US and China heading for an ugly trade war?

If you’ve been watching the financial news over the past few months I think you’ve probably picked up on a powerful new message that’s being broadcast by Corporate America: things aren’t going well for US companies in China, who are just about fed up with government restrictions and shenanigans that make it impossible for them to compete with their Chinese counterparts.

This has always been an issue. In the past, however, Corporate America kept its unhappiness to itself and held big media events to show how happy happy happy they are to be doing business in China and how committed they are to the Chinese market and how thrilled they are at the opportunity to pour billions of investment dollars into China’s coffers. American companies simply loved to do this.

Of course, those who listened behind the scenes always knew this love was – how shall we put it? – insincere. The companies were simply fuming at the hurdles and land mines strewn in their path, nonsense that made competing with home-grown Chinese companies next to impossible. The foreign firms built research parks and came up with cool programs for the kids in their neighborhoods, science fairs and contests and tree-planting and other love-ins. They appeared at elaborate press conferences with local officials, and somehow they’d usually get someone from the MII to attend and validate their event. There were photo opportunities, long handshakes, lots of smiles and applause.

But the winds that are blowing now indicate trouble in paradise. More and more stories have emerged in the past few months about growing frustration on the part of Western companies, and increased arrogance on the part of the Chinese officials. This is not entirely surprising. After all, it’s the US that, more than any other party, brought us the economic catastrophe, and the irony has been noted again and again that after being asked by Chinese banks to help them modernize and get organized, it’s now the US banks coming hat in hand to China. This turn of events has given the Chinese a lot to gloat about. So you have two opponents in the corners of the ring, frustrated US companies at wits end over getting nowhere in China, and a haughty, super-charged China feeling stronger and mightier than ever before.

The fact that the camel’s back is breaking came last week when the CEO of GE publicly lashed out at China’s uncooperative trade practices

THIS week’s plain-speaking prize goes to Jeff Immelt, the boss of General Electric.

He argued that China is increasingly hostile to foreign multinationals; he also gave warning that his company, the world’s biggest manufacturer, is actively looking for better prospects in other emerging markets. “They don’t all want to be colonised by the Chinese”, he said, going rather further than was prudent. “They want to develop themselves”.

Mr Immelt’s broadside was undoubtedly significant. It reflects a growing mood of disillusionment with China among big Western companies. It came from the mouth of one of China’s biggest boosters, a man who praised the Chinese leadership, only last December, for doing exactly what they say they will.

This is important. Immelt IS (or was?) a breathless “China booster.” For him to suddenly bare his teeth and say what’s on his mind like this tells us – well, it’s no accident that he did this. That same blog post goes on to question Immelt’s stand and points out some Western companies have successfully “cracked the China code” and are making money there. But I think a lot more are struggling there. I can’t prove it, but I certainly know of some very big businesses that are as fed up as GE.

And that brings me to this article, which predicts a total trade war. The author contends we are heading toard an “imminent showdown,” and I don’t doubt it.

A significant part of China’s rapid growth has been driven by its ability to export its goods to countries such as the United States. In turn, the U.S.’s ability to continue to finance its massive $13 trillion federal deficit has been substantially underwritten by China’s ongoing purchase of U.S. Treasury debt.

While each side has gained from this relationship it is charting an unsustainable trajectory that could lead to severe problems. This is particularly troubling because Chimerica tension is rising over China’s currency policy just as many countries — including the U.S. with its high unemployment and China with its property bubble and inflation concerns — appear to be struggling to emerge from the ‘Great Recession’…..

Chinese have been driving a very hard bargain with the rest of the world with their managed currency policy. China has benefitted tremendously from joining the open world economy. However, free trade is not an inalienable sovereign right.

China’s growing economic power comes with the role of being a responsible global actor by playing by the same rules as its trading partners. The U.S. has grown weary of waiting for the Chinese government to come around at a time when it is also economically weakened. In short, the time has come for the renminbi to be revalued upward or U.S. action will occur.

China’s leadership, emboldened for example by the failure of the U.S. to navigate the world away from a near financial collapse and Google’s recent blink, is growing more confident. It is reasonable to assume that China will increasingly flex its economic muscles and may reject the U.S.’s request for a change in its currency policy.

The Chinese government stubbornly detests public pressure from foreign government officials. Yet the Chinese leadership appears to only move when they are forced to do so. And often when they do finally make a change, as with the most recent renminbi move, they barely budge.

At the same time, it is highly unlikely the U.S. will quietly surrender its role as the world’s dominant superpower. And the pressure is growing to take swift, assertive action on the renminbi as calls to “do something” grow louder in the face of a deteriorating domestic economy.

China — similar to Japan in the 1980s — is directly in the U.S.’s economic crosshairs. The inescapable conclusion is that an escalating U.S.-China economic war is not only underestimated in terms of its likelihood, but probable.

Sorry for the long clip, but I think this is an important story. Maybe it’s just another example of pack journalism, with everyone making a lot out of some circumstantial evidence and all of them pointing in the same direction and shouting the same accusation: “China’s pushing the envelope and pretty soon there’s going to be a rupture; something’s got to give.” It will be interesting to see what happens next, after watching the tension build up for so many months. I can’[t make any predictions, except to say that China seems to have the upper hand, fair or not.

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Richard Burger is the author of Behind the Red Door: Sex in China, an exploration of China's sexual revolution and its clash with traditional Chinese values.

The Discussion: 6 Comments

China the upper hand. I don’t think so. I remember still when Japan had the upper hand.

Yes, Chinese officials feel strong, but they are acting too soon. They are not following Deng advice.

They have still 10 or 20 years more to go, but it seems the hubris bug has bitten them.

Let’s see whom the goddess Nemesis gets this time

July 6, 2010 @ 2:24 pm | Comment

What is encouraging about this analysis is the expectation that governments and companies in China and the USA take responsibility for their behaviors and roles in current economic conditions and in future global development. You make it obvious that improvement will not result from pointing fingers and falling back on old practices.

July 6, 2010 @ 8:19 pm | Comment

We are getting closer Richard. Just be patient. It’s inevitable. I’d like to apologize for not posting on your blog for many months, I’ve been busy mumbling and pushing my cart all over the world.

July 7, 2010 @ 1:41 am | Comment

I would really love to see an (unlikely) growth in domestic manufacturing in America.

I wonder if big brands will bring home manufacturing jobs under the banner of some faux patriotism with the idea that consumers will more likely purchase made in America jeans vs. Made in China jeans.

July 8, 2010 @ 1:57 am | Comment

Geoff – unlikely. Expect to see growth in American manufacturing in…I dunno – Bangladesh? Vietnam? Africa? Actually, Africa would be good – seems to work for the Chinese ;-)

This any good? http://www.atimes.com/atimes/China/LG08Ad01.html

July 8, 2010 @ 5:41 am | Comment

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