Trade, China and the World Economic Order, Part 4: Balancing Business Imperatives and Policy Issues

May 27, 2009

As China and the U.S. continue to explore ways to do business together, an overarching question remains: how to balance the benefits of economic integration -- which accrue to the people of the U.S. and China, as well as American and Chinese businesses -- with concerns about such issues as environmental and human rights protection.

"What is the ultimate integration we're looking for? What's our vision?" asked Merle Hinrichs, chairman and CEO of Global Sources. U.S. stakeholders -- including both business leaders and policymakers -- should paint that picture jointly with China's stakeholders. "We're desperate for a broad vision that extends beyond rules and frameworks," Hinrichs said.

Answering that question is made difficult by the fact that businesses deal with economic integration in a very different way than policymakers do. Recently, business leaders, academics, and other stakeholders gathered at the ASU/The Kearny Alliance Forum on Trade, China and the World Economic Order, to discuss ways that the world's two economic superpowers -- the U.S. and China -- can lead together.

As Part 3 in this series made clear, the American and multinational companies that have succeeded in China are those that have found ways to work within China's often difficult business environment. Yet at the same time, U.S. policymakers often focus on other issues associated with economic integration -- issues like the environment and human rights.

"Business decisions are more immediate and pragmatic," said Gary Tooker, former chairman of Motorola. In contrast, "policy decisions are often centered on big-picture issues."

Paul Schiff Berman, dean of the Sandra Day O'Connor College of Law at ASU, said one piece of that vision should be economic integration as a shared and better future for all. "Once we define in detail what that means, we can articulate both formal and less formal steps toward that vision," Berman said.

Robert Mittelstaedt, dean of the W. P. Carey School of Business, agreed that the first step is articulating the vision; the second is deciding how to achieve that vision. "We should move toward a vision of what a great U.S./China relationship looks like," Mittelstaedt said. "Let's write an abstract story of the ideal relationship, then we'll decide how to get there."

The 'how' of economic integration

The 'how' of economic integration between the U.S. and China was a topic that consumed much of the forum's focus.

"Clearly economic integration can be beneficial to all," Berman noted, "but instead of just assuming that any kind of economic integration is an unalloyed good, we need to focus on how best to achieve the kind of integration that will maximize joint benefits and minimize negative consequences." If we frame the task that way, Berman said, economic integration is not in tension with various other concerns; rather, addressing those concerns is part of creating effective, sustainable terms for such integration.

"It's most challenging to reshape the questions being asked," said ASU President Michael Crow in his comments closing the forum. "There's plenty of momentum when the questions are standard," he said -- but asking new questions that will redefine the debate is key to creating a more productive discussion and, eventually, relationship. "If we fall back into linearity then we will have failed."

Falling back into linearity is often the outcome, said Clyde Prestowitz, Jr., founder and president of the Economic Strategy Institute. "At a high level, these kinds of discussions are great, but at the end of the day you come back to where you are -- something has to give on one side or the other," he said. "The U.S. will have to come to resemble China more and China will have to come to resemble the U.S. more."

To accomplish that, cultural learning is key. "Neither the U.S. nor China can hope to have a productive dialogue without first learning more about the other's culture," said Karen Dickinson, an intellectual property (IP) attorney with Quarles & Brady LLP. "And not just from TV," she added.

What should the rules of integration be?

Focusing at a high level on what economic integration means and how it should proceed may be the first step, however asking what the rules of integration should be is inevitable. At the end of the two-day forum, participants split into two groups to create pictures of economic integration from both the U.S. and Chinese perspectives.

Speaking for the U.S. group, Arthur Blakemore, chairman of the economics department at the W. P. Carey School, said one rule of integration is that it be mutually beneficial -- that it involve income and job growth to increase the size of the pie. "For both countries, job creation is a big issue," Global Sources' Hinrichs said. "Two important questions are: how do you reach full employment? And, how do you improve standards of living?"

And while popular opinion might be that economic integration leads to job losses, that's simply not the case, Blakemore said. "Economists agree that technology leads to increases in standards of living. There's no evidence that technological progress comes at the expense of job creation," Blakemore said.

Economic integration can open up opportunities for both trading partners to develop technology -- and that should be our focus, Blakemore said. "Maybe we should be asking the question: How do we improve technological progress?"

Speaking for the China group, Buck Pei, associate dean of Asia programs at the W. P. Carey School, reflected similar expectations about the rules for integration. "Economic integration must be mutually beneficial. Both the U.S. and China must realize that working together, they will both be far better off than in divorce. The consequences of divorce are unacceptable."

According to Pei, from China's perspective finding a target area for cooperation -- one in which there's not a significant history and it's possible for the U.S. and China to work together 50/50 to create a shared vision -- may be the best first step toward effective discussions. "We could use alternative energy -- which is already established as a major point of dialogue -- as a lens to look at the outcomes of economic integration," Pei said.

Addressing tough issues -- together

Once the U.S. and China have successfully defined a shared vision in a "target area for cooperation," then more difficult issues might be addressed. One of those issues is sustainability.

"There is an implicit assumption that China makes and America takes; we may have to reconsider that implicit assumption," said Prestowitz of the Economic Strategy Institute. "The U.S. can't continue same current account deficits -- Americans will have to consume less and produce more. And China can't continue same current account surpluses -- the Chinese will have to produce less and consume more."

W. P. Carey School Dean Mittelstaedt said that current account imbalances will resolve themselves -- though the resolution may not be comfortable. "Consumer deleveraging, for example, had to happen," Mittelstaedt said. "It came in a nasty way, but that doesn't stop the desire or ability to trade." Even as calls escalate for protectionist measures, Americans are still "voting with their wallets," buying "Made in China" products at Wal-Mart, for example.

Environmental sustainability is one tough issue that has caused significant friction between the U.S. and China -- at least in American popular opinion. But, "there is interest in China in working toward long-term sustainability," law dean Paul Schiff Berman said.

IP attorney Karen Dickinson said that the tragic earthquake in China last year offers the opportunity for real progress in environmental sustainability. "China has expressed the goal of rebuilding with greener, more sustainable technologies," she said. "We can use rebuilding now as a new way of looking at sustainability into the future."

And President Obama's focus on creating "green" jobs in the U.S. could be another window to open discussion between the U.S. and China. Like the U.S., China faces significant energy challenges, forum participants agreed -- those challenges might form a common bond for the two countries.

Environmental sustainability could present an opportunity for the U.S. and China to move toward a shared vision, said Kenneth Abbott, professor at the Sandra Day O'Connor College of Law and School of Global Studies. A recently released report from the Pew Center on Global Climate Change and Asia Society, "Common Challenge, Collaborative Response: A Roadmap for U.S.-China Cooperation on Energy and Climate Change," outlines just that kind of opportunity. The foreword to the report reads, in part:

"The world faces no greater challenge in the 21st century than arresting the rapidly increasing accumulation of greenhouse gases in the atmosphere that cause climate change. The two largest producers of these gases are the United States and China. Their cooperation is essential if there is to be a solution to the daunting climate change challenge. If the United States and China can become active catalysts in bringing about a strategic transformation to a low-carbon, sustainable global economy, the world will take a giant step forward in combating climate change. The United States and China will also edge closer to energy security, protecting their environments and assuring greater prosperity for their citizens. Equally important, they will also succeed in building a far more stable and cooperative foundation for U.S.-China relations as a whole."

Similarly, trade can be "an agent of positive change for human rights in China," said Christopher Lause, a partner with law firm Bryan Cave LLP. Economic integration with the United States can be the "carrot" for China to improve its human rights protections, rather than trying to use a "stick" to force China's hand, Lause said.

On human rights, Abbott identifies three general strategies that advocates have called for as ways for the U.S. to engage China on the issue. "On one end of the scale, the U.S. could use trade as a lever to promote human rights in China -- threatening sanctions if the government doesn't do better. On the other end, some prefer 'quiet diplomacy' -- for example, we saw that Secretary of State Clinton was only willing to talk about human rights quietly and in private on her last trip to China. In the middle is the slow change in human rights that U.S. business promotes when it operates responsibly in China."

Reshaping the way we think about trade

Reflecting W. P. Carey School Dean Mittelstaedt's observation that "economics works," U.S. businesses have found ways to succeed in China, despite significant challenges. At the same time, policymakers have made significant strides in moving toward greater cooperation between the U.S. and China on a range of important issues.

But the way businesses and policymakers approach integration is quite different. Businesses tend to be pragmatic -- focusing on finding immediate solutions. Policymakers, on the other hand, are often more idealistic and focused on resolving "big picture" issues -- which can be much more difficult to do.

How to balance the two -- how to address those tough "big picture" issues, such as sustainability and human rights, without impeding economic integration at the company level -- is a key question. As difficult as it may be, achieving that balance is possible -- if stakeholders think creatively -- reshaping, as ASU President Crow put it, the way we think about trade.

Bottom Line:

  • One overarching question of the ASU/The Kearny Alliance forum is how to balance the benefits of economic integration with concerns about such issues as environmental and human rights protection. Answering that question is made difficult by the fact that businesses deal with economic integration in a very different way than policymakers do.
  • U.S. stakeholders -- including both business leaders and policymakers -- should work jointly with China's stakeholders to create "a broad vision that extends beyond rules and frameworks."
  • Asking new questions that will redefine the U.S./China trade debate is key to creating a more productive discussion and, eventually, relationship. "If we fall back into linearity then we will have failed," said ASU President Michael Crow.
  • Yet while focusing at a high level on what economic integration means and how it should proceed may be the first step, asking what the rules of integration should be is inevitable.
  • From the U.S. perspective, one rule of economic integration with China is that it must be mutually beneficial; it must involve income and job growth to increase the size of the pie.
  • From China's perspective finding a target area for cooperation -- one in which there's not a significant history and it's possible for the U.S. and China to work together 50/50 to create a shared vision -- may be the best first step toward effective discussions.
  • Even a tough issue like environmental sustainability could present an opportunity for the U.S. and China to move toward a shared vision.
  • Trade can be "an agent of positive change" for human rights in China -- the carrot rather than the stick.