* American CEOs recalibrate how to succeed in China
* Business mounts pressure for hardened U.S-China stance
* US concerned China sliding away from market capitalism
* China's state-led industry tough competition for US
By Paul Eckert and Stella Dawson
WASHINGTON, Dec 9 Few in the United States would
recognize Charlene Barshefsky or remember what she did. Not so
in China where the former U.S. Trade Representative says she is
stopped in the streets by ordinary people and thanked.
Her gift to the Chinese people was leading the U.S.
delegation that negotiated China's entry to the World Trade
Organization in December 2001. The removal of trade barriers
heralded unprecedented economic growth for China, vaulting it in
a decade to the second largest economy in the world and helping
slash its rural poverty rate from 10.2 percent in 2000 to 2.8
percent in 2010.
"The Chinese consider WTO entry the most historic achievement
in U.S.-China relations since (U.S. President Richard) Nixon's
visit to China," in 1972, Barshefsky said.
It is a different story in the United States where, 10 years
on, China's entry into the club of world trading nations is
having equally huge ramifications.
The flood of cheap manufactured goods gives an extra $600 a
year for the average American family to spend on clothing,
shoes, household goods and electronics. But Made in China has
hastened the decline of U.S. manufacturing. Factory jobs have
shrunk in number by 25 percent the past decade to 11.5 million
today, and average factory wages adjusted for inflation have
Chinese imports meanwhile have ballooned the U.S.-Sino trade
deficit to $273 billion, four times that with any other country.
It has stirred anti-China sentiment, a labor union backlash and
legislation in Congress to try and force China to let its
currency strengthen more rapidly to lower its export advantage.
Now American business, lured a decade ago by the promise of
a fast-growing Chinese middle class, is starting to shift gears
and rethink what the China dream can deliver. Some chief
executives are questioning whether the United States is pressing
China hard enough to hold up its side of the bargain in joining
the elite trade club.
"I think by any definition -- if you look at the raw numbers
-- we've made a lot of progress. But by the same definition,
we'd be fooling ourselves if there isn't a lot of frustration,"
said the man who now holds Barshefky's old job, U.S. Trade
Representative Ron Kirk.
The reconsideration of China is taking place while the
United States struggles with an economic slump that has brought
high unemployment and doubts about the country's long-term
fiscal health. It is also taking place in an election year, and
while China is a regular target in presidential campaigns, even
Mitt Romney, with the strongest corporate credentials of all the
Republican candidates, has made a point of criticizing
Almost 10 years to the day that China joined the WTO on Dec.
11, 2001, Washington is growing concerned that China has lost
its commitment to freer trade and that as new leaders prepare to
take over next year, China is abandoning its march toward market
capitalism in favor of state mercantilism.
"There's competition between the American economic model and
the more state-centered economic model of China and other
countries," said Robert Hormats, U.S. Undersecretary of State
for economic affairs in an interview last month.
For the United States, toughening its economic stance toward
the world's emerging superpower is a delicate balancing act and
carries with it geopolitical risks as China flexes its muscle
across Northern Asia, Africa and Latin America.
"We have a challenge in dealing with China," said Hormats,
one of the Obama administration's top economic diplomats. "On
one hand, the global system won't work well if we and China
can't cooperate and productively resolve our differences. On the
other hand, we have real differences, many of which are awfully
difficult to resolve."
The U.S. complaints about China are well known --
widespread theft of intellectual property, a lack of
transparency about its regulations, missed WTO deadlines for
opening markets, foot-dragging in allowing its currency to rise
in value and subsidies such as low-interest state loans that
favor domestic industries.
China argues that as a developing economy, it needs to
protect its nascent industries and help them grow. It also
retorts that the United States blocks its companies in key
Huawei Technologies, for instance, withdrew its $2
million bid this year for 3 Leaf Technologies when the U.S.
government raised national security concerns, and oil giant
CNOOC canceled an $18.5 billion bid for American oil company
Unocal Corp in 2005 after a political backlash in the United
As trade frictions grow, corporate America for the first
time is publicly voicing concern that the trade deal with China
is lopsided, and pressure is building on President Barack Obama
to toughen his stance.
Jim McNerney, Boeing Co's chief executive, touched
upon the issue in November, speaking of a "dilemma" in China
relations when he asked Obama at the APEC business summit how he
would assess the U.S.-China relationship when both the left and
the right are calling for a harder line.
Obama gave his administration's standard response of
pursuing constructive engagement and a strong policy with a key
partner, but the subtle criticism appeared to have hit home.
Later, after a private meeting with Chinese President Hu Jintao,
he called for China to stop "gaming" the world trade system.
Business can be a far more powerful lobby than trade unions,
the traditional voices that have complained of China's trade
practices. Its influence, particularly in a presidential
election year, could lead to increasingly adversarial relations.
"The level of business support for stable U.S.-China
relations is beginning to fracture," said Nick Consonery, China
expert at the EurAsia Group, a political risk institute that
works closely with corporations.
"It is definitely happening because the business perspective
is changing and they are less willing to get out in front of
(and support) the administration's 'strong and stable'
In October, the U.S. Senate passed for the first time a bill
designed to punish Chinese imports with levies, unless China
allows its currency to rise more rapidly in value. Many U.S.
economists and lawmakers believe China's yuan is kept
artificially cheap by as much as 10-25 percent -- another
subsidy to Chinese exporters that helps them undercut foreign
Never before has a currency measure, brought forward
multiple times in the past, won U.S. Senate support. No action
has yet been taken in the U.S. House, where it is expected to
The policy that perhaps most frustrates American business
stems from a 2008 announcement by China's State-Owned Assets
Supervision and Administration Commission. It identified
"economic lifeline" sectors that China says it must dominate.
The list is long -- aviation, air freight, coal, oil and
petrochemicals, power generation, telecommunications and
weapons. Industries such as chemicals, equipment and auto
manufacturing, electronic communications, steel and nonferrous
metals are set as state controlled to varying degrees. These
state-owned enterprises enjoy a monopoly or oligopoly in the
Chinese market; subsidies for land, water and power; and
below-market cost of capital.
Until recently, American business leaders had been loath to
speak of China's practices for fear it would lose them lucrative
contracts or result in regulatory scrutiny that harms their
China operations. Several have gone public in the past few
"The Chinese government is not going to allow a non-Chinese
Internet company to succeed... It is a weapon in the 21st
century national security games," eBay Inc chief
executive John Donahue said in October at a Web 2.0 summit.
EBay has abandoned its efforts to build a Chinese
marketplace where people bid for goods online after it ran into
stiff competition from a free Chinese site. Its new strategy is
to sell goods from Chinese companies to international buyers.
"It was about finding a business model that works in China,"
said Daniel Feiler, spokesman for its China operations.
Google Inc. last year pulled back to Hong Kong on
concerns Chinese were hacking the Internet search giant and a
row with China over censorship.
Jeffrey Immelt, chief executive of General Electric Co
which has multibillion dollar contracts in turbines,
railroad engines and aircraft parts with China, also faced
choices in how to compete. "The notion was, if we're part of the
Chinese economy, we should be allowed to win."
But finding ways to win means that companies have to avoid
confrontations with Chinese authorities, he said. "We're not
naive or stupid about these things. We really do think a lot
about it," said the CEO, who advises Obama on business
competitive issues. "There is a multitude of ways to succeed in
China's policies have helped vault its industries to global
prominence. It has 61 companies today among the global Fortune
500 list, almost quadruple the number in 2005. The U.S. tally
over the same period has fallen to 133 from 176. What American
business finds disturbing is that most of the Chinese companies
are state-owned, including the three in Fortune's Top Ten --
China Petroleum and Chemical Corp, China National
Petroleum and State Grid.
The U.S. Chamber of Commerce said in a joint report with the
Coalition of Services Industries that China and other countries
lavish regulatory favors and generous subsidies on their
state-owned firms, making it very difficult to compete.
"No adequate and effective international disciplines now
exist to deal with this problem," it said.
In the past three years, the United States has brought five
cases against China at the WTO, more aggressive than the seven
cases during the eight years of former President George W.
Bush's administration. By March 2010, the United States had won
three WTO cases against China, four were resolved before WTO
action, and four were pending.
Apart from negotiations at WTO complaints, the United States
also is working to draw other big Asian trading nations into
regional or bilateral trade pacts, which are designed to open
markets and serve as a hedge or counterweight against Chinese
trade policies. It ratified a free trade agreement with South
Korea recently and has breathed new life into the Trans-Pacific
Partnership (TPP), a 9-nation free-trade group that gained new
heft in November when Japan, Canada and Mexico announced plans
to join negotiations. U.S. officials want TPP to set new
standards on free trade and become a template for future
international trade deals.
What remains unclear in Washington is whether China's new
leadership in 2012 will resume market opening or turn further
The country took a huge leap in the 1990s as it prepared for
WTO entry, slashing red tape, removing layers of protection for
domestic factories and farms and opening its markets. That work
is widely credited inside and outside China with turning the
country into the industrial dynamo of today.
The U.S. ambassador to the WTO Michael Punke said China made
"impressive steps" to bring its laws and regulations into line
with global rules in the five years after WTO entry.
Some trade experts say reform fatigue then set in and they
expect opening measures to resume. Other U.S. experts say China
turned away from market liberalization as early as 2003, when
the reform-minded team of President Jiang Zemin and Premier Zhu
Rongji retired and handed power to the more cautious current
leadership of Hu Jintao and Wen Jiabao, respectively.
"Nobody who was watching China enter the WTO back then saw
this change coming," said China trade analyst Derek Scissors of
the Heritage Foundation. "It was as if a different government
with different priorities came in," he said.
Hu and Wen are due to retire from their state posts in March
2013 and hand over power to successors, most likely led by
current Vice President Xi Jinping. The next generation of
leaders has not expressed economic or trade policy views that
depart from current statist orthodoxy, and are expected to
proceed cautiously once in power.
The cost could be high, said Long Yongtu, who negotiated
China's WTO entry in the late 1990s. He told a recent symposium
he was extremely worried that "essentially, after 10 years, it
seems China is drifting away from the WTO."
A statist model that denies fair competition for all
enterprises, domestic and foreign, could stifle China's economic
growth, Long said.
"We cannot only have large-scale and state-owned
enterprises. That is only the skeleton of the economy. We need
thousands upon thousands of small and medium-sized private
enterprises. They are the flesh and blood of the Chinese