After three decades of double-digit growth, China has just passed Japan to become the world's second-largest economy behind only the United States -- and it should surpass us as early as 2030. And when China wins in trade, as it now does every day, it's really only the U.S. which loses. In fact, for the last several years the correlation has been almost dollar for dollar, with America's trade deficit with China in goods and services virtually mirroring China's overall trade surplus.
This should be enough of a clarion call to the administration to demand the integrated all-of-government approach to our trade relations with China that is the only one which is going to address the economic nightmare we find ourselves in with that country. Yet the realities around our trade with China trade continue to worsen -- and become a whole lot more foreboding.
Back in May 2009, in a speech I gave in Qatar, I predicted that as an extension of its ever-growing trading and geopolitical status, China would soon accelerate (and relatively soon complete) its deployment of a full-scale "blue water navy." I felt that once China has this force in place and is able to readily project power throughout the Pacific and as far as the Indian Ocean, there will be, into the long term, regional and global tensions of a magnitude not seen since the Cold War. I also felt there would soon be great pressure on Japan to re-militarize, given that a massive 86% of its oil & gas needs are met by Middle East suppliers by way of the Indian Ocean.
This past April 2010, the New York Times also began to write about China's military's initiative that is now called "far sea defense", which China has publicly confirmed is fully intended to project naval power well beyond the Chinese coast. China has been testing long-range ballistic missiles that could be used against our aircraft carriers, it intends to deploy their own aircraft carrier group 'within a few years', and its naval forces already stand at 275 "principal combatants" -- i.e., major warships -- and more than 60 submarines, including at least two Jin-class submarines with ballistic missile capabilities, with two more under construction, and two Shang-class nuclear-powered attack submarines.
So, what do you do if you suddenly have a 'blue water navy'? Well, you use the bloody thing, which is exactly what China is already doing in the South China Sea, where it's just said it will tolerate no interference in what it now believes to be a "core interest" of its sovereignty, on par with Taiwan and Tibet. And by making the South China Sea sovereignty issue 'non-negotiable', imminent problems now exist between China and each of Vietnam, the Philippines, Indonesia, Malaysia, Singapore and Brunei.
The most recent example of China's aggression -- and of it linking its trade practices with its growing military might - is its blockage of exports of "rare earth" minerals to Japan in retaliation for Japan's detention of a Chinese fishing trawler captain operating in disputed waters of the South China Sea. At the same time, to show it really means business, it even cancelled the China tour of SMAP, the Japanese boy-band.
You might ask what could possibly have more value than a touring Japanese boy-band, well it's those "rare earths", which are not only "rare" but vital to almost everything worldwide that is on the cutting edge of technology, from hybrid cars to wind turbines to Boeing's helicopter blades to the tiny magnets that direct the fins of the bombs being dropped every day in Afghanistan to Raytheon's missile targeting systems to General Dynamics' tank guns.
These 17 elements in the periodic table - these "rare earths" -- are now among the most sought-after materials in modern manufacturing, and China currently supplies a staggering 97% of the world's demand for them. This is because in 1986 Chinese leader Deng Xiaoping made 'mastering' them a priority. And just six years later, Deng was able to say that, "The Middle East has oil, but China [now] has rare earths." With this domination has come global trade friction, massive U.S. job losses and, now, threats to the national and economic security of America, Japan and any other nation which is dependent, as we each are, on access to rare earths for high-end manufacturing.
Every day, China uses a combination of export taxes and controls, which clearly violate WTO rules, and mid-'70s OPEC-like practices to price gouge rare earths in the extreme, to destroy all possible foreign competition in rare earths, and, most insidious, to 'persuade' foreign firms to move their related manufacturing to China before non-Chinese rare earth mines are on stream and its market domination diminishes. Even though China actually holds in-country only 36% of global rare earth reserves, this highly manipulated 'triple play' gives China global supply domination approaching 100%.
When China imposed a ban on exports of rare earth metals to Japan, the world saw firsthand the complete failure of diplomacy-only strategies with China that don't include the threat of retaliation.
We know that U.S. trade officials have been considering for months whether to challenge China's quotas on rare earth exports, just as they have been considering whether to meaningfully challenge China's myriad other trade abuses. And all the while they have been considering - some might call it 'dithering' - China has continued to steal even more American manufacturing jobs, launch even more capital ships, and, lately, threaten one of our staunchest allies, Japan, and in the process our own national security. As Paul Krugman recently inferred, the hype about the adverse consequences of a possible trade war with China in response is so unjustified as to be laughable, for as Krugman actually wrote, "there are worse things than trade conflict" - things like our ongoing jobless recovery and real U.S. unemployment rate of 20%!
With China's trade and real guns pointed at our heads -- and at the heads of a lot of other citizens of the world - what should the U.S. government do in response?
To start, we need a much fuller picture of China's commercial policies, business practices and rule of law, and their relationship to China's military aspirations. We need to 'update' this picture on a real-time basis, with a lot better analysis than attaches to infrequent Congressional hearings held usually on only one issue. To achieve this, the White House should establish, as a complement to the National Security Council's "China Directorate", an Office dedicated to understanding China's commercial activities at all levels. This Office would specifically not make U.S.-China policy of any sort, rather it should be structured to fully understand China's manufacturing and industrial strategies and policies and then communicate its findings and analysis to the NSC's Directorate, State and Defense, and the relevant Committees of Congress.
At the same time, while the USG shouldn't discard single-issue WTO cases, it must better appreciate their often too-narrowly-tailored limitations and too-protracted timeframes. (The only recent exception to this generalization is the brilliantly crafted pending 'clean energy' subsidies case brought by the United Steelworkers.) Instead, the USG should mostly concentrate on the six broad issues that if aggressively pursued would bring great value back to the American-side of U.S.-China trade relations:
1. Mitigate the role of China's centralized approval authority which forces foreign companies to go to the authority for just about anything they do in China, including notably foreign imports into China. In the process, mitigate China's deplorable record on transparency and its dramatic overuse of vague and draconian "State Secret" laws to restrict foreign competition.
2. Seek to balance the de minimus labor and environmental requirements that China places on "State Owned Enterprises", or SOEs, with the responsible ones placed on non-state owned enterprises operating outside China.
3. Go after all of China's illegal subsidies, not just its currency manipulation, while also putting a quick halt to China's persistent theft of America's hard-gained, valuable intellectual property or IP. Many of China's practices provide its companies with obvious "counteravailable subsidies" and they need to be treated as such.
4. Bring what's called a Section 301 case at USTR against China's "Indigenous Innovation Production Accreditation Program.". This Program limits all Chinese central and provincial government procurement to companies that have "indigenous" - or Chinese - "innovation", and embedded in it are China's two so-called 'trade advantages', namely, (i) regulations to block non-Chinese firms from selling their products to Chinese government agencies and (ii) rules that force Western companies to give up technological secrets in exchange for access to China's markets.
5. Establish strong "Committee on Foreign Investment in the United States" (or CFIUS) type reviews of any planned investments by China in our nation's ports and transportation industry, natural resources, financial markets, "Advanced Technical Products" manufacturing, and items deemed by Defense to be "militarily critical". In these instances, however, before a controlling or influencing investment is made, there should be a "national security impact statement" prepared jointly by Commerce and Defense for the Congress and the administration which considers the investment's defense, security and infrastructure implications.
The House just sent an unusually strong signal to China's leaders when it voted overwhelmingly, on September 29, to give the Obama administration expanded authority to impose tariffs on virtually all Chinese imports to the U.S. - more than $300 billion in goods this year alone - in retaliation for the country's refusal to revalue its currency. The bill, H.R. 2378, passed 348 to 79 and included the support of 99 Republicans. Treasury Secretary Geithner (finally!) added his own tough rhetoric in a speech last week at the Brookings Institute. Now, it's time for the Senate to follow through when it returns in November and pass its own version (S. 3134).
Finally, as the rare earths contretemps has made abundantly clear, we must acknowledge with great urgency that China is growing more confident in leveraging its economic power through its growing military might, in order to advance its broad strategic interests and regional expansion objectives. We must conclude that if we don't manage this situation aggressively, this shift will soon begin to seriously adversely impact our allies in the South China Sea region and of course our relationship with China itself. We need to commit to our allies that with their asking, they will have the support of the U.S. to protect their national and economic security.
It's past time for China to see, firsthand, that the U.S. is committed to permanently linking our trade policies with our nation's security interest, global defense responsibilities and foreign relations.
Leo Hindery, Jr. is Chairman of the US Economy/Smart Globalization Initiative at the New America Foundation and a member of the Council on Foreign Relations. Currently an investor in media companies, he is the former CEO of Tele-Communications, Inc. (TCI), Liberty Media and their successor AT&T Broadband. He also serves on the Board of the Huffington Post Investigative Fund.
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