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SPEAKING FREELY
China-US trade: The game's
afoot
By Paul Nash
Speaking Freely is an Asia Times Online
feature that allows guest writers to have their say.
Please click here if you are
interested in contributing.
It is said
that Socrates, the celebrated philosopher of ancient
Greece, once asked a traveler on the road to Athens
about the character of the people in the city from
whence he came. The traveler replied that he had found
them to be the most ignoble sort - liars and cheaters
all. Socrates told this man that when he arrived in
Athens he would likely find the people there to be no
different.
Socrates then asked another traveler
along the road the same question, and the traveler
replied that the people of the city he had left behind
were quite the opposite, noble and of good character.
Socrates informed him that he would no doubt find the
people of Athens to be the same, thus illustrating his
point that what one perceives in the world is what one
inevitably finds - a kind of psychological
self-fulfilling prophecy.
China, like Socrates'
travelers, seems destined to fulfill the prophesy of the
US-China Economic and Security Review Commission that it
is not "playing by the rules of the international trade
game", as Richard D'Amato said in a hearing last month
of which he was the vice chairman.
The hearing
was convened in Washington, DC, to solicit US
perspectives on China's national investment and
industrial strategies, US production and high-technology
transfers to China, and China's currency exchange-rate
policies. While the commission's brief is to seek to
gain a better understanding of how these dynamics impact
the US economy, particularly the manufacturing sector,
D'Amato has already charged Beijing with promoting
unfair subsidies and mercantilist practices that are
adverse to US national-security interests.
I
would have been surprised if D'Amato had reported
differently. After all, his commission was not set up to
determine whether or not China is playing by the rules.
It was established on the premise that China will likely
not play by the rules, resulting in a "distorted
transfer of US economic treasure to Beijing" and posing
a threat to US national security.
Each year, the
commission submits a report to the US Congress, in both
unclassified and classified forms, analyzing the
national-security implications and impact of the Sino-US
bilateral trade and economic relationship. It also makes
recommendations for legislative and administrative
actions to address distorted trade transfer and, in
D'Amato's words, to "put the brakes on it".
The
12-member commission, "with expertise in
national-security matters and United States-China
relations", was created in 2000 and was in effect born
of the debate over granting China permanent most-favored
trade status. The administration of president Bill
Clinton had maintained that China would "play by the
rules" and not promote permanent unfair subsidies or
mercantilist practices.
Sandy Berger, Clinton's
national-security advisor, at the time said it was in
the United States' "vital national-security interests"
for China to be granted these important trade
concessions. The Clinton administration, which pursued a
policy of greater engagement with China, believed that
increased economic growth and reform in China would lead
to higher standards of living, which in turn would
create an environment more conducive to democratic
reform.
Ambassador Charlene Barshefsky was one
of those at the forefront of championing the potential
benefits of China's entry into the World Trade
Organization (WTO). As the US trade representative and a
member of Clinton's cabinet, Barshefsky was the
principal trade policymaker for the United States from
1997 to 2001. In response to the US State Department's
misgivings, she contended that China's entry into the
WTO would in fact "help to anchor the relationship
between China and the United States in a most
fundamental way".
Clinton sent Barshefsky to
Beijing in 1999 to negotiate the historic market-opening
agreement, for which she earned a popular reputation in
China as one of the "toughest American negotiators".
About two years afterward, I asked Barshefsky whether
the relationship, in her view, had been moving in that
direction.
"Generally speaking", she said, "on a
trend-line basis, US relations with China have been
improving over the last decade post-Tiananmen Square.
The United States and China have had a very stormy and
emotional relationship for many, many years.
"Often, neither side has seen benefits to
cooperation - and often neither side has been able to
cooperate even on matters of mutual interest because the
relationship has so often been characterized by very
deep mistrust and fundamental divergence of values. The
WTO relationship will help, I think, to alter the
equation for both sides. There will be a greater cost in
non-cooperation and a greater desire, in any event, to
cooperate. So I do think that the WTO is certainly one
anchoring element in what will have to be continuing
diplomatic work to shore up the relationship.
"Many Americans are, of course, uncomfortable
with the way in which China is governed. From my point
of view, that may be perfectly legitimate but should not
suggest that the United States should repudiate China.
What it suggests to me is that the benefits of
cooperation and engagement can help alter a situation,
again over time, with which many Americans are still
uncomfortable."
The benefits of engagement with
China still exist. But the current state of the US
economy, particularly its declining manufacturing
sector, has prompted some Americans to point the finger
of blame overseas with renewed vigor.
The United
States is quickly losing its manufacturing
competitiveness to China - there is little disagreement
about this. The US manufacturing sector has undergone
unprecedented changes over the course of the past
decade, shedding millions of jobs in the past two years
alone. Fifty years ago, the US was a manufacturing
powerhouse. Its manufacturing sector employed 29 percent
of its workers. Today, little more than 10 percent of
the total US workforce remains employed in
manufacturing, their standard of living greatly eroded.
Basic, labor-intensive, low-technology
manufacturing in the United States has been hit
particularly hard. China, with its enormous, inexpensive
labor market, advancing technology and expanding
production base, is clearly emerging as the dominant
global manufacturing center - the "workshop of the
world".
Although China is the United States'
fourth-largest trading partner, it has the largest trade
surplus with the US. The US National Association of
Manufacturers recently reported about 50 percent of US
manufacturers surveyed indicated that China was their
main source of competition.
The United States is
indeed losing manufacturing jobs. But to lay the blame
at China's doorstep is misleading and ignores some basic
economic facts.
When Socrates questioned the
travelers on the road to Athens, he was demonstrating a
point: in order to find knowledge, people must first
know themselves.
In attempting to understand the
dynamics of the US manufacturing sector, Americans
should first look within their own economy, not
overseas, for reasons. If they do so, they will find
that the path taken by the US economy itself over the
past decade has contributed enormously to the erosion of
America's basic manufacturing capacity.
First,
during the 1990s, the US economy experienced
unprecedented growth at a time when economies around the
globe stagnated. At that time, the Asian economy was
recovering from a severe financial crisis; the Japanese
economy lay flat after its bubble had burst; Europe was
battling a slowing economy by trying to patch together
the European Union; and the Russian economy was
scrounging to meet massive social security payments.
As a result, the gap between the earnings of
ordinary US residents and people in the rest of the
world widened. In 2001, for example, the estimated gross
domestic income (GDI) per capita in China was US$890,
compared with an average annual wage of $45,580 per
capita in the United States. Expansion of this earnings
gap in the 1990s led to low-value-added, labor-intensive
manufacturing operations moving offshore. The impetus to
move overseas intensified when the US economy neared
full employment.
Second, China's production
capabilities improved considerably in the 1990s. The
advent of the microchip has made advanced technology
more readily available and much less expensive. China
has aggressively availed itself of this technology,
allowing it to increase both production and quality at
low cost.
In the United States, the dot-com
fever diverted enormous amounts of resources to the
development of technology that ultimately went to waste.
Investors poured huge amounts of venture capital into
technology start-ups between 1995 and 2000, to the point
the terms "venture capital" and "technology start-up"
became virtually synonymous. Market capitalization of
these firms soared to outlandish levels, only to fall
back again to virtually nothing. Many firms ultimately
filed for bankruptcy.
During this time, only a
small portion of US venture capital went into the
manufacturing sector. China, however, received
unprecedented levels of foreign direct investment (FDI),
much of it directed to the manufacturing sector.
Although US companies improved their productivity by
automating production and streamlining assembly, US
investments in capital equipment lagged far behind
China.
That lag in investment in effect narrowed
the gap between the two countries' overall manufacturing
capabilities, and allowed China to gain the upper hand
in basic manufacturing.
Capital expenditures and
individual spending in the United States have declined.
Companies make capital investments based on projected
revenues, and consumers spend money based on their
projected earnings. The bursting of the US technology
bubble and the subsequent decline in financial markets
have conspired to shorten the expenditure span.
In fact, the United States now has a negative
savings rate, and both companies and individuals are
spending money through loans. This has caused the US
spending machine to grind almost to a halt. Many
industries, such as telecommunications and airlines, are
now suffering from excess capacity. US companies are
working harder than ever before to reduce overheads and
cut costs.
This is not to say, though, that the
bursting of the US economic bubble is chiefly to blame
for the United States losing its manufacturing
advantages relative to China. Many other factors have
contributed, including China's enormous population, its
production-oriented economy, its engineering-oriented
education system and its export-oriented attitude.
Also, China has vigorously pursued an open-arms
policy aimed at attracting significant FDI and
technology transfers. The continual annual inflow of
more than 50 million new people into China's labor pool
has rendered it a formidable competitor in the
manufacturing realm. Moreover, China's factories have a
flexible, "can do anything" attitude, and Chinese
entrepreneurs seem to be greater risk takers than their
US counterparts.
Chinese companies are forged in
a highly competitive domestic environment, and they are
closely attuned to current market trends. Such factors
will undoubtedly ensure China's competitiveness for at
least the next 10-20 years, while the United States will
continue to move away from a manufacturing economy
toward a more service-oriented, information society.
D'Amato claims that China is to blame for this
decline in US manufacturing because Beijing has
promulgated "artificially pegged exchange rates
calculated to give China across the board highly unfair
advantages vis-a-vis its so-called trading 'partners'".
This makes it cheaper for US companies to buy products
made in China.
One question comes to mind,
though. If US workers are losing their jobs because
products are being purchased more cheaply in China, are
US consumers, by the same token, not benefiting from
paying less for their goods? The effect is not a net
loss but a shifting of benefits from the US worker to
the US consumer. In fact, the United States benefits
from being able to exploit a cheap labor force in China.
Americans seem content with this shift. After
all, US consumers are not forced to buy Chinese
products. When they walk into a store, they purchase
them of their own free will. Chinese products are
clearly labeled "Made in China". And US companies have
by no means hesitated to avail themselves of China's
cheap labor. Wal-Mart, for example - a home-grown US
company that once prided itself on selling only goods
"Made in the USA" - has now become the largest importer
of Chinese products into the United States.
While championing the cause of "the worker is
noble", then, the US-China Security Review Commission
should not forget that Americans are buying from China
of their own free, democratic will.
The
commission contends that China is growing stronger as a
result of its unfair trade practices with the United
States, but the democratic reforms that were supposed to
come hand in hand with economic reform have not emerged.
The commission cites Beijing's handling of the SARS
(severe acute respiratory syndrome) health crisis as an
example of China's unwillingness to embrace
Western-style openness.
"Democratic reforms have
been squelched in China after some brief flicker of hope
in connection with the SARS health crisis," D'Amato
said. "Openness is still treated as an enemy of the
governing regime. The regime maintains tyrannical
practices in a widespread gulag against its own people."
But there is another perspective. Who would have
thought 10 years ago that the mayor of Beijing would
have been sacked so quickly for mishandling the SARS
crisis? And who would have thought 10 years ago that a
mass demonstration of some 600,000 people could have
taken place peacefully this summer in Hong Kong - a
protest, no less, against moves by Beijing that would
impede the institutions of democracy in Hong Kong?
Progress is evidently being made, albeit more
slowly that some would like. There are, of course,
legitimate concerns for social stability in China that
necessarily dampen the pace of reform. Ironically, many
prominent US business people engaged in trade or
investment with China have told me they would not want,
if indeed it were possible, to flip a switch that would
turn China into a Western-style democracy overnight.
It is well known that economic reform in China
has created a great divide between those in urban
centers, primarily in east-coast cities, and those in
rural areas to the west. It is feared that if China
somehow became a democracy overnight, the vast majority
of people in China who have not experienced many
benefits from reform would vote into power a hardline
Communist Party that would put the brakes on the
remarkable economic and democratic reforms that have
been taking place over the past two decades.
The
US-China Security Review Commission's website posts
scores of articles written by various Chinese military
officials and academics. Many of these articles explore
the modernization of China's defense infrastructure
within the context of China's economic reform and
development.
This gathering of material no doubt
appears quite disconcerting to US readers. Juxtaposed as
it is to issues of Sino-US trade and investment issues,
the unspoken allegation is that China's membership in
the WTO is allowing it to modernize and build up its
military machine to challenge the United States. I would
bear three points in mind, though.
First, such
articles were written by military officials and
defense-budget analysts in China whose job it is to
contemplate all possible ways of increasing defense
budgets. One may look for such articles in any country
and find them in abundance. The fact that some such
people have contemplated ways of increasing a defense
budget within the context of a growing economy should
not, in itself, lead to the conclusion that this was or
is China's goal in entering the WTO.
Second,
while China is clearly concerned about national and
regional security, it presents less of a threat to the
US than the US does to it. After all, China does not
have an extensive military presence in close proximity
around the United States, it does not routinely fly
military reconnaissance aircraft up and down the US
coastline, it does not bomb US diplomatic missions
abroad, and it does not supply massive amounts of
military hardware to a potentially hostile island
situated just off the US coast. China naturally would
like to modernize its military commensurate with its
growing economic and diplomatic strength.
Third,
the United States itself is the largest supplier of arms
to China today, and has been for many years.
As
Barshefsky asserts, there are more benefits to continued
engagement with China than there are to repudiating
China. Such engagement is, by no means, easy - it is
complex, it is oftentimes frustrating, and it involves
much trial and error.
Speaking Freely is
an Asia Times Online feature that allows guest writers
to have their say. Please click here if you are
interested in contributing.
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