Love Story 2010: An Even Sadder Tale About China Trade

"What can you say about a twenty-five-year-old-girl who died?"

This is the opening line from the book and movie Love Story that teared up the eyes and crumpled the knees of every reader and viewer who read or heard it in 1970.

From December 13th though the 15th, Secretary of Commerce Locke and U.S. Trade Representative Ron Kirk, will be meeting with their Chinese counterparts, including PRC Vice Premier Wang Qishan, in Washington to discuss economic and trade issues confronting our two nations. Perhaps this meeting's opening line should be, "What can you say about a ten year old trade relationship which died?"

The U.S.-China Joint Commission on Commerce and Trade (JCCT) was established in 1983 as an annual forum for high-level dialogue on bilateral trade issues and a vehicle for promoting commercial relations. The JCCT is also supposed to resolve problems affecting American companies. However, until September 8, 2000 JCCT meetings were about as benign as benign gets -- mostly just very low-level encounters between our Commerce Department and China's Ministry of Commerce -- because until then there was only de minimus trade between our two nations, mostly, on the China side, the exporting of low-value goods made with cheap labor.

Why "September 8, 2000"? Well, that was the date on which the U.S. Senate enacted Permanent Normalized Trade Relations (or PNTR) with China. That was also the date on which the fervor in the Clinton White House and those in Congress behind PNTR's two underlying promises -- namely, its promise to American workers of burgeoning balanced reciprocal trade, and its promise to the American people of long-term cooperative foreign relations -- was matched only by the euphoria at the U.S. Chamber of Commerce and the Business Roundtable over the obvious profits that they knew would soon come to their multinational corporation members from opening up vast new operations in China.

By the time of the 2004 JCCT meeting, which was the second year into China's PNTR-induced WTO membership, American 'industry' became very much involved in the JCCT process. Unfortunately, under the Bush administration, 'industry' meant only those major U.S. companies which had by then extensive operations in China and which were anxious to direct the U.S. trade agenda only in their own favor.

In the ten years since PNTR, the promise of balanced trade notwithstanding, America's cumulative trade deficit with China has aggregated $1.76 trillion, much of it, as the Chamber of Commerce and the Business Roundtable expected, being substantial profits on exports to the U.S. by the Chinese subsidiaries of some of America's largest multinational corporations.

And as for the other promise -- namely, more cooperative foreign relations -- China instead, using its massive trade surplus-driven foreign exchange reserves (now more than $2.5 trillion, including of course the $1.8 trillion or so it has earned from its trade surplus with the U.S.), has built a formidable "blue water" navy which is already beginning to project great power throughout the South China Sea and the Pacific Ocean and into the Indian Ocean.

China has begun testing long-range ballistic missiles that could be used against our aircraft carriers and other targets, and more than 275 major warships now comprise its "principal combatants". Included in this fleet are at least 60 submarines, two of which are Jin-class "boomers" with ballistic missile capabilities with two more under construction that we know of, and two of which are Shang-class nuclear-powered attack submarines.

What do you do if you have both trillions of dollars of foreign reserves and a 'blue water navy'? Well, of course you use them -- and if you're China, you use them each aggressively. You use your foreign reserves to embed your domestic industrial and manufacturing prowess, to the exclusion of competitors, and to buy up natural resource reserves around the globe (oil & gas, iron ore, coking coal and copper). You use your spanking new navy to back up your declaration that in the South China Sea, you will tolerate no interference in what you now claim is a "core interest" of your sovereignty.

Of course, by making South China Sea sovereignty "non-negotiable" (China's own phrase), China has made almost inevitable problems down the road between it and each of Vietnam, the Philippines, Indonesia, Malaysia, Singapore and Brunei, which, in turn, will create frightening problems for the United States and Japan.

We have already seen early evidence of the contretemps that America, Japan and the other developed nations will be confronting down the road in China's recent blockage of exports of "rare earth" minerals to Japan in retaliation for Japan's detention of a Chinese fishing trawler captain operating in disputed waters of the South China Sea. These rare earths are vital to almost everything worldwide that is on the cutting edge of technology, from hybrid cars to wind turbines to Boeing's helicopter blades to the tiny magnets that direct the fins of the bombs being dropped every day in Afghanistan to Raytheon's missile targeting systems to General Dynamics' tank guns. Yet China currently supplies a staggering 97% of the world's demand for them because in 1986 Chinese leader Deng Xiaoping made 'mastering' rare earths a priority.

As I've said, all of this started with trade PNTR in September 2000, yet during the entirety of the Bush administration the JCCT meetings were either an after-thought or, even worse, the tool of multinational corporations. It's way past time for China to see, firsthand, that the U.S. is committed to permanently linking our trade policies with China with our nation's security interests and global defense responsibilities. Hopefully Secretary of State Hillary Clinton will also participate in next week's meeting, as she knows better than most anyone else in the Obama administration the immense problems and the massive dislocations which our grossly unbalanced trade relations with China are causing and that they are transcendent.

At this December's JCCT meeting, the USG should concentrate on six initiatives that with successful outcomes would most quickly bring the greatest value back to the woebegone U.S. side of U.S. -- China trade relations. These are:

  1. Mitigate China's deplorable record on transparency and its dramatic overuse of vague and draconian "State Secret" laws to restrict foreign competition.

  • Balance the meager labor and environmental requirements that China places on "State Owned Enterprises", or SOEs, with the much more responsible requirements that are placed on companies operating outside of China.
  • Bring to light all of China's significant illegal subsidies, not just its ongoing currency manipulation. We know that many of China's subsidy practices, including its abysmal environmental practices, provide its companies with "counter-available subsidies", and they need to be treated as such,.
  • Go after, with what's called a Section 301 case or otherwise, China's "Indigenous Innovation Production Accreditation Program", which limits all Chinese central and provincial government procurement to companies that have "indigenous" - or Chinese - "innovation". Embedded in this Program are China's two most blatant 'trade advantages', namely, (i) its regulations used to block non-Chinese firms from selling their products to Chinese government agencies and (ii) its rules that force Western companies (such as Boeing) to give up their technological secrets in exchange for access to China's markets.
  • Put the full weight of the USG behind the efforts of the United Steelworkers and others to hold China accountable for its illegal aid to its clean-energy producers, including its illegal export credits, preferences in bidding, and forced transfers of technology.
  • Put a halt to China's persistent theft of America's hard-gained, valuable intellectual property or IP.
  • Regarding the latter, of course it is not just the likes of Boeing, GE and IBM that are having their IP pirated every day. As we just learned from the WikiLeaks cables, it was, according to our Embassy, the Chinese government itself that was behind the recent hacking of Google, ostensibly to identify dissenters but also, very obviously, to at once steal the IP of Google and its 'clients'.

    Because it's so relatively easy to pull off, we've always known that our Silicon Valley-type companies are at grave risk from Chinese IP theft, but it is actually China's perpetual theft of our high-end manufacturing expertise that is the most pernicious and the most draining of our economy. With only 8% of America's workers now in our manufacturing sector -- when the figure must be 2.5x or 3.0x this level for our economy to prosper -- any further loss of U.S. manufacturing due to the combination of IP theft and illegal subsidies to Chinese manufacturers is unacceptable.

    To this point, before China was granted PNTR, the United States never had a trade deficit in what is called "Advanced Technology", and it certainly never had one with China. Suddenly, in 2000-2001, that all changed, and now we have an annual trade deficit with China in AT of nearly $100 billion, or about 40% of our overall annual trade deficit with China in goods & services. In other words, in the highest technology portion of the manufacturing sector, where the U.S. was once dominant in global exports and where our nation's manufacturing future most evidently laid, we now have an overall trade deficit, almost entirely with China.

    As a strongly related aside, while the JCCT process is ongoing, the Executive needs to draw -- for State, Defense, Commerce and Congress -- much fuller pictures of our major trading partners' commercial policies, business practices and rules of law (including, in the particular case of China, their relationship to the country's military aspirations). Perhaps the answer is nothing more than a new office in the White House dedicated to solely carrying out this mission, or perhaps it's a new, high-level inter-agency Task Force, including various parts of the intelligence community, dedicated to understanding overseas commercial activities at all levels. Whichever, what is not working well right now is the current National Security Council structure which is primarily focused on keeping the political aspects of our foreign relations but which focuses very little on tracking and scrutinizing the potentially adverse commercial activities of our major trading partners.

    Domestically, the dislocations that were born out of China PNTR and its later admittance into the WTO lie at the roots of our ongoing jobless economic recovery, our greatly weakened manufacturing sector, and our persistent economy-zapping massive trade deficit. Globally, they lie at the root of China's leveraging of its economic power, through its growing military might, to further advance its broad strategic interests and its regional expansion objectives. Given the past repeated failures of Treasury Secretary Geithner and Larry Summers, former director of the President's National Economic Council, to bring any meaningful fairness and rationality to U.S. -- China trade relations, we should all hope and pray that next week's JCCT meeting is a meaningful step to getting this train back on track.

    Leo Hindery, Jr. is Chairman of the US Economy/Smart Globalization Initiative at the New America Foundation and a member of the Council on Foreign Relations. Currently an investor in media companies, he is the former CEO of Tele-Communications, Inc. (TCI), Liberty Media and their successor AT&T Broadband. He also serves on the Board of the Huffington Post Investigative Fund.