Posted on 08/26/2004 2:54:12 PM PDT by ninenot
IN RECENT MONTHS the United States has claimed several victories in keeping trade with China free and fair. From China's decision to postpone indefinitely its protectionist wireless networking standard to the recent US-China semiconductor agreement, China has dropped policies favoring domestic firms in the face of US pressure.
US trade officials have been quick to point to these agreements as proof that trade liberalization under the World Trade Organization rules is working. Critics of US trade policy such as Alan Tonelson have charged that China is not an honest broker and will quickly violate the spirit if not the letter of these agreements.
The historical lesson the critics draw upon is the perceived failures of the United States to open Japan's domestic market despite a series of agreements and deliberations during the 1980s and early 1990s, the notorious trade talk kabuki. The proponents of the current policy dismiss this analogy as irrelevant in today's globalized world. In reality, both sides miss the mark.
Rather than a replay of past trade conflicts with Japan or the dawn of a new era of global economic harmony, the United States will find the economic challenge of China lies not so much in China's capabilities as it does in the politics of economic policy making at home.
The critics are correct that China is still pursuing predatory industrial policies. The Chinese state is creating a new domestic digital video format called EVD to replace the foreign DVD format. Directly after the Chinese agreed to abandon the tax rebate for semiconductors, the government revealed that new industrial policies for the semiconductor industry are in the works. The objectives of these policies are to be WTO-compliant while providing support to domestic industry and to increase subsidies tenfold. These are hardly the actions of a nation that has embraced the gospel of free trade. Yet China appears to have a limited ability to carry out protectionist policies.
Despite Washington's concern over China's semiconductor subsidies, China doled out only $25 million in total tax rebates for semiconductor manufacturers. These subsidies represent less than one-third of 1 percent of domestic semiconductor production. The small size of the subsidies also points to the inability of the Chinese state to implement its policies effectively -- the planned rebates should have totaled 14 percent of the domestic production.
Likewise, past standard-setting gambits have proven futile, such as the China's past promotion of VCDs (video compact discs) to replace the international DVD standard. Furthermore, the Chinese state's attempts to create dozens of domestic champions have ended in failure, with only one Chinese firm, Huawei, remotely capable of challenging American firms on their own high-tech turf.
Despite the ineffectiveness of China's predatory policies, the nature of China's development still presents economic challenges against which America's policy tools may prove ineffective. Unlike Japan during its heyday, the Chinese economy has been reliant on foreign direct investment. Professor Richard Lester of MIT argues that China's dependence on foreign direct investment precludes it from becoming another Japan able to create homegrown giants that displace American firms from world markets.
Unfortunately, there is a downside in China's developmental strategy. This foreign investment-driven development presents the problem of American industrialists jumping camps. If these American firms have extensive resources in China, they will have little incentive to work with the US government to promote competitiveness at home and aggressive trade policy abroad.
Instead of repeating the successful comeback of the US semiconductor industry through industry-government cooperation in the face of the Japanese competition in the 1990s, American businesses may spurn the US government's efforts to respond to rising competition from China.
As an ominous harbinger of things to come, a new report by the consulting firm Deloitte and Touche advocates that foreign firms work with China's government standards-setting bodies rather than try to resist them.
American auto manufacturers are pressuring their American suppliers to move operations to China as a new export platform to the United States. What's next? Member firms of the Semiconductor Industry Association of the United States fabricating chips in China? That day might not be far off. When it comes, will US manufacturers still place first priority on American competitiveness?
Douglas B. Fuller is a PhD student in MIT's political science department and a research associate in MIT's Industrial Performance Center.
What the author says about chips--can be said about metal-bending components such as stamped/machined parts--not to mention plastic molded products.
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Here's my attitude on this, with regards to the PRC's feign: Fool me once, shame on you. Fool me twice, shame on me!
No. Half of America rallies the globalization trend and the others cry, "Buy American!" which, without knowing corporation background, is self-defeating support for the former.
B U M P
Globalism has created the biggest mess possible in the financial markets. There is not one sound fiat currency in the world. The manufacturing industries are on the way out, following the financial trends. Any college student wishing to prepare himself for the future should be taking basket weaving or fish cleaning.
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