In mid-December, American representatives led by Secretary of
the Treasury Henry Paulson will travel to Beijing to kick off the
U.S.-China Strategic Economic Dialogue. These talks will be an
ongoing, high-level series of meetings which will take place each
year, alternating between the U.S. and China. Within the context of
these discussions, Paulson and his Chinese counterpart, Wu Yi, will
examine the long-term strategic opportunities and challenges the
two countries face in the economic realm.
As Secretary Paulson has correctly pointed out in the past, "The
prosperity of the United States and China is tied together in the
global economy, and how we work together on a host of bilateral and
multilateral issues will have a significant impact on the health of
the global economy." In the globalized world of the 21st
century, China's continued growth and movement toward a rules-based
economic system is clearly in the best interests of China, the
United States, and other stakeholders in the international
The Pacific Reality
China and the U.S. are the two great powers of the modern era,
one ascending and one already a superpower. While China's overall
GDP of $7.6 trillion is rapidly approaching America's $11.7
trillion GDP (using comparable data), China's typical citizen is
relatively impoverished and far less productive, earning just 15
percent of the income of the typical American.
In the United States, the public's commitment to economic
freedom is waning, as evidenced by some of the rhetoric of the 2006
congressional campaign. Both major U.S. political parties have
become more populist, and less progressive, in their rhetoric. Free
trade is no longer a popular slogan, as Americans now wonder if
globalization has made them fools at the hands of foreign
mercantilists. Furthermore, many voices across the ideological
spectrum question whether China truly intends to be a "responsible
stakeholder" in the existing international system. This, coupled
with the unfortunate reality of the public's declining support for
economic freedom, will increasingly challenge Chinese leaders.
American officials should not approach the Strategic Economic
Dialogues as an opportunity to lecture Chinese officials on why
alleviating these tensions is in China's interests. The Chinese
regime is more than capable, in its own eyes, of deciding what is
or is not in its country's interests. Rather, American officials
need to make clear that these areas of friction are a natural
public reaction to large trade deficits and credible reports of
unfair trade practices abroad. The effect of this, especially in an
environment with growing skepticism of economic freedom, could very
well be the erosion of the U.S.-China economic relationship through
measures such as the Schumer-Graham tariff proposal.
Vital Issues to Discuss
Within the context of the U.S.-China Strategic Economic
Dialogue, there are a number of important areas of discussion:
trade and investment protectionism; economic espionage; and piracy,
counterfeiting, and other violations of property rights. Many
Americans see these issues as evidence that China is not a
responsible stakeholder in its economic relations with the rest of
the world, especially the United States.
The most vital concern is protectionism. Increasingly, Chinese
local and central government bureaucracies erect major hurdles to
U.S. businesses that have invested in the Chinese markets. This is
particularly true in the automobile industry, but also in
retailing, banking, financial services, and basic industrial
commodities. In October 2006, for example, the Carlyle Group, a
private equity fund, agreed to buy only half, rather than the
initially-agreed 85 percent, of a state-owned construction firm,
the Xugong Group Construction Machinery Co., due to intervention
from the Chinese central government. Similarly, Citigroup was
forced to scale down its investment in Guangdong Development Bank
from 45 percent to 20 percent. Finally, although Beijing has opened
up the domestic construction market as agreed on China's accession
to the World Trade Organization in 2001, foreign enterprises are
required to employ at least 200 staff in China before being allowed
to sign any contracts in the country under regulations issued in
December 2003. Foreign companies wanting to compete for
infrastructure projects must also have at least $35 million in
registered capital in China.
The Chinese government blames the United States for this new
protectionism. It claims the U.S. Congress blocked the Chinese
National Offshore Oil Corporation's (CNOOC) acquisition of Unocal,
but China has long denied similar U.S. equity stakes in China's
energy production sectors. China also claims that the Committee on
Foreign Investment in the United States (CFIUS) blocks Chinese
investment in U.S. high tech. These accusations are groundless if
the Chinese are unwilling to let U.S. corporations acquire major
stakes in Chinese oil producers or Chinese national security
industries. Indeed, there is little comparison between the Chinese
government's systematic protectionism and the examples the Chinese
point to on the American side.
A second area of concern is China's unwillingness to enforce
intellectual property rights (IPR) and address other acts of
counterfeiting and money laundering. Chinese government officials
claim intellectual property rights protection is a challenge of
means, rather than will. This claim is dubious, as any salesman who
has tried to sell illegally counterfeited Beijing 2008 Olympics
merchandise could attest. In fact, 55 percent of companies
associated with the American Chamber of Commerce in China reported
they were negatively affected by IPR violations and 41 percent said
counterfeits of their products had increased since China's
accession to the WTO. U.S. businesses lose an estimated $20-25
billion per year in trademark, patent, and copyright losses.
With per capita GDP at 15 percent of the U.S. level, the Chinese
economy can afford to eschew IPR in the short term, but it does so
at the expense of its long-term credibility. A bad business
reputation will chill future investment and even growth prospects.
Systematic IPR violations create doubt and hesitancy in companies
seeking to do business in China. Chinese leaders need to treat
these issues seriously; they also need to treat WTO dispute
resolution seriously as a legitimate avenue of action--after all,
they voluntarily signed up for the WTO--rather than a "senseless"
act which will have "an extremely negative impact" on U.S.-China
trade relations, as Chinese Commerce Minister Bo Xilai argued.
China's refusal to participate in the international Financial
Action Taskforce to combat money laundering by terrorist groups and
criminal organizations furthers this impression.
Finally, officials should discuss Chinese government-led
espionage. China has conducted espionage operations to obtain
military technology and commercial trade secrets through over 3,000
front companies operating in the United States. The Chinese
government runs a program linked to its military, called 863, which
invests in companies with innovative technologies, and supports
research institutions, enterprises or provincial governments with
ties to many economic espionage cases. Silicon Valley has been a
major target of the Chinese espionage operations, and about a dozen
espionage cases with suspected ties to China are currently under
FBI investigation in the Silicon Valley area. According to the FBI,
the number of cases involving China nationwide is not available,
but it has increased more than 50 percent in the past few years.
Chinese espionage often involves Chinese students and visiting
business executives as well as Chinese nationals and Americans of
Chinese descent living in the United States. Economic espionage in
general is causing at least $45 billion in annual losses for the
largest 1,000 U.S. companies.
The U.S.-China economic relationship is vital to the prosperity
of the United States, China, and the entire world. Negotiators on
both sides have a prime opportunity to move the relationship
forward during the biannual U.S.-China Strategic Economic Dialogue
and should seize the opportunity this December. It is important for
the American side to discuss their concerns with the Chinese
without lecturing Chinese government officials on where their
interests lie. The U.S. approach should make clear the fundamental
problems in the relationship that feed American concerns about
Chinese intentions and pave the way for further problems in the
future. American and Chinese interests ultimately lie in economic
freedom, and it is vital to move rapidly to address the issues
standing in the way.
Michael A. Needham is
Director of, and John J.
Tkacik, Jr., is Senior Research Fellow in China Policy in, the
Asian Studies Center at The Heritage Foundation. Tim Kane, Ph.D., is Director of
the Center for International Trade and Economics at The Heritage
"Remarks by Treasury Secretary Henry M. Paulson
on the International Economy," September 13, 2006.
American Chamber of Commerce People's Republic of China, "White
Paper 2006: American Business in China," 34.
Estimating the amount of revenue lost because of piracy is an
inexact science. The $20 billion to $25 billion number is based on
industry estimates of the full retail value for all illegal
products sold in China each year, and it is useful in pegging the
magnitude of the problem. Although not everyone who bought an
illegal product would have bought a legal version if given no other
choice, lost revenue due to piracy in China is in the billions of
dollars, even by the most conservative estimates. Further damage is
done both to reputation and to health by Chinese firms that pirate
trademarked pharmaceutical packaging and sell placebos or worse as
genuine drugs. See Henry A. Levine, Deputy Assistant Secretary of
Commerce, "Is China Playing by the Rules? Free Trade, Fair Trade,
and WTO Compliance," statement to the Congressional-Executive
Commission on China, September 24, 2003, at www.hongkong.usconsulate.gov/uscn/trade/general/doc/2003/092501.htm.
Chris Buckley; "Top U.S. Official Warns China on Piracy Anger,"
Reuters, November 14, 2006.