Page 2 of 2 China-US: A long, hot
summer By Benjamin A Shobert
that are strictly prohibited under
WTO rules persist - subsidies designed to distort
trade by increasing exports or limiting imports
into China. China also maintains a number of other
subsidies that distort trade and harm US
businesses, workers, and farmers. Those subsidies
need to be eliminated without further delay."
It is easy to forget that even if these
developments amount to nothing other than politics
as usual, this time may still yield different
outcomes than in the past. Overlooking what is
similar in
the
political hyperbole of yesterday and today
overlooks the important ways in which the climate
in Washington and the American people at large are
of different minds now than in the past.
Many felt that the transition of
leadership from Republican to Democratic
majorities in Congress would lead to moderate
escalation in language concerning US trade
policies toward China, but few felt that the
underlying strategy would change. In large part
this is still the case: only at the fringes of
both parties can you hear voices arguing for
entirely rejecting a policy of engagement with
Beijing. But move away from the fringes and what
becomes obvious is that broad bipartisan support
exists for legislation to introduce penalties
including tariffs and countervailing duties that
would have been dead on arrival in previous
congressional sessions. Paulson is aware of this,
which is why he rears the specter of protectionism
during his most recent comments.
Perhaps
the rare alignment of a troubled housing market,
fears of a related and uniquely US debt crisis in
the form of mortgage defaults, coupled with a
manufacturing sector loudly proclaiming the ills
of Chinese exports, and Washington is now finding
it must challenge the status quo on how it
interacts with Beijing. When traditional
supporters of trade with China such as Congressman
Manzullo and Senator Shelby signify that even they
believe they must support pieces of legislation
that require expanded accountability of China for
the country to continue exporting to the US, the
debate is no longer whether Washington has the
willpower to act, but what it will chose to act
upon. What remains to be seen is whether their
actions will be only politically expedient, or
prudent, measured and meaningful.
China
still very much needs a healthy US economy, but
among the changes an increasingly hostile trading
partner necessitates is diversification, which the
Chinese leadership is undoubtedly beginning to
entertain seriously. Professor Barry Naughton
testified at recent congressional hearings that
foreign firms still account for about 60% of all
Chinese exports, and that foreign firms operating
in China are responsible for more than 87% of all
technology exports. His comments were couched
within a discussion on the role of China's state
sector and its potential impact on the US economy,
but he illuminates the extent to which China is
still very much beholden to outsiders for its
economic well-being.
As the US begins to
flush out in detail how it will respond to what it
believes are unfair trade practices on China's
part, the Chinese government itself is going
through similar calculations about what it
considers unfair with its relationship with the
US. China's leadership is not naive, and those in
the US government who believe they can count on a
subservient and clumsy political class in Beijing
to play the surrogate to Washington's political
animas are mistaken. The president of the Economic
Strategy Institute, Clyde Prestowitz, recently
commented: "China knows it has precedent in its
favor, that what it is doing is no different than
what Japan, Ireland [and other countries] have
done, and that it should be treated no
differently."
If China knows it is being
blamed for ills not of its making, and of uniquely
US origin, at some point it will turn inward,
something it has done time and time again, as best
chronicled by Jonathan Spence in his classic To
Change China: Western Advisers in China.
Spence's analysis suggests many things
about China, not least that when the country has
gleaned what it wants from Western influence in
the form of technology and knowledge, or when
Western influence erodes what the Chinese believe
are unique characteristics of their culture that
are worth preserving, the country's leadership
will not hesitate to turn inward. Americans'
modern-day ears are somewhat deaf to this lesson
of history; supremely confident in the advantages
of globalization, we have become unwilling to
believe that the leadership in China today would
follow any of the same historical parallels of
their predecessors. While it may be unlikely that
Beijing would throw out Western advisers or freeze
foreign investments, a sort of economic freeze is
not unrealistic if the Chinese begin to feel that
they are being used as a vessel for misplaced US
frustrations.
While the political
leadership of both countries have their own
short-term considerations, the tone in Washington
suggests a greater acuity for change is building
in the US than in Beijing. The much-alluded-to
domestic discontent within China's peasant class
undoubtedly still exists and remains a threat to
the country's single autocratic political
institutions; but these concerns are likely
manageable as long as China continues to prosper
and grow. Conversely, as economic conditions in
the US, particularly in the form of job loss,
rising consumer debt levels, and personal home
foreclosures intensify, it becomes difficult for
Congress to be perceived as allowing the status
quo to continue.
China may well do all
that it can, which is significant given that the
country is projected to have an estimated US$1.7
trillion in foreign-exchange reserves by the end
of 2007, to preserve the vitality of the US
economy through the 2008 Beijing Summer Olympics.
But after this it may become increasingly obvious
that China cannot sustain both its own domestic
concerns with the ongoing drain represented by
servicing US debt. If such a moment comes,
Americans may wish that the US Congress had acted
in 2007 not to penalize China, but to embrace
meaningful fiscal reform, trusting that our house
being in order is the foundation of any national
competitive advantage worth protecting.
In
this sense, Paulson is right: Congress would do
well to focus on its own need for reforms and
secondarily emphasize changes China needs to make.
Unfortunately, Paulson's comments focus almost
wholly on US politics and avoid any reasonable
concerns about changes Beijing resists following
through on. As a result it seems inevitable that
the summer of 2007 promises to be long and hot on
both sides of the Pacific.
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.
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