Who Needs Whom More?

Recent US arms sales to Taiwan met a sharp Chinese response that unnerved US business interests. So far, the Obama Administration has preferred accommodation to confrontation with Beijing. Business concerns, of course, fear any disruption to growth in China. But is what is good for business necessarily good for the US in the case of China? According to the author, the US should recognize that China only plays by Western rules when it is to its own advantage. Indeed, China has been the big winner in trade thanks to open markets. But there hasn’t been a commensurate improvement in political freedoms, despite expectations for such an outcome by Washington. Though no one wants a trade war, it is the US and not China – still modernizing and dependent on foreign investment and technology – that has the advantage if one were to ensue. – Yale Global

Who Needs Whom More?

Philip Bowring
Friday, February 5, 2010

HONG KONG — Is what’s good for U.S. business good for the United States? That old question has become pertinent again as the Obama administration stumbles in its relationship with Beijing.

Last week, the U.S. announced a weapons sale worth $6 billion to Taiwan. The United States has been selling defensive weapons to Taiwan for decades, but this latest deal set off strong reaction from a newly confident Chinese leadership, one that wants to believe that Washington is dependent on Beijing to finance its budget and trade deficits.

Beijing has responded to the weapons sales with threats of trade sanctions that are making some big U.S. companies, such as Boeing, nervous. Likewise, technology companies with interests in the China market are worried about the fall-out from tensions over Google’s anti-censorship stance and charges of hacking.

So far, the Obama administration has been unwilling to call China’s bluff over its exchange rate and capital controls or sanctions threats, which run contrary to free trade principles. Instead of a strategy for addressing the inequalities in the trade relationship, there are fitful protectionist outbursts, for example over tires. The U.S. needs to regain its self-confidence and make Beijing face the question: Who needs whom more?

Forget diplomatic horse-trading on issues such as North Korea and Iran. Look instead at how real or imagined China business opportunities obstruct action by Washington.

China’s threats, explicit or implied, are at the very least contrary to the spirit of open trade. But the concerns of a few businesses seem uppermost. They feed both on immediate sales prospects and the belief that China will continue to be a global growth leader for years to come.

For sure, individual companies may suffer from Chinese retaliation. But the U.S. government’s job is to look after national, not individual, corporate interest. Take a long view and ask: Who has benefited most from the explosion of the U.S.-China trade and investment?

Years before China joined the World Trade Organization it enjoyed many privileges in America. The United States offered access to its markets, its capital and much of its technology to encourage the development of a market and private capital-based economy.

It hoped that China would join a U.S.-led world system and liberalism and democracy would follow in the wake of economic opening. Others — Japan, Korea, Taiwan, Germany — played big roles in China’s trade-led modernization, but only following a U.S. lead.

China seized the trade and investment opportunities, but economic liberalism has failed to deliver its political counterpart. The present trend is in the opposite direction: Success is fossilizing China’s political system and spurring nationalism and a military build-up.

Despite years of massive trade deficits, of seeing intellectual property stolen and profits on investment in China snatched from under their noses, U.S. businesses are still pursuing the rainbow of China growth.

Of course there are big U.S. winners. There are the brand names and retailers who fatten their margins by squeezing their Chinese suppliers. There are the manufacturers for whom loyalty to U.S. shareholders far exceeds loyalty to U.S. workers, and the investment bankers who have made vast sums bringing Chinese companies to foreign stock markets.

U.S. consumers have benefited. But then the U.S. might have benefited if Mexico or other friendly, open, democratic neighbors had been the supplier.

China, for a variety of reasons — including size, sense of historical grievance, level of development, nationalist aspirations and one-party rule — only plays by Western rules when those are to its advantage.

Other countries do that too at times, of course. But the asymmetry in the U.S.-China relationship transcends all of these. Pushed by a mix of idealism and business interests, the United States clings to its hopes of tutoring China in freedom and private capital. But China is not listening. Nor is China listening to common sense.

An unsustainable trade imbalance with the U.S. remains largely unaddressed despite a long U.S. recession. The West stands frozen in awe of an economy that has a grand exterior but, like the fast-growing Soviet economy of the 1950s, requires ever more capital to produce a unit of output. Meanwhile China — and some Western commentators — naïvely believes that a trade surplus and massive foreign exchange reserves ensure stability. Look at Japan since 1990 or the U.S. in the 1930s.

No one wants a trade war. But the U.S. is in a stronger position to wage one than a half-modernized China still relying on foreign markets and foreign companies’ technology and investment.

Does President Obama have the guts to start a modest confrontation, like Nixon over gold convertibility in 1971, while he can control events? Or will events overtake leaders in both the U.S. and China?

© The International Herald Tribune

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