Tag: China

GM’s Nationalization and China’s Capitalists

GM’s restructuring under Chapter 11 includes plans to sell off the Hummer, Saab, and Saturn brands. Well, just one day after GM’s bankruptcy filing, a Chinese firm has come forward with a $500 million offer to purchase Hummer. The prospective buyer is Sichuan Tengzhong Heavy Industrial Machinery Co Ltd, a manufacturing company in western China, which hopes to become an automaker.

Not only is the Hummer offer the first bid for a GM asset in bankruptcy, but the bidder is foreign. Not only is the bidder foreign, but Chinese. And not only is the bidder Chinese, but the Hummer was first developed by the U.S. military. Thus, this is certain to be characterized as a national security matter, and the Committee on Foreign Investment in the United States (CFIUS) will have to review the proposal. There should be little doubt that the economic nationalists will be out in full force, warning CFIUS against transferring sensitive technologies to Red China.

Let me offer two quick points, as the bulging veins in my temples pulsate with disdain for official Washington.

First, if this deal is rejected (even if the bidder is scared away by detractors), any remaining credibility to the proposition that the United States will once again become that beacon on a hill, exemplifying for the world the virtues of free markets and limited government, will vanish into the ether. There has been too much U.S. hypocrisy on free trade and cross-border investment and too much double talk about the impropriety of government subsidizing national champions, that another indiscretion in a high profile case will blow open the already-bowing flood gates to economic nationalism worldwide. Considering that U.S. companies sell five times as much stuff to foreigners through their foreign subsidiaries than by exporting from the United States, investment protectionism is as advisable as nationalizing car companies.

Second, the willingness of this Chinese company to purchase Hummer serves as a stark reminder of what could have been. Had George W. Bush not allocated TARP money to GM last December, in circumvention of Congress’s rejection of a bailout, then GM likely would have filed for bankruptcy on January 1. At that point, there would likely have been plenty of offers from foreign and domestic concerns for individual assets to spin off or for equity stakes in the New GM. There would have been plant closures, dealership terminations, and jobs losses, as there is under the nationalization plan anyway. But taxpayers wouldn’t be on the hook for $50+ billion, a sum that is much more likely to grow larger than it is to be repaid. It is also a sum that will serve as the rationalization for further government interventions on GM’s behalf.

Troublesome North Korea Strikes Again

The North Koreans have been busy, testing a nuclear weapon and shooting off missiles.  It seems that nothing upsets North Korea more than being ignored.

President Barack Obama expressed the usual outrage:

These actions, while not a surprise given its statements and actions to date, are a matter of grave concern to all nations. North Korea’s attempts to develop nuclear weapons, as well as its ballistic missile program, constitute a threat to international peace and security.

However, this really is all old news.  Although the nuclear test reinforces the North’s irresponsible reputation, the blast has little practical importance. North Korea has long been known to be a nuclear state and tested a smaller nuclear device a couple years ago. The regime’s missile capabilities also are well-known.

Contrary to the president’s excited rhetoric, the North has little ability to project force beyond the Korean peninsula.  So Washington should treat the North’s latest offense as an opportunity to reprogram the latter’s negotiating formula.

The U.S. should not reward “Dear Leader” Kim Jong-il with a plethora of statements beseeching the regime to cooperate and threatening dire consequences for its bad behavior. Rather, the Obama administration should explain, perhaps through China, that the U.S. is interested in forging a more positive relationship with North, but that no improvement will be possible so long as North Korea acts provocatively. Washington should encourage South Korea and Japan to take a similar stance.

Moreover, the U.S. should step back and suggest that China, Seoul, and Tokyo take the lead in dealing with Pyongyang. North Korea’s activities more threaten its neighbors than America. Even Beijing, the North’s long-time ally, long ago lost patience with Kim’s belligerent behavior and might be willing to support tougher sanctions.

Washington should offer to support this or other efforts to reform North Korean policy.  But without Chinese backing there is little else the U.S. can do.  War on the peninsula would be disastrous for all, and Washington has few additional sanctions to apply.  Beijing has the most leverage on Pyongyang, but whether even that is enough to moderate North Korea’s behavior is anyone’s guess.

North Korea is a problem likely to be long with us. The U.S. has limited ability to influence the North. Washington should offer the prospect of improved relations as a reward for improved North Korean behavior, but should let the North’s neighbors, most notably China, take the lead in managing this most difficult of states.

Who’s Going to Buy Your Debt, Mr. President?

The administration’s presumption that America can borrow its way to prosperity has taken a couple of big hits over the last couple days.

First, just as the Third World debt crisis destroyed the belief among international bankers that countries don’t go bankrupt, so is the West’s borrowing binge ending the belief among international investors that the U.S. and other Western nations are safe economic bets.

Reports the Wall Street Journal:

Britain was warned by Standard & Poor’s Ratings Service that it may lose its coveted triple-A credit rating, triggering a drop in U.K. bonds and sparking global fears about the consequences of massive debts being incurred by the U.S. and other major nations as they try to dig out from the economic crisis.

The announcement quickly sent waves across the Atlantic. Investors initially dumped U.K. bonds and the pound, heading for the relative safety of U.S. Treasurys. But within hours, worries about an onslaught of new U.S. bond sales and the security of America’s own triple-A rating drove down the prices of U.S. Treasurys.

The yield of the benchmark U.S. 10-year bond, which moves in the opposite direction to the price, rose by 0.15 percentage point from Wednesday to 3.355%, its highest level in six months.

The relative gloom about the U.K. and the U.S. was apparent Thursday in the market for credit-default swaps, where investors can buy and sell insurance against sovereign defaults. Five years of insurance on $10 million in U.K. debt jumped to around $81,000 a year, from $72,000 earlier in the day. U.S. debt insurance cost the equivalent of $37,500 — in the same range as France at $38,000, and Germany at $35,000.

A shot across the bow of the American ship of state, some analysts have called it.

But shots also were being fired from another direction:  East Asia.  The Chinese are starting to have doubts about Uncle Sam’s creditworthiness.  Reports the New York Times:

Leaders in both Washington and Beijing have been fretting openly about the mutual dependence — some would say codependence — created by China’s vast holdings of United States bonds. But beyond the talk, the relationship is already changing with surprising speed.

China is growing more picky about which American debt it is willing to finance, and is changing laws to make it easier for Chinese companies to invest abroad the billions of dollars they take in each year by exporting to America. For its part, the United States is becoming relatively less dependent on Chinese financing.

Financial statistics released by both countries in recent days show that China paradoxically stepped up its lending to the American government over the winter even as it virtually stopped putting fresh money into dollars.

This combination is possible because China has been exchanging one dollar-denominated asset for another — selling the debt of government-sponsored enterprises like Fannie Mae and Freddie Mac in a hurry to buy Treasuries. While this has been clear for months, new data shows that China is also trading long-term Treasuries for short-term notes, highlighting Beijing’s concerns that inflation will erode the dollar’s value in the long run as America amasses record debt.

The national debt is over $11 trillion.  This year’s deficit will run nearly $2 trillion.  Next year the deficit is projected to be $1.2 trillion, but it undoubtedly will run more.  The administration projects an extra $10 trillion in red ink over the coming decade.

Fannie Mae and Freddie Mac need more money.  The Pension Benefit Guaranty Corporation is in trouble.  The FDIC will need more cash to clean up failed banks.  The effectively nationalized auto companies will soak up more funds.  Then there’s the more than $70 trillion in unfunded Social Security and Medicare liabilities.

But don’t worry, be happy!

The Global Economy Is Not Immune to Swine Flu

World governments should be careful not to play politics with the Mexican swine flu outbreak. The health consequences should of course be rigorously addressed—but without adding economic consequences, which is what several countries appear poised to do.

Public health scares have a history of seeping into trade policy without anything resembling sufficient consideration of the evidence. Governments in Russia and East Asia are already banning pork exports from Mexico, even though there is zero evidence that they pose a health hazard. It hearkens back to unfounded bans of U.S. beef in recent years by the European Union and South Korea.

If the U.S. government jumps on board, U.S. exports could be targeted for retaliatory trade actions. One quarter of U.S. pork production is exported, as well as billions of dollars of our soybeans used as feed by foreign hog farmers.

Exploiting this crisis could turn what is so far a manageable health problem into an unnecessary trade and diplomatic conflict. Obviously the global economy does not need the extra strain.

Obama’s First 100 Days: Mixed Record on Foreign Policy

Cato foreign policy experts weigh in on President Obama’s record in his first 100 days:

Christopher Preble, Director Foreign Policy Studies:

President Obama deserves credit for making a few modest changes in U.S. foreign and defense policy, and he has signaled a desire to make more fundamental shifts in the future. Some of these may prove helpful, while others are likely to encounter problems. In the end, however, so long as the president is unwilling to revisit some of the core assumptions that have guided U.S grand strategy for nearly two decades – chief among these the conceit that the United States is the world’s indispensable nation, and that we must take the lead in resolving all the world’s problems – then he will be unable to effect the broad changes that are truly needed.

Ted Galen Carpenter, Vice President Defense & Foreign Policy Studies; Christopher Preble:

On the plus side, Obama moved quickly to fulfill his most important foreign policy promise: ending the war in Iraq. That said, the policy that his administration will implement is consistent with the agreement that the outgoing Bush administration negotiated with the Iraqis. Given that the war has undermined U.S. security interests, and our continuing presence there is costly and counterproductive, Obama should have proposed to remove U.S. troops on a faster timetable.

Malou Innocent, Foreign Policy Analyst:

The jury is still out on the other major, ongoing military operation, the war in Afghanistan. That mission is directly related to events in neighboring Pakistan, which is serving – and has served – as a safe haven for Taliban supporters for years. President Obama deserves credit for approaching the problem with both countries together, and also in a regional context, which includes Iran, as well as India. Still unknown is the scope and scale of the U.S. commitment. President Obama has approved a nearly 50 percent increase in the number of U.S. military personnel in Afghanistan. Some have suggested that still more troops are needed, and that these additional troop numbers might prevail for 10-15 years. That would be a mistake. The United States should be looking for ways to increase the capacity of both Afghanistan and Pakistan to confront the extremism in their countries, and should not allow either to grow dependent upon U.S. military and financial support.

Christopher Preble and Ted Galen Carpenter:

On Iran, President Obama made the right decision by agreeing to join the P5 + 1 negotiations, but that is only a first step. The two sides are far apart and President Obama has not signaled his intentions if negotiations fail to produce a definitive breakthrough. Sanctions have had a very uneven track record, and are unlikely to succeed in convincing the Iranians to permanently forego uranium enrichment. If the Iranians are intent upon acquiring nuclear weapons, military action would merely delay Iran ’s program, and would serve in the meantime to rally support for an otherwise unpopular clerical regime, and a manifestly incompetent president.

Doug Bandow, Senior Fellow; Christopher Preble:

A related problem is North Korea’s ongoing nuclear program, an area where the president and his team seem to be grasping for answers. President Obama was mistaken if he believed that that the UN Security Council would render a meaningful response to Pyongyang’s provocative missile launch. It was naive, at best, for him to believe that even a strong rebuke from the UNSC would have altered Kim Jong Il’s behavior. The president must directly engage China, the only country with any significant influence over Kim. The North’s reckless and unpredictable behavior does not serve Beijing’s interests.

Benjamin Friedman, Research Fellow; Christopher Preble:

Obama and Defense Secretary Robert Gates are correct to apply greater scrutiny to bloated Pentagon spending, and to terminating unnecessary weapon systems, but the budget will actually grow slightly, at a time when we should be looking for ways to trim spending. If President Obama decided to avoid Iraq-style occupations, we could cut our ground forces in half. If we stopped planning for near-term war with China or Russia, the Air Force and Navy could be much smaller. Unless we commit to a grand strategy of restraint, and encourage other countries to provide for their own defense, it will be impossible to make the large-scale cuts in military spending that are needed.

Jim Harper, Director of Information Policy Studies; Benjamin Friedman; Christopher Preble:

Two other quick points. President Obama has moved away from some of the overheated rhetoric surrounding counterterrorism and homeland security, including dropping the phrase ‘War on Terror”. This was the right approach. The language surrounding the fight against terrorism is as important – if not more important – than the actual fight itself. Equally useful is his pledge to close the detention facility at Guantanamo Bay and his renunciation of the use of torture and other illegal means in the first against al Qaeda. These steps send an important message to audiences outside of the United States who cooperation is essential.

Ian Vasquez, Director, Center for Global Liberty & Prosperity; Juan Carlos Hidalgo, Project Coordinator for Latin America.

President Obama has signaled a slight change on US-Cuba policy by softening some travel and financial restrictions. It is not as far as we would have liked, but it is a step in the right direction – toward greater engagement, as opposed to more isolation, which was the approach adopted by the Bush administration.

For more research, check out Cato’s foreign policy and national security page.

The Chinese Currency Issue Is No Longer

In its first statutory, semi-annual report on foreign currency practices, the Obama Treasury Department refrained from designating China a “currency manipulator,” further affirming the view that an aggressive, sticks-only approach to the bilateral trade relationship advocated (mostly) by campaigning politicians is simply untenable. After serving more than 5 years as a great source of bilateral trade tension, the Chinese currency issue is dead.

Senator Obama and presidential candidate Obama both talked tough about Chinese currency practices, identifying an undervalued yuan as a source of unfairness to U.S. producers and an important cause of the bilateral trade imbalance. Treasury Secretary-designate Geithner, during his confirmation hearing in January, reiterated President Obama’s commitment to dealing with the issue before the Senate Finance Committee:

President Obama - backed by the conclusions of a broad range of economists – believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices. While in the U.S. Senate he cosponsored tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles.

Those who relied on hyped-up media accounts of Geithner’s testimony, which generally homed in on the terms “aggressively,” “tough,” and “enforcement” in the above passage to imply that Obama would take action against China on this matter, are probably utterly surprised that Treasury balked yesterday. But those who read the rest of Geithner’s response to the question may have noticed this broad canvas for inaction:

The question is how and when to broach the subject in order to do more good than harm. The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.

Those last two sentences of Geithner’s response contained the answer—nearly three months beforehand—to the question of whether Treasury would label China a manipulator. And, taken in its entirety, the response is a perfect summation of the distinctions between criticizing policy as a challenger and being responsible for policy as the guy in charge. You can talk tough as a challenger because you don’t have to account for the consequences of your actions. But when you are responsible for the consequences of potentially incendiary policy changes, circumspection is a rediscovered virtue.

As President Obama knows by now, the consequences of simply labeling China a “currency manipulator” (let alone attempting to do something remedial about it) would undermine broader U.S.-China relations, invite recriminations, inspire potentially adverse policy changes in China, and would inject heaps of uncertainty into global currency and financial markets. Besides, as yesterday’s Treasury report concludes, the yuan continues to appreciate against the dollar, the government’s accumulation of foreign reserves has decelerated, and policies are in place to encourage greater domestic consumption in China and to reduce the economy’s reliance on exports.

I remain hopeful that this distinction between Obama the president and Obama the candidate will become and remain evident in U.S. trade policy more broadly.

Freedom for Yang Zili

Congratulations to Yang Zili, a Chinese advocate for political pluralism and human rights who has been set free after serving eight years in prison.

As I noted in the Fall 2007 edition of Cato’s Letter, Yang was an admirer of the libertarian thinker F. A. Hayek and described himself as a political liberal. A computer engineer by trade, Yang quickly recognized the power of the internet to spread ideas, founding a website, the “Garden of Ideas” (www.lib.126.com), where he forcefully condemned communism and argued for democratic reforms. “I am a liberal,” he wrote, “and what I care about are human rights, freedom and democracy.” Yang also participated in a discussion group called the New Youth Society, where he discussed the potential for political reform in China with young people who were similarly passionate. In 2001, Yang Zili and three of his colleagues were jailed for conspiring to overthrow the Chinese Communist Party.

As the Washington Post reported in 2004, the small group met for only a few months, and during that time one of its members was reporting to the Ministry of  State Security. Indeed, the Post reported:

What happened to the New Youth Study Group offers a glimpse into the methods the party uses to maintain its monopoly on power and the difficult moral choices faced by those caught in its grip. The fate of the study group also illustrates the thoroughness with which the party applies one of its most basic rules of survival: Consider any independent organization a potential threat and crush it.

The eight members of the New Youth Study Group never agreed on a political platform and had no real source of funds. They never set up branches in other cities or recruited any other members. They never even managed to hold another meeting with full attendance; someone was always too busy.

And yet they attracted the attention of China’s two main security ministries. Reports about their activities reached officials at the highest levels of the party, including Luo Gan, the Politburo member responsible for internal security. Even the president then, Jiang Zemin, referred to the investigation as one of the most important in the nation, according to people who have seen an internal memo summarizing the comments of senior officials about the case.

Such is life in a police state.

Yang Zili spent eight years in prison for being brave enough to speak out against an authoritarian regime, which is 8 years too many in my book. Still, we can take comfort that he got out, and that his colleagues are slated to be released from prison next year.
Unfortunately, many young internet activists brave enough to stand up for freedom still languish in jail.