If you managed to peer through the blizzard of news reports about the presidential election, you may have heard that there is another country out there that is also going through a major change in leadership—albeit one with far less public scrutiny about the process than ours. China recently placed Xi Jinping in charge of the communist party, and thereby the nation—and policy wonks here in the United States are scrambling to try and figure out what sort of leader he is likely to be over the next few years. And perhaps more importantly what his leadership means for our nation and for U.S.-Chinese relations.
There is little doubt about the importance of China in the world economy today. Their rapid economic growth has accelerated the nation into the number two spot in terms of economic output. Recent fears regarding a slowing of the Chinese economy have spooked some economic experts who see such weak results as one flash point in a wobbly world economy. What is interesting is how this growth has influenced China's relationship to the U.S. government—particularly officials at the state and local level.
In the United States, the Federal government has exclusive rights to determine and execute foreign policy. This relates to diplomatic relations, immigration, and of course international trade policies. What this has meant in practice is that despite the huge strategic importance of China, state and local governments in the United States initially had little interest in the nation beyond the occasional ‘sister city’ ritual or exchange program. This began to change in the 1980s as China started to open its economy and move towards modernization – something that is still ongoing to some extent. At first, state and local governments found China to be a nuisance and even a threat. But over the last few years this has shifted yet again, and suddenly state and local governments find themselves moving away from lobbying the Federal government for protection from the nation to working to build direct ties with the Middle Kingdom. This is best, if not exclusively, witnessed right here in California.
The spectacular speed of China’s industrialization has been discussed ad nauseam and given its importance for global growth, today’s global economic forecasters peer intently at the limited set of economic statistics collected for the nation. Nevertheless, sometimes it is helpful to look at the trends over the past few decades to understand what a profound influence China has had on the world—particularly the United States. In the early 1980’s when Ronald Reagan was in the White House, exports from China made up less than 1% of all U.S. imports. Within 20 years it leaped to 12.5%, and the pace is accelerating. In 2011, goods imported from China made up almost one-fifth of all imports into the United States.
China has been moving quickly from being only an exporter of low-tech goods to one that was attempting to quickly move up the supply chain. Between blatant violations of intellectual property rights and moves by large American companies to invest in China’s rapidly growing economy, there has been little for local politicians to cheer about. Local political rhetoric only became more heated.
The need to placate such local interests explain why most elections in the United States tend to be preceded by an acceleration of anti-dumping charges against Chinese exporters, and why China-bashing is often a central part of campaign debates. In the run-up to the current Presidential election, Barack Obama has pursued anti-dumping charges against China for solar panels and tires. Consider that Obama, George W. Bush, and Mitt Romney in their initial campaigns to become President all promised to label China as a currency manipulator—a charge that can open up a variety of legal avenues by which the United States can retaliate. Also note that this actually never occurred because once the office is won, national and corporate interests quickly take precedent over local voter appeasement.
Still, over the last decade there has been a distinct change in local interest in China with a parade of state governors visiting the nation on trade missions. The leaders of Washington, Minnesota, Utah, New York, and the City of Milwaukee started the trend when they all made highly publicized, and controversial, trips to the mainland. Most aggressive was California Governor and movie icon Arnold Schwarzenegger who made official visits in 2005, 2007, and 2010. Such trips are now very common. In 2010, representatives of nine southern states all convened a joint mission to Beijing that was hardly publicized in the United States at all.
Why the shift in strategy? There are numerous reasons, but they all stem back to the growing sophistication and openness of the Chinese economy, and the growing wealth of at least a portion of its residents. This has made China a place to sell goods, as well as a place to buy from. While the United States still runs a massive trade gap with China, it has been closing, particularly since the Great Recession as China has allowed the value of the Yuan to appreciate against the dollar. The value of US exports to China doubled from 2000 to 2005, and despite the global downturn, doubled again by 2010. China is now the third largest purchased of U.S. produced products behind only Mexico and Canada.
It isn’t just goods, of course. Service exports are also growing rapidly, by a factor of 5 from 2001 to 2011. And even more important are the profits being earned by U.S. companies operating in China—they grew six-fold over the same period of time. State and local politicians are inherently provincial in their interests—and it was becoming clear that there was money to be made and local jobs to be created by expanding ties with this new economic powerhouse.
It is not surprising that it was California that was on the forefront of the movement to open local relations with China. Geographically, California is the gateway to the East, meaning that there has always been some relationship between the two. When the first transcontinental railroads were being built, it was California that went to China in search of workers to help finish the railways. As a result, California became home to one of the first large populations of Chinese in the United States—something that hasn’t changed in the hundreds of years since. According to the 2010 Census, today there are over 4 million ethnic Chinese in the United States, over half being foreign-born. Well over one-third of this population resides in California, although New York, New Jersey, and Texas also have rapidly growing populations. Over one-third of Chinese exports to the United States arrive at California ports.
California has enjoyed the fruits of its long-term relationship with China, including a current surge in exports. California exports to China are 20% higher today than they were in 2008. As always, technology goods dominate the trade—including industrial and electronic equipment. But the nature of the trade is changing. The two most rapidly growing sectors for exports include high-end parts for electronic and transportation items as well as agricultural and mineral commodities. In short, the two economies no longer just sell each other final products, but are rapidly becoming part of each other’s supply chain—much like the U.S. trade relationship with Mexico and Canada.
Moreover, the growing relationship, and interest of local politicians, is no longer simply a function of US produced stuff crammed into metal boxes for long trips overseas. There are four ways in which local politicians are waking up to the importance of expanding ties with China.
First, China appears to be moving towards even greater liberalization in terms of trade flows and investments. The new batch of leaders coming to power recognize that they will need to find new ways to keep the domestic population happy and the economic growth machine running now that the nation is no longer the low-cost producer of the world. This means allowing foreign firms more access to sell service goods—finance, entertainment, and healthcare being among the top categories—inside China.
The second is direct investment. The U.S. economy is still struggling to add the jobs back lost in the 2008-09 recession. Looking for funds to invest in local economies is big business among local political leaders. The fact that China is in the midst of a buying binge has not been lost on these officials. Nor has the buying spree been overlooked by the Federal government, although they look at the trend with worry—an ironic reversal compared to just a decade ago. According to a report by researchers Daniel Rosen and Thilo Hanemann1, since 2000 the United States has seen more than 500 deals worth $16.4 billion. Of that, California accounted for about one-third, or 156 deals.
Of course these official figures likely miss much of the money pouring into the United States. While official movement of Chinese investment funds out of the nation are strictly controlled by the Chinese government, numerous reports have suggested that large flows are being moved out of the country in a variety of underground ways. While there is little direct evidence of where these funds are ending up, there is plenty of anecdotal evidence that at least a portion have found their way to U.S. real estate markets. Perhaps this is not too surprising given the spiraling costs of property in Shanghai and Beijing, and recent restrictions put on domestic real estate investments. Chinese investments tend to be in urban areas and in high-end properties. And it isn’t just homes—apartments, office buildings, and even restaurants are being purchased by Chinese investors.
And while these two forms of investment may or may not lead to new jobs in a local economy, there is a visa program in the United States that has begun to attract interest by foreign investors and local politicians. The EB-5 program, as it is known, has been around for many years, but only recently has the U.S. Immigration Service sufficiently fleshed out the rules and regulations and made it a truly viable option for those looking to obtain a U.S. green card. The process is simple—the investor must put enough money into a business within a qualified local economy to create 10 local jobs. If this investment is made, the investors will receive one visa per 10 jobs created. In just the past two years there has been a flood of projects submitted for approval.
Third on the list is the growing importance of visits by Chinese nationals. For years Mainland Chinese have been coming to the United States for advanced education—and many U.S. schools are actively working to recruit these high performing students. Recently U.S. universities have started to collaborate directly with Chinese centers of learning. California’s own Stanford University, for example, recently set up a learning center in Beijing.
But visits have started to move from this traditional academic base. Just over the past year there has suddenly been a flood of new visitors from China to the United States. According to official statistics the number of visitors has grown by 45% compared to 2011. Growing income, easier availability of visitor permits and passports, and of course the strength of the Yuan, have all contributed to the surge in visitors. While still number 8 in terms of overall visitors, the double-digit growth rates suggest that attracting Chinese tourists could be another enormous economic driver for local economies. In California alone the number of arrivals from China has grown four-fold since 2006.
Lastly, and perhaps of greatest interest from a long run perspective, is technological exchanges. While China has for years been essentially an intellectual property pirate—happily using world technology for its own internal purposes without paying basic royalties—this too is starting to shift. China is moving to develop its own technologies and knowhow and is starting to play by more traditional rules. In 2011 Chinese firms applied for 4,500 patents with the U.S. Patent Office. This is only fraction of the number U.S. firms applied for, and less than 10% of those applied for by Japanese firms, but it has grown four-fold in the past 6 years.
And with technological advances comes an interest in learning from Chinese experience. For example, one of the purposes of Schwarzenegger’s last visit was to get a closer look at China’s investments in high speed rail—as a model for what California might do if it begins to build the proposed line between San Francisco and Los Angeles. But it isn’t just trains that bind California to China. There are current collaborative efforts in stem cell research, green technology such as electric cars, and sustainable agriculture.
It is clear that just as the U.S. Federal government is becoming more wary of China’s growing economic and military power, state and local governments are becoming more interested in China as an economic partner on many levels. Ultimately, it may be ties at the lower end that restrict the potential conflicts at the top end, as local politicians begin to lobby national interests not for a tougher line on China, but for a softer one. It’s clear there will be many bumps in the road—but the trends in local relationships with those on the other side of the Pacific Ocean are powerful force for peace.