Exclusive: Desperate to Trade with the Enemy?

by WILLIAM R. HAWKINS May 3, 2010
A story  in the Wall Street Journal April 28th raised doubts about whether it was possible to reach the Obama administration’s goal of doubling U.S. exports in the next five years. Reporter Sudeep Reddy wrote that “the lack of momentum on demolishing trade barriers and the shift by more American companies toward producing overseas” limited opportunities for exports from American factories. He did not explore what role the policies of foreign governments play in sustaining both obstacles.
For U.S. exports to increase by such a large amount, they must displace rivals in overseas markets. Those rivals are not going to surrender their markets without a fight and they will be supported by their governments who do not want to see jobs lost or industrial capabilities weakened.
At the end of March, the U.S. Trade Representative’s office published its annual report on foreign trade barriers. The chapter on China ran 37 pages, and still did not address the currency manipulation problem which is considered a Treasury issue. Beijing has been practicing “import substitution” to bolster domestic production, especially in automotive parts, semiconductors and telecommunications, all major growth areas. China has long followed a policy of granting access to its market on the basis of local manufacturing and partnership with Chinese firms. To sell in China, one must produce in China, which gets to the point Reddy made in his article, 
The shift by more U.S. companies toward producing goods overseas is one of the factors that makes doubling exports tougher. These firms have built more factories in fast-growing foreign countries to serve emerging markets, so they often supply the goods and services from an overseas arm—not by loading shipping containers in the U.S.
The push to increase exports has opened the door to special interests whose agenda is more about politics than economics. Dan Griswold of the libertarian Cato Institute had an op-ed in The Washington Times April 27 arguing for doing more trade with America’s adversaries to boost exports. He wants sanctions lifted on Cuba, a poor island where the Castro regime controls what little money there is. Lifting sanctions would only benefit the regime and its loyalists, while adding virtually nothing to U.S. balances. Some firms might profit from helping the communist dictatorship, but bad behavior is not a proper policy objective. When Castro lost his Soviet subsidies after the USSR collapsed, his ability to cause trouble was reduced by the lack of resources. Cuba is now being subsidized by other rogue states, but the U.S. should not add to the effort to keep the regime in power.
Griswold also wants to “modernize our regime of export controls. In the name of national security, we make it hard to export ‘dual-use’ (military and civilian) goods to China and other non-democracies, even when such technology is generally available in global markets and poses no real threat to U.S. security.” Griswold is a favorite of the Beijing authorities and often gives exclusive interviews to the state-owned Chinese media. His argument to his American audience is misleading. If China could get comparable “dual use” technology elsewhere, their officials would not be placing such a high priority on ending U.S. export controls. Their officials raise this issue in every meeting. Beijing knows that America leads the world in military technology and they want to get their hands on it, by hook or by crook.
Michelle Van Cleave, who coordinated the hunt for foreign spies for the Director of National Intelligence from 2003 to 2006, told CBS’s “60 Minutes” last February,
Virtually every technology that is on the U.S. control technology list has been targeted at one time or another by the Chinese. Sensors, and optics, and biological and chemical processes. These are the things, information technologies across all the things that we have identified as having inherent military application.
Beijing would like to acquire this information wholesale by legal purchases, and there are firms willing to take Chinese money regardless of the larger consequences.
Defense Secretary Robert Gates has been working to streamline the license process to aid American exporters. The State Department regulates exports of military items while the Commerce Department regulates “dual-use” items. Gates would like one agency (his) to regulate a single, shorter list of controlled items. In a recent speech to a business group, Gates noted how companies seeking to export questionable items have engaged in “forum shopping” by seeking permission from both State and Commerce, hoping to get approval from one to offset disapproval from the other. One such case he cited involved exporting carbon composite materials used to make nuclear missile nose cones. Who could favor that? Somebody did.
Gates’ reforms do not go far enough for the Chinese. A commentary in the Chinese Communist Party newspaper Global Times on April 26th stated,
China complains that US controls on high-tech export stem from its Cold War mentality, which is an important reason for the Sino-US trade imbalance. In the wake of US pressure on the appreciation of the yuan, China responded by requiring the US to loosen its high-tech export controls, which were somewhat loosened in the Bush administration.
The commentary warned readers not to be “overly optimistic” that U.S. reforms would work to Beijing’s advantage.
China should not expect to import high-end products and technologies from the US after the reform. The lack of strategic mutual trust between the US and China and the US strategy of both engaging and hedging China determines that the US will not open up the export of advanced technologies and products to China within a short period.
The US and EU still ban the sale of weapons to China. Many dual-use high-tech products will definitely remain on the control list. After the reform, the US will still have an export control "blacklist" which involves terrorist groups, hostile countries and others. It remains unknown what "others" refers to and whether China will be blacklisted, but the prospects of China coming off the list are hardly optimistic.
One can expect, however, that the Cato Institute will continue to push for the removal of Beijing from any “black list.” The official Cato line is that “China’s ability to become a great military power is hindered by the uncertainty of its continued rapid wealth creation.” Cato has devoted itself to helping China create wealth by advocating that the American market remain open to Chinese exports and that corporations be allowed to move or outsource production from here to there.
Disingenuously, Griswold argued “fewer dollars will be available…to buy U.S. exports” if any restrictions are placed on imports. And he again specifically mentioned China. But the world is awash in dollars. From 2003 to 2008, the U.S. ran a cumulative trade deficit of nearly $4 trillion, over $1 trillion of which was with China. Foreigners have plenty of dollars; they just won’t spend them on U.S. exports. They prefer to advance their own economies by running surpluses and investing the profits. We should seek to do the same.
The largest, most accessible market for American producers is here at home. Even last year in a recession, imports ran nearly $2 trillion and were well over that amount in prior years. If we cannot beat foreign rivals here, we cannot beat them overseas. Taking back the U.S. market should be our immediate objective, something we can do by our own initiative and legislation. National prosperity depends on increasing our own ability to produce. We need to generate jobs and incomes at home; and to outproduce rivals overseas to assure American preeminence. 
FamilySecurityMatters.org Contributing Editor William R. Hawkins is a consultant specializing in international economic and national security issues. He is a former economics professor and Republican Congressional staff member.

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