The China conundrum

Two important articles over the weekend and a recent speech raise serious concern by commentators with impeccable establishment credentials about the fundamental assumptions of American policy on China.

The announcement that China's Shanghui International is acquiring America's venerable ham and pork producer Smithfield Foods in a $4.7 billion deal sparked a very thoughtful and insightful response in Saturday's Washington Post by long time free trade champion and Carter administration undersecretary of commerce for international trade, Bob Herzstein. Then Sunday's New York Times featured an article on China's Economic Empire by Heriberto Araujo and Juan Pablo Cardenal, authors of China's Silent Army: The Pioneers, Traders, Fixers, and Workers Who Are Remaking The World in Beijing's Image. These followed a speech two weeks ago by founder and retired Director of the Peterson Institute for International  Fred Bergsten who said that currency manipulation by China and others is seriously damaging the U.S. and global economies.

Let's start with Herzstein who inadvertently provided the answer to the first question my wife popped when she read of the Chinese acquisition of Smithfield.

"Why," she asked, "can't Smithfield just sell the pork and ham to China without being taken over by a Chinese company?" She also wondered why there would be any concern in the United States about the deal since pork doesn't immediately strike one as a national security issue. Of course she operates under the impression that free trade prevails between the United States and China because, after all, both countries are members of the World Trade Organization (WTO).

But Herzstein points out the unseen problems and risks. One is that Shuanghui is known to have fed chemicals to its pigs in China that made them lean but that made humans sick. Rampant food adulteration in China indicates a lack of concern for safety and health standards. Of course, U.S. standards would apply in the U.S. market, but enforcement is spotty and heavily reliant on voluntary compliance. Then there is the probability that Shuanghui will use Smithfield's animal gene technology in its production in China which could, in a few years, lead to enhanced Chinese production and a reduction in imports from Smithfield. Indeed, it could even lead to a reverse in the flow of trade with the United States becoming an importer rather than an exporter of pork. Why is this? Herzstein points out that U.S. companies seeking to invest and sell in China's state dominated economy have been forced to share their intellectual property and manufacturing know how with Chinese competitors. In other words, the WTO to the contrary notwithstanding, U.S. trade with China is not free trade, says Herzstein.  

He goes on to emphasize this point by noting that Chinese investors in U.S. companies such as AMC movie theaters and IBM's personal computer business (now called Lenovo) operate freely in the U.S. market without being subject to special conditions. Not so in China however. There U.S. firms often are forced to share ownership with state owned companies, to make special deals on supply or sales with local companies, and to clear many investment decisions with bureaucratic authorities. Herzstein concludes that China's economy is state dominated economy, that its business culture is vastly different from the free market systems of the United States and most of its trading partners, and that it is directed for purposes of potentially adverse strategic interests. He emphasizes that the United States and other countries that rely on open trade and investment badly need leverage to counter what he calls "China's protectionist practices." His key recommendation is broader authority for U.S. government review of the likely impact of foreign investment on U.S. and global economic interests.

Araujo and Cardenal explain that as a result of subsidization of key industries and maintaining an undervalued currency, China has established a chronic trade surplus and accumulated over $3 trillion of dollar reserves which are completely at the disposal of the state. It is now using this and its control of state owned enterprises that comprise about half of China's economy to conduct a far reaching program of foreign investment aimed at gaining as much control of key foreign sources of supply and of key foreign markets as possible.

They emphasize that: "it is important to remember what is really behind China's global economic expansion: the state. China may be moving in the right direction on a number of issues, but when Chinese state owned companies go abroad and seek to play by rules that emanate from an authoritarian regime, there is grave danger that Western countries will, out of economic need, end up playing by Beijing's rules. As China becomes a global player and a fierce competitor in American and European (one might add Japanese) markets, its political system and state capitalist ideology pose a threat."

Fred Bergsten has been a leading champion in Washington for free trade and globalization for more than forty years. Some consider him the father of APEC (Asia Pacific Economic Cooperation) and he has been an enthusiastic supporter of NAFTA (North American Free Trade Agreement), CAFTA (Central American Free Trade Agreement), and of all the WTO rounds of free trade negotiation. No one would call Fred Bergsten a protectionist. Yet in his paper on currencies he makes the point that the global financial system is broken, that the role of the dollar as the main global reserve currency makes America vulnerable to the off-shoring of its tradable industries as a result of currency manipulation, and that such manipulation by China and others is causing the loss of 2-3 percent of U.S. GDP growth annually.  To stop this he calls for drastic measures such as countervailing currency manipulation and taxation of certain foreign investment in the United States.

As President Obama prepares to meet this week with Chinese President Xi Jinping, it is essential that the fundamental contradiction of U.S. China policy highlighted by the above articles be resolved. On the one hand, the United States is dealing with China economically on the basis of the syllogism adopted by President Clinton and popularized by the New York Times columnist Tom Friedman - globalization will make all countries rich, being rich they will become democratic, and being democratic they will become peace loving because we know that democracies don't go to war with each other." Thus the primary assumption of U.S. China policy has been that as a member of the WTO and an integral part of the global economy, China will become what former U.S. Trade Representative and World Bank President Bob Zoelleck has called a "responsible stake holder" in the largely U.S.-Europe designed and constructed global economic system.

On the other hand, the Obama administration's "Pivot to Asia" which emphasizes an upgraded and increased military presence along with promotion of the Trans Pacific Partnership (TPP) free trade agreement and along with the obvious intent to maintain military superiority in the western Pacific suggests the perception by the White House and the U.S. security community of a threat from China.

All of the commentary above suggests that there may be more than a mere military threat, that, indeed, there may be a system threat. Moreover, the prevailing economic policies of America, Europe, Japan, and others may actually be feeding both the military and the system threat.

At the very least, President Obama should use his upcoming discussions with President Xi to determine the true nature of China's system, of the guiding assumptions and principles or its leaders, and of its likely direction and impact on America and the global system supported by America.

SAUL LOEB/AFP/Getty Images

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