- The Washington Times - Tuesday, May 29, 2007

The second Strategic Economic Dialogue brought a record number of high-ranking Chinese officials to Washington. They took a quick measure of their American counterparts, concluded there was no serious push coming from the other side and thus felt no need to compromise on any point of contention.

At the end of the meeting, Vice Premier Wu Yi, who earned a reputation for toughness as trade minister, called the talks “a complete success” because they had avoided the “easy resort to threats and sanctions” that would have caused Beijing trouble.

Treasury Secretary Henry Paulson had given the game away in his opening statement: “There is a growing skepticism in each country about the others’ intentions. Unfortunately, in America this is manifesting itself as anti-China sentiment as China becomes a symbol of the real and imagined downside of global competition. … A look back demonstrates, of course, that increasing our ties has benefited both our people.”

Unfortunately, Mr. Paulson, the former chief executive officer of Goldman Sachs, a firm heavily involved in Chinese finance, thinks of his people as living on Wall Street rather than Main Street. He acted more like a neutral party than an advocate of U.S. national interests, trying to keep the U.S. and China on an even keel for the benefit of his transnational business comrades.

On the eve of the SED, 41 bipartisan members of Congress filed a petition asking the administration to bring a World Trade Organization (WTO) case against China for manipulating its currency. House Ways and Means Committee Chairman Charles Rangel, New York Democrat, said the time for talk had passed and that the U.S. must act to end an unfair trade practice that “cripples” American industry. The Bush administration rejected similar petitions filed in 2004 and 2005 and has argued that dialogue with China is the better course.

But words have particular meanings in diplomacy. The first morning of the SED, Commerce Secretary Carlos Gutierrez confirmed that “‘these are not negotiations” but merely “dialogue.” Chit-chat over tea and cookies. The Chinese know they do not have to change a thing, as long as it is only “dialogue.”

This “do nothing” approach is fully supported by Mr. Paulson’s Wall Street friends. Under the name Engage China, a coalition of banks, insurance companies and financial services trade associations ran an ad campaign to support the SED. Using the slogan “China’s Growth, America’s Opportunity,” the ads ran May 16-23. These groups feel they can profit by helping China continue rising to great power status. But even they were stiffed by Beijing at the talks.

What the bankers wanted from the SED was the opportunity to buy larger shares in Chinese second-tier banks (Beijing’s five largest state-owned banks are clearly off limits). China’s banks are used to pump funds into state enterprises, and many of the loans are by Western standards “nonperforming.” Beijing would like foreign investors to put more money into their system, and provide management skills, but not any control. The Chinese were, thus, unwilling to lift the caps on single foreign investors to no more than 20 percent ownership, with total foreign equity in a local bank not exceeding 25 percent.

That Beijing was not going to liberalize ownership rules had been signaled by how it responded to British-based HSBC’s 19.9 percent investment in the Bank of Communications (BoCom). The chairman of China’s Banking Regulatory Commission announced in April that BoCom will be reclassified as a “large state-owned bank” instead of a “joint-stock bank” thus preventing HSBC from expanding its stake. The Chinese government owns 41 percent of BoCom. HSBC traces its lineage back to the Hong Kong and Shanghai Bank established in 1865 to finance trade between China and Europe. It was the only Western bank to continue operating in China during the worst days of Mao Tse-tung’s communist revolution. If its long pedigree is not good enough, American bankers cannot expect to be more than handmaidens to Chinese expansion.

That means the proper slogan should be “China’s Growth, America’s Peril.” While corporations see the gains from trade and investment in terms of private profit, Beijing uses its gains in industrial capacity, capital and technology to rise as a major power in world politics —with an agenda hostile to U.S. interests. In every danger point around the globe — be it Iran, North Korea, Sudan, Venezuela, Cuba, Burma, Zimbabwe or Central Asia — China is on the opposite side of the United States. Beijing is rapidly modernizing its weapons, which are designed for use against American forces, as detailed in the Pentagon’s annual report on Chinese military power released two days after the SED. This “strategic” aspect is missing from the Strategic Economic Dialogue.

In a world still beset by geopolitical rivalries, where distribution of wealth, technology and productive capacity are key elements in the balance of power, international economic issues cannot be treated in isolation. The SED is thus not just failing to correct predatory Chinese business practices harmful to American industry, it is failing to contain Beijing’s rise as a global threat to U.S. pre-eminence and national security.

William Hawkins is senior fellow for national security studies at the U.S. Business and Industry Council in Washington, D.C.

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