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U.S. Losing Leverage to China?

A Chinese 100 renminbi (yuan) note is held up in front of the Shanghai skyline.
Mark Ralston / AFP/Getty Images
AFP/Getty Images
A Chinese 100 renminbi (yuan) note is held up in front of the Shanghai skyline.

The candidates took turns attacking China and warning that the U.S. is at risk of losing its leverage as the dominant player in the world economy. That's a hard argument to support — at least in the short term — because the U.S. is a dramatically larger economy than China.

The U.S. GDP is more than five times as large as China's, and far larger on a per capita basis. The U.S. share in world trade is nearly double China's. And the U.S. has an incomparably larger share of global capital markets, money flows or any of the other metrics used to measure importance in the global economy. China is, certainly, growing at a fast clip and its importance is growing just as quickly. But its economy is still so much smaller than the U.S. that it's hard to imagine China will overcome the U.S. as a dominant economic power in the next decade.

Most of the candidates said that the U.S. has, as former Sen. John Edwards (NC) said, "not held China accountable" under the Bush administration. One can argue about whether President Bush's efforts have been successful, but he certainly has not ignored the issues.

Many in the U.S. are concerned that China manipulates its currency, the renminbi, to keep it artificially low against the U.S. dollar. The idea is that this manipulation distorts global trade in a way that benefits China and hurts the U.S.

Under President Bush, the Treasury Department has held near-constant negotiations with China's finance officials over their currency interventions. The Chinese did revalue the renminbi by a few percentage points. This is nowhere near the 20 to 40 percentage points many want, but it's something.

Another key issue in the debate was over China's export of unsafe goods.

Sen. Obama had the strongest proposal, arguing that the U.S. should ban all imports of toys from China. Others said they would never buy Chinese-made goods for their own children or grandchildren.

It's a bit hard to reconcile these strong views with the facts.

So far, in 2007, far fewer than 1/100th of 1 percent of China's toys exports to the U.S. have been recalled. A majority of the recalled toys had U.S.-made design problems, not Chinese-made manufacturing problems. The few children who are known to have been made sick swallowed magnets that separated from the toy (clothes for a doll in one instance). After press reports blaming China circulated for weeks, Mattel finally apologized to its Chinese contractors and acknowledged that Chinese factories were not at fault in this particular recall.

In short, it's hard to see exactly why this issue has risen to the level of such intense presidential-candidate scrutiny. China does make about 80 percent of U.S. toys.

A total ban on Chinese-made toy exports would probably mean severe shortages of toys in the U.S. for some time, as capacity is built elsewhere. In times of severe shortage, markets generally become so distorted that black markets appear and safety standards disappear. Banning Chinese-made toys would almost certainly lead to a huge rise in unsafe toys.

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Adam Davidson
Adam Davidson is a contributor to Planet Money, a co-production of NPR and This American Life. He also writes the weekly "It's the Economy" column for the New York Times Magazine.