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.

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.

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.

Joel Rosenthal

In his 2000 campaign for president, Governor Bush never missed an opportunity to define China as a "strategic competitor." This position seemed to be part of an overall foreign policy orientation that claimed the mantle of "realism" and took the practical form of "anything but Clinton."

As we approach 2008, any realist assessment would have to feature two observations. First, the United States and China are in fact competing for global power and influence. The competition at this point in time is most fierce over soft power issues that will determine the rules of the game for the global economy as it evolves for next generation. Second, the United States and China are the biggest beneficiaries of the process of economic integration that is called globalization. With this common interest established, one can see that the competition over rules and norms of global economic integration may turn out to be the main game rather than a sideshow.

All of this means that U.S.-China relations will play out under a complicated constellation of rivalry and strong mutual interest. The challenge and opportunity for policy makers on both sides is to see this moment clearly and to identify and lock in common goals and common interests. As the two biggest winners in the globalization sweepstakes, there is much to gain by engaging in a "concert" approach, based on win-win scenarios.

The United States and China have much to gain by forging a 21st century globalization that will continue to benefit its peoples and help to raise the fortunes of the least well off around the world. Further, Chinese investment in the global economy can be an opportunity to encourage China's emergence as a responsible stakeholder in the global system. This outcome would depend not only on China itself, but also on U.S. leadership that will show the way and insist on human rights and related ethical standards as the basis for a stable and just world system. In the end, the power of principle will prevail. A global system that does not reflect basic human values, justice and fairness will not be sustainable over the long term.

Nader Mousavizadeh

Containment of China is not a realistic option, given Chinese access to global markets and resources, especially in Europe and Latin America--not to mention East Asia. Nor, is it, in all likelihood, an effective one, given the web of relationships China is forming around the world--leveraging diplomacy in trade negotiations and vice versa--a world which is growing increasingly susceptible to multiple sources of power.

Integrating and nurturing China's emerging managerial class should form a central part of our strategy toward China. To the extent that the Chinese are engaged in acquisitions of Western firms, they are doing so in part to gain Western experience, knowledge and expertise, and improve their ability to manage the power and risk of market forces. Given the integrated nature of the global economy, the world as a whole stands to benefit from the development of these skills in China.

From the perspective of the (in many cases U.S.-educated and free-market-oriented) managers of China's emerging global companies, the United States and its most successful companies are models to emulate. They want to compete and win on the global playing field, which is why there is a great risk involved in protectionist measures that could signal a double standard for global M & A.

In potentially overreacting to a perceived threat from China, the United States may undertake policies that will send precisely the wrong message to China's modernizing managerial class and encourage highly damaging (to the United States, as well as the rest of the world) tendencies in China, including nationalism, mercantilism and distrust of the international markets. To the extent that some U.S. politicians define foreign--and in this case, Chinese--acquisitions of U.S. assets as threats for domestic political purposes, they are jeopardizing a relationship--and a larger open global market--from which the United States has gained the most, and from whose weakening it has the most to lose.

Ruchir Sharma

Everyone seems to be convinced that a new superpower is on the verge of overtaking the United States. History, of course, never plays out in purely linear fashion. We've seen this before. In the 1990s it was the small economies of East Asia, the "Asian tigers", which were the wave of the future. Recall that in the 1950s, based on linear projections, Burma and the Philippines were supposed to become the most developed countries of the region. And in the early 1980s the CIA was projecting that the Soviet economy was nearly as large as that of the United States.

Linear projections are not the entire story; they do not encompass the quality of growth or social benefits. It takes a lot more than uninterrupted growth rates to match or even surpass the United States. We don't focus on the very real challenges China faces in making it to the next level of development. I wonder how, in five years time, we are going to evaluate some of these overblown expectations about China.

It is popular to underestimate how well the U.S. economy is doing, and to be worried about the Chinese juggernaut. China is still very dependent on exports to the United States to sustain its economic growth. Domestic demand in China is flat. For a long time to come, China is going to need a healthy, strong and prosperous United States to ensure its own prosperity and development.

Fareed Zakaria

Washington has an unsatisfactory way of conceiving the "China challenge" and for coping with it. The discussion tends to focus on the military growth or on the trade deficit. Those aren't the real issues. The real issue is that of size and scope. China poses a multidimensional challenge to the United States: it possesses an almost limitless amount of inexpensive labor for manufacturing as well as a growing high-technology sector (small as a percentage of the Chinese population but large by any other measure). This means China can combine research and development with labor arbitrage. When combined with China's growing surpluses, this means China is in a position to acquire U.S. assets, particularly in the high-technology sector, and move them offshore. Take one example: a firm like JDS Uniphase. This is a company that does high-tech optical physics. It's about as high up on the value chain as you can get. But cost pressures have made it outsource almost all its research and production to China, which happens to be strong in optical-physics research. The shell of the company remains American, but it is essentially a Chinese technology company. The Chinese are in a position to use their labor advantage to produce products more cheaply, and their research and engineering base to imitate American-developed technology. This is a challenge on a different scale than Japan or Germany ever posed. And it can have national security implications when we are considering dual-use technologies. I know the Ricardian answer to all this. But I do wonder if China's size makes things different.

Another aspect of the problem of scale is that China will not be a rich country per capita when it becomes a rich country in toto. China may not be an advanced industrial power, but when its per capita GDP (real) reaches approximately $4,000 or $5,000, it becomes the world's second largest economy. Is it going to think like a rich country, concerned about global rules and norms, or is it going to see itself as a developing country with its narrow interests dominating? I think the latter. This is a unique situation, where India and China will both cast huge shadows on the global economy but still be poor or middle-income countries.

The United States talks about upholding a broad, liberal, international order; Beijing is concerned with how it can get oil from Sudan back to the mainland. Even domestically, China's interests are not necessarily defined in the same way as American ones. The state is very concerned to use economic growth and prosperity to sustain the existing regime. A U.S. company will try to make profits and not be worried about contributing to "full employment" but this is still very much a concern for China. China's state-owned and state-funded firms operate to full employment rather than return on investment.

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.

In New York, especially in financial and business circles, there is a "thin, wonky consensus" about China reflected in our discussions: promoting engagement with China and facilitating its continued integration, as opposed to a confrontational approach defined in terms of containment and protectionism. This consensus does not necessarily hold when one travels to Washington, particularly when one reaches the Congress. But 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.

Nikolas K. Gvosdev

If war is too important to be left to the generals, China policy may be too important to be left to the politicians. It is unrealistic to expect that the solution to the challenges posed by "China going global" is to convince China to "stay at home", or that tightening energy markets can be corrected by beseeching the Chinese (or Indians for that matter) to forego an American-style, middle-class lifestyle. Yet the temptation for both political parties to succumb to demagoguery about a "China threat" to the United States is very real.

It is important not to overestimate China's progress or to elevate them to the position of America's new superpower rival. But we are approaching the point where we can no longer compartmentalize the Sino-American relationship into neat "economic" and "political" boxes, and we cannot expect that as China begins to accumulate leverage (as Beijing acquires more U.S. debt, for example) that it will refrain from seeking to influence U.S. policy. Either we have to accept the political consequences of the growing economic interdependence between the United States and China, or we have to change our domestic patterns of consumption that create our dependency on foreign sources of energy and on inexpensive consumer goods from Chinese sources.

Barry Lynn made a cogent observation about the U.S.-China relationship in the Winter 2005/06 issue of The National Interest: "The two nations share absolutely no political framework in which to manage a deeply interdependent economic relationship." One of the recurring themes of our discussion was that a course of action that makes perfect sense from a macroeconomic standpoint may at the same time be highly undesirable from a foreign policy perspective. Currently we have an unbalanced relationship, which cannot be sustained indefinitely.

We have a mindset that conflates competition with hostility. In "going global", Beijing is signaling that it intends to compete, for markets, for resources, for influence, not simply in East Asia, but around the world, including in our own backyard of Latin America and in the United States itself. Will we be able to duplicate the success of the post-1895, Anglo-American rapprochement with China in this century? Or will China become the equivalent of Wilhelmine Germany, seeking its place in the sun? Much depends on whether America's politicians are prepared to lead, to make the case for a Sino-American modus vivendi.