Chinese follow same old script (and they get the punch line)

Chinese President Hu Jintao is making his first state visit to the United States.
Washington Post Staff Writer
Tuesday, January 18, 2011; 10:58 PM

Here we go again.

China's Supreme Leader visits Washington, and administration officials declare in the run-up to the visit that the United States has had quite enough of Beijing's currency-manipulating, intellectual- property-stealing, domestic- industry-subsidizing policies.

The Supreme Leader denies his country engages in such practices, then promises it will stop them in its own sweet time, without any more meddling interference from Imperialist Running Dogs.

Meanwhile, with great fanfare, the Supreme Leader announces an order for a few more Boeing passenger jets. There are toasts and smiles all around at the A-list White House dinner. As the Supreme Leader flies off, the Treasury secretary declares his "get tough" policy has been a success.

Then it's off to the headquarters of Multinational Corp., where the Supreme Leader signs one of those joint venture agreements with a Chinese government-owned company in which Multinational Corp. agrees to share its latest technology to gain access to the World's Fastest Growing Market - a market that by treaty obligation is supposed to be open to foreign products and foreign investment but in practice is just one giant pay-to-play racket.

By week's end, Americans finally turn their attentions back to the more pressing issue of whether the Jets can really make it to the Super Bowl.

So far, this week's visit by President Hu Jintao has pretty much followed the script.

There was last week's tough speech by Treasury Secretary Timothy F. Geithner that extolled the growth in the U.S.-China trade relationship but threatened to cut off access to U.S investment opportunities and access to U.S. high-tech products if more progress was not made on the usual laundry list of concerns.

Within days, we learned that a company called Evergreen Solar would shutter its solar panel factory in Devens, Mass., opened with great fanfare three years ago with at least $43 million in state subsidies. Evergreen is shifting its production to China. Plunging prices for solar panels had rendered the U.S. plant unprofitable, according to chief executive Michael El-Hillow, but Evergreen can still make money in China because of the lower costs and considerable government subsidies offered by the government there. So much for those 800 "green jobs" in Massachusetts.

Then this week, my colleague Howard Schneider weighed in with an equally telling story from Wisconsin, where Manitowoc Co. has for years exported giant cranes to China for use in giant construction projects such as the Three Gorges Dam. But now that Chinese firms are ready to enter the market, Beijing has slapped a 30 percent tariff on Manitowoc's exports under a provision of global trade rules that allow "developing" countries to protect "emerging" industries. To stay in the game, Manitowoc has had to enter a joint venture with one of its Chinese competitors, which means much of the work will be done there.

The right response to these challenges would be for the president this week to laud China for the success of its economic policies and announce that the administration will begin forthwith to apply each and every one of them to Chinese exports into the United States. Subsidies and directed credit for local companies, buy-American provisions for government agencies and government contractors, currency manipulation, the rules on "conditional market access" and "indigenous innovation" - surely China could hardly complain if we were to pay them the highest compliment by embracing their economic model.

To start things off, the administration might announce its intention to block the joint venture Hu intends to announce later this week with General Electric. GE already sells lots of engines to China for all those Boeing and Airbus jets it buys. Now GE is hoping to get the contract to provide avionics to the state-owned Commercial Aircraft Corp. of China, which intends to go into direct competition with Boeing. What better way than by forming a 50-50 joint venture with Aviation Industry Corp. of China, another state-owned firm?

In addition to $200 million, GE will be contributing technology to the partnership that will operate as the avionics brain for Boeing's new 787 Dreamliner. And going forward, the partners will jointly develop new radars, controls and guidance system at a jointly run research and development laboratory that is already under construction. Call me cynical, but this sure sounds as if one of America's leading technology companies has decided to sell some of this country's crown jewels to ensure access to China's rigged market, potentially jeopardizing the competitive advantage enjoyed by this country's leading export industry.

This is the nub of the problem. With its state-controlled economy, China can force its companies to act collaboratively to achieve the country's strategic economic objectives. And that gives it a tremendous advantage in negotiating the terms of trade with a country like ours, where China can strike deals that may provide short-term profits to one company and its shareholders but in the long run undermine the competitiveness of the other country's economy. What's good for GE or Honeywell or Rockwell is, in this case, almost certainly not good for America and American workers.

Americans are uncomfortable with the idea of industrial policy. But when competing against countries that practice it skillfully and aggressively, we may have no choice but to respond in kind - if for no other reason than as a way to negotiate a more level playing field for American firms and American workers. China has already leveraged this advantage to wipe out large swaths of American industry, build up a $3 trillion dollar war chest and help to put the U.S. economy in a rut characterized by low growth, high unemployment and unsustainable trade deficits.

How much longer must we wait, how much deeper does the rut have to get, before we say, "Enough!"?

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