Popular accounts often depict China's economic rise as the result of a carefully coordinated strategy inimical to American interests. In the following essay, associate professor of political science Edward Steinfeld argues that this view is too simple. China's growth, he writes, comes amid the globalization of production and ownership, which gives American consumers and firms a stake in the success of Chinese products that compete with other American interests. Steinfeld also shows that China's central government cannot carefully manage its far-flung enterprises, and thus that the idea of a unified "China Inc." is mistaken. The essay was originally published by the National Security Working Group of the Tobin Project, a Cambridge think tank that links academics with policy-makers.

 

CHINA'S TRADE SURPLUS with the United States ($202 billion in 2005), rapid overall economic expansion, and growing appetite for energy have made China's growth a salient issue for average Americans. While the facts of Chinese growth are indisputable, the causes and ramifications of that growth story are anything but. For many Americans, though, the story is straightforward-China is winning the game of globalization because it is playing by a different set of rules from us, and its gains come at our expense. From this standpoint, the only real question is whether we should do anything about it. Do we stand up to China-on trade issues, foreign exchange valuation, intellectual property rights protection, etc.-or let the situation ride? This perspective has a certain gut appeal, but it is based on faulty assumptions about the Chinese economy and our own. Left uncorrected, such assumptions will lead to policies that damage American interests.

Globalization of Production and Ownership

China's economic rise, unlike Japan's a generation ago, is taking place amidst revolutionary changes in production. The physical products we consume are now made through international production chains involving myriad corporate actors, firms bearing a wide variety of national flags of origin, and firms operating across a host of geographic locales. China has become a key mode in these chains, a shop floor for manufacturing activities. Yet, who actually benefits-which countries, companies, and stakeholders-is murky. Just as Americans feel that we are losing the globalization game, many Chinese too feel that they are losing, often for the same reason. The sections below explain why.

China today is running substantial trade surpluses with North America and Western Europe. Simultaneously, China unlike Japan in the 1980s, is running substantial trade deficits with other key parts of the world, including Taiwan, Japan, South Korea, and virtually every Southeast Asian nation, a fact that says much about internationalized production chains. Many products that Americans view as "made in China" are assembled in China, but are composed of parts-often high-value parts-manufactured outside China. In personal computer production, for example, the product gets booked as a Chinese export, but 60-85 percent of the profits go to American firms (software, integrated circuit design, branding), 10-35 percent to Taiwanese, Singaporean, or Korean component and ODM (original design manufacturer) firms, and five percent to Chinese assemblers. When Americans see a "made in China" computer, they rue their nation's economic demise. When Chinese see a "made in China" computer, they see Intel inside (processors), Samsung inside (screens), and Microsoft inside (operating software), and rue their nation's inability to compete globally. This partly explains why China accounts for such a small portion of global production value. In 1990, Japan accounted for 22.5 percent of global production, the United States 20.7 percent, and China 2.2 percent. By 2003, the United States had grown 20 23.3 percent, Japan was at 18.1 percent, and China at 6.6 percent.

Globalized production chains complicate national economic interest. Japan, South Korea, Taiwan, and Australia-all net exporters to China-hardly sympathize when major net importers from China, namely the United States, complain about Chinese trade practices. Similarly, firms producing the high-value guts of Chinese-assembled products (the software, the processors, etc.) or the capital-intensive machines driving Chinese industrialization (construction equipment, high-end looms, and textile production equipment, semiconductor assembly equipment) are also unreceptive to concerns about China's rise. Similarly, despite justifiable U.S. Department of Commerce complaints about intellectual property rights violations in China, victims of such privacy-firms like Microsoft, IBM, and Hewlett Packard-have been unwilling to bring cases to WTO.

The situation is made more complex by ownership patterns with Chinese industry. China has been open to foreign direct investment - whether through foreign equityinvestment in Chinese companies or wholly-foreign owned companies/ subsidiaries in China. Today, foreign-invested or wholly foreign-owned entities perform thebulk of export-oriented manufacturing in China, particularly at the higher end. In 2004, foreign-invested firms produced 57 percent of Chinese. Such relationships now extend even into China's strategic industries, including oil and gas. When the Chinese National Offshore Oil Corporation (CNOOC) attempted to acquire UNOCAL in the summer of 2005 for 18.5 billion, Goldman Sachs and JP Morgan provided advice and over two-thirds of the financing. David Polk provided legal counsel; Aiken Gump lobbying. One should then be skeptical about arguments attaching clear-cut "flags of origin" on commercial interactions. Similarly, one should be skeptical about assertions that the actions of ostensibly Chinese firms-like CNOOC-are either dictated by the Chinese government or part of Chinese state geostrategy.

Manufacturing, Benefits, and Social Services

Globalized production also makes for complicated societal outcomes, whether in the U.S. or China. Manufacturing employment in the United States stood at 35 percent of the total in 1950, and 13 percent in 2004. A comparable decline has occurred in China, albeit at China's substantially lower level of per capita income (according to World Bank estimates, China's per capita income in 2004 was $1500, compared to $41,440 for the United States). During the first fifteen years of China's economic reforms, manufacturing jobs rose absolutely and as a percent of total employment. By 1995, however, manufacturing jobs, then at 98 million, began to decline, absolutely and relatively. By 2001, they were down to 80.8 million. Several things were happening. First, the bulk of new job creation in the Chinese economy shifted to the service sector, namely construction and transportation. These are generally temporary jobs, devoid of benefits and performed by migrants moving from the countryside into cities. Second, the remaining manufacturing jobs have lost the extensive benefits traditionally associated with socialism. Lifetime employment, guaranteed housing, free healthcare, and extensive pension programs are mostly gone. Chinese per capital income is up, largely because the nation is undergoing an industrial revolution. For large parts of the population, extreme agrarian poverty has been replaced by a somewhat wealthier, but tenuous semi-urbanized existence. Meanwhile, along the coast, clusters of real wealth lie in cities like Shanghai, a municipality whose local per income is now on par with Portugal's. Disparities developed alongside a shift to fee-for-service provision of basic public goods like healthcare or education. In China today, if you want healthcare or education you generally have to pay cash for it. Chinese law guarantees free provision for both, but practice is a different story.

Governance

The divergence of public goods provision from legal requirements stems mainly from governance. Governance in China has several characteristics. First, the state bureaucracy is decentralized. Policies emanate from the center, but local officials define and implement them. Reform has moved through frequent instances of local experimentation, which often directly contravene formal central rules. Successful experiments may get propagated regionally and nationally, all the while technically in contravention of existing law. If success continues, only then does the experiment become official policy and the existing laws amended. This means that within a single national system of rules and regulations, multiple-and often contradictory-local institutional systems operate. Second, boundaries between the commercial and governmental sectors are blurry. Over the past two decades, the basic governance norm throughout the system has been that virtually any action is permissible if it brings economic growth. Many local officials interpret this not just as a mandate to foster business, but also as a mandate to go into business. For example, entrepreneurs often locate in a particular city because land is given to them for free by the municipal government. The municipality often acquires that land by forcibly relocating farming households, in violation of national rules. The municipality grows economically, local officials take a shadow equity position in the firm, the entrepreneur thrives, the peasant suffers, and the central government scrambles to address the socio-political dislocation that results. What we witness is not so much "China, Inc." -a national business system adroitly managed by a clear governmental hierarchy with a clear strategy-but instead a "government in business, government as business" model. Local governments are making the rules at the same time they are deeply involved in commercial affairs. Meanwhile, they barely provide public goods, whether in tangible form like healthcare or education, or intangibles like fair enforcement of rules.

Even in something as strategic as the energy sector, we see this pattern. In the electricity sector, China's total national generating capacity is approximately 500 gigawatts (GW). Yet, central officials estimate that approximately 110 GW of that capacity is produced by "illegal" power plants built, often with local government investment, without receiving required central approvals. These plants rarely comply with centrally-mandated engineering standards, environmental controls, or technical requirements. Chinese corporate entities, often with foreign advisory partners and investors and Chinese local governmental investors, end up making de facto policy through fait accompli infrastructure projects. Central officials, meanwhile, play catch up, scrambling not just to regulate, but also simply to learn what is happening.

Ramifications for American Politics

Two main points emerge from this analysis of China. First, American politicians should be cautious about playing the China economic threat card. Decrying "Chinese" currency manipulations, lobbying, IPR violations, and asset grabs may be politically appealing. The problem, however, is that many of the actions described as "Chinese" often involve substantial American stakeholders-investors, corporate partners, suppliers-whose support for China bashing will prove tepid at best. Growing portions of the American population benefit indirectly from "made in China" production through cheap products, low interest rates fostered by Chinese investment in the United States, or service-sector jobs related to the production of "made in China" products. Given these interests, bashing China is no longer a low-risk, low-cost political strategy.

Second, by miscasting China as overly unified, coherent, mercantilist, and geostrategic-in effect, by interpreting economic outcomes we do not like as products of Chinese strategic intent-we risk failing to identify areas in which American and Chinese interests overlap-for example, as major energy-consuming nations. We also miss areas where Chinese officials are as eager as we are to address the Chinese outcomes we find objectionable (for example, in the environmental area, or even in the area of currency valuation). In short, we risk missing opportunities to cooperate and creating conflict where none is foreordained.