Archive for the ‘Trade’ 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.

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.

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.

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.

Bad Analysis

May 31, 2009

Some of the reporting on US-China relations in the US media is good and some not so good.  But every now and then something comes along that is really awful.  My most recent example of the latter category is an AP story titled “Geithner Lacks Much Leverage in China Talks” (full text here (via Fox news):  http://www.foxnews.com/politics/2009/05/30/geithner-lacks-leverage-china-talks/).  Time does not permit an exhaustive presentation of all the misunderstandings offered in this piece, but I will point out a few.  I’ve got quotes from the article in bold, followed by my comments:

“…Mired in a brutal recession, the United States needs Beijing to boost its purchases of U.S. goods, let China’s currency rise and take other steps to narrow an enormous trade gap. And it needs China’s help to combat any military threat from North Korea…”  Comment:  This misses the whole point of the interdependent dynamic that exists between the US and China today.  China “needs” the US economy to recover as much (more actually) than the US “needs” China to increase imports from the US.  Even on the political front, the North Korea situation is just as much a problem for China as it is for the US.  On both the economic and political fronts we need to be working together.  Of course when you get down to specific policy approaches the issues we will have different perspectives based on each country’s concrete situation.  The challenge is to work through these differences and come up with coordinated approaches on the common problems we share.

“…The problem is Washington’s leverage has waned just as China’s power over the U.S. has grown…”  Comment:  Ugh.  This whole “leverage” myth really gets to me.  The notion of “leverage” is increasingly outmoded in an interdependent world, especially among the major countries.  And it certainly does not apply in US-China relations.  Per para. above, the goal is for two major countries to seek win-win solutions that advance both countries’ interests and address global challenges.

“…Even so, as Geithner headed Saturday to China to meet Monday and Tuesday with top Chinese officials including President Hu Jintao, he brings an ambitious U.S. goal: persuading Beijing to adopt policies that would transform its nation of savers into spenders…”  Comment:  China’s leaders recognize they need to increase domestic consumption as a main driver of their economy (and they are taking steps in that direction).  They now view this goal with increased urgency because of the global downturn in demand for their exports.  No doubt Geithner will discuss this issue with China’s leaders, but describing this as an “ambitious goal” of “persuading China’s leaders” of the wisdom of the US view sounds dramatic, but it’s just not consistent with the situation.

“…Those comments, plus remarks by the head of China’s central bank about whether the world needs a new top reserve currency to replace the dollar, jolted financial markets…”  Comment: maybe my memory is off here, but I recall those comments created a lot of discussion, but don’t remember they “jolted” financial markets, which have much bigger issues to be jolted about.

“…But the fact that the administration’s chief economic policymaker is going hat-in-hand to the Chinese to explain the soaring deficits shows how much has changed since his predecessor, Henry Paulson, met with the Chinese as the Bush administration’s treasury secretary in 2006…”  Comment:  this is really obnoxious.  No “hat in hand” here.  China and the US have a common set of problems.  China needs the US economy to recover and the US (and the world) needs China’s economy to continue to grow.  Our relations today are not the balance of power politics of 19th century Europe 

“…Back then, Paulson managed to arm-twist China into agreeing to a new round of economic talks. Those talks were aimed at prodding Beijing to move faster to let its currency, the yuan, rise in value against the dollar. Doing so would make U.S. exports cheaper for the Chinese to buy…”  Comment:  great example of a journalist creating drama from nothing.  Chinese did not need “arm-twisting” to establish the SED with Paulson.  They were happy to do it because they saw it as a useful forum for dialogue.  And the SED was not “aimed at prodding Beijing to move faster to let its currency” rise.  Paulson raised that issue (under political pressure from the Hill) but it was never a major focus of the SED.

“…But this time, Geithner is expected to adopt a softer tone on the issue, even though some U.S. lawmakers want to impose tough sanctions on countries like China that are deemed to manipulate currencies to gain trade advantages…”  Comment:  Geithner’s tone on this will be similar to Paulson’s I’ll wager.  Currency is not now and has not been a significant issue with regard to employment in the US.  The main pressure on the currency issue has come from some manufacturing groups and the Congress.  But it is more of a political than an economic issue and is treated as such in US-China interactions.

“…Though the crisis has given Geithner a weak hand, Treasury officials said he’ll push for something of a grand bargain. The United States would work to reduce its budget deficits once the crisis ends and urge U.S. consumers to save more and shrink the trade deficits that are pumping dollars into the hands of Chinese and other exporters.

But to replace diminished U.S. spending, the administration will push for the Chinese to step up their own spending and stop saving so much. The administration says this can be done if Beijing improves pensions and health insurance so Chinese households don’t feel pressured to save so much…”    Comment:  Again with the “weak hand”!  This is not an arm wrestling match.  “Grand bargain”?  Both the positions stated here (US to reduce deficits after the crisis ends and encourage savings; China increase consumption) are already the stated positions of both governments.  I’m sure each side will want to reassure the other on its goals, but our interests are aligned here already, as are our stated policies.

I think you get the idea.

The story as I see it should read something like:  “The US and China (and the world) are facing the worst economic crisis in two generations.  Both sides have made clear they understand this and are working closely together to contribute to a recovery.  Of course, there are some differences of view on specific policy prescriptions.  Also, each side wants the other to move more quickly than it is to make changes in its economy to ensure sustained global growth going forward.  But the huge changes each side needs to make will inevitably take time.  Geithner on his trip will explore all these issues and work to coordinate even more closely with China on this set of critical issues.  We can expect announcements from the trip reiterating both sides commitment to addressing the current crisis.”

I understand the imperative to make a story exciting and create dramatic tension (Geithner is going hat in hand!  Will he prevail?).  But this is important stuff and deserves more thoughtful treatment.

It’s Not All About Us

May 21, 2009

Saw an interesting column in the Newsweek online edition by Fletcher School of Law and Diplomacy Professor Daniel Drezner (also an active blogger at Foreign Policy (http://drezner.foreignpolicy.com/).  The article is titled “Fearing China” (http://www.newsweek.com/id/198586) and it touches on a subject that has been on my mind for some time.

Drezner discusses several of the recent economic statements/activities by China that have garnered a lot of attention, including PBOC Governor Zhou Xiaochuan’s statement re the need for a new international reserve currency, the increase in China’s purchases of gold (allegedly to reduce its purchases of US debt), Premier Wen’s publicly expressed concerns over the future value of China’s dollar holdings, etc.  His conclusion (with which I concur) is that in all cases there is less here than meets the eye as far as an impact on global economic affairs is concerned.  In the final two paragraphs of the article he goes to say:

“If these moves do not amount to much, then why all the hubbub? To be blunt, America is out of practice at dealing with an independent source of national power. For two decades the United States has been the undisputed global hegemon. For the 40 years before that, America was the leader of the free world. As a result, American thinkers and policymakers have become accustomed to having all policy decisions of consequence go through Washington. Our current generation of leaders and thinkers are simply unprepared for the idea of other countries taking the lead in matters of the global economic order.

Most of China’s recent actions do not constitute a real threat to the United States; indeed, to the extent that China helps to boost the economies of the Pacific Rim, they are contributing a public good. Obama—and Huntsman—need to make the mental adjustment to a rising China, welcoming many of China’s policy initiatives while pushing back at those that threaten American core interests. If they can make this cognitive leap, then Sino-American relations can proceed on the basis of shared interests rather than mutual fears.”

Drezner has touched on significant issue.  I’m not much of an historian and will defer to his judgment re the roots of the problem (as described in the first of the two paragraphs quoted above).  But to me there are too many Americans who fall into the trap of thinking that if China proposes a change to the global economic (or political) system it must be aimed at undercutting the US.

To me, there is a big difference between:

1.  The idea that China has different interests than the US in certain areas and as it becomes more important it will expect its views to be taken into account to a larger degree than in the past, and some of the changes it proposes will be disadvantageous for the US.

VS

2.  The idea that China is pushing certain proposals WITH THE GOAL OF undermining the US.

The first is the natural result of different countries having different interests, coupled with the challenges of incorporating a rising power into the global system.  The second is a conscious, unfriendly effort by one country to weaken another.

Let’s take the issue of the future of the US dollar.  Against the backdrop of the current economic crisis it seems to me China has a legitimate set of concerns about being forever locked into a situation in which the dollar is the sole reserve currency.  Arguably their interests would be better served by a reserve currency composed of a basket of national currencies and this is the idea that PBOC Chairman Zhou Xiaochuan raised for international discussion.  At the same time, a move away from the dollar as the international reserve currency would be a negative for the US.  However, that is not the same as saying that China is talking about such an idea for the purpose of harming the US.

At the end of the day, this is all a question of attitudes and intentions.  If China is pursuing a policy that is detrimental to the US – regardless of the motivation — of course we will need, as Drezner puts it, to be “pushing back at those that threaten American core interests”.  But my concern is that there remain too many people in the US who inevitably jump to the “China is out to get us” conclusion.  This creates a corrosive atmosphere in bilateral relations.  Most of China’s policy proposals are not about us but rather reflect rational expressions of Chinese national interests.  Recognizing this fact won’t lessen the degree to which we have differences, but it will create a better foundation for resolving them.

Note:  This question of course is a perfect example of mirror imaging.  There are still a frighteningly large number of people in China who are inclined to view most US moves in the global arena as aimed at weakening or containing China.  They too need to get over this.

Role of the Government

May 20, 2009

I have previously opined in this blog that issues such as the exchange rate of the RMB and the size of the bilateral trade deficit are matters upon which have been lavished far too much attention by the US Congress and others (and if I have not made this explicit before, I should have).  In terms of the US-China economic relationship and the future of China’s economy itself, a much more important question is the scope and nature of the role of the Chinese government in its domestic economy and international trade and investment. 

A central issue facing China’s leaders in this regard revolves around questions of industrial policies and how best to promote innovation in China.  I have previously in this blog noted my view that while the US needs to “re-regulate” our financial services industry, China needs to continue to deregulate in virtually all areas.  The recent tendency of the Chinese government to continue, or increase, the use of industrial policies in certain industries runs in the opposite direction.

I have also noted that over the long run I believe a greater use of competition, transparency of regulations, strong IPR protection, freer flow of capital, etc. will help China best achieve its goal of promoting innovation.  An approach that has government bureaucrats picking winners from the vast array of emerging technologies and companies and nurturing them with government supports and protective policies is a sure loser in my view.  Yes, increased competition, etc. will improve the access for foreign companies in the China market, but I happen to believe this is ultimately to the benefit of China.

Having stated these views previously, some friends (and some not-friends) have cited the example of Japan to argue that industrial policies can be successful in propelling a country to the front ranks of technology.  In response, I have noted that I think China wants to develop an economy as dynamic and innovative as the US, not Japan, and anyway, outside of autos, how many successes has Japan had in becoming a global leader in industries due to its industrial policies?

With all of this background in mind, I direct readers to a fascinating article in the NYT today (http://www.nytimes.com/2009/05/20/business/20policy.html?_r=1) that examines issues related to industrial policies (in the US and Japan) and assesses its benefits and (substantial) limitations.  (Note:  When I say “fascinating” I mean it supports my previously stated positions.

One of the very points made in the article is the following:

“…Problems [with industrial policies], [economists] say, are typically byproducts of what economists call “political capture.” That is, an industrial sector earmarked for special government attention builds up its own political constituency, lobbyists and government bureaucrats to serve that industry. They slow the pace of change, and an economy becomes less nimble and efficient as a result.

Economists say the phenomenon is scarcely confined to nations with explicit industrial policies and cite the history of agricultural subsidies in America or military procurement practices.”

I agree with the analysis of US agricultural subsidies and military procurement practices.  However, I would note the scope of “industrial policies” in the US (until very recently, as discussed in the article) has been exceptionally limited, even when compared with Western European economies, not to mention China.

To me, continued broad government involvement in the economy and use of industrial policies by China will undermine China’s efforts to develop the dynamic, innovative economy it wants.  It will also lead to increasingly sharp trade frictions with the US and other trading partners.

I believe China’s leaders broadly recognize that in a country where the government’s role in the economy is huge the opportunities for “political capture” are also huge (just substitute “corruption” for “political capture” in this sentence).   The question is:  can those who specifically understand the damaging role industrial policies play in this equation overcome the substantial pressure that well-connected Chinese special interests are already bringing to bear?  For the sake of China’s continued economic development and the smooth development of bilateral economic relations, I hope the answer is yes.


Follow

Get every new post delivered to your Inbox.