Nick Smith, January 4, 2004

There are numerous obstacles to better U.S. relations with China. Some are political, some are economic, and the question is: are we smart enough to find solutions that will not be disadvantageous to the United States? It depends on where China is really headed: does it intend to become a full partner in an open world economy, or to gain power behind a wall of government subsidies and protectionism? Does it hope to incorporate its people in a just, representative political order, or to enforce the power of the current political elite? Will China cooperate in combating terrorism and the proliferation of weapons, or will it make decisions simply based on their economic and power advantage?

Curiously, different analysts look at the same set of data and come up with different answers: either the miracle will end and China will return to a cycle of economic bust and political chaos, or the miracle will continue as China reforms its economic and political structures and becomes a world power.

Economically, the factors are these: China has had astounding savings rates, but reportedly, 60% of bank credit is being poured into failing state enterprises. Investments are impressive, but foreign investment, which could quickly move to other shores, accounts for 50% of China’s exports and 29% of its overall industrial output. While savings and investment have been high, return on investment and factor productivity have been low, pointing to major inefficiencies in the system. Hidden within a secretive financial structure, government liabilities may be as high as 150% of China’s annual domestic product. Looking at these factors, some analysts conclude that growth cannot be maintained.

Others see these same factors as the basis for continued growth. If China’s economy has grown so rapidly in spite of these deficiencies, its potential for continuing growth is strong if economic reforms take effect. Surplus labor will keep wage costs low, and recent investments in education and technology (borrowing, buying and copying) will pay off. A growing middle class will provide the consumer base for second stage industrialization and service sector growth. The private sector will supplant the public sector’s subsidized production while pressures of the world market will transform China’s financial sector.

The U.S. interest in China’s economic future is enormous; China is today our fourth largest trading partner. At my meetings with the Chinese in early January, I will forcefully object to egregious discrimination against our products, theft of our industrial and intellectual property, and currency inequities. Truly free trade is fair trade based on reciprocity. If we have to threaten reciprocal administrative barriers to Chinese goods coming in to this country in order to create a level-trading field, so be it. I will be meeting in China with government and political leaders. It is my position that we must keep China to its WTO commitments and to a mutually advantageous trading relationship if our interests are to be protected. I will be writing my next column from Beijing, where I will report on how current Chinese attitudes might affect our future political and economic interests.

Congressman Nick Smith, a Republican, represents Michigan's 7th Congressional District in the U.S. House of Representatives.