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Appeasing Red China By: William R. Hawkins
FrontPageMagazine.com | Friday, June 01, 2007

Under the name Engage China, a coalition of financial services trade associations announced a new ad campaign to support the U.S.-China Strategic Economic Dialogue (SED) on May 15. Using the slogan "China's Growth, America's Opportunity," the ads ran in both online and print media from May 16 through May 23. The SED was held in Washington May 22-23. Engage China includes the American Bankers Association, the American Council of Life Insurers, the American Insurance Association, the Council of Insurance Agents & Brokers, the Bankers' Association for Finance & Trade, the Financial Services Forum, the Financial Services Roundtable, the Investment Company Institute, and the Securities Industry and Financial Markets Association.

The first SED took place in Beijing last December, having been initiated by Treasury Secretary Henry Paulson to calm trade tensions with China. A central issue is Beijing’s manipulation of the exchange rate of its currency, the RMB. Economists have estimated that the RMB is undervalued by as much as 54 percent, according to a recent survey by the Congressional Research Service. Congress requires the Treasury to determine whether foreign countries set exchange rate for the purpose of "gaining unfair competitive advantage in international trade." Such a finding would require the Treasury Secretary to initiate negotiations on an "expedited basis" for the purpose of eliminating the unfair advantage. The Treasury Department has refused to find Beijing guilty of this charge, saying only that the RMB  is “misaligned” with the dollar.


Former Treasury Secretary John Snow was losing patience with Beijing. He said in May, 2006 that "if current trends continue without substantial alteration, China's policies will likely meet the technical requirements of the statute for designation." But he was then replaced by Paulson, the former CEO of Goldman Sachs, the most active investment bank in China. Paulson, who made a fortune helping build Chinese economic strength, has no desire to confront the monster he helped to create. So instead of negotiations, he is engaging China in a “dialogue” which no one expects will change Beijing’s behavior in any meaningful way. Which is why Paulson’s old comrades from Wall Street want to support the SED. They are all heavily involved in trying to profit from Chinese expansion.


A more accurate slogan, however, would be “China’s Growth, America’s Peril.” While corporations see the gains from trade and investment in terms of profit, Beijing uses its gains in industrial capacity, capital and technology to rise as a major power in world politics-- with an agenda hostile to the interests of the United States. The Pentagon’s 2006 annual report on The Military Power of the People’s Republic of China sums up the situation nicely: “China continues to dispute sovereignty claims in the South and East China Seas and is preparing for potential conflict over Taiwan. Chinese companies continue to play a negative role in the proliferation of advanced military capabilities, and continue to supply countries such as Iran with critical military technologies. Beijing has refused to join the Proliferation Security Initiative. China has not fully leveraged its close ties with Pyongyang to stem North Korean nuclear ambitions, and continues to maintain or strengthen political, economic, and military ties with Iran, Sudan, Burma, Zimbabwe, Cuba, and Venezuela, undercutting international efforts to influence those states.”


A report by the RAND Corporation on the Chinese defense industry found it was more advanced that previously thought. The authors reported that, “China’s emerging IT sector is not an officially designated part of China’s defense-industrial complex; however, it is probably the most organizationally innovative and economically dynamic producer of equipment for China’s military....Although IT enterprises are primarily (exclusively, in most instances) oriented toward domestic and international commercial markets, the PLA has been able to effectively leverage certain IT products to improve the military’s command, control, communications, computers, and intelligence (C4I) capabilities—a critical element of the PLA’s modernization efforts.”


The April 2007 International Monetary Fund Regional Economic Outlook for Asia and the Pacific supports the Rand analysis. The IMF found “Asian economies have steadily raised their share of the global electronics market, from 38 percent in 1990 to 42 percent in 2005. The increase is more marked for sales of semiconductors, for which Asia’s share has more than doubled from 20 percent in 1995 to 47 percent last year. The rise in market share has largely been driven by the rise of China as a production platform for these products. China’s share of electronics exports among Asian countries has more than tripled since 2000.”


China’s IT industry has benefited greatly from foreign investment and technology transfers. To be able to advance further, Beijing has urged developed countries to “ease restrictions on technology export.” Existing restrictions are primarily on products that could be used for military purposes. Li Ruogu, the deputy governor of the People's Bank of China, has said “They [Americans] should concentrate on sectors like aerospace and then sell those things to us and we would spend billions on this.” And use the gains to build more weapons aimed at U.S. and allied forces.


National Foreign Trade Council (NFTC) President (and former Clinton-era Commerce Department official) William Reinsch has been lobbying his former department against tightening export controls on dual use technology sales to China. He argues that security restrictions “undermines U.S. competitiveness” by which he means the ability of certain corporations to make money selling the Beijing regime whatever it wants, regardless of the consequences. The NFTC membership consists of major transnational corporations and banks whose top priority is “advocating public policies that foster an open international trade and investment regime.” Such a ideal world of business cannot operate in a world still beset by geopolitical rivalries where the distribution of wealth and productive capacity are key elements in the balance of power. So lobbyists like the NFTC seek to deny that geopolitical threats exist.


Secretary Paulson expressed this outlook at the Peterson Institute for International Economics May 2. He said, “I hesitated to take this job because I could see the protectionist sentiment in the US, and nationalism and protectionist sentiment in China’s local elections and in selecting the State Council this Fall, and elections in the US.” He would prefer to continue dealing with China as when he was in the private sector, treating state enterprises as business partners rather than the instruments of a communist regime that sees itself as the global rival of his home country.


The NFTC established what may be the model for Engage China when it created USA*Engage in 1997 to oppose economic sanctions against rogue states. An early concern was to protect the military dictatorship in Burma which is heavily backed by China. On May 9, USA*Engage and NFTC joined other trade associations to urge the Senate to reject legislation that would “impose broad, unilateral U.S. sanctions resulting from foreign entities doing business with Iran.” The Business Roundtable, the National Association of Manufacturers, the U.S. Chamber of Commerce and the National U.S.-Arab Chamber of Commerce were among the co-signers. Yet American sanctions, especially closing down Iran’s access to foreign financial institutions, has been particularly successful in putting pressure on the Tehran theocratic regime.


The recent actions by certain elements of the business community which now consider themselves to be transnational, and thus outside (or above) the concerns of national security and international politics, confirms the statement made by James Sasser, U.S. ambassador to China during the Clinton administration, to Bloomberg News in 2004, "The Chinese really don't do any lobbying. The heavy lifting is done by the American business community." But it is a lobbying effort the American people and their representatives in Washington should reject.


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William Hawkins is a consultant on international economics and national security issues.

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