April 29, 2008

Thoughts on U.S. China Trade

Wary of the Soviet Unions demise as it struggled to keep up with the Americans in the arms race, China is embracing a different approach by adopting an increasingly competitive economic policy, whereby it uses its huge its huge financial reserves to gobble U.S. business interests.

Since the end of the Second World War, the U.S. has mostly driven global free trade. From the outset, foreign policy was used as a means of building a network of trade between capitalist states to offset communist expansion. Yet even in our post communist era, the U.S. remains committed to free trade using it as a vehicle to promote prosperity, world peace, and democratic freedom.

Equal treatment, little regulation and/or subsidies and rules pertaining to transparency, have governed its liberalization policies to date. It has not all been smooth sailing though, as even groups within the U.S. have felt threatened by changes to labor practices and called for state protection to guard against competition. Just like here in Australia, many sectors in the U.S. economy have collapsed due to the outsourcing of jobs or simply eliminated by low priced imports. Despite the upholding of policies favoring liberalization in general, protection pressures have cropped up resulting in specific trade agreements and even trade sanctions, although these have not undermined the original principles of free gratis trade. Still, many citizens have grown wary of the ever ballooning trade deficit figure and this world trade phenomenon.

“We’re making sure America has a chance to compete on the same terms as people who sell into our market. And we’ll use the tools necessary to make sure the playing field is level”.
President George W. Bush 2004


For a nation that some see as an imperial rather than hegemonic power, it would appear odd to run a trade deficit, importing much more than it exports but there is the obvious positive spin to this; controlled inflation, more economic growth, and an open window to world export markets. Foreign policy objectives are also fostered through the imbalance. For example, successive the U.S. Government’s have managed China’s economic rise by making it dependant on a constructive relationship within the world economy, one that’s productive in terms of western interests, hence, the U.S. backing China’s entry to the World Trade Organization whose governing rules were largely drawn up by the U.S. in the first place. This provided some guarantee that China would abide by western international trade rules. On the surface it makes for a cozy economic relationship, the deficit increases the supply side of goods for American consumers at a price that controls inflation, but one example of economic dependency.

However, where there is strength there is inbuilt weaknesses, where there is opportunity there is also exists an inbuilt threat. In an effort to gain greater access to raw materials and compete more effectively with the U.S., China has been busy fostering trade alliances with other nations in all the major regions. In an example of another threat, the Chinese have been building massive dollar reserves which currently stand at over $1.3 trillion. If this were all invested in U.S. treasury bonds it would strengthen mutual dependence, increasingly however, China is using such reserves to gobble up U.S. companies and/or threaten to liquidate them if Washington makes decisions counter to their economic interests.

Wary of the Soviet Unions demise as it struggled to keep up with the Americans in the arms race, China is embracing a different approach by adopting an increasingly competitive economic policy, whereby it uses its huge its huge financial reserves to gobble U.S. business interests. Previously successful gains include China’s Lenovo group swallowing up the IBM Personal Computer business for $17.5 billion and the Haier Group offering $12.8 billion for Maytag, the long established home appliances company. The extreme example however, is that of the National Offshore Oil Company (CNOOC), in its unsuccessful attempt to buy Unocal, the U.S. energy giant. They offered $18.5 billion even after Unocal had beforehand accepted $16.4 billion by Chevron. In Washington, as concern mounted about China’s increasingly aggressive behavior, CNOOC continued active talks with Unocal by raising the amount on offer. This is remarkable given that they originally proposed a cash payment for the $18.5 billion. You read it right; cash! House representatives on Capital Hill raised the point directly with President George W. Bush and China responded by advising Washington to stop “politicizing economic and trade issues” referring to its endeavors as, “normal competitive activity between enterprises”.

In this regard, China is a greater threat than Japan was in the mid eighties when it tried something similar. Unchecked, this sort of behavior can undermine the economic ties cultivated by the U.S. over the years.

Trade deficit, trade liberalization, trade protection, trade alliances, Chinese ownership of American companies...

What do you think...

8 comments:

heidianne jackson said...

great post otto - well said on all points. our imports vs. exports ratio increases each year and is contributing greatly to the decline u.s. dollar value. however, i'm still not convinced that all is bad.

protectionist tactics ALWAYS backfire and will make us less prepared on a global level. however, there does have to be some sort of tit for tat that is used to balance out the trading.

you said "... China is a greater threat than Japan was in the mid eighties when it tried something similar..." you are quite right.

one of the reasons for their greater success is their willingness to employee their citizens for pennies a day and create and live with sub-adequate products as the american consumer (and others around the world) are beginning to learn with the recalls. also, their population, unlike japan, is not an aging, dying society - this counts more than most would give credit for.

heidianne jackson
http://biggirlpants.typepad.com

Tapline said...

Otto, Outstanding post....I worry very much about the influence China has over activities here in the States. I also worry about our borrowing to fund a war. No one mentions it, but it exists......stay well....

MK said...

I'd be worried too, nothing wrong with economic ties and prosperity and all that, however we must never forget that the Chinese leadership is not answerable to it's people through democracy. Just who exactly are they answerable to. On the plus side, demographics are not on their side.

The Liberal Lie The Conservative Truth said...

Excellent article Otto. The Chicoms have obviously learned form the demise of the Soviets and undersatand the no one can compete with The United State from a military stand point. This was the down fall of the Soviet which Reagan foresaw and follow though with.

The Chicoms on the other hand have sensed a weakness in American economic policy and also taken a page from our own economic success and used to their advantage while also using it to cut our throats at the same time.

If this is not addressed we could find ourselves as a second class economy behind a surging China economy with no end in sight!

American Interests.blog said...

Heidianne: And if the day comes that they pay their peoples an amount comparable to the West its bye bye Wal Mart and the like...

American Interests.blog said...

Tapline: Shared concerns my friend...

mk: You made two very good points there, thanks...

The Lib Lie the Conservative Truth: I worry about future projecions that paint an ugly picture in 2050... U.S 2nd class to China?? Best I ensure one of my kids picks up on this blog when God calls my name...

Aurora said...

Great informative post, Otto. While we're all preoccupied with the elections and the war, a lot is happening in the world at large, not the least is the military and economic expansion of China. I see them as the modern day vulture, buying up pieces of our debt as western world dies a slow death. Apparently they've already bought up 33% of American debt and they have their fingers in plenty of Australian pie as well. We might find that the humanitarian disaster to the North suddenly has control over far more than just their unfortunate citizens.

American Interests.blog said...

Thanks Aurora, I see you get it.