Clyde Prestowitz takes issue with George Koo

Response to Asia Times critique of my book on China by George Koo

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By CLYDE PRESTOWITZ, President of the Economic Strategy Institute and APP member

Asia Times April 26, 2021

I must begin by thanking George Koo for his interest in and important commentary on my recent book, The World Turned Upside Down: America, China and the Struggle for Global Leadership.

By way of introducing the reader to this book, Koo mentions my earlier book, Trading Places (1988), that dealt with the trade frictions and negotiations between the US and Japan in the 1980s when I was the chief US negotiator with Japan’s key trade officials and CEOs like Sony founder Akio Morita.

There were many trade issues between Japan and America at that time including Japanese displacement of US producers in industries like consumer electronics, steel, autos, and semiconductors. With the US trade deficit soaring and hundreds of thousands of US workers losing their jobs, I was under enormous pressure to fix what we called the Japan problem.

Japan’s game

There were many causes behind this problem, but two factors were fundamental. One was Japan’s yen policy. The Bank of Japan constantly intervened in currency markets to buy dollars and sell yen, thereby holding the value of the yen down versus the dollar and indirectly subsidizing Japanese exports while also imposing a hidden tariff on imports.

I and my colleagues negotiated what became known as the Plaza Agreement under which Japan agreed to halt currency-market intervention and to allow the yen to float to its true value. Ultimately it rose by more than 50%. 

The second factor was what I called “the name of the game.”

The US was playing a game called “free trade” without special subsidies for targeted industries, or industrial development targets, or hidden barriers to imports and foreign investment, or compulsory transfer of technology as a condition of market entry, and without export subsidies that could enable predatory dumping of products in foreign markets aimed at driving foreign producers out of business.

Japan was playing a game called “catch-up industrial policy.”

There was much talk at the time of fair and unfair trade, but that was all a misunderstanding. It was as if the Americans were playing baseball and the Japanese were playing American football. No one was cheating and everyone was trying as hard as possible. But football is a rougher game than baseball and the baseball players were taking a licking. 

When I recognized this reality, I urged the US government to begin playing like the Japanese. Then-president Ronald Reagan listened to me and the US government changed its policies to be more like those of Japan.

It established a government-industry joint venture called Sematech that funded development of more advanced semiconductor production equipment. Rather than waiting for industry to complain, it self-initiated anti-dumping legal procedures against the Japanese industry, and it also provided additional funds for semiconductor research and development.

It also negotiated what came to be called the Semiconductor Agreement, under which Japan pledged to halt all dumping of chips in the US market and to enable full opening of the Japanese market for US chips. 

I could go on with other details but suffice it to say that the US trade deficit with Japan declined, Japanese auto companies began producing their cars in America, and the US semiconductor industry remains the overall world leader. Taiwan’s TSMC has become the leading chip fabricator, but it is now building major fabrication facilities in America. Thus the US will remain the leader in this industry for the foreseeable future. 

China’s game

Regarding China, Koo says I accuse it of rampant theft of intellectual property, but this is not an accusation. It is merely a statement of a simple fact.

I do not chastise China for doing this, because obtaining intellectual property by whatever means necessary is what all countries that have ever achieved industrial development, including the United States, have done.

Few today realize that there was a debate at the founding of America in the 1790s. Thomas Jefferson foresaw a country of yeoman farmers exporting agricultural products and raw materials. Alexander Hamilton saw Britain becoming the workshop of the world through industrialization and wanted America to do the same. Eventually, Hamilton won the debate because America nearly lost the War of 1812 for want of weapons-manufacturing capacity.

It grieves me that Koo thinks I hold a zero-sum attitude such that I see any gain for China as a loss for the US and vice versa. I must emphasize that such is not my attitude. As it happens, my wife is Chinese. Through her I am related to many Chinese both in America and in China. I wish nothing but the best for those relatives of mine and for all Chinese people. 

Helping China

Indeed, I was one of the leaders of the first US trade mission to China in 1982. I brought with me to Beijing a group of American business leaders who were interested in investing and starting businesses in China.

I and the rest of the US government urged them to invest, to transfer technology to China, to build factories in China and thereby contribute to the development of China as they had contributed to the development of Europe and Japan after World War II.

During my time as a leading official, the US Commerce Department strongly promoted US investment in China as well as Chinese exports to the United States.

Later, as a consultant I helped Intel Corporation and other US companies establish themselves in China. I do not harbor any fear of China’s economy becoming bigger than that of America. Indeed, I believe it should be bigger in view of the fact that China has four times the US population. Objectively speaking, its economy should be four times as large.

Having said that, I do believe that China, like Japan in the 1980s, is playing a different game than the US. Like Japan then, China today is playing “catch-up,” and this involves the government in obtaining technology, subsidizing and/or protecting the development of certain industries.

The best example is the program called “Made in China 2025.” This aims for essential autonomy for China in a long list of key high-technology industries such as semiconductors, robotics, aviation, and many more. These industries are receiving special assistance from the Chinese government.

Let me emphasize that I think Beijing is right to give these industries special help. I would do likewise if I were running China. 

However, this “catch-up” policy is at odds with many of the rules of the World Trade Organization. This leads officials in the US and elsewhere to accuse China of playing unfairly. I do not so accuse. Rather, I say America should do the same. It should have a Made in America 2025 or 2030 program.

Rather than complain about China’s “unfair trade.” the US should copy the smart things China is doing.

Belt and Road

For example, China has undertaken the Belt and Road project. It is a brilliant concept that I deeply admire because it is meeting a major global need while also promoting China’s global strategic expansion and influence. I am advising the United States to launch a similar program along with other countries as partners. It should be a real win-win effort.

The Party

George Koo suggests that I have problems with China because it is governed by a Leninist political party, the Communist Party of China.

A Leninist party is one formed on the principles dictated by Lenin when he established the Bolshevik Party in 1917. Such a party is completely dedicated to holding complete power in a society and to concentrating that power in the hands of a very few people at the top of the party.

It is a party that recognizes no limits on its power and no untouchable rights of the individuals it rules. It is a totalitarian party that trusts no one and suspects and surveils everyone.

I make a distinction between the people of China and the Communist Party of China. I wish the people only the best. I have concerns about the Party. I admit it has achieved many positive things. Yet it has also made its driving values quite clear in Document 9, the “Communiqué on the Current State of the Ideological Sphere On the Ideological Sphere.”

Here the CPC quite clearly states its opposition to “Western constitutional democracy,” to the concept of “universal values” (such as “all men are created equal with certain inalienable rights”), to civil society, and to journalism “not subject to Party discipline.” This, in effect, is a denunciation of everything for which America and the rest of the free world stands. 

If the CPC’s doctrine were applied only to China, the conflict might not be too serious. But Beijing has been using its increasing wealth and power to extend the reach of these anti- liberal doctrines.

Of course, the crackdown in Hong Kong is technically an internal matter, but because Hong Kong has always been an international city, the overthrow of its one country-two systems regime far short of the 50 years initially promised by Beijing is having global repercussions, as is the expulsion of most foreign journalists from China.

Increasingly, foreigners have no knowledge of what is happening in the world’s most populous country. Beijing’s halt of the showing of professional US basketball games in China because of a tweet by the Houston Rockets coach supporting demonstrators in Hong Kong seems to be an effort to halt free speech not only in China but in the US as well.

The sudden, unannounced suspension by Beijing of various imports from Australia because Prime Minister Scott Morrison called for an inquiry into the origins of the Covid-19 virus appears to be an attempt to impose censorship on Australia.

The advice from Beijing to Mercedes-Benz that it had best remove the Dalai Lama from any advertisements, even those outside China, if it wishes to continue doing business in China is just another example of the attempt to export censorship by the CPC abroad.

The militarization of South China Sea reefs and the swarming of Chinese fishing and para-police boats around Philippine, Malaysian, Vietnamese and Indonesian islands and reefs sends a hostile, threatening, bullying message. 

I wish China peace, prosperity, and happiness. I also wish for the free world to continue enjoying free speech, rule of law, and human rights.