Familiar Trade Fears, but Bigger Risks

If rising tensions in Washington over China’s trade practices and economic expansion sound familiar, there’s a good reason: The same issues were raised about Japan two decades ago.

Although there are similarities in U.S. economic relations with China now and Japan then, crucial differences make today’s situation far more complicated and risky, policymakers and analysts say.

Like two decades ago, today’s conflicts are emerging at a time of widespread uneasiness about America’s competitiveness, now triggered by the rise of low-cost competitors in China and India and technological advances that have made it easier to move capital and jobs across borders.

China, like Japan before, is accused of keeping its currency artificially low to boost exports, sending the U.S. trade deficit to record levels and accelerating the loss of high-paying manufacturing jobs.

But there is one key difference: The United States today is trying to build an economic partnership with a Communist country that, unlike Japan, harbors superpower ambitions and has the potential to become an economic and military rival in the next 50 years, according to analysts.

China is clearly “the major emerging power in the 21st century,” said Richard Ellings, president of the National Bureau of Asian Research, a Seattle think tank.

By contrast, even during the very worst periods of Japan-bashing, there was never a serious threat to the post-World War II military alliance between the U.S. and Japan.

Another significant difference: the rise in globalization. Two decades ago, the U.S. economy was far less tied to its trade partners. With the exception of large U.S. multinationals such as Boeing Co. and Procter & Gamble Co., most U.S. firms and investors were focused on the domestic market. Japanese cars, stereos and other products were increasingly popular in the U.S., but U.S. firms faced steep barriers to investing or doing business in Japan.

Ties between the U.S. and China are far more extensive. Chinese immigrants have played a key role in the American high-tech boom and have served as a bridge between the two countries. Trade between the U.S. and China has grown thirtyfold in the last decade, propelled by global retailers and producers such as Wal-Mart Stores Inc., shifting production from other low-cost countries to China.

China has become the world’s top destination for foreign funds. Last year, that country received nearly $61 billion in foreign investment and more than half of that country’s exports are from factories owned by foreigners.

China has also become the fastest-growing market for many U.S. industries such as high-tech and natural resource extraction.

Low-cost goods from China keep U.S. inflation down, while Chinese buying of U.S. Treasury securities helps keep American mortgage rates down. If China’s growth were to slow significantly, it could trigger a global slowdown and major disruptions in key U.S. industries dependent on Chinese imports or components.

“Until recently, we were not very dependent on China at all,” said Edward Gresser, a former Clinton administration trade official and analyst with the Progressive Policy Institute, a Democratic think tank. “Now, we’re relying heavily on China as a source of finance for our growth and our budget deficit.”

With so much at stake in its dealings with China, the United States must walk a tightrope -- encouraging China to move forward with economic and political reforms without triggering a costly confrontation.

Striking that balance won’t be easy. China has made no secret of its desires to become a major player in key strategic industries such as semiconductors or defense, which would directly challenge the leadership of American firms.

Meanwhile, China remains an authoritarian, one-party state whose legitimacy depends on delivering jobs and economic growth. Those who paint China as an economic goliath underestimate the serious challenges that its leadership faces, experts said. Double-digit economic growth has raised millions out of poverty, but it has also put huge strains on water and energy resources and created new tensions between the rich and poor.

Push too hard, experts warn, and the country’s stability could be at risk.

The rising tensions over China were evident Wednesday as American critics of the Asian nation said at a congressional hearing that a bid by China’s state-run CNOOC Ltd. to buy U.S. oil producer Unocal Corp. was part of an effort to severely limit U.S. influence in Asia and overtake America economically and politically.

Today’s worries about China, however, haven’t generated the anti-Asian ethnic or racial overtones seen in the 1970s and 1980s. Then, a surge in Japanese auto imports and Japanese purchases of trophy real estate triggered a nationalistic backlash that at times boiled over in violence. In 1982, a 27-year old Chinese American was beaten to death by two Detroit autoworkers who were angry about job losses and thought he was Japanese.

Americans’ fears of Japan turned out to be unfounded. Japan today is mired in a two-decade-long economic slump. Although Japanese brands such as Sony and Toyota are world leaders, predictions of Japan surpassing the United States in semiconductors or other critical industries never came to pass.

Americans today have far more exposure to Asians and are more savvy about the effect of globalization on the U.S. economy. Asian-owned companies have set up shop across the U.S. and employ thousands of American workers. Chinese and other Asians -- such as basketball player Yao Ming of the Houston Rockets, and action film star Jackie Chan -- are popular sports or entertainment figures. Sushi and kung pao chicken are familiar fare in even the most remote American towns.

China’s investments in the U.S. have been relatively small and low-profile, at least until the recent bids by Chinese firms for Unocal and Maytag Corp.

But Gerald Curtis, an expert on Japan at Columbia University, fears that the rising emotions in Washington and China’s relative inexperience in global diplomacy could escalate the trade conflicts.

“This is brand new stuff for China, and the danger of their overreacting, misinterpreting or drawing the worst possible conclusions about American attitudes toward China are very real,” he said.

The mood on Capitol Hill has strong echoes to the late 1980s and early 1990s, when Congress was pushing for curbs on Japanese auto imports and semiconductors. Faced with a an overall trade deficit running at an annual rate of $681.6 billion and widespread job anxieties, Congress has put China in its bull’s-eye. More than 20 bills are pending that would impose penalties on China for alleged trade infractions.

When the U.S. was battling Japan two decades ago, some of the biggest proponents of tough action were the Big Three automakers and U.S. semiconductor firms that were frozen out of the Japanese market. Today, those industries depend on China for sales and imports.

The push in Washington for tougher action against China is led by small and medium-size manufacturers whose sales and production are primarily in the United States.

The Bush administration, like the Clinton administration, has sought to avoid confrontation with China over economic issues, contending that diplomacy is the most effective way to persuade that government to reform its economy.

The administration also insists it has gotten tough when China has flouted the rules, citing its decision to file a WTO case against China alleging discrimination against foreign semiconductor firms.

But critics argue that the U.S. has not pushed hard enough, in part because of the pressure from influential U.S. multinationals and Wall Street financiers.

Sen. Charles E. Schumer (D-N.Y.), one of the Senate’s toughest critics of China, said he learned one important lesson from his battles with Japan: threats work when diplomacy fails.

In the early 1990s, Schumer, unhappy that Japan maintained steep barriers to foreign banks, proposed legislation to keep Japanese financial firms out of the U.S. market. Wall Street issued dire warnings that Japan would retaliate and quit buying U.S. Treasury bonds, sending the U.S. economy into the tank.

But Japan eventually agreed to open its market further to foreign financial institutions and the threats of punitive action were dropped.

Now Schumer is advocating a similar tough love strategy with China.

He said China -- which pegs its currency to the dollar -- undervalues the yuan by as much a 40% to give its exporters an extra boost.

Schumer has co-sponsored a bill that would impose a 27.5% tariff on Chinese goods if that government didn’t move toward a flexible currency within six months. He recently agreed to postpone the vote on that bill until next fall, after being assured by the White House that China was on the verge of revising its currency regime.

“You’ve got to come at them with more than words,” he said.