Chrystia Freeland of Reuters has a highly recommended article on U.S.-China trade and worker dislocation. While this might appear to be your standard American screed against Chinese competition, it falls quite short of calling for any sort of protectionism.

Freeland’s approach should be lauded, because although she presents information from a recent study about the negative effects on the U.S. from China trade, she does not wrap up the article, as so many do, with a unworkable or illegal policy suggestion.

While I tend to criticize protectionists more often than free traders, I have problems with anyone who does not admit the reality of globalization and international trade. While protectionists come at the problem with bad solutions, some free traders do not even acknowledge the negative aspects of trade. I think that this position is becoming more and more difficult as time goes on and more information comes to light.

Freeland references a recent paper:

In the debate about the causes of growing income inequality, U.S. economists have tended to opt for technology as the driving force. Indeed, in his remarks, Mr. Krueger referred to a survey he did of those economists, who overwhelmingly cited technological change as the most important factor.

But, drawing on detailed data from local labor markets in the United States, the authors of the “The China Syndrome” argue that globalization, and in particular trade with China, is having a huge impact on blue-collar U.S. workers: “Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment.”

Free traders tend to downplay this sort of thing, while protectionists like to think that raising tariffs is a quick fix.

Here’s the thing. International trade is generally beneficial to nations. At the same time, there are winners and losers within sectors. U.S. blue collar workers have taken a series of hits, from productivity gains to competition from abroad. It is not surprising that new evidence shows that China trade has led to job losses and wage decreases in the U.S.

Freeland quotes economist Joseph Stiglitz on this issue:

What happens when you bring together countries which are very different like the United States and China, what happens is that the wages in the high-wage country get depressed down. This was predictable.

At the same time, we should admit that if it wasn’t China, that dynamic would still have occurred but with competition from other low-wage nations. China just happened to be in the right place at the right time with hundreds of millions of workers. I’m not quite sure that protectionists understand this, since many of them believe that China’s “cheating” is the source of these ills, not the obvious wage differential.

And this thinking makes a big difference. If you believe that China’s trade policies are to blame, then it follows that some sort of punishment may force China to stop what it is doing, level the proverbial playing field, and bring everything back to the status quo. In other words, all those jobs will simply come back.

This brings us back to a familiar refrain, though. Those jobs aren’t coming back. Even if China were somehow taken out of the picture, those manufacturers are going to move to Vietnam, Indonesia, or another low-wage nation. You can’t put the trade genie back in the bottle.

If the international trade conversation could be dominated by realists, folks who on the one hand admit that trade dislocation is a huge problem, but on the other hand acknowledge that protectionist quick fixes are fantasies, then we could get down to real solutions.

How might the U.S. attract more jobs in the future? That’s a difficult question, but at the very least, it wouldn’t hurt to start spending more money on education and infrastructure.

© Stan for China Hearsay, 2012. | Permalink | 7 comments | Add to del.icio.us
Post tags: free trade, protectionism

My guess is that the U.S. will do nothing (that’s my default position on trade cases), but I don’t say that with a great deal of certainty. Here’s what is going on:

Midwestern lawmakers and union groups on Tuesday urged President Barack Obama to restrict imports of auto parts from China that they said benefited from massive illegal subsidies and threatened hundreds of thousands of American jobs. (Reuters)

There is no doubt that the U.S. auto parts sector has been absolutely hammered by imports, and particularly those from China. According to the Economic Policy Institute, which produced the study that the complaint has been built around: “the U.S. trade deficit in auto parts increased from $9.5 billion in 2000 to $31.2 billion in 2010.” Significant, yes.

Three things about trade cases like this. First, there has to be political will to go the distance and actually initiate a formal process, such as calling for an investigation or, later, filing a case with WTO. The Obama administration thus far has been quite aggressive on the WTO front when it comes to China, so no reason to think that they wouldn’t sign on for another one.

Then again, if we take the words of this guy who talked to Reuters as any sort of guidance, maybe Obama would like this one to just go away:

A U.S. trade official stopped short of committing to action on the issue, but said the Obama “administration will not stand by when our competitors don’t play by the rules.”

“We will continue to identify and address unfair trade practices to ensure … U.S. workers and companies can compete and succeed on a level playing field,” the official said on condition of anonymity.

Not only is that language chock full of the worst insipid international trade politics blather, but the guy didn’t even feel confident enough in spouting the blather to go on the record with it. Please excuse my inside-the-beltway politically incorrect political jargon, but that guy is a real pussy.

The political decision always comes down to a balancing of constituencies of course. We’ve got unions and the auto parts industry, plus their Congressional reps, on the one hand, and then other industry groups that do business with China on the other. A familiar dynamic.

To complicate matters, the states involved here, including Michigan and others in the Midwest, will play a key role, as usual, in the upcoming presidential election. Perhaps Obama will appoint a “Blue Ribbon” committee to study the issue and push things until after the election?

Second, the complaint against these imports contains a very long list of unlawful trade practices. Its sheer breadth, however, is a bit problematic. If this was a litigation complaint, I’d understand the tactic: you throw everything you can in there and hope something will stick.

In this case, the charges might be way too ambitious. In addition to a number of illegal subsidies, you’ve got currency manipulation, forced technology transfer, deals cut by local authorities, and the list goes on. It’s almost a comprehensive list of all the problems faced by foreign investors in China. A lot of them may even be true, but it would take years to follow up on all of it. Seems like a real danger of this getting bogged down.

Third, even if some of these charges are substantiated via an investigation, the hard part will be gathering sufficient evidence to win over a panel at WTO. For example, everyone knows that several U.S. auto companies have been given approvals for Sino-foreign Joint Ventures conditioned on technology transfer. Knowing that and proving it was an official (or tacit) government policy, however, is a very different thing.

So we’ll see what happens with this complaint. Apologies for the cynicism, but since it is an election year, I’d say that whatever decision is ultimately made will reflect more of a political calculus than the merits of the case.

FYI, if you are interested in this case and want more details than what the major media outlets have, take a look at the briefing paper prepared by the Economic Policy Institute, which has links to other sources at the end. For my purposes, the position paper drafted by D.C. trade law firm Stewart and Stewart was most interesting.

© Stan for China Hearsay, 2012. | Permalink | 5 comments | Add to del.icio.us
Post tags: auto parts, subsidies, world trade organization

Last night was the State of the Union address, the constitutionally-mandated report to the nation by the President of the United States. These days, the SOTU (as the cool kids call it) is focus grouped, scripted, and pretty much devoid of anything interesting.

A couple of items from this year’s SOTU involved China, either directly or indirectly. Cognizant as I am that many of my readers are still trying to enjoy their New Year holiday and probably would rather avoid a lengthy post on trade issues, allow me to apologize at the outset. (Thanks to Tom Lasseter for posting the text of the SOTU on G+.)

1. Tax Policy

This one hits US-China trade/investment in an indirect way. The basic point: U.S. companies should be encouraged to stay at home and employ domestic workers.

[N]o American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas. From now on, every multinational company should have to pay a basic minimum tax. And every penny should go towards lowering taxes for companies that choose to stay here and hire here.

Third, if you’re an American manufacturer, you should get a bigger tax cut. If you’re a high-tech manufacturer, we should double the tax deduction you get for making products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers.

My message is simple. It’s time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America.

The suggestion here, I suppose, is that some companies are moving overseas because staying in the U.S. is too expensive. That is true for some, and not true for others. In terms of China investment, for example, most of the U.S. companies that relocated here for cost savings did so long ago, and the ones coming here now are doing so because of access to China’s huge, and growing, domestic market.

Is it a good idea to throw money at U.S. companies so they’ll stay home? Probably not. Josh Barro explains why (h/t Andrew Sullivan):

Now Obama is calling for protectionist tax policies, aimed at rewarding companies that manufacture here and punishing those that manufacture abroad. This is economically inefficient–less expensive manufacturing abroad is a key downward driver of the price of consumer goods, which raises Americans’ real incomes. It’s also a fool’s errand. There is nothing that forces multinational corporations to incorporate in the United States. Attempting to use America’s unusual system of worldwide corporate taxation to tax the foreign operations of U.S. companies just advantages foreign-incorporated multinationals over American ones.

Contrary to popular belief, American manufacturing is not in decline. Manufacturing employment has declined because, as Obama notes, American manufacturing productivity is excellent and has been improving. What we need to do in the long run is build a workforce that has the right skills to work in the industries where America has comparative advantage–not try to reclaim the glory days of American manufacturing employment.

Exactly. As far as the “fool’s errand” is concerned, globalization would make all this rather difficult. Barro also calls Obama out for his hypocrisy, which will probably go unnoticed in the U.S. press:

Obama is praising Siemens for creating jobs in the United States. But as Michael Moynihan points out, Siemens is a German company. When it creates jobs in the United States, it’s shipping jobs overseas. Why is Obama celebrating that?

Yeah. Oops. I suppose nationalism means you never have to apologize for inconsistency.

To sum up on this point, I’m all for doing away with tax breaks for companies that move overseas. But that’s as far as I’ll go (with some exceptions for targeted industrial policy – see below). Once we start throwing money at companies to stay at home, the handouts will never end. The private sector will always find reasons why they need more money, and with their lobbyists, they will find it easy to convince D.C. to give it to them. Bad idea.

2. Trade Enforcement

This was the direct hit against China’s trading practices, and I’m sure a crowd favorite on both the Right and the Left.

I will go anywhere in the world to open new markets for American products. And I will not stand by when our competitors don’t play by the rules. We’ve brought trade cases against China at nearly twice the rate as the last administration – and it’s made a difference. Over a thousand Americans are working today because we stopped a surge in Chinese tires. But we need to do more. It’s not right when another country lets our movies, music, and software be pirated. It’s not fair when foreign manufacturers have a leg up on ours only because they’re heavily subsidized.

Tonight, I’m announcing the creation of a Trade Enforcement Unit that will be charged with investigating unfair trade practices in countries like China. There will be more inspections to prevent counterfeit or unsafe goods from crossing our borders. And this Congress should make sure that no foreign company has an advantage over American manufacturing when it comes to accessing finance or new markets like Russia. Our workers are the most productive on Earth, and if the playing field is level, I promise you – America will always win.

My emphasis. Bleah. A combination of the usual chest-thumping nationalism with some old fashioned Washingtonian empty administrative reshuffling. Plays well in Peoria, though.

The familiar jargon is there from the beginning. “I will go anywhere . . . ” Not sure what that means. The Commerce Department has people in U.S. embassies all over the world whose job it is to help open markets. Their job performance is assessed, in part, on how they help U.S. businesses. The U.S. government also has thousands of other employees all over the U.S. who have similar duties. This has been the case for a long time, so I have no idea what Obama was talking about.

There was also “play by the rules,” “level playing field,” and talk of America winning . . . something. Not sure what the game is. I thought we were talking about trade policy. And I’m not so sure that American workers are the best on earth. I guess admitting this isn’t politically correct, though.

The reference to the Tire case probably made the unions/Left happy, but I hardly think it is a good example of overall policy. I wrote about the case and its narrow applicability back in December 2010.

Aside from tire manufacturers, who got a shout out? Big Content, of course. Fresh from their (perhaps temporary) SOPA/PIPA defeat, “movies, music and software” were afforded special treatment in the SOTU, perhaps because of the special access that folks like MPAA honcho Chris Dodd ensures.

The only part of all this that I support is the talk of subsidies. China heavily subsidizes various industries, and the U.S. has been slow to challenge these practices at the WTO. The Obama administration has turned that particular ship around, though, so kudos on that front.

However, some of those subsidies will ultimately pass muster at the WTO, forcing the U.S. to either compete with its own WTO-permitting subsidies or cede further ground to China in certain key industries. I’ve been saying for years now that the U.S. needs some sort of industrial policy (sorry, free market types). To the extent that this year’s SOTU moves in that direction, that’s a good thing.

As to the formation of a new Trade Enforcement Unit, I guess we’ll have to wait and see what it looks like. I’m no expert on the nuts and bolts of the Commerce Department and the US Trade Representative’s office (not to mention the Department of Agriculture, the Food & Drug Administration, etc.) and whether their partially overlapping missions could benefit from consolidation. I suspect that there will be positives and negatives, although my chief concern is that USTR, whose China team has traditionally been a group of top-notch lawyers who do tremendous work, will somehow suffer from a shakeup. Let’s hope not.

OK, that’s it. The rest is domestic politics.

© Stan for China Hearsay, 2012. | Permalink | 7 comments | Add to del.icio.us
Post tags: State of the Union

James Fallows has the news that Jon Huntsman, ex-ambassador to China and, for the moment, presidential hopeful, will be dropping out of the race. Fallows reminds us of his initial skepticism:

One year ago, when my wife and I were headed back for several months in China and I had just heard the first rumblings that Huntsman, then still the serving ambassador in Beijing, might resign to run against Obama, I argued that the reports were hard to believe. The center of his party was moving away from the kind of “modern” positions he represented on evolution, environmentalism, and other social/cultural issues. Moreover, I thought, he would have a hard time running within the party against the very president who had appointed him and with whom he had worked very well.

Obviously those rumblings were correct, my initial skepticism was wrong — but the obstacles to Huntsman within the party were at least as formidable as they seemed then.

I had the same feeling of incredulity when the rumors surfaced last year. A guy who worked for Obama? Acknowledged climate change and believed in evolution by natural selection? Spoke a foreign language and lived in another country? The man was obviously DOA. The thought that he could make headway in a place like South Carolina (the next primary state) is just goofy, and at the moment, he is polling there behind Stephen Colbert. I’m sure that when he received that news, Huntsman let out a very loud, woeful “哎呀!”

Huntsman has been described as both the “sane” candidate and as a moderate. I’d probably go with the former rather than the latter. He certainly espoused a lot of very conservative talking points, particularly on economic/domestic policy issues. And yes, the guy is definitely a conservative when it comes to social issues. Indeed, if I had to choose between Huntsman and Romney for president, I would probably side with Romney, who isn’t a conservative at heart. (Labels don’t fit with Romney, since he doesn’t seem to believe in much of anything. Of course, we could always label him a “pragmatist.”)

Anyway, back to Huntsman. I liked him just fine as ambassador. Maybe if Romney wins, Huntsman can come back to Beijing? It’s not like that’s unprecedented, and I doubt that Romney is going to appoint Huntsman to a cabinet post or anything. (Apparently Huntsman will endorse Romney formally at an event that Romney might not even attend. Ouch.)

The best spin here for Huntsman I can come up with is that by dropping out of a race to prove who is the nuttiest zealot, he once again proves his sanity.

© Stan for China Hearsay, 2012. | Permalink | No comment | Add to del.icio.us
Post tags: Jon Huntsman

I’ve said this many times in the past, that thrusting China forward as the next Big Bad is exactly what the big defense contractors, and their friends in Congress, need to justify the obscenely-large American defense budget, specifically big-ticket items like ships, planes and miscellaneous high-tech widgets. Without defense lobbyists, not only would the budget be a lot smaller, but I have a feeling that the U.S. would magically find more reasons to avoid confrontation with China.

Professor Amitai Etzioni summed it up nicely in an Op/Ed the other day:

President Barack Obama unveiled Thursday a new military strategy. It calls for “pivoting” from the Middle East to the Far East, focusing partly on the military buildup of China.

Without a major public debate of the kind we have about raising taxes, or a congressional vote, the U.S. government is moving slowly but surely toward characterizing China as an aggressive superpower and is preparing for war, should it become necessary.

[ . . . ]

All but the most ardent Western hawks see no significant Chinese military threat to core U.S. interests in the near or even intermediate future.

[ . . . ]

Hence, the U.S. can safely continue to seek to turn China into a partner before concluding that a course of confrontation is unavoidable.

Read the whole thing for caveats, quotes and the positions of both hawks and doves.

Here’s the point: we can quarrel about whether China is America’s enemy, whether it is building up its military for a future confrontation. (The Chinese are having the same conversation over here, by the way, about the U.S., and its own military establishment is playing a similar role, albeit without the lobbyists.)

Indeed, this is the kind of argument one would want before the U.S. decided to adopt a more aggressive stance towards China. If consensus was that China was arming for a later fight, then the U.S. could take steps to counter those plans. If, on the other hand, the conclusion was that China’s defense buildup has little to do with a U.S. confrontation, then an aggressive American policy could be shelved.

Sounds reasonable, but of course there’s never an easy answer to this question, and often “hawks” and “doves” arrive at their conclusions based more on their own preconceived notions than a calm review of the evidence at hand.

Since this is a tough call, and there’s always the risk that a mistake will be made, one could argue that it’s better to err on the side of caution (arguably a more aggressive stance) than to move forward with a naive sense of trust.

Again, a reasonable approach. However, as Etzioni points out, we really don’t need to make that decision right away. Because such a huge gap is present between U.S. and China defense programs and budgets, and because it will take decades for China to “catch up” to the U.S., the decision whether to trust China is not one that has to be made immediately.

Yes, I know that there are some folks out there who can concoct scenarios where China can make trouble for the U.S. in a specific geographic area, or with respect to a certain kind of technology. But on the whole, there is no arguing that China’s military is far behind that of the U.S. (I choose to ignore idiots like this).

If that is the case, then the U.S. has plenty of time to move forward in a non-confrontational manner, looking to China more as a partner than a threat. Why not give it a try? Even if that is hopelessly naive and turns out to be completely wrong, then the U.S. can still pivot to a containment strategy in the future, still long before China becomes any sort of mortal threat.

With the unveiling of Obama’s new defense strategy, which focuses on China as a threat, the decision has apparently been made to throw the above logic out the window and go with the aggressive approach immediately.

Makes little sense to me. Whether you are a hawk or a dove, the new policy succeeds in unnecessarily taking one option off the table. Since China will no doubt see this as a confrontational move by the U.S., and respond accordingly, it furthers the old “inevitable conflict” scenario.

So why would the defense establishment, and the Obama Administration, favor such a move? Don’t be shocked, but the military gets paid to prepare against enemies, and there’s a surfeit of threats out there these days, at least significant ones. In other words, if you’re going to draw up a defense strategy, who else but China are you going to war-game against?

And remember, it’s only the most scary, nation-state threats that can justify huge expenditures on sexy, high-tech defense programs. This sort of short or medium-term threat translates into hundreds of billions of dollars for defense contractors, some of the profits of which are funneled back to Congressmen, Senators, and even presidents for their re-election campaign “war chests” (so to speak).

That’s certainly sufficient motivation to rubber stamp a plan that sows the seeds of distrust for no apparent reason.

© Stan for China Hearsay, 2012. | Permalink | 9 comments | Add to del.icio.us
Post tags: defense policy, defense spending

American political junkies are at this moment fervently waiting on the results of a bizarre, antiquated and frankly ridiculous relic of the U.S. election process known as the Iowa Caucus. In essence, it is the first U.S. state to decide on which candidate should stand for the office of president. Since the Democrats already have an incumbent in the White House, the action in Iowa is all about the Republicans.

The frontrunner in this race is Mitt Romney, and by all accounts, he should end up fairly pleased with the results from Iowa. Yes, I realize that as the presumptive favorite, his failure to win the contest outright (if that happens), or essentially splitting the vote with a bigoted Jesus freak like Rick Santorum, makes Romney look quite weak.

On the other hand, there is zero chance that Santorum or Ron Paul (who is projected to place third), both certifiable lunatics, will win the nomination; neither one of them should give Romney any trouble in the long term. It is true that the results show that precious few actually like Romney, but we already knew that.

If anything, Iowa makes a Romney nomination more probable than ever.

As someone with an interest in China (I’m assuming), you may feel that a Romney presidency would be bad for U.S.-China relations. After all, Romney’s continuous China bashing over the past several months has been much more heated than his opponents. He has successfully out-bashed everyone else in the field.

Let your worries cease. As I’ve said before, Romney’s China bashing has absolutely no relationship to any actual policies he would support in a future Romney Administration. This has been my guess, anyway, based on the fact that Romney is a smart guy, takes his marching orders from the moneyed classes, and seems willing to tailor his message to whatever audience he’s attempting to woo. In other words, he might talk a good game of China bashing to get elected, but his financial backers will make sure that his actual policies reflect their best interests (i.e. a stable trading and investment relationship between the two countries).

Still not convinced? Here’s some additional evidence from a Romney supporter. I suppose this story should embarrass Romney, but I’m actually not so sure that he isn’t pleased that this came out:

Mitt Romney has been a staunch critic of China on the campaign trail for the presidency. But a businessman who hosted a Romney appearance in Clive, Iowa, seems to think that Romney’s anti-China rhetoric is all talk and the President Romney wouldn’t follow through on the harsh words.

[ . . . ]

“I think the rhetoric of a campaign is different than the actual application,” he said. “[Romney] will sit down and he will get the right people in, he will take the advice of maybe a Huntsman who will say, ‘this is how to handle China.’”

This supporter, whose business involves a significant amount of outsourcing to China manufacturers, sees no problem with Romney’s China bashing, because he thinks it’s all bullshit. And he hosted a Romney event during which the candidate bashed China!

You know, this level of cynicism is actually kind of breathtaking. Politicians lie all the time, and voters routinely fall for this stuff. But when the lies are so transparent, and when people discuss the lying in such an open fashion, well, I personally haven’t seen anything like it since President Clinton.

The sad part of all this is that if the American public require their political leaders to bash China, I suppose I’d rather go with the guy who lies about it than someone who might actually follow through on stupid policies.

And from a voter’s perspective, that’s not exactly an ideal choice. Welcome to U.S. politics.

© Stan for China Hearsay, 2012. | Permalink | 13 comments | Add to del.icio.us
Post tags: Mitt Romney

If you were a well-known Chinese company looking to acquire a famous American Internet firm, you’d be smart to consider the political implications. After all, anti-China rhetoric is rampant not only in D.C. these days, but across the nation as know-nothing, smarmy douchenozzles (i.e. Republican candidates) vie for high offices in the 2012 elections. Alibaba is now saddled with this problem, and they appear to be taking the advice of that famous M&A specialist Archie Bunker, who when faced with a challenging legal issue said “I’m gonna go into town and get me a good Jew lawyer.” Indeed.

But let’s back up a bit first. Although most deals involving Chinese companies sail through with little fanfare, other inward investment deals have been sabotaged by political campaigns. I speak of course of electronics giant Huawei, whose U.S. deals have been repeatedly thwarted by concerns over its ties to China’s government and military. Is Alibaba in danger of being Huawei’d? And if so, can it avoid such a fate?

So here’s the proposed deal, which has been the subject of much discussion over the past few months:

Alibaba, China’s largest e-commerce business, has sought to buy back a stake that Yahoo owns in the company. It stepped up efforts to make a deal after the September ouster of Yahoo Chief Executive Officer Carol Bartz, who opposed a sale. Yahoo also is considering proposals by private-equity firms seeking to buy minority stakes, people with knowledge of the talks have said.

[ . . . ]

Yahoo has considered offers for a minority stake from bidders such as TPG Capital and a group led by Silver Lake, people familiar with the matter have said. Silver Lake’s bid valued Yahoo at about $16.60 a share, these people said. TPG Capital’s offer was higher, they said.

News of friction between Alibaba head honcho Jack Ma and folks over at Yahoo has been percolating for years, and with the shakeups at Yahoo and the tension over the Alipay restructuring, a lot of people were waiting for something to happen. As with any partnership or joint venture that sours, at some point working together becomes too difficult. Moreover, Yahoo is not what it used to be and wants to sell, and Alibaba has a right of first refusal for those shares.

Assuming that a price can be agreed upon (that certainly won’t be easy), is there really a danger of the U.S. government stepping in a la Huawei and shutting down the acquisition? The concern here is that the privacy of Yahoo users’ personal data might be misused by Alibaba. I wrote about this possibility back in October:

[T]he U.S. has a national security review process for inward investment deals like this. The review body is called CFIUS, and I’ve discussed it many times in the past. Is personal data that was disclosed to or collected by Yahoo and later turned over to the control of Alibaba a matter of national security? I’m no expert on CFIUS, but I’d strongly suspect that the answer is “no.”

Several problems here. First, one would assume that detractors would argue that Yahoo and its assets constitute part of the “critical infrastructure”/technology of the U.S. The scope of the law under which CFIUS operates was expanded in 2007 to include this language. Obviously, “critical infrastructure” is a rather loose term.

I would argue that there is nothing about Yahoo that is critical to the tech backbone of the U.S., nor do they own any assets, including data, that would bring a takeover within the scope of that language.

I also shot down the idea that Alibaba has close ties with the Chinese government or military (this has been the sticking point with Huawei) and questioned whether a CFIUS rejection would simply be an excuse for protectionism. On the whole, I think that a rejection based on national security would be a joke, and I can’t think of any other reason that would justify blowing up a Yahoo acquisition.

That doesn’t mean it can’t happen, though, and it definitely doesn’t mean that Alibaba wouldn’t face hostile politicians and media criticism in the U.S. during this process. And it looks like Alibaba is taking steps to deal with this possibility.

They’ve gone local, not only snapping up New York M&A law firm Wachtell, Lipton, Rosen and Katz, but also the Duberstein Group, a powerful D.C. lobbying group headed by Ken Duberstein, Ronald Reagan’s former Chief of Staff. In their battle against potential national security concerns and other protectionist roadblocks, Alibaba has definitively chosen some high-powered Chosen People.

It’s a smart move, and I’m not just saying that as a fellow professional Jew (Note: I mean a Jew who is a service professional, not someone who makes a living at being a Jew). With a Yahoo deal, I strongly believe that Alibaba would have the law (in addition to lawyers) on their side, not to mention the principles of free trade. However, the election looms, the Internet and data privacy is a hot button issue, and stubborn high unemployment in the U.S. means that many Americans are sympathetic to China bashing.

The good news is that Alibaba does not have the kind of historical or structural baggage that has plagued Huawei. Whether that, and their high-powered Yiddishe posse, will enable Alibaba to avoid running afoul of American protectionism remains to be seen.

© Stan for China Hearsay, 2011. | Permalink | 4 comments | Add to del.icio.us
Post tags: Alibaba, CFIUS, Huawei, Ken Duberstein, Yahoo

I keep running across issues/trends over here in China that are similar to things that are going on in the U.S. (and perhaps other places, but for non-China domestic news, I mostly read about the U.S.). I’m thinking of starting a new regular feature about this, with the post title taken from the classic Pulp Fiction dialogue.

I’ll throw out a few examples here to get this going, but first, a caveat. By no means am I trying to make some sort of equivalence on these issues. In some cases, these trends will be much more dramatic in one country or the other. These are just things that seem to be making the rounds in the media.

1. Protests and response

It’s interesting to compare/contrast the recent social unrest here, and the demands made by protesters, with the OWS folks in the U.S. The government response is also part of that analysis. In the U.S., much has been made of heavy-handed local police. We got the same shit here, of course.

Just came across this article today: “Riot Police Fire Teargas to Disperse Protesters.” That could apply to any number of countries, but these days, I normally expect to see a “China” or name of a U.S. city in the title, or perhaps Greece. (In this case, it was “China”.)

2. Income inequality and privilege

Related to the first issue, this is what seems to be driving a lot of protests in both countries. This is probably the one trend/problem that got me to writing this post in the first place. As I’ve said before, we’re getting to the point where a rich guy in Shanghai has more in common with his counterpart in New York than he does with his fellow Shanghai residents. I find this bizarre, and the trend seems to be accelerating in both countries.

For more on this from the China side, read Christina Larson’s excellent piece in Foreign Policy, “The End of the Chinese Dream.”

3. The death penalty

Again, I’m not making an equivalence argument here. But it is true that the U.S. and China are two of the few remaining countries that regularly engage in this sort of thing. The other nations on the list include Yemen, North Korea and Libya. Yikes.

Of course, many would say that the U.S. still does this because of religious reasons, and indeed, the states that still have the death penalty tend to be more religious (they also have poor educational systems, by the way). China is motivated by other things, some cultural, some political. And yet, both countries are bucking the international trend to remain in the execution business.

Lots of other examples floating around out there. I’ll add more on an ad hoc basis, if the spirit moves me.

© Stan for China Hearsay, 2011. | Permalink | One comment | Add to del.icio.us
Post tags: same shit there that we got here

Warning: if you are not a fan of my periodic anti-religion screeds, please change the channel now.

Strange, he seems so non-threatening.

Not only do I really dislike religion, organized and otherwise, but I find proselytization in particular to be despicable. I understand why religious people do it, of course. If I thought I knew the secret to everlasting salvation, it would be criminal of me to keep it to myself. Many of these folks are therefore just trying to spread the word and “save” their fellow human beings. I get that.

I’m also a strong supporter of religious freedom, although I do admit to a slight thrill now and then when I hear, for example, the CCP admonishing its membership to remain atheists. Heh.

But free speech and religious freedom have limits, and when it comes to kids, we as a society really need to be careful. I would definitely draw the line at allowing American religious schools to prey on desperate Chinese students in hopes of converting these impressionable youth and turning them into fellow members of the God Squad, ready to spread the message to heathen China.

If you think I’m over-stating the problem, please do go and read this Bloomberg article in its entirety. (I assume that the author of the piece, Daniel Golden, is a Jew. He must have received some very interesting email!)

My head almost exploded as I was reading Golden’s article, beginning with this passage:

As evangelical schools capitalize on the desire of affluent Chinese families for the prestige of an American education, many Chinese students are learning first-hand how the Bible Belt got its name.

While proselytizing is banned in China, Protestant — and, to a lesser extent, Catholic — high schools are doing their missionary work on this side of the Pacific Ocean. Through placement agents and religious networking, they’re recruiting growing numbers of students from China, most of them atheists, and encouraging them to convert, in the hope that some of them will spread the faith back home.

This would be disgusting in any form, but when you learn more about how this racket works, trust me, the gorge will rise in your throat.

Here’s the problem: these are kids. In most countries, there are limits on what kids are allowed to do. Things like drinking alcohol, or voting, or signing contracts. Why do we have those limits? Because we feel that children lack the mental capacity to do certain things, like understand the substance of a legal agreement.

And yet it’s somehow OK for these children, whom we admit are not yet fully developed mentally, to be brainwashed by Big Jesus. It’s bad enough when parents, churches and mass media get in on the action; it’s even worse when kids are assaulted 24/7 at these “educational” institutions. (The word does belong in quotes. Some of these places teach creationism, bigotry and other lessons that ill-prepare their young charges for the real world.)

Here’s what happened to one kid after being assaulted by propaganda at one school for months, including mandatory chapel, religious instruction, bible study, and being sent to a “Christian counselor.” This should not be allowed to happen:

The more she read the Bible, the more truth she discovered there. After praying for a month, she felt the Holy Spirit one night in March 2009.

“Before, what I believed, what Chinese people believe, is that people are innately good,” she said. “I realized that I was sinful. I was lying, not loving. Those are as bad as killing someone. There’s no difference between me and a murderer.”

She was baptized in April, 2009. Now a sophomore at Davidson College in North Carolina, Su proselytized vacationers this past summer on Myrtle Beach.

This young girl was a junior in high school when they told her she was no better than a murderer.

Here’s another one, a boy who hasn’t converted but has certainly been influenced by the propaganda:

After watching a creationist video in Bible class, he developed doubts about evolution. Now a senior, he prays with teammates before games, he said. He lives in a teammate’s home, and prays with the family for success on exams.

OK, many of you might be wondering why these kids, and their parents, decide to go to these schools in the first place. None of them should be surprised at the religious environment as these institutions are upfront about their affiliations.

Two answers to that. First, these kids and their parents are desperate:

Chang Su was unusually blunt. A Shenzhen native, whose father is a computer engineer and whose mother teaches kindergarten, she “didn’t want anything to do with a Christian school,” she said.

She opted for Ben Lippen after missing the application deadline for secular private schools. Meeting Edgren, she informed him that she was not Christian, she said.

She was “so antagonistic,” said Edgren. He thanked her for her honesty and told her she would have to go to church.

Reminds me of the necrophilic Christian sects in the U.S. who prey on the ill and elderly in hospitals. Both my parents were subject to their propaganda in their final days, despite their deteriorating mental conditions. When I went to visit my mother in the hospital earlier this year before she died, I had to remove from her room the various books, leaflets and cards that these ghouls left there for her to read in her final hours. The people responsible are lucky that they didn’t show up while I was present. (Yeah, you betcha I’m biased on this issue.)

In addition to desperation, a lot of these kids and their parents are misinformed. Just because a school’s English-only website has lots of Jesus information does not mean that the parents will be properly informed. Some of these people go through agents, who of course do not disclose the downside of these schools. Here’s what one education consultant had to say:

“Relying on recruiters who do not emphasize their schools’ religious focus, Chinese parents perceive these schools as ’safe’ and ‘family-oriented’ places where their children will get a typical American experience,” she said in an e-mail. “They have no idea how religion permeates the day to day environment. I would no more place a Chinese student in an evangelical Christian school than in an orthodox Jewish school.”

Even when parents are informed that these are religious schools, their wrong-headed expectations and prejudices often propel them to make poor decisions:

Zhang Shaoxuan, the father of another girl at the fair, would gladly send her to a Christian school, he said.

“Both religious school and private schools are fine, the public schools are what you don’t want to be in,” he said. “Because there will be all kinds of odd students there.”

I might be off-base here, but I’m assuming that “odd students” is code for black kids. (That’s a topic for another day. Suffice it to say that among folks in the PRC, there is a lot of casual, uninformed racism against Africans and African Americans.)

And don’t think the schools are innocent educators here. They know what they’re doing:

While some trustees were leery of bringing so many non- Catholics to St. Mary’s, they couldn’t pass up the chance to evangelize. One trustee said, according to Glowacki [headmaster], “We have blank slates coming that we have an opportunity to write upon.”

Or the head of another school:

“Some people sacrifice so much to spread the gospel,” said Park, a Presbyterian. “Now we have people at our doorstep, offering money. I always tell the schools, ‘God has a bigger plan than we see.’”

Charming. Sinclair Lewis couldn’t have written it any better.

The question remains what to do about all this. First, and this will never happen, the government here could simply bar minors from going to these schools and being subject to religious indoctrination. Richard Dawkins has gotten into some trouble talking about how religious education of minors is tantamount to child abuse. I won’t go that far, but putting a child into such an environment is morally reprehensible.

It will never happen because China encourages students to go abroad, and many of these schools have generous financial aid. Many of the students, I’m sure, take the free education and just pretend to listen to the Jesus talk for a year. Good for them. If the PRC restricted students from going to these schools, the U.S. government (which regularly fawns on Big Jesus) would have the foreign policy equivalent of an aneurysm.

Second, the Chinese government, perhaps through the Ministry of Education, should try to educate parents more about their options. That’s assuming, of course, that they have options. If a religious school is the only way for these kids to get their one year in the U.S., a lot of them will go anyway, even if it means putting up with Big Jesus for 12 months.

Third, there should be a lot more scrutiny of education agents, including tougher licensing requirements. I don’t know enough about this industry to get into detail, but the agencies that outright lie to their clients should at least be sanctioned. Guidelines on dealing with the subject of religious schools might not be such a bad idea either.

Fourth, it would be nice if the U.S. or state governments cared enough to get involved. No wait, my mistake, this involves religion, so if anything, the U.S. government will somehow make it easier for the charlatans and hucksters to get in on the action. As long as religion is involved, then the failings of the institution are almost always overlooked. As the late Christopher Hitchens eloquently put it, religion poisons everything.

I wonder what’s going to happen to that poor kid who now doubts evolution and, I would guess, believes creationism has merit? Forget about that engineering degree; you need to believe in science to do that kind of work. Perhaps he can devote his life to smuggling Bibles into China — the school would love it.

It’s hard to believe that in 2011, we still allow young, impressionable kids to be brainwashed like this.

© Stan for China Hearsay, 2011. | Permalink | 46 comments | Add to del.icio.us
Post tags: education, proselytization, religion

This is a bit over the top, all things considered:

A Chinese scholar of foreign trade said Wednesday that a ruling by the US Court of Appeals for the Federal Circuit (CAFC) was an epoch-making victory for Chinese exporters who have long suffered unfair countervailing duties from the United States on top of anti-dumping duties (AD).

Yes, there was a ruling on this issue, but the long term prospects for Chinese exporters hoping for relief from countervailing duties is quite unsettled. The basic issue was addressed in the Financial Times:

A federal circuit court, the highest level under the Supreme Court, on Monday said the US could not use so-called “countervailing duties” against imports from highly regulated countries such as China which are designated as “non-market economies”.

[ . . . ]

Countervailing duties are imposed against imports deemed to be unfairly state-subsidised. A landmark 1984 US court ruling prevented their use against non-market economies, in effect saying it was double-counting to impose them on top of so-called “anti-dumping” tariffs, which are used against imports deemed to be unfairly priced.

Sounds OK so far. If I’m an exporter, this is all good news. Anti-dumping fees plus countervailing duties for subsidies doesn’t sound like a lot of fun. Indeed, the WTO seems to agree.

But here’s the problem. The US court admitted that this was all a matter of Congressional intent:

Although commerce has wide discretion in administering countervailing duty and anti-dumping law, it cannot exercise this discretion contrary to congressional intent. If commerce believes that the law should be changed, the appropriate approach is to seek legislative change.

In other words, Congress has the authority to reverse all this and return to the status quo ante. One trade lawyer, quoted in China Daily, thinks that’s exactly what will happen next:

“I’ve always felt that if the courts were to ultimately declare that the administration cannot apply the anti-subsidy law to China, Congress will act within about a week to make it clear that the administration can,” said David Spooner, a former Commerce Department official now at the law firm Squire Sanders & Dempsey LLP in Washington.

Since this provision wouldn’t exactly be controversial in D.C., I could certainly see quick action. On the other hand, Congress can’t seem to even get the easy stuff done these days, so who knows?

The bright side here for Chinese exporters is not that the US will never again apply both anti-dumping levies and CDs to the same parties, but that all the cases pending since 2007 on this issue are now in jeopardy. Whoever is waiting in that queue might get some relief.

Other than that, the next move will be made by Congress. Stay tuned and beware of trade experts acting like giddy schoolgirls.

© Stan for China Hearsay, 2011. | Permalink | 4 comments | Add to del.icio.us
Post tags: anti-dumping, countervailing duties, subsidies, WTO

The Office of the United States Trade Representative (USTR) today issued the Special 301 Out-of-Cycle Review of Notorious Markets. It identifies more than 30 markets that typify the problem of marketplaces that deal in goods and services that infringe on intellectual property rights (IPR) and help to sustain global piracy and counterfeiting. (USTR)

China is usually well represented on this list. Any surprises this year? Actually, yes. One of the big headlines is that “serial offender” (in terms of this list) Baidu was finally dropped. As I’ve written before, Baidu has been cleaning up its IP act for a while now, and I wouldn’t have been surprised if USTR had given it this vote of confidence last year. The USTR report specifically mentioned that Baidu had been removed this year, citing the deal that the search giant cut with U.S. content owners.

The other big takeaway from the list (here’s the link to the report) is the sheer number of different nationalities involved. Instead of a list that is 40% China, 40% Russia and a few Eastern European nations thrown in, this year we see offenders from all over.

Let’s have a look at some of the categories (I’m not going to mention all of them in detail):

1. Deep Linking: Chinese companies are still the offenders here.

These are online services engaged in “deep linking” to allegedly infringing material that is often stored on third-party hosting sites.

Sogou MP3:  China-based Sogou MP3 reportedly provides easy access to deeplinks of music files for downloading or streaming, and reportedly ignores rights holders’ notices to take down infringing material.

Gougou:  Industry reports that this China-based website actively provides users with deeplinks to infringing music files and torrent links from unauthorized sources.

Lesson to be learned here: get rid of that “gou” in your company name before USTR comes after you.

2. B2B and B2C: Three sites are listed, China’s Taobao and two Canadian platforms (the latter are probably related sites).

Commenters has reported that these Business-to-Business (B2B) and Business-to-Consumer (B2C) websites offer a wide range of infringing products (such as cigarettes, clothing, manufactured goods, pharmaceutical products and sporting goods) to consumers and businesses.

Taobao:  Several commenters reported that pirated and counterfeit goods continue to be widely available on China-based Taobao.  While stakeholders report that Taobao continues to make significant efforts to address the problem, they recognize that much remains to be done.

Quick note here on Baidu vs. Taobao. Obviously these are two very different companies, with completely different business models. The fact that Baidu has successful fought its way off the list, while Taobao is still stuck in the IP ghetto should not be used to make a comparison. As a search engine, Baidu has limited control over what pops up as search results. Therefore, sites that host or otherwise have information about infringing activities can be found on Baidu, or Google, or Yahoo!.

However, that’s not what Baidu has been criticized for in the past. The problems it had with IP owners involved things like deep linking to MP3 files and otherwise maintaining platforms that directly facilitated copyright infringement. Once they got rid of this kind of thing and made peace with content owners, USTR took them off the “bad guys” list.

But Taobao does not have that sort of control. As I talked about yesterday, the sheer volume of transactions on Alibaba’s e-commerce platform means that discrete oversight of each transaction is impossible. That’s why we have a legal system that limits operator liability.

I would suspect, therefore, that because of these control issues, it’s going to be more difficult for a company like Taobao to clean things up than it was for Baidu, and so the former’s inclusion on the list is perhaps not that surprising, even though (as USTR mentions) great strides have already been made by the e-commerce site. Remember that it took Ebay a while to figure this all out, and they have ongoing problems with counterfeit products to this day.

3. Unlicensed programming retransmission: a China company is the only one on the list, but this is really only an example of a widespread problem.

Unlicensed programming retransmission, which includes live sports telecast piracy, affects amateur and professional sports leagues and other television programming rights holders by making protected telecasts and broadcasts freely available, without authorization, over the Internet.

TV Ants:  This peer-to-peer service, which reportedly operates from China, exemplifies this problem.

This is a huge problem with respect to sporting matches that exploits a weakness in copyright law/related rights.

4. Physical markets: 15 are listed, four of which are in China. One of them is Beijing’s Silk Market, perennial bad boy.

The only surprise here is that more markets in China are not on this particular sub-list. Look, China is the manufacturer to the world. Everything is made here, including counterfeits, so four out of fifteen is not unexpected. By the way, other nations represented in this category include India, Indonesia, Mexico, Thailand, Ecuador, Colombia, Ukraine, Philippines, Pakistan, Argentina, and Paraguay.

5. In the following categories, no Chinese companies are included:

Blogs, online forums and newsgroups

Cyberlockers

Social media sites

BitTorrent (indexing and trackers)

Pay-per-download

Offenders in these categories (or their servers) are from: Russia, Canada, Sweden, the Netherlands, Ukraine, Romania, Panama, Switzerland, Bulgaria, UK, and Luxembourg.

What’s the big picture here? IP infringement and counterfeiting is a worldwide problem. The type of IP infringement that is seen by USTR as a huge problem in a given nation seems linked to its economy. For developing countries (South America, Southeast Asia, Eastern Europe), physical markets are the issue. For developed nations (Europe, Russia), online infringement is noteworthy.

China straddles both categories. As the world’s workshop, it has a prominent place on the physical markets list. However, because of its huge population and growth of e-commerce, there are some Net-based activities where China is also cited.

I wonder what next year’s list will look like.

© Stan for China Hearsay, 2011. | Permalink | 2 comments | Add to del.icio.us
Post tags: Baidu, counterfeiting, Special 301, taobao, trademark infringement, United States Trade Representative, USTR

What can I say about Michael Wessel’s Op/Ed in the Financial Times, entitled “US Should Seek Reciprocity With China“? Here’s a guy who is “a member of the US-China Economic and Security Review Commission, an independent federal agency that advises Congress.”

After reading the Op/Ed, I am reminded why none of the grownups in the D.C. China policy community take this agency seriously. Unfortunately, it also suggests why some members of Congress, who read the reports churned out by this group, are so woefully uninformed about what goes on over here.

[For what it's worth, here's is Wessel's full bio. Note the absence of anything remotely related to China. Other members of the agency, to be fair, have much stronger CVs when it comes to PRC experience.]

Let’s document the atrocities, starting with this, where Wessel melodramatically bemoans:

. . . the futility of relying on Beijing’s promises of serious reform, when China’s leadership is convinced change threatens the Communist party’s authoritarian rule.

It’s certainly true that China’s government is threatened by political change, but equating this with all types of economic reform seems ridiculous given the pace of change here over the past decade. Perhaps Wessel has not been following the “recent” changes to China’s economy?

I suspect that Wessel threw that in as an excuse to use the terms “Communist party” and “authoritarian rule” in the same sentence. Since the reference is completely irrelevant to the point of the article, which is supposed to be about trade negotiations, I therefore must assume that the man is an ideologue, and therefore hopelessly biased.

Nevertheless, let’s move on to this bit:

Opening tourism offices is easy enough, but opening an office of the US Food and Drug Administration in China to conduct safety inspections? Not so easy.

1) And yet, it did happen; and 2) Since China is essentially allowing in a foreign government to conduct enforcement activities on its soil, who said this process should be easy? By the way, other agencies like the FBI have offices here in Beijing as well. First time I heard about this, it shocked the hell out of me. Wessel is a hard man to please. Does the Public Security Bureau have offices in the U.S.?

China pledged 10 years ago when it joined the World Trade Organisation to sign the group’s government procurement agreement “as soon as possible”. A decade later, Beijing is still offering excuses in the run-up to this week’s WTO ministerial.

Yeah, that’s a tough one. This is a huge deal, involving a great deal of potential revenue for U.S. companies. But has China “broken a promise” here? Well, sort of. But since they never actual signed anything binding on this issue pre-WTO, they do have the right to drag their feet on this. It’s frustrating, but it doesn’t rise to the level of a legal violation.

Here’s one that really annoys me, for obvious reasons:

China also agreed in 2001 to bring its see-no-evil system of intellectual property protection up to international standards. Ten years later, China has just agreed once again to “continue working to develop solutions to combat the sale of infringing goods on the internet”. Really? Strange that in a country that officially spends more money on internal security measures, censorship and control of the internet than on its military, Beijing has not been able to shut a few sites that sell purloined music and videos.

Again, Wessel is just showing off his ignorance here, or perhaps he’s being deliberately obtuse. First, China did agree to harmonize its IP laws to international standards (i.e. to the WTO TRIPs standard). Guess what? With reforms to the trademark, copyright and (twice now) patent laws, it did just that. Everyone understands, except apparently Wessel, that the problem is not about China’s IP laws, but in enforcement.

Second, is Wessel really surprised that China is still experiencing problems with counterfeits and e-commerce? He should talk to the FBI; the U.S. has the same problem, albeit on a much lesser scale. Apparently Wessel believes that the Net is just a series of tubes and that all the government needs to do is block up a tube or two and the problem will be solved for ever more. {sigh}

Third, Beijing has shut down more than a few sites that deal with counterfeit products and pirated digital media. A lot has been done, and a lot more needs to be done in the future. But this is a complex problem that can’t be fixed with some keyword filtering, and it is an ongoing struggle.

Moreover, even if Wessel doesn’t value any of the money China spends on its internal security apparatus (I don’t much either), it’s still true that budgets here are finite, and that the government would probably rather spend an extra dollar on the Great Firewall than going after another pirate movie site. Let’s just stipulate that Beijing’s priorities are different than those of Wessel — is that surprising?

Wessel ends with this policy suggestion:

When a critical problem has defied solution for so long, it is time to search for an alternative. Fortunately, another approach is readily available: reciprocity. The US already conducts some trade negotiations on this basis – for example, on aircraft landing rights at international airports. International mail is delivered by a reciprocal arrangement.

[ . . . ]

Reciprocity would not help every aspect of the complex relationship between the US and China. But it would be a useful organising principle and would create a clear benchmark to judge the success of future trade agreements. If Stairway to Heaven costs 99 cents on iTunes or Amazon but is free on China’s Baidu, it should be plain to all that something is very wrong.

Uh, this all makes little sense. First, comparing airports and mail to some of these trade issues is just ridiculous. Wessel sort of admits to this later on, admitting that the bilateral relationship is complex. Gee, ya think?

But what to do with this bizarre example of the price differential between an iTunes offering of Stairway and the “free” access on Baidu? Many FT readers will no doubt assume, after reading the Op/Ed, that Baidu is engaging in massive piracy by offering free access to music.

This used to be true, of course. Perhaps Wessel is stuck in the past and hasn’t noticed that many of China’s top media sites, from search engines like Baidu to file sharing sites like Youku and Tudou, have recently cut revenue sharing deals with content owners, in many cases allowing the sites to run music and videos free to visitors in exchange for watching ads.

Then again, if Wessel admitted to this, it would blunt his “something is very wrong” conclusion.

Before I sign off, though, let me address Wessel’s basic point, that the U.S. should negotiate with China on the basis of reciprocity. I don’t have a problem with that, and indeed, I think that a lot of the bilateral negotiations proceed along those lines already. The problem of course is that China’s economy makes it easy for Beijing to implement an industrial policy, which is not true for the U.S. This ultimately puts the U.S. is the position of perennial demandeur, which makes reciprocity difficult.

So Wessel’s advice, while ultimately unworkable, is at least a reasonable policy issue to discuss. Why he feels that his argument is strengthened by throwing in so much ideological rhetoric and misleading information, I have no idea. He ends up sabotaging himself.

© Stan for China Hearsay, 2011. | Permalink | 4 comments | Add to del.icio.us
Post tags: U.S.-China Economic and Security Review Commission

So many pundits, politicians and journalists hop over to China for a week or two, do the tourist thing and interview a couple CEOs (I’m looking at you, Friedman), then return home convinced that China is either: a) a perfect, modern society that will reign supreme in a few years; or b) a nation so plagued by economic, political, social and environmental problems that it’s a wonder it didn’t implode years ago.

Both opinions are ludicrous and indicative of a profound misunderstanding and ignorance of the Middle Kingdom, but at least those guys get to write off the trip as a business expense. Whenever one of these columns finds its way onto the pages of a major newspaper, expat heads in Beijing and Shanghai explode in sequence like a Spring Festival string of firecrackers.

And then there’s Eugene Robinson, a longtime columnist for the Washington Post, who to the best of my knowledge has no China background. He is currently over here doing the journo thing, and although he has plenty of time to embarrass himself with an off-base column, his first try is stunningly reasonable and spot on.

After reading this first paragraph, I was hooked:

This is my first visit to China, and I plan to spend the next few columns reporting what I see and learn. I spent enough years as a foreign correspondent to know how tricky first impressions can be. The subtleties and complexities of any society are — unsurprisingly — subtle and complex.

Oh my. I purposely used the phrase “stunningly reasonable” because columnists these days don’t get very far by being reasonable. This also applies to bloggers of course — I always expect more comments and traffic after writing a blistering rant than a well-reasoned, fair exposition that explores both sides of an issue. The Voice of Reason is often quite boring.

Robinson goes on to explain why U.S. politicians, with the exception of Jon Huntsman of course, get China wrong. His first target is Mitt Romney, whom Robinson chides for claiming that China is “running all over” the U.S.:

Really? From here, it looks more like an embrace than a war. My hotel is in the chic, yuppified Chaoyang District, just up the street from an Apple store, a Starbucks, a Calvin Klein boutique and just about every luxury retailer you could possibly name. An hour’s drive away, at the visitors center for the Mutianyu section of the Great Wall, the first restaurant you see is a Subway. High-status automobile brands in China include not just Porsche, Audi and Mercedes, but also Buick.

Not only is this a fairly accurate observation about foreign brands in downtown Beijing, illustrating the success of some multinationals here, but it is also accompanied by careful disclaimers. Robinson notes, for example, his understanding that conditions in Beijing and Shanghai are not indicative of less-developed parts of the country.

Robinson relates this evidence of economic interdependence between China and the U.S. and posits that talk of a trade war makes little sense. If anything, he says, China’s interests are in ensuring that the U.S. economy remains strong enough to purchase products manufactured here. As recent export numbers reveal, a softening U.S. economy is definitely not good news for Chinese factories. This is old news, but many in D.C. still fall for the “China will dump all its dollars if we don’t kowtow to their demands” paranoia.

The Voice of Reason goes right at the vitriolic China bashing that has been a staple of U.S. politicians from both political parties this year:

So this is really a dispute over issues that shouldn’t be addressed with chest-pounding and tough-guy threats. The solution involves negotiation and simple arithmetic — and both sides have a powerful incentive to reach an accord.

Quite right. But before I leave you with the impression that Robinson’s column was all criticism of U.S. rhetoric and no “reality check” on the China side, he does mention in passing several troublesome issues, including currency manipulation, intellectual property rights enforcement, human rights, etc. He hedges his bets to some extent, which I think is always a good strategy for a reasonable columnist.

Robinson’s first piece from China isn’t flashy or sensationalist, and some may find it a bit boring (much like this post, I suspect). But compared to what his journo colleagues usually come up with after a brief trip over here, I am pleasantly surprised.

© Stan for China Hearsay, 2011. | Permalink | 4 comments | Add to del.icio.us
Post tags: Eugene Robinson, Washington Post

When the political rhetoric over international trade policy heats up, I tend to side with the free traders against the protectionists. In both China and the U.S., the latter are often nationalists, although many trade critics in America also couch their arguments in terms of labor rights, jobs and environmental protection.

So even though I’m a Lefty on most issues, I find myself siding with the centrists and pro-business folks on trade. However, that doesn’t mean that I’m willing to accept false or misleading arguments from folks on my team. Free trade advocates should stick with the facts and hope to win the argument on the merits.

Therefore, in the interests of fair play, allow me to point out a certain blog post from The Heritage Foundation, a conservative American think tank that has a lot of clout in D.C. (for reasons that escape me). The offender author is Charles Kaupke, whom I suspect may be an intern, in which case he should not be allowed to put up stuff like this without supervision. Anyway, I’ll need to give you some extended excerpts to present the entire context:

Conventional wisdom has it that China’s growing economy poses a serious threat to America’s status as a global economic superpower. The media and politicians repeat time and again that the United States is losing much of its manufacturing base to China and that American jobs are disappearing as a result. Many Americans who believe these claims vote for politicians who promise to “protect” American jobs from foreign competition.

At this point, I’m still on board. This is an accurate description of mainstream American criticism of China. Indeed, a lot of China bashers base their entire schtick on the whole eroding manufacturing base/outsourcing meme.

Regular readers of this blog already know my position on this issue. Yes the U.S. has lost a huge number of manufacturing jobs, many of which are now in China. However, this doesn’t make China “evil” and the process by which this happened was inevitable given globalization and wage/cost differentials. Moreover, those jobs ain’t coming back, and protectionism will not help in the long run.

Onward:

A look at the numbers reveals that, contrary to the assertion that corporations prefer to invest in low-wage countries like China, the United States is the world’s strongest magnet for investment dollars.

[ . . . ]

According to the World Bank, FDI in America has been higher than FDI in China every year except one since 1970.

OK, a good point. The U.S. does indeed benefit from the free flow of capital for several reasons: the U.S. has a huge consumer market, is the financial capital of the world, and (in addition to FDI) enjoys many benefits on account of the special status of the dollar.

Now, if Mr. Kaupke had stopped there, essentially leaving the reader with the argument “Hey, globalization/free trade critics, this whole thing has its benefits too. Look at how much money is being invested in the U.S., amounts that offset many of these losses you complain about,” I’d say well done, sir.

Too bad he ends with this:

In 2010, even as commentators complained about jobs being outsourced from the United States to China, foreign investors continued to favor the United States, pouring $236.2 billion into the U.S. economy—about 28 percent more than they sent to China.

Although scary stories about U.S. jobs being outsourced to China continue to make headlines, these numbers reveal that international investors consistently prefer to send their job-creating dollars not to China, but to the United States.

This is the funny thing about statistics. They only tell you part of a story, and it’s dangerous to make up the rest when you don’t know what you’re talking about.

Maybe I’m wrong, but I don’t recall trade critics suggesting that aggregate investment into the U.S. was more or less than that of China FDI. Doesn’t really come up that often in political discussions, and it certainly wasn’t asserted by the author of the New York Times article linked to by Kaupke.

No, most critics talk about things like jobs, and although there are ways to estimate jobs gained per dollar of investment, I don’t have a lot of faith in the applicability of that data.

Why not? Here’s a question: do you think that U.S. FDI and China FDI result in similar types of investments? Are the targets of M&A deals similarly situated in terms of technology, capital equipment and manpower?

How about a completely speculative question: I wonder how many jobs are created in China per dollar of FDI compared to U.S. FDI? Given the different strengths of each economy and the mix between labor and capital in these economies, why would we expect these numbers to be the same in terms of jobs created? Correct me if I’m wrong, but I doubt that the U.S. and China are identical when it comes to labor and capital intensity.

Therefore, unless I’m completely off base here (I’m no economist, so who knows?), Kaupke’s concluding statement that investors prefer to send their “job-creating dollars” to the U.S. as opposed to China is quite misleading. If he had left out the “job-creating” bit, he would have been safe. Too bad.

Thanks for the effort, Mr. Kaupke, but no thanks. Free trade is a good thing, but we don’t need to pretend that investors are clamoring to set up factories in the U.S. to assemble mobile phones and manufacture textiles. Next time come up with a better argument.

© Stan for China Hearsay, 2011. | Permalink | 5 comments | Add to del.icio.us
Post tags: FDI, foreign direct investment, Heritage Foundation

I’ve been writing a lot recently about the China bashing coming out of the U.S., so here’s one for the other side of the ledger. You may have heard that the U.S. Congressional “supercommittee” failed to reach an agreement this week on deficit measures. According to the deal struck during the last fake budget crisis, a failure of this kind would trigger automatic cuts in certain programs, including defense. We’ll see whether any of this actually takes place soon enough.

China is apparently not very happy. Here are a few choice bits from the AFP story:

China’s state media Tuesday blasted the United States over its “ticking debt bomb” and urged American lawmakers to be more responsible after they failed to agree on deficit-cutting measures.

[ . . . ]

“Washington’s political elites… are obligated to muster the courage to defuse the ticking debt bomb and start to show the world they have the wisdom and determination not to further jeopardise the fragile global economic recovery,” Xinhua news agency said in a commentary.

[ . . . ]

Xinhua, a mouthpiece for the Chinese government, blamed partisan in-fighting, saying both Democrats and Republicans were ignoring the impact of a possible US default on the global economy.

“US politicians have never shied from lecturing other countries about global responsibility and now it is high time they showed a sense of true global leadership,” Xinhua said.

[ . . . ]

Chinese state media have previously savaged the US over what they call its “addiction to debt” with one analyst going so far as to compare US debt to a “Ponzi scheme”.

My first reaction to this is a dramatic rolling of the eyes, accompanied by a Reaganesque “There they go again.” This language is not new, and China seems quite willing to point out the deficiencies of the American economy and political system.

But upon further reflection, none of this makes sense from a realist point of view, and China has historically pursued a realist foreign policy. What’s the problem here?

From a very superficial glance, China’s criticism is reasonable. It owns a lot of dollar-denominated debt and is therefore nervous about U.S. economic instability. The U.S. Congress failed to fix a problem that the government itself says is a “ticking time bomb.” So Beijing’s concern seems warranted.

However, one would hope that Beijing could look beyond the insipid Congressional rhetoric on this issue and take a pragmatic look at the U.S. economy. If they did that, they would discover that there is no ticking time bomb:

1. Interest rates are extremely low and not expected to shoot up.

2. The U.S. is nowhere near any sort of default.

3. The budget deficit could be narrowed appreciably on the tax side, with much more modest spending cuts than some folks are demanding. I doubt that a Ponzi scheme situation would be as easy to fix.

4. The biggest budget problem right now is that the U.S. economy has been flirting with a recession. Short-term spending is actually called for, not an austerity plan.

China has traditionally been fairly tight-fisted when it comes to social spending, but on the other hand, it has no qualms about intervening in the economy when stimulus is needed (e.g. 2008/9). After what’s happened in Britain this year, with its disastrous austerity plan, does China really want the U.S. to follow suit?

To be honest, the Xinhua criticisms sound a lot like Fox News talking points. The easiest way to help solve the budget deficit in the U.S. is to allow the Bush tax cuts to sunset. One political party is willing to do that and one is not; Xinhua (and much of the mainstream U.S. media) calls this “partisan bickering.” Huh? I surely is partisan, but it seems to be rather one-sided to me.

Wouldn’t it make more sense for Beijing to criticize this nonsensical “no new taxes” pledge by the Republicans? Certainly the GOP hasn’t made a lot of friends over here recently with the rhetoric coming out of their presidential nomination debates.

So what’s the explanation for this Xinhua criticism? It could be just a knee-jerk reaction. The State media is generally tasked with pointing out the failures of other nations, and seems quite willing to do so when the U.S. is the topic of conversation.

Alternatively, it could be a failure to understand the U.S. economy and domestic politics. If that’s the case, Beijing might want to check up on the folks at Xinhua and make sure they aren’t getting their information from Fox News and the New York Post.

China has a lot of money invested in the U.S. A smart move would be to support policies that will grow the U.S. economy, stabilize its tax base, and keep its citizens employed. That’s what we call a win-win.

Note: I understand that my comments are based on my own highly partisan political views and that not everyone agrees with this take on the U.S. budget deficit. On the other hand, if any of you actually believes that austerity and further tax cuts is a healthy prescription for the U.S. economy, you’re living in a fantasy world.

© Stan for China Hearsay, 2011. | Permalink | 14 comments | Add to del.icio.us
Post tags: supercommittee, U.S. budget deficit