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What Washington Really Needs to Know About China

Our elected officials in Washington continually fail to grasp the aggressive nature of China’s mercantilism and military expansionism. And so, as China’s President Xi arrives in Washington for two days of meetings with President Obama, I’d like to offer Capitol Hill an unvarnished perspective about the true intent of China’s ruling regime.

1. Regarding the state visit of Chinese President Xi Jinping, and of his discussions with American business leaders, we’re already hearing reports from meetings held on the West Coast to indicate that Xi is turning a deaf ear to many of the concerns expressed by technology business leaders anxious to do business in China but face a host of barriers.

Judging by Xi’s remarks, these government imposed barriers are not coming down any time soon.  They include forced technology transfer, administrative barriers that discriminate against foreign firms operating in China, and forced cooperation with the central government in providing ‘back door access’ to American hardware and software in China.

2. Xi claims he is willing to cooperate on the issue of hacking and cyber-theft, but has dismissed other American concerns as out of line with Chinese development needs. President Obama was reportedly going to announce sanctions on China for hacking in advance of Xi’s visit.  But at a high-level meeting between Chinese and U.S. government officials, Beijing indicated that it might cancel the visit altogether if this was done. No sanctions were announced.

3. This is a game of cat-and-mouse — over business models and conditions, market share, technology development, military, labor, human rights, and a host of other issues. And guess who, generally speaking, plays the role of the mouse? Hint: not China.

China is a complex place, but the central feature is of a one-party state, run by a party that will do everything necessary to maintain its power and preeminence in dominating the country politically, economically, technologically, and socially. No aspect of Chinese life is too small to be overlooked by the party as a possible source of dissension or discord that might disrupt the chokehold the Communist Party and its officials have on Chinese life. Thus the quick persecution of anyone perceived as a dissident in any way — and not just limited to politics.  Witness the arrests in connection with reporting on the stock market crash.

4. The Chinese leadership is extraordinarily proud of its model of state-directed capitalism, finding it far superior to Western models. And for a long time, given China’s growth rate, it seemed that the leadership might be on to something.

However, that phenomenal growth was based on Chinese mercantilism, currency manipulation, massive government intervention in markets, forced technology transfer, outright technology theft, exploitation of labor generally, slave and prison labor in some cases — and many other practices that we in the West consider unwise, illegal, or abhorrent.

It appeared that the Chinese government had unleashed market forces after year of failed socialist experiments.  However, there was still central government control of the actions and decisions of this so-called market experiment, and it turns out the the government in many cases overshot — creating inefficient monsters in its state-owned enterprises or even in its real estate and housing sectors and financial institutions.  Trees in fact do not grow to the sky, to paraphrase an old saying, and the state-capitalism model is not sustainable over the long-run on its own terms.

5. China is currently dealing with the failure of its central (and provincial) interventions in the market place. The big question is, can it do that successfully — without massively impacting the world economy. Will it continue exporting its overcapacity and potential unemployment instead of shutting down inefficient producers?  Already it has caused a massive glut in world markets, as we will discuss a little later.

6. How will the United States and other trading partners act when they see Chinese goods invading their already fragile markets?  Or additional currency manipulation? Or more hacking and cyber-theft designed to give China absolute rather than just comparative advantage in hi-tech industries? Will the West continue its supine accommodation of China, or will it challenge practices and developments antithetical to its economies?

7. One particularly unfortunate result of China’s growth has been the growth of its military and of its increasing military aggression.  The island-building and militarization in the South China Sea is the most prominent aspect.  But just as important is the heavy pursuit of asymmetrical means of warfare, including space-based weapons designed to render U.S. military communications unusable in the event of conflict. Just last week, there was a near miss due to the dangerous action of a Chinese fighter jet shadowing a U.S. reconnaissance aircraft. Coincidence or a reaction to a U.S. military official’s comments that we patrol close to and overfly the new island bases — which is both an anemic and dangerous response.

8. What seems to be missing in Washington is any idea that our massive trade deficit with China and the concomitant hollowing out of our industrial base, with its wealth-creating benefits, is a large part of the problem.  It’s a case of ‘following the money,’ to use the old Watergate phrase. China’s defense budget is stated to be about $120 billion, a fraction of the U.S. defense budget.  But there are no reliable, official numbers in China — of any kind.  So conservative estimates are set at $150 billion. Other estimates are multiples of that figure.  Often ignored is the profits that the PLA makes on the businesses it owns.

9. As for a cybersecurity agreement between our two countries, any dependence on Chinese cooperation is worthless.  Beijing will not change its behavior.  China is grabbing every useful piece of government, business, commercial, medical, and technological info it can.  This is a nation seeking military supremacy and technological dominance. They will not adhere to a cybersecurity agreement any more than they did their WTO and IMF obligations not to devalue currency for a competitive advantage.

Some conclusions:

To reach a real state of cyber-security, President Obama must be Kennedyesque and announce a cyber-security program that, in a few years, will make the U.S. hack-proof. Essentially, an Apollo program on hacking. We have to go big or go home.

With a goods trade deficit now reaching into the mid $300-billions annually, the U.S. is essentially sending China two or two-and-a-half times its defense budget each and every year. We must get a tight grip on our trade deficit and foreign borrowing. We have added about $8 trillion of debt in the Obama administration and are quickly headed to a national debt of $20 trillion and above.

Getting our trade house in order would have an enormously positive impact on our economy, and would put pressure on the Chinese to rationalize their economy, including state-owned industries and military spending.

Unless a new approach is adopted, however, I do not expect anything definitive on these critical issues to emerge from the Obama-Xi meetings.

Kevin L. Kearns is president of the U.S. Business & Industry Council (USBIC), a national business organization advocating for domestic U.S. manufacturers since 1933.

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