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Wall Street History
https://www.gofundme.com/s3h2w8
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11/10/2006
The U.S. / China Relationship
As I was catching up on some reading I came across comments
on doing business with China from the Gramercy Round, which
meets from time to time at the Gramercy Tavern in New York to
discuss issues of the day.
Needless to say this is an ongoing hot topic and in light of the
shift in power in Washington is likely to be even more of one in
the months and years ahead.
Following are a few excerpts from the event, as reported in The
National Interest, Sept./Oct. 2006.
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Harry Harding, director, Eurasia Group
“Increasingly, the Chinese want to capture a greater portion of
the ‘value chain’ in the production of goods, no longer
concentrating on providing low-cost labor to assemble products.
“China seems largely intent on what some describe as a
mercantilist, as opposed to a purely market-oriented, strategy.
That is, China is not willing to rely simply on the international
marketplace to gain indirect access to the resources it wishes to
import, but prefers to gain direct access by acquiring those
materials at the source.
“Moreover, since the Chinese government is the majority owner
of many firms, questions are raised not only about unfair trading
practices (for example, if the state provides below-market
financing) but the interrelationship between Chinese business
interests and foreign policy objectives. There are reports, for
example, that the Australian government has become far more
guarded about supporting the U.S. commitment to the security of
Taiwan as a result of growing Chinese investment in that
country. Conversely, there is also the possibility that the Chinese
government will be more supportive of the host governments of
the countries in which it has key investments or contracts,
regardless of those government’s international orientations or
domestic human rights records; China’s energy relationships
with countries like Iran, Burma and Sudan pose these kinds of
concerns .
“China is now in a position to make major investments in the
United States itself. Two kinds of investment may be of
particular concern: strategic and iconic. Strategic investments
are those by which China seeks to acquire, and thereby to
control, critically important resources. Oil is one obvious
example, but I suspect that Chinese attempts to acquire American
high-technology firms will be the more common way in which
this issue gets raised. Iconic investments would involve the
acquisition of companies or other assets of particular symbolic
importance to the United States: imagine a Chinese attempt to
buy a well-known American automobile or equipment
manufacturer, a major shopping center or resort, or an American
film studio.
“The efforts of Japanese firms a decade or so ago to make similar
strategic and iconic investments in the United States were
controversial enough – and Japan was a fellow democracy and
strategic ally of the United States.”
Ian Bremmer, president, Eurasia Group
“(Steady), sustainable Chinese growth is in America’s interest. It
is crucial for the health of the global economy and for the future
of a growing list of U.S. companies. China’s economic
expansion requires that its international investment strategy
succeed.
“Will U.S. policymakers see past protectionist politics if Hugo
Chavez decides to sell a Chinese state-owned company a major
stake in Citgo? If a Chinese automaker bids for a stake in a
struggling General Motors? Or a U.S. airline? Beijing (and
many in the United States) is waiting for Washington to define
which assets the U.S. government considers ‘critical
infrastructure.’
“The United States needs a balanced approach. Washington is
wise to insist that China develop a political system supportive of
long-term stability. But China must know where its investment
policy will bring it into conflict with the United States – and
where it will not .
“China’s state-owned companies are generally intent only on
locking up deals, developing strong relations with local elites and
supplying these elites with what they want – often at the expense
of local stability. Because Chinese companies neglect the need
to establish footholds in local communities, anti-Chinese
sentiment in many of these states is growing.
“The same is true for the Chinese government. When the
tsunami devastated Indonesia and other Southeast Asian states in
2004, the United States and Asian/Pacific democracies
(Australia, Japan and India) were quick to respond with badly
needed help for local populations. China was nowhere to be
found. But the Chinese were not invited to participate. They
should have been .
“Coordination, not competition, can help both (the U.S. and
China) realize their shared goal of better relations. And a clearer
definition from Washington of where, and under what
circumstances, U.S. and Chinese goals conflict can help Beijing
grow its economy in ways that serve the long-term interests of
both.”
David Lipton, managing director, Global Country Risk
Management at Citigroup
“When discussing the economics of foreign investment, we need
to be clear in the terminology that we use. The Chinese are not
engaged in much foreign direct investment in the sense of
building new factories or bringing in fresh investment; they are
engaged in acquisition of existing assets, so the impact on jobs
and output is less than Greenfield FDI.
“The CFIUS [Committee on Foreign Investment in the United
States] process has served well in identifying the acquisition of
U.S. companies that threaten our national security interests,
while avoiding undesirable obstacles to useful investments. In
thinking through the challenge of dealing with prospective
Chinese investments, it might be useful to distinguish three
categories of targets: firms that have control over critical parts of
the infrastructure, assets that secure access to energy and other
raw materials, and firms that enhance Chinese manufacturing
capabilities. In the first, there may be legitimate objects of
concern for CFIUS. In the second, China is unlikely to acquire
enough to materially affect energy market pricing and supply,
and for now there is less rationale for concern over national
security. In the third, acquisitions are likely to be mainly
commercial. [There is a need to reform the CFIUS process.] We
have never defined what constitutes national security – and to
some extent, that lack of definition has served us well, giving us
a certain degree of flexibility .
“The whole debate about China reflects a larger unease with
globalization. The economies of Europe and Japan have not
been growing satisfactorily and the U.S. economy has not been
generating satisfactory job growth. [Ed. some would argue with
that.] The economic rise of China and India has led to downward
pressure on domestic wages and over time may increase the cost
of capital because of the rapid investment needed to support
growth.
“We have to find ways to bring more Americans into the ‘capital
game.’ Politicians will face pressures to react to these forces,
and those pressures will be for protection against low-wage
imports and against capital acquisitions. It will be important to
accept and make the best of globalization despite its adverse by-
products, because consumers will gain so much. It is preferable
to find ways to live with globalization rather than try to impede
it.”
Robert D. Hormats, vice chairman, Goldman Sachs International
“We (need) to put things into perspective. Americans tend to
panic because China seeks to buy a company that produces the
equivalent of 1 percent of the U.S. oil supply and portray this as
a threat to national security. The vastly bigger national security
issue is that the United States continues to rely on imports for 60
percent of its oil needs. That is where our strategic focus should
be.
“There are overlapping interests between Washington and
Beijing. Both countries want a stable supply of oil in global
markets. The task is getting China to think of itself as a global
consumer, who shares interests with other consumers, and to
trust the markets, rather than try to lock up resources using
equity arrangements. And we can help China with clean coal
technology .
“The crux of the matter is this: We need to create a dialogue
about how Beijing plans to use its growing economic and
political power and to encourage it to do so in a way that creates
a more stable and prosperous global economy.
“In the end, I do not think we need to worry very much about
China’s increased global economic presence. But we do need to
see it as a challenge to us to boost our competitive capabilities
and improve our education system.”
Robert Friedman, international editor, Fortune
“In assessing the challenge of a China going global, we are very
far from any sort of threat situation. China is still in an immature
stage in terms of its outward investments, and its track record, so
far, is poor. TCL acquired RCA but still has no profits to show;
Lenovo has seen profits go down by 85 percent after it purchased
IBM’s PC division. Indeed, we should be thankful that Chinese
firms are willing to take bankrupt or troubled U.S. assets off of
our hands; if these are companies in which China can use its
labor advantage to make them more productive, then ‘bring ‘em
on.’ The selling companies benefit by disposing of assets that
are no longer profitable.
“It is not necessarily the smartest strategy for Beijing to try to
lock up natural resources in various parts of the world. China is
opening itself up to all sorts of political risks its policymakers
and business figures have not foreseen in places like Nigeria and
Pakistan, where the Chinese are beginning to encounter a
backlash to their presence. Rebels in the Niger Delta seeking
more autonomy and greater control over their resources have
targeted Chinese oil workers as well as those from Shell, which
suggests that China’s desire for energy security may link it more
closely with the interests of the U.S. and other consuming
countries than with those of revolutionary movements it once
supported.”
Fareed Zakaria, editor, Newsweek International
“There is a great deal of concern about China signing natural
resource contracts with ‘rogue’ states around the world. I think
we need to put this in perspective. I see China less as an evil
mastermind signing deals with rogue states to thwart
Washington’s geopolitical ambitions and more as a scavenger.
The United States and Europe have locked up the choicest oil
suppliers in the world. China is looking for equity stakes
wherever it can find them. If we are concerned about Chinese
involvement with less than desirable regimes, then we need to
find a way to collaborate with them as consumers. I’ve always
thought that a consumers’ cartel of petroleum is a better solution
than to have individual countries try to freelance .
“(Politicians) have to deal with realities. China and India are not
going to stop growing, they are not going to ‘disappear.’ Our
political leaders cannot escape the very clear intersection
between domestic and foreign policy in dealing with the China
challenge. This includes moving beyond talking about
competitiveness to having the political courage to prescribe the
remedies (some of which may be unpleasant in the short run)
needed to heal an ailing American economy.
“China certainly benefits from having low wage workers and
Chinese firms can sometimes turn to the state for assistance, but
Beijing is not responsible for a low savings rate in the United
States, or the costs of our hyper-litigiousness, or our lack of
investment in education and research.”
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Last week I said I was going to do a piece on oil prices and
equity indexes covering the energy sector .I’ll get around to
this next time.
Brian Trumbore
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