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Leo Hindery, Jr. Headshot

China Trade Reform: Mission (Not Yet) Accomplished

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Last week, as the portion of the annual two-day US-China summit in Beijing regarding trade came to a close, I half-expected Treasury Secretary Geithner to tack up a banner on the wall of the Great Hall and declare "Mission Accomplished".

While Mr. Geithner didn't go that far, he certainly made it clear both before and after the summit that at least in his mind we've made great progress in reforming our deeply troubled trade relations with China.

Frankly, I couldn't disagree more with his assessment. My doubts are bolstered by the few words of the President of China himself, who in his closing speech for the summit ovrerall uttered only a single sentence on the subject of trade. Sixteen months into the Obama administration, all that President Hu Jintao was willing to say is that "China will continue to steadily push forward reform of the renminbi exchange-rate formation mechanism in a self-initiated, controllable and gradual manner".

And just to make sure that we in the United States know precisely what "in a gradual manner" means, President Hu had one of his vice premiers, Wang Qishan, follow up later by saying that in return for even this weak commitment, China needs to see "steps by the U.S. to improve treatment of Chinese companies investing in the U.S., and to treat China as a 'market economy' in trade law, which would raise the burden of proof in anti-dumping cases and other trade remedies sought by U.S. companies".

This brings us to the reality that until the United States undertakes to reform the entirety of our very complicated trade relations with China, we in turn will never truly counter the entirety of China's comprehensive industrial development policies and mercantilist practices. Yet there seems to be no political will in the administration right now to do this.

At least as long ago as December 2007, when the current Great Recession officially began, several of us were writing that without some immediate and dramatic changes soon in our trade and economic policies and practices, America's Great Recession would prove to be China's 'Great Opportunity'. And sadly, we've indeed seen our American companies cutting their payrolls and their capital spending, thereby driving business to China, at the very same time that China, through the actions and support of its central government, is increasing the global competitiveness of its own manufacturers.

I certainly applaud President Obama for his comments on February 3 when he told the Democratic Policy Committee of the Senate that one of the challenges we have to address internationally is currency rates, specifically how we make sure that our goods are not artificially inflated in price at the same time that foreign goods are artificially deflated in price. But what about everything else China is up to in its competition with U.S. manufacturers? The Chinese RMB is arguably the most visible 'symbol' of China's mercantilism, but despite the fact that the renminbi is obviously undervalued, on the order of at least 25% and probably closer to 40%, it's only the tip of China's mercantilist iceberg. Granted, it's a very big tip, but then it's a very big iceberg.

Much has been written about how China has gained unfair trade advantages through its abysmally low direct labor costs, lack of meaningful environmental and labor standards, and currency manipulation, all of which is valid. Less appreciated, however, are the other measures China uses to game the system and the magnitude of these measures - these so-called 'trade advantages', which will allow China to dominate certain industries for years to come, include (1) regulations to block non-Chinese firms from selling their products to Chinese government agencies, (2) technical standards that prevent or at least greatly hinder the Chinese government and Chinese businesses from buying non-Chinese goods, and (3) rules that force Western companies to give up technological secrets in exchange for access to China's markets.

The most extreme example of China's use of its mercantilist policies to create jobs in China at the expense of jobs (and technology) overseas is China's "Indigenous Innovation Production Accreditation Program". The IIPA Program was promulgated on November 15, 2009, and limits all Chinese central and provincial government procurement to companies that have "indigenous" - or Chinese - "innovation". This Program is far more restrictive than any other buy-domestic program in the world, and its adverse impacts are already being felt across all industries that seek to export to China, but especially in computers and consumer electronics, green technologies, autos, aviation and specialty materials. And if this wasn't blatant enough, embedded in the IIPA Program is the demand that in order to sell things in China not yet manufactured there, foreign companies must first transfer and license, to Chinese companies, their latest technology for "co-innovation" and "re-innovation".

The needed United States responses to these unfair practices and demands are actually pretty simple, if only we had the political will. We need to:

(1) Demand that the U.S. government not enter into a bilateral investment treaty with China until China makes WTO-compliant the IIPA Program, and in the interim, demand that the United States Trade Representative bring a Section 301 case against the IIPA Program;

(2) Establish and then enforce our own buy-domestic and other domestic investment requirements for federal procurement and for grants to states and local governments;

(3) Enact investment criteria for public resources not covered by buy-domestic and related laws, such as (i) the use of domestically produced parts and components, (ii) the return of idle manufacturing capacity to productive service, and (iii) locating in states with the highest number of unemployed manufacturing workers; and

(4) Assess and then address, through a joint effort among Treasury, Commerce and Defense in conjunction with Congress, the risks to the United States of planned investments by China in our militarily and otherwise critical technologies and companies.

Right now, we as a nation are tolerating very selfish behaviors that hurt our workers, trade balance and the national security of our country. We are tolerating these behaviors mostly because too many leaders in Washington are too deferential to the interests of multinational corporations and financial institutions that wield undue influence on Congress and the administration. It's also, to be fair, because the United States is concerned about upsetting the largest purchaser of America's ever-mushrooming debt, which of course is China.

This latter concern is not to be ignored, but it is greatly exaggerated. As Dr. Derek Scissors of The Heritage Foundation recently testified to the US-China Commission, "China has two choices: buy U.S. bonds or build a really big mattress."

Regarding those multinational corporations which continue to overly influence our country's trade policies in general and especially with China, the reality is that some of them and in turn some American consumers may, for the good of our nation, have to suffer some pain. For example, we saw, as an instant response to President Obama's February 3 speech regarding currency manipulation, commercial threats from the Chinese aimed at the Boeing Company and at offshore drilling by American oil companies in the South China Sea.

As China's biggest 'customer' and as the world's only true super power, however, the United States is not without its own influence and capabilities. So, while we may have to live with some threats and maybe even some adverse actions by the Chinese for a while, this is an outcome and these are conditions that we must, and can, accept.

We know what to do, and we have known it for a very long time. So, if this administration cannot find the political will to properly and fully rebalance our trade relationship with China and do what is right for American workers and American companies, then it's time for our representatives in Congress to step forward and exert the pressures on China that are now sorely missing.

Leo Hindery, Jr. is Chairman of the US Economy/Smart Globalization Initiative at the New America Foundation and a member of the Council on Foreign Relations. Currently an investor in media companies, he is the former CEO of Tele-Communications, Inc. (TCI), Liberty Media and their successor AT&T Broadband. He also serves on the Board of the Huffington Post Investigative Fund.