China as strategic competitor

“Lenin once said: When it comes time to hang the capitalists, they will sell us the rope. Even he didn't expect that the capitalists would provide their enemies with the funds for the rope as well.”
--Clifford D. May (1), January 13, 2005, Foundation for the Defense of Democracies’ symposium (2) on “Propaganda and Terrorism”

Lenin, of course, was talking about “capitalists,” the bane of the collective. While Mr. May was referring to the Saudis and Iranians and the capital provided by their oil revenues that funds the radical Wahhabi madrassahs and Shiite Islamic terrorists. It seems not much of a stretch to see how this also applies to the economic and strategic relationship between China, the West in general, and the United States in particular.

Now, the first definition of “strategy” according to the Merriam-Webster online dictionary (3) is:

1 a (1) : the science and art of employing the political, economic, psychological, and military forces of a nation or group of nations to afford the maximum support to adopted policies in peace or war

while the third is given as:

3 : an adaptation or complex of adaptations (as of behavior, metabolism, or structure) that serves or appears to serve an important function in achieving evolutionary success

Both these definitions would seem to apply to the economic reforms initiated by Deng Xiaoping (4) in the late ‘70s. For he did not embrace a total abandonment of Marxist-Leninist ideals but an evolved hybrid economic system wherein the Communist leadership would still do the central planning but implement the plans through market mechanisms rather than central party dictates. The ten years of the Cultural Revolution had devastated China economically as well as in many other way. Deng, the last great personage left alive from among the ranks of the long marchers, proclaimed that socialism did not mean that the proletariat and peasants should be forever condemned to a state of “shared poverty.” And so at the age of 76 Deng Xiaoping carefully, deliberately and strategically began the opening of China to outside capital, technology and markets in order to achieve the transformation – an evolutionary adaptation – of China’s ancient but now collectivist society into a modern industrial giant.

A mere quarter-century later the results are astonishing. A visitor to China twenty years ago might have described the visit as a trip to a planet from our past. Today, in the industrialized metropolitan centers, it is a trip to the modern present, and in some cases might even be considered a trip to future planet. This was achieved through the extraordinary hard work of the Chinese people who were enabled by the investment of capital and technology by the West. All the while all economic activity was directed and moderated by the plans and policies of the Chinese Communist Party.

And just what kind of policies might the Party planners implement? First, currency control. No one is permitted to speculate with the yuan as it will be pegged to the U.S. dollar so as to strictly control the exchange rate. If you wish to do business with and in China you just have to live with it. Period. What has been the result of this policy? China’s foreign exchange reserves (5), which includes all its reserve currencies, have grown almost exponentially and will probably exceed one trillion (6) U.S. dollars (excluding Hong Kong) before the end of this year. It’s currency remains undervalued (7) by as much as forty percent, thus keeping China’s exports very inexpensive indeed. While the U.S. Chamber of Commerce assails (8) China over copyright fraud and currency manipulation, even the normally hard-to-ignore Senator Chuck Schumer (9) seems but easily ignored (10) by the cat-bird-seated Chinese.

Though no longer a strict requirement (11), for most of the period since the economic opening of China foreign ownership of joint ventures was generally limited (12) to forty-nine percent. This meant that managerial control and decision making remained in Chinese hands while any technology contributed by the foreign partners became Chinese property. If you wanted to do business in China, technology transfer was mandatory. Boeing is teaching (13) the Chinese how to manufacture aircraft components using the latest composite construction techniques and General Electric is handing over generator designs (14$) while footnoting that the transferred technology is not the “most advanced.” The same has been true for General Motors which has achieved success with it’s Buick line of autos in China, but also at the price of telling its hosts everything they wanted to know about how and why everything is done. Such a deal.

Intellectual property is not held sacred by the Middle Kingdom. At least that which they deem not worth protecting. For years the U.S. has beseeched China to clamp down on entertainment and PC software pirating (15) to little or no avail. The Chinese knockoff business, however, is apparently not limited in scope to within China proper. There’s a recent story about a factory in Italy, said to be owned by two Chinese businessmen, that’s turning out counterfeit Gucci and Louis Vuitton bags and other branded accessories in the Tuscan town of Prato. Italian police confiscated more that 650,000(!) fakes in a raid (16) that also uncovered a dormitory for illegal immigrants who produced the bags. Now, it may be unfair to taint the Chinese bureaucracy with this specific example of overseas shenanigans, but when business ethics and intellectual property protections are merely paid lip service by those that govern and regulate, such bold piracy seems much more likely to occur.

But overseas shenanigans in the form of industrial espionage and intellectual property theft are more the rule than the exception when it comes to China. As Peter Brookes of the Heritage Foundation informs (17) us:

"One good spy is worth 10,000 soldiers."— Sun Tzu, ancient Chinese military strategist […]

But don't think James Bond. It's all much more methodical — and mundane.

Chinese intelligence collection uses numerous low-level spies to painstakingly collect one small piece of information at a time until the intelligence question is answered. Kind of like building a beach one grain of sand at a time.[…]

China also doesn't rely on "professional" spies stationed overseas to the extent other major intel services do. Instead, it uses low-profile civilians to collect information.

The PRC's Ministry of State Security (MSS) often co-opts Chinese travelers, especially business people, scientists and academics, to gather intel or purchase technology while they're in America.

The MSS especially prizes overseas Chinese students, hi-tech workers and researchers living in the U.S. because of their access to sensitive technology and research/development that Beijing can use for civilian and military purposes.

Of course, not all the 150,000 Chinese students and researchers now in America, or the 25,000 official PRC delegates — or the 300,000 victors (sic) — are spies, but they do provide the MSS with a large pool of potential recruits for collecting secrets on U.S. targets of interest.

But what do you do when there isn’t a fellow traveler in the right place at the right time to get what you wish to possess? Well, if necessary, get out the checkbook and use some of that foreign exchange surplus you’ve accumulated or just find an overseas native sympathetic to China:

An equal opportunity employer, the MSS (China’s Ministry of State Security) will, of course, "hire" sympathetic Americans — or any ethnicity — that will further China's cause, including scholars, journalists and diplomats, among others.

The United States isn't the only country with a Chinese spy problem. The MSS runs an espionage network against scientific labs and large research universities in several European countries, including the U.K., France, the Netherlands and Germany. In Asia, Taiwan recently arrested 17 of its military officers for working for the PRC.

While Americans were being treated to a daily barrage of Clinton’s “Oval Office Adventures with Monica,” the Senate Intelligence Committee was preparing a classified report that included a detailed history of China’s theft of American nuclear weapons designs as well as its history as an egregious weapons proliferator. The Senate version of the report was so revealingly detailed that it had to be reissued later in redacted form (18) by the House of Representatives:

IMPORTANT NOTE: This declassified report summarizes many important findings and judgments contained in the Select Committee’s classified Report, issued January 3, 1999. U.S. intelligence and law enforcement agencies within the Clinton administration have determined that other significant findings and judgments contained in the Select Committee’s classified Report cannot be publicly disclosed without affecting national security or ongoing criminal investigations.

So, we can’t be told the really, really bad stuff but what we can be told is that:

• The People’s Republic of China (PRC) has stolen design information on the United States’ most advanced thermonuclear weapons.

• The Select Committee judges that the PRC’s next generation of thermonuclear weapons, currently under development, will exploit elements of stolen U.S. design information.

• PRC penetration of our national weapons laboratories spans at least the past several decades and almost certainly continues today.

And when it comes to the Chinese proliferating weapons they’ve legitimately developed themselves or by means of stolen technology we learn that:

The PRC is one of the leading proliferators of complete ballistic missile systems and missile components in the world.

The PRC has sold complete ballistic missile systems, for example, to Saudi Arabia and Pakistan, and missile components to a number of countries including Iran and Pakistan. The PRC has proliferated military technology to Iran, Pakistan, and North Korea.[…]

The Select Committee is aware of information of further PRC proliferation of missile and space technology that the Clinton administration has determined cannot be publicly disclosed without affecting national security.

See the chapter PRC Acquisition of U.S. Technology for more detailed discussion of the Select Committee’s investigation of these matters.

Again, we don’t get to see the really, really bad – or good, depending on your viewpoint – details that are in the Senate version of the report. What we are told comes from the House “U.S. National Security and Military/Commercial Concerns with the People’s Republic of China” report, more succinctly and popularly known as the “Cox Report.”(19) Guess the American public, mainstream media and legislators paid too much attention to the wrong set of events tag-able with that moniker.

The United States is not, however, the only supplier, through means legitimate or otherwise, of weapons systems and military technology to China. As the Taipei Times complained (20), “French perfidy must be challenged.” And just what did the French do to deserve this uncomplimentary description? Well,

As France tries to pressure the rest of the EU into lifting the arms embargo on China, some readers might remember that Christine Deviers-Joncour -- the erstwhile mistress of former French foreign minister Roland Dumas whose tell-all books played a serious role in clarifying details of the scandal surrounding the kickbacks involved in Taiwan's purchase of Lafayette frigates in the early 1990s -- once wrote a book about herself called The Whore of the Republic.

The former lingerie model's right to this title is now under severe challenge from France's Defense Minster Michele Alliot-Marie, who last week said -- and you should probably reach for your sick bags now -- "France has the strictest, most stringent rules applying to the sale of weapons of the European Union and probably in the world." As the American writer Fran Lebowitz once said: "To the French, lying is simply talking."

In Taiwan we know about French arms sales -- principally how they are manipulated so that everyone in on the deal can pocket huge wads of cash at the taxpayers' expense. According to Dumas himself, the sum involved in the Lafayette case was US$500 million with People First Party Chairman James Soong's then office, the Chinese Nationalist Party's (KMT) secretariat general, acting as bagman. What could Alliot-Marie's "strict rules" be? Perhaps she means a strict scale of bribes.

Ouch!

Unfortunately, even the Israelis are not without sin when it comes to selling arms to the Chinese. One deal that didn’t go through because of intervention by President Clinton – see, on occasion even he did the “right thing” – was the sale to China by Israel of the Phalcon Airborne Early Warning System.

William Safire described (21) this deal with China as “shameful”:

Li Peng, China's hardest-line Communist leader - the man famed for ordering the Tiananmen massacre - was feted in Israel this month.

After a visit to the Holocaust memorial, foreign ministry officials took him to the Israeli Aircraft Industries facility near Ben-Gurion Airport. He inspected a Russian-built plane, owned by the Chinese, on which Israel is installing an advanced AWACS battle-management system called the Phalcon.

Israel is charging a quarter of a billion dollars for the aerial reconnaissance radar installation, and has a contract for three more. It's a lucrative deal. It may also be the biggest geopolitical blunder any Israeli government ever made.

Free Chinese on Taiwan have no such high-altitude early warning system. Combined with the new long-range and surface-to-air missiles being installed by the PRC in Zhangzhou, China's Israeli purchases will give it a ``qualitative edge'' in any military confrontation in the Taiwan Strait. That would include, of course, new ability for China to look down on and target any U.S. warships sent to discourage invasion.

Why is Israel, a small democratic nation threatened by powerful neighbors, helping to menace Taiwan, another small democratic nation threatened by a nearby tyranny?

When the deal got cancelled at Clinton’s insistence, Jonathan Adelman of the Jerusalem Center for Public Affairs opined (22):

The Israeli decision, under intense American pressure, to cancel the sale of the Phalcon Airborne Early Warning System to China during the Camp David summit in July 2000 threatens to be a major foreign policy debacle for Israel.

What was once a promising Israeli endeavor to develop strategic and lucrative commercial relations with a rising great power now lies in tatters. The Chinese, still angry over the Phalcon debacle and loss of face, have demanded large-scale compensation. The Americans, the reigning superpower, demand a veto over Israeli arms sales to certain countries. Israel's very credibility as an arms exporter has been called into question.

…Israel began to develop close ties with China beginning at the end of the 1970s, and in recent years these ties have become particularly strong in the area of defense. Yet Israel's security is primarily dependent on its relations with the United States -- a country perceived by the Chinese as the main obstacle to achieving their national objectives. This leads to great risks for Israel, as evidenced by the forced cancellation of the Phalcon deal.

The Chinese-Israeli business relationship was put back to ‘normal’ when Israel agreed to settle what had turned into a long-running quarrel with China by paying (23) $350 million as compensation for the cancellation of the deal to supply the Phalcon system.

But the U.S. is certainly not without grievous fault – maxima culpa for the classically inclined. This is illustrated by our own Clinton-approved sales of missile and satellite technology to the Chinese as the ever-vigilant David Horowitz explains (24):

Thanks to the Cox Report, we now know that the seven years of the Clinton presidency have coincided with the most massive breach of military security in American history.

As a result of the calculated degrading of security controls at America's nuclear laboratories, the Chinese communists have been able to steal the designs of our arsenal of nuclear weapons, including our most advanced warheads.

As a result of the 1993 Clinton decision to terminate the COCOM security controls that denied sensitive technologies to nuclear proliferators and potential adversary powers, the Chinese communists have been given the secrets of our intercontinental ballistic missile systems, along with previously restricted computer hardware. This allows them for the first time to target cities in the United States.

Well, enough of this spilt-milk, water-under-the-bridge nonsense. Over the dam of the last twenty years what did America get out of its trade and economic policies vis-à-vis the Chinese? We certainly didn’t receive any advanced technology from them as a result of our trade relationship. Has our military capability relative to China improved or deteriorated? Has their foreign policy proved congruent with that of the U.S. in our dealings with countries such as North Korea and Iran? Where in the world, the third world especially, aren’t the Chinese making inroads and weakening the influence (25) of the United States? Seems there are many, not a few even in this country, who consider that an improvement and a sign of progress for mankind. What, in fact, of lasting value have we accumulated with our credit-financed purchases of vast quantities of Chinese consumer goods?

Debt. And plenty of it.

Now, the American voting and consuming public has been hearing for years how “free trade” is a panacea for curing economic stagnation and just great for re-invigorating the health of America’s post-industrial, service-oriented economy. We’ve been fed the pabulum that the trade deficit is really something we need not worry about and, as far as the federal budget deficit is concerned, that’s not a real problem since that debt is owed to ourselves. If you’ve been among those who’ve swallowed all of this, or have just pushed it to the bottom of your things-I’ve-got-to-worry-about list, you are probably in for a very rude awakening.

Indeed.

As reported (26$) by Mark Whitehouse in the Wall Street Journal:

U.S. Foreign Debt Shows Its Teeth As Rates Climb - Net Payments Remain Small But Pose Long-Term Threat To Nation's Living Standards

Over the past several years, Americans and their government enjoyed one of the best deals in international finance: They borrowed trillions of dollars from abroad to buy flat-panel TVs, build homes and fight wars, but as those borrowings mounted, the nation's payments on its net foreign debt barely budged.

Now, however, the easy money is coming to an end. As interest rates rise, America's debt payments are starting to climb -- so much so that for the first time in at least 90 years, the U.S. is paying noticeably more to its foreign creditors than it receives from its investments abroad. The gap reached $2.5 billion in the second quarter of 2006. In effect, the U.S. made a quarterly debt payment of about $22 for each American household, a turnaround from the $31 in net investment income per household it received a year earlier.

Please note the bit about “…for the first time in at least 90 years, the U.S. is paying noticeably more to its foreign creditors than it receives from its investments abroad.” This is not the same old refrain about trade and budget deficits. This is new, at least if you’re less than about 110 or so years old, and may represent a major tipping point in America’s economic and power relationship with the rest of the world.

What’s happened is that budget and trade deficits have combined to make the U.S. a net debtor nation paying more in interest to other nations than it receives in earnings from overseas investments. This is the result of large budget deficits that were financed by foreign nationals and foreign nations buying U.S. Treasury instruments with all those extra dollars they had accumulated selling us all that oil and all those consumer goods that we so covet. In other words, folks, we no longer owe our national debt to ourselves. We owe it to others to a greater extent than they owe us.

All this seems to imply some belt-tightening is in our future:

The size of the nation's debt payments matters because it represents a share of income that American consumers, companies and government won't be able to spend or save. The higher the debt payments, the harder it will be for the U.S. to prosper.

"Your standard of living is going to be reduced unless you work much harder," says Nouriel Roubini, chairman of Roubini Global Economics. "The longer we wait to adjust our consumption and reduce our debt, the bigger will be the impact on our consumption in the future."

And just how bad could it get?

Among economists' biggest concerns, though, is the fast pace at which the U.S. is accumulating new debt. As that leads to larger interest payments, it will make the current-account deficit harder to control -- a vicious cycle that could accelerate if worried foreign investors demand higher interest rates to compensate for the added risk.

"You end up having to pay more and borrow more," says the University of California's Prof. Gourinchas. "Things could get out of hand very quickly."

Well, maybe things aren’t as rosy as we often hear on the evening news in those quickie macroeconomic reports. Low unemployment levels, rising household income and record corporate profit reports don’t seem to tell the whole story. If America has maxed-out its collective national credit card, no one in Washington will be willing to take any responsibility for our short-sighted economic policies when the free-trade and fiscal-finger-pointing merd hits the fan.

And where does that leave the country after we’ve consumed ourselves into poverty with a $800 billion per year trade deficit?(27$) Two hundred billion or so of that being with China. That’s right. We’re rapidly approaching one trillion per year. That would be a lot of dollars even to Everett Dirksen (28), the late Republican Senator from Illinois who once quipped regarding Congressional fiscal follies, “A billion here, a billion there, pretty soon, you’re talking real money.” Even today a billion dollars is “real” money. But there aren’t enough politicians in Washington who think so to make a substantive difference in America’s spending habits. We seem be unable to curb our own appetites. We may quickly be approaching the day when our global competitors will, despite our inability to do so ourselves, wean us off our excesses.

When and if that day comes, we will have neither the economic nor military muscle to protect and advance our national interest in a world dominated by a country we helped bring into the twenty-first century – having done so by significantly impoverishing ourselves financially, technologically and morally.

Think they’ll thank us?

Notes:

(1) Clifford D. May, Biography Section, Foundation for the Defense of Democracies

(2) Clifford D. May, Opening Remarks: Symposium on "Propaganda and Terrorism", Foundation for the Defense of Democracies, January 13, 2005

(3) http://www.merriam-webster.com/

(4) “Deng Xiaoping”, Wikipedia free encyclopedia, October 5, 2006

(5) “Foreign exchange reserves”, Wikipedia free encyclopedia, September 28, 2006

(6) Macartney & Duncan, “Chinese foreign reserves to exceed $1 trillion”, The Times, March 29, 2006

(7) Entry for July 21, China Reform Monitor No. 635, American Foreign Policy Council, August 16, 2006

(8) “US business leaders assail China over copyright fraud, currency”, Channel NewsAsia, MediaCorp News, September 28, 2006

(9) “Good call by Graham and Schumer”, Washington Times editorial, April 2, 2006

(10) Irwin M. Stelzer, “Surprise, Surprise – The economy isn’t performing exactly as expected”, The Daily Standard, October 3, 2006

(11) “Cargill Acquires Full Ownership of Its Xanthan Gum Joint Venture in China”, Cargill Corporation News Release, August 7, 2006

(12) “Commercial Presence in China – Transportation and Related Services”, Department of Commerce, International Trade Administration bulletin, December, 2001

(13) “Boeing 787 Highlights $600 Million in Contracts with Chinese Suppliers”, Boeing Aircraft Corporation news release, June 2, 2005

(14) Kathryn Kranhold, “China's Price for Market Entry: Give Us Your Technology, Too”, Wall Street Journal, February 26, 2004

(15) Engardio & Yang, “The Runaway Trade Giant – As its impact on the U.S. economy expands, China is also growing less vulnerable to American pressure on key issues”, Business Week, April 12, 2006

(16) “Fake Gucci, Vuitton bags seized in Italy - Police raid counterfeiting factory in Prato, Italy, said to be run by Chinese businessmen”, Reuters, September 25 2006

(17) Peter Brookes, “Legion of Amateurs: How China spies”, The Heritage Foundation, May 31, 2005

(18) Rep. Christopher Cox et al., “U.S. National Security and Military/Commercial Concerns with the People's Republic of China”, Overview of the Report of the House of Representatives Select Committee, May, 1999

(19) Rep. Christopher Cox et al., “U.S. National Security and Military/Commercial Concerns with the People's Republic of China”, Report of the House of Representatives Select Committee, May, 1999

(20) “Editorial: French perfidy must be challenged”, Taipei Times, March 14, 2005

(21) William Safire, “Israel’s Deal with China on Weapons Is Shameful”, Seattle Post-Intelligencer, December 24, 1999

(22) Jonathan Adelman, ”The Phalcon Sale to China: The lessons for Israel”, Jerusalem Center for Public Affairs, March 1, 2002

(23) John Gee, “Phalcon fight over at last, as Israel agrees to pay China $350 million”, Washington Report on Middle East Affairs, April 1, 2002

(24) David Horowitz, “The Manchurian Presidency”, Salon, June 21, 1999

(25) Joshua Kurlantzick, “How China is Changing Global Diplomacy”, The New Republic, June 27, 2005

(26) Mark Whitehouse, “U.S. Foreign Debt Shows Its Teeth As Rates Climb”, Wall Street Journal, September 25, 2006

(27) Greg Hitt, “Trade Deficit Climbs to a Record, Driven by Summer Oil Prices”, Wall Street Journal, September 13, 2006

(28) “Everett Dirksen”, Wikipedia free encyclopedia, October 2, 2006