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Economy: Bush Shouldn’t Expect Much Help From China’s Hu on North Korea and Iran

Interviewee: Elizabeth C. Economy, C.V. Starr Senior Fellow and Director for Asia Studies
Interviewer: Bernard Gwertzman, Consulting Editor
April 14, 2006

Elizabeth Economy, the Council's C.V. Starr Senior Fellow and Director for Asia Studies, says that when President Hu Jintao of China meets President Bush at the White House next Thursday, the administration would like to see some progress on "sticky security issues" like North Korea and Iran. But she says that she does not expect much help from China on these questions. "Unfortunately these are very difficult, very intransigent issues where the United States and China have, I think, commonality of interest, but it's a commonality of interest that ends where approaches to solving the problem begin."

The administration is focusing its attention on the huge trade imbalance with China and the alleged devaluation of the Chinese currency in relation to the dollar. Ahead of the meeting, U.S. and Chinese negotiators reached some agreements, Economy says, but "the proof will be in the pudding. We will have to wait to see what the Chinese do when they go home in terms of enacting this new trade agenda; it is always a question of implementation. But at the very least, the Bush administration will now have something to show for its efforts with this meeting."

President Hu Jintao of China is coming to the United States, stopping first in Seattle, then going on to Washington. The Chinese press calls it a "state visit" and Washington doesn't, as far as I can tell. Does this mean anything or is this just symbolic of a kind of skittishness on the part of Washington?

The difference between a state visit and a meeting does matter to the Chinese. The truth is that China's agenda for this meeting is really quite short, basically boiling down to the ongoing issue of Taiwan and receiving some recognition from the administration that China is an important player on the international scene and an important partner for the United States. Providing China with a state visit is one very clear signal to the Chinese leadership—and more importantly, in some respects, to the Chinese people—that the United States believes China merits its top-level treatment. From the perspective of the administration, however, there is a lot of dissension within Congress concerning China policy. There are a number of contentious issues, and the downside of raising the profile of this visit in terms of domestic politics clearly outweighs the upside in terms of pleasing the Chinese.

A state visit as I remember it is a greeting on the White House lawn, speeches, etc...

Basically, the difference in this instance seems to boil down to the fact that there will be no state dinner for President Hu.

In advance of the trip, there was a recent meeting of trade officials in Washington. They reached some agreements, I guess. Are they important?

The Joint Commission on Commerce and Trade met and announced some potentially important progress on the trade front, including Chinese efforts to protect intellectual property issues and open market access for telecoms, etc. I think there was a deliberate effort on both the Chinese and American sides to make the JCCT meeting a success in order to enable President Hu and President Bush to begin and end their meeting with an announcement of some progress. Of course, the proof will be in the pudding. We will have to wait to see what the Chinese do when they go home in terms of enacting this new trade agenda; it is always a question of implementation. But at the very least, the Bush administration will now have something to show for its efforts with this meeting.

And part of it was a huge promise by the Chinese to buy "legitimate software" as distinct from using pirated software.

Right. They have agreed to have software preloaded onto computers before they are sold. This should be relatively straightforward from an implementation perspective.

One of the major issues that many China watchers are concerned about is Taiwan. Is there any movement there at all?

Frankly, I think from the perspective of the United States, Taiwan is a third-tier issue for Thursday's meeting. Above all, the United States wants progress on trade and currency as well sticky security issues such as North Korea and Iran. The administration will also promote Deputy Secretary of State Robert Zoellick's framework for engaging China as a responsible stakeholder in the international community. From the Chinese perspective, of course, Taiwan is always the number one or number two issue on the agenda. The Chinese will raise the issue of U.S. arms sales to Taiwan and President Chen Shui-bian's gambits for making progress on Taiwan independence. But there really isn't anything that has happened with regard to Taiwan in the past few weeks that would raise the issue to the top of the bilateral agenda.

So from the U.S. point of view, what is the top item? Trade and currency?

Trade and currency are key issues, particularly for Congress.

What is the imbalance of trade right now?

We are looking at a trade deficit of slightly over $200 billion for last year. That number is not insignificant. Of course, there are mitigating factors. For example, profits from Chinese exports accrue to U.S. multinationals that are doing business there, U.S. consumers benefit from cheap Chinese goods, etc. But these are the fine points that get lost in a number like $200 billion.

And the main U.S. concern is of American factories closing and jobs going to China, is that right?

Absolutely. And underpinning the concern is an issue of fairness: how did China achieve this surplus? This is where intellectual property rights and how China values its currency become so important.

And on currency, can you explain that one?

Essentially, the argument is that China continues to manage its currency in order to prevent it from appreciating as it should. The undervaluation of China's currency makes Chinese goods cheaper, raising their exports and limiting their imports.

In 2004, we had about 74,000 incidents of protests in China. Has that continued?

The number has actually increased. This year the Chinese government announced that in 2005 there were 87,000 protests.

These are what, local protests, strikes?

The protests are not necessarily strikes. Much of what the Chinese people protest against centers on corruption—whether it's officials illegally taking land from the Chinese people, taxing them beyond the regulations, or polluting their land, water and air and making them sick. When laborers protest, it may be because they are losing their jobs, but it is as likely to be because factory managers have absconded with their medical and pension benefits.

If you're in the agricultural areas, is it a pretty tough life?

Absolutely. That is why we see so many people moving to urban areas within China.

What percentage of the population is still out in the countryside? Three quarters?

About 750 million out of 1.3 billion. People in the countryside are not necessarily farmers. They could be working in local township and village enterprises with a small family-managed farm on the side. The real issue for President Hu as he looks out across China's rural dwellers is that their income levels have increased so much more slowly than those of Chinese who live in urban areas. China is now a more unequal society than the United States, which is astonishing. These inequalities and a sense of unfairness within the Chinese system also contribute to rural unrest.

And these farmers are really providing the labor force for the industries in the cities, right? I mean the children of the farmers flee the countryside to go to factories in the cities?

Right. There is an enormous pull factor from the urban areas in China because people know they can make higher wages working in factories than in subsistence farming. Over the next twenty years the Chinese government wants to urbanize 300 million people in China, essentially the entire population of the United States. They recognize that this is the only way to raise the standard of living for the majority of the Chinese people who have not benefited significantly from the most recent decade of economic reform.

In addition to what they have now you mean?

Correct.

So they have now about 550 million people in urban areas?

Right.

And they want to add 300 million more?

Three hundred million more in a span of twenty years. When you read about China's building boom, its infrastructure development, and its skyrocketing needs for energy, this urbanization effort is a lot of what's behind it.

Every industrial country has a very small agriculture area now as far as population goes. China's often depicted now as this sort of Dickensian economy where the workers are being paid really minimal wages and work long, long hours, often in very wretched circumstances. Is that really true?

Certainly it is true for the bottom tier of the manufacturing sector in China. Many of these people, however, will still see factory work as better than life in the countryside, but from a U.S. perspective what goes on in many factories would be considered serious violations of labor rights. But I think it goes beyond abuses within the Chinese factories. What also causes such difficulty for the Chinese people is that, as the Chinese government has pushed forward so aggressively to become a market economy, it has failed to put into place any sort of social welfare system. China spends on health, education and social welfare about 3.5 percent of its GDP. The United States spends about 16 percent and Europe about 29 percent. Some may argue that China is a developing country so it cannot provide the kind of health care and pension system and free educational system that wealthier countries in the West provide. Nonetheless, this is a country whose foreign currency reserves have just topped $800 billion, pushing it ahead of Japan for the first time. China ought to be able to do more to provide for the neediest in its society.

Do you see much progress on North Korea and Iran coming out of these talks?

Probably not. Unfortunately, these are very difficult, very intransigent issues where the United States and China have, I think, commonality of interest, but it's a commonality of interest that ends where approaches to solving the problem begin. In both cases we're facing a similar problem, which is that the United States needs China to step up to the plate and use its economic leverage or its position on the UN Security Council as a stick with North Korea and Iran, respectively. The Chinese, however, do not see themselves as the world's policeman, and while they are not interested in a nuclear Korean Peninsula or a nuclear Iran, they are far more willing to negotiate ad nauseum than the United States is.

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