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What now: The future of U.S-China trade relations

Commentator David Frum.

TEXT OF COMMENTARY

Kai Ryssdal: One of the questions on our minds this week, as we greet 2011 full of enthusiasm for the news yet to come, has been this: What now? What will this year bring that we'll have to come to grips with?

Today, commentator David Frum's thoughts turn to foreign trade.


David Frum:The financial history Niall Ferguson calls it "Chinamerica," the strange hybrid relationship across the Pacific. China exports, the United States imports. China lends, the United States borrows. China is growing fast, the United States is not growing fast.

What's next in this relationship? Here's one prediction: The Chinese currency will increase in value again, as it has increased before. From over eight to the dollar now to just over six, soon to... who knows?

By keeping the Chinese currency low, China has accelerated its exports. It has also accelerated its own inflation. The price of cooking oil jumped by over 27 percent in China in the past year. That's the stuff of which revolutions are made. Never mind what is happening to the price of real estate.

So they will up value sooner or later, as they have done before. They will have to.

But what happens then? Americans might reasonably expect that a higher-currency China will be less competitive. They expected the same of Japan as the yen rose in value in the 1970s and 1980s. Instead, Japan migrated up the added-value ladder, industries shifting from more basic to more sophisticated goods. There's no reason that China can't follow and it likely will.

People speculate about China "dumping" its dollars: Abruptly selling it's dollar-denominated bonds forcing an asset crash. Why would they do that? But sooner or later they will want to use those dollars. If they don't want to buy American goods, they will buy American hard assets, again as the Japanese did. Look for Chinese investment in U.S. real estate and Chinese purchases of U.S. companies.

This sounds like it could be a formula for synergy. If we were dealing with a country that was already a good friend, like Japan, so it would be. As is: Expect conflict.

Ryssdal: David Frum is editor of FrumForum and a former speechwriter for President George W. Bush. Our commentary series "What Now?" wraps up tomorrow with a peek into the future of the tech geek. Your views and previews are always welcome.

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