On an average weekday afternoon, the showroom in Bangkok for Huawei, China’s mobile telephone giant, seems less like a store and more like a subway at rush hour. Crowds of Thai teenagers in crisp-pressed school uniforms huddle over showcases of the latest-model phones, oohing and aahing over each function. Young professionals in slick suits debate how they can boost their salaries to trade up for better cells.

In the near future, scenes like the mob at Huawei Thailand will become more common-and more worrying to Washington.

Once content to draw in foreign investment and slowly build up domestic companies, today China, backed by its vast currency reserves, is beginning to invest abroad in large numbers. As part of this expansion, Chinese firms like Huawei, the automaker Chery, and many others are shedding their reputation for low-quality, no-name products, to compete head-on in the United States with American companies. Yet at the same time, the American public, and many of the major players in the Democratic Party, which swept the 2008 elections, are becoming more skeptical of trade with China, and free trade in general. And as Barack Obama assumes office, after eight years of free trade Republican rule, that skepticism could result in a rewriting of the free trade bargain America has, for decades, made with the world.

 Over the past decade, a dangerous convergence of factors has begun to threaten the future of U.S.-China trade. Besides making itself the workshop to the world, China has emerged as a major global exporter of its own branded products, in both low-end and high-end products, creating an ever-larger trade deficit with the U.S. (The U.S. will run a trade deficit with China of over $200 billion for 2008.) As recently as 2003, China’s total stock of outward investment was only $37 billion, less than that of the Netherlands. “You didn’t see much of a presence of Chinese businesspeople here even five years ago,” says leading Thai politician Kraisak Choonhaven.

But over the past five years, that has begun to change. By 2008, China’s stock of outward investment had grown substantially-in just the first quarter of the year, Chinese firms invested nearly $19 billion abroad, a rise of over 300 percent year-on-year. And China’s low-cost manufacturing hubs, like the Pearl River Delta near Hong Kong, now control an overwhelming share of the world market in everything from toys to low-end electronics. “China has become the quintessential trading nation, whose international commerce dramatically increases its national power,” notes David Zweig, an expert on China’s trade and investment at the Center on China’s Transnational Relations at Hong Kong University of Science and Technology.

 As part of this global expansion, Beijing has enthusiastically embraced the idea of free trade. In just the past decade, it has signed or is negotiating trade deals with Chile, Thailand, ten Southeast Asian nations, the leading Persian Gulf countries, and many other states. As Zweig found, China’s trade has grown by an average of 15-17 percent annually for the past 30 years, a staggering figure.

The China alternative

Perhaps even more threatening to U.S. interests is how Beijing uses these trade deals to convince other nations that it is not only sucking away their jobs but also bringing back commerce, investment, and cheaper goods. “China is positioning itself as a trade alternative to having trade deals with U.S. or another WTO round,” says Federico Macaranas, a trade expert at the Asian Institute of Management in Manila, where China has made large investments.

Even as China embraces freer trade, some of its strategies have caused concern about whether it is flouting international trade laws. By receiving protections in their home market, Chinese firms can amass enormous cash flows, which make foreign acquisitions easier. Meanwhile, in many countries where they operate China’s state-owned banks stand accused of offering low-interest soft loans to help Chinese firms enter a market, or of handing out generous financial incentives to foreign governments that give preference to Chinese firms.

“China’s national champions enjoy a range of benefits from the government including information-sharing networks, domestic tax breaks, cheap land and low-interest funding from state-owned banks,” notes one comprehensive study on Chinese companies by the consulting group Accenture. Chinese automaker Chery, for one, recently inked a $1.5 billion loan package with China’s Eximbank designed to help Chery expand overseas-the loan is not to be used for business in China’s domestic market.

To move up the value-added ladder, Chinese firms also have borrowed extensively from their foreign partners. Sometimes, this works well, benefiting both sides. But other times, Chinese firms simply copy the Western technology or boot out their joint venture partner and build products themselves. In recent years, for example, foreign automakers in China have launched a raft of suits against Chinese firms for infringement. General Motors sued state-owned Chery for allegedly knocking-off GM subsidiary Daewoo’s Matix compact car to build Chery’s popular QQ small car. Honda sued another Chinese car-maker, Shuanghuan Automobile, for similar alleged copying. But foreign companies who look for recourse in Chinese courts don’t find much relief. “China’s legal system seems just like a foreign legal system, but when you have any case that involves local government interests, the local officials will just tell the court how to rule,” says Clive Ansley, a lawyer who worked in China for over two decades.

Perils of free trade

Meanwhile as China prospers, in the United States many blue-collar workers (and the labor unions that represent them) increasingly feel free trade has not benefited them at all. In one recent poll by the Pew research organization, an overwhelming majority of Americans believed that trade agreements lead to job losses, while the benefits of freer trade, like lower prices for American consumers, fail to register as strongly in the public consciousness. And while in the early 1990s, the time of the signing of NAFTA, their trade bogeyman was Mexico, today this group of Americans has trained its sights directly on China. In another study, this time by Zogby International polling group, both the American public and congressional staffers said that job losses due to trade were their greatest concern about China, outstripping even fears of a future war between the two nations.

A toxic brew

In the 2008 election, these unions provided a critical base of support for Obama, especially in key swing states like Ohio and Pennsylvania. Catering to their anger, Obama promised a tougher line on Beijing than his predecessor, like filing many new cases against Beijing at the World Trade Organization or pushing China much harder to revalue its currency. “China must stop manipulating its currency because it’s not fair to American manufacturers, it’s not fair to you, and we are going to change it when I am president,” Obama promised in one appearance on the campaign trail.

 With a Democratic president and a Democratic Congress, this toxic brew of factors could explode. Within the Obama administration, the new president will have to referee a growing split in his party on free trade. In the 1990s, the party embraced free trade, exemplified by the NAFTA deal negotiated by Bill Clinton.

 But over the past decade, the party has begun to split on trade. Some economic centrists like former Treasury Secretary, and now senior Obama advisor, Larry Summers, still support trade deals, even if they now say that globalization has not broadly benefited the American middle class. But others in the party have become stridently anti-trade, including most of the major trade unions. Many leading Democrats also have seen that bashing trade can win elections-a view reinforced by underdog victories in 2006 and 2008 by Democratic trade skeptics, like Ohio Senator Sherrod Brown, one of the loudest critics of globalization on Capitol Hill.

 Obama himself reflects this division. On the campaign trail, Obama opposed many of the trade deals negotiated by the Bush administration, including the U.S.-South Korea agreement, also opposed by the Democratic Congress, and the U.S.-Colombia deal. Yet several advisors who know Obama well believe he is more of an economic centrist, and trade supporter, than he let on in the campaign. Obama, says one of his close Asia advisors, isn’t necessarily anti-trade, but he just is not as willing to push trade deals just to keep the U.S. in the front of free trade negotiations. “If a trade deal is flawed or if laws on the books are not being enforced does that really make one skeptical?” the advisor asks. “And if you negotiate a bad deal does that make you ‘good’ for trade?”

Yet the China juggernaut is not unstoppable, and Obama’s hands are not tied, even though he must simultaneously take on Beijing and rely on China to keep buying up U.S. treasury bills-Beijing is the largest foreign holder of treasuries. As China becomes a bigger global player with many free trade deals up in the air, it will be forced to respond to complaints about questionable trade practices like dumping, or soft loans to its state-owned companies, or else lose the positive image it is building by inking free trade deals around the globe. “We see that the trade deal has meant a lot of cheap Chinese products coming into the local market, and there are questions about how China is dumping these products at such a low cost here,” says Macaranas, of the Asian Institute of Management. “If that continues then we’ll have much stronger anti-China feeling.”

Indeed, some experienced China hands in Washington expect Obama to use Beijing’s newfound desire for respect as a tool of leverage, perhaps to get China to make its banks more transparent, or to revalue its currency, a constant point of dispute between the U.S. and China. (It doesn’t help, too, that powerful Speaker of the House Nancy Pelosi is known as one of the biggest China hawks in town.)

But danger lurks in this approach. Derek Scissors, a China expert at the Heritage Foundation, predicts a disaster, coming as soon as the next few months. “Congress may well pass unprecedented legislation targeting China…featuring a short period of time by which the PRC must satisfy any of a variety of possible American demands or face trade sanctions.” If China does not respond proactively, he believes, the U.S. will impose high tariffs or other barriers on Chinese goods. “I think the pieces are falling into place for a conflict [on trade],” agrees Walter Lohman of the Heritage Foundation think-tank in Washington. “It’s going to take real free market leadership on our part-and cooperation on the part of the Chinese-to avoid it.”

 For all his weapons, though, the new president still might not be able to change Beijing. China is in a far stronger position than it was a decade ago: Even if Obama comes down hard on China, Beijing may have other options. In the past five years, China has courted Africa, the Middle East, and other parts of the globe outside of the U.S. and Western Europe, where it has many tough trade disputes. According to one study by the World Bank, China has become the largest lender in Africa, while in some Asian nations, like Cambodia, Chinese investment now has surpassed that of all other rivals. In downtown Phnom Penh, Cambodia’s capital, Chinese construction firms furiously put up new offices and hotels, while Chinese industrial companies peddle new tractors and trucks to Cambodian government officials. “We have almost no choice but to buy from China,” one Cambodian trade official told me. “They give so much support to the [Cambodian] government-we have to.”

Now, with the global financial crisis hitting China’s trade relations with the West even harder, Beijing may step up its courtship of other regions. “I think the Government will use investments like Chery to gain more influence in other regions, in order to find more allies and a balance of power away from the U.S.,” says Shaun Rein, managing director of the China Market Research Group. “You see many of China’s national champion [companies] expanding first into the Middle East and Africa to help build up bilateral relations.”

What’s more, with Beijing concerned about keeping their growth going during the global downturn, China will be in no mood to make many concessions on trade. “People in Beijing generally believe [Obama’s tough stance] is mostly campaign rhetoric,” agrees Li Mingjiang, an expert on U.S.-China relations at the S. Rajaratnam School of International Studies in Singapore who frequently speaks with officials in Beijing. “They [in Beijing] expect more frictions in trade and other economic relations, but Beijing will be able to handle them through a combination of resistance, talks, and minor concessions. Many also note that China may not budge significantly given the domestic economic pressures brought by the financial fiasco.”

With large pools of cash and the state behind them, Chinese companies also are in position to pick over distressed Western assets. Andy Rothman, a longtime strategist at CLSA Asia Pacific Markets in Shanghai, believes Chinese companies will be very careful as they continue expanding abroad. “I expect that Beijing will be very cautious given the level of global uncertainty on both commodity prices and financial issues,” he says. But Shaun Rein, on the other hand, thinks some of China’s biggest players actually will not be so cautious. China’s “national champion [companies] will use the downturn to more aggressively expand abroad to take advantage of low valuations to make acquisitions.” For example? “I see some of the big Chinese auto firms acquiring brands like a Volvo or Saab in order to get access to technology and brand awareness,” he says.

This Chinese expansion could only make the anti-trade backlash in America worse, tying Obama’s hands. Even some of China’s largest companies do not seem to understand: When Chinese oil giant CNOOC tried to acquire U.S. firm Unocal in 2005, it was shocked to find its way blocked by Congress, which feared America losing strategic energy firms. “CNOOC totally underestimated the response in the U.S. because they have no experience dealing with something like Congress, or public opinion, and they were kind of blundering around,” said one Washington lobbyist who had worked closely with Chinese clients. And today, with U.S.-China tensions far higher than in 2005, another blunder could prove far more explosive. wt



Joshua Kurlantzick, a visiting scholar in the Carnegie Endowment’s China Program, is the author of  Charm Offensive: How China’s Soft Power is Transforming the World.

Sidebar: Whither Doha?

Even as he ponders how to handle China, the new president also must master an even trickier trade issue: the Doha round of multilateral trade negotiations, which has been stalled for years since launching in November of 2001. On the campaign trail, again, Obama staked out a relatively hard-line stance, similar to the anti-trade elements of the party. Though Obama claimed to want to finish the round of negotiations, during the campaign one of his advisors declared: “Obama believes we need to change our trade focus from the Bush years so there is a true focus on workers, jobs, farmers and on ensuring that we are lifting standards of living overseas.” In other words, trade deals without corresponding labor and environmental agreements, which help ensure trade does not cause a race to the bottom, would be Obama’s mantra in the Doha round.

But in office, as he has tacked back to the middle on other issues like defense and diplomacy, Obama may change his mind on Doha. Several Obama advisors say that, along with reinvigorating America’s relations with multilateral organizations like the United Nations, which often had a poor relationship with the Bush administration, Obama could invest his capital in the Doha round to show that Washington again can work with the world.

But don’t count on it. Doha, says Derek Scissors of the Heritage Foundation, is abstract and thus hard to sell to the American public-and the world lost interest as the global financial crisis hit. The round is “not only abstract but comatose,” he says. “The push from everyone else got much weaker starting the moment Lehman failed.”