US anti-China rhetoric at danger level
By Benjamin A Shobert

WASHINGTON – The US-China Congressional Committee (USCC) this month held its most recent hearing on US-China relations, specifically on “China’s Past and Future Role in the World Trade Organization” (WTO). As Commissioner Patrick Mulloy stated at the opening, “The purpose of today’s hearing is not to second guess what Congress did 10 years ago. Its purpose is to look at the arguments made in favor of China’s WTO entry by proponents and to consider the results.”

Considering the political environment in Washington, where recent days have been marked by the most serious bi-partisan efforts of the past decade to introduce legislation that would impose new trade barriers on Chinese-made goods, and increase pressure for

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The nature of politics in Washington can lull policymakers to sleep: rhetoric over China’s rise has been slowly growing increasingly negative as a more specific set of grievances over the past five years have coalesced. Most advocates for economic integration with China have grown used to (and perhaps even weary from) those who seem fixated on the loss of opportunities related to China’s ascent.

But voices that were once easy to dismiss are now, in the middle of an ongoing economic setback that at its best is labeled a “jobless recovery”, are becoming more politically powerful, and insiders in Washington are beginning to sense that this time it might actually have significant impact on the economic relationship between the two countries.

During last week’s USCC testimony, Senator Charles Schumer (Democrat, New York) provided in written testimony a very specific insight into the grievances of many Americans and, as a consequence, the powerful politicians who represent them: “China’s policy of large-scale intervention in the exchange markets and the significant undervaluation of its currency also subsidize Chinese exports to the United States and, at the same time, make US exports to China more expensive. Thousands of US factories have been shuttered and millions of jobs have been lost or displaced over the past decade as a result.”

He went on to share that, “There is no question that this is what one might call a ‘put-up or shut-up’ moment for US lawmakers. American jobs and wealth are flowing out of the US, across the globe to China and other countries with cheap labor, lax environmental standards, and no compunction about flouting WTO rules to gain an unfair competitive trade advantage. This has got to stop.”

It would be a mistake to overlook the senator’s comments, or to simply mark them up to the traditional politics of organized labor and Schumer’s relationship with them. This week, during a separate congressional hearing of the House Ways and Means Committee, Republican Congressman Dave Camp (Michigan), asked whether “enough was doing to push China … on its egregious economic barriers” specific to its currency manipulation, the country’s “Indigenous Innovation” policies, and ongoing intellectual property compliance with WTO rules.

What both provide is, at the base of their comments, a critical insight into the inner-workings of Washington’s political class. Whatever the heritage of those ideas, which for several decades have knit together the two countries, they are under strain as never before. To the extent both sides of the aisle hold similar frustrations about China’s economic policies, DC will find a way to vent the intensifying political pressure.

What remains to be seen is the form this political pressure will take: on the table appears to be a handful of likely options, most likely of which may be a set of countervailing duties imposed on China for its currency practices, the remedy presented by Schumer in his Currency Exchange rate Oversight Reform Act of 2010 (S.3134). During this week’s House Ways and Means Committee hearing on “China’s Trade and Industrial Policies”, chairman Sandy Levin (Democrat, Michigan) said simply but forcefully ” … China must change its ways”. Straight-forward words certainly, but important coming from an influential congressman long known for his reputation of urging caution and balance in America’s relationship with China.

It would appear that, if politicians like Levin can win the day, Washington’s approach to China will incorporate more than just a single-minded emphasis on the country’s currency policies. Specifically, Levin appears to be working for a compromise that would take into account the whole of Beijing’s economic policy, what he and other policy-makers understand to be a form of national mercantilism.

As Levin stated, “There are other policies in China that place US companies and workers at a disadvantage, often in clear violation of China’s WTO obligations. They are part and parcel of the overall trend in China’s approach to trade … the selective use of tax rebates to stimulate certain exports; export restrictions on raw materials; trade-distorting subsidies, discriminatory product standards … weak laws and weak enforcement of labor and environmental laws; state-owned enterprises that discriminate against US companies. All of these policies have a common thread: they have the purpose or the effect of tilting the playing field to favor Chinese companies and against US companies, workers and farmers.”

Senator Debbie Stabenow (Democrat, Michigan), provided in testimony to the USCC panel her plan to introduce the “China Fair Trade Act, legislation that will prevent Federal taxpayer dollars from being used to purchase Chinese products and services until they sign on to and abide by the WTO Agreement on Government Procurement, which will allow American companies to export into their government markets.” This sort of move, while it remains uncertain as to whether it will be advanced in the House, does represent the sort of escalation between two countries that tends to indicate a looming conflict over trade that could, given the present economy, too easily get out of hand.

During last week’s USCC hearing, Congressman Tim Ryan (Democrat, Ohio), a long-time critic of China’s currency policy and one of the first to propose legislation attempting to address the matter, echoed the concerns of his colleagues but perhaps most importantly hinted at deeper concerns which are too often glossed over by those who suppose such critics want to simply hit rewind on the global economy: “Several years ago, progress toward further market liberalization began to slow and it became clear that some parts of the Chinese government did not yet fully embrace key WTO principals.”

Against the backdrop of a general economic frustration in the US, it is easy to miss that much of what lies beneath Washington’s concerns is not simply Beijing’s economic policy but a more general and caustic concern that how China was anticipated to evolve and embrace global rule sets and overall liberalize is not happening, which begs the political question of whether the sacrifice American workers are perceived to have made by opening their markets to China has, in fact, been worth it.

Understanding what Washington is currently obsessed with talking about, and separating it from what is actually likely to get acted upon, is not an easy task. This realization is essential when evaluating the likelihood of actions such as those suggested by Schumer, Stabenow, or Ryan to be implemented. Specific to the matter of China’s presence in the WTO, Alan Wolff, chair of the Committee on Comparative Innovation Policies at the National Academies, provided to the USCC during last week’s hearing a reminder that “The United States believed that bringing China into the WTO would foster domestic economic reforms within China, which would ultimately create a functioning large and growing market for US goods and services … Large US headquartered multinational businesses shared this vision. They saw China as a major market and a major source of supply for all other markets including the United States.”

This sentiment is perhaps the most powerful counterweight to the building political frustration in Washington; specifically, the interest of American business remains in many ways to maintain the status-quo with China. Changes in Beijing’s currency will have the immediate effect of changing costs for outbound exports from their Chinese-based subsidiaries, possibly forcing costly production relocations, and the even more dire possibility of the Chinese market growing additionally difficult to access and sell into.

It has been quite literally several decades since the interests of the working class and the ownership class have been so front and center in Washington as they are now. The still-powerful pro-business lobby will push back against bills like those mentioned earlier, but unless the American economy begins to show additional life, even organizations like the critical Business Roundtable may be ineffective at limiting a political retaliation against China.

During last week’s testimony, this was communicated most eloquently by James Bacchus, formerly a two-term chairman of the Appellate Body of the WTO and a former Special Assistant to the United States Trade Representative in the Executive Office of the President. “I worry when I hear other Americans describe China as a ‘threat’ to the United States,” he said. “I am reminded at such times of the warning of Thucydides in his history of the Peloponnesian War – that a belief in the inevitability of conflict can become one of the main causes of conflict. Trade disputes between the United States and China are inevitable. Conflict is not.”

The recent USCC hearing on China’s WTO compliance was ostensibly about just that, but it quickly became the tapestry for a broader conversation that is taking place within Washington about whether China’s growth has come at too great a cost for Americans, and whether its policies and practices will ever embrace the rough outlines of what the US recognizes as a politically liberal environment.

This debate is growing in intensity, and holds the potential to redefine the contours of the two countries’ relationship in ways that may prove as foundational as China’s first timid entry into free-market reforms in the early 1980s. The stakes, for Chinese and Americans, have not been any higher than they are now for decades.

Benjamin A Shobert is the managing director of Teleos Inc (www.teleos-inc.com), a consulting firm dedicated to helping Asian businesses bring innovative technologies into the North American market.