A vastly under-reported drama in Australia this past week both sounded a new departure in the old U.S.-Australian alliance and highlighted the central contradiction of the U.S. policy of "pivoting to Asia."
At the annual Australia-U.S. Ministerial meeting in Perth, Secretary of State Hillary Clinton, Defense Secretary Leon Panetta, and their Australian counterparts launched discussions on granting the United States further access to air bases in Northern Australia and to several naval ports, including one on the Indian Ocean just south of Perth. They also announced that the Pentagon would establish a powerful radar and space telescope in Australia to monitor Asian airspace.
In a speech in Adelaide following the meeting, Hillary called Australia an "indispensable ally" and said: "these past three days have reinforced for me the indispensability of the U.S.-Australian partnership. We are cooperating everywhere together -- in business, in shipbuilding, from the mountains of Afghanistan, to the atolls of the Pacific, to the thriving cities of Asia." This, of course, follows the agreement last year to deploy U.S. troops to Australia for the first time since the end of the Second World War. The plan is eventually to have 2500 marines at bases in Darwin. However, so far, only 250 have arrived there.
The announcements and the secretary's speech coincided with two major statements by Australians on the future of Australia. A white paper by a government appointed commission emphasized the centrality of China and Southeast Asia to Australia's future and called for a dramatic shift of Australian economic, educational, commercial, diplomatic, and strategic policies away from their traditional U.S. orientation and toward Asia. In particular, it called for a closer relationship with Indonesia and for Australian membership in the Association of Southeast Asian Nations (ASEAN). A speech by former Prime Minister Paul Keating not only called for closer alignment with Indonesia and ASEAN, but also called for a degree of separation from the United States, saying that Asia sees Australia as a toady of America and too ready to do its bidding. Other commentators raised the issue of whether Australia is unnecessarily and unwisely (in view of Australia's growing economic dependence on China) abetting the United States in a policy of containment of and opposition to the rise of China.
Indeed, in his own press statements, Australian Foreign Minister Bob Carr was at pains to explain that there was nothing about containment of China in any of the Australian-U.S. communiqués and insisted that Australia has not surrendered its foreign policy to the United States.
In her own response in Adelaide, Secretary Clinton said "the Pacific is big enough for all of us" and claimed that those who argue that Australia needs to choose between America and China are presenting a false choice. "That kind of zero sum thinking only leads to negative results," she explained.
On Saturday, however, The Weekend Australian foreign editor Greg Sheridan pointed to important hidden realities. The agreement from last year was supposed to bring 2500 U.S. marines for an annual rotation through Australia and was also to provide for expanded use of military air bases in northern Australia and of naval bases in Western Australia. Yet, so far the only thing that has happened is the rotation not of 2,500, but of only 250, U.S. marines. Sheridan says this is because the Australian government has gotten cold feet in the wake of Chinese warnings that Australia should not partner with America in suppressing China's rise.
What's going on here? Well for starters, it clearly is all about containing China. The United States has been the major power in the Asia-Pacific region for the 67 years since World War II. The Seventh Fleet has been there and U.S. troops have been stationed in Korea and Japan for all that time. Contrary to the popular meme that America was somehow neglecting Asia, it never left. But it also never felt the need to do a "pivot" and to establish further bases and troop rotations in Australia, or to station 60 percent of its naval ships in the western Pacific, or to become involved with the claims of various Asian nations over uninhabited rocks in the sea until China began to emerge as the second major power in the world.
Australia, like all of America's other allies, quasi-allies, and friends in the Asia-Pacific region is benefiting enormously from doing business with China and understandably wants to continue doing that business and even expand it. At the same time, however, it doesn't want to be pulled into too close an orbit by the Chinese tractor beam, nor does it want to have to defend itself against terrorist threats and those lusting for its vast mineral resources all by itself. So it turns to the United States to be the balancer and co-defender.
This, of course, is a way for Australia to have its cake and eat it as well. It is a brilliant strategy if it can be made to work. But there is a vulnerability highlighted by Bob Carr's urgent interjection that there is nothing about containing China in any of the U.S.-Australia agreements and by Hillary Clinton's comment that "the Pacific is big enough for all of us."
The vulnerability is that neither Australia nor any of the other Asia-Pacific nations want to risk offending China. Indeed, the Carr/Clinton comments as well as the slow implementation of the U.S.-Aussie agreements concluded last year are in consequence of complaints China has already made about these deals constituting nothing more than a policy to contain China.
Australia and the rest are increasingly ambivalent. They want Uncle Sam to be readily available in times of danger. At the same time, they don't want to admit too close an association. In short, they don't want to be asked to choose between China and America. One may wonder why the Americans would want friends who are afraid to acknowledge them, but so far, at least, Washington has taken the position that there is no need to choose. That, however, is not the position that China has taken. It interprets the ties of Asia-Pacific nations with America as aimed at containment of itself. It complains and threatens and in response everyone starts talking double talk.
Ultimately the question must boil down to what are the Americans getting out of this. The business the United States does with China makes it large and a chronic international debtor, and maintaining fleets, troops, and bases in the Asia-Pacific region only adds to its federal budget woes. Will it eventually conclude that the double talk is not worth the candle?
If you want to understand the truly upside-down nature of the thinking of Washington's foreign policy elite on Asia, take a look at the just released report and press commentary by the U.S.-ASEAN Strategy Commission of the Center for Strategic and International Studies (CSIS).
Like all of these think tank commissions, this one is studded with former high ranking officials now consulting for a variety of global corporations both American and foreign. Particularly prominent in their remarks were former U.S. Trade Representative Carla Hills and former Defense Secretary William Cohen. Hills urged negotiation of that philosopher's stone of modern international relations, a free trade agreement, in this case between the United States and ASEAN. Breaking down barriers to trade and capital flows would encourage further investment in the region by U.S. corporations, she said.
In light of the fact that the ASEAN region is drowning in investment while the United States is starving for it, it's not clear why Washington should want to encourage further investment in ASEAN, but maybe Hills thinks the deal would encourage a two way flow of investment that would also be beneficial to the United States.
If that is the case, however, the commission's proposals do not include any recommendations on exchange rate manipulation, reciprocity on investment incentives, or other tax and regulatory tools often employed by the ASEAN countries in ways that tend to promote their trade surpluses and the U.S. trade deficit with its consequent impact on U.S. unemployment.
Joshua Roberts/Bloomberg via Getty Images
"It's on me. It's on me," GE CEO Jeff Immelt recently told the Wall Street Journal's John Bussey in response to a question about the wisdom of transferring technology and production to his new avionics joint venture with China's state-owned Aviation Industry Corp. (AVIC), a company that supplies both China's commercial and military aircraft industries.
Presumably, this was Immelt's way of saying that he would man up and take responsibility if anything went wrong as a result of the deal. That is, of course, an admirable sentiment, but the problem is that it's not a responsibility Immelt can take because he will never be in a position to actually have to pay for any damage resulting from the deal.
Three points have gotten mixed up in the ongoing discussion of this deal, and it is important to unscramble them. First is the issue of access to the Chinese avionics market being conditioned by Beijing on the transfer of technology and production to China. GE spokespeople keep saying that it was never told it had to make such transfers in order to get the business. This is disingenuous, and Immelt ought to tell his people shut up in order to save his own credibility. Sure, no Chinese official ever made such a direct statement to GE. But it is insulting to trade and industry experts for GE to keep denying what everyone knows to be true. Beijing's five-year plans and its Buy China policies along with its Buy Indigenous Technology policies have made it abundantly clear to all observers of the scene that China intends to develop its own cutting-edge aviation and avionics industries and that it intends to do so by insisting that production and technology development for the Chinese market be done to the maximum possible extent in China. GE is doing this joint venture because it knows it has no chance of getting the business without technology and production transfer, and every China and trade expert in the world knows this to be the case.
The second issue is whether the technology GE is planning to transfer could leak into China's military aircraft programs and thereby endanger U.S. national security at some future date. Related to this question is also that of whether the technology could leak out and be used by other Chinese companies to take business away from other U.S. aerospace companies like Boeing. GE says it has devised strict procedures that have been approved by the U.S. Departments of Defense and Commerce to prevent such leakage. Further, GE insists that technology is the heart of the company and asks rhetorically, "Why would we give away our future?"
When Immelt insists that "it's on me," this is what he means. In other words, he'll take responsibility if somehow the technology gets away from GE into places where it could come back to hurt GE or the United States.
Historical experience strongly suggests that leakage of technology in these kinds of circumstances is virtually impossible to prevent. Look, we couldn't prevent the North Koreans from getting nuclear weapons technology even though we made every effort to stop them and certainly were not doing joint ventures with North Korean state-owned companies. And while it's admirable for Immelt to be willing to take responsibility if something bad happens, as a practical matter, what price exactly is Immelt likely to have to pay? By the time it happens he and his top managers are likely to be long gone from the scene with bonuses and retirement packages in hand. And even if something bad happens sooner, what will "it's on me" really mean to the companies or the U.S. forces that have to face the consequences?
But let's assume for sake of the argument that nothing leaks out of the joint venture. So GE is cool. It continues to control the technology, and its joint venture gets the business. Earnings soar. The stock price skyrockets, and Immelt and his team and the shareholders all collect big bonuses and dividends. The deal will thus prove to have been good for GE. But what about the United States? This avionics technology is something in which U.S.-based production and workers are the world leaders. The United States has a competitive advantage in this stuff. These are jobs that Americans can claim a better right to than anyone else. Under normal market conditions, without the necessity of technology transfer in return for market access, there would be no need of a joint venture. All the technology development and production would be done in America and would be exported in exchange for something that is better done in China or elsewhere. So under circumstances of no leakage, GE may come out looking golden, but the United States would still take a hit.
Oh sure, you can argue, as GE does, that by getting the China business and doing part of the work in the United States, GE is creating new U.S. jobs as well as jobs in China. And there is some truth to this argument. But it ignores the fact that the United States is getting less than the full value of its competitive advantage while at the same time that national advantage is being whittled away with the full support of multinational GE. In other words, GE can and would benefit at America's expense. So nothing would be "on" Immelt. The cost would be on the American worker, researcher, and U.S.-based producer.
That leads to the final point. The real problem here is not GE or Immelt. They are doing what is logical and best for them in the prevailing circumstances. As former Commerce Department official James Lewis told Bussey, "U.S. companies are making the right decision from a business point of view, but it might not be the right decision for the country. We've been passive (as a country) in deciding how to deal with China's aggressive industrial policies."
The real problem is the U.S. government or, rather, its absence from the discussion. China is conditioning access to its markets on technology and production transfer. There is no back pressure from the U.S. government. The CEOs are in a situation in which if they don't accede to China's pressures, they'll lose the business and they get no help from Washington in dealing with the pressures. So the rational thing to do under the circumstances is to play China's game. What is desperately needed is an American game in response. Washington needs to change the circumstances, level the playing field, give GE and Immelt a new set of incentives. The White House has to articulate an American economic interest, and that is not the same thing as the interest of GE or of any other particular company or set of companies.
So why focus so much on Immelt, you may ask. Well, it's true that in most respects he is acting no differently from any other global CEO and, let me make clear, no differently from how he should as the head of a global enterprise like GE. But there is one respect in which he is quite different. He is the chairman of the President's Commission on Jobs and Competitiveness and as such is the chief outside economic advisor to the president. He should be thinking of the American interest as well as the GE interest. He should recognize that the costs to the American economy and the American worker can't be "on" him, and he should be telling the president to change the game.
The plot of the story of the new made-in-China Oakland Bay Bridge has begun to thicken. Further digging has uncovered additional flaws in the rationale for having a major part of one of the United States' biggest infrastructure projects outsourced to China.
In the June 26 New York Times article that first broke the story, the claim was made that a major reason for having the fabrication of the bridge's major sections done in China was that American fabricators didn't have the capacity or capability to perform the work on such giant structures. Because of their supposed superior capabilities and lower labor costs, the Chinese were said to be providing the $7.2 billion bridge for $400 million less than U.S. fabricators who probably couldn't have done the work in any case.
But it turns out that the issue wasn't one of capability but of scheduling. U.S. fabricators had the capacity and the capability to do the work but argued that the project would take more time than the Chinese were proposing in their bid. Well, in the event, the Chinese have not been able to meet their own timetable, and the bridge is actually being built on the schedule originally proposed by the American fabricators. The first delivery of Chinese steel was more than a year late and the whole project is three years behind schedule and $5.2 billion over budget according to information provided by the National Steel Bridge Alliance.
So it looks like the Chinese low-balled their proposal in order to get the bid and then more than ate up the presumed savings by failing to meet their own timetable.
PHILIPPE LOPEZ/AFP/Getty Images
In the wake of my recent blog post on the new Oakland Bay Bridge being made in China, a lively debate has erupted. I found the best comments to be those of Vikram Dalal of Iowa State University. I am passing them along here.
By Vikram Dalal
Professor of electrical and computer engineering, Iowa State University
The real problems are:
1. The destruction of American industrial infrastructure. As former Intel chief Andy Grove says, it is absolutely critical that we continue to manufacture "commodity" industrial items, like bridges and rivets and bearings and computer chips and tires and steel and aluminum and commodity chemicals. Once we lose that, we lose the workforce. It takes many, many years to build up an industrial workforce, but only 10 years to destroy it. When younger people see jobs being lost in manufacturing, they turn away from it, with the result that the workforce dies off. That is exactly what is happening today -- industries cannot find enough well-trained young people.
2. The second problem is that as the industrial workforce (the people who make things that we can export) is reduced and laid off, they (and their children) go into "service" businesses, particularly health care. But health care is a giant monopoly -- the doctors have an iron grip on it. There is no competition there. What it means is that the only way more jobs are created in "meaningful" health care -- jobs like technologist or lab tech (as opposed to those in bedpan health care) -- is by doctors prescribing more MRIs, CAT scans, PET scans, and so on. That increases medical costs, especially because Medicare requires no second opinion. You walk in and before you know it, the doctor has prescribed 10 tests, because no one is checking; and he, and the hospital, make more money from more tests. So increasing health-care employment is not a winning strategy from a national economic viewpoint.
Chinese President Hu Jintao's arrival in Washington yesterday was accompanied by the announcement of the imminent signing of a major joint venture between General Electric and China's state owned Avic to produce sophisticated avionics (airplane electronics) in China for sale to Chinese and other airplane producers.
No doubt intended as a way of pouring oil on the troubled waters of U.S.-China trade relations by demonstrating mutually beneficial cooperation between U.S. and Chinese industry, the announcement instead demonstrated precisely why the waters are troubled.
Let's start with GE Chairman and CEO Jeff Immelt. About a year ago, in the course of a dinner he thought was private, Immelt complained that China is a miserable place in which to do business. It was bent on expropriating GE technology and made selling in China very difficult if not impossible unless a company also produced in and transferred technology to China, he opined. A few months later, Immelt spoke of having an epiphany about the dangers of off-shoring too much GE production. In the GE annual report, he wrote of the need for and his intent to put more investment in the United States and to bring some of GE's foreign production back to America.
But the announced deal will take things in the opposite direction. The investment and production will be in China and the technology (much of it initially paid for by U.S. tax payers and the Defense Department) will be transferred from the United States to China, thereby enabling China's aviation industry to move more quickly toward its goal of overtaking the U.S. and Europe in commercial and military jet production.
So what's going on? GE's Vice Chairman John G. Rice put it bluntly in commenting on the fact that China is expected to buy $400 billion of airplanes over the next twenty years: "We can participate in that or sit on the sidelines. We're not about sitting on the sidelines." Rice added that: "This venture is a strategic move that we made after some thought and consideration with a company we know. This isn't something we were forced into by the Chinese government."
Okay, but why can't GE sell to that big market without a joint venture with a state owned Chinese company? Why can't it just make the avionics in the United States and export them to the Chinese aircraft makers and airlines? After all, China doesn't have this technology right now. So GE is a lower cost and infinitely more sophisticated producer than Avic.
Well, one reason might be that if GE doesn't do this deal, another avionics maker might. But hold it. That has to mean that the Chinese are effectively making access to this big market conditional on producing in and transferring technology to China. So who is Rice trying to kid. Maybe the Chinese government didn't call him up and shout directly over the phone that "Mr. Rice we command you to do a joint venture with Avic and to transfer your technology and production to China." But Rice is not as dumb as he thinks we are. He was afraid that if he didn't produce in China, he wouldn't have a chance at the business.
And Immelt did say that he had cleared all this with the U.S. Departments of Commerce, Defense and State.
But that raises an even more interesting question. Will we be hearing of any joint ventures between U.S. and Chinese companies that will transfer Chinese technology and Chinese based production to the United States? I'm sure your guess was "no." And you're right. But why don't Obama and his Commerce, Defense, and State Departments make it clear to the Chinese that if they want to sell in the U.S. market they need to produce something here and transfer some technology here? China is way ahead of the U.S. in the production of solar panels for example. This is a technology being fostered by the Obama administration. Why not get the Chinese to help us in solar panels just as Immelt and GE (with the apparent approval of the Departments of Commerce, State, and Defense - and the White House) are helping them with avionics?
After all, isn't what's good for the Chinese goose also good for the American gander?
yesterday's (Nov. 25) Financial Times,
my friend Claremont College professor Minxin Pei commented
that "China may choose to do nothing (with regard to trying to rein in North
Korea) just to prove that the west cannot bash it and beg at the same time."
the question of China possibly cutting off its nose to spite its face that
caught my attention. After all, China may really not consider North Korea to be
or any danger to it at all. Rather it was the use of the term "bash" and its
ascription of bashing to the "West." Let me hasten to say that my comments here
are not at all meant as a criticism of Minxin who I am sure used the term
simply as a repetition of current usage and without giving it much thought. But
that in itself is significant as a manifestation of how extant this powerfully
loaded term has become.
what bash means or what people would be trying to say if they called you a
basher. The word suggests a vicious, even irrational and probably gratuitous or
perhaps racist, attack on someone or some group or some country. And let me say
up front that I know this and am sensitive to it, because in the 1980s and 1990s
when I was first a U.S. trade negotiator with Japan and then an analyst of
globalization at the Economic Strategy Institute, I was routinely referred to
in the press as a "Japan basher."
In the case
of yesterday's article, the comment was in relation to the fact that China has
been criticized over the past few years on a wide range of issues including its
claims of sovereignty over disputed isles in the South China Sea, the ramming
of a Japanese ship by a Chinese fishing vessel, refusal to relax its
intervention in global currency markets and to allow its currency to revalue
significantly, reluctance to accept some degree of responsibility for
rebalancing the current, massive global trade imbalances, as well as its
refusal or inability to do anything about its North Korean allies' nuclear
doubt, there are two sides to all these stories and China has a right to voice
its claims and to act or not to act as it sees fit. But surely other countries
may have grounds for their criticisms. China no more than any other country
should be immune from legitimate criticism. But this is, in effect, what
happens when we use start using the terms bash, bashing, and basher. Because
they suggest irrationality, hatred, and racism, they inhibit and obviate
serious and necessary discussion of important differences and issues. Are there
no legitimate grounds for concern about China's territorial claims in the
Pacific or about its currency and trade policies? Certainly the Federal
Reserve's monetary policies and U.S. currency policies were subjected to
withering criticism at the last G-20 meeting.
only underlines another interesting element of phenomenon. "Bashing" is
something that apparently can only be done by the West, and really only by the
United States. No one calls China a U.S. basher when it criticizes Ben Bernanke
or the U.S. banking system. No one calls Germany a U.S. basher when it levels
criticism at U.S. economic policies.
basher was first popularized by Washington
Post columnist Hobart Rowen in the 1980s when, in his passionate advocacy
of free trade, he used it to undermine the legitimacy of any U.S. response to
or even criticism of Japan's mercantilist, export led growth strategy of the
time. His tactic proved so effective that it was quickly adopted by the
officialdom and media of Japan and other countries wishing to deflect and halt
U.S. pressure on them for change.
time to stop using this term in reference to debate with or about our
international partners. We should be speaking of "criticizing" rather than of
Clyde Prestowitz is president of the Economic Strategy Institute and author of The Betrayal of American Prosperity.
OLIVIER LABAN-MATTEI/AFP/Getty Images
As the G-20 talks get underway, we're thrilled to have Clyde Prestowitz guest-blogging for us over the next few days. Clyde is the president of the Economic Strategy Institute here in D.C. He served as counselor to the secretary of Commerce during the Reagan administration and as vice chairman of the President's Committee on Trade and Investment in the Pacific.
Be sure to check out his most recent book, The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era as well as his piece, Lie of the Tiger, from the November print issue of FP. -JK
First, Barack Obama was shellacked in last week's congressional elections. Then, the U.S. president was garlanded in India and Indonesia. Now he's in Korea, where he's about to be waterboarded by the G-20.
Oh sure, the G-20 will come up with some paper-over language that will allow everyone to sign on to some vague agreement that it might be a good idea to achieve global rebalancing at some undetermined time in the next century. But this is just what the Japanese would call tatemae -- the packaging or superficial appearance of things. The honne -- the truth or actuality -- is that whether he knows it or not, the U.S. president has arrived in Seoul to preside over the end of the Flat World.
In fact, the Obama administration is demonstrating a lot of schizophrenia about this. In India, Obama couldn't stop spouting the conventional wisdom about how international trade is always a win-win proposition and how those who express concern about the offshoring of U.S. services jobs to India are just bad old protectionists.
At the same time, however, Treasury Secretary Tim Geithner is calling for some kind of deal for the G-20 governments to take concrete actions to reduce their trade surpluses or deficits. To be sure, Geithner has quickly backpedaled from his original proposal that governments would set hard numerical targets for the allowable limits of surpluses and deficits at 4 percent of GDP. His first fallback position was that the numbers would be only voluntary targets or reference points. When that elicited a new round of incoming fire he retreated further to the current proposal for agreement that each country will take the measures it thinks necessary to reduce excessive surpluses and deficits. Hardly much of a deal at all.
Yet even this is a revolution. No matter how watered down, Geithner's proposal is a call for managed trade. It is an implicit admission that contrary to 50 years of the preaching of economists, trade deficits matter. Even bilateral trade deficits can matter if they are big enough because they distort capital flows and exacerbate unemployment in the deficit countries. Further, it is an admission that unfettered, laissez-faire free trade is not self-adjusting and therefore not really win-win.
This implicit admission by Geithner has been manifested even more strongly (but still implicitly) by some of our leading free-trade economists and pundits. Thus, Paul Krugman, a Nobel Prize winner and long a champion of conventional free trade has called for tariffs on imports from China. So has Washington Post columnist and eternal free trader Robert Samuelson, and even the Financial Times' economics columnist Martin Wolf has suggested that some offsetting response to China's currency manipulation might be necessary.
But Obama isn't going to get agreement to any of that in Seoul. None of the other countries want to face the fact that the United States cannot be Uncle Sugar and the buyer of last resort forever. In fact, Obama has asked both the Germans and the Chinese to help out a bit by consuming more and exporting less. The Germans told him bluntly to get lost and the Chinese told him somewhat more politely to get lost. So the honne is that the Germans, because they're Germans, and the rest of Europe, because it is in terrible financial shape and can't borrow any more, are bent on creating jobs by dint of export-led growth. Essentially, they are saying they are going to create jobs by taking U.S. jobs. The Asians are saying and doing the same thing. Neither Asia nor Europe is likely to take steps that will achieve significant rebalancing in any reasonable period of time. That, of course, means no new jobs for Americans.
The big question is whether or not Obama will respond to that refusal by taxing foreign capital inflows, imposing countervailing duties on subsidized imports, matching the tax holidays and other investment incentives used by China and others to induce off-shoring of U.S. production, and challenging the mercantilist practices of many Asian countries in the World Trade Organization (WTO). These are all measures that he could take himself in an effort unilaterally to reduce the U.S. trade and current account balances and thereby create jobs for Americans.
If he does, he is sure to be harshly criticized by the apostles of the conventional wisdom. But if he doesn't he is sure to be toast in two years.
TIM SLOAN/AFP/Getty Images
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.