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July 1, 2009
Exclusive: Chinese Economic Warfare
When Congress included “Buy America” language in the $757 billion stimulus package adopted in February, the official Chinese Xinhua news agency called it an act of “protectionist poison.” China has fueled its economic growth on exports and did not want to be shut out of what it felt was its rightful share of American taxpayer’s money. Now, however, China is facing foreign criticism for an even stronger “Buy China” directive in its $580 billion stimulus package.
For governments to “Buy National” (whether it’s the U.S. China, India or the EU) makes impeccable economic sense. The whole rationale for spending such huge sums is to generate economic activity in the domestic economy to end the recession, renew production, and put citizens back to work. Any money that leaks out of the home economy weakens the nation’s recovery. Senators understood this when they voted 65-31 to reject an amendment to strip the Buy America language from the stimulus bill.
The misdirection of funds overseas was one of the reasons the recovery from the much milder 2000 recession was so slow despite the Bush administration’s large stimulus program based on tax cuts. As Business Week noted in April 2003, “the fiscal and monetary stimulus of the past two years has helped global producers as much as U.S. companies.” Business Week returned to this problem with its December 8, 2008 cover story by chief economist Michael Mandel who stated, “The financial crisis was caused, in large part, by U.S. consumers borrowing trillions of dollars from the rest of the world to buy imported cars, clothes, and gasoline, even as jobs slipped overseas. As long as the U.S. is running a big trade deficit and borrowing from abroad, a fundamental cause of the crisis remains.”
On June 18th, Beijing defended its policy in favor of domestic procurement. Foreign Ministry spokesman Qin Gang argued that China had promulgated a government procurement law in 2002 “years before the outbreak of the financial crisis” that had included the principle under attack. The 2002 law established that when carrying out government procurement, domestic goods, construction and services should be used except when the products cannot be obtained in China or cannot be obtained on reasonable commercial terms in China. According to a Xinhua commentary on June 22nd, “Government procurement is not about foreign trade, but about how to best spend the taxpayers' money, so guiding policies cannot constitute protectionism.” This is playing with words when the best way to spend taxpayer money is to boost the home economy against foreign rivals.
Beijing has also dismissed foreign criticism as being illegitimate because China has not signed the international Government Procurement Agreement that is supposed to open bidding on a non-discriminatory basis except where national security is at risk. Only 39 countries have signed the GPA. Of these, 27 are members of the European Union who are trying to promote economic integration within the bloc. Most countries are not willing to give up sovereign control of their fiscal policies. Even the EU carved out sizeable exceptions for public works to exclude those outside the bloc. The Europeans understand the need to create a large domestic economic base if they are to compete with such large nation-states as the United States and China.
The problem is too many American leaders do not understand that the international economy functions on the political-realism model of competition and not the liberal-academic model of cooperation. Consider President Barack Obama’s plan to foster a “partnership” with China on environmental issues, the most dangerous threat facing the American economy.
A new treaty to replace the 1997 Kyoto Protocol is to be drawn up in Copenhagen, Denmark in early December. More than 2,000 delegates from government, business and industry, environmental organizations, and research institutions gathered in Boon June 1-12 to move the negotiations forward under United Nations auspices. The talks continued the battle between China, claiming leadership of the developing world, and Beijing’s rivals in the U.S., Japan and Europe. China’s position is that all the cutbacks in greenhouse gas emissions should be imposed on the “rich” developed countries, and none on China and the other developing states (in particular India, South Africa, Mexico, and Brazil). Indeed, during the Bonn meeting, Chinese officials said that their country would actually be increasing its carbon emissions in future years as it continued to grow. Beijing does not believe for a moment in the “global warming” nonsense, but they are will ruthless exploit the phobia among Western liberals on the issue to gain economic advantage.
While the Bonn conference was meeting, Japan announced its goal of reducing emissions by 15 percent by 2020 from the 2005 level. China attacked the proposal immediately as insufficient. At the June 11th Foreign Ministry press conference, spokesman Qin Gang said Tokyo’s plan “clearly falls short of the urgency of tackling climate change and the common aspiration of the international community.” He then restated Beijing’s position,
“For a successful Copenhagen Conference, we uphold that countries should adhere to the framework of the UNFCCC and the Kyoto Protocol, strictly follow the authorization of the Bali Roadmap and stick to the principle of ‘common but differentiated responsibilities’. Developed countries should take the lead in emissions reduction and set their targets in the second commitment period at the Copenhagen Conference, that is, a 40 percent reduction by 2020 from the 1990 level. Developed countries should also honor their commitment of providing capital and technological transfer as well as support to the capacity building of developing countries.”
China is not concerned about changing the climate, only about changing the balance of economic and political power. Deindustrializing the West and transferring capital and technology to China will accomplish the latter very nicely.
In the United States, the Waxman-Markey American Clean Energy and Security Act (HR 2454) was passed by a narrow (219-212) margin in the House June 26. It aims to reduce alleged global warming pollution by 17 percent in 2020 compared to 2005, a goal not much higher than the Japanese plan. The cost of this effort will be enormous. The Congressional Budget Office says $846 billion will be raised over the next decade in tax revenues from the new carbon “cap and trade” system established under the bill, an approach favored by the UN. The Heritage Foundation estimates that increased tax revenues will amount to $5.7 trillion by 2035, adjusting for inflation. Heritage also predicts that electricity prices will go up by 90 percent and gasoline prices by 74 percent beyond the normal market fluctuations. The negative impact on economic growth and living standards will be tremendous. But for the Chinese this would not be a sufficient burden for the U.S. or other industrialized countries to accept.
A major objection to the Waxman-Markey bill was that the United States was unilaterally handicapping itself with a cap and trade system in the face of foreign rivals who would not adopt such measures, either on their own or as part of the post-Kyoto treaty. To reassure critics in a close floor vote, a provision from the House Ways and Means Committee was added to a managers' package to amend the bill just before the vote. The provision stipulates that as early as 2020, in the absence of a global warming treaty or similar carbon emissions-reducing steps taken by trading partners, the president would have to authorize a border tax (tariff) on those countries' products to offset any competitive advantage gained by continuing to pollute. As the bill puts it, the tariff is “to prevent an increase in greenhouse gas emissions in countries other than the United States as a result of direct and indirect compliance costs incurred under this title.”
In a report released on the day of the House vote, the World Trade Organization gave cautious support to the use of border taxes (tariffs) as envisioned in the Ways and Means amendment. "Rules permit, under certain conditions, the use of border tax adjustments on imported and exported products," said the WTO. "The objective of a border tax adjustment is to level the playing field between taxed domestic industries and untaxed foreign competition by ensuring that internal taxes on products are trade neutral," said the WTO in conjunction with the UN Environment Programme.
This perfectly reasonable approach made the Obama administration uneasy. A statement was issued that used the same tone and language as the president’s earlier concern about the “Buy America” provision. "The administration feels strongly that the enacted bill must be consistent with our international obligations and an open and integrated global economic system," said a White House Statement of Administration Policy. President Obama followed this with a personal statement on June 28th, “At a time when the economy worldwide is still deep in recession and we've seen a significant drop in global trade, 'I think we have to be very careful about sending any protectionist signals out there.'”
An “integrated global economic system” is the naïve dream of classical liberals living in an imagined harmonious world. Such a world has never existed, does not exist now, and is unlikely to exist within the life span of anyone reading this column. Basing policy on a false “idealistic” view of the world is always self-defeating. Yet, it seems to be Obama’s first reaction to any international situation. Protecting America always seems to come in second to his desire to foster a liberal world order.
The bill has the usual presidential waiver, though it says it can be exercised “only in an extraordinary case.” The danger is that President Obama will embrace an unbalanced post-Kyoto treaty, hoping to bring Beijing on board later through the policy of “engagement” on climate change that he has made the centerpiece of his China policy. Yet, there is nothing in the record to support Obama’s approach. Beijing sees the world economy as a battleground across which nations fight to expand their share of the world’s wealth and productive capacity. And the Chinese are correct. At stake is the material base upon which national communities build their prosperity, security and future prospects. It is the duty of the government to protect that economic foundation from being undermined by foreign rivals as part of the state’s general responsibility for national defense.
FamilySecurityMatters.org Contributing Editor William R. Hawkins is a consultant specializing in international economic and national security issues.
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