American Policy Made in China

Last week, President Obama forcefully declared that the United States would not withdraw from the Asia-Pacific, telling the Australian Parliament that he was dispatching 2,500 Marines as well as ships and aircraft to serve at a base in the Australian port of Darwin. The message, in case anybody missed it, was unmistakably directed at China.

But while Obama was making symbolic military gestures, his administration was doing nothing serious to contest China's growing threat to America's economic base. That threat is spelled out in an official government document that should be mandatory reading for all of us -- the annual report of the U.S.-China Economic and Security Review Commission, released last Thursday.

What's noteworthy is that this is a bipartisan commission created by Congress, and that all of its 12 commissioners, six Republicans and six Democrats, signed off on the report.

The basic findings: China is a mercantilist and authoritarian state that is determined to appropriate not only U.S. jobs but also U.S. advanced technology through illegal subsidies, suppression of worker rights, and deals with U.S. industry that are one part lucrative carrot (cheap wages, state capital) and one part illegal stick (if you want to do business in China, take a Chinese partner and share your trade secrets). Even then, you must produce mainly for export back to the U.S., not for sale in China.

Worse still, U.S. industry has been happy to take these deals, which makes them a domestic ally of the China lobby. While our government periodically makes half-hearted complaints that the Chinese currency, the Renminbi, is seriously undervalued, American corporations like that just fine -- because it makes their exports to the U.S. from Chinese factories even cheaper. The U.S. Chamber of Commerce, which fights industrial policy at home, lobbies fiercely against any pressure from Washington against Beijing's mercantilism.

So while the Obama administration flails around with small-bore military gestures and bipartisan free trade deals with smaller countries, it does not dare to challenge the grand bargain America's corporations have made with China, or China's own illicit policies.

Among the Commission's more important findings:

The U.S.-China trade gap continues to widen, especially in advanced technology. China sold the US $81 billion in advanced technology products in the 12 months ending last August, and imported just $13.4 billion worth. The total trade deficit with China was a record $273 billion, more than half of America's total trade deficit with the world. By mid-2011, China's overall trade surplus of $3.2 trillion was up $800 billion in just a single year.

Although China agreed in 2001 to stop explicitly requiring foreign companies to surrender their technology to China in return for market access and investment opportunities, the government in Beijing still employs several tactics to coerce foreign firms to share trade secrets with Chinese competitors. China's industrial policy in general and its indigenous innovation policy in particular seek to circumvent accepted intellectual property protections and to extort technology from U.S. companies.

These requirements and extortions explicitly violate prohibitions of the World Trade Organization.

China is becoming a national security threat, both because it is an increasingly important player in the supply chain for advanced components no longer made in the U.S., and because of its sophistication in cyber-warfare:

The U.S. government, foreign governments, defense contractors, commercial entities, and various nongovernmental organizations experienced a substantial volume of actual and attempted network intrusions that appear to originate in China. Of concern to U.S. military operations, China has identified the U.S. military's reliance on information systems as a significant vulnerability and seeks to use Chinese cyber capabilities to achieve strategic objectives and significantly degrade U.S. forces' ability to operate.

Despite the threatening and unpredictable conduct of North Korea, the Chinese Communist Party appears to have calculated that its interests are better served by
the support of the [North Korean] regime than by its removal. Likewise, China's relationship with Iran undermines international efforts to curtail Iran's pursuit of weapons of mass destruction and support of international terrorism.

China continues to be an autocratic, one-party state that brutally represses dissent, even as it becomes a more effective state-led, pseudo-capitalist world power. Despite China's increasing productivity, the Chinese government suppresses domestic consumption so that it can have ultra-low wages and cheap capital to build its economic machine and bribe American industry to collaborate with its mercantilism. Its state-owned industry sector is still immense, as its favoritism for domestic companies in its public procurement.

Because of the American reliance on Chinese capital to finance the U.S. public debt and American capital markets and because so many of our largest corporations have made their separate peace with the Chinese regime, we may have already reached a tipping point where Washington is unwilling to make more than token complaints that Beijing knows not to take seriously. Though China's suppression of the value of its currency has been thoroughly documented, Treasury Secretary Geithner has repeatedly refused to formally cite China as a currency manipulator, which would compel the U.S. government to pursue sanctions.

While the West teeters on the brink of a second recession and perhaps a collapse of the Euro, China's autocratic state capitalism is largely unchallenged by either the U.S. or Europe. After the most recent European summit meeting desperately sought to cobble together a new bailout fund, European leaders went hat in hand to Beijing, where they were told in no uncertain terms that if they wanted China's help, they needed to stop pressing trade complaints and change China's status from "non-market" to "market" economy. This is how China exercises its immense leverage to tilt the playing field even more extremely in Beijing's favor.

As the Commission reports, this is the 10th year of China's provisional membership in the World Trade Organization. Though the U.S. government and others still have some leverage to change China's behavior, if they choose to use it, the Commission reports that China hopes gradually to "strong-arm its way into market economy status, and shake free of restrictive terms and obligations in its [WTO] accession agreement."

Many Americans naively emphasize China's great progress in improving its educational system. While we can only applaud the social strides China has made, the source of America's growing economic disadvantage vis-à-vis Beijing lies elsewhere.

While Republicans and Democrats elsewhere agree on nothing, all commission members after extensive testimony and study agreed on the mounting threat of Chinese mercantilism. The problem is that other Republicans and Democrats -- such as those in Congress and in the White House, have a much more benign view of the Chinese government and continue to naively promote a "free trade" that China doesn't practice.

And while U.S. industry occasionally complains about the outright theft of intellectual property, for the most part the largest corporations like the deal they have with its outsourcing, its cheap and docile labor and its capital subsidies by the Chinese government. The Commission reports that this costs the U.S. between 600,000 and 2.4 million jobs.

It is ironic that both the Republican jingoism, support for expanded democracy overseas, and saber rattling against other perceived threats, and the Obama administration's desire to look credibly tough in the Pacific, both stop well short of defending America's real national interests against Beijing.

As for those 2,400 Marines soon shipping out to Australia, they just might have the sweetest posting of any U.S. servicemen and women anywhere. Reenlistments should be no problem. Our newly truculent policy toward China might as well be called "Throw another shrimp on the barbie."

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.