I dreamed I was a butterfly

…Now I wonder: Am I a man who dreamt of being  a butterfly, or am I a butterfly dreaming that I am a man?

Barack Obama, our first (soi-disant) Pacific President, has just been lectured by the Premier of  Communist China about the need for fiscal discipline at home.  Earlier in the year, Tim Geithner, our Treasury Secretary, was laughed at when he assured his normally polite Chinese audience that the American dollar is strong and they need not worry about the yuan value of all their investments in America.  Meantime, we accuse China of willfully poisoning our pets as well as our people.  Its exports, we say, rob the United States of jobs, and the government should take steps to restrict them. “There are at least two sides to each story, but no such thing as a free lunch” is the prosaic and American equivalent of Chuang Tzu’s iconic Taoist dream about a butterfly.

Here’s one side of the story, the familiar one that occasions such righteous outrage.  For the first three quarters of 2009, the US balance of trade with China was $165,801 million in the hole.    September was the worst month of the period.  So much for recession at least healing trade-deficit wounds. “But China, too, is experiencing recession – it’s worldwide!” you protest? Think again.  According to today’s TradingEconomics Global Economics Research, China’s economy is growing at an 8.90% clip, with unemployment a mere 4.30% and interest rates a relatively hefty 5.31%.

How many butterflies should we feel fluttering in our tummies here?   Not so very many as regards trade with China.  Very many as regards our domestic situation.

Here’s a second perspective.  What goes out the trade window must be held as cash or returned through the capital account.  It’s great to exchange real goods for paper, and saving and investing in our country help finance our debt and increase labor productivity. By June 2006, Chinese foreign exchange reserves totaled $699 billion, making China second only to Japan as foreign holders of U.S. securities like stocks and Treasury, U.S. agency and corporate debt. This year, China is our government’s largest foreign creditor.  If China didn’t purchase our debt, our interest rates would be much higher, thus increasing the burden of debt finance (already the fourth highest component of federal spending) and decreasing private investment, the source of most gains in productivity. While we worry what would happen if China pulled out, Premier Wen Jiabao has already voiced his country’s concern about what will happen to the dollar and therefore this trillion-dollar investment if we continue feckless government spending.

We’re in this together.  The economic benefits from trade, it seems, are as mutual as the vulnerabilities.  With its high savings rate – an estimated 39.7% of household disposable income for the last full year, China’s domestic prosperity depends on employment and income generated by American demand. America benefits from cheaper products and lower interest rates that make our national debt less expensive to finance and reduce its crowding out of private investment.

We must also be political partners in tackling the threats of North Korea and Iran.   Diversified as it is, US trade with China has created a vested interest in peace and facilitates the unconscious export of American values.   We should not underestimate the potential value of our under-the-radar cultural soft power in the transformation of China away from authoritarianism.  Our surest path to peace and prosperity may just be “Made with China.”