Tricks of Trade

Despite rhetoric about the risks, relations between China and U.S. companies are crucial to America's future security. Here's why.

By Michael Hirsh

It's a formula," sighs Charlene Barshefsky, the U.S. trade representative. A troop of dark-suited Chinese files into the negotiating room, smiling for the cameras. Then the door closes, and they stare balefully at their counterparts and begin The Lecture. China is special, it goes: once we were the Middle Kingdom; now we're the Big Kahuna of markets. If you want to do business here, you'll do it on our terms. Otherwise--well, there's always the Europeans and the Japanese. U.S. companies--whether they're computer makers envisioning 1.2 billion desktops, or deodorant firms contemplating twice that many armpits--shudder in horror at the implied threat. Then, more often than not, they cave. You want half ownership in a joint venture, while making only a fraction of the investment? Uh, OK. You'd like us to put up $1 billion toward developing your own auto industry--and agree to an indefinite ban on our sales locally? Um... (through gritted teeth) where do we sign? In every trade parley, says Barshefsky, Beijing's point is the same: "1.2 billion people put China in a category different from all other nations, and therefore... fill in the blank."

Chinese dancers perform around Honda's J-VX concept car at the Beijing International Auto Show. (Andrew Wong/Reuter)

For many U.S. businesses, it's been more like a blank check. They've forked over more than $4 billion in direct investment since 1993, when China fever really took off. And they've transferred huge amounts of technology and know-how in strategic industries like aerospace, autos, electronics and telecommunications. While some companies like Motorola and IBM claim success, for many there's been scant return--merely the vast, vague market promise that's "been there since Marco Polo," as Barshefsky notes. Some corporations, like Chrysler and Kimberly-Clark, have all but given up or fallen out with their Chinese partners. Only "a very small group of people have made a buck," concedes U.S. Commerce Secretary William Daley, whose predecessor, the late Ron Brown, helped turn China "engagement" into a code word for dealmaking. "There's a lot of disappointment." It's a sentiment easily quantified: the U.S. trade deficit with China has leapt to $50 billion a year.

Now America's corporate Sinophiles face a new frustration back home: Sinophobia on Capitol Hill. Congress, it seems, has suddenly discovered that much of what America's information economy sells abroad these days isn't deodorant but "dual use" high-tech stuff, like satellites and supercomputers. The charge: that sales of these cutting-edge goods have compromised U.S. national security by helping to upgrade the People's Liberation Army.

A Chinese woman waits for customers in front of a poster of NBA star Michael Jordan. The poster sells for 38 yuan ($4.60). (Greg Baker/AP)

Deepening these suspicions is a sense that U.S. corporations have pushed too hard for export liberalization, often acting as virtual lobbyists for Beijing. Pick up a newspaper or turn on your television these days and you'll see touchy-feely commercials from Boeing on the wonders of China, images of Chinese and American toddlers hugging (courtesy of the Business Roundtable) and this gem from Mobil: "The U.S. and others can choose to be partners" in China's growth, the ad reads, "or they can turn their backs on a nation that is home to 22 percent of the world's people." That wasn't written in Beijing, but it might as well have been. Now even Clinton's fellow Dems have joined the bashfest, leading to an extraordinarily lopsided House vote to ban satellite sales to China and, last week, a 409-10 vote to spend $2.5 million probing tech transfers to China. "The perception here," says a top House Democratic strategist, "is that the dollar is being put ahead of everything else."

Perception, yes. But what's the reality? Clearly, U.S.-China trade is troubled. And the administration may have to get tougher in monitoring obviously dangerous technologies involving missiles, nuclear and biochem weapons; if the allegation that two satellite companies, Loral and Hughes, helped the Chinese on missile guidance is true, that would be a clear violation of export controls. But many military and intelligence experts say the scandal is, for the most part, false fire. Not only are the dealings of Loral, Hughes and other U.S. companies not a security threat, but their China contracts may be crucial to maintaining America's military edge in the next century. Why? Because in the post-cold-war era, national security and commercial concerns are no longer competing interests (if they ever were). Warfare is becoming increasingly computer and electronics-driven; Silicon Valley, the glory of the U.S. private sector, is also key to the "military-industrial complex" of the 21st century. America's defense edge, in other words, depends more than ever on its companies' commercial success. The Pentagon needs high-tech products for the military but no longer buys enough of them to keep U.S. defense companies in business. And dozens of other countries now produce the same stuff.

Satellites are a good example of just how fused commerce and defense have become. The United States remains the world leader in this $27 billion industry, and there are 1,700 commercial satellite launches projected for the next 10 years, compared with fewer than 300 in the last decade. Hence there's a three-year global backlog for companies trying to buy space atop launchers, which so far only four countries--the United States, Russia, France and China--now supply. "Our ability to remain on the cutting edge for milsats [military satellites] as well as comsats depends on our ability to lead the marketplace," says William Reinsch, under secretary of commerce for export control. And that means launching in China.

So the United States may have no choice but to engage China--and the world--with high-tech trade. Today the good news is that the balance of power between Beijing and investors may be shifting. Thanks to the Asian contagion, the glow has come off the China market at the very moment Prime Minister Zhu Rongji is privatizing hundreds of big state enterprises and badly needs foreign investment. U.S. firms like Kodak are successfully bargaining for full control of their joint ventures; they're even setting up wholly foreign-owned subsidiaries, instead of just handing over their technology. Others are diverting investments to Latin America.

All this retrenchment will aid trade rep Barshefsky; her long effort to open the semi-closed China market wasn't helped by U.S. business's eagerness to pile in, come what may. Before China enters the World Trade Organization, she's insisting that it adhere to fair-trade norms (like ones that would bar Beijing from a favorite tactic: insisting that foreigners produce locally rather than import), create legal protections and lower its 20 percent-plus tariffs. China, she says, "has to be done right." That's good. For many U.S. businessmen, things at this point can't go much more wrong.

— With John Barry in Washington