CQ WEEKLY – COVER STORY
Feb. 11, 2012 – 1:03 p.m.
China: Two Sides of the Coin
By Joseph J. Schatz, CQ Staff
Donald Trump’s Feb. 2 endorsement of Mitt Romney may be of questionable value to the Republican presidential front-runner, but it said something important about the degree to which China has become an issue on the campaign trail.
The celebrity real estate mogul, whose dalliance with running for the GOP nomination burned out quickly last year, says China is a giant cheat when it comes to managing its currency and other business practices. That’s why Trump decided to back Romney, the former private-equity-manager-turned-Massachusetts-governor, who he believes will get tough with Beijing. “We have to have a president who will stand up to cheaters,” Romney said as he stood next to Trump.
Strong words from two scions of the business community, which has generally favored a go-along, get-along approach to China since the 1970s. And Romney and Trump aren’t the only ones taking a populist stance against China. These days, it seems that almost every member of Congress tells a story about a company back home that has seen its technology stolen by China, has been kept out of a Chinese market, or feels that Beijing’s currency practices have cost it money or put it out of business.
But words don’t equal action. Romney, for one, has the luxury of being a candidate, not an elected official tasked with actually conducting diplomacy with Beijing.
And despite all the tough talk, the White House and Congress are taking a rather measured approach toward China — including President Obama’s pledges of tough trade enforcement in his State of the Union address. For example, no legislation targeting China’s currency practices has made it anywhere near the president’s desk — and that’s not expected to change, at least for the time being.
That’s because the economic fates of the two countries remain intertwined, and American policymakers have found, by and large, that they can’t really take aim at China without risking an injury to U.S. firms and workers. Friction and fighting come with the territory and are ultimately the cost of doing expanded business with the Chinese. As a result, lawmakers and presidential candidates who want to take a tough stand against Beijing find themselves in a tight spot.
China’s status as the U.S. government’s biggest creditor is one elephant in the room. But another big factor is that, for all the complaints, many U.S. corporations (big and small) make real money in China — more than $150 billion a year, according to some estimates. Plus, even though American companies rail against Beijing’s restrictive policies, which limit their doing business in China, those policies affect different companies in different ways. As a result, the corporate community is divided on how to respond, and that, in turn, affects members of Congress, who hear mixed reviews from the companies in their states and districts.
“It depends on who you’re talking to,” says Sen.
So amid tensions over currency, piracy, foreign policy, and China’s and the United States’ respective ambitions in Asia, the economic relationship between the two countries remains as nuanced as ever, a reality underscored by this week’s Washington visit from Chinese Vice President Xi Jinping, who is widely expected to become China’s president within a year.
DeMint, a conservative not known for middle-of-the-road views, paints a clear picture of the approach-avoidance conflict in America’s relationship with China. And he takes a different tack from those who would pursue a confrontational strategy.
“I don’t want to do anything dramatic,” DeMint says. “We’re very dependent on China — and they’re dependent on us.”
Exit Hu, Enter Xi
China: Two Sides of the Coin
Both parties are using China as a foil on the campaign trail, although they tend to emphasize different themes.
Rust Belt Democrats such as Sen.
Still, Congress’ policy approach toward Beijing is relaxed compared with that of the 1970s and 1980s, when lawmakers weighed in heavily on issues surrounding Taiwan and human rights. The fact remains that U.S. and Chinese officials have managed the enormously complicated U.S.-China relationship for more than three decades. Beijing has made significant progress in establishing bureaucratic structures that keep different parts of the relationship functioning, even when tempers flare.
Xi’s visit is an example of just how significant the relationship is to both countries. Under China’s relatively opaque transition process, the 58-year-old Xi is expected to assume the chairmanship of China’s Communist Party this fall from President Hu Jintao, who has been in power for the past 10 years. Xi would then take over as president early next year.
So, even though Xi is technically making a reciprocal visit, in response to Vice President
He will meet with Obama and Biden at the White House, go to Capitol Hill to meet with Senate and House leaders from both parties, and then address business leaders at a lunch hosted by the U.S.-China Business Council and the National Committee on U.S.-China Relations.
Xi then will head to Iowa and later to California. Xi visited Muscatine, Iowa, in 1985 to learn about agriculture technology and has developed a relationship with Republican Gov.
For many lawmakers and administration officials, this visit will afford the first real glimpse of the man who is likely to lead China until 2023. Xi’s father was a Chinese revolutionary who was persecuted during the Cultural Revolution but then found political redemption; his wife is a hugely popular Chinese pop singer. Xi has far stronger ties to the United States — including a daughter enrolled at Harvard — than any previous Chinese leader.
Whether those ties will resonate with the American public remains to be seen. China’s rise as a nation has been a frequent theme on the campaign trail, in part because of public concerns about trade, military and human rights issues. In recent surveys conducted by the Pew Research Center for the People and the Press, 59 percent of respondents called competition from China a “major threat to economic well-being,” and 22 percent considered China the country representing the “greatest danger” to the United States.
Lawmakers have sought to exploit these feelings, with varying levels of subtlety. Michigan Republican Peter Hoekstra, who retired in 2010 after 18 years in the House and is now running for the Senate, aired an ad during the Super Bowl; it showed a woman of Asian descent mocking the United States in broken English for government actions that benefit China. The ad drew charges of racism from Democrat
Labor unions and small manufacturers have long blamed China for taking U.S. jobs. The hard feelings tend to be amplified by the fact that China has for years been one of the largest holders of Treasury securities and by the economy’s slow recovery, which has heightened discussion of whether the United States is in decline.
Since the Great Recession, some companies have also complained, although their concerns vary. China has undertaken a variety of policies designed to favor its own industries and force U.S. companies to pay a higher price to compete there. Between rising labor costs within China and Beijing’s heavy hand on some U.S. companies — such as Google Inc. — the Chinese market doesn’t look quite as rosy as it once did.
U.S. Trade Representative
China: Two Sides of the Coin
“One side of the coin is absolutely understanding why the United States wants to be engaged with China,” Kirk says, noting the “extraordinary opportunity” to create jobs and cater to hundreds of millions of new consumers. “But if you turn that coin over on the other side, we aren’t nearly to the level of penetration of Chinese markets that we should be.”
The picture is different than it was a decade ago, when companies successfully persuaded Congress to normalize trade relations with China.
Jeffrey Bader, who was President Obama’s point man on China on the National Security Council from 2009 through 2011, says a shift is under way, with companies and Congress likely to take a more aggressive stance in the coming years if real changes in the way China does business aren’t made.
Still, Bader says, corporate America is not of one mind, in part because of the success it has found on the other side of the Pacific. “I think it’s a split,” says Bader, now a senior fellow at the Brookings Institution. “Historically, about 80 percent of the American companies in China are making money.”
Money to Go Around
That’s certainly the conclusion of those who do business in China. For now, business is still very good for many companies, says Democratic Rep.
“It’s not necessarily gotten to the point where they’re ready to do something about it,” Smith says of American companies that have complaints about China’s trade and business practices. They want action but are apprehensive, Smith says, because the specifics of “what that something is going to look like” remain unclear.
Smith notes that although China exports large quantities of inexpensive auto parts — which earlier this month led to charges of unfair trade practices from labor unions and Rust Belt allies in Congress — the country does not yet export cars. That leaves an opening for American carmakers. General Motors Corp. has seen huge growth selling to middle- and upper-income Chinese consumers, who now make up the world’s largest single auto market. So, GM is not clamoring for major changes in U.S. policy toward China. It’s a classic case of “where you stand is where you sit,” Smith says.
“Divisions within the business community on what to do about China remain profound,” wrote Robert Sutter, an international-relations professor at George Washington University, in a January article for the Center for Strategic and International Studies, a think tank. “A prevailing sentiment is to support stability in the Chinese business environment, which has proven advantageous for many companies.”
Sutter, a former State Department and Central Intelligence Agency official, says that as much as lawmakers hear from critics, they also hear from “lobbyists and interest-group representatives for U.S. business and other interests with a broad stake in continuing stable and profitable U.S.-China relations.”
And although criticism of China often sells at the national political level, many state and local officials are unabashed in their efforts to lure Chinese investment, increase exports to China and generally cement local economic ties with the world’s second-largest economy.
Ohio Democratic Rep.
China: Two Sides of the Coin
Even if Congress wanted to get tougher, predicting its approach to a policy shift is difficult, partly because the experiences of U.S. companies vary so greatly and partly because groups such as the U.S. Chamber of Commerce become concerned when lawmakers start writing legislation. Most say they would prefer that the administration apply pressure through executive channels.
Romney has pledged, if elected president, to label China a currency manipulator on his first day in office — a move that would most likely lead to higher tariffs on Chinese-made goods. Most major business groups, however, fear retaliation against their products and don’t support that approach. Most groups have strongly opposed congressional attempts to clamp down on China’s alleged manipulation of its currency, the yuan. There are differences of opinion, particularly among manufacturers — and that is why the National Association of Manufacturers generally stays neutral in the currency debate.
This opposition from companies helps explain why legislation passed last year by the Senate to slap tariffs on Chinese goods has gone nowhere in the GOP-controlled House, where leaders view a currency bill as an invitation to a trade war. Obama, who also called China a currency manipulator on the campaign trail, changed his tune after assuming office (as most presidents do) and has kept his distance from any actual currency legislation. The Obama Treasury has declined to officially censure China, using existing statutory authority, for artificially holding down the value of the yuan.
Obama has asked Congress to effectively overturn a December federal court decision that restricted the government’s ability to levy duties on subsidized Chinese imports, an action Congress is sure to take. Still, the headline-making legislation is essentially an effort to keep in place existing punitive measures rather than take aggressive new action. (Tariffs, p. 294)
Plus, trade-enforcement cases filed with the World Trade Organization may serve the multiple purposes of punishing the offense and preventing Congress from taking even more aggressive action while providing political cover to lawmakers eager to take aim at China but wary of sparking a trade war.
“The WTO case and trade remedies currently being pursued serve a useful political function in letting a little air out of the balloon and demonstrating the will to act,” says Bader. “But they won’t have great impact in addressing the underlying imbalances, which will require a sustained approach.”
And as the global economy changes, the relationship seems certain to become even more complicated.
From an economic perspective, for instance, China has largely shed its reputation as simply a source of cheap labor. The Chinese government wants to move its industries up the value chain, a trend that liberals and conservatives alike have picked up on. Companies “aren’t going to China for cheap labor,” says DeMint, who contends that China’s evolution into a high-value exporter is an argument for making the U.S. tax code more competitive internationally.
“Dozens of America’s high-value industrial crown jewels are steadily becoming just as vulnerable to Chinese competition as clothing, shoes and toys,” Alan Tonelson, a research fellow at the U.S. Business and Industrial Council, wrote in a study released last week. The council is highly critical of U.S. trade policy with China.
Yet despite concerns about China’s move toward advanced manufacturing, some American companies — notably Apple Inc., the world’s largest company by market capitalization — depend on it. Apple makes a huge profit by assembling iPads, iPhones and iPods in specially designed Chinese high-tech manufacturing facilities.
Stability or Conflict?
Many analysts, lawmakers and administration officials wonder whether all of this economic interdependence has broader consequences for the balance of power between the two nations.
In a paper published last week, Thomas I. Palley, the former chief economist for the U.S.-China Economic and Security Review Commission, argued that China’s manufacturing power gives it immense leverage. “China’s newfound manufacturing capacity gives it commercial power that binds other countries’ economic interests to China,” Palley wrote.
China: Two Sides of the Coin
The question is whether the White House and Congress will be able to manage those ties that bind in a way that minimizes friction with China, or whether Washington will take steps that exacerbate the two nations’ other broad differences.
A test of that may be the Obama administration’s new focus on both commercial and strategic interests in Asia, through talks on a regional trade pact called the Trans-Pacific Partnership and through a military presence that many see as a clear counterbalance to China. “We’ve made it clear that America is a Pacific power,” Obama said in his State of the Union address in January.
The administration’s moves in Asia — among them sending troops to Australia — have led to talk of a new Cold War. Yet some observers, such as Geoffrey Garrett, who runs the University of Sydney’s United States Studies Centre, argue that the depth and complexity of the two nations’ economic ties may actually help forestall conflict.
“The U.S. and the Soviet Union were fierce rivals, but their economies were hermetically sealed off from each other,” Garrett wrote last year. “But the depth, breadth and intensity of economic ties between China and the U.S. is staggering. Rather than reinforcing Sino-American geopolitical differences, these economic ties are a profound source of stability in relations between the world’s two most powerful — by far — countries.”
But lofty geopolitical analysis means very little on the campaign trail. That’s why Obama, Romney and other candidates are expected to continue their tough talk for the time being. For many Americans, it seems to resonate.
If past is prologue, the answer is, probably not.
FOR FURTHER READING: Court rejects tariffs, CQ Weekly p. 85; currency fight, 2011 CQ Weekly p. 2169; U.S.-China relations, 2010 CQ Weekly, p. 2704, 2009 CQ Weekly, p. 1366.