America’s China policy is broken

WASHINGTON (MarketWatch) — Americans owe a hearty “thank you” to the China-United States Exchange Foundation. In advance of Friday’s U.S.-China summit, the Hong Kong-based nonprofit has demonstrated vividly that the case for the longstanding American economic strategy toward China, faithfully pursued by President Barack Obama, has become as broken as politics in Washington.

Not that this is the Foundation’s intended message. Quite the contrary. Its new study “US-China Economic Relations in the Next Ten Years” insists that bilateral economic relations since the Nixon Administration’s opening have benefited both countries so spectacularly that they should now seek even deeper economic ties, preferably by signing a new free trade agreement.

In fact, the biggest danger identified in the report stems from current, but overwhelmingly avoidable, tensions over trade and investment, which the report says could destroy decades of win-win progress and further weaken a fragile world economy.

To highlight the supposed stakes, the “Next Ten Years” effort has marshaled support from many of U.S.-China economic relations’ biggest guns, including Nobel Prize-winning economist Michael Spence, former chief White House economic advisor Michael Boskin, former Cabinet secretaries and senior officials Carlos Gutierrez and John Podesta, corporate titans Bill Gates, Hank Greenberg and Andrew Liveris, and even the living embodiment of post-Cold War U.S.-China rapprochement, Henry Kissinger.

Matching this lineup, title for title, are comparable heavyweights from China’s power structure. Leading scholars from both sides of the Pacific helped with research and analysis.

Missing the facts

If appeals to authority alone could win policy battles, “The Next Ten Years” would unquestionably achieve its authors’ and funders’ aims, quiet dissident voices, and guide America’s economic approach to the PRC for decades. Read more: China’s pain is America’s gain.

Fortunately for both countries and the world economy their decisions will make or break, American politics at least still attaches some importance to substance. As a barely disguised brief for policies that have enriched outsourcing-happy multinational companies and their financiers — but weakened America’s economy and destabilized global finance — “The Next Ten Years’” cavalier regurgitation of discredited myths, cynical policy fakery, and thinly disguised moral equivalence won’t convert anyone not already in the choir. But its glaring flaws are the same that have driven Washington’s China policies far off-course for so many years.

Like many leading U.S. policymakers, the study can’t even get some of the most basic facts about U.S.-China economic relations straight.

For example, although China’s industrial and technological progress is noted, the authors repeatedly insist that America’s huge margin of superiority can long keep fueling robust and mutually beneficial trade expansion — as Americans exchange their super-advanced goods and services for China’s cheap consumer products.

Completely missed is the skyrocketing share of bilateral trade that’s head to head, as China’s exports to the U.S. have leaped up the technology and value chains.

In fact, in 2000, when China’s landmark entry into the World Trade Organization was approved, high-value manufacturers represented 35% of China’s exports to the U.S. Last year, they represented almost 59%. In addition, in 2000, products made in China (often in factories owned or affiliated by U.S. multinationals) held less than 1% of the entire U.S. market for a wide-ranging group of more than 100 advanced manufacturing sectors. The latest (2011) data show that this figure has more than quintupled.

“The Next Ten Years” also keeps claiming that Americans will gain from China’s steady transition from an export-driven economy to one whose growth is fueled by domestic demand. No doubt Chinese household consumption has risen strongly in absolute terms. But the latest figures show that despite major government programs to juice personal spending, its share of the economy remained unchanged from 2011 to 2012, and has actually dropped from around 50% in 2000 to just under 36% last year.

And though fixed investment seems to have replaced overseas sales as China’s growth driver during this period, the export share’s shrinkage seems largely cyclical — stemming from the financial crisis and weak ensuing global growth — and obscured by investment data’s failure to distinguish properly export-oriented and domestic-focused capital spending.

Changes in attitude

The study’s interpretation of key bilateral economic developments is no better — contending that the overall expansion of bilateral trade has significantly boosted overall economic growth in both countries.

But this neglects a crucial lesson of the credit-fueled near-global crash just five years ago and still-limping recovery: not all growth is created equal. The wildly lopsided nature of U.S.-China trade, shaped by predatory Chinese practices that deprived Americans of valuable earnings opportunities, contributed to a dangerous U.S. bubble during the 2000s, not to healthy output. In one chapter, Chinese financier John Zhao even recklessly lauds Beijing’s massive purchases of U.S. government debt as contributing to national prosperity and global financial stability, whereas it has actually been instrumental in addicting Americans to debt-fueled growth.

The policy recommendations in “The Next Ten Years” focus just as single-mindedly on preserving the status quo and just as conveniently ignore its failures and perils. These proposals expose the report’s biggest and most glaring weaknesses. Even the thorniest bilateral disputes, like those over cyberhacking or intellectual property theft (currency manipulation, revealingly, never makes the agenda), are belittled as the diplomatic equivalent of newlywed spats. Their allegedly typical origins: alarmist or simply impatient American politicians misguidedly but worrisomely rail against cumbersome, culturally antiquated Chinese governing structures, and against the PRC’s economic under-development itself.

The study’s standard prescription? “Urgent” negotiations with artificial deadlines. Undoubtedly, time-buying exercises, empty promises, and do-nothing agreements can keep the China cash and influence-peddling machines run by many of the sponsors’ companies humming awhile longer — as they have for the last two decades. But the very scale of “The Next Ten Years” suggests that their political allies are growing restless, as a wide range of Chinese provocation grows ever more serious, and as entirely legitimate concerns simply become too pressing to define out of existence — like those arising from the growing presence of China’s kleptocratic business system in the American economy, or the proliferation of Chinese manufacturers in U.S. defense supply chains.

In time, popular pressures for real responses from Washington could become harder to resist. And the critical mass of U.S. leaders seems increasingly aware that the longer Washington dithers, the less capable America can be in dealing with this often-unfriendly rival from a position of strength. Just as important, voters and officials who keep hearing about deep-seated political and cultural obstacles delaying even minimal Chinese accommodation logically could ask whether cooperative relations are in fact hopeless and U.S. strategy needs major rethinking.

The sponsors of “The Next Ten Years” will no doubt continue controlling America’s China policy for now, given the megabucks they shower on Washington. But as this dressed-up propaganda tract makes all too clear, there’s nothing else behind their success.

Alan Tonelson is a fellow at the U.S. Business and Industry Council, which represents nearly 2,000 small and medium-sized manufacturers. Follow him on Twitter (@AlanTonelson) and Facebook (Tonelsonontheeconomy), and AmericanEconomicAlert.org .