China's America problem

China-bashing is all the rage in the U.S. Beijing is pushing back

Jason Reed/Reuters

As the U.S. election looms, President Barack Obama and Republican challenger Mitt Romney have been eager to blame China for America’s economic woes. Both are running ads that paint China as a job-stealer, an intellectual property thief and a currency manipulator. Romney’s campaign has called China a “cheater” in international trade, while Obama has accused Romney of offshoring American manufacturing jobs while running his private equity firm.

The rhetoric is amplified by concerns about the $1.15 trillion worth of U.S. Treasury bills that China holds, ostensibly threatening Washington’s financial independence. “I love Big Bird,” Romney said during the first debate, spawning a torrent of Twitter jokes. “But I’m not going to keep spending money on things to borrow money from China to pay for it.” Beijing hasn’t found the campaign threats nearly as funny. A spokesperson for China’s foreign ministry urged both candidates to “do more things conducive to China-U.S. mutual trust and co-operation,” while China’s official news agency, Xinhua, called the China-bashing an election-year ritual that “leaves Americans with the impression that China is responsible for their country’s decline.”

The war of words highlights how high tensions are running on both sides. That’s because both countries are under intense economic pressure. America is trying to pull out of a crushing recession (and a debt of more than $16 trillion) and put millions back to work. China is desperate to maintain economic growth, the glue holding the country of 1.3 billion together, while in the midst of a difficult leadership transition (tarred by the Bo Xilai corruption scandal). Caught in the middle is a $503-billion trade relationship that’s emerged as a cornerstone of the global economy.

It’s also a relationship fraught with distrust. And, increasingly, it’s not only Americans who are complaining. A recent poll by the Pew Research Center found that 39 per cent of Chinese people view the China-U.S. relationship as one built on co-operation, down dramatically from 68 per cent just two years ago. “The Chinese government and many Chinese believe China has not been treated fairly,” says Jing Li, a history professor at Pittsburgh’s Duquesne University and author of the book China’s America. From China’s perspective, the issues range from barriers facing Chinese companies investing in the U.S. (and Canada) to, ironically, China’s U.S. debt holdings, which many Chinese believe is a sketchy investment in a faltering global power. “Many are saying, ‘We’re not being strong enough in standing up to the U.S.,’ ” Li says.

America’s frustration with China is well-documented. But there is good reason for China to feel unfairly treated, too. And yet, the two countries have become so economically intertwined that any attempt to “fix” the relationship could cause even bigger problems for everyone.

Romney’s oft-repeated promise to label Beijing a currency manipulator on “day one” if elected is among the few examples of consistency he has shown on the campaign trail. There’s little question Beijing keeps its currency, the renminbi, artificially low—by replacing the U.S. dollars paid to Chinese manufacturers with newly printed money, and then investing the dollars back into U.S. Treasury bills. But officially calling China out on this practice is extraordinarily risky, experts say. Any effort to punish China by slapping tariffs on Chinese imports would almost certainly elicit a response from Beijing. “What happens on day two?” asks Yuen Pau Woo, the president of the Asia Pacific Foundation of Canada. “China’s going to hit back with something, or maybe they stop buying U.S. Treasury bills. I don’t think I want to be around on day three.”

China’s low currency makes it difficult for U.S. exporters to compete. But for its part, Beijing says the policy is necessary to maintain political stability. It has allowed the renminbi to rise 25 per cent against the U.S. dollar since 2005, but policy-makers fear that moving to a floating valuation would result in a more dramatic spike, sparking mass layoffs of factory workers and political unrest. As it is, the Communist party is having a hard time keeping a lid on discontent. China’s fast-growing economy has created a sharp divide between rich and poor, not to mention a growing middle class that is increasingly demanding better pay and working conditions. Violent protests, often by factory workers, have become much more common in recent years, with official reports of “mass incidents” doubling to 180,000 annually between 2006 and 2010. Last month, some 5,000 police were called to quell a riot involving 2,000 workers at a factory owned by Taiwan-based Foxconn, which supplies electronics for companies like Apple, Dell and Microsoft.

It’s not only Chinese factory owners who benefit from a weaker currency. Shoppers trawling the aisles at Wal-Mart have a sea of cheap, Chinese-made products to choose from. At the same time, American multinationals have boosted their global competitiveness by tapping China’s cheap labour force. China’s appetite for U.S. Treasury bills has also helped keep America’s borrowing costs low by keeping demand for U.S. debt high. And though it’s all come at a price—American manufacturing jobs—that tends to be menial, low-wage positions that many Americans wouldn’t want.

Apple is the prime example of this arrangement. The iPad-maker is among the world’s most valuable companies, frequently touted as America’s most innovative. But while it boasts that its devices are “designed by Apple in California,” it manufactures nearly all its products in Chinese factories. The work is tedious and the hours long. In 2010, as many as 14 Foxconn employees died after leaping from the roofs of factory buildings. Foxconn responded by stringing the buildings with nets.

Romney claims he wants those jobs back. But it’s not clear whether China actually reaps as big an economic benefit from them as many believe. In the case of the iPhone, a study last year by researchers at the University of California at Berkeley found that Chinese assembly labour accounts for only a tiny fraction—about $10—of the estimated $229 to $275 production cost of each iPhone or iPad. The rest goes to foreign parts suppliers, or to the salaries of Apple’s California-based designers, marketers and executives. In other words, a good portion of the revenues stays in the U.S. This fact isn’t reflected in America’s $282-billion trade deficit with China, which only takes into account the country where the iPhone’s final assembly takes place. With the numbers not always what they seem, Beijing isn’t all that receptive to American complaints that the trade relationship is currently tilted in China’s favour. “The Chinese say, ‘We’ve worked hard and been competitive,’ ” says Li. “So when you say we’ve succeeded because we’ve cheated, or stolen from you, that’s just unfair.”

Meanwhile, On U.S. cable news channels, America’s indebtedness to China is frequently portrayed as not only a fiscal problem, but one of national security. With U.S. Treasury holdings second only to the U.S. Federal Reserve, it’s sometimes argued that Beijing could suddenly sell off its stake, flooding the market and driving up America’s borrowing rates—essentially inflicting a Greece-like crisis on Washington.

So pervasive is this view that the Pentagon recently conducted its own national security investigation. It concluded, however, that the “use of U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States,” according to an internal report obtained by Bloomberg. That’s because any attempt by China to bankrupt America would be akin to strangling its biggest customer. In fact, China’s decision to buy U.S. debt is largely driven not by desire, but by a need to find somewhere to park its massive foreign exchange reserves, with U.S. treasuries still representing one of the deepest and safest options on the planet.

As Americans wring their hands about China’s U.S. debt holdings, what many don’t realize is that the Chinese are doing the same thing. China sees itself as a country that has ascended to become a “first-class power in the world and should be treated as such,” according to a recent Brookings Institution report co-written by Wang Jisi, the dean of the School of International Studies at Peking University and a foreign policy adviser to China’s foreign ministry. America, by contrast, is viewed as a superpower in decline, beset by “financial disorder, [an] alarming deficit and unemployment rate, slow economic recovery and domestic political polarization.” Hence, the idea of sinking more than $1 trillion of China’s savings into U.S. debt instruments strikes many Chinese as foolhardy. “I think it’s a question about whether China is too exposed,” says Pitman Potter, a law professor at the University of British Columbia, whose research focuses on China and Taiwan. “The official view from the Chinese government is the Americans need to get their debt in order. The Chinese are really averse to debt, generally.”

Nor are they fans of the cavalier way U.S. lawmakers have approached the problem. During last year’s congressional standoff over raising the debt ceiling, an article distributed by Xinhua called the political brinkmanship “dangerously irresponsible” and recommended that Washington “revisit the time-tested common sense that one should live within one’s means.” Such nervousness is part of the reason China has pulled back on its buying of U.S. debt in recent years, although so far the slack has been taken up by other countries, including Japan.

The frequent obstacles Chinese companies face when they try to buy U.S. assets—again because of national security questions—is another sore point for Beijing. That includes China National Offshore Oil Corporation (CNOOC)’s bid in 2005 for Unocal, a U.S. energy company. The $18.5-billion deal was ultimately scrapped because of fears that it was a threat to America’s energy security. More recently, a congressional report warned against awarding government telecom contracts to China’s Huawei Technologies because of cybersecurity concerns. (Both companies are also facing headwinds in Canada. CNOOC’s $15.1-billion bid for Nexen, an oil sands producer, is currently under review by Ottawa. And it’s not clear whether the federal government would have allowed Huawei to bid on a contract to build a secure government communications network.)

Though Chinese firms’ state backing and an overall lack of transparency are a legitimate cause of concern, Woo says China has reason to feel frustrated, given that it is criticized for keeping its currency low on the one hand, but faces a tough slog when trying to take advantage of any increase in purchasing power by buying foreign assets. “You can’t have it both ways,” he says.

Bridging such deep divides won’t be easy. And the job is made tougher each time a U.S. finger is pointed to score political points. “The issues are real, but the rhetoric is unfortunate,” says Elizabeth Economy, the director of Asia studies at the New York-based Council on Foreign Relations. “What we want to avoid is what’s been happening with the Philippines, Vietnam and Japan. We don’t want to get to a point where China decides it’s in its interest to use economic coercion to get what it wants from the U.S. That would represent a whole new level of headaches for us.” And, odds are, the rest of the world, too.