U.S.-China Trade Relations and Economic Distrust

Transcription

1 may june The Chinese Economy, vol. 47, no. 3, May June 2014, pp M.E. Sharpe, Inc. All rights reserved. Permissions: ISSN (print)/issn (online) DOI: /CES Edward I-hsin Chen U.S.-China Trade Relations and Economic Distrust Abstract: This article explores U.S.-China trade relations and economic distrust. Generally speaking, the U.S.-China trade relationship has tilted in favor of China since the 1980s. There is long-term distrust between the United States and China on intellectual property rights, renminbi exchange rates, the Trans-Pacific Partnership (TPP), the Regional Comprehensive Economic Partnership (RCEP), rare earth metals, and state-owned enterprises (SOEs). Given this economic distrust, the United States and China have engaged in limited cooperation and coordination on issues where their national interests are identical or partially identical, but are likely to compete with each other more than ever before on other matters. Areas of cooperation include clean energy, climate change, and China s huge holdings of U.S. treasury bonds; areas of competition include intellectual property rights, intellectual property theft, currency exchange rates, and investment access to one another s markets. In 2011, the U.S. deficit with China reached US$295.4 billion, up 8 percent from the previous year. For the first eight months of 2012, the United States exported US$69.9 billion worth of goods to China and imported US$273.1 billion from China, resulting in a deficit of US$203.1 billion. Chinese growth in the first half of 2012 slowed significantly from the double-digit averages of the previous decade. Chinese export growth has also slackened dramatically, mostly as a consequence of weak demand for Chinese goods from its two main trade partners, the United States and Europe (U.S. Economic and Security Review Commission 2012, 27). Most recently, the U.S. trade representative has engaged China over its practice of using investigations and trade-remedy actions in retaliation for challenges brought by the United States and not based on actual evidence (U.S. Economic Edward I-hsin Chen is a professor in the Graduate Institute of the Americas at Tamkang University, Taiwan; chened8852@yahoo.com.tw. 57

2 58 The Chinese Economy and Security Review Commission 2012, 39 46). State-owned and state-controlled firms in China provide the opportunity for the central government to implement its industrial policy, create global competitors, and develop monopoly industries for its own benefit. The government does so at the expense of foreign competitors, U.S. firms in particular (U.S. Economic and Security Review Commission 2012, 35). From Washington s perspective, American firms are placed in a disadvantageous position in terms of investment access to the Chinese market. In the areas of trade and economic policy, there is a long-standing distrust between the United States and China. China s fast economic rise, its rapid economic growth, and its ambitious investment and trade policies abroad have raised concerns that China seeks to sustain its rapid growth at the expense of U.S. global economic interests (Lieberthal and Wang 2012, 1 50). Such issues as intellectual property rights, currency exchange rates, constraints on foreign direct investment (FDI), and restrictions on the export of rare earth metals have contributed to U.S. suspicion about China s motives. On the other hand, Chinese misgivings have accumulated suggesting that Washington is making use of these economic frictions as a scapegoat for America s economic failures. Intellectual Property Infringements in China China agreed to provide minimum levels of protection to the intellectual property of fellow World Trade Organization (WTO) members when it joined in Under an agreement with the WTO, Beijing has extended copyright protection to computer programs that are protected as literary works under the amended Berne Convention of 1886 (WTO 2012). By nearly all accounts, however, China is one of the world s largest producers of counterfeit and pirated goods. In 2011, China remained first on the priority watch list of eleven countries that are the worst enforcers of intellectual property rights (Office of U.S. Trade Representative 2011). China is by far the dominant source of the counterfeit and pirated products seized by customs agents at ports and airports around the United States. According to U.S. Customs and Border Protection, Chinese-sourced products accounted for 53 percent of the seizures at U.S. ports of entry in 2010, up from 6 percent in The second-largest number of seizures originated in Hong Kong, but it is likely that many counterfeit and pirated goods from Hong Kong actually originated in China. In other words, more than three-quarters of the seizures of illicit products were from China and Hong Kong. According to an assessment by the Chinese government, counterfeits constitute between 15 percent and 20 percent of all products made in China and are equivalent to about 8 percent of China s GDP (U.S. Economic and Security Review 2011, 81 82). Worldwide business circles also list China as one of the largest sources of intellectual property infringement. An estimated 78 percent of personal computer software in China is pirated, according to an annual study by the Business Software Alliance (2011), decreasing from 82 percent in However, the total commercial value of

3 may june unlicensed software in China rose from US$5.4 billion in 2006 to US$7.8 billion in Hong Kong s piracy rate was 45 percent, a figure much lower than China s. The sharp contrast demonstrates that China is a large-scale source of piracy. China was the second-largest market for computer hardware in the world US$64.4 billion in 2009 second only to the United States, whereas it was the eighth-largest market for software, behind Canada and Italy, at US$5.4 billion. The International Intellectual Property Alliance (IIPA) says that China s nonenforcement and restrictions on market access suggest that its policies are consciously designed to drive its own competitiveness by enabling free access to foreign content through unapproved pirate channels (IIPA 2011). According to a 2010 IIPA report, High copyright piracy levels persist in China, from pervasive use of unlicensed software by business and pre-installation of unlicensed software (hard disk loading piracy) at the distribution level, to widespread online piracy of music, films, television programming and other copyright materials, and piracy of hard goods.... China s principal reliance on its woefully under resourced administrative system to deal with IPR (intellectual property rights) infringements rather than through criminal enforcement presents a significant hurdle to effective enforcement. One of the remedies recommended by Washington and required by the WTO in negotiations with China is the greater use of criminal penalties rather than administrative fines. The latter are too often levied at a nominal rate and are absorbed by Chinese counterfeiters as a cost of doing business. U.S.-China Trade Relations Trade relations between the United States and China have by and large tilted in favor of China since the 1980s. Although the U.S. trade deficit with China fell in 2009 as a result of the global recession, it has since surged, reaching a record high of US$295.4 billion in 2011, up from US$273.1 billion in 2010 (U.S. Economic and Security Review Commission 2012, 35; 2011, 21 22). In the first eight months of 2012, the United States exported US$69.9 billion worth of goods to China and imported US$273.1 billion from China, resulting in a deficit of US$203.1 billion. The United States has a far larger deficit with China than with any other trading partner, amounting to 40.6 percent of the total in Trade relations between the United States and China have remained tense since the beginning of the twentyfirst century. Currency appreciation leveled out in The renminbi (RMB) did not appreciate as much as in 2011, and there are signs that China may devalue the RMB to boost exports (U.S. Economic and Security Review Commission 2012, 35). As a result, Washington will keep a close eye on the currency reform promised by China for years. Despite the economic reforms launched since 1978, state-owned and statecontrolled enterprises still account for as much as half of the Chinese economy today. Their political influence within China and their ability to compete on a global

4 60 The Chinese Economy scale are both on the rise, and China s industrial policy envisions an ever larger role for the state sector, particularly in support of exports and overseas investments. Chinese government corporations provide the means for the central government to designate and control important segments of the economy. At the same time, the government employs its corporations to advance its foreign policy objectives and international commercial interests. Many, if not all, of the corporate executives appointed by the Central Organization Department of the Chinese Communist Party (CCP) are party members, and many of them become part of a revolving managerial class that cycles through the hierarchy of China s largest state-owned enterprises (U.S. Economic and Security Review Commission 2012, 47 53). All 130 leaders of the largest state-owned firms in 2011 were party members. Actually, the largest state-owned enterprises (SOEs) are generally managed by the central government through a holding company that is directly responsible to the State Council, according to a 2011 estimate by the World Bank. The top leaders of 121 centrally owned, nonfinancial SOEs are chosen by a branch of the party and are typically party members. In turn, the SOEs influence government and party decisions regarding the economy. In addition to SOEs owned by the central government, there are 114,500 SOEs owned by provincial or local governments. As Washington sees it, the existence of SOEs is a barrier to American firms which are anxious to gain access to the Chinese market. According to the 2012 Report to Congress by the U.S. Economic and Security Review Commission, twenty SOE executives served in 2010 on the CCP s Central Committee, which elects the ruling Politburo. The existence of state-owned and state-controlled enterprises presents numerous challenges to U.S. corporate competitors in three distinct venues: within China, within the United States, and in third-country markets. Because SOEs are the preferred suppliers for all levels of government in China, U.S. firms face many kinds of discriminatory barriers to sales there. The subsidies and preferences enjoyed by the state sector when competing with foreign firms in China make Chinese SOEs stronger competitors in the U.S. market and third-country markets U.S. Economic and Security Review Commission 2012, 47 53). In other words, Chinese firms always have the upper hand over American firms as a result of the symbiotic relationship between the SOEs and all levels of government as well as governmental subsides and preferences enjoyed by the SOEs in China. Moreover, unlike enterprises in the United States and other developed countries, Chinese SOEs lack monitoring functions and are subject to powerful political interference (Tsai 2012, ). Managers of SOEs are often appointed by the state and thus under strong pressure to comply with governmental requests for funds even when this is not in the interest of the SOE. They offer rights issues to public shareholders and then transfer the proceeds to the state by distributing cash dividends, hence their income is often falsified in financial statements issued before the rights-issue offering. All these factors suggest that earnings are deliberately inflated before offering rights issues to meet profitability requirements set by the

5 may june China Securities Regulatory Commission and implying state ownership. Due to the strong governmental influence on the banks, the SOEs are unlikely to manipulate their earnings before rights issues. Chinese SOEs are further privileged over American and other foreign firms as a result of the Chinese banking system. The Chinese banking system has remained resilient since the Asian financial crisis due to three factors. First, capitalcontrol policies have limited exposure to international capital and credit markets. Second, it is focused on traditional banking rather than securitization activities, such as primary and secondary funding, insurance, and investments. Third, it is owned and dominated by state-owned banks availing themselves of public trust (Liang 2012a, 3 7; 2012b, 8 27). Actually, the banking system in China is entirely state owned and is dominated by five banks that account for nearly all lending. Chinese SOEs are the principal borrowers, whereas other entrepreneurs and private firms, much less American and other foreign firms, find it hard to obtain loans even at higher rates (U.S. Economic and Security Review Commission 2012, 53 54). The underdevelopment of the country s bond and equity markets puts private Chinese firms and foreign affiliates of U.S. firms at a further disadvantage. The rate of interest payments to depositors is set by the government at an artificially low rate, allowing the government to provide low loan rates to its favored clients in the state sector. This system of financial repression represents a transfer of wealth from the private sector to the state sector. It goes without saying that U.S. firms face unfair competition from Chinese SOEs in China, in the United States, and in third-country markets. The procurement contracts of governments at all levels in China favor Chinese SOEs. Chinese affiliates operating abroad do so with preferential financing from the government in China. Governments at all levels in the United States seek investment from China. However, investment from Chinese SOEs carries a number of risks for U.S.-based competitors due to the preferential financing provided by Chinese governments at all levels. United States laws and regulations are inadequate to address the advantages given to Chinese SOEs operating in America. Although Chinese investment in the United States is low, China has large dollar holdings that could be converted into direct investment in the United States (U.S. Economic and Security Review Commission 2012, 54 81). Likewise, even firms that are majority privately held are likely to be influenced or controlled by the government. Chinese private firms are expected to follow the guidelines spelled out in Five-Year Plans and other official planning documents issued by the State Councils and implemented by government ministries (U.S. Economic and Security Review Commission 2012, 54 81). When Beijing joined the WTO in 2001, it committed to economic reforms that would diminish the state s role in the economy, but it has not complied with many of these explicit obligations. Washington has several possible remedies to counter China s failures to comply. These include bringing WTO complaints and antidumping and countervailing duty cases against the Chinese government and

6 62 The Chinese Economy against Chinese industries (Das 2012, 7 38). The Securities and Exchange Commission (SEC) could require Chinese SOEs listed on U.S. exchanges to disclose the subsidies they receive. Washington could demand reciprocal treatment for foreign investment in China to match the treatment afforded Chinese firms in America. Many American firms are restricted to minority ownership of joint ventures in China or excluded entirely from some business sectors, whereas there are no such restrictions on Chinese firms in America. In some cases, reciprocal treatment is called for. Washington could exclude Chinese products and services from federal and state government service and construction projects in the United States until China opens its own government and SOE contracts to competitive bidding by American firms. The domestic innovation policies and additional attention to certain strategic sectors identified in the Twelfth Five-Year Plan ensure that China will continue to provide support to its national champions. For the foreseeable future, SOEs will be favored over foreign firms for government and state-owned enterprise procurement contracts and will continue to benefit from a range of subsidies, tax breaks, special development funds, increased credit support, and other assistance not enjoyed by their foreign competitors. These advantages continue to make Chinese national champions formidable competitors in China and in other markets globally, undermining U.S. industry innovation and success (Lieberthal and Wang 2012, 27). Inconsistencies in central and subnational laws, practices, and enforcement efforts, particularly in the realm of intellectual property rights, continue to damage the U.S. economy, as American businesses in America and China lose sales and jobs to competitors who do not play by the same rules, especially since the United States has no means of persuading China to address the problem. Although sequential market-oriented macroeconomic reforms and institutional upgrades have turned China into a dynamic market-oriented economy, Beijing has been slow to open its trade sector to American and other trading firms. Financial sector reforms and developments have lagged behind; SOEs still have a notable presence. Despite criticism from the United States and elsewhere, Chinese officials continue to believe that China will achieve economic success in its own way (U.S. Economic and Security Review Commission 2012, 35 81). Overall, China s state-directed financial system and export-driven growth model, its market barriers to various U.S. exports, its discriminatory favoring of SOEs over American investors, rampant theft of intellectual property, and its unreliable rule of law, as well as its inconsistent adherence to WTO commitments, continue to disadvantage American competitors. U.S. Dissatisfaction with China s Motives The distrust between Washington and Beijing is of long standing. China s fast economic rise, together with its rapid economic growth and its ambitious investment and trade policies abroad, has created concerns that China intends to sustain

7 may june its rapid growth at the expense of U.S. global economic interests (Lieberthal and Wang 2012, 28). The issues of intellectual property rights, currency exchange rates, constraints on FDI, and rare earth metals have contributed to U.S. suspicions about China s motives (Lieberthal and Wang 2012, 27 28). First, in the U.S. view, China is manipulating the value of the renminbi to advance its economic and trade interests. It has constantly kept the RMB below market-determined levels not only to facilitate the export of Chinese products to America, but also as a tax on U.S. exports to China (U.S. Economic and Security Review Commission 2011, 87). At a time when the United States is anxious to create jobs in its manufacturing and export sectors, China s currency policy, at a minimum, is perceived as demonstrating indifference to vital U.S. interests. Second, American and other foreign firms doing business in China risk the loss of their intellectual property and inventory to Chinese joint venture partners because of the lax enforcement of intellectual property rights and business contracts in China. American technology firms are increasingly vulnerable to Chinese intellectual property theft resulting in lost profits and market share (U.S. Economic and Security Commission 2011, 87). China agreed in 2001 to stop explicitly requiring American firms to surrender their technology to China in return for market access and investment opportunities in the United States. Despite this, Beijing is still using various tactics to coerce American firms to share business and trade intelligence with Chinese firms. China s industrial policy, and in particular its domestic innovation policy, circumvents accepted intellectual property protections and extorts technology from American firms (U.S. Economic and Security Commission 2012, 19). Chinese firms are privileged over American firms and China-based foreign affiliates in government procurement contracts. Municipal and provincial governments and SOEs also tilt in favor of Chinese firms. American or foreign firms seeking Chinese procurement contracts or public works projects are expected to file for patents and copyrights in China to qualify for preferential treatment. If they agree to do so, they risk the unintended transfer of their technology to Chinese firms as a result of the nature of the Chinese intellectual property system and the lax enforcement of intellectual property rights laws and intellectual property rights regulations (U.S. Economic and Security Review Commission 2012, 35 81). Moreover, as a result of China s capacity for second-generation innovation, American firms and U.S.-headquartered firms have increasingly moved their product research, engineering, and manufacturing to China, while retaining design, marketing, and sales in the United States. Although this has helped some American firms to maintain their price competitiveness, it has led to the loss of manufacturing jobs in America (Lieberthal and Wang 2012, 27 28). Furthermore, China heavily depends on industrial espionage, forced technology transfer, and counterfeits and piracy of foreign technology as part of its system of innovation mercantilism. This enables China to avoid the huge expense and difficulty of basic research and

8 64 The Chinese Economy specific product development. China has successfully created its economic miracle by obtaining what it needs illegally at the expense of the United States. China s investments in science and technology focus on experimental development rather than on applied and basic research. While this strategy helps China develop commercialized products, it may handicap the ability of its scientists to produce leapfrogging innovations as directed by the Twelfth Five-Year Plan and the National Medium-and Long-Term Plan for the development of Science and Technology, (Lieberthal and Wang 2012, 28). Third, the United States has long perceived China as a country of intellectual property theft. China has approved many rights and laws related to intellectual property rights, and has joined some major international conventions on intellectual property rights. Nonetheless, China s legal enforcement of intellectual property rights has disappointed the U.S. government. What America cannot accept is that the Chinese government dominates the realm of intellectual property theft (U.S. Economic and Security Review Commission 2012, 19). Cyber-attacks from China have resulted in huge losses of sensitive information in the U.S. private sector. The attacks have even intruded into the U.S. defense sector to gain sensitive intelligence such as engineering data for the F-35 stealth aircraft. Moreover, China has effectively and successfully required American firms to transfer technology as a condition of gaining access to the Chinese market. Technology sharing or transfer agreements have also led to technological theft. The Chinese government has made good use of pirated technology, subsidies, and other support for Chinese firms to drive the American firms out of business. All this leaves the Americans with the impression that theft activities are an integral part of China s economic development and defense capabilities. Fourth, while Beijing complains about U.S. restrictions on the export of certain specific technologies to China, it periodically publishes a list of sectors where American and other foreign investments are either prohibited or limited (Lieberthal and Wang 2012, 28 29). Such restrictions amount to protectionism that directly harms U.S. economic interests. Many of these restrictions not only affect sectors where the American firms are highly competitive, such as financial and insurance services, but also increase concern that China is growing its economy at a direct unfair cost to its American counterpart. The Chinese government has assigned a high priority within its industrial policy planning to the development of a culture of innovation. Its primary goal is to replace low-wage, resource-intensive manufacturing with high-value-added production. Funding for research and development has significantly increased, and China has increasingly invested in science and engineering education, as demonstrated by the large increase in the number of university graduates with science and engineering degrees. What China lacks, however, is a financing system to support entrepreneurs and the willingness to enforce intellectual property protections, two fundamental requirements for an innovative society (Lieberthal and Wang 2012, 29). Fifth, China s imposition of significant restrictions on the export of rare earth

9 may june metals has led to concerns about its strategic approach to trade (Donilon 2013). The rare earth metals are crucial for many military and civilian products, especially in the electronics and clean-energy areas. What increases U.S. concern is that China has allowed several American and other foreign firms to access these metals since 2011 but only if they promise to move their production facilities to China, thus putting their technologies at an even higher risk of theft. Despite many Chinese pronouncements stressing 2-C (Cooperation and Coordination) with the United States, Washington believes that Beijing perceives the future with America as a zero-sum game (Mearsheimer 2003, 1 28). This impression troubles top U.S. leaders more than the officials responsible for managing U.S.-China economic relations. Sixth, in his speech to the Asia Society in New York on March 11, 2013, U.S. National Security Adviser Tom Donilon pointed out that the centerpiece of economic rebalancing is the Trans-Pacific Partnership (TPP). He makes it clear that the TPP is intended to be an open platform that additional countries can join if they are willing to meet the TPP s high standards (Lieberthal and Wang 2012, 15 16). Beijing has not responded to his invitation so far. This view seems to reflect John Mearsheimer s offensive realism, which warns against putting too much faith in the goodwill of other countries (Mearsheimer 2003). He argues that great powers tend to maximize their share of world power because having dominant power is the best means to ensure one s own survival. In his opinion, trying to make China wealthy and democratic will only make it a stronger rival. When another power is rising, the current hegemon should try every possible means to slow down its adversary s economic growth or disrupt its economic development (Lieberthal and Wang 2012, 14 15). Overall, from the economic and trade aspects, Washington is especially sensitive to the Beijing policies that impose direct costs on the U.S. economy. These costs include intellectual property theft, keeping the value of the RMB below market levels, serious restrictions on market access in China, and the constraints in on exports of rare earth metals. All of these appear to have been strategically designed to acquire sensitive U.S. and foreign technologies. Chinese Misgivings About U.S. Motives On the Chinese side, there is also accumulated dissatisfaction with the United States. First, most Chinese believe that the Obama administration s decision to develop clean energy only serves U.S. national interests (Lieberthal and Wang 2012, 15). While China is interested in stronger cooperation with the United States and the European Union in developing clean energy, echoing their calls for a green economy with inappropriate enthusiasm is politically risky, simply because China s high-speed economic growth will have to depend on fossil fuels for many years to come. Second, many Chinese question whether it is in China s national interest to have

10 66 The Chinese Economy maintained such huge holdings of U.S. treasury bonds since 2008 (Bramhall 2012; Capling and Revenhill 2011, ; Yoon 2012). Due to the devaluation of the U.S. dollar, ranging from QE1 to QE4, the fluctuations of the U.S. financial market, and the fiscal battle between the Obama administration and the U.S. Congress, more and more Chinese suspect the political wisdom of their leaders. While China s political and economic leaders continue to see few alternatives to purchasing American debt and U.S. dollars, they are no longer willing to increase their purchases. Third, in the face of a weakened U.S. dollar, Beijing might feel the necessity to internationalize the RMB. However, Beijing tends to believe that Washington has set barriers to the RMB s becoming an international currency. Many Chinese think that U.S. global hegemony is sustained by the dominance of the U.S. dollar and believe that America has sought to constrain the rise of Japan and the European Union (Lieberthal and Wang 2012, 14). In China, the Obama administration s ambitious plan to expand the TPP is viewed as an attempt to compete with the Regional Comprehensive Economic Partnership (RCEP) and to sabotage China s growing economic ties with other Asian Pacific countries (Lieberthal and Wang 2012, 40 43). Fourth, in the eyes of Chinese leaders, the United States is simply using Sino-U.S. economic frictions as a scapegoat for America s economic failure (Lieberthal and Wang 2012, 41 42). Increasingly American trade protectionist measures are seen as an indicator of U.S. failure in international trade competition. From the viewpoint of the Chinese, the huge U.S. trade deficits with China do not result from Beijing s manipulating the value of the RMB, but from Washington s political prejudices against Beijing. Pressure by the United States on China to appreciate the RMB are seen as a political instrument to sabotage China s economic development. It obviously serves U.S. national interest at the expense of China s economy and Chinese workers. The United States is seen as setting up political barriers for Chinese firms to invest in the United States and merge with American firms. Overall, Beijing views Washington as taking advantage of the dollar as a reserve currency, adopting protectionist measures to disadvantage China economically, and using the TPP to compete with China s growing economic ties with Asian countries. Building Mutual Economic Trust Despite the intensive and extensive dialogue and communication channels between the United States and China, their mutual distrust in the areas of trade and the economy remains high (Lieberthal and Wang 2012, 42 43). Political and economic leaders on both sides are fully aware of the problems, but there is no immediate solution on the horizon. A long-term plan that would resolve their disputes on an incremental basis is not only possible but also desirable. First, both the United States and China want to gain investment access to the other side s market. Therefore, they should work together toward a bilateral investment treaty (Lieberthal and Wang 2012, 42).

11 may june Second, the Chinese government would heighten U.S. confidence if China makes its political system more transparent to key U.S. officials, analysts, and American firms. In this way, the United States will no longer develop nonrealistic expectations of China. Likewise, the Americans may have to fully explain U.S. trade policy to key Chinese officials, analysts, and Chinese firms so that the Chinese will understand how transactions can be conducted without violating U.S. laws (Lieberthal and Wang 2012, 42 43). Third, the Obama administration is reviewing its regulations on the export of technology and some of the regulations will be removed or updated (Lieberthal and Wang 2012, 42). It is widely expected that these changes will significantly reduce restrictions on technology transfers, and will only apply restrictions to technologies that have a clear impact on national security and are not readily available elsewhere. China has long viewed Washington s wide-ranging restrictions on technology transfers as an indication of its fundamental distrust of China. Updating the regulations may significantly reduce this suspicion. Even when all this is done, the economic distrust between the two giant powers will not disappear permanently. Nor will their misgivings about one another be removed overnight. But at the least, this will help build their economic trust. Conclusion The U.S.-China trade relationship, generally speaking, has tilted in favor of China since the 1980s. In the economic and trade areas, there is long-standing distrust between the United States and China. American firms doing business in China risk the loss of their intellectual property and inventory to Chinese joint venture partners because of the lax enforcement of intellectual property rights and business contracts in China. American technology firms are also increasingly vulnerable to Chinese intellectual property theft resulting in lost profits and market share. The United States views China as manipulating the value of the RMB to advance its economic and trade interests. While Beijing complains about U.S. restrictions on the export of certain specific technologies to China, it periodically prohibits or limits American and other foreign investment in certain sectors. Many of these restrictions not only affect sectors where American firms are highly competitive such as financial and insurance services but also increase the concern that China is growing its economy at direct unfair cost to its American counterpart. China s imposition of significant restrictions on the export of rare earth metals has created concerns about its strategic approach to trade. The concern by the United States is heightened by the fact that since 2011, China has allowed American and other foreign firms to gain access to these metals only if they move their production facilities to China, thus putting their technologies at even higher risk of theft. Despite many Chinese pronouncements stressing 2-C (Cooperation and Coordination) with the United States, Washington believes that Beijing may perceive the future with America as a zero-sum game. Overall, in the

12 68 The Chinese Economy eyes of many Americans, China is an economy characterized by plenty of legal and institutional defects and underdeveloped financial markets. In the eyes of many Chinese, American increasing protectionism is an indicator of U.S. failure in international trade competition. From the viewpoint of the Chinese, America s huge trade deficits with China do not result from Beijing s manipulating the value of the RMB. Instead, they display Washington s political prejudices against Beijing. The pressures placed by the United States on China to appreciate the RMB are seen as a political instrument to sabotage China s economic development, thereby serving U.S. national interests at the expense of China s economy and Chinese workers. The United States is seen as setting up political barriers that prevent Chinese firms from investing in the United States and merging with American firms. From the perspective of the Chinese, the United States is simply using Sino-U.S. economic friction as a scapegoat for American economic failure. Many Chinese think that U.S. global hegemony is sustained by the dominance of the U.S. dollar and that America seeks to constrain the rise of Japan and the European Union. They even believe that the Obama administration s ambitious plan to expand the TPP is an attempt to compete with the RCEP and to disrupt China s growing economic ties with other Asian-Pacific countries. While China is interested in stronger cooperation with the United States and the European Union in developing clean energy, the call for a green economy is met with little enthusiasm simply because China s high-speed economic growth will have to depend on fossil fuels for many years to come. Given the level of economic distrust, it is expected that the United States and China might have limited cooperation and coordination in a number of areas when their national interests are identical or partially identical, but are likely to compete more than ever on many economic and trade issues. The areas of cooperation are clean energy, climate change, and China s huge holdings of U.S. treasury bonds, whereas the areas of competition include the enforcement of intellectual property rights, intellectual property theft, currency exchange rates, and investment access to one another s markets. If building U.S.-China economic trust is desirable, both Washington and Beijing should begin thinking of the unthinkable. The United States may have to encourage Chinese investment in real assets in America and complete the current review of its technology-export restrictions. China should make its political system more transparent to key U.S. officials, analysts, and American firms, so that the latter can develop more realistic expectations. The two giant powers may have to start negotiations toward the completion of a bilateral investment treaty. References Bramhall, S.J Will the RCEP Kill the TPP and Why You Never Heard of Either One. Dissident Voice. December 8. Available at will-the-rcep-kill-the-tpp-and-why-you-never-heard-of-either-one. Business Software Alliance Eighth Annual BSA Global Software 2010 Piracy Study. May. Washington, DC.

13 may june Capling, A., and J. Revenhill Multilateralising Regionalism: What Role for the Trans-Pacific Partnership Agreement? Pacific Review 24, no. 5: Das, D.K The Chinese Economy: A Rationalized Account of Its Transition and Growth. The Chinese Economy 45, no. 4: Donilon, T. [National Security Adviser to the President] The United States and the Asia-Pacific in A speech at the Asia Society, New York, March 11. Released by Office of the Press Secretary, The White House. Available at International Intellectual Property Alliance (IIPA) Special 301 Report on Copyright Protection and Enforcement, People s Republic of China. February 15. Washington, DC. Available at Liang, Y. 2012a. China s Short-Term and Long-Term Development After the 2007 Global Financial Crisis: Some Critical Reflections. Guest Editor s Introduction. The Chinese Economy 45, no. 1: b. Development Finance: China s Banking System in Light of the Global Financial Crisis. The Chinese Economy 45, no. 1: Lieberthal, K., and Jisi, W. 2012, March. Addressing U.S.-China Strategic Distrust. Monograph Series, no. 4. March. Washington, DC: John L. Thornton China Center at Brookings. Mearsheimer, J.J The Tragedy of Great Power Politics. New York: Norton. Office of the United States Trade Representative Special Report. Washington, DC. Tsai, B.H Political Interference and Earnings Manipulation in Chinese Firms. The Chinese Economy 45, no. 6: U.S. Economic and Security Review Commission Report to Congress. 112th Congress, First Session. November. Washington, DC: U.S. Government Printing Office. Available at Congress.pdf Report to Congress. 112th Congress, Second Session. November. Washington, DC: U.S. Government Printing Office. World Trade Organization Intellectual Property: Protection and Enforcement. Geneva: WHO. Yoon, S TPP vs. RCEP: A New Washington-Beijing Tug-of-War? The Nation. December 6. Available at Washington-Beijing-tug-of-war html.