Sallying forth

As presidents Hu Jintao and Barack Obama prepare to meet at the Asia-Pacific Economic Cooperation meeting in Yokohama, the US-China relationship appears to have entered a newly contentious stage. But ties between the two countries – particularly in the commercial sphere – remain more complex than recent rhetoric on currency might suggest. Bob Poole, vice president of China operations at the US-China Business Council, spoke with China Economic Review about US perceptions, the renminbi and other issues facing foreign companies in China.
 
Q: How big a concern is China on the ground in the US?
 
A: Clearly, there’s important domestic consideration in the US to economic developments that include a slow recovery but mainly concern employment. Interestingly, the American people have in recent years displayed uncertainty when polled about the benefit of trade, or the benefit of the China economic relationship to the US. There’s a new NBC/Wall Street Journal poll that showed that for the first time, over 50% of Americans think trade has a negative impact on the US economy. Similar polls on China showed more than 80% of Chinese people think trade is good for their country. That’s easy to understand: They get nice export revenues and buildup of industry, and they get nice imported products.
 
Q: So how does that perception affect Washington’s approach?
 
A: That underlying popular sentiment – well-founded, unfounded or wrongly grounded – is what politicians also have to care about. So Congress increasingly tells us two things. First, they do think there’s economic harm from some of the China imports, particularly to smaller companies or those that are competing with the mid-grade products China is shipping to the US. This may be different to what a major multinational experiences from the China relationship. Second, they’re telling us that they don’t feel that the dialogue and discussion by the administration is doing enough to redress this situation, or to have China play a more accommodative part regarding the trade deficit. The administration is obviously separate from the House and Senate, and we don’t know whether it would support legislation out of the House or Senate because we haven’t seen the final terms. But the US Trade Representative and Commerce Department in particular, and maybe the National Economic Council or National Security Council, have to look at the China trade picture on behalf of the administration and hopefully understand that legislation might not be the best way to go.
 
Q: Not just "not the best way to go," but potentially harmful?
 
A: When we look at the currency legislation that proposes a tariff on all goods from China, there are a lot of problems with it. We still don’t know the final form, but what’s interesting is that it would certainly increase costs for American households. If Congress is trying to send a message to China, it’s not clear to us what the message is. Stop or I’ll tax myself? If you don’t do something about that currency then I’m going to raise my own prices! It’s a bit of a logic problem with some of these proposals that are meant to do something good, but actually don’t work out that way.
 
Q: Do the different understandings simply reflect different levels of exposure to China?
 
A: I’d say that international trade and economics – and certainly currency – aren’t easy subjects to understand. So when we look at our increased trade deficit with China, we often don’t see that our trade deficit with the rest of East Asia has actually gone way down. Similarly, there’s the question, for example, of whether we would manufacture low-end tires at all if we didn’t buy them from China. With a 40% tariff, imports from China have gone down, but they’ve gone way up from countries like Mexico, South Korea and Indonesia because US manufacturers didn’t choose to make those tires. There’s a 40-year trend of declining manufacturing employment in the US, and sometimes people don’t understand the connection and China’s role in the longer-term and other trends.
 
Q: It also seems that US companies here may have more pressing concerns than currency…
 
A: Thank you! You get 100 points for having exactly the right perspective as we see it. The currency itself should, we think, reflect market influences in a better way. It’s in China’s interests for it to do so, and there are well-known reasons why – it will help with their consumption, with their own imports and a variety of things. We think over time it will get there. But for the USCBC and US companies, it isn’t customarily a top issue. We poll companies each year, and the value of China’s currency doesn’t show in the top 10 or 20 issues that they find problematic. What we do think would be more important would be market access.
 
Q: Specifically what kind of access?
 
A:  Market access for goods is one thing, and agriculture is obviously a case that often leads in some of the trade discussions. Genetically modified foods and seeds would be one area, but there are certainly lots of others where US products would do better if China would relax on some of its standards, restrictions, and tariff and non-tariff barriers. Separately, 50% of our members are in services, so market access in services – where the US does have a trade surplus with China – would also be signfiicant to us, and to the US economy.  It would also go in the same direction China wants to go. Services make up about 40% of China’s GDP and they want it to be 70%, like developed countries. We think that’s the best way to go instead of outsourcing and trying to compete with India.
 
Q: Then what’s the hold up if it’s win-win?
 
A: Not unlike the US, China has domestic issues to confront. And whether it’s continuing employment, or creating new employment for market entrants, income inequality, inflation, real estate prices, pork prices – there’s a lot that China has to try to manage in order to continue stable and moderately-paced growth. The case of services, manufacturing and even technology is frequently seen a little more nationalistically, where China wants to first have strong national companies or strong competitors before allowing participation by foreign companies. I think it’s largely a question of some parts of the industrial planning apparatus wanting to see fully developed competitors here before allowing in foreign companies with experience, capital, and a willingness to help to develop it, that in fact would help the market.
 
Q: Do those policies favor domestic and state-owned enterprises?
 
A: I like to think that Chinese consumers and companies still want best-of-world and best-of-class products. And they’ll be the ones behind the stage demanding that they be allowed to purchase software, technology, and other goods from abroad or have them made here and available in this market. But from an industrial policy point of view, there have been some developments that have seemed to be unfavorable to foreign business interests and generated a high level of concern. China’s initial indigenous innovation scheme was one. That has already taken a lot of input from foreign friends here in China and has been revised for the better, but still it could use some focusing and improvement.
 
Q: What was your role in that?
 
A: We submitted a long study that shows how innovation is done successfully in many developed countries. China studied it and asked us about it. We’re also watching closely to see strategic industries policies that are due out by the end of the year. Our latest survey says US companies are seeing signs of protectionism in standard-setting, market access barriers, government procurement in local plans in the provinces, administrative licensing, pressure to favor Chinese firms, tighter legal enforcement on foreign companies than on domestic, difficulty in bidding on contracts, M&A review and approvals, subsidies and external financing. Companies say that they feel more protectionism in a number of areas, and that’s where we put on our Robin Hood tights and leap into the breach and sally forth.