- The Washington Times - Saturday, October 18, 2003

On his trip to Asia, President George W. Bush should be looking for ways to combine economics and security concerns into a coherent strategy for shaping the region to America’s advantage.

The president is visiting Japan, the Philippines, Thailand, Singapore, Indonesia and Australia. Mr. Bush is expected to meet with Chinese President Hu Jintao during the Asia-Pacific Economic Cooperation forum in Thailand. Before embarking, he said he would urge the leaders of China and Japan to stop depressing their currencies artificially to gain an unfair trade advantage over rival American firms.

While China has been the primary target of criticism in the United States over its currency manipulation, the Japanese, South Koreans and Taiwanese also regularly intervene in the markets to keep their currencies in check and their cars, consumer electronics and other products priced competitively in the American market.

Beijing, however, deserves the special attention it has been getting. Beijing set off the world financial crises of the 1990s, from which the world economy has not yet fully recovered, when it devalued the yuan and fixed its rate against the dollar in 1994. This act gave China an edge against its trade rivals which it has exploited ruthlessly, not only in export market shares, but in its ability to attract foreign investment to expand and deepen its industrial base.

The deficit with China is the largest in U.S. trade accounts and by far the most lopsided. For every $1 of American produced goods sold in China, Chinese producers sell $5 worth of goods in the United States. About half of China’s exports come from factories built with foreign money, representing a shift of industrial capacity and jobs from other lands to China.

Some of this movement has been of American-owned factories, but other countries are also shifting industry, technology and capital to China, from Europe, Mexico and the Pacific Rim.

The consequences of this redistribution of productive assets is not just economic. Changes in the wealth of nations translate into changes in the balance of power between nations.

Historically, most trade has taken place between allies or with neutrals, lessening the worry that the gains from trade will be used by adversaries to undermine national security. Trends in China trade since the mid-1990s have taken a very different and dangerous course.

Beijing has benefited from much more rapid growth and has taken market share away from rival Asian states aligned with Washington. And Beijing has made no secret of its desire to drive American influence out of Asia and diminish its dominant role in world affairs.

Philippines President Gloria Arroyo has often stressed how poverty in her country provides the breeding grounds for the recruitment of Islamic and left-wing terrorists. It would be far better from the standpoint of U.S. security and foreign policy if a substantial share of the capital American firms are sending to China was invested in the economic development of the Philippines instead.

Washington should be looking at ways to “play favorites” in its international economic policies in order to strengthen its strategic position in Asia, rather than let Beijing call the tune.

It is because of this interaction of trade and power, that the United States-China Economic and Security Review Commission was created by Congress in the Defense Authorization Act of 2001. Its membership is composed of academic and private sector experts appointed by the leaders of both parties in the House and Senate. The current chairman is Roger W. Robinson Jr. who served as senior director of International Economic Affairs on President Ronald Reagan’s National Security Council.

The commission’s mandate includes examining China’s economic policies and the United States trade and investment relationship with China, including the relocation of high-technology, manufacturing and R&D; facilities, and assessing the effect of such movements on U. S. economic security. The hearings the Commission held on Sept. 25 were thus not limited to exchange rate issues, but looked at Beijing’s investment and industrial policies as well.

China’s currency manipulation is not an end in itself, but one of many strategies being used by Beijing to build what it terms “comprehensive national strength.”

The commission sent its recommendations to Congress on Oct. 15. Among them, the commission suggested President Bush’s Manufacturing Initiative “include provisions that strengthen the competitiveness of U.S.-base manufacturers in light of the growing shift of production to China, especially in high-tech and R&D.;” Especially needed are ways to counteract “de facto Chinese subsidies… such as tax incentives, preferential access to credit, capital and material, and investment conditions requiring technology transfers.”

The commission also was concerned with finding out more about investment and R&D; flows to China from U.S. companies and recommended that Congress “consider establishing an enhanced, mandated corporate reporting system to capture better this information.”

When many American firms are building not just factories, but research labs and training centers for Chinese engineers and scientists in military relevant sectors like aerospace, the need to know what is being made available to Beijing is obvious.

It is not expected that President Bush will be able to change Chinese policy simply by discussing matters with President Hu Jintao in Bangkok. On his return, he should turn his attention to more direct and effective measures the United States can take to improve its situation.

William R. Hawkins is senior fellow at the U.S. Business and Industry Council.

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