Archive for the ‘Economy’ category

Why?

March 8, 2010

We’ve got increasing US-China friction on a number of issues.  Observers have offered some pretty simple explanations for this situation, e.g. “the Obama Administration has been too soft on China so they feel they can push us around” or “China holds so much US debt that they have leverage to push us around”, etc.

Albert Einstein has been quoted as saying “Make everything as simple as possible, but not simpler”.  Chinese government behavior (like our own) is driven by a complex set of factors (with domestic considerations by far the most influential).  The following is a partial list of the factors as I see them:

  • Continued sensitivity about being bullied or dominated by foreigners, growing out of China’s experience in the period 1840 – 1949 (sentiments kept fresh by the Chinese educational system and media).
  • (Overconfidence) (Justifiable pride) from success in managing the domestic economy in face of global economic crisis, which has (incorrectly in my view) discredited the US model of growth in the eyes of some Chinese.
  • Leadership insecurity at home driven by Tibet, Xinjiang, and increasing protests over economic and social issues, leading to a stronger voice by security and propaganda officials, who tend to be more suspicious of foreign companies/governments than the average Chinese official.
  • Jockeying before unusually large leadership change in 2012 (Party Chairman, Premier, and most of the Politburo Standing Committee turning over); at a time like this hopefuls for senior positions want to look tough on domestic and foreign issues.
  • Success of foreign companies in the China market since China’s WTO accession in 2001 that has created a backlash (think:  US in the 1980s (yikes, Japan is buying Rockefeller Center!))
  • Impact of internet opinion, which by all accounts Chinese leaders regularly view and take seriously and which in turn tend to be dominated by a nationalistic tone (younger people use the internet more and they tend to be more nationalistic).

Ok, so what to do about this?  Complex issues do not have simple solutions.  There is no magic bullet, but there are important steps we can take.  The subject of a future post.

Keeping Our Eye on the Ball

March 2, 2010

There has been an increase in friction between the US and China in a number of areas.  As any reader of this blog (read:  hi mom!) would know, I am no China basher.  But I must say I place the weight of responsibility for the current situation on the Chinese side.  I think there are a complex set of factors driving Chinese behavior now, though I will save that discussion for another time.

The important thing for policymakers and observers now is to distinguish between bilateral issues where increased frictions are mainly rhetorical and those where there is a real substantive problem.  I put issues such as Taiwan arms sales and Tibet in the former category.  There seems to be hotter rhetoric from the Chinese side, but the fundamentals of the issues have not changed.

Bilateral economic relations are another matter however.  I am not talking about the RMB exchange rate issue, which I happen to think is worth only a small fraction of the time the US government spends on it.  This issue will continue to be the subject of much rhetoric and perhaps, unfortunately, concrete action on the US side (though I concur with observers who believe that China will allow the RMB to appreciate this year somewhat, based on their domestic concerns).

But the real story has to do with the Chinese view of the role of foreign companies in the Chinese economy:  Over the past few years the strong momentum behind the “reform and opening” policy in China has slowed.  This is not to say China is going backward toward a planned economy, but the voices in China most supportive of increased competition and openness as the way to fuel innovation and economic growth have been pushed into the background.  Instead, we have seen a surge in the voices of those who favor government intervention (aka industrial planning), as the way to propel China’s economic future.  This has been coupled with a noticeable rise in economic nationalism and increased influence for propaganda and security officials (who tend to be more suspicious of foreign influence than the average Chinese official).

Foreign tech firms have felt the brunt of these developments.  Under the rubric of promoting “indigenous innovation”, the Chinese government has undertaken numerous policies, in areas such as technical standards, government procurement, taxation, and M&A policy, to support local firms and disadvantage those from abroad.  Even non-tech firms have felt the sting of the changed environment, with some major foreign acquisitions of well-known Chinese firms in non-sensitive sectors foundering on the rocks of Chinese domestic political concerns.

But here’s the really significant part:  I’ve been involved in US-China relations for 25 years and I have seen commercial issues come and go even as major US companies remained excited about China and worked strenuously to avoid crazy actions by the US Congress and all administrations.  Over the past several months, for the first time, I have begun to hear some major firms express the view that their very future in the China market could be at risk.  They are not proposing to pull out of the market, which they still see as important.  However, their frustration level is so high that some are questioning whether the business community should sit on the sidelines the next time strong China legislation is moving on the Hill.  Such a “neutral” stance by major US companies could pave the way for some truly awful, anti-China legislation.

It’s not that there are any companies today demanding that their industry and trade associations stay out of the next major China legislation fight.  Nor is there anything close to a consensus on taking such action.  However, the fact that some major firms would even pose the question for discussion represents a striking shift in mood.  And of course, a decision by the business community to withdraw from its active efforts to prevent serious anti-China actions would have a significant destabilizing impact on bilateral relations.

I don’t know how this will develop nor where we will eventually wind up.  But I am sure that something is happening with regard to US China economic relations as it relates to the role of foreign companies in the Chinese economy.  I am also sure that in this area we are seeing an issue of substance, not mere rhetoric.  This is the one to keep an eye on.

Obama Shanghai Town Hall: Mission Accomplished

November 16, 2009

I stayed up way past my bedtime last night to watch the live feed (via White House website) of the President’s town hall meeting with students in Shanghai.  I took a particular interest in this event because while serving as Consul General in Shanghai I frequently visited college campuses and engaged in similar exchanges.  the format  (minus any press interest) was similar; I’d start with 20 minutes or so of views on US-China relations (including whatever topic was hot at the time) and then open the floor to questions.  Based on those experiences here are my reactions to yesterday’s event:

1)  The students were more polite to the President than they were to me.  This is no surprise.  I am certain the participants yesterday had been warned to maintain a respectful and polite attitude and to stay away from inflammatory questions.  This reflects more than anything the sense that China would be judged around the world by the demeanor of the students at this globally aired event.  To try to embarrass the President of the US or put him on the spot would be considered poor manners and would reflect badly on China.  So the questions for the President were pretty soft, though the clever students did manage to get in a question re US policy toward Taiwan (couched as a question from a Taiwan netizen); one about US aggressiveness around the world (couched as a question contrasting China’s drive for a “harmonious society” with US greater comfort with “diversity”); and one on internet freedom (again, a question from a netizen, relayed by a student in the room).

In contrast, I found in discussions with Chinese students that given the chance without the glare of cameras they could be very pointed, posing questions such as: Wasn’t it US policies in the Middle East that brought about the 9/11 attacks?  Why does the US see itself as the policeman of the world?  (in the aftermath of the EP-3 incident) Why does the US spy on China; isn’t it true the US wants to contain and weaken China? Why is the US so protectionist and why does it impose so many anti-dumping penalties on Chinese products?

As noted above, no surprise that in a very public forum Chinese students stayed away from very direct questioning.  That said, the students in the room were among the best and brightest in the country and I was impressed (again, as noted above) in the way that they managed to gently slide in questions on controversial topics.

2)  I thought the President did a great job, especially on the human rights and information freedom issues (take that NYT!).  He clearly intended to show the audience back home that he would not shy away from raising these tough issues.  However, he did so in the most effective way possible, which can be summarized as follows:  “Here is the way we in the US think about [human rights] [treatment of minorities] [internet freedom]; we are not perfect but we think our values in these areas have been central to our success as a nation; we are not out to force our views on other countries, but we do think that basic principles of freedom and human rights apply everywhere and we will continue to speak out in support of that view.”  In other words, his responses did not contain a direct rebuke to China but rather conveyed a humble expression of why we think our values/system is good for us and why we think these basic principles are universal.

3) Tiny nitpick of interest:  in responding to the question re Taiwan the President repeated our commitment to a one China policy and the Three Communiques.  Readers who know the intricacies of US policy on this issue will note that he did not refer to the Taiwan Relations Act, which is usually part of the mantra by USG officials when they mention the Three Communiques.  I took this not to be some intentional signal but rather a function of information overload for the President.  As insiders know, the language the USG uses on the Taiwan issue is exceptionally complex and nuanced.  In fact, the President clearly stumbled a bit when at one point he referred to Taiwan and then started to say “… and the rest of China”, but unsure if that was the right formulation, caught himself and said “…and the People’s Republic”.  So to me, he had done a great job of absorbing the sensitivity attached to the language surrounding Taiwan and dropping the TRA reference was, I think, not a signal but a sign of the limits of even his prodigious capacity to master complex issues in very short time spans.

The bottom line:  my goal in talking with students was not to enter into a debate nor win them over to my point of view.  Rather, it was to show them that the US government had a thoughtful, basically friendly approach to China, even if we did not agree on all issues.  I think the President conveyed very much the same message yesterday.

A Better Read

November 15, 2009

By way of contrast with the NYT article I discussed in my last post, see the much more informative Christian Science Monitor article titled:  “US eyes China as global partner” (link here: CSM article)

I don’t agree with every detail in the piece, but the general outline (the administration sees China as a partner to tackle global problems; this is new territory for China and it is moving very cautiously in this direction) gets the basics right.

I still can’t get over how widely NYT missed the mark.

Obama Visit to China: Analysis too Awful to Ignore

November 15, 2009

I’ve been away from this blog for a long time, but every now and then something outrageous enough surfaces to drive me back:

One of the great pleasures of my younger days was sitting on the promenade in Brooklyn Heights, sipping from a container of Tropicana orange juice while nibbling on a fresh pastry and taking a leisurely read through the Sunday New York Times.  I note this to emphasize that I am a huge fan of the NYT.  It is in fact the first thing I read each morning (though online now).  But that is why a particularly shallow and sensationalized article from that source is so upsetting.

Headline of the article (on the first page of the paper’s online edition) reads:  “China’s Role as Lender Alters Dynamics for Obama’s Visit” and here’s the link: article.

The gist of the piece can be summarized as:  The US owes China a lot of money so, unlike his predecessors, Obama is afraid to criticize China too much on his visit there.  Some samples from the article:

“… unlike his immediate predecessors, who publicly pushed and prodded China to follow the Western model and become more open politically and economically, Mr. Obama will be spending less time exhorting Beijing and more time reassuring it.

…It is a long way from the days when President George W. Bush hectored China about currency manipulation, or when President Bill Clinton exhorted the Chinese to improve human rights.

Mr. Obama has struck a mollifying note with China. He pointedly singled out the emerging dynamic at play between the United States and China during a wide-ranging speech in Tokyo on Saturday that was meant to outline a new American relationship with Asia.

“The United States does not seek to contain China,” Mr. Obama said. “On the contrary, the rise of a strong, prosperous China can be a source of strength for the community of nations.”

He alluded to human rights but did not get specific. ‘We will not agree on every issue,’ he said, ‘and the United States will never waver in speaking up for the fundamental values that we hold dear — and that includes respect for the religion and cultures of all people.’”

What a crock.  It is really disturbing to see such a total lack of understanding of US-China dynamics from such a distinguished source.

Here’s the way to think about the way the Administration is approaching US-China relations, including the President’s visit:

1)   Important countries get treated differently from less important countries, always.  Since Nixon’s visit to China in 1972, the US has treated China more carefully than Liberia.  For that matter, Liberia treats the US more carefully than Peru.  And Russia treats Japan more carefully than Chile.  All administrations from Nixon on, have maintained a delicate balancing act of seeking to promote a wide range of evolving US interests with China, including security, trade, and human rights.  Some administrations have pushed on a particular area more publicly at one time and others have pushed on other areas at other times.  This administration is no different in this regard.

2)   The money the US owes China is just not a factor in the overall mix of policy considerations shaping this (or the previous) administration’s approach.  Yes (as noted in the NYT piece), the Chinese now ask more questions about the health of the US economy.  But this reflects their increasing sense of vulnerability about their exposure to the US economy.  One could just as well write an article saying that the Chinese leaders will be especially nice to Obama because they want to encourage him to take policies to keep the US economy strong and protect the value of China’s large US debt holdings.  It is pure nonsense to suggest Obama will pull his punches on human rights or other issues because China holds lots of US treasury bonds.  The US wants to get the US economy back on track and wants China to maintain strong economic growth while shifting to more reliance on domestic consumption.  The Chinese government, and the rest of the world, want, and need, the same thing.  There may be differences at the margins on particular policy steps, but there is no “leverage” here that either side has on the other.

3)   Though the fundamental US approach to China has not changed in 37 years (i.e., an effort to pursue a complex and changing set of US interests, each has brought its own style and areas of emphasis, in part depending on external developments (think: mutual fear over the Soviet intentions, Tiananmen, the collapse of the Soviet Union, etc.).  This administration clearly believes it is now critical to deepen cooperation with China in preventing global catastrophes, especially those dealing with:  the global economy; climate change; the spread of weapons of mass destruction; North Korea and Iran; and pandemics.  The process of deepened cooperation on global issues began in the Bush Administration with regard to the economic crisis, but the current administration is clearly seeking to broaden and deepen this kind of engagement.  In doing so, it is the case that more activities and public pronouncements on China will center around these global issues rather than others in the relationship.  I suppose one could say that in this sense the Administration is giving less public attention to human rights in China, but this is not the same thing as suggesting that the administration is treading lightly in this area because the US owes China a lot of money, as the NYT suggests.

4)   And last but not least:  Those who slam the administration for allegedly being afraid to press China on human rights have some serious explaining to do.  If the policy of publicly hectoring China on human rights was so successful in the past, why are we all still so concerned about the human rights situation there?  Where are the big achievements from that approach?  If the tough approach is the key, why did Bill Clinton (cited as a role model in the NYT piece) back down, with egg on his face, from his linkage of human rights to trade in the early part of his administration?  The point is that this administration’s enhanced cooperation with China on key global issues coupled with a less public approach on human rights stands at least as good a chance of achieving results as the in-your-face approach to this issue that some urge.  I believe progress on human rights in China will take decades and that those improvements will come as the result of changing priorities by the people of China.  Respectful exchanges of ideas with government and non-government actors in the US will play a role in this process.  Public hectoring adds little to the mix.  In any event, that fact that the current administration has shifted from a more public, critical approach on human rights to one emphasizing broad cooperation between our countries and quiet discussion of human rights, does not mean they are abandoning the search for progress in this area.

So, with much sadness, I can only report that this NYT article reaches a new (recent) low in China analysis from the news publication I admire most.  Let’s hope things improve soon.

A Simple Solution

June 13, 2009

This “Green Dam-Youth Escort” filtering software issues continues to get more interesting in highlighting the complexities of the Chinese political system today.  On the one hand, senior levels of the Chinese government continue to press their support for the new regulation and propaganda officials reportedly have ordered that criticism of the new regulation in the media be stifled.

At the same time, opposition in China continues to grow and is widely aired on the internet (sort of ironic, no?).  One of the most interesting developments is the potential use of China’s new Anti-monopoly Law (AML) to attack the new regulation as an administrative abuse of power.  Here’s a description of the issue from the WSJ (subscription required; full article here:  http://online.wsj.com/article/SB124482083845410171.html):

“Zhou Ze, a political science professor at China Youth University, said he and a professor from Hong Kong have submitted formal complaints to China’s State Council and the National Anti-Monopoly Committee saying the requirement is an “abuse of power.”

They argue that it is anti-competitive because it will flood the market with software produced by two companies selected by the Ministry of Industry and Information Technology in a non-transparent way.”

Ok, so in 1979 China begins its policy of reform and opening.  Years later as a part of that process China enacts the AML, to deal with the issue of monopolies in the economy, an important issue all market-based economies must deal with.  And today it is being cited to attack the non-competitive way this filtering software was chosen for monopoly status by the Chinese government.  And who says that economic reforms don’t bleed over into reform of the political system?

To make matters worse, there now seems to be some evidence that the Green Dam software is based in part on pirated computer code from a US company (full AP article via Physorg.com:  http://www.physorg.com/news164103095.html):

“Solid Oak Software of Santa Barbara said Friday that parts of its filtering software, which is designed for parents, are being used in the “Green Dam-Youth Escort” filtering software that must be packaged with all computers sold in China from July 1.

Solid Oak’s founder, Brian Milburn, said he plans to seek an injunction against the Chinese developer that built the software, but acknowledged that it’s new legal terrain for his company…

A report released Thursday by University of Michigan researchers who examined the Chinese software supports Solid Oak’s claim that the Green Dam software contains pirated code. The report also found serious security vulnerabilities that could allow hackers to hijack PCs running the Chinese software.

The report found that a number of the “blacklist” files that Green Dam employs were taken from Solid Oak’s CyberSitter program.

The report’s authors – researchers in the university’s computer science and engineering division – also said they found another clue that Solid Oak’s code was stolen: a file that contained a 2004 CyberSitter news bulletin that appeared to have been accidentally included in Green Dam’s coding.”

All in all this is turning into a larger and larger embarrassment for the folks who promulgated this regulation and for China’s government more broadly.

And here’s a pop quiz:  what one simple step could Chinese regulators have taken to avoid all this embarrassment?

Answer:  Publication of the draft regulation with an adequate period of time for public comment.

In fact, I believe that prior publication and public comment on this kind of regulation would fall under China’s commitment to this mechanism as a part of its WTO accession.  In any event, I think it would be clearly required under guidelines that have been issued (more than once), though never effectively enforced, by China’s State Council.

Just think about it:  had this regulation been published as a draft with a 60 or 90 period for public comment, all of the concerns of Chinese citizens and foreign companies would have been aired.  Chinese companies with competing products could have made their case for a competitive selection process and software experts inside and outside China could have reviewed the Green Dam software to assess its effectiveness and expose any use of software piracy it contains.  Then regulators could have assessed whether changes were needed in the regulation in an orderly, non-embarrassing way.

Instead, the folks who rammed this sweetheart deal through the Chinese system in secrecy have put senior Chinese leaders in an awkward position, domestically and internationally.

It is true that China has ramped up its public support for the new regulation in response to the increasing criticism it has generated.  But I stand by my predict (see my previous post) that ultimately this regulation will be withdrawn or allowed to wither away unimplemented, though it may take six months to a year for that to happen.

In addition, I have some hope that this debacle will reinforce the voices of those within China who have argued strenuously for more transparency in government rulemaking, including a strict commitment to prior notice and public comment for new regulations.

And when China’s most senior leaders get together and talk about the Green Dam issue, I hope they realize that it was this pro-transparency group, not the unhealthy alliance of Chinese IT companies in bed with their Ministry supporters, who had the interests of China foremost in mind.

Understanding Trade

June 10, 2009

Just saw a great piece on the ForeignPolicy.com website called “The Myth of Made in China” (http://experts.foreignpolicy.com/posts/2009/06/10/chinese_exports_are_not_exactly_chinese)

The article, in unusually clear language, makes the point that most of what China ships to the US consists of components sourced all over the world and merely assembled in China.  For this reason, it does not make sense to view the trade deficit with China as an indicator that we are big losers in this flow of products across the Pacific.  The piece also notes that much of what we import from China used to be produced in other Asian economies, not in the US anyway.  Here’s a sample from the article:

“…”Made in China” is a bit of a misnomer these days. Over the last 20 years, supply chains have fragmented across the globe — with one part made here, and another made there. Rarely is any one product made in any one country. China often specializes in the final stage of production: putting components together before exporting to the final users. Indeed, much of the value of U.S. imports from China, and similarly from Mexico, includes parts and components made in other countries — the United States among them. According to our recent study, domestic content (the stuff that directly contributes to domestic economic growth) makes up about 45 percent of Chinese exports and 34 percent of Mexican exports to the United States. The rest comes to China from abroad to be assembled and sold. A tag like “Made in China, Vietnam, the United States, Japan, and China again,” might be more apt.”

The article makes points that sophisticated analysts of trade flows have been trying to make for some time.  Unfortunately, it is much more satisfying (and beneficial) for politicians to rail about the US-China trade deficit and assert that it is a substantial cause of the problems facing US manufacturers over the past decade or so.  Too bad it’s just not true.  Read the full article.


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