Proponents of closer bilateral links say the US$ 121 billion in two-way trade will lead to ever-closer political ties and help create a prosperous country capable of buying larger amounts of American luxury products. However sceptics believe Washington is tacitly allowing US corporations to sacrifice manufacturing jobs, technology and military security in pursuit of quick profits.

Consider the foreign direct investment (FDI) capital flowing into China. Over the past three years, China has received US$ 112 billion from overseas capital markets. This year, it will receive an estimated US$ 50 billion in FDI — more than South Korea, Malaysia, Singapore, Thailand, Vietnam and Indonesia combined.

Certainly these increases in foreign investment have given foreign corporations a more visible presence in China. In 1990, for example, American FDI amounted to only $400 million, much of it concentrated in 45 foreign affiliates that employed a mere 13,600 workers. Today, the US alone has more than $33 billion invested in China. Over 450 China-based US affiliates with annual sales of $23 billion employ more than a quarter of a million workers. Ironically, some political and labour leaders in the US view these outposts of American capitalism with suspicion. They view these multinational affiliates as conduits for technology used by the Chinese to manufacture products exported to the US thereby adding to the trade imbalance.

“The greatest danger on the US-China trade front is that while many in Washington view China as a ‘strategic competitor,’ American businesses have increasingly embraced the mainland as a ‘strategic partner,’” writes Morgan Stanley senior economist Joseph P. Quinlan in the July issue of Foreign Affairs magazine. “This divergence represents a dangerous disconnect that must be reconciled in short order.”

Since the French defeat in Vietnam at Dienbienphu and the demise of the British Empire, the economic development of East and South-East Asia has been largely linked to the strength of the US dollar and an American business presence throughout the region. Today, however, Asian nations from South Korea to Indonesia are starting to regard China as the economic engine that will pull Asean and its neighbours through the 21st century. Talks are currently underway for China to become a full member of Asean, the regional free trade bloc.

“For all the countries in Asia, China is such a large force that the only rational response is to figure out how to work with it,” says Nicholas R. Lardy, a diplomatic and trade analyst with the Washington-based Brookings Institution.

“They know well that China can’t be stopped.” Andy Xie, a managing director and economist at Morgan Stanley in Hong Kong, believes China’s US$ 1.2 trillion economy will surpass that of sluggish Japan’s US$ 4 trillion economy in the not-too-distant future.

If the goal of economic engagement has been to turn China into a land of hard-working consumers, then shouldn’t Washington should be pleased with all the changes? Not according to a recent report by the US-China Security Review Commission. China has learned the lessons of capitalism so well that its continuing development poses a security threat to the US. Compiled by a 12-member bipartisan panel of businessmen and Washington insiders, the 209-page document asserts that Beijing is a growing economic and military threat. And China, despite its promises to the contrary, does little to protect human rights, ensure religious freedom or curtail the illegal sales of nuclear materials and missile-related technology to countries accused of sponsoring terrorism, say critics.

• More closely monitor Chinese students, scholars and researchers in the US
• Require a code of ethics for US firms operating in China
• Use the national security exemption of the World Trade Organization rules to create barriers to Chinese steel imports
• Require pre-licence and end-user checks on sensitive technology sold to China to prevent diversion to military users
• Restrict the export of technology that would permit the Chinese government to police the internet

“The tables have begun to turn,” says Xie in a recent report. “Last year, Japan’s economy was merely 3.4 times as big as China’s. If the current trend continues, the Chinese economy could become bigger than Japan’s sometime in this decade. Even so, China’s living standards will remain far lower than Japan’s due to its much larger population. It will take another three decades for China to catch up with Japan in living standards.”

Although the US remains a powerful force and essential trading partner for many nations, Washington’s ability to lead is crippled by its deepening recession and serious questions about the honesty of its capital markets. As Beijing consolidates the benefits of its World Trade Organization membership, the flow of goods, capital and executive talent to China will intensify.

Already trading relationships are changing. Malaysia’s exports to China have increased 30 per cent over the past three months due to increased demand for electrical components. Singapore’s exports to China are more than 69 per cent above the levels recorded in 2001 due to booming petrochemical biotechnology sales.

US ally Taiwan, which once dominated the manufacturing of computer components in the world, has seen its lead slip as its companies shift production to the mainland. In fact, according to the Taipei government, Taiwanese-owned factories on the mainland make more than 40 per cent of China’s electronic exports.

Taiwan and US officials were recently alarmed to see the Taiwan-invested Semiconductor Manufacturing Industrial Corporation set up shop in Shanghai to produce chips, the technology at the very heart of computers. The US$ 1.5 billion investment is just the first of six major foreign-funded semiconductor projects setting up in China. Once all six are operational in the coming five years, China could well surpass Japan to become the world’s second largest semiconductor maker, behind only the US.

As China purchases machinery and raw materials from its neighbours as never before, China has accompanied its new economic leverage with diplomatic efforts designed to assure its trading partners that it offers cooperation, not competition.
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