Wednesday, November 14, 2012

Obama should take a new approach to China

While there are numerous difficult hurdles facing Obamas next administration, China does not have to be one. All it takes is a fundamental change in its approach regarding China and the bilateral relationship.

The first step to resetting the bilateral relationship is to recognize the campaign rhetoric on China for what it was: nonsense. Both candidates felt obliged to savage China for our ills but the voters saw through the political ruse and did not pay any attention.

Whos the currency manipulator? We are. No one can be expected to keep up with our printing presses run by the Fed. Even so, the renminbi has appreciated by about 32%, since it was taken off the peg to the dollar.

Lets also not talk about outsourcing jobs as if companies are committing grand larceny. Private enterprises make rational decisions. They send the work to China or elsewhere because it makes economic sense. When it ceases to make sense, the work comes back as some have.

Adding an import duty on goods invariably backfire as has been the case with the much talked about 30% duty on auto tires made in China. A few hundred jobs may have been preserved but all American consumers ended up paying significantly more for their tires and most of the tires were still foreign made, just not from China.

Raising tariffs also prompts retaliation. In a tit-for-tat, China raised tariffs on American chicken which may have cost as many jobs on Tysons assembly line as the gains at the Goodyear plant. Time and again, nobody wins in trade wars.

China has an apparent huge trade surplus with the US and we hold that against China as well. But why should we object to being able to buy our iPad and stuffed animals at a much lower price than if made in the US?

Furthermore, as many economists have pointed out the trade surplus is not exactly what we say it is. For example, the added value of China labor in an iPad is about 2% of the total cost. Many of the components and assemblies are made in Japan, Korea and Taiwan and even some in the US but China gets all the credit for the import value.

Its not as if enjoying a trade surplus when doing business with the US is some extraordinary aberration. The US has a trade deficit with 98 countries because this is the way our American economy works.

One of the first principles of the Chinese classic, Sun Zis Art of War, is to know your counterparts, be they friend or foe, before engagement. Perhaps its time that we take a look at how China regards this bilateral relationship to gain the more solid understanding of what actions to take.

The Chinese public continued to be fascinated by the presidential election. Apparent exercise of democracy in action made the people in China wishful that some would rub off in China.

The financial tsunami of 2008 and aftermath had shaken the Chinese confidence in Americas ability to manage its finances and has cause them to diversify their hard currency holdings and to make the renminbi more accepted as an international currency. The trauma however has not changed Chinas regard of the US as a vital economic partner.

It simply is not in Chinas national interest to consider the US a hostile competitor. China has its own laundry list of internal challenges and do not need the distraction of external confrontations.

For more than a decade the leaders of Beijing have been talking about the urgency of combating graft. Endemic corruption saps the economy and more importantly erodes the legitimacy of those in power. While success in overcoming corruption is problematic, it will be the foremost preoccupation of the incoming leaders.

Secondly, even though the US has a serious unemployment problem; it pales by orders of magnitude to the one Beijing has to face. Just finding jobs for the approximate 8 million college graduates every year is beyond American comprehension.

Although Obamas pivot to Asia defused accusations during the campaign for being soft on China, he needs to review the consequences of this policy.

Occupying foreign lands may have been a western tradition, but it is not for China. In early 15th century, the Chinese had the worlds mightiest navy and could have colonized the many places Admiral Zheng He and his sailors visited, but they did not.

It is not in the Chinese DNA to compete with the US for world hegemony. However, if Chinas sovereignty is being tested by US activity in Asia, China will not quietly stand by. Rather than enhancing stability, the American increase military presence has encouraged Japan, Philippines and Vietnam to be more energetic in contesting the islands off Chinas coast.

In response, China raised the stakes by establishing the Sansha City on one of the Paracel Islands in the middle of South China Seas. The city will own an enlarged runway, a desalination plant and other related infrastructure for future tourism. The city along with a military garrison will administer over 200 islets and sand bars along with two million square km of water.

Sansha, in midst of South China Seas, enjoys significant logistical advantage over the nearest US marines in Australia. Such asymmetrical arrangement is the only basis that China would counter unfriendly acts from America--in other words, relatively modest investment by China that would offset considerably more investment by the US.

China has no appetite to match US military might on a dollar for dollar basis.

Its time the US reexamine the concept of strategic ambiguity in dealing with China. It simply has not worked. Sometimes friendly, sometimes hostile, sometimes cajoling and sometimes imposing has merely led to a permanently rocky relationship. Both the US and China can better deploy their energy on other issues than managing the ups and downs of the bilateral relationship.

With the incoming new generation of leaders, Obama should try a new approach: be transparent. Lay all the cards on the table and agree on those issues the two countries can work together and put others on holdan approach Deng Xiaoping would applaud.

The US cant really afford to allocate money it doesnt have to build up a military presence that would only increase tension in Asia. With China, cooperation trumps confrontation.

An edit version has been posted on China-US Focus.

Jack Perkowski is well known investor in China. Read his careful debunking of Obama's complaint about China's alleged unfair subsidy of its auto industry.


Jay Hsu said...


I commend you (again) on a piece that’s brilliantly written. In a limited space you certainly manage to cover most of the important points. I fervently hope that Obama will somehow get to read it, since I’m skeptical if he is “up” on all the points you raise. I strongly suggest that the article be published in the next issue of the CAF. In addition, all of you who knows some way to connect with important people in the government should get them to read the piece too.

If CAF is considering publishing the work, I like to suggest a couple of minor enhancements. First, it will be useful to point out that in case of the Diaoyu Island and the Sansha island groups, China genuinely believes that they have ownership of the islands, from historical documents as well as from post WWII declarations from Potsdam and Cairo. The US will only end up looking foolish in the eye of rest of the world if it tries to act in contradiction to universally accepted sense of fair play.

Another point is, the “huge” trade in-balance between US and China is actually somewhat of an accounting shamanism. We all know that since China opens up to the West in the ‘80s, numerous multinational companies from the US flocked to China. These include Coca-Cola, McDonalds, Wal-Mart, Starbucks, GM, Caterpillar, … And most of them are making money in China hand over fist. However, by the way we recon GDP (something invented in the West), the income taken in by these companies in China are all counted as China’s GDP(!) Only the profits they made can count toward the GDP of the US provided that such money is transferred back to the US. As many may know, most of these multi-nationals are not transferring their earned profits back just to avoid corporate tax!
Thus we are all left in the dark on the question of who is buying more from whom. My guess is (since China has very few companies making money in the US), if we account everything properly, China is buying much more things from the US than vice-versa. Here in the US, people like Senator Charles Schumer continued to accuse China as not playing on a level field in terms of trade, but guess what? The field is really tilted the other way!

All in all, a magnificent piece of writing which I highly recommend for publication in CAF.


Anonymous said...

The best approach to cina is to kill all the communists there