Stephen King: Bush threatens to turn up the heat on China, but the US could get burnt

Protectionism is an extraordinarily blunt instrument, a policy that leads to unintended and all too often unfortunate consequences

I sincerely hope that Chinese policymakers have access to a collection of asbestos shoes because, according to Rob Portman, President Bush's nominee for US trade representative - and a man seemingly in a hurry to establish his hawkish credentials - "we need to hold their feet to the fire". This charming approach to international trade relations no doubt went down well in front of the Senate Finance Committee last week but the reaction from Beijing will, presumably, be somewhat more frosty (a good thing too: a cool reaction will help to soothe the burns.)

I sincerely hope that Chinese policymakers have access to a collection of asbestos shoes because, according to Rob Portman, President Bush's nominee for US trade representative - and a man seemingly in a hurry to establish his hawkish credentials - "we need to hold their feet to the fire". This charming approach to international trade relations no doubt went down well in front of the Senate Finance Committee last week but the reaction from Beijing will, presumably, be somewhat more frosty (a good thing too: a cool reaction will help to soothe the burns.)

America's new-found hostility towards China doesn't stop there. The Treasury Department has decided to adopt a more "Rambo-esque" approach to Sino-American relations, demanding that Beijing should revalue the renminbi not next week, and not even next month, but now.

America, so it seems, needs immediate action from China: anything less just isn't good enough. And, as if to add insult to injury, no lesser man than Alan Greenspan, the chairman of the Federal Reserve, has suggested that it would be in China's own interests to revalue the renminbi because the alternative - excessive domestic liquidity, a side effect of persistent foreign exchange intervention - would eventually lead to rampant Chinese inflation.

At least Mr Greenspan had the courtesy to argue that a revaluation of the renminbi might be in China's interests. The rest don't seem too bothered about China's aspirations at all, instead preferring to think about the threat to America, and to American jobs, that stems from persistently cheap Chinese exports. In the midst of all these worries, protectionism is rearing its ugly head: Congress is pondering whether to impose huge tariffs on Chinese exports unless China agrees to revalue the renminbi within the next few months.

This is not the first time the US has demanded action from a recalcitrant trading partner. Over the years, the US has frequently pointed its finger at others and demanded action. In the 1980s, Congress threatened Japan with tariffs unless the Japanese allowed the yen to rise and, at the same time, boosted domestic demand. At the beginning of the 1970s, President Nixon imposed import tariffs on other members of the Bretton Woods exchange rate system, and removed them only when the other countries agreed to revalue their currencies against the dollar.

China would do well to look carefully at these two episodes before acquiescing to US pressure. In the 1980s, Japan did exactly what the US demands of China now: the yen rose, Japanese interest rates were cut and the Japanese economy boomed. Japan's trade surplus did come down - as Congress had demanded - but the cost to Japan was, ultimately, enormous: a stock market and land price bubble, a serious misallocation of resources and, eventually, a sad descent into deflation and economic stagnation.

In the early 1970s, the initial revaluation of exchange rates within Bretton Woods didn't amount to very much. But the revaluation revealed to speculators that the Bretton Woods system was no longer one of fixed exchange rates but, instead, a system of adjustable exchange rates. George Soros's forerunners suddenly realised they could bet on the likelihood of further currency appreciation: by the beginning of 1973, the whole system was blown apart. Countries, now cut adrift from any kind of intelligible monetary framework, found themselves facing inflationary and financial market turmoil.

The bottom line is that protectionism is an extraordinarily blunt instrument, a policy that leads to unintended and, all too often, unfortunate consequences. So why do politicians ever go down the protectionist route in the first place? The obvious answer is votes. Politicians think they look tough when they're rattling a few sabres and standing up for the "national interest", and there's no doubt that Congress and, more recently, the US Administration think that a bit of China-bashing can only do some good.

It's not obvious, though, that the latest bellicose approach really is in America's national interest. China's emergence as an economic powerhouse cannot be denied, but to see China's emergence purely in competitive, antagonistic, terms is fairly silly. In part, this is because China has learnt from Japan's mistakes in the 1980s. Japan refused to have anything to do with Western companies, spurning attempts by them to get a foothold on the Japanese mainland. China, though, has actively encouraged inflows of foreign direct investment from Western companies. And, because of this, China's relationship with the rest of the world is, whether the US likes it or not, one of mutual dependence. Hurt China and you may, inadvertently, hurt yourself.

Workers in Western manufacturing industries have good reason to feel threatened by China's rapid growth. Yet this sense of foreboding is nothing new: Western manufacturing has been on a declining trend for decades and China's arrival only continues that trend. I doubt that many US Congressmen look back at the inefficient rust belt that dominated US manufacturing in the early 1980s with any degree of fondness, yet they're in danger of protecting the same sorts of businesses 20 years later.

Companies - and, more importantly, the shareholders who own companies (and I'm thinking here of all those people who have occupational pensions that, in turn, depend on company profitability) - should regard China as an opportunity, a chance to allocate capital more efficiently on an increasingly global stage.

Western consumers will also welcome China's emergence: Wal-Mart would never have achieved its phenomenal success without China's help, and Wal-Mart's success has doubtless been of benefit to US consumers.

For the West, then, the problem with China really lies with the seeming ambiguity of China's impact on the industrialised world. We worry about the potential loss of jobs. Yet we lose sight, in the process, of the income gains that come to us as consumer goods are produced more cheaply by Chinese workers. After all, if DVD players and televisions fall in price, we have more money left over to go on holiday, to eat out, to hone our torsos in health clubs or, for those so inclined, to slob out in front of Sky Sports Extra. And we lose sight of the potential benefits for our longer term financial health as corporate profits rise, boosting the value of our pension funds.

Ultimately, I don't think it's China that's at fault. What we're seeing, instead, is a growing paranoia from politicians who recognise that the free flow of capital around the world, and the opening up of new economies and labour markets, threatens their own sovereign power.

In the same week that American politicians decided to turn up the heat on China's leaders (or, at least, on China's leaders' feet), DaimlerChrysler provided yet another example of the blurred lines associated with China's emergence. Here's a company that is managed mostly by Germans, represents a merger between German and American companies and which, at the Shanghai motor show on Thursday, said that it was moving ahead with plans for a new factory in China to produce cars that will be exported to America.

I've no doubt that, if this venture takes off, China's trade surplus with the US will rise still further because these cars will be cheap. But who, if anyone, should we blame for this? The evil Chinese workers who are prepared to work for very low wages? The devious German managers, who have decided to take jobs away from Detroit and give them to the Chinese? The avaricious shareholders who demand profits at all costs? Or, maybe, the spendthrift US consumers, who are happy to carry on buying so long as the price is right? The reality, of course, is that all these people benefit. The odd thing, then, is that the injuries caused by US protectionist pressures might not be limited to the occasional Chinese burn: there's every chance that Rambo will end up shooting himself in the foot.