Monday, December 22, 2003
12-22) 04:00 PDT Washington -- China once beckoned as the ultimate dream market of a billion untapped consumers, its potential so vast that California's high-tech community threw all its considerable political firepower into winning China's coveted entry to the World Trade Organization in 2001.
"China will open its markets to American products from wheat to cars to consulting services," then President Bill Clinton promised as he signed legislation in 2000 paving China's way into the free-trading system, "and our companies will be far more able to sell goods without moving factories or investments there."
Today, the bloom of that promise has faded. China has become the fastest growing U.S. export market, but U.S. companies are, if anything, moving factories to China faster than ever.
Protectionist calls in Congress from both parties grow louder by the month. Most anger is focused on China's undervalued currency, which has been pegged to the dollar since 1994, making it even more difficult for U.S. manufacturers to remain competitive. Economists say the currency is 15 percent to 40 percent undervalued.
Many fear that sentiment is building for a major trade confrontation similar to the 1980s trade fight with Japan.
"Unless something changes dramatically, global competition is going to be a front and center issue for both parties and candidates at all levels of government in the 2004 election," said Harris Miller, president of the Information Technology Association of America, a high-tech lobbying group.
Thanks in part to U.S. investment, China now looms as a competitive threat to industries across the globe -- including Silicon Valley -- the likes of which some say has not been seen since the industrialization of the United States itself. China's economic reach has grown so broad and deep, its industrial transformation so extraordinary, that its output of low-cost goods is exerting deflationary pressure on the global economy.
Many in the tech sector who fought so hard to secure China's entry to the WTO are increasingly disillusioned by what they call China's failure to live up to its promises to open its markets. They fear China as an emerging strategic competitor whose low wages and increasing technical capacity pose a frightening challenge to their dominance -- even as they continue to invest heavily in China in their drive to remain competitive in global markets.
Intel Corp. chairman Andy Grove warned tech executives last fall that software and services are losing market share to competitors like China, following earlier patterns of such U.S. manufacturing bastions as steel.
"It's the footprint in the snow, if you wish," Grove said. "I have no choice as a corporate manager, nor do my colleagues at Intel and outside of Intel" to do what is best for the company, he said, and "that very often involves moves of jobs and moves of capabilities into other countries."
The U.S. trade deficit with China is expected to top $120 billion this year, more than a fifth of the nearly $500 billion record trade deficit the U. S. is running. China now ranks second only to Canada as an exporter to the United States.
Those exports are visible in a flood of products, not just toys and baseball bats, but such items as mobile phones, microwave ovens and computers, now increasingly stamped "Made in China.'' And they arrive in the midst of a presidential race in which the top domestic issue is the loss of U.S. manufacturing jobs.
Department of Commerce Undersecretary Gran Aldonis told Congress that in his visits to a wide spectrum of U.S. manufacturers in 23 cities this year, "there was no other topic than China that was a higher concern from their point of view."
Frank Vargo, head of trade policy for the National Association of Manufacturers, said the rise in the trade deficit with China "and the spread, rapid spread, into more and more products and industries is leading to a significant increase in calls for protection. I have never seen anything like it."
Despite warnings that a trade war would endanger a shaky world economy, the Bush administration has begun responding, imposing quotas on Chinese exports of bras and nightwear, and opening an investigation of $1 billion in imports of Chinese bedroom furniture. Treasury Secretary John Snow visited Beijing to press Chinese officials on U.S. complaints and to speed up steps to float the yuan.
"The Bush administration is making concessions to protectionist pressure, but I think clearly with an eye to forestalling more dramatic moves," said Brink Lindsey, head of trade policy for the libertarian Cato Institute and a free trade advocate. "Whether it can stay on top of this process remains to be seen."
Congressional reaction is growing more intense. Numerous House and Senate hearings have been held, and the "China Act," introduced by Rep. Phil English, R-Pa., would allow the administration to slap steep tariffs on Chinese goods if it determines China is manipulating its currency to gain a trade advantage.
This view has sympathizers inunusual quarters. Former Bush economic chief Lawrence Lindsay blasted China's currency policy as mercantilist, in a recent speech in Washington, and warned that "Chinese produced products will enjoy an ever increasing advantage over those made in America or Japan."
Any "modern large economy that is truly part of the global trading system must have a flexible exchange rate policy," Lindsey said. "Yet one of the fastest growing economies of the world does not, and it is wreaking havoc."
Yet other economists caution to keep things in perspective. The U.S. manufacturing sector alone, noted Treasury Undersecretary John Taylor, is larger than China's entire economy. Economic relations with China are far more complex, they contend, than the trade deficit alone reflects. Comparisons between the wealthy "Japan, Inc." of the 1980s and China, still a very poor country, are too facile, some economists warn.
Even if China sharply revalued its currency, that would not dent its trade surplus with the United States or save many U.S. jobs, most of which have been lost to the recession and rising productivity.
Chinese goods are mainly replacing imports from Mexico and other poor countries in Asia that compete most closely with China and have been hit hardest by its cheap labor and manufacturing prowess. A Chinese currency revaluation, economists say, would not help U.S. manufacturers so much as shift U.S. imports to other low-wage countries.
Unlike Japan, China is not -- yet -- competing in major U.S. industries such as automobiles and machine tools, or high technology goods and services. Much of Chinese production comes from U.S. joint ventures -- about a third of its manufactured goods are produced by foreign companies.
China also is, unlike Japan, a huge importer, now the third largest in the world; imported goods amount to 25 percent of its gross domestic product. Its trade surplus is mainly with the United States; it is running trade deficits with most of the world.
Much of China's output consists of local assembly of imported parts. "Most of what they're selling us is still very labor intensive products," said Nicholas Lardy, a China expert at the Institute for International Economics. "Even when they're computers, they've got Intel Pentium processors in them ... So yes, China is selling products into the international market that look fairly sophisticated, but all the sophisticated components of those products they actually import."
James Jarrett, Intel's vice president of world government affairs, said China is the second largest market for personal computers, surpassing Japan, and is now the largest market for mobile phones, all of which use computer chips, making it one of Intel's fastest growing markets.
"That isn't to say that the Chinese are not going to represent very substantial competition to the U.S. in the future," Jarrett said. "The challenge to us is to compete effectively in this changed environment.''
Silicon Valley has its complaints, however: rampant pirating of software, entertainment and other intellectual property, a discriminatory 17 percent tax imposed on semiconductor chips not made and designed in China, and the threat of a new regulation that would prohibit the Chinese government from purchasing software not made in China.
These actions have turned the tech industry's earlier optimism to disillusionment and even alarm.
"We and a lot of other business organizations put out a tremendous amount of political capital to get China approved by Congress to enable them to join the WTO," said Miller, of the high-tech lobbying group. "It was a huge fight and we did it based on a lot of commitments from the Chinese government" to open its markets.
But Miller called recent Chinese actions in high tech all in the wrong direction.
In the meantime, Rick White, chief executive officer of Tech Net, a lobbying group, said the industry wants the Bush administration to press China harder to open its market and stop piracy.
Companies "are perfectly willing to have someone beat up on China, but it probably ought to be the government," White said. "The business community can't do a whole lot against a one-party state. That's a positive, constructive thing for the government to do. That actually helps us sell things into China, helps keep jobs in the United States.''
