The Barack Obama administration released its 2010 National Security Strategy (NSS) on May 27, just after the conclusion of the Strategic & Economic Dialogue (S&ED) meeting with China in Beijing May 24-25. The connection between power and wealth was explicit in both events, but often expressed in contradictory ways. The Obama team clearly wants to embrace the liberal nostrums of classical economics, especially the notion that trade promotes peace. Yet, it cannot ignore the cold fact that these ideas have not been working to the advantage of the U.S. and have actually produced a major rival power at odds with America in every trouble spot around the world.
The NSS states,
A steadily growing global economy means an expanding market for exports of our goods and services. …United States economic leadership now has to adapt to the rising prominence of emerging economies; the growing size, speed, and sophistication of financial markets; the multiplicity of market participants around the globe; and the struggling economies that have so far failed to integrate into the global system.
The problem is that a primary engine for “global” growth has been the transfer of wealth and productive capacity from America to foreign lands through the U.S. trade deficit which over the last decade (1999-2009) sent a net $6 trillion overseas. While American exports increased, imports increased faster, meaning that the net effect on the economy and job opportunities was negative. Yet, the tone of the NSS on international commerce is upbeat as if the numbers had been running the reverse of the actual record.
The U.S. has been “adapting to the rising prominence of emerging economies” through the movement of factories overseas and the transfer of technology. America does not need to “adapt”—which is passive; it needs to compete, which is an active strategy requiring the same coordination between government and industry here as has been practiced by our overseas rivals.
The NSS does talk about desired changes in the world economy. “We must prevent the reemergence of imbalanced growth, with American consumers buying and borrowing, and Asian and other exporting countries selling and accumulating claims,” it says. “For the rest of the world, especially in some emerging market and developing countries, a better balance means placing greater emphasis on increasing domestic demand as the leading driver of growth and opening markets. Those countries will be able to import the capital and technologies needed to sustain the remarkable productivity gains already underway. Rebalancing will provide an opportunity for workers and consumers over time to enjoy the higher standards of living made possible by those gains.” But what will compel these foreign governments and firms to “rebalance” in our favor?
China is developing its domestic economy and raising the living standards of hundreds of millions of its people, but it is still using exports and a trade surplus to power growth. It also has initiatives to guarantee that domestic growth builds on itself in a positive upward spiral. Beijing is pursuing a “win-win” strategy at home and abroad, using both national and foreign markets as the foundation for economic expansion. The Chinese will not voluntarily surrender on either front, but compete vigorously for gains everywhere.
In his opening statement at the S&ED, Treasury Secretary Tim Geithner said, “China's stimulus measures have been successful in supporting growth and shifting its composition towards domestic demand. The challenge will be to reinforce this shift to domestic demand as exceptional stimulus measures are withdrawn and as the rest of the world moves back over time to full employment and growth.” The word “shift” is crucial, as it implies Beijing will back off on pushing exports as domestic demand expands. But why would China do this? President Obama has announced a new campaign to double U.S. exports to boost the American economy, so why would China find exports any less attractive? And why would China “adapt” to the U.S. export strategy by watching its market fall into foreign hands? Beijing will continue to run large trade surpluses as long as it is allowed to do so.
One element of Chinese trade strategy has been to set its exchange rate by fiat at a level that gives its producers a price advantage. The U.S. and Europe have been trying to persuade Beijing to change its currency policy, to no avail. At the S&ED, China said it would continue to conduct its exchange rate policy in its own interests. While in his closing S&ED statement Geithner again argued for Beijing to reform its currency policy, he had to concede, “This is of course China's choice.”
Geithner also claimed that Beijing “has affirmed its commitment to abide by the principles of non-discrimination; market competition; open trade; intellectual property protection; and leaving the terms of technology transfer and production processes to agreement between enterprises.” Any such verbal “affirmation” by Chinese officials will not change a determined strategy that is actively promoting “national champions” to drive foreign rivals out of the China market. Intellectual property theft remains rampant. And leaving issues of technology and production to “agreement between enterprises” is not reassuring given that state-owned or controlled enterprises will be the ones making the deals with American firms in accordance with Beijing’s policies.
The Chinese Communist Party newspaper Global Times focused on Commerce Secretary Gary Locke’s attempt to promote Green technology trade at the S&ED, an important part of Obama’s export strategy. The Beijing leadership media outlet warned,
This is not an ordinary trade offensive. Green technology will be a big driver of economic growth in the future. But previous examples have taught us the lesson that trading market share for technology is not a good deal. China should instead protect its robust and still growing green technology industry, and be careful about US stratagems at this dialogue.
Shifting the diplomatic spotlight from Beijing to Geneva, U.S. ambassador to the World Trade Organization Michael Punke criticized the WTO Secretariat for suggesting in its Trade Policy Review of China that Beijing was opening its market to foreign goods and services. The United States “notes its disagreement with the report's broad assertion that China has maintained its long-term strategy of gradually opening up its economy to international trade and FDI since its Trade Policy Review in 2008,” said Punke on May 31, adding “In the United States’ view, China has become much more focused on developing industrial policy initiatives aimed at helping Chinese enterprises move up the value chain in key industries, and China has demonstrated a highly selective interest in continuing to open its market more fully and fairly to foreign participation.”
The NSS says, “At the center of our efforts is a commitment to renew our economy, which serves as the wellspring of American powerAs we continue to act to ensure that our recovery is broad and sustained, we are also laying the foundation for the long term growth of our economy and competitiveness of our citizens.”
The NSS is stating a truth that applies to all countries. However, while the NSS mouths platitudes, China and other countries are actually implementing trade and industrial policies.
Washington must shape the flow of commerce and investment in its own interest as its rivals have done. It must limit the foreign penetration of the American market to end the trade deficits that have weakened U.S. industry, undermined financial integrity; and destroyed millions of good jobs. With a “firm place to stand” at home, American producers can better compete on global terms, using the leverage of U.S. political leadership to open overseas markets on advantageous terms.
The U.S. must abandon the failed sophistry of “free trade” whose content is undefined and which is intellectually bankrupt. It must manage “fair” trade so that it provides real benefits to American producers, so that growth can be built on income rather than debt. A favorable outcome in world commerce is no more “automatic” than a favorable outcome in world politics. It is always a struggle that requires statesmanship and wise strategy, elements that have been missing from U.S. trade policy for a long time.
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.
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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