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Inviting in the Trojan Horse? By: William R. Hawkins
The Washington Times | Tuesday, June 10, 2008


Speaking recently in Beijing, Commerce Secretary Carlos Gutierrez called on China to invest more in the United States. "This $256 billion bilateral trade deficit is a problem," he said, "It feeds the appetites of those who would build walls around our markets. In both our countries, there has been a rise of economic nationalism."

In China, economic nationalism has been central to rapid growth. It has declined in America, however, replaced by a corporate globalism no longer concerned with building U.S. capabilities.

Mr. Gutierrez reminded his hosts that America is the world's greatest market. But because the market is open, the Chinese do not have to build in America to sell in America. In contrast, U.S. firms need to be in China, with a Chinese partner (preferably one with government ties), to have a chance in a market still largely closed.

Mr. Gutierrez wants Chinese capital flows to help balance accounts and counter growing "protectionist" sentiments. His remarks are the newest gambit for deflecting criticism from the failure of the Strategic Economic Dialogue (SED) to make any progress on the China trade problem. The next SED will be held in Annapolis June 17-18.

On the merits of his first point, the secretary has an odd way of looking at the trade balance; and on the second, an increased Chinese presence is likely to fuel a political backlash.

Mr. Gutierrez cited Suntech Power Holdings as the type of foreign direct investment [FDI] he had in mind. This Chinese firm plans to manufacture solar power systems in America. But this is not the profile of the typical FDI enterprise. According to the Commerce Department's Bureau of Economic Analysis, 91.5 percent of FDI in 2006 went to buy existing facilities. Only $13.7 billion (out of $161.5 billion) went to open new businesses. FDI often eliminates American jobs and capacity as operations are consolidated with the foreign owner's parent facilities. The American subsidiary then serves as a beachhead for importing more goods manufactured overseas.

Balancing accounts by selling assets to finance consumption is the path to financial ruin for countries as for households. U.S. leaders should be trying to reduce the trade deficit, not offering to sell the country's assets to perpetuate it.

Beijing has been using its surplus-generated cash to buy Treasury debt, rather than place FDI. This is the less dangerous course, and American policy should seek to contain Chinese capital within the public sector. Still, even this is not without risks. Writing in the spring issue of the Army War College journal Parameters, business economists Felix K. Chang and Jonathan Goldman argue that China's large block of Treasury securities gives it the power to disrupt U.S. financial markets. "No bombs need fall from the sky. Yet damage can be inflicted on the United States through market manipulation that would be as costly to recover from as any conventional attack," they warn. Given that financial distress is already pushing the economy into recession, reducing America's vulnerability to foreign pressure should be a high priority.

Disrupting markets would also be costly to Beijing, so a financial strike would depend on what larger strategic objectives were in play. A more "win-win" peacetime strategy for China would be to buy up productive assets to expand what its leaders call "comprehensive national power," a melding of economic and military strength.

Chinese FDI has focused on raw materials and high-tech to sustain expansion. In 2005, the attempt by state-owned China National Offshore Oil Co. to acquire Unocal generated a political backlash.

The House of Representatives passed a resolution against the deal. Unocal then sold to an American firm instead.

The CNOOC incident was one of the factors that led to a unanimous Congress enacting, and President Bush signing, the Foreign Investment and National Security Act of 2007. This strengthened and expanded the Committee on Foreign Investment in the United States (CFIUS) which can restrict or prohibit foreign acquisitions that pose a threat.

The first successful test of the improved CFIUS process was in halting the attempt by China's Huawei Technologies to purchase a stake in 3Com, a firm that makes computer network security software for the Pentagon. But in an alarming turn, Treasury Special Envoy Alan Holmer was in China May 21 proclaiming that new rules had been issued to "reinforce strong open investment principles" in the CFIUS process so Beijing should not unduly worry about future national security reviews!

Beijing and Washington are geopolitical rivals and Beijing has used the gains from trade and investment to strengthen its capabilities. It has been foolish to allow China to amass its dollar hoard through an inattentive trade policy. It would be even more irresponsible to allow Beijing to use its money any way it pleases to support ambitions that are at odds with American strategic interests.


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


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