Keep Chinese Capital and Tech Flows Restricted

By William Hawkins l February 14, 2011

Peace in Our Time                                   Chinese Mercantilism


The summer and fall of 2010 were marked by diplomatic clashes between an increasingly assertive People’s Republic of China and the United States and its allies running from the Korean peninsula through the South China Sea to Southeast Asia. Angry words were backed by competing military exercises. President Barack Obama’s first priority during the state visit of Chinese President Hu Jintao in January was to “ease tensions” even though it had been Beijing’s aggressive claims to territory in the South China Sea and in the Japanese islands, and its continued defense of a North Korea that had committed several acts of war against South Korea, that had provoked confrontation.

President Obama fell back on the standard classical liberal practice of offering economic cooperation to China, something President Hu knows his country still needs to fuel its rapid growth and to reach its goal of overtaking the United States in advanced industrial capabilities and national wealth. At a roundtable of American and Chinese business leaders held in the Executive Office Building, Obama opened his remarks by noting, “There has been no sector of our societies that have been stronger proponents of U.S.-China relations than the business sector.” The spin presented to the American media was the summit would open the Chinese market to U.S.-made exports, something that has been promised for decades but has yet to happen.

Much was said of the $45 billion worth of export deals supposedly agreed to at the summit, but as the Wall Street Journal reported January 20, “Many of the agreements, including China’s deal to buy $19 billion of airplanes from Boeing Co., have been previously announced,” some as long ago as 2007. The deals are also spread over a number of years to create a more impressive sounding aggregate number. Yet, even if all the deals were consummated in one year, it would barely dent the trade deficit America runs with China, which totaled about $260 billion last year.

More important was the message sent to China about the willingness of the U.S. to make concessions on trade and investment issues in the hopes that Beijing would accept these economic gifts and not jeopardize future gains by pressing its political ambitions in trouble spots around the world. If one looks at what China wants out of the commercial relationship with America, however, what is seen is a pattern that fuels those ambitions rather than constrains them; some would call that appeasement.

First, Beijing wants to continue the trade imbalance that has promoted domestic industrial development and provided the communist regime with the world’s largest currency reserves. China will not make more than token adjustments in its undervalued exchange rate nor reduce any of its other mercantilist policies that promote exports and hamper imports. Beijing’s policy remains that to sell in China; firms must produce in China— and transfer technology to state-owned enterprises as the price of doing business. Joint ventures have kept American firms subservient to Chinese “partners” until those partners can become strong enough to drive the foreign firms out of the market.

Second, China wants more access to restricted “dual use” technology that can be of use to its military. The Chinese understand they must close this gap if they are going to become the equal of the U.S. in a “multi-polar” world where America has lost its preeminence. And third, China wants to buy into strategic sectors of the American economy, using its gains from trade not to purchase U.S. products, but to acquire U.S. resources, productive assets, and technology. These last two aims show how success breeds success, profits are reinvested to gain new capabilities and to further shift the balance of wealth and power in the international system.

A lengthy commentary published by the Chinese Communist Party newspaper Global Times on the day of the presidential summit touched on both issues:

The complaint about the lack of access American companies are supposed to have to Chinese markets. Some of this is self-inflicted. After all, the US has very strict policies preventing high-tech, military and other companies from selling a lot of highly valued goods to China. The concern is that China will get access to sensitive technology that could be used by its military.

And Chinese companies do have concerns when it comes to access to the American market. Opposition in Congress and the US government prevented China National Offshore Oil Corporation from buying US oil producer Unocal in 2005.

When Chinese telecom equipment company Huawei wanted to be a junior partner in an acquisition of US telecom equipment firm 3Com in 2008, it was also blocked by Washington. Again, it was supposed to be a question of the security implications for the US.

Note that “access to the American market” means buying American companies in strategic sectors; trade is to be balanced by selling technology and factories to make China stronger. The national security impacts are clear. In 2005, Lenovo, a corporation in which the Beijing government owns the controlling interest, was allowed to buy IBM’s computer manufacturing business. In May, 2006, the State Department, responding to fears that its security might be breached by secretly placed devices or hidden software, decided to keep the 16,000 personal computers it had purchased from Lenovo off its networks that handle classified government messages and documents.

Last November, Sprint Nextel announced it was excluding Huawei Technologies and another Chinese firm, ZTE Corp., from a multi-billion dollar contract to upgrade its cellular network largely because of national security concerns. In October, Senators Jon Kyl (R-AZ), Joseph Lieberman (I-CT), and Susan Collins (R-ME), along with Rep. Sue Myrick (R-NC) had sent a letter to the Federal Communications Commission opposing Chinese participation with Sprint because it could breach the security of the U.S. telecommunications system. Motorola, which has been involved with Huawei, has accused the Chinese firm in a law suit of having an “espionage-driven corporate culture.” Both Huawei and ZTE have close institutional ties to the Beijing regime.

Yet, the Obama administration is signaling that it will ease already loose oversight of Chinese investments, as well as reform export control rules on technology. As the Wall Street Journal reported January 27, at the summit business roundtable, “President Barack Obama and the head of China’s Investment Corp., the country’s $300 billion sovereign-wealth fund, talked about the Chinese investing in infrastructure projects in the U.S. ‘The United States is open for investment and would welcome it,’ Mr. Obama told the group.” President Hu said at the meeting, “I also have a message to Chinese entrepreneurs. That is, the Chinese government will, as it has always done, support you in making investments and doing business here in the United States.” But such support— coming from government controlled funds and state enterprises, will guide investments to fit Chinese national strategy, not merely for commercial gain.

In November, the same China National Offshore Oil Corporation whose attempt to buy Unocal in 2005 set off a political firestorm, closed a deal to buy a one-third stake in the oil and natural gas Eagle Ford Shale project in South Texas without stirring any official concerns. CNOOC, a government owned firm, will also fund 75 percent of future drilling costs. The development of American energy sources is a good thing if it reduces dependence on foreign oil imports, but CNOOC’s participation raises the question of whether the oil pumped out of this field will end up in China.

CNOOC has been leading China’s global quest for energy supplies. As the 2010 Defense Department reportMilitary and Security Developments Involving the People’s Republic of China stated, “Beijing’s goal for oil and gas development projects is to provide China with direct access to and control of extracted crude oil and natural gas…. Beijing will therefore likely continue to look to the Persian Gulf, Central Asia, Africa, and North America to satisfy its growing demand for oil.”

Even if CNOOC is not the majority owner, its major position in the Eagle Ford project will give it rights over how the resources are used, especially if it leverages its role as the provider of future funds to the project. When CNOOC tried to buy Unocal, the U.S. House of Representatives voted 398-15 against the deal on the grounds that “oil and natural gas resources are strategic assets critical to national security and the Nation’s economic prosperity.” This has not changed. Indeed, it has become more acute as global competition continues to push up energy prices.

What has changed is that the Obama administration is willing to pay off Beijing to keep the peace. Such a bargain has not worked well in history. As tensions mounted in Europe during the 1930’s, the idea was increasingly put forward that business deals could supplant talks between diplomats. As a Federation of British Industries memo stated at the time “Captains of industry had long recommended that meetings of businessmen… might perhaps be a suitable means of bringing about a return to common sense.” The British Foreign Office even set up a special Economic Section to promote deals with Nazi Germany to tame Hitler’s ambitions. In their book The Appeasers, Martin Gilbert and Richard Gott mention a 1936 memo from a London banking house which talked of “Nazi Moderates.” These were Germans who it was thought possible to “come to an understanding and co-operate with” so as to avoid having to fight another war. Winston Churchill denounced the “building of German factories with British and American money” but his warnings were ignored until too late.

America has been given ample warnings of China’s ambitions and how they collide with U.S. interests around the world. Washington needs to reduce, not expand, economic ties with Beijing which have only served to empower the communist regime. The United States needs to put its financial house in order and balance its international accounts. Until that happens, Chinese investments funded from its trade surplus should be limited to the purchase of Treasury debt which does not transfer control over any real property to foreign hands.

The executive branch has the authority to carry out such a policy. The Committee on Foreign Investment in the United States (CFIUS) is an inter-agency committee authorized to review transactions that could result in foreign control of a U.S. business that could affect national security. It was first enacted in 1950 and has been strengthened in recent years, at least on paper. Unfortunately, CFIUS is chaired by the U.S. Department of the Treasury, which has been derelict in its duties to police capital flows. Congressional oversight of the process is a continual need, as is public pressure to assure that international commerce serves to strengthen America rather than its rivals.

William R. Hawkins, a former economics professor and Congressional staffer, is a consultant specializing in international economics and national security issues. He is a contributor to

SFPPR News & Analysis.