Americans who worry that China might overtake the United States are worrying about the wrong thing. They should instead be concerned that Beijing may not make key reforms or that it will face significant economic difficulties down the road. Serious troubles in China’s economy could threaten the stability of the U.S. and global economies.
Secretary of Treasury Henry Paulson in Foreign Affairs Sep/Oct 2008 — on the challenges ahead for China. Excerpt:
…Economic nationalism, for one thing, has been a growing concern in the United States in recent years. Low-cost imports, particularly from China, sometimes have a negative image among the American public, even though they have helped the United States contain inflation and both maximized the choice of products available to Americans and minimized their costs. Foreign investment into the United States, especially by sovereign wealth funds and state-owned enterprises, is also increasingly viewed with suspicion by some U.S. companies, various members of the national security community, and the American public at large, despite regulations by the Committee on Foreign Investment in the United States that provide sufficient protections in sensitive sectors.
These concerns are misplaced. Like many countries accumulating large foreign exchange reserves, China is simply looking for profitable places to invest them over the long term. China invests its reserves in U.S. securities, including U.S. Treasuries, but there is little Chinese direct investment in the United States. This is largely because Chinese companies are just beginning to invest in their export markets and are unsure whether they are welcome. In any event, the United States would do well to encourage such investment from anywhere in the world — including China — because it represents a vote of confidence in the U.S. economy and it promotes growth, jobs, and productivity in the United States.
The size of the bilateral trade imbalance — $256.2 billion in 2007 — has also been a bone of contention. It is a source of anxiety in both the United States and China. Beijing believes that the trade deficit could be reduced if Washington dropped export controls and allowed sensitive technologies that may also have military applications to reach Chinese markets. In fact, U.S. export controls have only a marginal effect on the bilateral trade imbalance: in 2007, export license applications were required for $9.7 billion worth of U.S. goods destined for China, and just 0.7 percent of these applications were denied — a drop in the bucket. Removing all export controls in 2007 would have affected only 0.0265 percent of the U.S.-Chinese trade deficit.
A real issue is the inadequate protection of intellectual property rights in China, which has been an obstacle to increased U.S. trade with and investment in China and has prevented a reduction in the bilateral trade imbalance. This and the theft or pirating of goods are big problems for many U.S. companies operating in China and a reason others are reluctant to do business there. To protect themselves, some U.S. companies purposefully introduce older products into the Chinese market, releasing the newer goods only once the older ones have been copied.
But these and other strategies are merely stopgap measures. As China pursues its quest to develop a modern economy focused on technology, the Chinese government and Chinese companies will increasingly recognize the need to reward the creativity of their own firms and entrepreneurs by strengthening and enforcing intellectual property laws and regulations. It is by improving and enforcing its intellectual property laws that China will accelerate the development and competitiveness of its economy and also open up new market opportunities in China for companies around the world.