2007 November 22 Thursday
China Favoritism For Domestic Businesses Increases

I still remember when our elites assured us that giving China membership in the World Trade Organization was supposed to open up Chinese markets to our exports. What a naive era that was. Private equity is one of many industries where the Chinese government is working to build an unlevel playing field.

Beijing is encouraging domestic equity funds to supplant global private equity titans such as Carlyle (CYL.UL: Quote, Profile, Research) on Chinese turf, but their small size and lack of experience mean it will be years before they threaten their international rivals.

The government has stepped up its efforts to bolster home-grown private equity by allowing yuan currency fund-raising, erecting hurdles for foreign rivals and encouraging IPOs on domestic markets.

Shouldn't we make our playing field less even for Chinese exporters?

The annual report fo the US-China Economic and Security Review Commission find that the Chinese are engaging in lots of espionage to steal US technology.

Chinese espionage poses "the single greatest risk" to the security of US technology, a panel has told Congress.

China is pursuing new technology "aggressively", it says, legitimately through research and business deals and illegally through industrial espionage.

China has also "embraced destructive warfare techniques", the report says, enabling it to carry out cyber attacks on other countries' infrastructure.

US companies should think twice about hiring Chinese nationals to do technological development. When those Chinese nationals leave to get jobs at Chinese companies any secrets and source code they had access to stands a good chance of going with them.

To read that report from the US-China Economic and Security Review Commission here are your choices (all PDF format): Press Release, 2007 Report to Congress, 2007 Report Introduction, 2007 Report Executive Summary, and 2007 Recommendations to Congress.

China is moving in several directions that are unfavorable (though unsurprising) from a Western perspective. Here is an excerpt from Chairman Carolyn Bartholomew’s opening statement on the release of the 2007 Annual Report to Congress (PDF)

The Commission’s conclusions as presented in this report are a mixture of good news and bad. China has taken a constructive role in reaching agreement among six nations to dismantle North Korea’s nuclear weapons production capacity. China has agreed to send a combat engineering battalion to Sudan to help with the U.N.’s peacekeeping and reconstruction activities there, and is showing signs of interest in strengthening its export control system to limit proliferation. China’s economic policies have helped lift 200 million of its people out of poverty, and its leaders also have begun to acknowledge the widespread environmental degradation of China’s air and water.

But, this past year revealed some disturbing trends in China. Rather than continue down the path towards a more market-based economy, China reversed course. In its 11th Five Year Plan, Beijing listed a dozen industries that it retains under central government control and ownership. These industries include information technology, telecommunications, shipping, civil aviation, and steel. This is problematic for several reasons. For one, these industries are more likely to receive the kinds of subsides, such as export-dependent tax cuts and low interest rate loans, that will continue to make them unfair global competitors. For another, by walling off a large sector of the economy from public ownership, China isn’t fulfilling the expectations of the members of the World Trade Organization who voted to admit China in 2001. China’s actions certainly violate the spirit and principles of the WTO. Free and fair trade depends on a market approach to international commerce, rather than a contest among governments and their closely owned and subsidized industries.

While speaking of subsidies and violations of free market principles, it is worth noting here that China is continuing to manipulate the value of its currency in order to gain an unfair export advantage. Meanwhile, China has not fulfilled its many promises to protect the intellectual property of foreign business software and entertainment companies from rampant piracy, just to cite two industries important to the U.S. economy. Nor has China reduced the many subsidies provided to exporting industries in China. As of this year, both of these issues are subjects of formal complaints before the World Trade Organization, a development that the Commission has advocated in the past.

The Commission has examined China’s energy and environmental policies over the past year as well. China’s lack of energy efficiency and poor enforcement of environmental regulations, are creating devastating environmental effects that threaten China, the United States, and other nations. China’s strategy for acquiring energy resources—a reliance on acquiring oil at the wellhead rather than through the international markets, for example—also concerns the Commissioners. As a result, China continues to invest in countries whose governments perpetuate human rights abuse, such as Sudan, Iran and Burma. China’s energy use patterns have also added substantially to the air pollution over the Western United States.

China's industrialization is driving up the prices of food, oil, coal, iron ore, and other raw materials. China's industrialization is also generating an increasing amount of pollution on an enormous scale. Plus, they are stealing our intellectual property on a similarly enormous scale.

Share |      By Randall Parker at 2007 November 22 08:01 PM  China

Wolf-Dog said at November 23, 2007 5:15 AM:

As pointed out in this blog above, the phenomenal industrialization of China, and considerable internal building of their infrastructure, forces China to import a commensurate amount of raw materials. These raw materials are paid for by using foreign currency. But ultimately, when the US and the EU are forced to stop their trade deficit, this will make it very difficult for China to pay for the raw materials. China then certainly use bartering manufactured goods for raw materials, but it will not be sufficient. The phenomenal growth of China, will ultimately cause political tension in the world. This century will be even more militarized than the previous century.

Fox Bark said at November 23, 2007 5:41 AM:

The fact is that because so few White Americans are actually qualified to the scientific and technological jobs, American industry mUST rely on Chinese and other Asians to fill these positions.

Anon said at November 23, 2007 8:42 AM:

Another "Fuck You" from the PRC. Just because they can.


Boycott these fuckers. Hit them in the wallet.

tommy said at November 23, 2007 9:02 AM:

"But, but....comparative advantage! Comparative advantage! Don't forget comparative advantage!" scream the economists.

Hal K said at November 23, 2007 1:45 PM:

Fox Bark: I wonder if you say "American industry mUST rely on Chinese and other Asians to fill these positions" because you want it to be true. Truthfully, whose side are you on here? Please remember the law of supply and demand and don't try to explain it away by special circumstances supposedly in effect here. Foreigners add an extra supply of technical professionals, which reduces the incentive for native-born people to go into these fields. People on the open borders and/or free trade side have a habit of telling the rest of us that we have no choice, when actually we do have a choice.

Kenelm Digby said at November 24, 2007 5:16 AM:

Actually 'only' about 15% of China's annual value of exports is sold to the USA.If a total trade embargo is imposed, China will make up this shortfall in less than one year at the current rate at which its export trade grows.
Furthermore, any tade restriction, never mind a full embargo is totally out of the question.
Too many vested interests (with very big money) behind them have too much invested in keeping the status quo going.We're lking very serious money and very serious people here, people who can buy up dirty politicians for breakfast, and oh, by 'dirty politician' I mean at least 90% of congress.
Also, the product range that China is so expert at making (both in quality and price) eg textiles, shoes, consumer electronics, motor bikes, trucks,tractors,buses, cars etc etc, makes a very congruent fit for the needs of the less developed nations that have the food and mineral resources to sell in a mtual beneficial relationship.
China has more enough dollar reserves these days to meet any contingencies.It can do without America.
Alas, America probably couldn't do without China.

Wolf-Dog said at November 24, 2007 1:38 PM:

"Actually 'only' about 15% of China's annual value of exports is sold to the USA."

But despite this, most of the trade deficit of the U.S. is with China, and given that the total annual trade deficit of the U.S. is nearly $700 billion, if the U.S. stops the trade deficit, then China will suffer, because other nations do not tolerate trade deficit like the United States.

But you are right in another sense, ultimately China will be able to barter its manufactured goods in exchange for raw materials without using the US dollar or the Euro. However, for the moment, China needs the US dollar in order to import raw materials. Also, if suddenly the US stops its trade deficit, even though China does have enormous foreign currency reserves (mostly dollars), there would still be at least a violent temporary internal depression and financial collapse, since current profits would be annihilated despite the reserves. This would result in terrible unemployment and dire consequences internally for China. I bet that after 2008, China will experience a financial shock due to the correction of the malinvestments.

Jerry Martinson said at November 27, 2007 12:03 AM:

Hal K,

It is true that when you look at simple supply and demand, that increasing the pool of technical labor available to employers in the US by allowing in more foreigners increases supply. If one were to completely cut out H1B visas, etc... the wages of entry-level engineers in the US would certainly go up - in the short run. But is this true in the long run? Certainly, when there are economic contractions, the demand curve jerks leftward and people are competing for jobs. But in high-tech areas, this is only true for about one year for every four where it is supply constrained.

Simple supply and demand accurately describe markets that are zero-sum games. Is the market for those who can make complicated products a zero-sum game? Many of the venture capitalists that fund the new companies that are responsible for many of the innovations in electronics and computers are immigrants who were once entry-level employees. So are the managers. Often too, are the customers and suppliers.

Most of the companies that I have worked for were founded, financed, or ultimately led by immigrants. Early in my career I may have gotten a little more money when I was fresh out of college if the US had a more restrictive H1-B policy at that time. But I have since seen many of my colleagues let in on H1B's grow in their profession to the point where they are working on new things that nobody has ever done before. They are creating entirely new segments in the industry that are making many new jobs for people who are both new H1Bs and US citizens.

Would I have a job that paid just as well or better if they weren't let in 20 years ago? I don't think so. That would only be true if the market for high-tech products was limited by a finite demand. Instead, I believe that the current and future market for high-tech products is generally not limited by demand, but rather the supply of new ideas. Importing the very smartest people from around the world is a pretty good way to keep the industrial realization of new ideas happening in the US at rates that are higher than the rest of the world.

I think the situation is probably different in other professions. Is the market for digging ditches and pushing brooms a zero sum game limited by finite demand? I would say it mostly is.

So as far as open borders are concerned, I wouldn't say that we don't have a choice. But rather I would say that we are fortunate to have a choice as a country. The US is one of the few countries that has a broad appeal around the world for people to live here. We can decide who we let in and who we keep out. I think we should let people in who are likely to help keep the US a technical leader, those who are likely to pay more in taxes than the services they need, and are likely to have children that do the same. There are millions of potential immigrants like this. There are also millions of potential immigrants who are not. It doesn't take a rocket scientist to know that rocket scientists make good neighbors.

Hal K said at November 28, 2007 9:20 PM:

Jerry Martinson:

You are saying that demand increases after an initial increase in supply, which is a different issue than what I was addressing before. Even if this is true there will still be dislocations. There are plenty of stories about people who were forced to train their H-1B replacements just before being laid off. Some people may even have to move to a different part of the country to remain employed in this situation. People are not just economic units. Many native-born Americans are discouraged from pursuing certain types of technical careers by the immigration situation. More tech companies would be started by Americans if this were not the case. What's more, demand cannot expand elastically in academia and in government research labs. While it is undoubtedly true that some Americans owe their job's existence to immigrants, I think that wages and career prospects for the native-born would be better in technical professions in the US if we didn't have so much immigration.

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