Double debacle in Beijing

In an attempt to recover from its bumbled handling last week of negotiations over  the blind Chinese dissenter, Chen Guangcheng, the Obama administration was at pains over the weekend to present the results of its concurrent Strategic and Economic Dialogue as a resounding success that will rebalance U.S. -China trade, spur U.S. exports to China, and stimulate U.S. job growth while turning China into a U.S. style consumer paradise.

Amazingly, U.S. media like the Wall Street Journal, New York Times, and Washington Post, that had done an admirable job of uncovering the administration’s Katzenjammer Kids approach to Chen, swallowed the economic success story hook, line, and sinker. All ran triumphal Sunday stories essentially parroting the great progress line being promoted by administration spokespersons. This is even worse nonsense than Hillary Clinton’s line that the deal over Chen was "his wishes and our values."

To understand fully just how bad the whole week was, let’s go back to the original Wednesday announcement of a deal that had Chen going to Chaoyang Hospital in Beijing to be reunited with his wife who had been brought from the Shandong village out of which he had made his earlier escape. This was when Clinton made her wishes and values statement, and that story was accompanied by pictures showing U.S. Ambassador to China Gary Locke and Assistant Secretary of State Kurt Campbell holding Chen’s hands as they accompanied him to a limo for the drive to the hospital. They were widely described in the press as America’s most experienced and savvy diplomats. What wasn’t clear but subsequently became so was that the deal had been hastily put together in order to prevent the Chen issue from impinging on the Strategic and Economic Dialogue scheduled for Thursday and Friday. The administration had half the U.S. cabinet and some 200 top officials coming for those talks and the last thing it wanted was a breakdown.

In their haste, however, the top diplomats made it clear to Chen that if he didn’t leave the haven of the U.S. embassy for the hospital controlled by Chinese security forces that his wife would be sent back to the tender mercies of the local goon squads in Shandong. Maybe this wasn’t a threat, but nor was it a show of friendly support. Moreover, the top diplomats failed to achieve any continuing presence at the hospital or any way of assuring continued good treatment for Chen. They and he were now at the mercy of the Chinese security forces which is why Chen got scared and things began to break down. Eventually, of course, a new deal was apparently worked out to let Chen come to America to study law. Whether and how this will actually work is still unclear.

What is clear is that a great sigh of relief went up from the U.S. delegation when the Chinese proceeded to move ahead with the Strategic and Economic Dialogue on schedule. There had been concern that they might postpone or call the whole thing off in response to the U.S. handling of Chen.

Perhaps out of gratitude and certainly to prove to themselves that it had all been worth the effort, the U.S. team then proceeded to present the Dialogue as an outstanding success — one obviously worth the ambiguity with Chen.

So of what did all this success consist? According to the Wall Street Journal, China agreed to consider making changes to boost domestic consumption, to rely more on domestic consumption than investment or exports for growth, to boost dividends paid by state owned companies to the national treasury to support social spending that arguably will enable Chinese consumers to spend more of their earnings instead of saving, and slightly open the Chinese economy to additional competition.

For instance, foreign financial firms will now be allowed to increase their stake in Chinese firms to a maximum of 49 percent from the current 33 percent. There was also agreement to consider reducing some of the favorable export financing provided to Chinese exporters and thereby bring China’s practice into conformity with global standards. China will also give consideration to removing or reducing advantageous financial and regulatory standards for state owned enterprises. And, although there was no Chinese commitment of any kind on currency valuation, Treasury Secretary Tim Geithner could not repress the urge to point out that the yuan has appreciated by 13 percent in real terms over the past two years.

Some of this may indeed be useful, although Chinese and American analysts differ about the likely effects. Americans think increased Chinese consumption will boost U.S. exports and jobs. The Chinese don’t believe that but think the increased consumption might make for more balanced and stable domestic growth. But in any case none of it is game changing in the least, partly because, as the Journal‘s Bob Davis was quick to note, none of the agreements to consider doing various things are at all binding on Beijing, or the United States for that matter.

More important, however, are the questions of framework, direction, and impact on long term wealth creation and power. Clinton could not repress a telling burst of clichés. "Our countries," she said, "have become thoroughly, inescapably interdependent." And, "the United States believes that a thriving China is good for America, and a thriving America is good for China."

I guess, she has to say that, but why does she particularly want to celebrate this interdependence? China is clearly doing its best to become less interdependent. And is it true that a thriving China is good for America and vice versa? Well, it may or may not be true. It depends on circumstances. And Clinton’s job is quintessentially to assure that circumstances in China are favorable to making America thrive and perhaps making America less interdependent.

At the moment, the circumstances are such that most of the incentives in the U.S. -China relationship are to move the production of tradable goods and the provision of tradable services and the related jobs out of the United States to China. Under those circumstances a thriving China does not necessarily result in a thriving America. What are those incentives? Regardless of Geithner’s praise of the revaluation of the yuan in real terms, it is still undervalued. Moreover, the markets know that the Chinese can and will increase the undervaluation whenever it suits them.

So the initiative and the dynamics are with China. Investment incentives of both the financial and administrative guidance type are set in a pro-China anti-America direction. In many industries like avionics and aerospace, it is clear to market players that if they want to sell in China they will need to produce in China because of both overt and covert Buy China policies and attitudes. By the same token, it is also the case that China provides very aggressive tax, investment grant, and other financial investment incentives that are usually unmatched by the United States. The use by China of Value Added Taxes combined with their non-existence in the United States is a powerful incentive to move production to China.

Until these fundamental factors change, no amount of agreements to consider having state owned enterprises pay more dividends to the Chinese national treasury and to allow foreign financial firms to invest up to 49 percent in Chinese firms is going to change any important trajectories. In particular, they will not change the trajectory of loss of American wealth producing capability and global influence.

Not only have our "top diplomats" led by Clinton given us a feckless performance in Beijing. They are leading to nowhere in particular. They are captives of the status quo, of slogans and shibboleths and the march of events. No one is thinking. They’re all too busy doing Dialogues.