The China Track 与中国接轨

China's Japan Complex

Given Japan's treatment of China in the first half of the 20th century it's no surprise that many Chinese hold very negative feelings about the land of the rising sun. At the same time, Beijing does go over the top, using educational texts, movies, and other means to highlight this past. The goal is to essentialize this earlier behavior as eternal Japanese character traits that disqualify Japan from the right to have a military, to be a leader in Asia, and have a permanent seat on the UN Security Council. With Japan sidelined and the view of many in China that the US is not genuinely a part of the region ("Asia-Pacific" is a US myth to many Chinese), it would leave China as the only legitimate leader for the region.

But China's approach toward Japan is not winning it any friends, and I expect this is entirely frustrating to Chinese. In the Fall of 2010, a Chinese fishing vessel collided with the Japanese Coast Guard, and the fishing boat's captain was detained for several days. In addition to permitting public protests, China responded by temporarily shutting off exports of rare earths to Japan. These metals are vital to a variety of Japanese industries, and the goal was to teach Japan a lesson by showing how dependent it is on China's good will. But to China's surprise, the US and other countries interpreted China's scheme as an indictor that China only followed international rules when convenient and could dismiss them whenever necessary. The US, EU, and Japan later sued China in the WTO over its broader policy of export restraints for rare earths and won the case this past summer. The effect on the rare earths sector was minimal -- demand had already fallen dramatically -- but a broader point was made. 

It apparently fell on deaf ears because China is at it again. This time Beijing announced a new "air-defense identification zone" that intentionally includes the Diaoyu Islands/Senkakus, a large swath of Japan's own IDIZ, and even a small segment of South Korea's IDIZ. Chinese appear to believe that their strong negative views of Japan must be shared by others, and that no one would come to Japan's defense. Wrong again. The US immediately flew two B-52's over the airspace without prior notification to Beijing and in contradiction to Beijing's original pronouncements, the US faced no consequences. Other countries in the region have criticized China's effort as going too far and appear to welcome the US's display of disregard for China's assertion of new rights. 

China's approach toward Japan is self-defeating. Taking an aggressive tact toward the East China Sea and Diaoyu Islands/Senkakus will not win Beijing any friends; in fact, it will push others into the waiting arms of the United States and Japan. It may also have the effect of reducing tensions between South Korea and Japan. (It is not even clear to me this is popular domestically given that it raises the prospect of conflict, and average Chinese aren't really interested in going to war over a small group of uninhabited islets.) 

Despite previous history, and even the denial of that history by a tiny segment of the Japanese population, Chinese are going to need to figure out how to come to terms with this past and put it in the past, entirely. China's Japan complex could end up being a chain that keeps China from fulfilling the "China Dream" of becoming a well-off society and respected globally. 

From Nouns to Adjectives: The 3rd Plenum Communique

Since Party plenums are closed-door events with nothing emerging except what the leadership wants us to hear, we are still reduced to tea-leaf reading and old-school Zhongnanhai-ology. And although Xi Jinping has been praised for using more flowerly language and shows genuine emotion, the communique issued at the end of the 3rd Plenum of th 18th Party Congress is a bland document. This is the kind of thing you would introduce your students or family to if you wanted them to never be interested in Chinese politics and leave you alone. 

I drank some strong coffee, pulled out my highlighter, and opened my dictionary. What did I find? A document that potentially heralds substantial reforms, but leaves a lot, perhaps too much, to the imagination.  

Communiques from previous Party plenums that signaled major policy changes introduced new nouns to the ideological lexicon. The "commodity economy," "socialist market economy," etc. Perhaps the key word from yesterday's communique is "decisive," as in having "the market place the decisive role in resource allocation." That is not as big a change in direction as was ushered in at the 3rd Plenums of the 11th, 13th, or 14th Party Congresses. By focusing on an adjective and not a noun, the Party is now trying to clarify and sharpen the direction it wants China to go, not set a fundamental new course.

I say "perhaps the key word" because the summary provided by Xinhua at the end of the text did not focus on that point at all. It definitely is significant because it goes beyond previous statements of markets playing a "basic" role in allocating resources. But is it the most important thing in the document? No one can say for sure.

There were other significant elements.

On the positive side of the ledger:

1. It looks like we will see a lot of experiments and new national policies in a wide variety of areas, including general government administration, further price liberalization, central and local government finances and budgets, cadre assessment, property rights and land ownership, taxes, environmental protection, the judicial system, household registration, greater access to capital and industries for private and foreign industry, and ensuring competitive markets.

 2. There was a clear sense on the need to nationalize and unify policies, including reducing inter-regional barriers and standardizing government administration across the country. 

 3. The word innovation was used several times, including with regard to science and technology, but the adjective "indigenous" (自主) never appeared. This continues Li Keqiang's pattern of never saying "indigenous innovation," in contrast to Wen Jiabao and Hu Jintao, and portends a more liberal approach to sci-tech policy.

 4. There will be a creation of a national security council. It's unclear precisely what its job will be, but it could potentially operate like the US's NSC and help coordinate foreign and security policy across the ministries. This could help alleviate inconsistent signals and bickering we see between the PLA, Ministry of Foreign Affairs, MOFCOM, the PBOC, and other ministries.

 5. There was no mention of border disputes, the South China Sea, the island dispute with Japan, or cybersecurity. Any emphasis on a threatening external environment could be used to justify greater defense spending or a more aggressive international posture. We did not see that. 

On the negative or unclear side of the ledger:  

1. There could have been more details about specific kinds of reforms. Instead, there were lots of hints -- and hints are often critical -- but the more detail would have provided less wiggle room to opponents.

 2. There was a strong emphasis on the continued importance of the public, state-owned economy. Not only are SOEs important in "pillar" (支柱) sectors, but they are supposed to raise their overall competitiveness in the entire economy. That may be the politically safe thing to say, but it suggests genuine constraints on reforms in these sectors and walling off SOEs to standard rules regarding competition policy, market access, and financial markets. On the other hand, it is possible that this means SOEs will be pushed to be much more efficient, to hand over a much larger percentage of their earnings, to standardize their internal governance, and to compete more head-to-head with private and foreign companies. We just don't know, but the vagueness is not reassuring. 

 3. The creation of a Leading Small Group to Deepen Reform could be a way to get around the gridlock that exists in the standard policymaking process and the special interests within the Party, government, and SOEs that oppose change. This could help speed up adoption and make implementation go more smoothly. But its creation may also signal that there is significant opposition and making headway will be quite difficult.

4. Aside from emphasizing the need for judicial reform and genuflections toward democracy, human rights, and other standard elements of the constitution, there was very little new that would give one confidence the Party is willing to accept systematic constraints on its authority, either rules governing how it operates or ways it and the government can be held accountable. For those who think greater political space is needed for markets to work well and for state-society relations to be genuinely stable, this document does not openly provide a lot of hope. 

5. There was no mention of family planning policy despite signals it would be an important reform. Just the day before the state press ran stories to this effect. We will need to wait to see if the one-child policy is adapted further into an essentially two-child policy. 

NY Times Warped View of China and the Global Arms Market

The New York Times is running a story about the rise of China's global arms sales. They were prompted by China's large deal with Turkey, a NATO member. Yes, Chinese sales are up, to around $2.2B per year, and they're gradually moving up the value-added chain to sell more sophisticated stuff. It's a story that sounds similar to the civilian sector, where extensive state support puts China in a position to undercut the US and other advanced economies. And given that the most recent sales are to a NATO member, this could force a wedge into the alliance.

Yes, all true, but the Times has ignored what the real public interest is in Chinese arms sales, and in fact, with arms sales in general. The real problem is not about growing Chinese competition; the real worry we all need to pay attention to and get control of is how large the global arms business is in the first place. This $72B industry fuels wars and destruction, and is destabilizing.

The most alarming part of the story is not China's rising market share, but that the Chinese see that arms exports and selling more advanced products are, as one Chinese observer put it in the story, a "very normal phenomenon." The US has socialized China to see the arms business as something every great power should be involved in, not to mention that it can be quite lucrative. From a public-interest perspective, that is not the lesson we should be teaching China. And it will come back to haunt us, in additional conflicts and in conflictings lasting longer than they should.  

This socialization process has occurred across the spectrum, and includes "teaching" China about the global rules of international trade, protecting the environment, regulating financial markets, and many other areas. Although many areas of this "education" are positive and commendable, others are downright dangerous and against the public interest. This includes the global antidumping regime, weak regulation of financial markets, inadequate controls on pollution, and other areas. Weapons are not any ordinary product; their sales need to be controlled and made far more transparent than is now the case. For another area where the US trade policy has run amok, look at the Obama administration's advocacy for reducing countries' abilities to limit tobacco sales. 

By the way, as the Times reports, the US controls 39% of the global arms market, or $29B per year, still far higher than any other country. So don't cry me a river that they're suffering at the hands of the Chinese.

If this were a story about the domestic US weapons market (or cigarettes), you can be darn sure the Times wouldn't have fallen for this. They wouldn't ever write a sympathetic story -- and put it on the front page -- reporting that a major gun manufacturer such as Smith & Wesson is facing an unexpected challenge from a new up-and-coming handgun producer, and that such a trend is threatening to the incumbents. That kind of story would sound like something pushed by the National Rifle Association (NRA) or be reported in a bland way by Fox News, not the Times. 

The Times has unwittingly become an advocate for the US defense industry, the gun lobby, and the global arms market in general. We should all recognize this and be appalled. 

China in the Debates, Electric Car Sales in China

China featured prominently in the 2nd and 3rd US presidential debates, in fact, more in the 2nd than the 3rd, even though the latter was on foreign policy. Although there has been handringing in Beijing because President Obama and Governor Romney have emphasized the competitive nature of the relationship and the need to have China play by the rules, neither has given many specifics about policy going forward. Also, both have used essentially the same formulation, "We want to be partners if China plays by the rules." That is essentially consistent with the approach taken since the middle of the Clinton Administration.

The most detail we got from Romney is that, "On Day One I will label China a currency manipulator." That implies he will institute sanctions or penalties against China because the RMB is undervalued. Maybe, but not necessarily. There are several steps that have to occur between his declaration and sanctions, and none are automatic. So this moment of supposed policy precision is just another example of Romney being Romney. In fact, we have absolute zero idea what Romney's policies toward China -- or essentially anywhere in the world -- will be. 

President Obama's position seems clearer. He'll continue his policies of the last 4 years, particularly since the administration adopted its "pivot" to Asia in 2010/11. Obama will continue to go to the WTO, since as he noted, the US has been so successfl there. By my count, it has won 9 of 10 cases against China in Geneva. He also was perhaps unexpectedly honest about the Trans-Pacific Partnerhsip (TPP). He did not mention these words last night, but when he said the US is organizing countriesi in the region to adopt an agreement on trade and investment principles that sets high standards and that should put additional pressure on China, he meant TPP. This framing gives the agreement a sharper edge than perhaps the administration has been suggesting in public, but one can see why Obama would do so in the context of the campaign. He may have also concluded that there is no way China would ever sign on, at least initially, so there's no harm in being more explicit about the TPP's goals. 

Switching gears, in 2011, China sold less than 9,000 electric or hybrid vehicles. At the time I remarked how this was a horrible record for a country supposedly so intent on promoting green energy. Things have only gotten worse. According to Caixin, in the first 3 quarters of 2012, China has sold only 235 electric cars. That is essentially zero and means there is no support for this sector whatsoever. China reportedly did export 7,500 electric cars. If so, we are seeing the same pattern as in the solar sector: export over 95% of production. This means solar and electric vehicles are part of a global trade strategy but not central to domestic energy or conservation policy. 

The censor's marker

Last month I picked up a copy of Newsweek just before boarding a plane in Beijing for the US. The issue focused on women across the globe. Inside was an interesting table placing American women in comparative context. A thick black line was placed through the word "country" at the top of the second column. Given that Taiwan is mentioned in table -- not once but twice -- I can understand how this kind of thing might be insulting to Mainland readers. However, I can't think of a good substitute word to put in that location. "Region," "authority," "island," "location," etc, don't fit there.

There may be another explanation. Not nationalism, but prudishness. Perhaps censors were upset that Taiwanese women apparently have the world's highest ownership rate for vibrators, and discussion of such things shouldn't be so public. Or was it both?

At least Taiwanese women are good in math!

China not an anti-status quo power, unfortunately

On March 23-24, 2012, Indiana University's Research Center for Chinese Politics & Business (RCCPB) and the Workshop for Political Theory and Policy Analysis jointly hosted the "Conference on China and Global Governance" in Bloomington, Indiana. Scholars from the US, Canada, China, and Europe presented findings from research projects examining the growing role of the Chinese government and non-state actors in international regimes dealing with foreign investment, exchange rates, intellectual property rights, foreign aid, public health, and climate change.

Some conclusions that emerged out of the papers and discussion are surprising:

• China by and large is a "status quo power." This finding goes against the expectations of those who believe that a rising China that did not create the current rules of the international system would naturally be an opponent of the status quo. That has not been the case. Although there is disagreement about what constitutes "status quo" vs. "anti-status quo," in no area that we examined did we find the Chinese government, industry, NGO's, or experts going strongly against the grain of existing international rules and procedures. For the most part, Chinese are attempting to learn the existing rules of the game and not promote alternate institutions and norms.

Ren Xiao (Fudan University), left, and Cheng Shuaihua (International Centre for Trade & Sustainable Development)

In 2009, Zhou Xiaochuan, the governor of China's central bank, put forward the idea of creating a "super-sovereign currency," but in reality China still favors a dollar-based international monetary system. A substantial part of China's foreign aid is "tied" to economic benefits for Chinese industry, but foreign aid even from many OECD countries has been similarly tied. China's rules for reviewing foreign investment for national security and competition policy concerns are relatively similar to those of other countries. China is a huge violator of IP, but its legal system and the trend of growing patenting amongst Chinese companies places China increasingly within global common practices.

Bruce Reynolds (University of Virginia)

• China's domestic political economy fundamentally shapes how Chinese participate in the international community. Chinese are prone to gravitate making international regimes serve the interest of industry and production, as opposed to the interests of consumers and workers; and they generally prefer state-based institutions, as opposed to private governance mechanisms.

Zhang Lu (Temple University), left, and Xu Jiajun (Oxford University)

• The global status-quo shouldn't be seen as inherently good, and in fact, in many areas is quite troubling, as overall poverty levels and inequality are still on the rise. The global IP regime, to many, has overly shifted its balance toward protecting inventors at the expense of consumers. China and others need to be much stronger advocates of reform; otherwise, poverty, climate change, and other problems will not be solved.

Elinor Ostrom (Indiana University), left, and Ricardo Melendez-Ortiz (ICTSD)

Workshop co-founder Lin Ostrom, winner of the 2009 Nobel Prize in Economic Sciences, gave the conference's keynote address. She discussed how to apply polycentric governance approaches, a key prinicple the Workshop has long advocated, to effectively addressing the problems of global climate change. Her advice: don't just depend on national governments and international negotiations; local initiatives can also be extremely important. She noted a program in Sacramento where when customers were given electric bills that showed how much electricity they used relative to their neighbors ("You're using much more than your neighbors!"), people quickly cut back.

This research on global governance is currently being issued through the center's working paper series. Contributions will soon be revised and published through an edited volume, journal articles, and other formats.

Happy 10th Birthday!

China this year celebrated a variety of anniversaries, including the 100th anniversary of the 1911 Xinhai Revolution and the 90th anniversary of the founding of the Communist Party. Also deserving of celebration is the 10th anniversary of China's entry into the World Trade Organization. China's application was formally approved on November 10, 2001, and it officially became a member on December 11, 2001.

I don't know if folks in the Ministry of Commerce are having a cake with candles, or if Jiang Zemin and Zhu Rongji, the leaders most responsible for China's entry, are popping bottles of champaign, but the rest of us should.

Many of the Westerners attending the festivities have decidedly been party-poopers, focusing primarily on those areas China has not come into compliance or the ways China has figured out how to bend the WTO rules so that it gets what it wants without being subject to harsh penalties. One day after the anniverary, the U.S. Trade Representative issued their annual assessment of Chinese compliance, which was decidedly mixed. And on Tuesday, the Congressional-Executive Commission on China held a hearing, and the atmosphere was hardly celebratory.

I'll leave the dicing of the report and the hearing testimony to others, but here's my five big takeaways from China's membership:

1. The economic benefits to China and the rest of the world have been massive, and far more important than the negatives. Chinese trade and investment have expanded dramatically, and this has created millions of jobs in China and elsewhere. Although a significant amount of manufacturing jobs have shifted from to China, in part from the US, but mainly from around China's neighbors, the integration of China into global production networks has allowed companies elsewhere to stay in markets they otherwise would have exited and move up the value-added chain; and consumers everywhere have benefitted from the reduced prices and increased quality that global production and innovation networks have facilitated. Some may want to partly blame China's unbalanced economic growth for contributing to American unemployment or the financial crisis, but my view is that the problems of the American economy are largely self-inflicted. Send your thank-you notes to Alan Greenspan, the toothless Securities & Exchange Commission, and a Congress that is uanble to fundamentally reform health care and education or sufficiently invest in America's infrastructure.

2. Joining the WTO has led China to not only reform its trade regime, but also adopt a slew of beyond-the-border reforms governing just about every corner of the economy, society, and policy process. Ed Steinfeld marks many of these changes in his Playing Our Game (2010); he associates these changes strictly with Chinese integration into global production networks, but that trend accelerated massively because of China's WTO entry. China is far from a liberal, free-market economy, and many of its economic policies are wrong-headed and will generate lots of waste, but the distance between China and others has narrowed by a wide margin. It's perfectly reasonable to discuss China in the context of capitalist economies writ large.

3. The process by which trade conflicts with China are addressed has improved dramatically. Long gone are the two-seconds-before-midnight negotations in which failure means the implementation of rigid sanctions and the imperilment of the entire relationship. Late-night bargaining is now reserved for more mundane, incremental bilateral issues.You don't like how conflicts are addressed in the WTO? Perhaps you'd like to be an iron ore trader and play by the hard knuckle rules of commodity pricing. In 2009, deep in the middle of negotiations over annual iron ore prices, fretting over a likely loss, the Chinese arrested the folks on the other side of the table, four Rio Tinto employees. (Rio Tinto and the other iron ore providers were so spooked by the experience, they cancelled the negotiating ritual, and now prices are set according to a standard index.) At least in antidumping cases or WTO disputes, the chances of anyone doing time in a Chinese jail or having something worse befall them have been essentially eliminated.

4. China's compliance record is just about as good -- or bad -- as any other major WTO member. China has lost just 8 WTO cases during the last decade, and it has reformed its domestic laws to come into compliance in 7 of these cases. That record is just as good as that of the US and EU, both of whom have lost a lot more cases and in several instances have not come into compliance. Think American cotton. Think Airbus subsidies. Of course, the big worry about China isn't the official win-loss record, but whether its economic system simply doesn't fit the spirit of the WTO. If you think the WTO is about promoting one type of economic system, then you may be right. But if you think the WTO is about permitting some substantial variation and creating a system for adjudicating among these differences, then China is far from destroying the system. And we should be realistic, the WTO is not immune to power politics; wealthier and stronger members will always be able to get away with more than the weaker members. That may not be fair, but even with these imbalances, the WTO is fairer than almost any other international organization out there.

By the way, anyone who thought China joining the WTO would mean China would be perfectly liberal obviously don't know much about China; they know even less about the rules of the WTO, which provide -- intentionally -- dozens of legitimate excuses for members to protect domestic industry. China's continued limits on market access in part reflect simply avoiding explicit commitments; but this also reflects its ability to skillfully use the rules the US and EU wrote. Changing Chinese behavior not only requires pressuring China, it requires reforming the WTO. The United States is opposed to some of these reforms, for example regarding the use of antidumping measures.

5. In a show of staged choreography, Taiwan joined a few weeks after China, and so will celebrate its 10th anniversary at the end of this month. It's a shame no one is lighting candles for the "Separate Customs Territory of Taiwan, Penghu, Kinmen nad Matsu." Have you noticed the state of cross-strait relations of late? Not too darn bad. The economic relationship expanded dramatically even as Mainland expressed clear distaste for Chen Shui-bian. And last year the two sides signed a wide-ranging deal, the Economic Cooperation Framework Agreement (ECFA), that ought to expand ties even further. ECFA would have been impossible without both sides' membership in the WTO. Is long-term peace across the Taiwan Strait assured because of such economic ties? Of course, not. But the extent of share interests has made such a turn appear far less likely than was the case during the 1995-96 Straits crisis, let alone during the 1950s and 1960s.

Am I polyanish? No. I think China, the US, and the WTO all have serious problems they need to address, and if they don't, that spells real trouble for everyone. But if a straightforward thumbs up, thumbs down vote for Chinese membership in the WTO were held today (in the US in 1999, the vote was over whether China should receive permanent MFN), and we already knew what this last decade would be like, the decision would be simple: a big, big thumbs up!

Speaking at the Caixin Summit on Green Modernization

I have no illusions about China's political system and its effect on freedom of the press, but no one can deny that the unofficial media in China have developed substantially over the last two decades, and this has been followed by the growth of the Internet and non-traditional media sources.

An initiator of this trend has been Hu Shuli. She broke through with Caijing Magazine from 1998 to 2008. But she left Caijing to form a new company, Caixin Media, which has expanded well beyond a weekly magazine. Caixin is now a brand applied across a wide range of information products, from periodicals to video programming to conferences.

Given Caixin's role in China, it was an amazing honor to be invited to speak at this year's summit, whose theme was "China and the World: Strategizing Sustainable Growth." I spoke on the panel on “Green Modernization – the Next 10 Years,” together with representatives from Rio Tinto, Citibank, and a local private equity company. I stressed that going green will require going beyond government-mandated standards. Green certification programs for products and construction, well developed in the United States, are just in their infancy in China, but hold a great deal of promise in reducing energy usage and increasing efficiency, all the while contributing to economic growth.

I also suggested that Chinese consumers use their market power to push domestic and foreign product suppliers to raise the environmental protection standards of their goods. A “China effect” could be just as positive in promoting green modernization as the well-known “California effect." As an example, I said that China shouldn't criticize the EU's new airline carbon trading scheme, which many have said is too costly and a trading barrier; instead, China should not only embrace it but issue their own higher standards. I think most folks in the audience were sympathetic to these kinds of suggestions, but one person interpreted my comment as a defense of European protectionism and went on a rant for several minutes. I actually would've been happy to engage her, but the moderator shifted to other questioners.

Here are links to more coverage of the conference and the Green Modernization panel. A PDF version of his PowerPoint presentation is available here (Download Kennedy Green Modernization Nov 11).

In suggesting that Chinese need to go beyond their government to promote green modernization, I provided data about the relatively low level of government transparency in providing information about the state of the environment and government policies.The Natural Resources Defense Council and a Chinese partner organization developed a Pollution Information Transparency Index based on 2009 data. They found wide variation across Chinese cities; the most transparent city was Ningbo, in Zhejiang; the least transparent was Xining, in western China. Peter Lorentzen of UC-Berkeley and Pierre Landry of the University of Pittsburgh took the data one step further to examine the reasons for these differences. The answer: cities in strong fiscal positions have the resources to collect environmental data, and cities that do not have a dominant company have the political will to release this information. Here is a look at the Top Ten and Bottom Ten and the related data. I'm grateful to Peter and Pierre for letting me use this information in my presentation.

The most interesting speaker on my panel was from Rio Tinto. He gave a detailed description of how this huge mining company attempts to be as efficient as possible and support reductions in energy usage for itself and its customers.

Beyond our panel there was a ton of interesting speakers and comments. Liu Mingkang, who just stepped down as head of the China Banking Regulatory Commission, described in detail how the CBRC has tried to monitor and control the negative consequencese of expanding local government debt. Economist Wu Jinglian spoke quite forthrightly about his hope that the new leadership line-up next year will usher in a new wave of economic reforms that liberalize China's markets and create a greater likelihood the economy will be more efficient and balanced in the years ahead.

All in all, a total blast!

10th Anniversary Conference Wrap Up

This past weekend's conference, "The 10th Anniversary of China's WTO Accession: China's Learning Curve," went off extremely well. I had the same worries as a restaurant owner -- the kitchen may be a little chaotic, but as long as the customers enjoy their meal (and don't look in the kitchen), then everything will be okay. I think the conference served up some nutritious food for thought.

Some highlights of Day 1:

• Long Yongtu, China's chief WTO negotiator, gave a subtley worded critique of current economic policies. When China joined the WTO, it made policies changes which were domestically seen as "progress" (进步), but are now criticized as "concessions" (让步). He said he is worried that China may be getting further and further away from the spirit of the WTO. His concerns were echoed, more directly, by Christian Murck, President of the American Chamber of Commerce in China, and Dirk Moens, the Secretary-General of the EU Chamber of Industry & Commerce.
  
  
• In his keynote address(Download Day 1 Robert Wang WTO Conference Remarks 10 29 2011), Robert Wang, American Deputy Chief of Mission, struck a balanced pose. He praised China for the distance it has travelled in economic development and reform the past 10 years, but he noted the concerns the US and others have about China's recent economic policies, including currency policy. He also stressed that China can't avoid taking on greater responsibility in the WTO just because it is a developing country. In perhaps the most memorable line of his speech, he said: "As our trade negotiators are fond of saying, no doubt to the annoyance of their Chinese colleagues – 'China is not Chad.' And the fact of China’s astounding success as an exporting power means that China carries considerably more responsibility than was the case ten years ago with regard to the liberalizing mission of the WTO."
• 
  
  
• On the Doha Round, Huang Rengang, Deputy Director-General of the Ministry of Commerce's WTO Division, said China would obviously like to see the Doha Round reach a successful conclusion, but there need be no rush to a conclusion. He joked that trade ministers weren't tired of negotiations but rather were addicted to them. Ricardo Melendez-Ortiz, Chief Executive of the International Centre for Trade and Sustaintable Development in Geneva, outlined a wide range of initiatives the WTO can take even with a stalled Doha Round to promote liberalization and development. Rorden Wilkinson of the University of Manchester said that the WTO and its members need to go back to first principles and decide once again what the main goals of the organization should be; he argued that liberalization and other policies should more squarely be in service of development and poverty alleviation.
  
  
  
• Several speakers, including Tang Wenhong of MOFCOM's Law and Treaty Division, noted that China had moved rapidly up the learning curve in the dispute resolution process. China has been a respondent in 23 cases and a complainant in 8. Xiao Jin, a partner at the law firm King & Wood, noted that China has complied with negative rulings in at least 7 out of 8 cases it has lost. Philippe De Baere, a partner at the Belgium-based law firm Van Bael & Bellis, gave a run down of China's victory in the "metal fastners" (nuts and bolts) case, showing how the portion of the European Union's antidumping regulations related to non-market economy status were found wanting and had to be changed. 
  
  

On Day-2, we turned our focus to analyzing 11 pieces of research conducted as part of the RCCPB's Initiative on China and Global Governance.The papers can be found on the center's Publications page.I was particularly impressed by how seemless the discussion went. Despite using Chinese and English, everyone was speaking the "same language." The biggest differences in approach and opinion were  among scholars from the US and Europe. We were all using the same concepts and familiar with the same range of methods. If there was a difference it was that Western scholars are probably still a little more comfortable in making theoretical pronouncements based on their data and analyses, but the difference in approaches, at least in economics and political economy, are not what they used to be.

One particular highlight on Sunday was a visit paid by Madame Zhang Yuejiao, a current member of the WTO's Appellate Body. She was extremely impressive in her command of the WTO's dispute settlement process. It seemed to me that she had totally absorbed the norms and approach of the WTO, and likely, is not just a passive user, but also an active contributor to the norms and procedures in the system. It's highly unlikely the Chinese government uses her presence to their benefit -- she was a former MOFCOM official -- but Chinese can certainly be proud of her accomplishments on a very high-profile international stage.

Following Sunday's panels, we adjourned to Bellagio (鹿港小镇) for dinner, a Taiwanese-style restaurant owned by a couple from Guam. And then some stalwarts visited the 81st floor of Guomao Tower #3 (国贸三期) to look out over Beijing. Of course, our view was blocked by smog, which is still sitting over the city as I type. Just as with China's first 10 years in the WTO, much has changed for the better, but a lot of work still needs to be done.

I'm extremely grateful to the entire team that worked hard over several months to make the conference a success.

New happenings at the RCCPB

We are having a cool conference in Beijing this coming weekend, October 29-30, 2011. Day-1 will be fancy show at the Beijing International Hotel. The occasion is the 10th anniversary of China's entry into the World Trade Organization (WTO). In attendance will be several WTO representatives, officials from various governments, international trade lawyers (my favorite), business execs, and scholars. On Day 2, we will move the meeting north to the campus of the University of International Business & Economics, and turn our attention to 11 working papers produced through the RCCPB's Initiative on China and Global Governance. 

We've had a great response rate so far, with lots of folks registered. You can still try and reserve a spot, but if not successful, you can at a minimum get copies of the related working papers.

We're proud to have several co-conspirators in this venture. Our co-organizer is the University of International Business & Economics China Institute for WTO Studies, and Caixin Media is our exclusive Chinese media partner. Of course, anyone from the media is welcome to attend, cover the event, and interview the participants.

China and Egypt

No one in the English-speaking world cares what I think about this, but I was fortunate enough to be interviewed by the very cool Chilean paper El Mercurio in early February. Try out your Spanish. For those who won't, in a nutshell, I think the chances of the political uproar in the Middle East, including in Egypt, having a serious effect on China's political stability, that is, CCP rule, is smaller than small. Beijing may be worried sick about this, but they shouldn't be. 30-plus years of economic growth, greater socio-economic liberalization, and greater international influence and prestige has resulted in greater domestic popular support for the regime. Study after study shows this. Someone please pass along the data to Beijing.

RCCPB Signs Agreement for Research Cooperation and Beijing Office

On January 24th the center I direct, IU's Research Center for Chinese Politics & Business (RCCPB), signed a memorandum of understanding with the China Institute for WTO Studies at the University of International Business & Economics (对外经贸大学中国WTO研究院) that promotes both institutional and research cooperation. Starting May 1st, the RCCPB will open an office within the WTO Institute on UIBE's Beijing campus. To make this work, I will be re-locating to Beijing for at least the next two years. However, I'll need to make a few trips to Bloomington each year. We will be a bi-continental center and have programs in the US to carry out. In addition, my family will remain in Bloomington. We are swapping one set of complications (higher living expenses and uprooting my wife and kids) for another kind (maintaining a family over a very long distance).I've done both before and know that neither is easy.

In my opinion, the WTO Institute is China's leading scholarly organization focused on China's participation in global trade and economic affairs. Its director is Zhang Hanlin (张汉林), and its deputy director is Tu Xinquan (屠新泉). Founded in 1951 and located in central Beijing, UIBE is one of China's premier universities, with a full range of disciplines and programs. It has an extensive array of cooperative programs with leading universities around the world. Although Beida and Tsinghua are somewhat more prestigious, everyone I talk to who has interacted with UIBE has been consistently impressed by their scholars and students. More than one China rep of a multinational company told me they prefer to hire UIBE students over those from Beida and Tsinghua because of their stronger language skills and greater willingness to take on any job thrown at them. My own experience so far has confirmed these sentiments, so I'm quite excited to see what the next few years will bring.

Chinese trade surplus down in 2010

Data for 2010 is starting to come in, and China's merchandise trade surplus was $183.1 billion, according to Chinese customs. Assuming China's GDP grew 9% in 2010, to about $5.46 trillion, that would mean China's trade surplus was equivalent to 3.4% of its GDP. That is way down from the skyrocketing 7-11% range of 2006-08.

The US now finds itself in a dilemma. Both Democrats and Republicans have been critical of China's large overall and bilateral trade surpluses and accumulation of foreign exchange reserves, arguing that these imbalance were contributing to a slower recovery in the American economy and elsewhere. Hence, the pressure of the RMB to appreciate, a growing number of bilateral and WTO trade cases, and even changes in American monetary policy to effectively weaken the dollar (and strengthen the RMB). At the Fall G-20 meeting, US Treasury Secretary Geitner pushed for an agreement in which countries would commit to keep their international economic activities in rough balance, including not having trade surpluses above 4% of GDP. I suspect he got that 4% from Chinese officials who had publicly stated that they themselves had this 4% goal in mind. Despite the underlying consensus, no such agreement was reached at the G-20, and calls for continued bilateral and multilateral pressure continued.

Now the US is in an uncomfortable position: China has apparently met the broader goal of lowering its overall trade imbalances, but it still has a very large bilateral surplus with the US and the RMB has appreciated 2-3% against the dollar since the summer. In addition, although there has been some improvement in US employment data (down to 9.4%), that is still a high figure and economic growth is still extremely sluggish.

When President Hu Jintao arrives for his state visit next week, it will be decidedly difficulty for President Obama and his team to continue to pressure China with much authority. To the contrary, one might expect President Hu to seek recognition from the US side that it, in fact, has done much to reduce global imbalances, fulfilling its obligations as a "responsible stakeholder," and moreover, it's now the US's turn to chip in -- get control of its budget deficit, increase savings, and facilitate greater long-term economic growth. He might even push President Obama to publicly praise China.

Will this happen? Probably not. Given a weak US recovery, the continued large bilateral deficit (particularly as a percentage of the overall US trade deficit), and serious complaints from American multinationals about China's business environment, I wouldn't expect the US to declare victory next week. President Obama may offer some kind words on the economic front, but if so, they will be part of a longer sentence in which the main phrase is about the need for more progress, as in, "The US welcomes China's lower global trade surplus, but this improvement needs to be accompanied by a range of other substantial changes." We shall see.

Viewing Beijing from Tokyo

A couple weeks ago I made a one-week trip to Asia, spending the first couple days in Beijing and the next five in Tokyo. Most people I know see the similarities between China and Japan -- a Confucian heritage, Chinese characters/kanji (汉字), the use of chopsticks, high savings rates, interventionist economic policies, etc. I'm much more struck by their differences. I'll mention just a few:

1. The air. China and Japan are at very different places in their economic development. China's industry is energy-intensive, and that of Japan is not. Japan, like the US and Europe, has moved much of its manucturing, particularly that part which is based on low-wage labor and high use of energy, to Southeast Asia and the People's Republic. Beijing is making major stides in reducing energy intensity of production, yet overall absolute use of coal and oil is continuing grow at a rapid pace. The air doesn't give a whit about percentages and intensity; it only cares about absolute levels. Below are photos from Beijing, Shanghai, and Tokyo on what I would call representative days that I think capture the basic difference between the three. Disagree? Send me your photos.

   

Every day I was in Tokyo I could make out, even faintly, the outline of Mt. Fuji many miles away. In Beijing I rarely notice that the city is, in fact, surrounded by mountains on two sides, with those to the west within a couple miles of the city proper.

 

 

 

 

2. The temples. Tokyo's temples seem more peaceful and refined than those in Beijing. I visited three near the home of my uncle and aunt, who live in Hyoshi, the suburban home of Keio University. The photo below is typical of them. I could've sat for a long time just relaxing.

3. Economic Policy. During my stay in Japan, I visited with an official from METI, the Ministry of Economy, Trade, and Industry. METI was the center of Japanese industrial policy in the post-World War II era, and for most of that time was known as MITI, the Ministry of International Trade and Industry. I say "was," because although METI still has bureaux devoted to specific segments of the economy and its officials regularly interact with business, it is no longer "pilots" Japan's economy. Instead, it is a highly interested bureaucratic body that can try to informally steer Japanese business with information and limited financing, yet it lacks many of the tools needed to compel compliance. Its heyday is long over, and Japanese officials who work there (I've spoken with several over the years) do not see themselves as economic architects or engineers in the vein they used to be. And amazingly, they don't seem overly upset about that. Now maybe that's the perspective of a non-Japanese speaking China specialist speaking. So please correct me if I'm wrong.

The contrast with China is stark. China first learned from its Soviet comrades the art of mandatory central planning. In the 1980's and 90's, as China shifted away from mandatory planning, the target for many Chinese officials was incentive planning in the model of Japan, South Korea, and Singapore. Chinese officials learned a great deal from their neighbors about how to develop and implement industrial policies, and to this day, the Chinese bureaucracy feels it is entirely legitimate for it to encourage, coddle, or mandate micro choices of Chinese companies or the macro environment around them. That does not mean that the policy process is neat and orderly. The development of the policy agenda, the consideration of choices, their adoption, and their implementation are influenced heavily by the preferences of individual political leaders, inter-bureaucratic rivalries, experts, and lobbying by domestic and foreign companies. Nevertheless, I'm struck at how far Japan seems to have moved away from what some call the "coordinated capitalism" approach and how in China the government is still committed to keeping its hands firmly on the wheel. Again, this may largely be a difference of time -- that part of the Chinese economy which is less subject and responsive to industrial policies is gradually growing -- but the side-by-side contrast one sees in traveling between the two countries seems dramatic.

4. Train signs. Beijing and Shanghai (and other cities) are moving quickly to develop subway and train systems on par with those of Tokyo and other major metropolitan cities around the world. I'll admit Beijing's subway, which I'm most familar with, is light years ahead of where it was five years ago, let alone two decades ago. Nevertheless, I'm struck at how the Tokyo train system gets you to absolutely everywhere in the city you'd need to go. Moreover, companies, hotels, and stores all have online directions to their establishments via the trains. Not only do they tell which stop they are near, they say which exit to leave the station, give precise street directions, and estimate the number of minutes to you destination. Here's the online map with directions to METI's headquarters.

But the most interesting difference in subway systems are the signs. Yes, advertising has taken over both systems. And in Beijing there are digital ads that spring forth in the tunnels as you pass by at 100 km/hour; they somehow follow alongside your car for a few seconds before disappearing. And yet in Tokyo there are still lots of creative signs posted to remind you to be polite and curtious to your fellow travelers. My favorite sign, below, could be misinterpreted, but its real purpose is to remind passengers that they should turn off their cell phones when sitting in seats reserved for the elderly or women, since they might find your talking with your friends or headbanging rock-n-roll seeping out of the earphones to be upsetting. I welcome my Japan specialist friends to provide further details, including the comments from the upset passengers.

 

Now it may appear that most of the contrasts I pointed to indicate a pro-Japan/anti-China bias. If so, that'll be the first time most people have ever accused me of being anti-Chinese. One thing I missed about China when in Japan was the Chinese language. I've learned a smattering of Japanese phrases over the years, but the reality is that after the basic greetings, numbers below 100, and some food, I can't say very much. Luckily, my family helps me a lot when I'm there, and the scholars and officials I interact with all speak excellent English. But I'm still left feeling somewhat isolated. But on the few moments when I heard Chinese, I felt right at home. When I was eating by myself in a sushi restaurant, I heard these two Chinese businessmen next to me chatting, and it felt wonderful. Then I took my aunt Mikie, my cousin Mie, and her daughter Tesla to lunch at a Chinese restaurant in Yokohama, and I had the best time talking to our wait staff, three lovely ladies from Jiangsu, Xiamen, and Shenyang. It felt like being in China. Until I got the bill -- then I remembered I was in Japan.

Indigenous Innovation: Determining "Our" Position

Last year iron ore was the big worry with China. This year it's "Indigenous Innovation" and rare earths. The latest take is given by Adam Segal, a senior fellow at the Council on Foreign Relations. A long-time astute observer of Chinese technology policy, in a brief commentary posted on the Foreign Affairs website yesterday, Adam recognizes that the Chinese government has given in to pressure and relented on some of the most odious elements of Indigenous Innovation, such as by modifying government procurement policies. Yet he expresses deep concerns that these concessions are only limited changes in tactics and keep in place China's worrisome larger strategy. Here's the key paragraph in his piece:

The problem for the United States is that these concessions are more tactical than real shifts in underlying policy. China’s leadership is broadly committed to the goals of reducing dependence on foreign technology, producing Chinese intellectual property, and creating Chinese technology champions. Even if China reverses certain policies under U.S. pressure, it will remain dedicated to those goals. U.S. policy is likely to become a game of Whac-a-Mole, beating down one Chinese initiative on indigenous innovation only to see another pop up.

I have 2 problems with this argument. First, the whac-a-mole strategy has been an unmitigated success. The US has the opposite problem of Ah Q (maybe we should call it "Z Q"): it walks around imagining defeats when it has achieved substanial victories. As I wrote in a piece published earlier this month for China Economic Quarterly (and posted with their permission), there is a consistent pattern of China issuing unacceptable technology policies and then modifying them in the face of massive public criticism by foreign industry and government and quiet complaints from Chinese businesses with extensive foreign partnerships and pro-liberal Chinese experts. The most worrisome policies -- software encryption, WAPI, the CCC Mark for information security products, Green Dam, the Indigenous Innovation catalogues, government procurement rules -- were all challenged and defeated.

The second problem is the implicit view that the US government and US industry have the same interests and should have the same position on Chinese policies. I can see why American companies would be quite worried about interventionist Indigenous Innovation policies even if they are compliant with WTO rules -- the rules in some ways reduce market access to China and in some instances will yield more competitive Chinese companies who may take market share away in China and elsewhere. However, the USG, or at least USTR, has a different mandate: whether China breaks the rules. And on that score, the pattern of Chinese behavior -- its initial policies and then retreats -- is not as worrisome. By and large China has skirted the line and crossed ocassionally, but it has pulled back and crossed back when challenged. 

The issue of whether China should have an interventionist technology policy is less about the rules and more about what would be in the best interests of Chinese and foreign industry. There we can have a very good argument about the strengths and weaknesses of indsutrial policies as opposed to government taking a lighter touch. BTW, I don't know many folks who now encourage an entirely "free hand of the market" approach. The "ligher touch" means government facilitating and supporting instead of directing, not sitting on its hands. Framing Chinese behavior as about compliance may be a good lobbying strategy for US multinationals, but that's not the real issue; it's competitiveness.