May 8, 2011

THE THIRD ANNUAL Strategic and Economic Dialogue between senior U.S. and Chinese officials begins Monday, and this time U.S. concerns about China’s undervalued currency do not loom as large as in past years. A much more pressing bilateral issue is China’s renewed efforts to control and limit U.S. and other foreign investment, even as it presses to deploy its own pile of cash in U.S. companies.

Not that China has fully met American demands to let the renminbi appreciate, which would help U.S. products compete on a more level global playing field. It is still holding the renminbi at about 25 or 30 percent below its probable market value. Over the past 11 months, however, China has allowed its currency to rise at an annual rate of about 8 percent against the dollar — partly to check domestic inflation.

But as U.S. and European companies describe it, Beijing has increasingly used government procurement rules, technical standards and tax laws to force foreign companies to transfer their technology to state-owned Chinese firms in return for access to the Chinese market.

This is bad for U.S. companies and their workers, since, despite worries about “outsourcing,” U.S. subsidiaries abroad often create demand for inputs made back home. It’s bad for China’s workers, too, since it deters job-creating investment. But Beijing’s objective is the mercantilist one of building up state-owned “national champion” firms that can then capture global markets from Japanese, European and U.S. competitors. No matter that the state-owned sector already receives massive official support, direct and indirect — while more efficient private-sector job- creators must scramble for resources.

Many U.S. companies say that China’s push for “indigenous innovation” represents the biggest step back toward protectionism since its market reforms began in 1979. When added to China’s improving but still inadequate enforcement of broader intellectual property rules, the policy calls into question commitments China made to open its markets when it joined the World Trade Organization in 2001.

The Obama administration has wisely made “indigenous innovation” a focus of its evolving China policy. In a tough May 4 speech, Commerce Secretary — and ambassador-designate to Beijing — Gary Locke declared “this just cannot continue.” The United States has leverage. Though it would be counterproductive to ban job-creating Chinese investment in the United States, which has already reached $2.3 billion, China wants a treaty to facilitate more — and it’s hard to see how China can expect to get it without changing its own policies.

The United States also sees eye to eye on this issue with other advanced industrial nations whose firms face similar obstacles; the administration needs to form a united front with them on China’s investment limits, just as it has tried to muster international pressure against China’s currency policies.

China’s efforts to extract foreign technology in this manner are not even in its own interest. The country and its people would be better off cultivating a welcoming and transparent investment environment for the long term. All the more reason that the United States and its economic partners around the world are right to push back.