Re: Fact Sheet on US-China "Trade Relationship"

Below is a balanced assessment of US/China trade and power relationships.  It 
provides a rational assessment of why the US has the upper hand for the 
foreseeable future.

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Advantage: U.S. in Sino-American Cold War

Summary  

China's delayed release of the United States' EP-3E crew 
represents a chronic deterioration in Sino-American relations. 
While an outright war is unlikely, the emergence of a Sino-
American Cold War is a distinct possibility. And as China would 
quickly discover, its economic position is wholly dependent upon 
its relationship with the United States. Should Washington decide 
to initiate an economic standoff, the result would be as 
devastating to China as a major war.   

Analysis   

The detention of 24 American crewmen from the EP-3E spy plane 
indicates a broader deterioration in relations between the United 
States and China. The problem for China is that such conflicts, 
at least for the foreseeable future, will be resolved in 
Washington's favor. Beijing simply lacks the economic and 
political power it needs to directly challenge the United States. 

The reasons for increasingly cold cross-Pacific relations reach 
far beyond the EP-3E incident and the onset of a Republican 
administration in Washington. Politically, both China and the 
United States wish to be the dominant Asian power. 

But in political, economic and military terms, Washington clearly 
holds the upper hand. China can score political points against it 
in international fora, but most Asian states prefer their links 
to America. Moreover, most of China's neighbors view Beijing as 
more of a competitor than a partner. 

As with the Soviet Union, a "cold" conflict would be both 
economic and political. But China lacks key characteristics that 
granted the USSR its staying power. China cannot count upon 
energy and mineral sales because it has none to export. And the 
income differential is lopsided. In 1950, the American economy 
was only three times the size of the Soviet economy, according to 
CIA estimates. In 2001, China's economy is only 11 percent the 
size of America's, according to the World Bank. The technology 
gap is also far more noticeable: China is still importing over $1 
billion in weapons annually from Russia. 

The United States' position vis-a-vis any potential competitor is 
far stronger and more consolidated than it was in 1950. Every 
major commodity and financial market is denominated in dollars, 
while the Chinese yuan is not even freely convertible. In fact, 
American economic might is so overwhelming that China's own 
economy is dependent upon its links to the United States. 

Western - primarily American - technology and capital has powered 
China's development. China enjoyed a sharp rise in foreign direct 
investment over the last decade, from under $5 billion in 1990 to 
$45 billion in 1999. Fifteen percent of total FDI came directly 
from the United States, even more flowed in via Taiwan and Hong 
Kong. The U.S. Department of Commerce estimates the Chinese firms 
that receive foreign investment account for 50 percent of Chinese 
exports. 

In effect, the bedrock of China's economic and military strength 
depends upon its economic relationship with America. 

It is a relationship the United States can easily terminate with 
only minor repercussions to its own economy. While China is the 
fourth-largest U.S. trading partner, there is nothing China 
provides that America cannot get elsewhere. 

China is the single largest player in the production of textiles, 
footwear and toys - all easily replaceable items. Its involvement 
in the computer industry is limited primarily to assembly and 
testing - an easily relocatable process dependent upon imported 
technology and capital. The guts of the machines - the chips - 
are constructed in the more technocratic economies of Europe, 
Israel, Japan, Malaysia, Singapore, South Korea and the United 
States.   

The United States is China's largest trading partner, absorbing 
$100 billion in exports in 2000, approximately 9 percent of 
China's total gross domestic product. Meanwhile, China purchases 
a number of essentials from America, namely $16 billion of 
machinery, aircraft, telecom equipment and chemicals. 

In a serious economic spat, America would take some hits. 
American firms such as Hewlett-Packard, IBM, Intel and Motorola 
are heavily involved in China's nascent information technology 
sectors, while BP-Amoco, Enron, ExxonMobil and Chevron-Texaco are 
developing interests in China's energy industry. Other firms, 
such as Arco, Cargill and General Motors are nurturing 
investments in chemicals, agriculture and automobiles, 
respectively. All would see their efforts evaporate. 

But even with these significant exposures, a knock-down-drag-out 
economic fight would leave the United States relatively 
unscathed. As foreign firms relocate their production bases 
elsewhere, the United States would face slightly higher inflation 
and a mild slowdown. China, however, would see the fruits of 
twenty years of economic development evaporate. And China would 
bear the brunt of the damage even in areas in which the American 
companies lost their investments. Nearly all of those firms are 
involved in infrastructure development. 

The United States remains the largest trading partner of India, 
Japan, Malaysia, the Philippines, Singapore, South Korea and 
Taiwan and the second-largest trading partner of Australia, 
Indonesia and Thailand. Nearly every Pacific country is a direct 
competitor with China. 

Here China is particularly vulnerable. Forty-three percent of 
China's exports are labor intensive, according to the WTO. China 
commands the apparel, suitcase, toy and footwear markets, 
industries wholly dependent upon cheap labor. A serious spat with 
Washington would push these industries out of China as fast as 
good relations during the Clinton years pushed them in. 

Another 27 percent of China's exports are technology intensive, 
read: foreign technology intensive. The United States, Japan, 
South Korea and Taiwan provide the bulk of the expertise and 
could easily relocate these industries as well. 

There is no economy that could replace the United States as the 
keystone of China's economic strategy. Europe may have the 
capital but would refuse to open its market to low-cost Chinese 
competition. Central Asia may be able to provide energy, but 
doing so would put China directly at loggerheads with Moscow, who 
considers the region its exclusive providence. Japan and South 
Korea could provide technology, but their much tighter links to 
the United States would limit their dependability. 

Washington would not even need to adopt a formal trade embargo to 
trigger an outflow of capital. Simply adopting a more adversarial 
role in cross-Pacific relations would be enough to trigger 
capital flight. In December 1998, the American Embassy in Beijing 
surveyed American investors and reported 50 percent of U.S. firms 
ranked the impact of U.S.-China relations as "major" or 
"moderate" on their operations in China, roughly equivalent to 
their rating of the impact of the Asian economic slowdown. Colder 
relations, coupled with a Soviet-style technology embargo of the 
Reagan model, could throw China into a tailspin. 

The Beijing leadership's success is dependent upon China's 
economic success. That success is in turn dependent upon 
tolerable Sino-American relations. China's unwillingness to 
implement trade agreements signed with the European Union and the 
United States are already likely to delay China's WTO accession 
beyond 2001. Any rupture in relations would completely eviscerate 
Beijing's economic plans and completely discredit - and probably 
overturn - the entire elite. 

In the time it would take for a new flavor of government to 
assert itself, China's coastal regions, already chafing at 
Beijing's control, could easily tip into outright rebellion. 
Since Chinese political stability works hand-in-hand with cheap 
labor to form the foundation upon which foreign investment 
builds, any political shifting would exacerbate an American-
initiated economic exodus. 

And so, while a U.S.-Chinese economic row would not have much 
direct economic fallout for Washington, the likelihood of a 
Chinese political implosion would reverberate across Asia. 
Australia, Japan, South Korea and Taiwan maintain tight links to 
China, using the country as a major assembly site. 

China's dependence upon the international economy in general and 
the American economy specifically cannot be lost upon the Beijing 
government. That logic is reflected in the EP-3E incident. 
Beijing pushed the United States as hard as it dared, and then 
ultimately gave in to prevent the diplomatic damage from spilling 
over into economic matters. Politically, China can hold its own 
against the United States in many circumstances. But 
economically, China can only punch at its weight. As long as 
China depends on American export markets and investment dollars, 
it will lack the economic and financial resources needed to 
realistically challenge Washington.

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