Our Incoherent China Policy (Fall Preview)

Our Incoherent China Policy

The proposed Trans-Pacific Partnership is bad economics, and even worse as containment of China.

September 21, 2015

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This article appears in the Fall 2015 issue of The American Prospect magazine. Subscribe here.

In the summer of 2009, I was invited with a few other policy analysts to the White House for a briefing on the newly proposed Trans Pacific Partnership (TPP). At that time, the potential participants included Canada, Mexico, Peru, Chile, New Zealand, Australia, Singapore, Brunei, Malaysia, Vietnam, and, of course, the United States. Whether or not Japan would be invited to join had not yet been decided.

Noting that the United States already had free trade agreements with Canada, Mexico, Peru, Chile, Australia, and Singapore, I asked why we needed an agreement that added only the tiny economies of New Zealand, Brunei, Malaysia, and Vietnam. The reply from a member of the National Security Council staff was that it would reassure our Asian allies that America was back; that this agreement would be the economic complement to the increased military deployments of the recently announced “Pivot to Asia” foreign policy, obviously aimed at counterbalancing the spread of Chinese power and influence. Along with health care and a possible treaty on nuclear weapons with Iran, TPP would be a major part of the president’s hoped-for legacy.

My first reaction was surprise. How could America come back to Asia? As far as I could tell, it had never left. The U.S. Seventh Fleet was in its 66th year of patrolling the western Pacific and keeping the seas safe for the mushrooming trade that was making the region rich. The United States still maintained almost 100,000 troops in Japan, South Korea, and Australia, and on the seas to maintain stability. Trade was burgeoning. The enormous U.S. trade deficit with Asia continued to grow as Americans bought everything Asian, and U.S. corporations transferred much of their production and employment, along with most of their technology, to Asia. Thus a policy aimed at correcting an absence seemed to be based on a false assumption.

Of course, this would not be the first time that false assumptions had guided U.S. policy (Vietnam War, Iraq War, War on Drugs, etc.). But it seemed to be a U.S. habit when it came to proposing and negotiating international trade agreements. That was due largely to the fact that after World War II, the U.S. foreign policy elite tightly embraced the classical free-trade catechism. As Britain’s 19th-century free-trade crusader Richard Cobden had put it, “Free trade is God’s diplomacy.”

Trade was taken to be mutually beneficial for the countries involved, leading to prosperity, democratization, and ultimately to peace among nations. It was assumed that even unilateral free trade, in which Country A opens its markets while Country B does not, is still a win-win proposition, because the more open country would get cheaper imports and the closed nation was just harming itself. The possibility of strategic use of trade by nations, an insight for which Paul Krugman won the Nobel, was not part of the story.

Thus it was natural to conclude that concessions on trade, such as unilateral market opening, could yield geopolitical objectives with no negative economic consequences. For example, the United States might want Japan to stop manipulating its currency, but it also might want Japan to vote with it on something in the UN. Washington has invariably yielded on the economic issue in order to prevail on the geopolitical issue. Geopolitics trumped economics. The result has been a long series of international trade agreements that tended to disadvantage the United States.

Two recent examples are the deal under which the United States agreed to bring China into the World Trade Organization (WTO) in 2001, and the U.S.-Korea Free Trade Agreement of 2012. In the case of China, U.S. strategic thinking was heavily influenced by the notion that by adopting capitalism (or what the Chinese called socialism with Chinese characteristics), China would more and more become like America. As former Deputy Secretary of State Robert Zoellick noted, we wanted to encourage China to become a “responsible stakeholder in the global system.”

It was widely assumed that globalization would make China and other developing countries rich; that by being rich they would become democratic; and that by being democratic, they would be at peace because democracies tended not to fight each other (or so we told ourselves). Thus, admitting China to the WTO was seen primarily as a way of encouraging the nation’s democratization, but there was also thought to be an economic bonus. Because China’s tariffs were much higher than America’s, it was thought by most economists (who ignored the fact that Japan’s market had remained closed despite its low tariffs) that U.S. exports would gain proportionately more than China’s as a result of trade liberalization through Chinese admission to the WTO. Most of the econometric models projected that America’s 2001 trade deficit of $83 billion with China would shrink dramatically as a result of Chinese tariff reductions providing better access for U.S. goods and services to the Chinese market.

In fact, however, the deficit doubled in three years and by now has redoubled. At the same time, China appears to have become less, rather than more, democratic. The same pattern can be found in the case of the U.S.-Korea Free Trade Agreement of 2012. That deal was mainly aimed at strengthening the U.S.-Korean alliance and has been used as a kind of template for the TPP negotiations. In both cases, a trade deal was done for primarily geopolitical reasons and produced neither the desired political nor economic results—largely because both the geopolitical and economic assumptions were mostly wrong.

The TPP falls very much into this tradition. The proposed agreement has been widely debunked in this magazine and elsewhere as dubious economics, a deal crafted by and for corporate elites [see box]. However, the administration has sidestepped the economic criticisms by insisting that the TPP is essential geopolitics—a necessary counterweight to the rise of China. But if anything, the TPP is even less plausible as a China-containment strategy.


NO COMPREHENSIVE ECONOMIC analysis preceded the launching of the negotiations to establish the TPP. No economic judgments were made as to which countries were most suited to join a new agreement that seemed to be aimed at something closer to an economic union than a mere free trade agreement. The U.S. government has made no estimates of the gains or losses to which the deal might give rise.

Although there are no official estimates of the likely economic impact of the TPP, a number of private analysts, such as the center-right Peter G. Peterson Institute for International Economics and the center-left Center for Economic and Policy Research (CEPR), have done estimates. They all tend to conclude that the one-time U.S. gains by 2025 would be on the order of .1 percent to 3 percent of GDP. This is, of course, in the range of a rounding error. Even if the forecast gains are achieved, they will be accrue mainly to the top end of the income distribution, with the average working person actually taking a loss.

The main reason for this is that the TPP includes many provisions that may be good for footloose global companies but not necessarily for real people. Provisions for strong intellectual property protection could result in delayed introduction of generic drugs and in higher drug prices worldwide. Evergreening of patents through use of small technology upgrades could lock in large corporate profits for many years while preventing real innovation by small, new companies.

The TPP does make a stab at stronger labor and environmental standards, but these have long proven notoriously difficult to enforce. On the other hand, provisions for the easing of regulations on foreign investment and Internet traffic, protection of corporations from losses resulting from changes in government policies, and continued approval of inducement subsidies for investment could well result in further offshoring of American investment, jobs, and technology.

Perhaps the major reason why the TPP will not produce even the minor gains for the United States that are forecast by the models is the impact of exchange rates. The models are all based on the assumption of fixed exchange rates. But in the real world, exchange rates are not fixed. Indeed, as I write, China has just devalued its currency by about 3 percent amid slowing growth and falling stock markets. When currencies can move 3 percent in just a day, or 2 percent to 30 percent over a period of several months, negotiation of tariffs, subsidy rules, and market-opening measures loses much of its meaning.

Because the TPP will not change this situation, it almost automatically cannot be good for the U.S. economy or the average American. Indeed, it is important to underline that no one in the Asian-Pacific or Latin American regions believes the TPP will in any significant way change the structure of regional trade that has long resulted in huge American trade deficits and lost American jobs, as the United States has played the role of global consumer of last resort.

Imaginechina via AP Images

An exhibitor talks with a visitor about emigration to the United States next to Chinese and U.S. national flags during 13th Shanghai Overseas Property and Investment Immigration Show in Shanghai, China, March 20, 2015. 

In view of this, it has been extremely disappointing to hear President Obama demonstrate complete misunderstanding of the realities of global trade and of the TPP. For instance, he has asked rhetorically in his speeches how anyone could be opposed to opening the Japanese auto market to enable Fords and Chevys to roll on Japanese roads. The very question showed his ignorance of the fact that nothing on the TPP agenda alters the Japanese manufacturers’ control of Japanese dealerships, which is the main mechanism of closure of the Japanese auto market. For example, even though the Koreans are the low-cost auto producers and have been taking market share from the Japanese in the European, Chinese, and U.S. markets, they have completely withdrawn from trying to sell in Japan. Since that is not being discussed, the TPP cannot put American or Korean or European or any other mass-market cars on Japanese roads.

Economically, the TPP is not going to be good for America because many of its fundamental assumptions are simply at odds with reality.


AS PRESIDENT BARACK OBAMA has worked to sell the agreement, he has declared that Congress must ratify the TPP, lest China write the trade rules of the future. Yet China already has concluded free trade agreements with Singapore, Australia, Chile, New Zealand, Pakistan, Peru, Costa Rica, Iceland, Switzerland, and Korea. It is currently negotiating free trade agreements with the Gulf Cooperation Council, Norway, and Sri Lanka, and is discussing a trilateral deal with Korea and Japan. Beijing is also leading negotiation of the Regional Comprehensive Economic Partnership (RCEP), which includes the ten member states of ASEAN (Singapore, Philippines, Laos, Cambodia, Indonesia, Malaysia, Thailand, Myanmar, Brunei, and Vietnam), plus Australia, New Zealand, China, India, Japan, and South Korea.

Most of these are also part of the TTP. Countries are understandably playing China and America against each other and hedging their bets on both sides. Consider Singapore. Even as it works to conclude the TPP and warns America of the danger of withdrawal from Asia, it is negotiating assiduously to complete the China-led RCEP.

So it’s implausible that TPP would limit or retard the expansion of Chinese influence and power in any way. Conversely, the notion that America will find itself excluded from Asia if it does not adopt the TPP is ridiculous.

Singapore’s Foreign Minister K. Shanmugam, for instance, recently warned that failure to adopt the TPP would result in the United States being “crowded out” from the region. Surely, Shanmugam was not suggesting that Singapore would rescind its defense arrangements with the U.S. Navy, or that Japan would expel the U.S. Seventh Fleet, or that Apple would be forced to withdraw the billions of dollars it has stashed in Singapore if Washington does not ratify the TPP. Nor will adoption of the TPP stop any of the Chinese-led deals from going forward.

Thus, to some extent, China will inevitably be writing some of the future rules of world trade. It won’t dictate all the rules, but it will surely have a major role in their writing. But that is only the beginning of China’s increasing global influence, and the TTP does nothing to counter the other elements. China is on a massive campaign to barter investment in third-world infrastructure projects for access to the raw materials that its economy needs. This offensive naturally yields diplomatic influence.

In late July, The New York Times reported on vast infrastructure and oil-exploration projects in Ecuador, based on loans from Chinese government institutions and state-owned enterprises that are to be repaid from claims on Ecuadoran oil and natural resources. According to the Times, China takes about 90 percent of Ecuadoran oil and requires that contracts for construction and even for labor be funneled to Chinese firms—something the United States cannot do under international rules because it is classed as a developed country, while China retains the developing country label. Similar deals are ongoing throughout Africa.

The money for this Chinese geo-economic offensive comes from China’s nearly $4 trillion of foreign-exchange reserves—and these come primarily from the enormous trade surpluses that China has racked up with the United States over the past 25 years. This deficit was not foreordained. Consider just one emblematic example—the transfer of General Electric’s avionics (aircraft electronics) business to China.

On January 18, 2011, the same day Chinese President Hu Jintao arrived in Washington for a state visit, GE Chairman and CEO Jeff Immelt announced a new joint venture between GE’s avionics business and Avic, a Chinese state-owned aviation-products maker, which did not previously produce avionics of any significance. Under the announced deal, Immelt, who also served at the time as chairman of Obama’s Council on Jobs and Competitiveness, said GE would transfer its leading-edge avionics technology to Avic and move the manufacture of its products from the United States to China. He emphasized that the arrangement had been cleared by the Departments of Defense and Commerce, presumably in keeping with a statement in a joint press conference with Hu that America would help China develop its own indigenous commercial jetliner.

AP Photo/Teresa Crawford

U.S. Trade Representative Michael Froman is seen at a news conference in Chicago on December 18, 2014, at the close of the U.S.-China Joint Commission on Commerce and Trade meeting. 

The important points to keep in mind here are that avionics rely on advanced technology that China did not yet possess. Production of avionics is not labor-intensive, and China was therefore not a low-cost location for manufacturing. Indeed, the low-cost producing country was the United States. So, in effect, GE was moving its avionics production to a higher-cost location. All the laws of economics and free trade seemed to dictate that China should import its avionics from America. Yet GE was actually setting up to transfer production and jobs to China and eventually to export avionics from China to America. And this was being done by the guy who chaired the president’s Council on Jobs and Competitiveness.

What was going on here? Well, China has a big, rapidly growing market for aircraft and it has made no bones about pursuing a policy of developing its own, homegrown aircraft and avionics capabilities. This is strategic trade par excellence. China was doing here what it had done in most other industries—making sales to China contingent on transferring technology and manufacturing to China. Immelt may be a major-league CEO in Washington, but here he was in Beijing kowtowing, just like all the other peons.

Most incredible of all was the fact that he was being aided in his kowtow by the U.S. government. The president kept him on as chair of the Council on Jobs and Competitiveness, even as he transferred jobs to China. Amazing as it may seem, this did not cause a ripple in U.S. political or media circles. There were no calls for a congressional investigation and no New York Times or Wall Street Journal editorials pointing out the contradictions and insisting on the conduct of truly reciprocal free trade with China.

These didn’t appear because it all seemed so ordinary. It wasn’t just the policy of Obama. A whole succession of presidents starting with Ronald Reagan had accepted and even promoted a non-reciprocal and hugely unbalanced trade relationship with China, urging and even indirectly subsidizing U.S. companies to invest in China and to move their production and jobs there.

While America’s leaders seemed to have no concern for the structure of their economy and what it produced, Beijing steadfastly pursued a comprehensive industrial-development policy that aimed to make China self-sufficient in most major industries and technologies. Its Internet whizzes systematically hacked the databases of the U.S. government and of the major American industrial and technology companies. It was no accident that the Chinese stealth fighter unveiled during Defense Secretary Robert Gates’s January 2011 visit looked very much like America’s F-22 Raptor. In conjunction with this thrust for industrial and technological leadership, China also sought to achieve control of key minerals and natural-resource reserves around the globe. This single-minded drive had now brought China to the status of the world’s second-largest economy—one that was inevitably a major trade and investment partner with most of the rest of the world.


CHINA'S MANIPULATION of its currency, in violation of the norm that markets should set currency values, is very much part of this strategy. Washington criticizes the practice, yet refuses to use serious leverage to counter it.

I was present at the Asian-Pacific Economic Cooperation (APEC) heads-of-state meeting in Honolulu in November 2011, when Obama warned in his speech to a group of APEC-country CEOs that China had to stop following its policy of intervening in the international currency markets to keep the Yuan undervalued versus the U.S. dollar. Of course, China had been following this policy for many of the preceding 20 years. Nor was the policy unique to China. Japan and the Asian Tigers (South Korea, Taiwan, Singapore) had invented it and were still following it. By keeping their exports inexpensive while causing their imports to be overpriced, this approach had given them large structural trade surpluses with the United States and big dollar reserves.

Along with the strategic trade policies and practices noted above, this was the major source of the $3.5 trillion treasure chest backing the loans, and of the investments China was using to gain broad global influence and control of critical resources. Of key importance in this regard was and is the fact that the $3.5 trillion is not just the net sum of China’s dollar reserves. It is the strategic investment fund of the Chinese government and of the Chinese Communist Party. By contrast, in countries such as Japan, Germany, and Korea that also have large dollar reserves, the investment of these funds is directed at maximum financial returns. But in China, the treasure chest often stands behind government-directed lending and investment aimed at achieving the strategic objectives of central authorities. China is the major investor in some of the world’s riskiest markets. According to The New York Times, it accounts for 57 percent of all foreign investment in Ecuador, 70 percent in Sierra Leone, 82 percent in Zimbabwe, 79 percent in Afghanistan, and 38 percent in Iraq. Not surprisingly, these are places with a lot of oil and key minerals.

In short, China has a comprehensive national strategy with clear objectives, a coordinated team aimed at achieving the objectives, and the money to pay for whatever it takes to achieve success.


OBAMA'S PLEA THAT HE must have the TPP in order to contain China is embarrassingly superficial as well as disingenuous. If Obama were serious, he would challenge China’s policy of making market access contingent on technology and manufacturing transfers. He would have blocked Jeff Immelt’s kowtow by directing the departments of Commerce and Defense to withhold any authorization for transfer of militarily useful technology to China. He would have removed Immelt from the chairmanship of the Jobs and Competitiveness Council. Imposing a China-like “you have to make it here to sell it here” rule on Chinese sales in the U.S. market would have done far more to contain China and to change the structure of trade in the whole Asia-Pacific region than any TPP.


AP Photo/Andy Wong

U.S. President Barack Obama puts an earphone as he prepares for a joint press conference with Chinese President Xi Jinping at the Great Hall of the People in Beijing Wednesday, November 12, 2014. 

Or, alternatively, inviting China to join the TPP and thus be subject to its much-touted (by the Obama administration) “high standard” rules would at least have put China on the same playing field as the United States. But making a deal with Japan and four minor economies in the Asia-Pacific region will not affect China or its trading relationships at all.

Let’s face it: The TPP partners are not significant enough or geographically well-placed enough for there to be any hope of the deal having an impact on China. While it is being labeled Trans-Pacific, it would be more accurate to call the agreement Trans-American. Of the 750 million people who would be covered by the arrangement, about 500 million are in Canada, the United States, Mexico, Peru, and Chile. Of the remaining 250 million, about 125 million are in Japan, which was not an original TPP country and only came into the deal later for its own domestic political reasons, and for the geopolitical purpose of keeping the U.S. happy in the context of the U.S. unilateral commitment to defend Japan. So the number of people in the Asia-Pacific region truly committed to the purposes of the TPP is about 125 million, of whom about 100 million are in Vietnam. This is just not a consortium of players that is going to have any impact on China.

The one thing that might have been done in the TPP negotiations that, while not affecting China too much directly, would have had the potential to change the whole structure of trade and production in the region would have been to ban currency manipulation among the members and to call upon the International Monetary Fund to enforce its rules against such manipulation globally. Based on Obama’s statement at the Honolulu APEC meetings, one might have thought that his administration would strongly support such an approach. But it didn’t.

Each year Congress requires the secretary of the Treasury to indicate which countries are engaging in currency manipulation. Although it was common knowledge that China was often manipulating, the Obama Treasury steadfastly refused to report that to Congress. Moreover, when setting the agenda for the TPP, the Obama administration again ducked even putting currency manipulation on the agenda.

It’s a shame, really. Obama has done some very important things—the Affordable Care Act, economic recovery, withdrawal from Afghanistan and Iraq, progress on civil rights and the environment. But on trade, globalization, competitiveness, and dealing with China, Obama has continued the perverse policies of his predecessors. To propose the TPP as a remedy, something that will affect the U.S. economy negatively while having no effect on China, is worse than embarrassing. It’s delusional.


WHAT SHOULD A SERIOUS China policy be? It depends on our perceptions of America’s national interests. One serious approach would be to back off. That sounds surprising, but think about it for a moment. Does China represent a direct threat to the United States in any way? Is China really going to invade the United States? Consider that the U.S. Navy actively patrols the coast of China and sends surveillance aircraft along its borders every day. How would we Americans react if Chinese aircraft carrier task forces were actively patrolling our Pacific coast around Los Angeles and San Francisco?

Take the Senkaku Islands, to which Japan and China both make claims but which the United States has promised to defend on behalf of Japan. Do we Americans really want to go to war with China over islands that have absolutely no significance to us? In the 19th and early 20th centuries, when the United States was a rising power, Great Britain faced a choice. Should it try to maintain supremacy in the Caribbean Sea and western Atlantic Ocean, or should it back off and let the Americans maintain stability in the region? The Brits decided to yield and what might have been a dangerous rivalry was avoided. Maybe we should forget the Pivot to Asia and the whole notion of containing China. The Chinese economy actually doesn’t look too healthy these days, and its problems are only likely to become more difficult as its population rapidly ages and its environmental degradation becomes worse. Maybe there’s really nothing to contain. Maybe we should pivot to America and direct the resources now devoted to containment to rebuilding America.

Or, perhaps the analogy to Great Britain and the rising America is false. After all, both countries were democracies under a rule of law and shared a tradition of freedom of thought and speech, something which is not at all the case between China and the United States. So perhaps there is a real rationale for containing China. But if that is the case, then America needs a real, comprehensive strategy—not a toothless TPP.

A serious American approach would begin with a demand that the IMF enforce its rules on currency manipulation. It would limit or condition U.S. investment in China and Chinese direct investment in the United States while taxing Chinese investment in U.S. financial instruments. It would use U.S. influence in the IMF to prevent any possibility of the Chinese Yuan being made a reserve currency. There is much more that could be included here, but you get the idea.

My main point is that if you’re a dove, the TPP does nothing for you because it will simply increase the trade deficit while worsening the circumstances of the vast bulk of Americans. If you’re a hawk, the TPP does nothing for you because it’s just not a serious tool for containing China. Thus, either way, Congress should just say no to the TPP.