China’s investment comes with a hidden agenda. And a secretive new treaty is about to make it worse.
[Reposted from Politico | Michael Wessel | September 24, 2015]
Republicans are criticizing President Obama for his willingness to roll out the red carpet for President Xi Jinping of China. They find the planned 21-gun salute for the Chinese leader unbecoming. I’m less concerned with the form of the greeting than the nature of the discussions.
Amidst the pomp and circumstance of the state dinner, there is likely to be a conversation about cyber intrusions emanating from China, president Obama is expected to call for a measured course in the South China Sea and the latest devaluation of the Chinese currency will apparently come up. But more worrisome than any of these points of tension between the United States and China is an issue where the two countries’ governments largely agree: trade.
What should truly concern Americans is the U.S.-China Bilateral Investment Treaty (BIT), a secretive agreement likely in the final stages of drafting with the potential to lock in place America’s unequal and imbalanced economic relationship with China. We’ve been importing hundreds of billions of dollars more in goods from China than we send to them. Now, we may be setting the stage to import their non-market economic principles and let them potentially undermine more and more of our free market system.
I’m an original and continuing member of the Commission of the U.S.-China Economic & Security Review Commission, which is instructed to “monitor, investigate and submit to Congress an annual report on the national security implications of the bilateral trade and economic relationship between the U.S. and China.” I also serve as a cleared liaison to two statutory trade advisory committees and am supposed to have access to U.S. proposals and negotiating text. But, so far, my colleagues and I have been denied the ability to review the offers made during the BIT negotiations that will determine what economic sectors are covered by the treaty. And the basic provisions we do know about aren’t appropriate for China, which has proven time and again that it can’t be trusted to follow trade rules.
After the financial crisis, the Council of Economic Advisors made clear that the United States welcomed foreign investment with open arms. Indeed, the “Select USA” program has been working aggressively to bring in foreign investors. Much of that investment can provide good jobs with good wages. The investments are transparent and many of them come from market-oriented businesses whose stocks are traded on public exchanges. China is an exception.
Chinese investments in the United States over a certain dollar threshold must still be approved by a minimum of one, and up to three Chinese governmental entities. So, by definition, large Chinese investments in the U.S. must fulfill governmental objectives. That’s not free-market principles at work.
To take just one example, let’s look at China’s purchase of Smithfield Foods a short time ago. This past weekend, former Treasury Secretary Paulson applauded the purchase and the resulting 45 percent increase in U.S. pork exports to China that resulted. He’s got it wrong. For years, U.S. pork producers had been trying to get their products into the hands of Chinese consumers. It was only after our leading company was purchased that exports—for that company’s products—increased. Under real free market conditions, we would have been able to export our high quality pork without China having to purchase one of America’s great companies.
This raises an important question: Is more investment by Chinese companies, who are primarily guided by non-market economic principles and often receive support from the state, really in our interest? What will their sourcing patterns be? Will a company that makes steel pipe and tube use domestically produced raw materials and suppliers or will they seek to employ the workers in their home market? As Smithfield Foods may no longer be subject to same profit pressures as other producers, have other companies had to engage in cost-cutting measures to compete against it? If so, what has been the impact of those cuts on pig farmers, feed grain producers and other suppliers?
As a commissioner, I’ve spent a good bit of time and energy trying to locate business case studies analyzing Chinese-invested firms here in the United States that were done by acknowledged experts with free access to the management, the workers and the books of those companies. And, as important, where the study wasn’t paid for by the firm being studied. So far, those kind of honest studies don’t appear to have been done.
China continues to build its industries far beyond its domestic demand. Rising overcapacity, in sector after sector, fueled by government subsidies and policies, has devastated producers in the United States and other markets who have had to compete against these products. From steel to aluminum to glass to solar to paper to many other industries, China has continued to keep capacity online, or add to it, despite global overcapacity and relatively stagnant or declining demand.
The result has been decreasing profits for too many U.S. firms, countless lost jobs and a flood of imports that are not governed by the need to make a profit for their companies. Trade cases have been filed against China in product after product area, but every time China loses a case it simply shifts strategies to subsidize and dump other products. Overcapacity has been raised during numerous Strategic and Economic Dialogue talks with the Chinese. But the problem is only getting worse.
The Chinese Communist Party’s power, in part, rests on ensuring an adequate level of domestic growth to keep its people employed and its industries humming along. So China isn’t interested in taking capacity offline and putting its people out of work.
In a recent trip to Beijing, my first in 18 years, a Chinese economic official lectured me about the benefits of the U.S.-China relationship. I responded that, rather than buy our pork, they bought our leading company. And, while we appreciated their purchase of U.S. soybeans, they have refused to buy soybeans that have been crushed to extract the oil and the soybean meal. That process leads to many more jobs—good paying jobs—and domestic wealth creation. But China wants to save those jobs for its own people.
Later on, a military official, in response to a question about Chinese cyber attacks, argued that these weren’t attacks—they were acts of espionage. All countries engage in such practices, he suggested. It’s true that every nation spies for national security reasons. But China’s intelligence services go much further by stealing economic secrets from private companies. China not only shares what it learns with its own companies, it takes requests from those companies. In May of 2014, U.S. attorney David Hickton succeeded in obtaining an indictment against five People’s Liberation Army hackers who took requests, obtained information by hacking and then gave the information to the requesting parties.
Unfortunately, China hasn’t stopped. Indeed, as FBI Director James Comey said, “there are two kinds of big companies in the United States. There are those who’ve been hacked by the Chinese and those who don’t know they’ve been hacked by the Chinese.” The Administration needs to take action to make clear that there are real costs if China continues these actions.
From the BIT to economic espionage to overcapacity China’s playing by a different set of rules. By now, we should have learned that further trade deals and investment treaties will only lead to more outsourcing of production and loss of jobs. China’s playing to win and so should the United States. When China understands that the U.S. will stand up when they don’t open up their markets and that we will respond forcefully to rule breaking and upsetting international norms, we may be able to manage our differences. Until then we should stop hoping that China wants to be more like us.
