Despite Some Unease, U.S. Business Still Marches with China

By William Hawkins l January 11, 2011

Though many major and controversial issues were pushed through the Senate during the lame duck session of the 111th Congress, the Currency Reform for Fair Trade Act (H.R. 2378) was not among them. The bill had passed in the House by a vote of 348-79 with majorities in both parties. And had the Senate leadership allowed it to come to the floor in the upper chamber, it would have easily passed there as well. But the Senate leadership of both parties is still under the thumb of transnational corporations and banks who are heavily invested in a rising China. Though this Wall Street establishment view no longer has the support of Main Street business or the general public, it can still buy influence at the top on Capitol Hill.

It may be true, as the press release issued by the Fair Currency Coalition put it, that “Instead of disagreement, there now is a national consensus that illegally undervalued foreign currencies hurt job creation and discourage investment in the United States.”  However, unless that consensus leads to action, the recovery of the American economy from the recession will be painfully slow. In the third quarter of 2010, imports grew so much more than exports that the trade deficit subtracted 2.8 percent from Gross Domestic Product. The difference meant that GDP grew by only 1.7 percent instead of the 4.3 percent had trade been balanced.  Unemployment went up instead of down. And China is the main source of the trade deficit.

President Barack Obama and Treasury Secretary Timothy Geithner have repeatedly made the currency issue a priority in G‐20 talks and in bilateral discussions with China. But Beijing knows that as long as American officials are merely talking and not taking action, it is safe. As dedicated communists, the Chinese leadership believes that the U.S. government is nothing more than a superstructure erected by Wall Street capitalists. Beijing’s thinking goes something like this: ‘If China can lure Big Business into its camp, then it can control the direction of U.S. policy’. Last March, Yao Jian, a spokesman at the Ministry of Commerce, urged American firms doing business in China to lobby against “protectionist measures” over currency issues, and claimed many firms had already done as Beijing asked.

Chinese strategy was easy when the “big emerging market” fad was dominant at the turn of the century. Every major American firm felt it had to be in China and was willing to make concessions on joint ventures and technology transfers in the hope of winning favor with the regime. Future profits seemed assured. It has become a more delicate balancing act for Beijing as it has shifted to a new phase in Chinese economic development. The focus now is on the creation of “national champion” firms that can push foreign rivals out of the Chinese market.

A lead story in the March 25 issue of Business Week by Dexter Roberts asked, “China: Closing for Business?” and noted:

“Western companies are finding themselves shut out as Beijing promotes homegrown rivals.” Roberts went on to say, nearly a decade after China’s entry into the World Trade Organization, many foreign companies say the warm reception they once received has turned frosty. While China can still be highly profitable, some question how long that will last as Beijing changes the rules to give a lift to its domestic companies, especially state-owned enterprises.

Earlier in 2010, the U.S. Chamber of Commerce and other American business groups sent a letter to President Obama complaining of “new rules issued by the Chinese government in November to establish a national catalogue of products to receive significant preferences for government procurement.” The groups said the policy would make it nearly impossible for U.S. companies to participate in Beijing’s government procurement market, unless firms transferred their research and development to China. Beijing is targeting the most innovative manufacturing and services industries, including consumer electronics, computer software and “green” technologies. The President’s 2010 Trade Policy Agenda states, “matters influencing market access remain unresolved including China’s approach to industrial policies such as indigenous innovation.”

Yet, when it came to actually taking action against predatory Chinese policies, the Chamber sided with Beijing and led the lobbying effort in the Senate against taking up H.R. 2378. In a letter to Senators, Chamber president Thomas Donohue opposed “the unilateral and protectionist approaches embodied in these and other proposals pending before the Congress.” He claimed, “International trade and investment have enabled [Chamber members] to expand into markets outside of the United States and to access raw materials, inputs, and finished products that make our companies and workers more globally competitive.” But with trade flowing 5-1 in China’s favor between the two countries, his argument made little sense from a U.S. national perspective. With a 9.4 percent unemployment rate at year’s end and a trade deficit that will likely top $630 billion for 2010, it is laughable to talk about America becoming “more globally competitive” by partnering with China.

Equally misleading is the claim about access to raw materials in the wake of the restrictions China has placed on the export of rare earth minerals which are essential to the production of high-technology items from cell phones to precision guided weapons.  Beijing has announced another 11 percent cut in exports for 2011. As the Chinese Foreign Ministry has stated, “It is China’s sovereign rights to manage and control rare earth resources.” China is estimated to supply 95 percent of the global demand for these metals, having used low prices to drive foreign competitors out of business. Beijing has used its monopoly power to favor its firms over foreign rivals, and as a lure to get foreign firms to relocate production to China as the only way to access these vital materials.

Corporations seem willing to change their allegiances under such pressure from Beijing, even if it means taking a subservient position to Chinese “partners.”  A lengthy essay in the Wall Street Journal Dec. 28 looked at the continuing shift in power between Chinese state-owned enterprises (SOE) and American corporations in strategic areas like aviation, automobiles, electronics, banking, and energy. The authors report on the risks that come from working so closely with Chinese firms,

Kawasaki Heavy Industries Ltd. and Siemens AG, for example, worked with Chinese partners to help build China’s high-speed rail network. Now the Chinese companies are bidding against them for international contracts—using products at least partly based on the foreign firms’ technology.

A repeat of this common scenario in the joint venture between General Electric and SOE Aviation Industry Corp. of China (AVIC) would have profound consequences for U.S. security as well as prosperity. The WSJ article reports that the GE-AVIC venture will be based in Shanghai.

In negotiations, GE is asking AVIC to match the value of the technology GE is contributing with a cash investment, according to people at GE. If a deal is finalized, all of GE’s existing and future civilian avionics contracts will go to the joint venture.

GE may profit from this partnership, but the United States will not. China will gain more technology which will increase its capabilities not only in commerce but in military competition as well. And it will pay for the advances with money earned from its trade surplus. In other words, American money will be used to buy American technology by a Beijing regime determined to overturn American “hegemony” in world affairs. Nominally American corporations will continue to be the Chinese handmaidens for the shift in the global balance of power.

The interests of the American people cannot be protected by a government that adopts a laissez-faire attitude towards international economics or whose office holders listen to lobbyists whose ambitions are not in line with the needs of the United States.

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.