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China's new world order demands stronger U.S. response

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Monday, January 24, 2011

By all appearances, Chinese President Hu Jintao's visit to Washington last week changed little in the lopsided American-Chinese relationship. What we have is a system that methodically transfers American jobs, technology and financial power to China in return for only modest Chinese support for important U.S. geopolitical goals: the suppression of Iran's and North Korea's nuclear weapons programs. American officials act as though there's not much they can do to change this.

It's true that the United States and China have huge common interests in peace and prosperity. Two-way trade (now about $500 billion annually) can provide low-cost consumer goods to Americans and foodstuffs and advanced manufactured products to the Chinese. But China's and America's goals differ radically. The United States wants to broaden the post-World War II international order based on mutually advantageous trade. By contrast, China pursues a new global order in which its needs come first - one in which it subsidizes exports, controls essential imports (oil, food, minerals) and compels the transfer of advanced technology.

Naturally, the United States opposes this sort of system, but that's where we're headed. Clashing goals have trumped shared interests.

Start with distorted trade. The New York Times recently reported that Evergreen, a maker of solar panels, is shutting its Massachusetts factory, moving production to a joint venture in China and laying off 800 U.S. workers. Despite $43 million in Massachusetts state aid, Evergreen's chief executive said that China's subsidies - mainly low-interest loans from state-controlled banks - were too great to pass up.

Thus subsidized, Chinese solar panel production rose fiftyfold from 2005 to 2010, reports GTM, a market analysis company. Cheap bank loans to solar companies total about $30 billion, but it's unclear whether they'll be repaid in full, notes GTM analyst Shyam Mehta. "It could be free money," he says. China's share of global production jumped from 9 to 48 percent. In 2010, about 95 percent of China's solar panels were exported.

With details changed, similar stories apply to many industries. The undervaluation of China's currency, the renminbi, by 15 percent or more magnifies the advantage. Jobs shift to China from factories in the United States, Europe and elsewhere.

Next, consider technology transfer. Big multinational firms want to be in China, but the cost of doing so is often the loss of important technology through required licensing agreements, mandatory joint ventures, reverse engineering or outright theft. American software companies estimate that 85 to 90 percent of their products in China are pirated.

Writing in the Harvard Business Review, Thomas Hout and Pankaj Ghemawat cite China's high-speed-rail projects. Initially, foreign firms such as Germany's Siemens got most contracts; in 2009, the government began requiring foreign firms to enter into minority joint ventures with Chinese companies. Having mastered the "core technologies," Chinese companies have captured 80 percent or more of the local market and compete with foreign firms for exports. The same thing is occurring in commercial aircraft. China is building a competitor to the Boeing 737 and the Airbus 320; General Electric has entered into a joint venture that will supply the avionics, the electronics that guide the aircraft.

Finally, there's finance. China's foreign exchange reserves - earned mainly through massive export surpluses - approached $2.9 trillion at year-end 2010. These vast holdings (which increase by hundreds of billions annually) enable China to expand its influence by sprinkling low-cost loans around the world or making strategic investments in raw materials and companies. The Financial Times recently reported that China - through the China Export-Import Bank and the China Development Bank - has "lent more money to other developing countries over the past two years than the World Bank."

It's important to make several qualifications. First, Americans shouldn't blame China for all our economic problems, which are mostly homegrown. Indeed, the ferocity of the financial crisis discredited U.S. economic leadership and emboldened China to pursue its narrow interests more aggressively than ever. Second, the point should not be (as the Chinese allege) to "contain" China's growth; the point should be to modify its economic strategy, which is predatory. It comes at others' expense.

The U.S. response has been mostly carrots - to pretend that sweet reason will persuade China to alter its policies. Last week, President Obama and Hu exchanged largely meaningless pledges of "cooperation." Alan Tonelson of the U.S. Business and Industry Council, a group of manufacturers, says U.S. policy verges on "appeasement." We need sticks. The practical difficulty is being tougher without triggering a trade war that weakens the global recovery. Still, it's possible to do something. The Treasury could brand China a currency manipulator, which it clearly is. The administration could move more forcefully against Chinese subsidies. America's present passivity encourages China's new world order, with fateful consequences for the United States and everyone else.


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