Mutual interests bind Chinese, U.S. economies

Michael Hiltzik

November 16, 2009

When President Obama embarks on a round of bilateral meetings with the Chinese leadership in Beijing today, he'll be laboring under a heavy burden of history and politics.

Many in the U.S. will want him to place human rights issues -- a preoccupation of the regime's critics dating to even before the Tiananmen Square protests 20 years ago -- on the front burner.

The rest of the talk-radio agenda would have him meeting the Dalai Lama (that won't happen until after the current trip), threatening a trade war over one commodity or other and discouraging China's putative search for a global reserve currency to supplant the dollar.

Zachary Karabell isn't among the agitators. An investment manager and commentator who first visited China in 2002 while setting up a China-U.S. growth fund for Fred Alger Management, Karabell believes the two economies have become entwined in a web of mutual interests.

As a result, he argues, the time is past when the U.S. could gain anything by trying to browbeat the Chinese over political issues -- or indeed over economic issues with implications for both sides.

"American diplomacy has been partly bluster, partly rhetoric and thundering statements, and that doesn't work," he told me after a recent talk at the Los Angeles Public Library tied to the release of his book "Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It."

"The Obama administration gets it that China is an economic force that we're better off working with as a partner rather than working against as an adversary," he says. "Similarly, the Chinese understand that for all the failings of the U.S. economic system, they've tethered their future to our health, not to our weakness."

The recent dust-up over imported Chinese tires illustrates that point. In September the White House announced it would boost tariffs on Chinese-made tires at least 25% for three years, in response to complaints by organized labor about a tripling of Chinese-made imports over the last half-decade. The

Chinese have threatened to retaliate by cutting imports of U.S. auto parts and chicken wings.

Among the losers in the spat are two Ohio-based manufacturers, Goodyear Tire & Rubber Co. and Cooper Tire & Rubber Co., which have factories in China and sell imports in the U.S. market.

Also suffering are U.S. tire importers and, of course, U.S. consumers -- who can often save a lot by buying the cheaper Chinese-made product.

"Goodyear's supply chain accounts for a certain percent of its own production in China," Karabell observes. "You can't just say to a company, 'We're going to make that part of your supply chain 25% more expensive, just deal with it.' It has direct consequences on their ability to maintain jobs in the U.S. This is a two-edged sword. It's a tool you can brandish as a threat, but it's very difficult to use without harming yourself."

Under the circumstances, it's not surprising that the dispute involves a low-priced commodity that, in relative terms, amounts to barely a blip in the trade figures -- $1.7 billion in imported tires, measured against combined U.S.-China trade that exceeded $400 billion in 2008.

Few regions have as much riding on the growth of trade between the two countries as ours. China, the largest single exporter to the U.S. by dollar value, accounts for roughly half the containers landed at the ports of Los Angeles and Long Beach. So when an outbreak of political grandstanding interferes with the relationship, guess who pays the price.

The best case in point may be the failed effort by China Ocean Shipping Co., or Cosco, to lease land at the decommissioned Long Beach Naval Station for conversion to a shipping terminal in 1998.

The plan, which would have created hundreds of jobs at the Port of Long Beach, provoked a handful of conservative politicians into conniption fits over the imaginary prospect that the facility would become a nest of Chinese spies.

A port spokesman described the House of Representatives' vote to quash the deal as "congressional 'friendly fire.' " That was accurate enough, since the ringleaders included three Southern California GOP congressmen: Duncan Hunter, Dana Rohrabacher and Randy "Duke" Cunningham. As my colleague Jim Flanigan reported at the time, the ridiculous China-bashing campaign succeeded only because the rest of the California congressional delegation sat on its hands, unwilling to "brave the talk-radio attacks as being soft on communism and China."

Since then, political heat over Chinese investments in the U.S. has waxed and waned in accordance with the nature of the investment. The U.S. killed a 2005 attempt by China National Offshore Oil Corp., or CNOOC, to acquire El Segundo-based Unocal Corp. on the grounds that Unocal’s oil production was too strategically important to place in foreign hands. Unocal merged with Chevron Corp. instead.

But multimillion-dollar Chinese investments to build plants or hire workers in places like South Carolina or Washington state have been eagerly welcomed.

Nor has there been much kicking about big investments by China's sovereign wealth fund, China Investment Corp., in such signature financial firms as Morgan Stanley, possibly because we need the money.

American businessmen complain that the China domestic market isn't yet as open to our investment as we are to them. That may be true, but plenty of U.S. businesses have found their way in. One reason that Hewlett-Packard Co. is so eager to acquire Massachusetts-based 3Com Corp., a generally underperforming telecommunications equipment maker, is its outstanding success in the China market. (China was 3Com's only growth region in its most recent fiscal year, which ended May 29.)

It's proper for leaders in the U.S. and other Western democracies to hold China to account for domestic policies with disturbing humanitarian and economic consequences.

While some Chinese have begun to enjoy the liberating effects of affluence, the level of government control over the mass media and Internet is extremely, shall we say, un-Western. The accusations of commercial piracy and industrial espionage commonly leveled at Chinese businesses can only put sand in the gears of trade expansion. The projection of China's military power in its home region and elsewhere, particularly when it's connected with its quest for scarce resources like oil and minerals, is justifiably unnerving for the rest of the world.

Yet the best way to tether China's interests to our own may be to expand the opportunities for cross-border investment. In Karabell's view, any American impulse to constrain these opportunities won't reflect our economic interests but our national psychology.

"It's easier to be ascendant than to be on top and facing competition and change," he says. "But we're in a situation of mutual dependency now, which is a difficult pill for the U.S. to swallow."

Put another way, the relationship between the U.S. and China today has reached its adolescence. Obama could do worse in his meetings in Beijing than to start nudging it toward adulthood.

Michael Hiltzik's column appears Mondays and Thursdays. Reach him at michael.hiltzik@latimes.com, read previous columns at www.latimes.com/hiltzik and follow @latimeshiltzik on Twitter.

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