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.