Stanford Progressive

Hearsay About Iran and U.S.-China Trade

By Lee Jackson, published November, 2011

The following is an excerpt from The Opportune Time, a free weekly financial newsletter:

Quick Summary
✦   What’s All the Noise About IRAN?
✦   The CHINA-U.S. Policy Puzzle

The top headline regarding U.S. politics this past week was the rumor that a U.S. strike on IRAN was imminent. After an International Atomic Energy Agency (IAEA) investigation failed to conclude all nuclear activities in Iran have been for “peaceful” purposes, several mainstream news outlets speculated the U.S. and/or Israel may soon target Iran’s nuclear facilities. In my opinion, the Western media overhyped the dynamics among the U.S., Israel, and Iran for a few reasons.

First, note how I said the IAEA report failed to conclude Iran was using its nuclear facilities for peaceful purposes. In the investigative world, there is a difference between a report that does not reach a conclusion and a report that confirms a suspicion. Many Western media articles reported that the United Nations (U.N.) found evidence that Iran has been working to develop a nuclear weapon. The full text of the report released by the IAEA, an organization that reports to the U.N., says the investigation was “unable to conclude” Iran has peaceful intentions for its nuclear program.

In fairness, the report does cite “serious concerns regarding possible military dimensions to Iran’s nuclear programme.” I encourage you to look at the full text of the report to arrive at your own view. Personally, after reading the IAEA’s conclusion, I better understood why many non-Western countries labeled the investigation as politically motivated.

Regardless of which news outlet, if any, you believe, the actions of politicians suggest a strike on Iran is unlikely for the time being. Contrary to popular belief, many Israeli military and intelligence leaders do not support deploying military force on Iran. The face of the Israeli government, including PM Benjamin Netanyahu and Defense Minister Ehud Barak, has been pushing for a military strike. PM Netanyahu and Defense Minister Barak are shown from left to right in the photo on the left. But Nahum Barnea, one of Israel’s most prominent journalists, reports that many top Israeli government officials are pushing back on the stance shared by the PM and the defense minister. In addition, earlier this year, the former head of Israel’s external spy agency deemed an attack against Iran “the stupidest idea (he’s) ever heard.”

Due to his aggressive stance, PM Netanyahu seems relatively isolated not only in the Israeli government, but also in the international community. According to reporters at the most recent Group of Twenty (G20) summit, French President Nicolas Sarkozy told U.S. President Barack Obama that he “can’t stand (Netanyahu),” and called the Israeli PM a  “liar.” President Obama replied to the French leader, “You are sick of him, but I have to work with him every day.” Neither President Sarkozy nor President Obama seems eager to side with PM Netanyahu at present.

President Obama largely has avoided using Iran and language related to physical force in the same sentence. Of late, the U.S. president has spoken relatively frequently about Iran, but mainly in response to the IAEA investigation and to a few Republican presidential candidates, who have called for tougher action on Iran. President Obama has said current economic sanctions against Iran have had “enormous bite,” and that he is working with Russian and Chinese leaders to form a “common response” to Iran’s so-called energy policy. Although news reports allege Iran is building its military presence in Iraq as the U.S. exits, I have a tough time imagining the U.S. would strike Iran immediately after withdrawing from its neighbor. A strike against Iran would be politically risky for the White House for a few reasons. Americans may disapprove of another war, given the failure of  the U.S. military to achieve its original objectives in Iraq. In addition, the debt super committee, which has shown signs of success recently, would have to return to the drawing board to cut spending to fund the attack. Imagine how the public’s opinion of Washington, D.C. would fare if Congress had to debate deficit cuts again. Lastly, a strike on Iran likely would increase tensions with Russia, CHINA, Iran’s number one oil customer, and other large economies. Launching an offensive against Iran would undermine the work the international community has done to welcome Russia into the World Trade Organization (WTO), and to push China to further open its trade policies. 

On Saturday at the Asia-Pacific Economic Cooperation (APEC) summit, President Obama toughened his rhetoric toward China. The U.S. leader warned Chinese President Hu Jintao that Americans have been growing “impatient and frustrated” over trade relations, and declared China’s currency and intellectual property right policies “not acceptable.” In response, President Hu stressed cooperation over confrontation, and highlighted that China has allowed its currency to appreciate. President Hu also emphasized that the U.S. has restricted Chinese investment options in America. As exemplified by rhetoric from the leaders of the two countries, trade tensions between the U.S. and China are notably elevated.

I am concerned disagreements between the U.S. and China may escalate into a more serious conflict in the future. The U.S. considers China’s currency policy, which pegs the yuan (CNY) to the U.S. dollar (USD), protectionist. Many U.S. economists commonly cite the CNY/USD peg as a main contributor to the trade deficit America runs with China. However, I can tell you from my current experience in Beijing that the reason Chinese exports are cheaper than their American counterparts is wages are significantly lower in China than in the U.S. U.S. and Chinese wages will converge naturally as China’s economy develops and productivity increases. But the U.S. will have to be patient, as it has been with other countries whose wages are lower. In my mind, wage differentials are the main contributor to the U.S. trade deficit with China.

At the same time, China has called some U.S. trade policies protectionist, including the current Trans-Pacific Partnership (TPP) project. During the APEC summit over the weekend, leaders from the U.S., Australia, New Zealand, Malaysia, Brunei Darussalam, Singapore, Vietnam, Chile and Peru laid the groundwork for  the TPP, a free trade agreement (FTA) intended to liberalize commerce among the nine aforementioned nations. Japan, Canada, Mexico, and Indonesia also may join the TPP. The deal certainly is positive for the countries involved. But given the TPP excludes the world’s second-largest economy, I am concerned about how cooperative China will be with its neighbors and the West in the future. I hope U.S. and Chinese leaders form stronger economic ties to avoid a repeat of the protectionism that characterized the Great Depression.

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Author Name and Electronic Mail Address:   Lee Jackson |

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