Chinese and American madness

Madness has been defined as continually repeating the same policies and actions while each time expecting a result different from the previous one.

Thus, at the conclusion of Tuesday’s U.S.-China Strategic and Economic Dialogue (S&ED) Treasury Secretary Tim Geithner hailed "concrete, tangible signs of progress on both sides." This is, of course, only the tenth or so time that Geithner has repeated this claim over the past few years of dialogue with China.

So what were these signs of progress? Perhaps the most important was a pledge by China to improve protection of intellectual property and to change its government procurement rules so that foreign bidders for government contracts don’t have to agree to transfer technology to China as a condition of being awarded a contract. China also pledged not to make indigenous innovation a condition of foreign companies being awarded a government contract at any level of government. On the other side, the United States pledged to relax controls on high-tech, national security related exports to China and expressed willingness to let Chinese banks invest in the U.S.

The only trouble with all this nice-sounding verbiage is that it has all been said before. If I had a dollar for every time China has pledged to improve protection of intellectual property, I’d be a very rich man. The last round of this S&ED also included assurances by China that it would not condition market access and awards of government contract bids on technology transfer or indigenous innovation. And, for as long as I can remember as a former U.S. trade negotiator, U.S. officials have been assuring trading partners like Japan and now China that U.S. controls on exports of military-related technology will be relaxed. As for letting the Chinese banks invest, I don’t think any U.S. official has ever said that they can’t invest as long as they meet all the rules for banking in the U.S.

The need to repeat these pledges time after time tells you that the pledges were never actually fulfilled or certainly not fully fulfilled. Why not? Well, neither country is telling flat-out lies, but there are certain overriding considerations that just prevent these kinds of pledges from ever being honored in a way satisfactory to the other side. Yes, China may step up enforcement of some of its patent or copyright laws and might change contracts so as not to require a formal commitment for foreign companies to transfer technology or for foreign companies to do indigenous innovation. But let’s be real here. China has a full-fledged industrial policy and economic strategy aimed at developing specified key industries and at raising the capabilities of these industries to world-class levels. Foreign companies know this. They also know that they have to get Beijing’s permission to blow their noses. Powerful forces in China are pushing for technology transfer from abroad and for indigenous innovation. Does anyone think that China’s authoritarian bureaucrats will be unable to convey that message in informal ways even if offending language is removed from contracts?

By the same token, American officials can easily say they are willing to have Chinese banks invest in the U.S. But will they be able to proceed with such investments? Ah, that is a totally different question. Does anyone think that U.S. officials are really going to allow nontransparent, state-controlled Chinese banks to set up for normal business in the U.S.?

It was somehow fitting that on the very day on which Geithner declared victory and hailed the success of the dialogue, the U.S. monthly trade deficit widened to over $48 billion while the deficit with China totaled 70 percent of the U.S. non-oil trade deficit.

Nothing in this dialogue will do anything to change that deficit story, and the reason is because the whole dialogue is just madness.