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    Greater China
     Oct 7, 2010

Perils of forgetting why China matters
By Benjamin A Shobert

The conventional wisdom about China has rarely been more put to the test that after last week's congressional passage by a vote of 348-79 for the "Currency Reform for Fair Trade Act". Analysts and policy makers alike have been quick to project all sorts of meaning onto what should be made of this.

For some, particularly those who believe China's growth has largely come at the now-unacceptable expense of American jobs, the bill represents a political victory, even if only a symbolic one whose actual impact on the American economy remains to be seen. For this group, actual passage of last week's bill is an important step forward from several years ago, when in 2007 legislation with similar intentions was introduced by Tim Ryan


(Democrat - Ohio) and Duncan Hunter (Republican - California), but did not have the critical mass of congressional support to make it very far.

Other voices have attempted to minimize the importance of last week's events: in particular, those that have been more accommodating to China's currency policy and who see parallels between what China does and what most export-intensive, emerging-economies tend to pursue with respect to their domestic currencies. While acknowledging the bill's passage as unfortunate, most in this camp have attempted to argue that this recent step is largely meaningless and toothless. They have been quick to suggest that the Currency Reform Act should be understood primarily as political posturing for American mid-term elections, as well as a signal to Beijing in advance of upcoming economic discussions between the two country's leadership.

But regardless which group you may find yourself in, the unsettling reality that seems to unite both perspectives is that we are forgetting why China matters, and that amnesia is dangerous for everyone.

For the first time in almost two decades, over the last several months many Americans have found themselves wondering what the world would look like if China was not a part of it. Not from the perspective of a consumer - although it would make for an interesting exercise to try and completely break away from consuming any Chinese-made products in America's day-to-day life; rather, what would the world look like without China as an active participant in globalization?

In the midst of our own economic anxiety, many Americans seem ready to rewind the clock, to go back to a time and place when China was an economic backwater, isolated from the world's developed economies. Actions like those from congress last week too quickly overlook the benefit American consumers have enjoyed from doing business with China, as well as how generally positive China's gradual (if, at times admittedly halting) entry into the role of one of the world's responsible stakeholders, has been. It makes for an especially timely thought experiment to ask: what the world would look like if China had not opened up after Nixon's historic trip in 1972?

Would China be a dysfunctional cousin to the Soviet Union? Would they be a much bigger version of North Korea, with over a billion - instead of Pyongyang's several million - mouths to feed, starving and angst ridden, using as leverage their nuclear weapons and military as a means of feeding themselves, or even worse as a vehicle for chasing some imaginary international status that had long ago dissolved into the background?

And what would American business, even the whole national economy, really look like without Chinese made products? Would product innovations we now take for granted be out of reach for the average American consumer? And absent both economically accessible innovation and the untapped domestic markets in China, what would animate American business? At one point in the not too-distant past these would have been extravagant thoughts, but as the American economy has continued to implode, it seems policymakers are increasingly pointing towards China as a party to blame, which begs the question of what exactly our world would look like today if they had their way, and China was not a part of it?

Until the American economy crashed and the country's own economic insecurities came to light, it was not clear how much between the US and China could change, and how we have taken this relationship for granted. As fears over the US economic situation have grown, so has its frustration with China. The traditional arguments for overlooking China's currency policies, economic nationalism, human rights failures, and lack of political liberalization are no longer accepted. Now, and unfortunately in tandem with frustration over our own situation, the political class in the US seems ready to address these grievances with China.

On both sides of the aisle, for different reasons, lines are being drawn against China by those who believe that if China's economic ascent could somehow be cut short, the malaise of the American economy will simply go away. As last week's passage shows, this simple abstraction, always loitering in the outer wings of Washington's political conversation, is beginning to gain traction.

Regardless of the other ideological incompatibilities between the two parties in Washington, increasingly large segments of both now agree that China's currency policy and national mercantilism are bad for American business, and both want increasingly aggressive trade remedies. Last week's action alone might not seem like a big adjustment, but it is, and it holds the potential to up-end the nature of the relationship between our countries.

Perhaps most importantly, America now finds itself negotiating with China from a position of perceived weakness. This is profoundly unfortunate because it shows how little Americans understand about the enormous gulf which separates Chinese standards of living, political institutions, and real power from what the US continues to enjoy.

Powerful interests are at play in this conversation. Companies like Wal-Mart, Home Depot and Best Buy simply cannot operate without easy access to China's manufacturing sector. Their business models evolved in concert with, and are now deeply enmeshed with, China's entry into the global supply chain.

On the other end of the spectrum are the labor unions, whose understandable fear of future job losses drives them to advocate for the most equitable terms of trade between the two countries they can and, where possible, to secure trade protection if they so desire it. For most of the last two decades, these communities have been able to keep one another at bay, in a sort of economic detente, largely because the American economy remained prosperous and growing. But as job losses mount and concerns over America's future grow, it has become increasingly difficult for the tensions between these groups to be avoided.

It may be possible to wait this all out, to trust that America's economy will again find its footing, and that China will develop a clearer understanding of what its trade partners expect from it in terms of its national economic policies and its need to further liberalize its political institutions. However, as the current recession drags on, this has become an increasingly tenuous idea, and it has begun to occur to many in the China policy community that this time things might really be different.

Those who believe staying connected to China is good and necessary have a challenge to go back and convince others of this, to cover ground that many may feel is old and well-worn. But on the off chance that this moment in time is different, and perhaps only so because of America's economic position and overall insecurities, then they must again prove, using this moment and today's facts, why China matters. This is no small challenge, as the last 12 months have not been kind to US-China relations.

As Americans - victors of the Cold War, advocates and enablers of globalization, progenitors of the Internet revolution - we are unsure how to greet these new economic realities. For most of the last 20 years, major shifts in the global economy or big changes in international governments have been to our advantage. On the relatively rare occasion when a short-term recession would buffet America's shores, concerns over jobs which had been shipped overseas or a diminishing manufacturing sector would present themselves; but, given the short duration of recent recessions, inevitably these concerns would dissipate as the economy regained its footing.

To say that Americans are feeling insecure at this moment might be an understatement. And, as is entirely understandable, we bring this to bear in our view of every domestic or international issue we encounter. Our relationship with China is no different. This charged environment has only been further challenged by several storylines over the last year which have done nothing to reduce tensions between the US and China: what to make of China's enormous holdings of US Treasuries, Google's announcement of Chinese spying and subsequent decision by the company to exit the market, and China's increasingly vocal disagreement on its responsibility for global warming, concerns over how it handles its domestic politics, and the US's ongoing support of Taiwan independence.

The cumulative effect of all this - the dull drum beat of quality problems of Chinese manufactured goods, needing Chinese capital to fund our domestic programs, seeing China's uglier proclivities as evidenced by its spying on human rights workers in China - has been to force many Americans towards a more hostile view of what it means to do business with China.

Taken together, it begs the question of whether we have forgotten, or perhaps taken for granted, that everyone understood and agreed upon why China matters to the US. Does this country, once deemed so critical to US' international geopolitics, a necessary counterweight to the Soviet Union, no longer matter?

Can it no longer be viewed as someone we can work with? And perhaps most importantly, if we no longer can view China in a constructive light, where does that leave the two countries? Is it even possible to envision a future with some sort of economic equivalent to the Cold War? Wouldn't such a world be one in which globalization had been rejected? And if globalization is rejected, what does the world look like then?

The question remains: why does China matter? To answer this, perhaps we should reflect on three ideas.

First, China matters because the world has no viable alternative method for bringing a reclusive, isolated and dysfunctional country from near starvation to a growing economy than to encourage it to trade on the small set of comparative advantages it has. For China, this was inexpensive labor. If we are not going to allow China this option, it is likely we do so as a result of insecurities we have about our own future.

Second, we must ask ourselves if our frustrations with China are misplaced. China is, in the most real sense, a mirror for American inadequacies. We should see in lost jobs entire industries that have not evolved and created new opportunities for the working American. We should see in Chinese-held US Treasuries no illicit goal on the part of Beijing, but an out-of-control American government unable to live within its means.

Last, we need to remind ourselves that a competitive China would not be possible without the global success of the American way of doing business. That we may feel in the short term they are beating us at our own game is not to say we are out of the game itself; no, if America's story says anything, it is that we are capable of absorbing enormous challenges, re-tasking government and business to meet new challenges, and moving forward.

Yes, China is a test of our will, spirit and culture, but if handled properly, America can use China to propel the country forward, to fix what is broken, and to prove that we can turn an enemy into a friend, a challenger to our national economy into a necessary trade partner. If we are unable to do this, history's lessons unfortunately hold out little promise for either country to find a peaceful outcome.

Benjamin A Shobert is the managing director of Teleos Inc (www.teleos-inc.com), a consulting firm dedicated to helping Asian businesses bring innovative technologies into the North American market. (Copyright 2010 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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