange rate with the US dollar is a hot-button issue for many textile and other U.S. manufacturers, who believe Beijing deliberately undervalues its currency to boost exports and discourage imports.

Obama promised, if elected, to monitor textile imports from China to make sure they do not violate “applicable laws and treaties.” He also pledged support for the Berry amendment, which requires the US Defense Department to only buy textiles made in the United States.
 
And Obama signaled his willingness to consider imposing emergency safeguard restrictions on imports of Chinese goods using a trade mechanism known as Section 421. As Democrats seek to expand their current majority in Congress, textile trade has been an issue in races for the House of Representatives and Senate in North Carolina, a major textile-producing state.
 
The Bush administration had pressured China for years to raise the value of its currency, with some success. The renminbe (RMB) had appreciated 20% against the dollar during Bush’s two terms. But the Bush administration had steadfastly refused to formally declare China a currency manipulator, which would open the door to other steps to pressure Beijing, including a possible complaint to the World Trade Organization and punitive US tariffs.
 
One of the key structural forces of inflation in China is the persistent and large rise in its foreign reserves, roughly half of which have been sterilized. China not only runs a large current account surplus (which averaged 7.4% of GDP during 2005-07), but it has also received very large capital inflows because trade surplus dollars cannot be spent in China with causing inflation because the wealth behind the trade surplus has been shipped to the US. Official reserves grew sharply from $286 billion in 2002 to $819 billion in 2005, and accelerated in 2007 when reserves increased by $461 billion.
 
China’s current account surplus for 2004 was $68.7 billion; for 2005, $160.8 billion; for 2006, $249.9 billion; for 2007, $371.8 billion; for first half 2008, $191.7 billion. Current account surplus for first half of 2008 fell to 10.4% of GDP, from 11.9% in 2007. Foreign direct investment in 2004 contracted was $153.5 billion, utilized was $60.6 billion; for 2005 $60.3 billion; for 2006 $63.0 billion; for 2007 $74.8 billion, excluding financial investments.
 
China’s trade surplus grew 74% to $177.5 billion and its foreign reserves added more than $200 billion to reach $1.07 trillion in 2006, rising to $1.93 trillion at the end of December, 2008. While the yuan has risen nearly 20% against the dollar in the past three years, the appreciation has stalled since July, 2008 as Beijing tries to help struggling exporters hit hard by weakening foreign demand survive the global financial crisis.
 
While China’s current account surplus continued to expand up to 2008, the growth in net capital inflow in 2008 accounted for 59% of the total increase in reserves. China’s current account surplus in 2006 of US$206 billion accounted for 41% of the increase in official reserves. China’s current accounts surplus in 2008 of $261 billion is nearly 11% of GDP or $250 billion.
 
Much of these large capital inflows might have been motivated by market expectation that the RMB would continue to appreciate against the dollar at a rapid pace, and that having a short USD/CNY exposure was a high-yield zero-risk investment. Thus, rather perversely, while Beijing's ultimate objective of bringing the value of the CNY more in line with the economic fundamentals should eventually lead to a more sustainable balance of payment position, the process of getting there is inflationary.
 
Related to this question are the concepts of the ‘fair value’ and the ‘equilibrium value’ of USD/CNY. The former is the value of USD/CNY that is consistent with the underlying economic fundamentals while the latter is the value of USD/CNY that will help to close China’s balance of payment surplus. Current spot USD/CNY rate is already close to ‘fair value’. However, to close China’s balance of payment surplus, USD/CNY would probably need to decline by another massive 50%. A 50% appreciation of the RMB would cause unimaginable instability not just for China but the whole global economy. US retail trade would collapse and interest rate would rise through the roof.
 
Next: The New Deal Dollar and the Obama Dollar