Trading with the dragon

When China applied to join the World Trade Organization in 2001, the argument in favor of its admission went something like this: China has more and higher tariffs than we do. So its admission will result in greater relative liberalization of the Chinese market and will reduce the U.S. trade deficit by providing more opportunities ...

When China applied to join the World Trade Organization in 2001, the argument in favor of its admission went something like this: China has more and higher tariffs than we do. So its admission will result in greater relative liberalization of the Chinese market and will reduce the U.S. trade deficit by providing more opportunities for sales in China than for sales in the already relatively open U.S. market.

On top of that, a popular mantra that held sway in the media and in academia argued that while corporations may compete economically countries don’t and if they try to do so they will only hurt themselves. It continued by saying that free trade will make all countries rich and that being rich they will all become democratic and being democratic they will no longer go to war because we "know" that democracies don’t go to war with each other.

Now let’s look at how things have developed over the past twelve years and at some recent headlines and editorial comments.

Contrary to predictions, the U.S. trade deficit has grown dramatically both overall and bilaterally with China. The notion that a greater relative opening of markets in China would reduce the imbalance has proven to be complete wishful thinking. Indeed, the method of China’s opening has actually contributed to increasing the imbalance. For example, as a condition of being allowed to sell in China, many non-Chinese corporations were made to understand that they would have to produce in and export from China. Or, take the case of GE. Recently it announced it is moving its avionics business into a joint venture with a state owned Chinese company to which it is transferring its avionics technology. Unstated was the understanding that China will be a huge market for avionics and that for GE to be able to crack the market for what the Chinese government has designated as a pillar industry, it would have to transfer technology and production to China. To be sure, this is not a formal written condition. But there are indirect and unwritten cues that are universally understood and that can be very powerful.

The joker in the deck here is unexpectedly different approaches to capitalism and free trade. U.S. and other western negotiators bargained on the assumption that China’s capitalism and its way of doing free trade would be more or less the same laissez faire variety as that of the United States. Or, at least they believed that China’s understanding and practice of capitalism and free trade would trend in the U.S. direction. But, even if for some reason it didn’t, they anticipated few problems because they believed that if China deviated from orthodox doctrine it would only hurt itself through wasted investment. This belief, of course, rested on the further belief that countries don’t compete economically, that the Chinese government would never guide the activities of Chinese corporations, and that Chinese corporations would strive to attain business goals but not government policy objectives.

To understand that these assumptions were all misplaced one only has to glance at a few recent headlines. Yesterday’s Wall Street Journal reported that "Japanese Auto Sales Plunge Amid China Rage." Behind this was the newly bubbling dispute between China and Japan over the rightful ownership of the Senkaku/Diaoyutai islands. In this case, globalization is not leading to democracy and peace. Rather it is leading to economic attacks on Japan as Chinese mobs attack Japanese factories and offices in China and Chinese buyers shun Japanese autos. The Financial Times of October 6, reported : "Chinese tourists give Japan wide berth." This was another instance of the broadening of the dispute over the islands into an economic confrontation. The same Financial Times reported also that Tokyo had lodged a formal complaint over the Korean invitation to visit the Takashima islands claimed by both Japan and Korea. So here are two democracies engaging in hostilities that have buried the proposal for a Japan-Korea Free Trade Agreement, at least for the moment.

The Washington Post of October 8 reported that the House Permanent Select Committee on Intelligence has issued warnings about doing business with China’s telecom and electronics companies, Huawei and ZTE. The committee voiced concern about close ties between the companies and the Chinese military and national security agencies and how such ties might result in electronic intrusion into sensitive U.S. facilities. The same paper reported that government stimulated and rampant Chinese investment in excess production capacity for aluminum is pushing many of the other major world suppliers to the wall. It turns out that subsidized excess investment and capacity can hurt not only the Chinese investors, but also all the other participants in the world market.  

 Finally, in an editorial on October 10 entitled Targeting Huawei, the Financial Times confirmed that there may well be grounds for concern about Huawei as well as truth to the charge that China engages in wholesale theft of intellectual property as well as in manipulation of the value of its currency. The FT went on to warn that Washington should keep the big picture in mind and, whatever the merits of the cases of Huawei and ZTE, contain the risks of a trade war.

One sympathizes with the FT editors. They so desperately want globalization to work as advertised and wish for the United States to guarantee that it does or at least that its aberrations won’t result in a collapse of the system. But by the FT’s own admission and that of the other leading media, if not a trade war, at least something very different from orthodox free trade based globalization appears to be evolving and evolving in such a way that war war is more imminent than trade war or that trade war might be the lesser of two evils.

The bottom line is that to avoid both trade war and war war it will not be possible to keep pretending that countries don’t compete or that free trade leads automatically to democracy and peace or that companies (especially those based in authoritarian, ideological countries but even sometimes those based in democracies) don’t cooperate with missions of their home state.

We must recognize the true nature of the world in which we live and develop pragmatic doctrines and practices for dealing with it. In doing so, we must particularly address the question of the relationship between globalization and conflict. Does rapid globalization lead to conflict rather than peace? Or are there particular circumstances when it does and other circumstances under which it does not? Should different rules and codes of conduct apply to relations between countries with very different political and social systems?

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