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Remarks to the National Foreign Trade Council International Human Resources Management Conference, Houston, Texas, March 7, 2007
Date: 3/7/2007
Written By: Bill Reinsch, NFTC, 202/887-0278

CHINA AND U.S. NATIONAL SECURITY

 

Remarks to the National Foreign Trade Council International Human Resources Management Conference, Houston, Texas, March 7, 2007

 

I’d like to begin with some short comments on China’s recent economic trajectory and then try to relate that to some current issues.

 

  • What is China doing?  It is growing – fast.  It is improving its agricultural capabilities, working on its infrastructure, and expanding its manufacturing, moving up the value-added chain as fast as it can.  
     
    • Average annual GDP growth of 14.8% since 1988.  Still hovering around 10% per year, despite efforts to contain it. 
    • Global trade has grown from $20.6B in 1978 to $474.3B in 2000 to $1.7T last year.
    • After a long period of fairly balanced trade, they are starting to post large surpluses -- $177 billion in 2006.
    • Total trade makes them 3rd or 4th in the world.
    • Total foreign investment grows from essentially zero to over $½ trillion.
    • Foreign exchange reserves grow from $20.6B in 1992 to over $1 trillion, largest in the world..
    • We estimate $700B of that is in US paper.
       
  • In fact, China is doing what Japan did in the 50s and 60s, what Korea and Taiwan did subsequently, and what Malaysia, the Philippines, Indonesia, Thailand, and a host of others are trying to do right now. 
     
  • In many respects we are mirror images.  We buy their products; they depend on our market to grow.  They save 40% of their income while we save virtually nothing.  We are the world’s largest debtor ($3 trillion plus), while their reserves reach new records.  
     
  • So, why are we worried about China and not about the others?
     
  • The easy answer is size.  Nobody is too worried about Malaysia’s progress up the technology value-added curve because there is a limit to their productive capacity.  With 1.3 billion people, there are potentially far fewer limits on China’s capacity.  In contrast to all the others, they will become a true economic rival.  They are not the proverbial 800-pound gorilla but the 800,000-pound gorilla.  
     
  • The other answer, of course, is politics.  While we had many of the same economic worries about Japan 20 years ago, at the end of the day they were still an ally and friend.  China is not, and we worry not only about the economic implications of rapid growth but the strategic implications of a potential struggle for predominance in the Pacific.
     
  • This is not a new condition.  It has characterized debate in Washington for 30 years.  Blue team, John Rood story.
     
  • The business community likewise maintains some ambivalence toward China.  On the one hand, they find it an enormously attractive market.
     
    • Size
    • Low labor costs
    • Work ethic
    • Of course, lemming effect 

On the other hand, it is enormously frustrating for them:

 

·        Forced technology transfer – creating competitors

·        Rule of law issues – theft of company

·        IP theft

·        Access difficulties if your product is not one they’re particularly interested in.  (selective capitalism) 

·        Exchange rate imbalances

 

·        In short, the Chinese don’t make the relationship easy, and the business community often finds itself in the awkward position of opposing Congressional attempts to “fix” the problems – like last year’s Schumer-Graham amendment – knowing that the concern Congress is trying to address is a legitimate one. 

 

B.  Integrating the domestic and the foreign

 

We are also not very good at understanding what is going on inside China and, more importantly, how that affects its growth and its relations with us.  My own colleagues on the China Commission, for example, tend to assume an invariable upward growth trajectory which ignores the very real internal contradictions the regime faces. 

 

C.  China’s future

 

  • In that regard and to oversimplify, there are two general theories on China’s economic future – and a new third one – that their economic policies will succeed and lead to –political liberalization as well; or their internal strains will become so great that they will implode.  Those strains include: 

o       A government with little legitimacy or inherent credibility maintaining itself by repression and on the strength of its economic growth policies, which will not last forever, no matter how successful they are right now.

 

o       The obligations China has undertaken to integrate itself into the WTO and the Western economic system, which will impose tremendous social, regional, and economic pressures.

 

o       The absence of a rule-of-law tradition and corruption-free bureaucracy, which are fundamental requirements for operating successfully in a globally integrated world, and which will ultimately drive people and money away, particularly in the face of new competition from India.  If there is no consistent, effective means of seeking redress, investors ultimately go elsewhere, probably India,  no matter how attractive the market.

 

o       A related concern is the growing view that corruption is systemic and not a problem that can be solved through the usual Chinese approach of a national campaign and a few arrests.  Party members retain status in their communities through a network of favors and interventions.  Take that away and you ultimately take away the reason why people tolerate the Party.

 

Jim Mann has recently propounded a third theory – that China will be able to continue its economic liberalization indefinitely without experiencing political change.  This is currently a topic of analysis and debate in Washington.

 

  • We may not know for years how this is going to turn out.  And, in fact, the truth is usually somewhere in the middle.  Their internal problems are serious and getting worse, and the government has not been consistently skillful in dealing with them.  At the same time, many Chinese believe in stability more than they believe in democracy.  That may change somewhat as the older generation dies off, but we cannot realistically expect any scenario that will lead to Western-style democracy. 
     
  • Even so, the United States can influence the outcome in a number of ways, though perhaps not in the way the current Administration thinks.  Demands for democracy, for example, will fall on deaf ears, and requests for cooperation with our goals in Iraq, Iran, North Korea, or elsewhere will be firmly subordinated to Chinese views about what is in their interest, not ours, although it is also true that their interests do sometimes coincide with ours.
     
  • What we can do, however, is help build rule-of-law, insist on WTO compliance, help with IP protection, and work, in the process, for the development of a more accountable government.  That is called engagement, and we do it in significant part via a U.S. business presence in China maintaining Western business practices and standards.  
     
  • It is also this Administration’s policy – so far – just as it was the last one’s.  That is important to the business community because it is losing patience with China on the trade front for the reasons I cited..  American companies were initially willing to forgive a lot in the interest of accessing an incredibly large market, and they showed considerable patience following WTO accession in waiting for the Chinese to fulfill their commitments.  However, those days are going.  Too many companies have experienced too many problems.  

·        While companies have not joined labor and others in supporting protectionist legislation – and will not – they are impatient for meaningful change and annoyed at the new problems they are encountering.

 

  • On the slightly better news front, there is evidence that our call for China to become a “responsible stakeholder” -- based on the idea that their exposure to the West would give them a stake in global stability, promote their own growth and prosperity, and through that help them become a responsible actor on the international scene -- has caught Chinese attention and precipitated debate there over what it means, particularly among those who are, at their end, trying to figure out what “Peaceful Rise” means.

 

 

The U.S. Response

 

  • Just as China has several paths, so do we.  On the one hand, we can overreact to current problems in ways that will make the long term situation worse.  The primary danger comes from the Congress, which has only blunt tools to work with.  Most of them do not want something stupid enacted, but they are unwilling politically to be perceived as not doing anything.  The proposals most likely to pass this year include making nonmarket economies eligible for countervailing duty complaints and making currency manipulation or imbalance a countervailable subsidy.

 

  • The other danger of overreaction comes from an Administration which is showing growing signs of paranoia about China from a security perspective.  There are now pending 4 separate proposed regulatory changes – three from Commerce and one from Defense – which will have a serious adverse effect on high tech trade with China and on continuing use of Chinese employees in American companies, particularly defense contractors, and on Chinese students seeking to study in the Unite States.

 

  • That latter issue is particularly important.  We trade with China; we invest in China; we visit China.  And vice versa.  But the biggest “gift” we have given China is the education of thousands of its brightest students – over 60,000 are here right now -- many of whom have returned to help their country grow, taking with them Western standards and values that may ultimately produce social and political change in China.  And, many of them stay here and contribute to our intellectual base.  I think this is win-win whether they stay or go, but that’s not a view shared by everyone. 

 

  • These regulations suggest a turning of the tide within the Administration in favor of those see security as our paramount consideration, many of whom regard military conflict with China inevitable.  It’s ironic, of course, that the Chinese have their own blue team.  Perhaps the goal of both our foreign policies should be to ensure that neither side’s blue team takes over.

 

  • The dilemma of the paranoid is that they can complain all they want about what’s happening, but they have precious few means of stopping it.  Are we going to stop trading with China?  Pull our investment out?  Evict their students from our universities and cause the schools a budget crisis in the process, not to mention the long term damage it would do to our ability to innovate?

 

  • These are unlikely steps.  China is, after all, the world’s largest market, and those who think the US can be the world’s greatest military power without simultaneously being the greatest economic power, need a refresher course in economics and globalization, so they understand why closing ourselves off cannot enhance our competitiveness and innovative capabilities.

 

  • Instead of paranoia, the real policy response should not be what to do to China but rather what to do in the United States.

 

  • Approaching the problem that way actually gives us some answers.  If you have an adversary, or a competitor – and we have defined China as one or the other – then the critical strategic issue is maximizing the military and technological gap between us – staying as far in front of them as we can.  You do that two ways –holding them back or running faster than they are.  Holding them back isn’t working too well and, in truth, cannot work very well.  It is far better to spend our time making sure we are running faster.  And that means looking more closely at our own declining competitiveness and developing policies to address it.   That means taking care of victims; incentives to stay here; running faster (high tech R&D support), but that’s another speech.