Bangkok will be pretty close to unrecognisable when George W. Bush arrives on October 20 for the Asia-Pacific Economic Co-operation summit. In efforts to make the sprawling Thai capital resemble its other name, Krungthep, or the City of Angels, paint has been slapped on to buildings, acres of instant greenery laid, flowers and statuary have sprouted, stray dogs have been packed off to temporary kennels and the city’s homeless, beggars, hawkers and street-walkers to God knows where. State employees have been given special leave in the hope, probably forlorn, of unblocking the notorious traffic jams.
All this, for the sake of a final communiqué that on past form is guaranteed to be devoid of firm decisions — my preferred translation of Apec (Asia-Pacific Economic Co-operation) is “Asian pronouncements empty of content”. Yet this summit will be watched carefully worldwide, and nowhere more so than in America — it will mark the first encounter between President Bush and China’s new President, Hu Jintao. At this meeting Bush must attempt the political equivalent of a conjuring trick. To deal with North Korea, it is essential to work closely with China, but a flaming row would play considerably better in Peoria, Illinois.
That is because across America, China is increasingly identified as the villain behind the loss of 2.8 million American manufacturing jobs — one in six — since the 2000 presidential election, and for the “jobless” nature of the US economic recovery. This is a huge oversimplification of a complex economic equation that includes US productivity gains and weak demand in Japan and the eurozone. But it is not hard to see why China is in the dock. Chinese goods are flooding into the US at prices consumers love and domestic producers cannot begin to match, producing a galloping Chinese trade surplus with America that hit $103 billion last year and will be bigger still in 2003, with Wal-Mart alone importing $15 billion worth of merchandise. The August figures, out last week, showed that while the overall US deficit narrowed — and fell sharply with the EU — with China it hit a new monthly record of $11.7 billion (£7 billion).
China’s holdings of US Treasury bonds have soared to $126 billion, second only to Japan’s — evidence, say the critics, that China has kept its currency falling in line with the dollar only by massive intervention designed to secure “uncompetitive trade advantage”. Politicians are asking how tax cuts will help the economy, if they are spent in stores crammed with “unfairly” cheap Chinese goods.
Still more potently, China is feared as the cause of future job losses, as millions more software engineers and factory employees see work of all kinds “outsourced” to the world’s most dynamic developing economy. America’s leading corporations may be doing well out of buying from China, or shifting manufacturing there, but smaller ones not in the China game are screaming about the “de-industrialisation of the United States”. This is wild talk. Despite the dramatic national shift to services, the US manufacturing sector is still by far the world’s largest, dwarfing China’s entire economy. But with some analysts predicting that, between 2000 and 2015, 3.3 million American jobs will have migrated to low-cost centres overseas, “China” is becoming shorthand for fears that the global supply chain, that triumph of American capitalism, might turn out to be its creator’s undoing.
To put it at its mildest, China’s entry into the World Trade Organisation (WTO) is no longer as popular as it was. A bipartisan clutch of senators is seeking a 27.5 per cent tariff on all Chinese goods until China frees its currency. The National Association of Manufacturers is preparing a case for Section 101 trade sanctions against China. The Democrats are again turning sour on free trade, with even Joseph Lieberman, the least protectionist of the party’s presidential hopefuls, declaring that the US is under “economic attack” from China. The Bush Administration, under escalating pressure to “do something”, has started to talk tough. The day after the WTO fiasco at Cancún, Don Evans, the US Commerce Secretary, received roars of applause in Detroit for declaring: “American manufacturers can compete against any country’s white collars and blue collars, but we will not submit to competing against another country’s choke collars.”
For “choke collar”, read undervalued yuan. The White House does not, however, want this to dominate President Bush’s swing through Asia. This Thursday, US Treasury Secretary John Snow was due to report to the Senate Banking Committee on whether China is manipulating its exchange rate for “unfair trade advantage”. Under a US law passed in the 1980s in a climate of similar panic about Japan’s penetration of US markets, such a finding would oblige the Bush Administration to insist that China revalue. Snow, aware that China will retort, accurately, that its overall trade is close to balance and assert that its exchange rate “complies with fundamentals”, has quietly postponed the hearing. The awkward truth is that even a 20 per cent revaluation of the yuan would make little dent on the trade balance — Chinese imports would still be irresistibly cheap — but it would almost certainly reduce Chinese demand for US government securities, forcing US interest rates upwards.
But politics can trump economics. If, just before the Bush-Hu meeting, China’s Long March rocket launches its first manned space mission, the political impact could be comparable to the Soviet launch of Sputnik. China’s vertiginous development, and its consequences for the US, would be a still more neuralgic issue. The old question used to be: “Who Lost China?” The new one could be: “Who Let China Loose?”
The Chinese ask why, having been cajoled by America to open up to foreign investment, join the global marketplace and sign up to the WTO, their successes are being met with brickbats and their problems with scant sympathy. Two weeks ago in this space, I wrote about some of the growing pains in China’s feverish economy, troubles on a scale that put America’s in the shade. If Bush broaches the “unfair” exchange rate, Hu may give him an earful on the importance, for America’s own interests, of doing nothing to jeopardise China’s financial stability.
He could bring powerful arguments to bear, for what is little understood by most Americans is how much of the Chinese trade surplus is generated by and for US corporations. “Foreign-invested companies” — Chinese joint ventures with global multinationals — account for more than half of China’s exports, and a princely 65 per cent of the increase in Chinese exports since it first pegged the yuan in 1994. Outsourcing of assembly to China, in other words, has become a key factor in corporate America’s own competitiveness. This is true not only of America, moreover; China is sucking in imports from Japan and the Asian tigers, half of which it then reprocesses for export. So “made in China” is a misleading label; what Americans are buying are, largely, goods formally finished in, and exported from, Taiwan, Singapore, South Korea or Japan. Take in the many billions worth of goods that American IT giants such as Dell and IBM are getting Taiwanese managers, under contract, to assemble in China for the US market, and the circle begins to close.
In testimony last month to the US-China Economic and Security Review Commission, the British economist Peter Nolan argued that for some time yet China will continue to be a workshop “for” the world, producing to order for the supply chains of global conglomerates. This, as he put it, is very different from being a self-starting workshop “of” the world, as Britain was in the 19th century. China’s own companies are still a long way from becoming global players with internationally established brand-recognition. A Stanford University study estimates that China’s domestic value-added share of exports to the US is only 20 cents on the dollar.
None of this, however, diminishes the pain for America’s jobless (or Europe’s, where the euro’s rise gives China even greater competitive advantage). So China is vulnerable to a protectionist backlash even if it plays fair — and this, corporate America insists with some justice, it is not doing. Since joining the WTO, China has sharply lowered import tariffs and eased access for exporters. But patent and copyright piracy is rife, with the damage to US industry inflicted by Chinese counterfeiting estimated by the International Intellectual Property Alliance at $1.85 billion last year; companies launching joint ventures in China complain about forced transfers of technology; and tax rebates on exports and hidden subsidies such as preferential government-directed credits give Chinese exports a genuinely unfair advantage.
What can America do to level the playing field? The answer, in the short term, is: a lot. Under the terms of China’s accession to the WTO, countries can impose “safeguard” tariffs against Chinese exports deemed to be disrupting markets — safeguards applicable to all Chinese goods until 2014. So China had better take these complaints seriously. If it does, and if Chinese imports of finished goods rise sharply, Americans may be readier to see the upside of China’s headlong growth. But there are deeper forces in play. China’s surging economy, fuelled as it is by multinational investment, is showing the US a portrait of its own future — and of the ultimate consequences of globalisation — that Americans do not like one bit.
