China’s relationship with Middle America is increasingly complicated—and Washington’s most delicate problem.
National Journal by Jim Tankersley
Thursday, November 11, 2010 | 4:00 p.m.
ANDERSON, Ind.—A little stretch of state highway bisects Interstate 69 as it climbs north and east of Indianapolis. It is wide and weather-beaten, and hardly ever clogged with cars, and it runs from the freeway into a once-mighty manufacturing town that is now steadily losing people. Like so many main drags in so many rusted-out cities across the Midwest and along the Great Lakes, the road tells a tidy, simple story about outsourcing, China, and America’s industrial decline: long-abandoned factories, big-box retailers, laid-off workers buying cheap imported housewares, auto parts, and toys for their kids.
It is a story that everyone in Anderson knows well, and one that Democrats and Republicans blared across the airwaves in campaign ads this fall. It is also a story that is changing—quickly, profoundly, and in ways that Washington is just beginning to understand. One small sign of this change: Many of Anderson’s economic-development officials were not around to watch the inescapable TV ads denouncing outsourcing here last month.
They were in China, lining up investors.
The United States’ increasingly complex relationship with China was President Obama’s most vexing concern as he gathered with leaders of the world’s largest economies in South Korea this week for the G-20 summit. Obama and his Cabinet secretaries must steer their way through difficult and frequently intersecting negotiations over China’s currency manipulation, its compliance with global trade rules, and its attitude toward intellectual-property rights—at a time when Chinese consumers are the administration’s best hope for an export boom to jolt the American economic recovery back to life.
Further complicating the administration’s task are rip currents of sentiment toward China flowing through the industrial heartland and down along K Street. Many of the Midwest towns and industries that suffered the brunt of job losses to outsourcing are now finding hope for economic revitalization in the prospect of Chinese investment. At the same time, major business lobbies that long championed expanded trade with China—including the U.S. Chamber of Commerce and the National Association of Manufacturers—are feeling pangs of anxiety over the two countries’ economic relationship.
“We are at a point of real change with our relationship with China,” says Patricia H. Mears, director of International Commercial Affairs for NAM. “In some ways, it’s a relationship that’s going to require more-delicate handling, because the issues are getting tougher.” Chamber President Tom Donohue tells National Journal, “There are 1.3 billion people there, and a massive, growing middle class … and we certainly don’t want to be cut out of trading and investing with them.” On the other hand, he adds, “we’ve got issues.”
No one is more blunt than Leo W. Gerard, president of the United Steelworkers International union, which has filed a series of complaints alleging Chinese trade violations in energy, steel pipes, and other market sectors. “China doesn’t play by the rules,” Gerard says. “They cheat. They bully.” Beijing’s economic model, he says, “is predatory.” Yet in August, Gerard and the Steelworkers struck a deal with two Chinese companies that stirred controversy when the firms applied for federal stimulus dollars to build wind farms that they would have manufactured largely in China. After intense negotiations, the Chinese companies agreed to buy American steel and assemble as much of the turbines as possible in the United States—creating, Gerard boasted, up to 1,000 American jobs.
SEEDS OF INVESTMENT
U.S. companies have long seen both opportunity and peril in China—but never this much of both. After its founding in Indianapolis, medical giant Eli Lilly opened its second office, at the turn of the 20th century, in Shanghai. It reestablished Chinese operations in the 1990s, and over the past decade discovered a booming middle class flush with income to spend on cars, housing, and, most important to Lilly, health care. China has emerged as Lilly’s fastest-growing market, thanks to sales of insulin to treat the country’s burgeoning droves of diabetics.
The drugmaker recorded $270 million in sales in China in 2009, recently opened a diabetes-research center in Shanghai, and employs about 2,800 Chinese workers to manufacture insulin alone. Executives say they cannot identify specific American jobs created to serve the Chinese market, although many of Lilly’s workers in Indiana now deal heavily with China. “There’s a famous Chinese saying that the best time to plant a tree is 150 years ago,” says Darren J. Carroll, Lilly’s vice president for corporate business development, who travels there frequently. “The second-best time is today. We view this market as an opportunity to plant trees that are going to grow for a long time.”
Other Indiana companies—and communities—hope to grab a share of those saplings. They are trying to repeat their experience with Japan two decades ago, when, after years of bitter rivalry and resentment over lost auto-manufacturing jobs, Hoosiers celebrated when several Japanese automakers opened plants in the state. And the state government is ramping up its efforts quickly.
Late last week, Indiana’s commerce secretary, Mitch Roob, finished another 15-hour day in China, dining with government officials, meeting with venture capitalists, hunting for new markets for Indiana products and new investors for his state’s top industries, including auto parts, agriculture, information technology, and biotechnology. Roob always brings an interpreter for the meetings; “I have yet to master important words like ‘beer,’ ” he says.
It had been a mad day in snarled Beijing traffic. Roob had hoped to attend five consecutive meetings with a team of associates. Crawling through the city in the morning, it became clear that wasn’t going to happen. He broke the team into small groups, dispatched them from their rental minivan into taxis, and let each group take one meeting.
City and regional economic-development officials from Anderson have made three trips to China in the past few years, most recently in October. They go to pitch Chinese government and business leaders on the merits of investing in their hard-hit city of just under 50,000 people.
A series of General Motors plant closures killed 25,000 jobs in Anderson over the span of a decade. “They basically outsourced all the automotive jobs,” says Barry Ritchey, an economics professor at Anderson University, a liberal-arts college. “So a lot of people in this town see China as a demon.” Yet the closures left the city with attributes that appeal to new manufacturers, including camera-ready infrastructure (the former GM plants, which the city bought, razed, and prepped for redevelopment) and a glut of high-skilled factory workers hungry for jobs.
Anderson has a good location, convenient to major consumer centers in the Northeast and Midwest. Local officials say that Chinese firms are eager to reach these markets after confining their past investments largely to the East and West coasts. Meanwhile, town leaders note, sea-shipping costs are rising, and China’s cost advantages are eroding slightly as its domestic wages rise.
For a town like Anderson in a global economy, “it’s impossible to compete strictly based upon labor costs or unskilled workers,” says Linda Dawson, the city’s executive director for economic development. “So you have to compete on the cost of distribution and transportation, on the cost and productivity of high-tech skilled labor, and you have to compete upon the fact that ‘Made in the USA’ is still a desirable label.”
To further enhance their bid, Anderson officials produced glossy promotional brochures in Chinese. They drew up a 19-point incentive plan for new assembly plants, promising tax breaks, better infrastructure, and help with red tape and public relations. Despite earlier hostility, city leaders expect no backlash against a Chinese factory opening in town—not when the unemployment rate here stands at more than 10 percent. Dawson says, “Most of the constituents that communicate to me say, ‘It’s about time that we start marketing what we have to China, instead of letting everything go in that direction.’ ”
It so happens that China is in a buying mood, and not just for Treasury bonds. Over the past 14 months, Indiana officials have made four official trips to China, and commerce between Indiana and China has quadrupled, Roob says. Direct Chinese investment abroad has soared in recent years, topping $87 billion in mergers and acquisitions globally in 2008, researchers at the Federal Reserve Bank of San Francisco reported earlier this year. “With China’s expanding wealth and vast foreign-exchange resources,” the researchers concluded, “further growth in the volume and variety of foreign direct investment is likely”—with the United States a prime target.
Although much of the investing so far has focused on resources such as oil and natural gas, analysts see a growing Chinese appetite for advanced research and manufacturing. For American businesses, and for Obama, that is where the stakes get really high.
RISKS AND REWARDS
Automaking is not dead in Anderson. At the southern edge of town, just off the interstate, sits a clean and cozy laboratory with a car hoisted on a lift. A few yards away another car revs on rollers behind a glass partition. It is not a full-scale factory, but one day it could be.
This is the headquarters of Bright Automotive, a next-generation car company that Anderson hopes will help lead a manufacturing renaissance. The specialty here is a work van, displayed on the showroom-style floor, which looks like the bully older brother of a Toyota Prius—long, beefy, but sleek, and powered by a hybrid electric motor that its makers boast will save 1,500 gallons a year in fuel.
Bright is a child of Anderson’s Flagship Enterprise Center, a business incubator that combines support from government agencies and Anderson University. The company has plans for an assembly plant, location to be determined, that would ramp up production and sell to major purchasers of fleet vehicles, such as delivery carriers and electric utilities. Like many other businesses in Anderson, Bright has a complicated relationship with China.
The Chinese government’s focus on energy efficiency and lower carbon emissions has made the country a leading buyer of advanced-energy technology—including electric vehicles—even as the advanced-energy market in the United States is struggling to establish itself. Critics say that the Beijing government’s support, including heavily subsidized land and loans for energy companies, runs afoul of international trade rules.
The Obama administration recently took up a petition by the Steelworkers union that could result in a World Trade Organization complaint against China over unfair clean-energy subsidies. The outcome could have huge implications for companies such as Bright; they worry that U.S. innovators, held back by sluggish domestic demand and less-generous government support, will watch China capture the products, profits, and jobs of a low-emission economy.
“China’s policies are making China a pretty attractive market for advanced vehicles. But we need to be making our policies so that we can put in place an effective strategy to participate,” says Reuben Munger, Bright’s chairman and CEO. “It’s really a question of where innovation and employment happen, and who controls the economics of opportunity.”
Most economic experts agree that for U.S. manufacturing to reverse a decades-long trend of job loss, innovation must lead the way. There will always be foreign competitors with cheaper labor and weaker environmental and safety rules. What America has—and what may attract Chinese companies here—is unusual skill in engineering and assembly. “The heart of economic recovery in states that are depending on manufacturing,” Munger says, “is that they have an extremely high-quality workforce that is just waiting for the projects and production that can employ them.” Business and civic leaders across the Midwest say the same.
China aims to compete more fiercely in that very space, however. Beijing announced a so-called indigenous-innovation policy a year ago. Essentially, this would force foreign companies that want to make things in China to turn over their technology in return. The policy has not yet been adopted—partly, perhaps, because the Obama administration has pushed back hard—but the idea has angered parts of the U.S. business community that were already leery of China’s comparatively soft approach to intellectual-property rights.
“Going back two years, a lot of our companies were thinking, ‘This is the market of the future; this is where you want to be,’ ” says Franklin J. Vargo, vice president for International Economic Affairs at NAM, and a former Commerce Department official who helped secure permanent normal trade relations with China. “Now, a lot of them are starting to rethink. They’re wondering, ‘Do they really want us here?’ ” Later, he adds, “There’s been a surprise on behalf of a lot of the U.S. companies, that the Chinese will not always be happy just buying our technology from us.… I do hear a lot of companies saying, ‘We’re not going to locate our newest technology there.’ ”
Even Darren Carroll, the Lilly executive who is otherwise effusive about China, allows that his company worries whether Chinese intellectual-property laws will allow Lilly to continue “to create innovative products and bring them to market.”
For American companies eyeing the Chinese market, exchange rates are the other big problem. China’s central bank takes great pains to keep its national currency, the yuan, weak against the dollar. That makes it easier for Americans to buy the flood of products China sends their way, and harder for China’s middle class to buy American. Beijing has allowed the yuan to appreciate slightly in recent months. Even so, the United States’ trade deficit with China hit a record high in August.
In the run-up to the G-20 meeting, Treasury Secretary Timothy Geithner offered a plan to resolve the currency issue, requiring countries to hold their trade balances to plus or minus 4 percent of gross domestic product. The multilateral talks have grown so sensitive that Treasury officials are reluctant to discuss them even in private, and multiple branches of the federal government have taken care to avoid irking the Chinese while they continue. Treasury postponed its most recent report to Congress on currency manipulation until after the summit. So did the U.S.-China Economic and Security Review Commission, a body created by Congress that is often severely critical of China’s policies.
Currency negotiations would be delicate enough on their own. They become much more so when combined with the multifront trade actions that the Obama administration has lately pressed against China. The administration retaliated against China’s tire dumping, and it took up the Steelworkers’ clean-energy complaint. Administration critics say that the actions have only rearranged trade—that the United States now imports tires from South Korea, Taiwan, and other Asian nations instead of China. But Gerard and other longtime critics of China’s trade activities give Obama high marks. “We’re already seeing real results from doing something simple, something no president’s done in several decades, which is enforcing American trade rules,” says Sen. Sherrod Brown, D-Ohio, who wrote a book called Myths of Free Trade: Why American Trade Policy Has Failed.
Administration officials say that Team Obama employs a sectional strategy with the Chinese. Geithner is charged with the currency issue, Commerce Secretary Gary Locke with IP and other export matters, and Trade Representative Ron Kirk with tariffs and WTO enforcement actions. The Chinese are “very strong negotiators,” a senior Commerce official says, speaking on condition of anonymity. “The complexities of the relationship require a number of different tools.” The official also stressed that U.S. negotiators assure their many Chinese counterparts that Chinese investment is welcome in America.
Congress could muddle that message, either in the lame-duck session or when the newly elected class takes office next year. The House overwhelmingly passed a bipartisan measure to punish China for currency manipulation earlier this year; the Senate has yet to act. Tea party Republicans and “fair-trade” Democrats disagree about most things, but not about the economic threat from China. This fall, China-bashing campaign ads came from both sides.
Anderson’s city leaders are still waiting to hear whether the Chinese company they are courting will set up shop in Indiana. Roob, the state’s commerce secretary, pressed the case in China again last week. “It’s not China versus America,” he says, in a phone interview from Beijing. “It’s not the Cold War. It’s about competitive advantage.”
Yet back in Anderson, even for the business leaders who would like to see Chinese investment and consumption revitalize their city, China versus America does have something to do with it. Some of the local business owners have been to China. They toured the factories and blanched at the poor lighting and the paucity of restroom breaks for the workers. Then they came home and reluctantly bought parts from those factories anyway. The parts were really cheap.