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

Coordination, not competition, can help both states 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.

 

Thomas Stewart

Americans spend a good deal of time worrying about China, yet we are not doing enough to develop our own strategies for competing in the globalized world of the 21st century. We have no one speaking up intelligently on the question of domestic competitiveness. Many American businesses now get half their sales or more from overseas; in a sense they have become stateless. The same is true of business schools. They won't advocate for one nation's competitiveness as they used to. Who's left to speak for America? Lou Dobbs and a Congress and an administration that have never demonstrated expertise in foreign economic policy. We cannot blame the Chinese for having a strategy.

The United States continues to take in more capital than it exports, and increasingly it seems that these resources are being used to support current consumption and government deficits rather than being directed into investment. But as the Chinese and Indian economies continue to expand, they will become increasingly attractive destinations for capital--and big enough to absorb a lot of it. What impact will this have on the dollar? Over time, investor economies in the Middle East and Asia may seek to develop an alternative that would enable them to bypass the United States and reduce the use of the dollar as a de facto international currency.

We have a theology that says the expansion of the free market system leads to democracy, and in turn that democracies do not fight each other. I think these premises should be questioned--because I think all premises should always be questioned--but if you accept them, the logical course of action vis-à-vis China is maximum engagement and to encourage China's deeper integration into the global system.

 

David Lipton

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 process has served well in identifying the acquisition of U.S. companies that threatens our national security interests, while avoiding undesirable obstacles to useful investments. [CFIUS (Committee on Foreign Investment in the United States) is an interagency mechanism that evaluates the national security risk of U.S. assets being acquired by foreign firms.] 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 more general need to update 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. But we run the risk of too broad of a definition of "national security" or "critical infrastructure"; we need an evolution in both the case law and procedures, given that the nature of national security concerns is changing as globalization progresses and various new threats emerge.

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. 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. It may be ironic for a Democrat to be advocating this, but we do need some version of the "Ownership Society" to expand the number of Americans with a stake in capital assets.

We need to help U.S. politicians to better explain to their constituents the new and different world we live in, and to lay out what the risks and gains are from the globalized system that has emerged. We also have to be able to make the case for the Sino-American relationship. Adjusting to the rise of China may be strange and difficult, but ultimately China going global is good for us.

 

Robert D. Hormats

We are not engaged in a zero-sum game with China. It is highly unlikely that there is a central grand plan where the Chinese state is coordinating the activities of all state-owned companies. The State Council did not sit down and dictate that Lenovo should purchase IBM's personal computer and laptop unit. Chinese state-owned firms make decisions based on what is good for the company, and managers have a good deal of discretionary authority; the government has far less control than many Americans assume.

This is not like the challenge posed by Japan during the 1970s: with an economy expanding outward yet relatively closed at home to foreign investment and imposing limitations to foreign penetration of its domestic markets. China may be "going global" but it is open for business at home. American businesses can invest in China and can benefit from access to the Chinese domestic market.

One potentially divisive issue is energy. Here the Chinese government has been making decisions that are frequently based on strategic rather than market calculations, a preference for acquiring equity stakes in oil rather than trusting market mechanisms. This is because the Chinese believe that in a crisis international oil companies might not be able to provide deliveries of energy to China.

We also 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.

Energy could be a contentious issue in the Sino-American relationship, but it is also a good prospect for cooperation. Here, a more creative institutional framework, perhaps a high-level cabinet committee, could be created to deal with questions such as the sale of clean coal technology to China as well as ways to ensure supply stability in both oil and natural gas markets. Otherwise, we will have dispute after dispute on energy issues.

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. Beijing is still inclined to participate in the international system. Washington, and specifically the Congress, however, must be more patient; we will need a more sophisticated diplomacy. It will take time for China to follow the path to becoming a stakeholder. Our watchword should be engagement, not containment.

 

Robert Friedman

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.

Essay Types: Essay