China’s fourth-largest steel producer, government-owned Anshan Iron & Steel Group, wants to buy a stake in the U.S. Steel Development Co. The plan is to build five new mills, with the first adding 120 jobs to one of America’s most economically depressed states, Mississippi. What could be wrong with that?

Um, actually there is nothing wrong with that. I said so a while back. But OK, I’m game. Let’s find out what he thinks is the big problem here.

The Anshan deal, far from an isolated event, is part of a larger go-abroad strategy of Chinese industrial policy. The goals: protect and subsidize China’s state-owned “national champions,” acquire foreign companies and/or their technologies, then further penetrate foreign markets while often bypassing trade barriers such as anti-dumping duties.

I see. So the Anshan deal is sort of like one link of a widespread conspiracy. Actually, I have no problem with him saying that China has an industrial policy (it does). Moreover, yes that plan includes the success of “national champions” via M&A and IP/technology acquisition. However, I fail to see how that’s either an illegal or unfair strategy (it isn’t).

With respect to bypassing trade barriers by setting up in a domestic market, I have two responses: 1) anti-dumping is stupid and should be done away with entirely; and 2) most nations are quite happy to receive foreign investment from firms that are faced with onerous trade barriers (that’s one reason they are put there in the first place). Again, I see no problem here.

At the heart of the Anshan matter is an ideological struggle between an America committed to free trade and private enterprise, and a socialist China using a potent array of mercantilist and protectionist weapons to breed national champions in key strategic industries — autos, computers, electronics, paper, textiles and, yes, steel.

No, at the heart of the Anshan matter is a company trying to invest in a Mississippi rebar plant. Everything else is what Navarro and other protectionist/scare mongers are making of it.

The grim reality is that American companies will continue to lose that struggle — and the U.S. will run huge trade deficits and suffer from high unemployment rates — until we adopt this Fair Trade Commandment: Do unto China as China does to us.

Yes, Americans will continue to lose that struggle to the extent that the U.S. fails to come up with some strategic vision of its own. However, the old reciprocity argument is the wrong solution. What that essentially says is the U.S. should also engage in protectionist policies. I disagree. The West has fought long and hard to set up an international free trade regime (i.e. GATT, GATS, TRIPs — WTO system). How about working within that system to fight against protectionism instead of playing tit-for-tat?

Anyway, that was just Navarro’s introduction. He then goes on to enumerate some of China’s sins, to wit:

In direct violation of free-trade rules, government-owned companies like Anshan benefit from massive, illegal export subsidies ranging from highly subsidized land, energy and capital to lucrative tax breaks. No wonder America has lost a third of its manufacturing jobs over the last decade.

If they’re illegal, file a case at the WTO. If the U.S. government refuses, call your Congressman. If these practices are not illegal, then you are arguing “fairness,” which is acceptable, but weak. By the way, and in case you were wondering, I do not accept Navarro’s casual conclusion that American manufacturing jobs have all gone to China or that a change in U.S. trade policy would have fixed that problem.

China is on a quest to beg, borrow, steal, or, in the case of Anshan, buy into the American market and American technology. China’s well-documented industrial espionage network is used to hack into Pentagon computers to steal military technologies. China also forces any American corporation wishing to produce on Chinese soil to transfer its technology.

I think the barrista at the UC Irvine Starbucks is spiking the lattes. This language is way over the top. Navarro seems to think that if he includes mention of cyber-espionage along with Anshan Steel in the same paragraph, readers will conflate the two. Nice try, but that’s a very weak rhetorical technique; Cicero is spinning in his grave.

Even worse, the statement “China also forces any American corporation wishing to produce on Chinese soil to transfer its technology” is really amateurish hyperbole. An editor should have caught this. Does China force (directly or indirectly) some American companies to transfer technology as conditions of investment? Yes, it does, and that’s a problem. I’m not sure why Navarro thinks that happens with all American investors, though, or even a majority (it doesn’t).

This might actually be my favorite bit of nonsense:

The acquisition of U.S. companies by state-owned enterprises is the most direct way for China to get its hands on American technology — and then turn around and use it against American industry.

Should I remind you that Navarro is a business professor? He seems to be saying that using M&A to acquire technology is somehow not fair. He also doesn’t like the fact that Chinese companies are competing against American companies. I hope this is not standard for the UCI business curriculum.¹

Once this technology and managerial expertise is transferred back to the Chinese mainland, it will be shared by China’s steel companies and used to further penetrate the U.S. and global steel markets. The perverse result: Over time, the Anshan deal will destroy far more American jobs than the 120 it supposedly will create.

One man’s perversity is another’s successful industrial strategy. Navarro here simply sounds petulant.

The remainder of the article discusses how Anshan and other steel companies are in bed with the Chinese government, which assists them in their investment activities. These strategic investments are then used to smack down U.S. industry. Navarro concludes by saying that since China does not approve strategic foreign investments, the U.S. should not either.

I am not trying to apologize for China’s trade violations/protectionism. I usually point those out when I see them. On the other hand, some transactions or policies are illegal, some are unfair, and others are simply tough business practices. Navarro lumps everything together. This approach will never lead to a practical U.S. trade and investment policy.

I’m a lawyer, so I look at the Anshan Steel investment like this. If it’s legal, the U.S. should allow it. End of story. Full stop. Shut up. Whenever the U.S. blocks a deal because of bullshit “security” reasons (e.g. UNOCAL), it tarnishes the image of the U.S. as a supporter of free trade.² It makes the job of U.S. negotiators that much more difficult when they try to get their Chinese (or other nation) counterparts to stop being protectionist.

Why is Peter Navarro counseling the U.S. government to become protectionist, and possibly violate WTO law, instead of formulating a legal, measured response to China’s industrial strategy?
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1. Might be a bit awkward, too, given the high percentage of Asian students at UCI.
2. There are deals where a CFIUS review makes sense, though. The current Huawei matter might be one of those.

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Related posts:

1. Anshan Steel Throws in the Towel, For the Moment
2. The Curious Case of Anshan Steel & the Space-Age Rebar Technology
3. Trade Policy: The First Step is Admitting You’re Also a Protectionist

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Post tags: Anshan Steel, anti-dumping, free trade, protectionism, world trade organization, WTO

A Chinese graduate’s record-setting $8,888,888 donation to his school at Yale University has stirred wide debate at home. While some say it’s up to Zhang Lei to do as he likes, others question why he didn’t donate to his alma mater in Beijing.

Opinions at home have been split in online forums since the story broke a few days ago. On pinggu.org, a forum run by Renmin University of China where Zhang was enrolled as a student of International Finance in 1989, netizens including alumni of the university have taken sides.

Some asked why Zhang, who graduated from Yale less than 10 years ago, chose an overseas institution rather than his Chinese university for the donation. But a larger group of online users voiced support for Zhang’s move and said there is still room for improvement regarding management of universities in China.

Those of you familiar with China’s online forums and the regular squawking from aggressive nationalists (a.k.a. fenqing 愤青) understand the dynamic here. Is there any thinking behind this or are we looking at a senseless nationalist discussion?

I fail to see any logic here. What are the possible arguments that one could make for favoring a donation to Renda instead of Yale?

1. Zhang benefited more from his Renda study than his Yale education. Pretty tough argument to make. He basically studied finance at each institution and is working in that field. One assumes that he was taught useful information at each school that have allowed him to become successful. I’m sure that the Renda students would argue that their school is much better than Yale, and therefore more deserving of the cash, but I haven’t actually seen anyone try to make that case.

2. Zhang was given a practical head start into the field of finance at Renda. I haven’t seen any evidence that his Renda experience launched him into business. However, I have seen discussion of his time at Yale, and at the Yale Investment Office, that suggests his time there tied directly into his later success at Hillhouse Capital Management (rumor has it that he received some investment from Yale or folks there as well, although I’m not sure about the accuracy of those statements).

3. Renda needs the money more than Yale University. That would be a complicated argument. Yale is of course fabulously wealthy, but it is after all a private university. Renda, in addition to being one of the best schools in China with a rich alumni network, has the backing of the Chinese government. Seems like a toss-up to me.

Regardless, you don’t hear most people argue need when discussing alumni donations. If that was the case, Americans who graduated from public schools would all be stuck sending half their paychecks to their Middle and High Schools, which apparently ran out of money sometime in the 1990s.

4. Zhang is Chinese and should therefore give his money to a Chinese institution. I suspect this is the focus of much of the online statements, whether stated or not. Straightforward nationalism that really doesn’t seem to take into account the reality of overseas students and globalization. Then again, who ever said ardent nationalists were based in reality?

To be honest, not only do I dislike aggressive nationalists, I’m not much for charitable giving to schools I’ve attended. This probably has something to do with the approximately US $175,000 I paid to these schools over the years in fees — seems to me like they already got enough out of me. So maybe I’m biased.

That being said, Zhang Lei’s donation sounds like a very positive one. Among the programs that the money will be used for include Sino-US exchange programs. Tough to criticize that sort of thing, even if you’re a dyed-in-the-wool nationalist.

Related posts:

1. Time Magazine and Zhang Yimou
2. Too Many Unemployed Law Grads May Lead to Education Reform
3. NDRC Says No New School Fees for Additional Security

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Post tags: donations, Renmin University, Yale University, Zhang Lei

Director of China Hearsay's Economics Department

I don’t know how many Teabaggers read his Forbes column, but Gordon Chang seems to be playing to that crowd:

Need another argument why Washington should refrain from further stimulus spending? Of course you don’t–your list should already be too long–but let me tell you what Andy Xie says anyway.

Obviously everyone already knows that stimulus spending is ridiculous, ha ha! Helping poor people and trying to inject money into the economy to boost job creation? Ludicrous. The U.S. government shouldn’t even try it. I suspect that Chang might go along with some tax cuts, but that’s speculation on my part.

OK, aside from the Herbert Hooverism, Chang does bring up an interesting argument made by Andy Xie:

Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now.

Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both. They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated. So when a government introduces stimulus, the initial increase in demand doesn’t necessarily boost local supply. More importantly, if multinationals decide to invest somewhere else, there wouldn’t be an increase in jobs to sustain the growth in demand beyond the stimulus.

Sounds logical to some extent, although note that Xie’s article is not a screed against stimulus spending but concerns developing country inflation. Anyway, here’s how it works: government sends a check to that poor unemployed slob in Detroit, who goes to Wal-Mart to buy a pair of cheap tube socks that were made in China. The stimulus helps this guy get his socks, but the increased demand may translate into more manufacturing jobs at Wal-Mart’s China factories.

Agreed. Some of U.S. stimulus (or similar spending by any other industrial nation with a trade deficit) will “leak” out to China and other trading countries. That’s what happens when you have a trade deficit and do not discriminate in your stimulus spending. It’s also a good argument for multinational stimulus programs (see Mark Thoma on this issue). The question is how much of this leakage would take place. Neither Xie or Chang include any handy statistics, and Xie’s stat that half of global GDP is from the international sector doesn’t tell us enough about the effects of stimulus spending on local job creation.¹

You see, if for every dollar of stimulus spending, 50 cents leaked out to other nations, I would agree that better solutions might be needed. I suspect, however, that the real number is much lower. If the number is actually 20 cents, is that “too much” leakage? Do we scrap the program even if 80% of it is helping the domestic economy? I’m not sure where to draw the line, but Chang never brings this up; perhaps even one cent of leakage is intolerable in his eyes.

In addition to appealing to people who despise non-military government spending of any kind, Xie’s argument probably sounds good to folks who think it “unfair” that the U.S. spend money that will help China. Understood, but that would be a lot more convincing if China had not already gone through a few rounds of stimulus itself. Granted, Beijing’s money did not go directly to foreign companies (it went predominantly to State-owned enterprises), but the overall stimulus undoubtedly benefited foreign firms that sell in the Chinese market; Chang admits this in his column. It would be odd to claim that while foreigners should not benefit from U.S. government spending, this rule should not apply to Chinese spending.

I’m not refuting the claim that more U.S. stimulus money will leak to China than the other way around. For those of you that find that completely unacceptable, I understand. However, does it therefore make sense to say that American stimulus programs should therefore be scrapped, particularly now when there are some indicators that the U.S. job market is getting worse? Again, that would only make sense if an overwhelming percentage of stimulus money/jobs would go overseas or if there were better alternatives.

As to the latter, the only “alternatives” being discussed in Washington, D.C. these days are 1) no spending at all; or 2) regressive tax cuts. No spending means no help to people in distress, and no pump priming the job market, and tax cuts are a notoriously inefficient means of stimulating the economy. The rich guy who gets a tax cut is just as likely to buy a condo in Shanghai than create some jobs in Seattle. Somehow the tax cut crowd never seems to worry about those leakages.

Let’s look back at that Wal-Mart example. The guy buys his tube socks – demand has increased at that store. What’s the result when we look at the aggregate? Yes, perhaps more hiring at Chinese factories. What else? Well, maybe some additional cashiers or other service jobs at Wal-Mart and their distribution partners. These might not be great jobs, mind you, but that’s another issue.

The U.S. labor force is not based on local manufacturing; it’s based on crappy service jobs in retail, health care, fast food, etc. Stimulus money that goes to an unemployed guy will indeed go to firms like Burger King, Blue Cross, and Supercuts. That money will for the most part remain in the U.S. economy, and to the extent some of it leaks out via a Wal-Mart type supply chain, you would expect at least a little domestic hiring anyway, plus profits would remain with the Arkansas-based company (assuming that matters).

I also haven’t brought up targeted spending, like infrastructure, but even if all of the contracts to rebuild roads and bridges were snapped up by Chinese construction firms, the vast majority of those local jobs would go to American laborers, wages paid to whom would stimulate the domestic economy. There are other categories of employment that could be included here as well, such as teachers, police and fire fighters, and other local public officials. Right-wing types don’t like to admit that these are “real jobs” but they are, and their wages, when spent, go into the domestic economy just like those paid to a manufacturing worker.

So is Chang right on his facts? When he (via Andy Xie) says that U.S. stimulus money will leak to China, he is absolutely right. The question is how much. If the answer is a great deal, then someone needs to prove that. Additionally, if that is a huge problem, we might consider ways to better target spending to minimize such leakages or other solutions (Chang does not suggest alternatives). To use Xie’s column to argue for a general cessation on new government spending smacks more of ideology than economics.
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1. I couldn’t find any user friendly data either, although my time was limited this weekend. Then again, I’m not the one arguing that leaking is such a huge problem that we should forget about further stimulus spending.

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Related posts:

1. First Time For Everything – I Agree With Gordon Chang
2. Belated Friday Photos: Liu Li Chang
3. First Note on the Spending Package

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Post tags: Andy Xie, Gordon Chang, pump priming, stimulus spending, Teabaggers

A bipartisan group of 50 US lawmakers called on Friday for an investigation into whether a Chinese investment in the US steel sector should be blocked on national security grounds.

The Congressional Steel Caucus, in a letter to Treasury Secretary Timothy Geithner, said it was “deeply concerned” the recently announced joint venture between Anshan Iron and Steel Group’s and the Steel Development Co also threatened American jobs.

As my post pointed out, this whole thing was ridiculous. The critics went so far to say that Anshan Steel might get access to high tech via the investment (remember, this facility makes rebar).

Fair enough. It’s an election year, there’s a lot of unemployment in the U.S., it makes sense for these protectionists and China Bashers to take their shot. I assumed, however, that once it became apparent that the claims made were laughable, the deal would go through.

Of course I was wrong:

Angang Steel Co (Angang) said Thursday that its parent, Anshan Iron and Steel Group (Ansteel), may postpone plans to invest in a US steel plant because of objections from US lawmakers, Reuters reported.

Optimists will say that this is a strategic move to let things settle down until the election is over, and that perhaps later in the year or early next year, the deal will get moving again. I’m going to go with that theory until I hear otherwise, but it’s still sad that the delay was necessary in the first place.

Related posts:

1. The Curious Case of Anshan Steel & the Space-Age Rebar Technology
2. Peter Navarro Drinks China Basher Kool-Aid
3. Shocking Development re: China Steel Subsidies

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Post tags: Anshan Steel, China Bashers, protectionism, steel industry, U.S. Congress

On an annual basis, when budgets are released and reports are issued (by both sides), government officials, commentators and journalists are given the opportunity to opine about the military “threat” from the other side. As both the U.S. and China continue to spend ever-increasing amounts of money on weapons, despite the fact that no real existential threats exist, there is much to talk about.

The latest bit of news was a report issued by the U.S. military, which laid out some concerns it had over China’s defense spending and increased capabilities. There are two key issues, as noted in a Businessweek writeup:

China is pursuing military capability to operate as far as the Indian Ocean and the western Pacific, as the country’s growing demand for oil and natural gas makes strategic sea routes more important, the Pentagon said.

New weapons and carriers give China an increasing ability to operate far afield, and it continues a military buildup opposite Taiwan even with improved economic ties across the strait, the U.S. Defense Department said in an annual report to Congress released yesterday.

Here’s where I start getting confused. I get that the US is a global power and can project force pretty much wherever it wants. Therefore if China expands force projection capabilities, then that in theory presents a possible threat to the US sometime in the future.

But I always come back to one question: that possible conflict between the countries concerns what exactly? I’m afraid it doesn’t help me to take the two issues described in the Businessweek article. First, of course China wants to ensure that it can protect energy supplies from the Persian Gulf, Africa or elsewhere. Understandable, that. There are some unreasonable folks running around the world, although China has cultivating fairly good relationships with most of their energy suppliers.

To pose some sort of theoretical conflict in the future that pits the US and China against each other, which includes the US interdicting oil/natural gas cargoes from the Persian Gulf to China, explains very well China’s military needs in that area. However, it does not explain what that underlying conflict might be about or how it could start. Can you think of a plausible precipitating incident?

OK, what about Taiwan, the age-old favorite of US-China conflict aficionados? This has always seemed rather odd to me, because I just can’t see the US risking so much to go to bat over Taiwan. Unless we’re talking armed invasion with wartime atrocities splashed all over CNN, the US is not going to get involved (and even that wasn’t enough in the case of Bosnia for several years). And let’s face it, despite the fact that the Taiwan Strait is bristling with weapons, it seems fairly obvious how this whole thing is going to end up (i.e., peaceful reintegration), it’s just a question of when.

Some people tell me that Taiwan is an integral part of the US navy’s Pacific theater of operations. Without that island, it will be harder to defend Japan, Southeast Asia, etc. OK, assuming that is true, it confuses me further. Do we really expect China to go after Japan with military force over ownership of a few islands? From China’s perspective, is Thailand or South Korea going to attack you? Is there any another precipitating factor that’s plausible that puts China and the US on opposing sides? North Korea? I really don’t see it, but maybe I’m just not very creative.

So that leaves me with a lot of questions and no answers. I certainly can see the possibility of armed conflict in the future. If two countries spend decades building up their arms and war-gaming against one another, bad things can happen. But that’s more of a self-fulfilling prophecy than the result of an intelligent policy choice.

Will we need some sort of bilateral arms treaty 30 years from now? If so, can’t we start negotiating it now and save ourselves a lot of money and worry?

Someone please educate me.

Related posts:

1. Trying to Decipher U.S. Taiwan Policy
2. U.S. Arms to Taiwan is Business as Usual. And Maybe That’s the Problem
3. Bad Timing For This Non-Story

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Post tags: defense spending, Pentagon, People's Liberation Army

Here’s the first paragraph of the AP story:

China acknowledged Thursday that only foreign companies have been forced to scrap or change business deals under its two-year-old anti-monopoly law but rejected complaints the measure is discriminatory.

Wow, Beijing has apparently been caught being protectionist, right? Wait, it gets even worse:

The American Chamber of Commerce in China and other business groups note that regulators have yet to pursue major state-owned companies under the law, even though most are monopolies or have market shares well above the legal limit.

So while they’re targeting foreign companies, they haven’t even gone after State-owned Enterprises (SOEs), which are obviously well above the concentration limits established in the Anti-monopoly Law (AML). Horrible.

OK, if you haven’t already noticed my sarcasm dripping off of your monitor or mobile phone screen, allow me to confirm: this “news” is ridiculous. As the AP article itself explains, there have been about 140 cases brought under the AML. Almost all of those have involved Chinese companies, with only five dealing with foreign company transactions (M&A reviews). Of those five, only the Coca-Cola/Huiyuan deal was rejected because of market concentration concerns.¹

Have only foreign companies been hit by the AML? Technically yes, but that statement is extraordinarily misleading.

What about the fact that the government has not gone after SOEs with high market concentrations that are above the limits set by the AML? Well, I’m not an expert on the AML, but I can read, and Article 7 of the law specifically says that SOEs will be treated differently than private enterprises.

In other words, you can’t just take the concentration limits found elsewhere in the AML and expect that the regulators will use that standard when it comes to SOEs — the law just doesn’t say that. It’s true that Article 7 does say that regulators will investigate SOEs whose concentrations lead to things like unfair pricing that harm consumers. To the extent that the government has been lax in enforcing pricing irregularities against SOEs, that’s a fair criticism (although not one cited specifically in the AP story).

I understand that someone from the Ministry of Commerce was talking about the subject and that the AP felt the need to report on it, but I have several problems:

1. An editor somewhere should have killed the story. There is nothing newsworthy here.

2. The article’s headline is very misleading and suggests something which is later disproved in the article itself. They could have at least put a question mark at the end of the headline or something.

3. Foreign criticism is attributed to “business groups” and “companies,” which makes me think the writer just called up AmCham and no one else, perhaps writing against a tough deadline. Not only is this really weak in and of itself, but these anonymous sources were cited in the article after it was noted that only the Coke deal had been scrapped (i.e. no widespread discrimination had really been going on). Sort of makes the critics look like idiots, and I don’t think that was the intent.

4. There is a great deal of bona fide concern out there from folks who think that the AML will be used to discriminate against foreign acquisitions of Chinese enterprises, or through challenges to IP rights/deals under Article 55. This could have genuinely supported the thesis of the article but was left out.

5. For heaven’s sake, get on the phone and get a direct quote from a M&A/competition lawyer!

UPDATE: Silicon Hutong just posted a less sarcastic criticism of the AP story.
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1. By the way, commentary by competition law experts on that case was mixed, with some saying that the outcome was justified. Given that the case was heard only months after the new law was passed, it always seemed to me quite a stretch to use it as an indicator of how future cases might be adjudicated.

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Related posts:

1. Anti-Monopoly Law: New Guidance for China’s State Sector
2. Anti-monopoly Litigation Phase II — China Mobile
3. Anti-monopoly Law and FDI

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Post tags: anti-monopoly law, Coca-Cola, competition law, Huiyuan, market concentration, monopoly, protectionism

Huawei Technologies Co. failed to reach agreements to buy two U.S. assets last month, even though the Chinese phone-equipment maker offered at least $100 million more in each case, according to two people with knowledge of the matter.

The sellers doubted Huawei’s ability to win U.S. government approval to purchase software supplier 2Wire Inc. and Motorola Inc.’s wireless-equipment unit, the people said.

I just want to highlight what happened here, because it’s slightly weird. Huawei tried buying U.S. computer company 3COM a couple of years ago and were blocked (politically) by the threat of being dinged by the Committee on Foreign Investment in the United States (CFIUS). Huawei ultimately withdrew their offer in the face of opposition.

So the 3COM deal is on everyone’s mind, as it should be. But there are a couple of things to think about here: 1) opposition to the 3COM deal was f@($^! crazy to begin with, not to mention blatantly protectionist; and 2) that was a different deal!

CFIUS is supposed to review deals, meaning that they should be looked at separately. People shouldn’t be thinking “Gee, that last one didn’t go that well, so better not try another one.” In other words, once a company gets a CFIUS rap sheet, the taint will stick to them for years thereafter. It’s patently absurd, not to mention unfair.

Why does Huawei get into trouble with U.S. investments? First and foremost, its founder, Ren Zhengfei, used to be an army guy, and the company still has strong ties to the PLA. Under that logic, General Electric would never be able to do business in China at all, right?¹

Another “problem” cited by the Bloomberg story is that Huawei has had some IP trouble, including some litigation. Oh noes! Listen, not only should outside litigation have no bearing on a CFIUS review (unless the case involved spying or something), but Huawei is a high-tech company! Show me an IT hardware firm that isn’t up to its eyeballs in patent disputes, and I’ll be shocked.

Bottom line: the U.S. was being protectionist in the 3COM case. With this latest bid by Huawei, the U.S. didn’t even have to do anything. Just the memory of the earlier incident was sufficient to scare off the parties involved.

The U.S. has apparently perfected the art of foreign investment intimidation, aka Zen Protectionism (I think I’ll trademark that).
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1. Yes, I understand the core issue here. If the U.S. assets in question include super-sensitive tech that the U.S. doesn’t want to fall in the hands of the Commies in Beijing, it shouldn’t allow it to be bought by Huawei. That doesn’t explain what happened in 3COM though, not to mention the CNOOC/UNOCAL deal.

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Related posts:

1. Huawei-3Com – let the fun begin
2. Protectionism and 3COM
3. Protectionism auf Deutsch

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Post tags: 3com, CFIUS, china outward investment, Committee on Foreign Investment in the United States, Huawei, protectionism

Washington called on China on Monday not to fill the vacuum in Iran’s struggling energy sector by taking advantage of the departure of primarily European companies that have complied with atomic sanctions.

Robert Einhorn, U.S. special adviser for non-proliferation and arms control, was quoted in the FT as saying:

We want China to be a responsible stakeholder in the international system and that means co-operating with UN security council resolutions, and it means not back-filling, not taking advantage of responsible self-restraint of other countries.

Perhaps I’m missing some of the minutiae of the agreement that was struck with China to get the first round of sanctions passed in the UN earlier this year, but calling on China’s self-restraint seems quite weak.¹

When the first deal was made, a lot of the discussion focused on whether, in its desperation to get sanctions passed, the U.S. would accede to China’s demands to 1) water down the language; and 2) insert waivers that would carve out certain kinds of business done by Chinese firms. That concern was justified — China got what it wanted and agreed to the action.

So now some European companies are pulling out to comply with the sanctions and the question is what should China do about it. It sounds reasonable to tell China that since they agreed to the sanctions in the first place, they should not undermine them by filling that vacuum.

On the other hand, if China successfully got the language it wanted, I suspect it was looking to this very possibility. If they can legally get around the sanctions and ratchet up their business with Iran, then isn’t the West just as much to blame for agreeing to that language in the first place?

Seems to me that the West was not satisfied with the deal and wants another bite at the apple. If that is really what’s going on, then the U.S. is essentially telling China:

Yeah, we know you agreed to X a few months ago, but now we want X + 1. Be good sports about it and sign off on the new one.

Why would Beijing go along with that?

This reminds me of some of the complaints I hear about foreign investment. Once in a while a client will say “I’m not happy that China hasn’t opened such-and-such sector to foreign investment. They’re not living up to their promises.” When I remind them that China did not promise to open up that particular sector in its Accession Agreement, the client gets annoyed and mumbles something about the “spirit of the WTO,” whatever that means.

Filling the vacuum left by European firms may indeed violate the spirit of the sanctions, but if China can do so without violating the letter of the law, won’t it go ahead and do so? Since Mr. Einhorn’s comments about “persuading” China suggests to me that we are not looking at a violation of the sanctions, I wish him luck with the negotiations. I think he’s going to need it.
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1. Disclaimer: I don’t know what went on behind closed doors during the sanctions discussions. Perhaps something was promised or an arrangement was made that makes the U.S. statement reasonable. If I’m missing something here, feel free to flame me in a comment.

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Related posts:

1. US Has Hard Time Getting China On Board With Iran Sanctions
2. China Wins Again: the Latest on Iran Sanctions
3. WSJ: Breaking News on the China-Iran Connection

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Post tags: china foreign investment, China-Iran relations, iran sanctions, non-proliferation, UN sanctions

Retired CIA chief Michael Hayden downplayed the notion that the U.S. is in a raging “cyberwar” with China during a speech on Thursday at the Black Hat technology security conference in Las Vegas.

Rather than calling the situation a “war,” the U.S. should instead listen to the advice his father gave him as a nine-year-old: “Quit whining, act like a man and defend yourself,” according to the Financial Times.

He noted that the U.S. maintains a presence on foreign networks, too. “We’re actually pretty good at this, and the Chinese aren’t the only ones doing it,” he said. (The Hill — h/t @raykwong)

It’s always the retired guys telling the truth, of course. Not that any of this is news. The headline is that someone who was in a position of authority is actually willing to move beyond the scare tactics.

Of course China has people working in the online security area, as does the U.S. Everyone’s doing it, and the rest is trying not to get caught and being good at spin and damage control.

Whenever someone gets caught (a la famous pilot and sheep dipper Francis Gary Powers), one is supposed to deny as much as possible, while the other side is then free to bitch and moan and pretend that their side does not engage in the same sort of behavior.

I suppose that there are two justifications for the “Red Scare” tactics with respect to the coming cyberpocalypse. First, you can’t let the other guys know what you know. You either exaggerate the threat or play it down, but in any event, you can’t tell the truth. In using hyperbolic language, the CIA and NSA are, I suppose, adopting Lou Holtz tactics.¹

Second, if the threat isn’t dire, you don’t get funding, so you better go with the worst-case scenario when you’re up on The Hill testifying in front of Congress. Of the two, this to me is the most persuasive. Sure, D.C. is populated by patriots trying to get their jobs done, but deep down in their hearts, they are bureaucrats whose foremost task is to remain relevant and employed.

The problem with this whole system, however, is that the scare tactics are spewed out there periodically (by both U.S. and PRC authorities), and dutiful members of the press in both countries parrot the government officials’ dire pronouncements. Average folks then read those press accounts and think that the world is about to end in a torrent of denial of service requests.

Which leads me to an inevitable conclusion: don’t trust anyone unless he/she is retired.
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1. Holtz, long time head coach of the American University of Notre Dame football team, was famous for talking up the strength of his opponent in the press in the week leading up to the game.

________________________________

Related posts:

1. China Takes Advantage of the Great Recession
2. Danwei Takes Us Into Dangerous Territory
3. Toyota Chief Compares His Cars to Limp Bean Curd

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Post tags: cyberespionage, cyberterror, cyberwar, Michael Hayden

News broke about a week or so ago that the two sides had come to an agreement about how China would amend its law to conform with the panel decision. This news was carried first by Reuters, citing a letter posted on the WTO web site.

Probably because of a suspicious lack of information, the press mangled this story, starting with Reuters and continued with other outlets that repeated mistakes and misinterpreted the original panel decision. Some journalists simply had no idea what the case was all about but felt perfectly fine with throwing their guesswork out there for everyone to see.

{sigh}

Global Voices, in a post on this strange incident, summarized things nicely (albeit with mistakes repeated):

Big news last week from Reuters—”China accepts WTO ruling on entertainment goods” ; “WTO: China cannot use censorship to justify trade barrier”—didn’t get as much coverage as one would expect, and some media that did run the story ended up taking it down.

The Reuters story refers to a letter signed by ambassadors to the WTO from both China and the USA in which an agreement was struck that would see China remove all barriers on imports of books, music, films and other entertainment products by March next year.

While not immediately obvious, as the Reuters report suggests, where on the WTO website the letter in question was published, a document which closely resembles it can currently be found on the website for the WTO Center of the Chung-Hua Institution for Economic Research:

“…China and the United States have agreed that the reasonable period of time for China to implement the recommendations and rulings of the Dispute Settlement Body (”DSB”) in the dispute China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products (WT/DS363) shall be 14 months from the 19 January 2010 date…”

I’m not going to review the entire case. It took me three posts to do it the first time (Part I; Part II; Part III). However, just for fun, I will quote myself (love doing that) summarizing the panel’s findings (ignore the numbering, it’s an excerpt):

4. Will this have an effect on content censorship? It might effect the process, but not the government’s ability to censor. That’s the whole point of the US argument against the public morals defense. “China, keep censoring, just let us sell into the market. We’ll follow all the censorship rules you want us to.”

5. Will this mean the entertainment industry is finally going to crack open the China market? Not much change from this case. Remember that there is still a quota of foreign films allowed into China every year — this case did not deal with that.

Let me reiterate, since I’ve already seen one news article talk about issues that are not really relevant to this case. This was not about film quotas!

Quotas are still here, censorship is still here. Distribution rights will open up some new opportunities, I suppose. The horrible licensing deals that, for example, foreign book publishers had to swallow, might change over time. That would be welcome.

The reason I wrote that to begin with is that some reporters and commentators, at the outset, were already mangling their writeups of the case. When some folks see the word “censorship” they tend to froth at the mouth and stop paying attention to the actual argument. When asked about what they read later, the answer will be “it was about discontinuing censorship.”

Similarly, if the words “movie” and “import” are in the same document, the assumption is that quotas are being discussed. Reading the actual document would have disabused folks of that notion, but after all, it was a 500 page panel decision that was full of a lot of legal jargon. Barf.

So to reiterate. U.S. and China may have agreed on a timetable for implementation of the decision. This magic letter vanished, as with Chinese press reports on the story, so your guess is as good as mine as to whether the news is true or not.

If it is true, then it means that China will have to allow foreign firms into the import and distribution business. That means breaking up the China Film Group monopoly, which is certainly a big deal for a lot of people I know.

But let’s be clear: this does not mean that quotas will be discontinued, and this does not mean that China will stop censorship of A/V products. If this was a podcast, at this point I would say “Repeat after me,” and then we would all repeat that last sentence. Since this is a blog, the whole “repeat after me” thing looks a bit foolish.

Please don’t make me post on this topic again, for heaven’s sake.

Related posts:

1. WTO A/V Products Case – China Appeals on the Basis of . . . Something, I Guess
2. WTO Decides for US Over China in A/V Products Distribution Case
3. China WTO A/V Products III: Some Thoughts

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Post tags: audio visual products, censorship, distribution, film industry, film quotas, world trade organization, WTO

Lots of folks these days will tell you that China is an unstoppable force, that its economy and military are growing like gangbusters and that it will soon supplant the United States as global superpower. It’s a bit of an exaggeration, right?

Sure, China’s economy is growing rapidly and the country has upped its military budget in recent years. However, China has many challenges ahead (I’ve talked about most of them on this blog ad nauseum), and even if everything was perfect, it would still take China a very long time to bridge the gap separating its economy or military from that of the U.S.

So this is what I’ve been telling myself in response to all those cheerleaders out there, and I refudiate that point of view on a frequent basis. Every time Tom Friedman of the New York Times breathlessly talks up China after lunching with the CEO of a Chinese solar power firm, I say yeah I understand, but careful with the sweeping, hyperbolic assertions. Solar power is not going to transform this country overnight.

I have to admit, though, that all my caution is making me feel misinformed. Events in the U.S. are much worse than I thought, and the folks in power are doing everything they can to make China’s monumental challenges look insignificant in comparison. You can talk about growth rates and military power all you want, but another important item to consider is the direction a country is heading, and what that might mean for future performance.  Take a look at this (h/t Americablog) and then try as hard as you can to be upbeat on the direction of the U.S. economy:

Paved roads, historical emblems of American achievement, are being torn up across rural America and replaced with gravel or other rough surfaces as counties struggle with tight budgets and dwindling state and federal revenue.

In Michigan, at least 38 of the 83 counties have converted some asphalt roads to gravel in recent years. Last year, South Dakota turned at least 100 miles of asphalt road surfaces to gravel. Counties in Alabama and Pennsylvania have begun downgrading asphalt roads to cheaper chip-and-seal road, also known as “poor man’s pavement.” Some counties in Ohio are simply letting roads erode to gravel.

But higher taxes for road maintenance are equally unpopular. . . . “I’d rather my kids drive on a gravel road than stick them with a big tax bill,” said Bob Baumann, as he sipped a bottle of Coors Light at the Sportsman’s Bar Café and Gas in Spiritwood.

Are you still upbeat about the good ol’ US of A after hearing from good ol’ Bob Baumann? I assume that I do not need to explain the significance of this information? I really, really hate to say this, but our friend Bob up there in Spiritwood could be the poster child for authoritarian government. You just know that he is going to cast his vote in 2012 for Sarah Palin, doing his part to put a functional illiterate in the White House (’cause American peasants don’t trust folks who are smarter than them).

Many parts of the U.S. are literally going backwards. Keep in mind that this is just one example of a government service that is being discontinued or cut back — replace “roads” with “schools” and you see where I’m going with this. What’s next? Everyone has their own gun now, so I suppose cities can do away with their police forces, right?

Given all of the problems facing China, you still might respond with “Well, the Chinese are having the same trouble.” Yes, local governments are in a world of shit over here, but the same stupid decisions are not being made as a result, with a few notable exceptions. Consider what is going on in the street outside my apartment. A work crew has been there for the last few days tearing up the pavement. This has been a source of annoyance, what with the noise, dust and inconvenience.

Here’s the thing. In the U.S. they are tearing up the roads to get rid of them, and in China they are tearing up the roads to widen the freakin’ road; when the work is done, they will repave the entire thing!

Will China catch up to the U.S. in the next few years? Not a chance. Is the U.S. doing everything it can to minimize the time China needs to bridge the gap? Seems that way.

Related posts:

1. Gotta Love Kissinger’s US-China Op/Ed
2. Wisdom from the Hutong on China Biz Books
3. Gotta Love The Onion

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Post tags: economic growth, government spending, infrastructure spending, local government, transportation

What’s the latest idiocy to come out of the House? Nothing we haven’t seen before, but the timing is ludicrous:

The U.S. House will debate legislation to authorize trade sanctions against China for currency manipulation as part of a package of measures to promote U.S. manufacturing, House Majority Leader Steny Hoyer said.

The measure, sponsored by Representative Tim Ryan, an Ohio Democrat, would authorize imposition of countervailing duties on China’s exports to the U.S. if authorities determined that the renminbi is undervalued by at least 5 percent on average for 18 months.

The measure, which would amend the 1930 Tariff Act that forbids subsidies of products imported into the U.S., would apply to all other foreign currencies.

Hoyer told reporters the legislation, still in committee, would be debated as part of a package of 18 to 20 measures designed to promote manufacturing. Other measures include tax credits to “expand manufacturing, job producing capacity here in America, for working men and women,” said Hoyer, a Maryland Democrat.

Right. To some extent, I’m wasting my time here. I doubt anyone is really taking this seriously anyway. But at the very least, it gives me the opportunity to vent. Let’s enumerate the glorious stupidity:

1. Everyone in the House will be re-elected this year and there is very high unemployment around the country, including in Ohio, where Mr. Ryan is from. These jokers think that the voters will reward them for this last-minute “We Care!” effort. Are the voters that naive? Probably.

2. The U.S. Treasury Department just this month determined that China was not manipulating its currency. To come out with legislation that contradicts the president (who is in your own political party) would be outrageous. (If they actually intended on passing this, which they don’t.)

3. This determination of currency manipulation would not be made by the Congress, but an agency. Maybe the Treasury Department. At this point, I would ask you to re-read #2 above.

4. If the entire legislative package is pushed as assistance to workers, it will never get anywhere in the Senate. There aren’t enough votes in the Senate to spend any money at all these days, and definitely not for working people.

5. U.S. firms that produce goods in China and export to the U.S. have never allowed, and will never allow, this sort of legislation to pass.

I know what you’re thinking. You’ve been reading all those stories written over the past couple of weeks about how U.S. corporations have “turned” on China, withdrawn their support, and will now demand that their representatives in D.C. punish the Chinese for their evil ways.

Don’t bet on it. Sure, some companies are pissed off. Some CEOs, like our friend from GE, Jeff Immelt, are spouting off anti-China sentiment in public. But this is rare behavior that will not be repeated by anyone else in a position like Immelt’s.

U.S. multinationals have way too much invested in China at this point. Sure, they would love for the Obama Administration to negotiate aggressively and secure some concessions from Beijing. They are not happy these days and would like some help from the U.S. government.

But this is a far cry from imposing tariffs on their own goods made in China and destined for U.S. distribution. You think Wal-Mart (just to name one) will stand by while tariffs are slapped on a majority of their products? You think they just might have some influence with the two Senators from Arkansas (and who knows how many members of the House)?

This legislation, if it ever really gets debated, was never intended to see the light of day. I would be surprised to see it get out of committee, but even so, no vote for this junk in the House should be taken seriously, since it will be dead on arrival in the Senate.

This is a complete waste of time, pushed by members of the House from manufacturing states with high unemployment to give them something they can use in television advertisements during this Fall’s campaigning.

Absolutely stunning nonsense, which is unfortunately a common occurrence these days.

Related posts:

1. China Currency Bill Update: Yep, Just What You’d Expect
2. Geithner to China and Currency Manipulation: Just Another Day in U.S.-China Relations
3. Will They Or Won’t They? The Annual U.S. Report on Currency Manipulation

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Post tags: countervailing duties, currency manipulation, Department of the Treasury, house of representatives, renminbi, Senate, trade sanctions

On the other hand, this is another instance of industrial policy in action, which is mildly interesting. It’s all fun and games until someone gets caught stealing secrets.

A 45-year-old Westborough man accused of illegally sending trade secrets to China may be granted bail.

Prosecutors said Monday in federal court in Worcester that Kexue Huang (coo-SHOO’ WHUNG) passed on insecticide information valued at more than $100 million to Hunan Normal University while he worked for Dow Chemical in Indiana from January 2003 to February 2008.

Huang faces a dozen counts of economic espionage to benefit a foreign government. His lawyer, James Duggan, said in court the allegations stem from an article Huang published in a Chinese academic journal.

Just as an aside, who writes those transliterations? That one above for “Kexue Huang” is absolutely horrid. The transliteration department would be putting their talents to much better use by explaining to their readers how best to pronounce “Worcester” in the local, unintelligible Western Mass dialect. (Answer: WHISS-ter.)

But back to the story of Mr. Huang. I don’t know what this guy actually did, although I doubt that a U.S. Attorney would get involved if he merely wrote a journal article. These U.S. Attorneys are busy folks that usually don’t screw around, unless they are explicitly told to do so by Karl Rove.

The problem with these cases (for China) is that the scope of “selling trade secrets to China” is extremely broad. In this instance, “China” was Hunan Normal University. It could just as easily been another university, a State-owned Enterprise, or a private company with “ties” to the Chinese government.

Huang might have been selling secrets to the government. Alternatively, he could have been dealing with someone with ties to Hunan Normal University who was trying to make a buck out of exploiting Dow Chemical technology. Who knows? Was it a government conspiracy or a more mundane case of theft?

The point is that this is one of the drawbacks of having a State-owned sector and an aggressive industrial policy. Anything happens and it’s laid on your doorstep, Beijing.

Innovation society, indeed.

Related posts:

1. All You Need to Know About China Espionage
2. China’s Clean Energy Market: Industrial Policy In Action
3. Chemical Plant Protest Gets Some Results

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Post tags: industrial espionage, industrial policy

Check out this local story by a Fox News affiliate in Grand Rapids:

The former Smiths Aerospace, now GE Aviation, got a visit from [Michigan] Governor Granholm today. Her tour of the Cascade Township facility comes week after the company announced 200 new engineers will be hired. Workers there will be teaming up with the Commercial Aircraft Corporation in China – COMAC – to make electronic controls for the C-919 airplane.

The plant in Cascade has already hired 25 workers; engineers from around West Michigan and across the country. These are high-tech, good-paying jobs that could help Michigan’s economy.

“We have seen, obviously as have other manufacturing states have seen, is a shift to manufacturing in lower-wage countries,” Governor Granholm said. “But what they’ve done here is sort of reversed that story, and say if we’re going to manufacture, we’re going to manufacture here, we’re going to give them great value, no doubt, with great talent and great expertise.”

It’s a nice feel-good story, I suppose, although I wonder where this is all going. Low-end manufacturing has fled the U.S. and will never come back in large numbers, but the jury is still out on the higher-end stuff.

If the U.S. can ever fix its health care problems, that would help local manufacturing a lot. Another possibility is that higher transportation costs (i.e. high oil prices) might push some firms closer to the U.S. market.

Aside from these scenarios, unfortunately another way to attract companies to manufacture in the U.S. is lower manufacturing costs, and ultimately that will mean either lower taxes or a general decrease in wages/standard of living. Either one of these is long term bad news for average Americans.

Another way to keep high-skilled jobs is to have the best trained workers in the world. Sorry to say, but the American school system is crashing and burning these days, so I’m not so positive on that front for the future.

Talk about pessimism. I can turn a feel-good local employment story into a depressing glimpse at the future. It’s a talent.

Related posts:

1. Tough Trade Talk – Pennsylvania Edition
2. Will Chinese Eat ‘Wild Mississippi River Fish’?
3. Sticky China Operations

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Post tags: COMAC, employment, General Electric, manufacturing

He starts off with GE chief Jeff Immelt’s recent anti-China comments and moves on to the bigger picture.¹

I’m a big fan of Mann and respect his China expertise, but I do have a couple of comments:

First, using Google as an example:

Immelt was merely the latest representative of corporate America to ring the alarm about restrictions on business operations in China, taking his cue from the leaders of Google and other major companies.

As I’ve said many times already, the Google situation is a special case and is not useful as an example of the problems facing foreign investors. Google decided to stop following the law and was told to stop it. This could just as easily have happened to a domestic firm. For more on that issue, I’ve written several posts on China Hearsay, and you can also check out my posts (and those of Kai Pan) on china/divide.

Second, using the Xue Feng case to illustrate the limits of American presidential intercession on China issues:

Sometimes, even presidential appeals to China produce nothing. Last November, during Obama’s visit to the country, he made a quiet appeal on behalf of Xue Feng, an American geologist who had been jailed in China. An employee of an energy firm, Xue had been charged with stealing state secrets, accused of trying to purchase information about China’s oil industry. On July 4, despite Obama’s plea, Xue was sentenced to eight years in prison.

I wrote about the Xue Feng case a couple of weeks ago. Yes, Obama and his team didn’t get what they wanted in that instance. I’m just not sure how this is relevant to a discussion about American foreign investment and corporate support of China engagement. Sure, Xue Feng was employed by an American company, but the case really had nothing to do with FDI policy. It was a criminal trial for violation of state secrets. If Mann is suggesting that the Xue Feng case has made FDI more risky over here, that’s something else.

Third, 20/20 hindsight of China’s WTO accession:

Occasional hints emerge that Obama himself has become irked—not so much at China as at the way his predecessors helped to bolster China’s position. Buried in a recent column about trade in The Wall Street Journal was this revealing tidbit about Obama: “He needles aides who worked in the Clinton administration that they let China into the World Trade Organization with a better hand than the one he had to play. Aides counter that China would be even more of a threat if not bound by WTO rules. He is un-persuaded.”

My comment here is on Obama’s thinking, not Mann’s.² It’s funny, but when China joined the WTO, they had to do so, to some extent, holding their noses and accepting what they felt to be a one-sided deal. U.S. markets were already open to a lot of Chinese goods at that point, and it was China that was giving up a lot, including sweeping legal reforms that liberalized foreign investment and strengthened protection of intellectual property rights.

At the time, foreign investors were very happy, and they joyously poured into China and tried to make money. In the years since, the law has actually become much more favorable to foreign investors (on the whole) than it used to be. China’s WTO accession was a huge success for United States corporations — for the most part, they got what they wanted.

Yes, in the past couple of years, China’s industrial policy has become more aggressive, and some U.S. corporations have suffered as a result. I would say that it’s more of a “three steps forward, one step back” sort of deal. For Obama, and other China critics, to look at current difficulties and conclude that U.S. negotiators should have seen this coming and been tougher during the negotiation process, speaks more to the ignorance of those critics and their unwillingness to deal with a situation where the U.S. cannot dictate terms to China the way it used to. Mann drives this point home quite well:

Western business leaders still don’t seem to grasp fully the extent of this fundamental change. Some of them still speak as though they have the same clout they wielded in the 1990s.

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1. I explained why I think Immelt is full of crap over on china/divide.
2. Mann knows a hell of a lot more than I do about China’s WTO accession process and the US-China negotiations.

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1. China Quake Donations – some other views
2. Corporate Charity and the Earthquake Coke Boy
3. Feng Shui and the Stock Market — Why the Hell Not?

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Post tags: foreign direct investment, industrial policy, James Mann, Jeffrey Immelt, obama, The New Republic