Obama and McCain’s Olympian China Error

If you've been absorb-ing the ubiquitous media coverage of the Beijing Summer Olympics, you might be getting a bit China-ed out right about now. But if you're a presidential politics junkie, probably not so much. So far this campaign season, "Rising China" has been the panda in the corner, pretty much ignored despite being the obvious subtext to almost all of America's economic challenges.

Take Barack Obama, for instance. In his campaign's 59-page "Blueprint for Change," China is mentioned but twice, neither time in explicitly economic terms. And in a series of policy speeches this summer, Obama hasn't mentioned China at all. Nor has John McCain been any better. He didn't say a word about China in a showpiece economic speech last month.

As they say in bad movies, "It's quiet out there, too quiet." But true enough when you recall that we're talking—or not talking—about an economic competitor whose government holds a cool trillion dollars in U.S. securities. And while China's warp-speed economy may be as big as America's in a few decades, it's already supplying a major chunk of global economic growth as the U.S. and European Union economies slow.

Nervous. So attention should and must be paid. The leaders of the aforementioned global growth engine are more than a little nervous these days—and we should be, too. The Chinese Politburo recently declared that the nation had twin economic priorities, to both fight inflation and keep growth steady. China experts consider this stance a major change since the focus of monetary policy has been purely on controlling inflation.

But no more, says international economist Donald Straszheim. "Beijing is increasingly fearful that growth will slow to a level which will not create sufficient new jobs to fuel the rapid rise in living standards the country now enjoys." In short, Chinese leaders equate slower growth with dangerous political instability. And to keep growth clicking along, Straszheim expects the government to slow the appreciation of the yuan to just 4 to 5 percent over the next year vs. a 15.7 percent rise during the past 24 months.

Now there's your trouble, folks. Democrats in Congress have been concocting all sorts of legislation to punish China for moving too slowly to boost its currency as a way of reducing its huge trade surplus with America. Such efforts had little chance of success given slim congressional majorities for Democrats and a pro-trade president in the White House. The yuan's slow but steady rise also helped deflate opposition.

But the next election may result in huge Democratic majorities and a President Obama, who would probably be more favorably disposed to a tougher trade position, or a President McCain, whose free-trade sympathies could be swamped by the anti-China tide coming from Capitol Hill. A weak economy in 2009 would further raise the chances of China's playing the role of scapegoat. Get ready for a protectionist backlash from an economi-cally anxious America.

You think the economy is bad now? Add a Chinese recession or a trade war with China into the mix, and the current ugly scenario starts to turn downright scary. Like 1930s scary.