Sino-US relations at vulnerable juncture
By Benjamin A Shobert
The November release of the US-China Economic and Security Review Commission's
(USCC) annual report on the state of US-Sino relations certainly covered its
fair share of the traditional suspects. Spread throughout the report are
numerous calls for action on the matter of the yuan valuation, the need for the
US to more aggressively access the WTO as a means of addressing its grievances
with China, and on the foreign affairs front, China's reticence to deal with
North Korea and Iran in ways that America believes China should.
But this year's report is different in that the commission's 2011 report to
congress takes place in the shadow of major power transitions in both China and
the United States (which country's
transition will be more orderly and productive is, of course, a matter of some
dispute).
In the US, the 2012 presidential election will occur in November, while in
China, the 18th National Congress of the Chinese Communist Party (CCP) will
occur sometime in the autumn, during which time a new central committee,
politburo and general secretary will be chosen.
Political forces have obviously always shaped US-Sino relations, but in 2012
the stakes are much higher for both countries. America's feeling of economic
vulnerability is beginning to express itself with building intensity over what
it feels is an unbalanced and unfair trade relationship with China. This
frustration is slowly but surely acting to reinforce the opinions of those in
Washington who believe that China should be seen less as a potential partner
and more as a strategic competitor on both economic and military fronts.
Consequently, those who have in the past dismissed the findings of this
commission as pure political posturing can not afford to any longer diminish
the weight of congressional committee findings like those of the USCC's.
Whatever lens through which outsiders may choose to interpret the USCC's 2011
report, it unmistakably captures and reflects a vibrant and increasingly
influential line of thought about China from within the US Congress.
At the forefront of the 2011 USCC report are ongoing concerns over the role of
China's state-owned enterprises (SOEs). As the report notes, the process of
reforming China's domestic economy and the role of SOEs within it has, if
anything, gone backwards over the last year.
The USCC points out that this reversal has been designed to, "creat[e] SOEs
that dominate important portions of the economy, especially in the industrial
sectors, reserved for the state's control". The USCC believes that this change
in the direction can be largely understood as a perhaps unforeseen consequence
of the massive 2008-2009 stimulus put through by Beijing.
This stimulus largely benefited China's SOEs at the expense of both China's
privately owned companies as well as to the detriment of American and European
companies who stood to potentially benefit if the stimulus money could be
directed towards products and services they were capable of providing.
Quoting a 2010 World Trade Organization report on China's SOEs, the USSC report
shares that "SOEs have been 'benefitting disproportionately from the
[g]overnment's recent measures to boost the economy ... at the same time
domestic private enterprises are finding it more difficult to access credits
from banks." The net of this is, to quote many a Chinese entrepreneur, "the
state advances, the private [sector] retreats."
How open Beijing is willing to be towards outside competition in sectors its
SOEs currently dominate is not only a question related to economic reform; it
also has implications for how American and European companies view the domestic
Chinese market. Here the long-standing and much publicized Indigenous
Innovation policies put forward by Beijing during its 2008-09 stimulus program
continue to be a cause for concern.
Even though analysts have pointed out that much of what is written in the
Indigenous Innovation policy was essentially putting down in writing what has
been the unspoken reality on the ground in China for years, by codifying the
practices, Beijing put a bulls-eye on an issue that most inside and outside the
country knew would ultimately need to be dealt with.
Beijing has made gradual moves to neutralize some of the more draconian aspects
of the Indigenous Innovation policy by relaxing the expectations that
government procurement catalogs only feature domestic Chinese companies (or
multinationals who had agreed to the technology transfer policy); however, as
the USCC report notes, "the long effort by the central government ... is a
message that will likely outlive any product catalogues."
What troubles the USCC is not only the policy itself, but also what it suggests
about China's attitude towards the need for a healthy trade relationship with
its partners. As the report notes, the policy "demonstrated the government's
view that Chinese companies and governments are better off substituting
domestic goods for imports".
USCC chairman William Reinsch said in opening remarks when the 2011 report was
issued, "These policies are intended to discriminate against foreign goods and
services and to substitute domestic goods, apparently as a device to force the
transfer of technology to Chinese firms."
He then went on to state, "These policies, along with China's failure to
provide adequate IP [intellectual property] protection, strike at the heart of
America's greatest economic strength - its ability to innovate". Throughout the
2011 report, numerous instances are made towards China's strategy for moving up
the manufacturing supply chain into higher value products coupled to "large
swathes of the Chinese economy [being] closed off to foreign investors", a key
structural challenge for the two countries.
By connecting technology transfer requirements to China's SOE sector, the USCC
is drawing a clear line connecting the direction of China's economic reforms
and its unwillingness to play by the rules with what the American economy must
rely on to pull itself out of the current recession. Whether this is a fair
criticism or a voice of suspicion related to American insecurities, there is no
more powerful political narrative in Washington right now than the growing
sense that China's entrance to the WTO has helped China bend the rules to its
benefit and the general detriment of its trading partners.
Making note of the 10th anniversary of China's entry to the WTO in December,
Reinsch noted that China's most recent strategies have been "contrary to the
spirit, and in many cases the letter, of China's WTO commitments". The 2011
USCC report goes further, writing that "China has grown more assertive and
creative in using WTO procedures to alleviate, eliminate, and avoid certain
restrictions in the Accession Protocol."
China's autocratic tendencies are of concern not only in how it manages its
domestic economy, but also in what the USCC report calls China's "internal
dilemmas". Of note through the course of 2011 was not only a regression of
hoped-for economic reforms, but also anticipated political changes. Frightened
by the instability brought upon governments in the Middle East during the Arab
Spring, Beijing acted to clamp down on any potential source of instability.
The report notes that in 2011, China acted to clamp down on Internet freedoms
while spiriting away several high-profile political activists. Internet cafes
are now being required to install software that obtains the user's information,
making it easier for the government to track down dissenting voices that use
the Internet to express their frustrations or opinions. Additionally, Beijing
has "rescinded many of the freedoms that were granted to foreign reporters in
the run-up to the Beijing Olympics". The hope that the Games would lead China
to incrementally allow additional political dissent afterwards, has almost
entirely dissolved.
This then appears to be the state of US-China relations as captured in the
USCC's most recent report: economic and political reforms have not simply
stalled, as was made the case in past years' reports. No, economic and
political reforms have actually reversed direction over the past year, a
finding that sets the stage very neatly for a US Congress looking for
convenient political scapegoats and an American public increasingly frustrated
over its domestic economy and equally suspicious over whether China might not
be part of America's problems.
Neither of these are to suggest that China's reversal is good, or that nothing
should be made as to what these changes might suggest about China's government.
They point, as the report notes, to a government increasingly concerned over
already wide and growing inequalities of income and access to services that
hold the potential to destabilize the country.
What Beijing may not realize, or, to give its leaders some credit, what they
may not agree with, is the timing of China's retrenchment and how it coincides
with the country's militarization. How these three phenomena have aligned over
the last twelve months is cause for concern because it brings together
economic, political and national security concerns.
While 2011 did see China's first aircraft carrier launch and the first flight
of its J-20 stealth fighter, the USCC notes that the more subtle change from a
policy of access denial to what the Commission calls a policy of "area
control". The change in language captures what the USCC believes is what the
PLA is now positioning itself for, "to easily conduct operations against
regional states".
This doctrinal adjustment represents a country that no longer believes its best
strategy against American power will be purely to deny access to critical parts
of its littorals. Now the People's Liberation Army (PLA) instead is preparing
itself to be capable of forward projecting its power regionally.
None of this is to say China is preparing to act in this way, merely that the
country's military planners are now developing strategies and weapons platforms
capable of doing so should they feel it necessary to do so. Looking at the
PLA's growing capabilities, the USSC report writes that "While US bases in East
Asia are vulnerable to PLA air and missile attacks, Japanese, Philippine, and
Vietnamese bases are just as vulnerable, if not more so."
At the end of the 2011 report, Commissioners Reinsch and Robin Cleveland make a
final plea for those reading the USCC's findings to look beyond those issues
the US may have with China and see those that lie within America's ability to
change. As they both write, "This means that the right answers lie in policies
we should pursue to make ourselves more competitive than policies to hold the
Chinese back."
While admirable sentiments, the bulk of the 2011 report suggests that unless
China and the United States can find a way to better balance their respective
domestic economic and political needs against the weight of globalization and
the changes it has brought with it, we may well be on the road towards
additional conflict instead of cooperation in 2012 and beyond.
Benjamin A Shobert is the Managing Director of Rubicon Strategy Group, a
consulting firm specialized in strategy analysis for companies looking to enter
emerging economies. He is the author of the upcoming book Blame China and
can be followed atwww.CrossTheRubiconBlog.com.
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