The Gramercy Round: China Goes Global: Implications for the United States

September 1, 2006 Topic: Economics Regions: Asia Tags: Industry

The Gramercy Round: China Goes Global: Implications for the United States

Mini Teaser: What will China’s growing international economic clout mean for the United States? A roundtable discussion with Harry Harding, Ian Bremmer, Thomas Stewart, David Lipton, Robert D. Hormats, Robert Friedman, Joel Rosenthal, Nader Mousavizadeh, Ruchi

by Author(s): Harry HardingIan BremmerThomas StewartDavid LiptonRobert D. HormatsRobert FriedmanJoel RosenthalNader MousavizadehRuchir SharmaFareed ZakariaNikolas K. Gvosdev

Chaired by Ian Bremmer and Fareed Zakaria, the Gramercy Round convenes over dinner in New York's historic Gramercy Tavern to consider issues which have received insufficient attention from the established foreign policy community but which have a direct impact on the peace and prosperity of the United States. The Round meets to discuss questions with an eye to promoting realistic assessments and innovative approaches for American policy.


Harry Harding

China is increasingly "going global." As part of a state policy to secure markets, technology and resources abroad, Chinese firms--primarily its largest state-owned enterprises--are making direct investments overseas and signing long-term contracts to acquire key natural resources from foreign producers. The numbers are still relatively small (a total of stock of less than $40 billion by the end of 2004) but they are expected to grow rapidly.

China's outbound foreign investment represents the beginning of a second stage in China's strategy of relying on integration with the global economy to promote its economic development. The earlier stage was one of "bringing in"--what the Chinese called kaifang, or "opening." Foreign investors were invited to establish operations in China while Beijing sought to create the international environment that would facilitate its access to foreign markets, capital and technology. This meant China adopted an omnidirectional foreign policy, in which it sought to reduce tensions with virtually every potential trade and investment partner; it also meant Beijing was willing to join existing international institutions (such as the World Bank and the World Trade Organization) and to accept "rules of the game" written primarily by the United States.

Now, Chinese firms are "going out" (a literal translation of the Chinese phrase zou chuqu). 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 (what the Chinese call jiagong or "adding 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.

As China goes global, it may increasingly seek to create new international institutions and norms, rather than simply accepting those already in existence. China is actively engaged in creating new organizations--from a new Asian free trade area (ASEAN+China) to a regional security entity, the Shanghai Cooperation Organization. Significantly, many of these new groupings explicitly exclude the United States. At some point, China may also attempt to define international norms differently than the United States, whether these are technical standards for key manufactured goods or the principles by which the international community is governed.

Finally, 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 a strategic ally of the United States. Nor is China unique; increasingly, India is also "going global" while the emergence of a form of "state capitalism" in Russia raises similar concerns about the intersection of a country's business interests and foreign policies. All of this presents a new set of challenges and opportunities to the United States, which have not yet been adequately identified or addressed.


Ian Bremmer

For the first time in history, China has gone global. Its strategy to secure the commodities, market access and new technologies needed to fuel sustainable economic growth has exposed China to unprecedented levels of political risk in every corner of the world. Its leadership has little experience in managing these risks, or the conflicts with the United States the new policy has generated. For its part, Washington has yet to formulate a coherent strategy to meet the challenges China's foreign investment strategy poses for U.S. interests, or to profit from the opportunities it offers.

At the core of current U.S. policy towards China's global strategy is an admonition that Beijing must act as a "responsible stakeholder" in international politics. In practice, this means China should accept responsibility for key elements of global stability (as defined in Washington). It also means there are red lines China should not cross as it seeks to lock down long-term access to key commodities and a larger share of the global value chain. But Washington has yet to clearly define where these red lines are.

If the United States could magically overcome all diplomatic misunderstanding, communicate clearly what it wants from China, and win unconditional Chinese support for this formulation, what precisely would Washington ask of Beijing? Are Iran, Venezuela, Sudan, Burma and Zimbabwe off limits for Chinese investment? May Chinese firms compete with American companies in West Africa and Latin America? Should China restrict its commercial dealings to developed economies? If so, would the United States welcome/accept Chinese investment in Canadian energy? May Chinese firms offer competitive bids for American firms? Recent history suggests Washington takes a dim view of all these options.

But 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.

Sloganeering will not persuade China to become a responsible stakeholder. But long-term Sino-American cooperation on the development of sustainable trade practices could. When U.S. firms invest in a foreign country, they take a holistic political approach to development there. They try to help improve local school systems, secure labor rights for women, encourage transparency and anti-corruption efforts, and address environmental problems, not because they set a premium on democracy and high-mindedness, but because politically active, better-educated citizens living in communities free of corruption and pollution offer a better environment for sustainable commercial relations.

China's state-owned companies lack experience in establishing such relationships. They 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.

If the United States wants China to adopt this sort of responsible role in the countries in which it is now investing, American companies and the U.S. government should offer their Chinese counterparts the chance to learn from America's experience investing abroad--its successes and its mistakes. This process won't be easy. China envisions itself as America's partner, not its student. But Beijing is well aware that Chinese firms are operating in uncharted foreign waters. If China's leaders had more confidence that Washington understood the need to coordinate their interests abroad, the relationship might grow much more smoothly.

Essay Types: Essay