Our Great Recession is China and Southeast Asia's Great Opportunity

I just finished a two-week trip that began in China, continued down throughout Vietnam, and ended in Thailand via Cambodia. It's a trip that everyone concerned about the nearly unprecedented 19% 'real' unemployment rate in the United States -- and the long-term welfare of our workers -- should make soon.

For in short, without some dramatic changes soon in our economic and trade practices, it is clear that America's Great Recession of 2007 will continue, while in turn becoming much of Asia's 'Great Opportunity'.

Inevitably, we are going to lose many more jobs to this region. But some of these losses, to countries like Vietnam and Thailand, will likely be 'fair' losses based solely on the trade maxim of comparative advantage, as these economies are now competing vigorously mostly on the basis of the capitalistic fervor in their economies, without manifest government intervention in trade.

China, on the other hand, is a very different kettle of fish, as over the last two decades we have effectively let it discard, when trading with us, the overriding principles of 'true comparative advantage' and 'fair trade', in favor of 'host-country-only advantage' and 'unbridled free trade'. The consequences of this failed policy on our part have been cumulative in the extreme, and thus the millions more jobs we're inevitably going to lose to China are, consequently, going to be 'anything-but-fair' losses.


As I said, my trip began in China, which I last visited in February 2008 just after the recession started.

Now, exactly two years later, construction cranes that briefly fell silent are back erecting high-rise buildings, important infrastructure projects that were halted are back being built along with new ones, and ports that had container ships laying at anchor are now again loading ships through the night. Chinese consumers are back shopping -- and eating out -- with complete abandon, and workers from the far-western provinces and rural China have again left their villages to return to work in China's major cities.

China's economy is visibly re-booming while much of the world, especially America, continues to face severe economic problems. The Great Recession has in fact quickly turned into China's 'great opportunity', with American companies cutting both their payrolls and their capital spending, thereby driving business to China, at the same time that Chinese manufacturers are boosting their global competitiveness, directly on their own and indirectly through subsidies from their partner central government.

In just the last year, China's share of our nation's trade deficit in manufactured goods jumped from 69% to an almost unbelievable 80% today, while its share of U.S. imports overall, non-resources and resources combined, increased 20%. In dollars, China right now is exporting about $330 billion annually to the United States, while purchasing less than $90 billion here.

President Obama got it right on February 3, albeit in my opinion late by about a year, when he told the Senate Democratic Policy Committee that: "One of the challenges that we've got to address internationally is currency rates and how they match up to make sure that our goods are not artificially inflated in price and their goods are artificially deflated in price. That puts us at a huge competitive disadvantage."

Certainly no responsible American economist disagrees with the President's assessment that China's currency, the yuan or renminbi, is undervalued compared to the dollar (and the Euro) by at least 25% and up to 40%. According to economist Peter Morici, this artificial devaluation of China's currency alone creates a staggering 25% illegal subsidy on its more than $300 billion of annual exports to the U.S.

Yet currency manipulation is actually just the tip of the Chinese trade iceberg, albeit a very big 'tip' - at least as concerning are China's overall unfair trade practices.

And contrary to what American workers have been told repeatedly by America's multinational corporations and by the U.S. Chamber of Commerce, the critical issue is not China's relatively low labor costs. As Norbert Sporns, a Seattle-based CEO, recently said, "The major reason why we're [now] sited [in China] is not because of cheaper labor, but because of government support, because of the infrastructure that is laid out properly". And this same logic applies both to global computer and consumer electronics, where China's role now extends far beyond assembly where it started, and to China's increasingly dominant role in the 'green economy' that all developed nations, including our own, were counting on to jumpstart their economies.

To this latter point, while our ongoing stimulus package devotes $80 billion to 'things green', China plans to spend, out of its enormous accumulation of foreign reserves, nearly three times as much, or $217 billion, over just the next five years on such efforts. And, as it has already done so successfully in other industries, China is making all of its domestic green economy expenditures in ways that are at the same time positioning it to become the largest global exporter of such components to the U.S. and other nations, while essentially 'locking out' any of them from importing products into its domestic initiatives.

Something on the order of 90% of China's domination in manufactured goods vis-à-vis the U.S. is due to its subsidies to domestic and foreign-owned manufacturers alike - subsidies based around plant sitings and financings, taxes and of course currency - and to its extremely low environmental standards. And the sad reality is that after years of accumulating market share and building the infrastructure it needed in order to dominate much of the global marketplace, all with the help of massive (often illegal) subsidies and a massively undervalued currency, China's trade advantages in many vital industries are now so embedded that they will exist for years to come even if President Obama is successful in confronting China's manipulated exchange rate, which of course is far from assured.

So, where does all of this leave the U.S. otherwise?

According to Richard Haass, the president of the Council on Foreign Relations, "We've [already] reached a point now where there's an intimate link between our solvency and our national security." And it is easy to see why Mr. Haass comes to this conclusion, since the U.S. government in 2010 will borrow one of every three dollars it spends, half or so of which will come from foreign countries.

Not even accounting for the forecasted $1.6 trillion federal deficit this year, the $1.3 trillion deficit next year, and the $8.5 trillion combined deficit for the next 10 years, the U.S. already has about $7.5 trillion in accumulated debt held by the public, of which China, with more than $2.4 trillion in foreign exchange reserves, is the largest single holder. And of course all the while China is every day accumulating ever more American dollars as our nation's largest non-resources importer - its foreign exchange reserves increased $453 billion (or 23%) just in 2009 alone.

There is no reason to believe that China's immediate threats in response to President Obama's February 3rd speech, both its explicit ones and its implied ones, are false, despite Deputy Assistant Secretary of State for East Asian and Pacific Affairs David Shear's testimony the very next day to this Commission that they probably are.

Nor does it seem particularly informed to suggest, as Mr. Shear also did, that China does not have the "intention at this time to create a [political] hegemony in Southeast Asia or to displace American influence in the region" -- of course it does. Just as it also intends to use its foreign reserves to acquire 'blocking positions' in resources and/or in agriculture in Australia, Africa and large parts of South America.

And Shear is simply wrong as well in suggesting that China's arms buildup is "consistent with modernizing military forces in general and [is] not in the fashion of an arms race" - it absolutely is an arms race for China, and a global one at that, as senior Chinese Admiral Wu Shengli confirmed on April 14, 2009 when he spoke about China's "accelerated and soon [to be] completed deployment of a full-scale 'blue water' navy, including home-grown submarines with nuclear-armed ballistic missiles".

Thus it seems inevitable that some individual American companies, for example the Boeing Company and those involved in oil exploration off the Vietnam coast, will suffer from Chinese trade retaliation, as likely will parts of our foreign policy and defense agendas. But the Obama administration's job is to look after our national interests first and foremost, and not after individual multinational corporate interests, which means above all else keeping the U.S. economy strong, which is about the only part of Mr. Shear's testimony with which I agree.

So, using whatever tools are available, the administration and Congress need to go after all of China's illegal subsidies, not just its currency manipulation, just as they need to put a quick halt as well to China's persistent theft of America's hard-gained, valuable intellectual property or IP, which zaps our economy almost as much as China's adverse currency moves.

Regarding the latter, a quick and easy solution, courtesy of former Senator Slade Gorton (R-WA), would be to make a finding at the end of each year of the total value of the IP the Chinese have stolen, followed by a tariff during the next year on everything they sell us levied at a rate calculated to recover 150% to 200% of that stolen value. (Slade, an old friend, believes that since the great and constant threat from China is always around our intellectual property, my "going after China's currency is the right church but the wrong pew" - the only difference between Slade and me is that I want to fill up both pews!)


After China, my trip continued through Vietnam and Thailand, ongoing economic 'miracles' of a quite different sort than China's.

The two most fascinating aspects of life in the major cities of Vietnam are the burgeoning markets and the traffic. Both are masses of humanity and intent. For obvious economic reasons, the principal means of motorized transport in Vietnam today is not the automobile, rather it is the motor scooter - there are 2 million of them in Hanoi and 3 million in Saigon. The people, as individuals, are like any American, and like any European, Russian, Brazilian or South African - they want education, health, offspring and material improvement in their lives. And they are thriving on capitalism, even under their one-party, Communist government.

Ho Chi Minh City (Saigon) and Hanoi are as different as Miami and Havana. Hanoi is the national capital, but it is a decade or even two behind Saigon in terms of its development and prosperity. There are now parts of Saigon, by contrast, that might easily be in Orange County, California from the standpoint of large-scale retail, office and residential development.

The 86 million Vietnamese people are delightful, gentle and gracious. They are very young in average age, and very capitalistic. Seeing Hanoi and Saigon today, it is incomprehensible to me how much effort the United States put into trying to forcefully steer this country away from Communism, even if that only meant to a pro-U.S. dictatorship.

In Thailand, everything is just more advanced than in Vietnam, most noticeably in the transportation infrastructure: an airport to rival Hong Kong's, expressways, light rail, bus lines, and, relatively, far more automobiles and far fewer scooters. The skyline is much more robust in Bangkok than in Ho Chi Minh City, and certainly more robust than in Hanoi. Bangkok's combined Siriraj Hospital and Medical School - presently undergoing extensive expansion - rivals any medical complex in Houston, Texas.

Thailand's 68 million people have the same basic aspirations that their Vietnamese neighbors have, indeed that all of us have. And given the pace of progress in Vietnam since the Vietnam War, it would be hard to argue that the democracy of Thailand is demonstrably better in helping the people succeed than is the one-party rule of Vietnam. It's just that Thailand has had a much longer interval of peace than has Vietnam.


As with most of Asia other than China and South Korea, which are a challenge for us unto themselves, the key to our trade and commercial relationships with Vietnam and Thailand is really quite simple. All we need to do is sensitively balance these countries' comparative advantages -- now their abundant labor and agricultural capabilities, and later their natural resources, especially oil & gas -- with our own relative advantages, without falling into the unfair subsidy and environmental practices traps that we are letting China get away with.

And then there is no reason at all that overall trade in any of these countries can't be in productive and mutually beneficial economic balance, including their trade with the United States.

I must say in closing that despite the obvious economic growth underway in the developing countries of Southeast Asia, we nevertheless still have an ethical and moral responsibility to at once be their significant foreign assistance and development partner, as they seek to advance the fringes of their societies out of poverty and provide them with good public health and nutrition.

Unfortunately, however, the foreign assistance and development role which is so highly correlated with trade is a role which too often we fail to effectively play. And over and above this being a moral failure on our part, absent our playing a more responsible foreign assistance role, there is no counterbalance to China's mercantilist practices in the region which are as relatively unfair and harmful to the economies of Vietnam, Cambodia, Laos and Thailand as they are currently unfair and harmful to our own American economy.

Leo Hindery, Jr. chairs the US Economy/Smart Globalization Initiative at the New America Foundation and is a member of the Council on Foreign Relations. From 2005 through 2007, he was Vice Chairman of the Presidential and Congressional HELP Commission which in December 2007 made recommendations to Congress for the reform of U.S. Foreign Assistance. He is the former chief executive of AT&T Broadband and other major media and telecom companies.