06/09/2013 07:26 pm ET Updated Aug 09, 2013

Sweet and Sour Pork

President Obama's personal summit with China's new president, Xi Jinping, at the well-named venue of Rancho Mirage, Calif., covered a wide range of issues, from North Korea to cyber-spying to territorial disputes with Japan and Taiwan, to global climate change. What the meetings did not engage is the fact that China's entire economic system violates the naïve American premise that free markets produce efficient and balanced outcomes.

As China has demonstrated for more than a generation, "free trade" is a useful American fantasy, and state-led capitalism is not a contradiction in terms. It is a recipe for hollowing out the U.S. economy in favor of Chinese economic primacy. Nor does capitalism, Chinese-style, logically lead to increased democracy and human rights.

Although the Clinton administration allowed China's entry into the World Trade Organization in 2000 on promises of better behavior, the Beijing regime doubled down on its strategy of state-owned or state-led enterprises, systematic theft of intellectual property, and deals with Western multinationals that demand transfer of sensitive technologies to Chinese "partners" in exchange for cheap labor and government industrial subsidies.

China's violations of trade norms, to the disadvantage of the United States, have been repeatedly documented by the U.S.-China Economic and Security Review Commission, an independent government body created by the U.S. Congress.

But Democratic and Republican administrations alike have refused more than slaps on the wrist, while China becomes more of an economic threat. Washington has repeatedly declined to brand Beijing a currency manipulator, as required by trade law. Trade complaints against China's relentless industrial subsidies have been very narrowly drawn to avoid wider conflicts. China's violations of labor rights have not even been part of the diplomatic conversation.

It is intriguing to consider why American administrations that have been relentless about containing the former Soviet Union and have tampered with Constitutional rights of Americans in order to monitor possible foreign terrorists have treated China with such kid gloves.

One oft-cited reason is that Beijing is America's largest creditor. But that's only been a major factor for the last couple of decades. Even when China has far less financial leverage, the Clinton and Bush administrations turned a blind eye to China's flagrant economic mercantilism.

Another reason is great power politics -- the hope that China could be a friendly regional counterweight to Russia or a moderating influence on its close ally, North Korea or an ally in the Middle East. These hopes, to say the least, have not been fulfilled.

The most convincing reason for Washington's soft line is that both American finance and American industry have decided that they can live nicely with the bargain China is offering them. Industrial companies such as Intel and Boeing, which once fought hard to preserve production in the United States, are willing to produce in China with cheaper labor even though it means that they gradually lose control of critical technologies.

And for the investment bankers, deals with China are a bonanza. When it was announced May 28 that a Chinese firm, Shuanghui International Holdings, was spending $4.72 billion to buy the iconic U.S. hog producer Smithfield Foods, investors pigged out as the share price rose $28 percent. Goldman Sachs holds shares in both Shuanghui and Smithfield.

Robert Rubin, the Treasury Secretary under Bill Clinton who previously served as co-CEO of Goldman, blocked China's accession to the WTO in the late 1990s until China liberalized its terms for allowing investment bankers and other financiers into its markets. Rubin was unconcerned about other major issues, such as coercive demands on industrial firms seeking to sell in China's domestic market without giving away proprietary technology, much less human rights violations.

Critics in Congress, ranging from liberal Democratic Sen. Debbie Stabenow of Michigan, who chairs the Senate Agricultural Committee, to conservative Republican Chuck Grassley of Iowa, have both raised concerns about food security and food safety. It's not clear whether China is buying Smithfield to complement its own domestic food supply or to gain a foothold in yet another U.S. export market.

Under free trade theory, if one country exports products at an attractive price, another country imports them. But under China's view of strategic trade, it's easier just to buy the company.

The Smithfield deal has to be vetted by a U.S. government agency called the Committee on Foreign Investment in the U.S, or CFIUS. The agency cannot block the deal, but it can recommend that the president veto it. However, CFIUS was created mainly to prevent militarily sensitive foreign purchases. The official U.S. trade ideology lacks the vocabulary to challenge purchases of large companies by foreign investors who play by different economic rules.

President Obama, renowned as an easy touch when it comes to negotiating with Republicans, seems to have extended his gentle style to his diplomacy with Beijing.

In this respect, though, he has plenty of Republican company.

Robert Kuttner's new book is Debtors' Prison: The Politics of Austerity Versus Possibility. He is co-editor of The American Prospect and a senior Fellow at Demos.

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