If I were a Chinese citizen in Shanghai or Beijing, and had just spent a few hours perusing the 279-page 2006 Report to Congress of the U.S.-China Economic and Security Review Commission, released last Thursday, I imagine I might have some strong feelings. The commission has been harshly critical of China since its creation in 2000, and this year's report is no exception. China is attacked for its lack of compliance with World Trade Organization rules, geopolitical ambitions, energy consumption, disrespect for intellectual property, military buildup and much more. The document reads like a Cold War screed. If the United States and China end up going to war in the 21st century, whether over Taiwan or oil, historians will look back at treatises like this and declare: See, the writing was on the Web.
That is not to say that there aren't reasons for the commission's stance. China does manipulate trading rules to its own advantage, does have a cavalier attitude toward intellectual property, is engaged in a military buildup with huge geopolitical implications, and has energy needs that are likely to destabilize the established world order. But some sections of the report, if viewed from a perspective that doesn't accept as holy writ that the United States is a paragon of unimpeachable character, are breathtaking in their hypocrisy.
...China's apparent willingness to value its own energy needs above the needs of international security is indicative of a nation as yet unprepared or unwilling to shoulder the burdens of a stakeholder state.
...China's strategy of securing ownership and control of oil and natural gas assets abroad could substantially affect U.S. energy security -- reducing the ability of the global petroleum market to ameliorate temporary and limited petroleum supply disruptions in the United States and elsewhere.
...Moreover, the Commission concludes that the matter of China's role as responsible stakeholder is a matter of some urgency: the threats to international security arising from the spread of ethnic conflict; terrorism and weapons of mass destruction; the challenges of a globalized economy; the weaknesses of failed and failing states; concerns over environmental degradation and pandemic diseases that do not recognize boundaries or state sovereignty; and, perhaps most of all, challenges to the legitimacy of democratic forms of governance all place increasing stresses upon the international community. The preservation of peace, prosperity, health, and liberty all require that China contribute to the global public interest rather than continue to pursue its own narrow national interests.
Substitute the words "United States" for "China" in each of the preceding three paragraphs and I think you would find that much of the world would be more likely to agree with them. But such semantics are parlor games. From a Chinese point of view, the most nerve-racking element of the report might not be what is in it, but to whom it is addressed: The Honorable Ted Stevens, president pro tempore of the U.S. Senate, and the Honorable J. Dennis Hastert, speaker of the U.S. House of Representatives.
As we all know, that's an obsolete letterhead. Hastert's name, for example, should be replaced with Nancy Pelosi's. And there isn't a single legislator in either chamber of Congress who has been more aggressive in criticizing China over the past decade than Pelosi. It is no exaggeration to call her a cold warrior of the sternest mettle. First elected in 1986, she was galvanized by the Tiananmen incident in 1989 to put human rights in China at the top of her legislative priorities. That very winter, she sponsored legislation to allow 40,000 Chinese students to remain in the United States after their visas expired, declaring "Congress must send a very clear signal to the butchers of Beijing." (Congress demurred.)
She's been consistent in her advocacy of Chinese human rights ever since. She led numerous congressional efforts to revoke China's "most favored nation" trade status under both the George H.W. Bush and Bill Clinton administrations. She unveiled a protest banner on Tiananmen Square in 1991 to mark the two-year anniversary of the crackdown on the student-led protests. Some legislators talk a good game on China, and then refrain from actually introducing any legislation. Not Pelosi.
Could there be a worse choice, as far as the People's Republic of China is concerned, to be speaker of the House? Not unless his name was Chiang Kai-shek, or Tojo. (Naturally, Taiwan's attitude is more favorable.)
My theoretical Chinese citizen has good reason to be wondering what happens next, even if the U.S.-China Commission has a long history of speaking strongly and carrying a soft stick and legislative threats to impose tariffs or otherwise punish China for its economic behavior have been equally limp-wristed. The new Congress will be run by Democrats who are supposedly planning to be feisty on trade issues, and there has been more than one attempt already to interpret the election results as a mandate on rolling back globalization.
China is, to many Americans, the human face of globalization. Nancy Pelosi's bully pulpit is now her biggest ever. Put the two together, and it seems inevitable that a clash will brew.
But Congress may find it even harder now to take meaningful action than it did 15 years ago. Consider: After the Tiananmen crackdown, China's international profile was its lowest since the Cultural Revolution. Congressional sentiment to punish China for human rights violations was extraordinarily high -- the Senate and House both voted twice to revoke "most favored nation" trading status.
Both times, George H.W. Bush vetoed the bill. Then came Bill Clinton, who campaigned explicitly on holding China to account. But he, too, repeatedly extended China's favorable trading status, even as the country repeatedly failed to meet the "conditions" he had set for renewal.
Why did both presidents let China off the hook? Easy: China's rapid growth as a trading partner of the United States. By 1991 trade between the U.S. and China had grown to $25 billion, a number no one could ignore.
By 2005, bilateral trade topped $300 billion.
There's been a lot of ink spilled about the manufacturing jobs that have moved to China, the unfairness of China's manipulated exchange rates, and the unwillingness of China to squelch intellectual property piracy with the same vigor with which it goes after political dissent. These are all, to varying extents, valid gripes. But anyone who thinks that the U.S. could painlessly rejigger the status quo in its favor without causing severe harm to vast swaths of the U.S. economy is being naive. The two countries are locked in a tighter embrace than ever -- as has been noted repeatedly, China, in effect, bankrolls American government budget deficits by purchasing U.S. Treasuries. A big tariff hike on Chinese-made goods would hit millions of lower-income Americans square in the pocketbook, long before they could start to find the higher-paying jobs protectionist action might theoretically spawn. Further strengthening restrictions on advanced technology to China, as part of an attempt to hinder military modernization, will undoubtedly encourage China to import more from the E.U. and other nations, where strangely, as the commission's report acknowledges, "the memberships of most of the existing multilateral export control regimes have not agreed that China should be a target of their efforts and so do not seek to impede Chinese acquisition of the items and technologies ... not surprisingly, therefore, these regimes and their controls play no role in preventing China from acquiring items and technologies the United States believes are militarily-critical."
All that being said, the gargantuan trade deficits the U.S. is running with China are most likely not sustainable, and it would be in everyone's interest to achieve more balanced trade. But are the U.S.-China Commission's 44 recommendations (which include everything from initiating complaints at the WTO to inspecting container shipments in Chinese ports for North Korean nuclear bomb-making materials to banning American companies from revealing their user's online identities to the Chinese government) the best way to go about this?
For those looking for a more nuanced view of exactly what is going on in the China economy than what the commission provides, here's another must-read: "China: Toward a Consumption-Driven Growth Path," a monograph by China expert Nicholas Lardy published as part of the Institute for International Economics' "Policy Briefs in International Economics" series.
Published in October, Lardy's analysis is as up-to-date and comprehensive as one could hope for in a mere 13 pages. The gist is this: China's leaders are well aware of the drawbacks of their country's trade surplus with the U.S., not least because of the chance that it will spur a protectionist backlash in the United States. Since at least December 2004, China's leaders have attempted to shift the nation's growth strategy from an over-reliance on investment and export-led growth to increased domestic consumption.
China's reliance on investment as a vehicle for economic growth is historically unprecedented. It is resulting, among other things, in astonishing levels of over-production of steel, aluminum, automobiles and cement, and even, amazingly, electricity production, something that would have been unthinkable to China observers a decade ago, when industrial power blackouts were a regular occurrence. For sustainable long-term growth, China has to get its citizens to consume more. Right now, Chinese save about 25 percent of their income (by comparison, in 2005, U.S. consumers had a negative savings rate).
The problem is, as Lardy documents, that China isn't doing a very good job of spurring consumption. The policy measures enacted so far, tax cuts on rural and urban dwellers, for example, are minimal in scope. Government spending on services (healthcare, education, pensions) -- the kinds of safety net structures that would encourage consumers to spend their savings more freely -- is relatively limited. Lardy also calls for a more flexible exchange rate because he believes that would free the central government's hands to raise interest rates, which in turn would put a damper on China's investment binge. But so far, China's touted new policy of limited exchange rate flexibility hasn't resulted in significant change.
Lardy's focus -- on what the Chinese government needs to do to live up to its own conviction that the economy must shift from a reliance on exports to domestic consumption -- offers a sharp contrast to the U.S.-China Commission's focus, which is basically a list of threats aimed at making China toe the line according to the economic and foreign policy desires of the United States. But it should be exceedingly obvious at this point that any negotiating stance that takes as one of its starting points the explicit desire to prevent China from becoming the equal of the United States is never going to go anywhere. And that's precisely what the commission's report does, by lumping together trade with national security and the geopolitical struggle over energy.
To those who would call a less antagonistic approach Neville Chamberlain-style appeasement, just remember, it was the ruinous restrictions imposed on Germany by the Treaty of Versailles that spurred that nation's seething resentment. There's no surer way to make China into an enemy than to treat it as one.
From the standpoint of global trade, the world needs Chinese consumers to buy more stuff (although from the standpoint of the environment, a Chinese consumption binge may be less than ideal). How can the U.S. contribute to this? Continued pressure for exchange rate revaluation seems to be a good bet -- something that would probably be in both China and the U.S.'s long-term interests. But bundling that pressure together with a containment strategy? Probably not so smart. Initiating trade complaints at the WTO while at the same time blocking Chinese companies from purchasing American corporations or advanced technology? Also seems a bit sketchy.
The era of extraterritoriality is over. The rest of the world can't tell China what to do. We have to figure out how to help it do what both it and the world needs.
Nancy Pelosi, are you listening?