Impact of the Nuclear Crisis on Japan's Imports and Exports

By A. M. Newhall, BASC Research Assistant

In the wake of Japan negotiating multiple trade agreements with Australia and India in terms of imports and exports, one must wonder how deeply the ongoing nuclear crisis will hinder their standing in the global economic market. On March 29, 2011 Japan pleaded at a World Trade Organization conference for consumer markets not to ban their products, a plea that came on the heels of New Zealand and other states experiencing an export boost in Asian markets "as buyers shun Japanese products on concern they may be tainted with radiation."

Near the Fukushima Daiichi power plant in the northern region of Japan, radiation has been detected in the ocean water, in groundwater, in the soil, and on crops. This will directly affect the fishing and seaweed industries and undoubtedly hinder Japan's dairy exports. According to CNN, "radiation gets into the milk because it falls on grass eaten by cows." Consumer concerns have been dismissed by the U.S. Environmental Protection Agency, which asserts it is safe to drink milk with low quantities of radiation. However, given that Japan's domestic milk and other produce may now have a uranium flavor, the Japanese government may be more receptive to Australia's previous demands that Japan abolish its tariffs on its beef, wheat, sugar, and dairy products.

Furthermore, one wonders if the recent troubles and ongoing criticism centered on Japan's outdated nuclear reactors has likewise made India have second thoughts about their recent trade negotiations with Japan. A press release stated, "Japan and India launched negotiations in June on a pact that would allow Tokyo to export its cutting-edge nuclear technology to the energy-hungry South Asian nation, a hotly contested market for atomic plants." Whether Japan's "cutting-edge nuclear technology" will still be as fervently desired or favorably viewed remains to be seen.

Ultimately, the economic impact of this multi-pronged disaster will be one more burden for the Japanese people to bear in the years ahead. Obviously, this disaster may accelerate the removal of Japan's tariffs on imports at a much faster rate than previously forecast and perhaps alter the nation's views about free trade. Indeed, the disaster has resulted in the European Union proposing a free trade agreement with Japan that "would be the most significant trade deal signed by the EU with a single country." In short, the tragedy unfolding in Japan may greatly affect free trade in the Asia-Pacific region.

Indonesia Rising

by Michelle Chang

BASC Research Assistant

In December 2010, Foreign Policy magazine forecast ten trends in 2011 that will come to change the world in the coming decades. Among them is the rise of Indonesia.

As the world lavishes most of its attention on China and India, Indonesia doesn’t come across as a hot topic. It rarely crosses anyone’s mind that Indonesia is the fourth most populous nation in the world, a fact alone that marks countless opportunities and possibilities.

Indonesia has emerged almost unscratched from the recent economic crisis, as its financial sector was not closely integrated with that of the rest of the world. After a landslide victory for President Yudhoyono in 2009, Indonesia is now firm on the path to solve problems of endemic corruption and invest heavily in building new infrastructure all over the country.

It is also worth noting that Indonesia also has the largest Muslim population in the world. President Obama has already acknowledged Indonesia’s key importance in global security in the future. We do not yet know exactly how Indonesia’s future shall unfold, but we can be certain that its political and economic importance will continue to rise in the years to come. It is a future worth anticipating, and for that, we should all be keeping Indonesia on our radar. 

Japan Seeks To Join TPP

By Michelle Tan, BASC Research Assistant

On Feburary 26, 2011, the Japanese government started a series of forums nationwide to gain widespread support for possible Japanese participation in the Trans-Pacific Partnership Agreement (TPP). The TPP is a multilateral free trade agreement that aims to integrate the economies of the Asia-Pacific region. There are nine current negotiating countries (Brunei, Chile, New Zealand, Singapore, Australia, Malaysia, Peru, the United States, and Vietnam) and they have set a target for settlement of negotiations by the next APEC summit in November 2011. Japan’s government plans to make its decision about whether to join the TPP negotiations by June this year and to work out measures for the economic reforms needed to join the pact. The TPP is very comprehensive, requiring members to reduce all tariffs in ten years. As a result, there has been much domestic opposition to Japan’s plans to join the TPP, which has led to a wider debate and discussion about the path of economic development Japan needs to take in order to remain competitive.

Japanese Prime Minister Naoto Kan has strongly advocated joining talks on the TPP to promote trade liberalization. First, agreeing to the trade agreement is essential to ensuring that Japanese companies are not at a disadvantage to their Chinese and South Korean competitors in terms of export competitiveness. South Korea has already signed free trade agreements (FTAs) with the United States and the European Union, and is engaged in FTA talks with Australia. In comparison, Japan does not have bilateral agreements with any of these major trading partners. Additionally, joining the TPP is a key way to force fundamental change in Japan and make it open up its markets. According to the stated goals of the TPP, Japan will have to loosen up its restrictive environment for mergers, acquisitions, and private equity while promoting better corporate governance. She will also have to open government procurement to foreign firms, and remove barriers to foreign investment. The removal of trade barriers will lead to increased competition from increased imports, resulting in more innovation and a more efficient allocation of resources. Economic liberalization might well provide the crucial jumpstart Japan’s lagging economy needs. China recently overtook Japan to become the largest economy in Asia.

On the other hand, opposition to the TPP is very strong, especially in agriculture. Farmers fear that joining the TPP will cause an influx of cheap agricultural imports into Japan. Japan currently has extremely high tariffs on certain food items, including 38.5% tariffs on beef, 360% tariffs on butter and 788% tariffs on foreign rice imports. In particular, Japanese rice farmers are notoriously inefficient, with only 1% of all rice farmers making at least half their income from rice. The balance of their income comes from heavy subsidies and transfer payments from the government. Yet, at the same time, these rice farmers who make up less than 3% of the population have disproportionate political sway to block Japan’s TPP bid because of how parliamentary representation is apportioned.

However, unlike what is believed by some, pursuing TPP membership and encouraging a vibrant agricultural sector are not mutually exclusive. The European Union and South Korea are both carrying out fundamental agricultural reforms, anticipating the impact that regional market integration and liberalization will have on the agricultural sector. Similarly, Japan can seek to boost the productivity and competitiveness of its farmers such that the removal of tariff protection will not affect them adversely.

All in all, the discussion about the TPP has spurred the Japanese to start questioning long-held views about the structure of their economy. Japan now stands at a crossroad. Its decision about whether or not to join the TPP is an important decision about the future direction of its economy. Does Japan want an open and dynamic economy or an economic structure that no longer seems to meet her needs?

Harmony with Chinese Characteristics

By Cindy Li, BASC Research Assistant

As social unrest spreads rapidly across the Middle East, "social management" is once again a great concern for the Chinese government. In their efforts to curb the initiation of a "Jasmine Revolution," government leaders further limited access to social networking websites and text messaging services and have detained several activists linked with the proposed protests.

Stanley Lubman, a long-time specialist on Chinese law and professor at the UC Berkeley Boalt Hall School of Law, writes on instances of rights violations that occurred in the name of maintaining social harmony. Lubman’s blog post on the Wall Street Journal’s website criticizes Chinese authorities for using violence and interfering with communications technologies in order to "maintain social order."

A smooth transition from the rule of the party to the rule of law remains an obvious determinant of the long-term success of the Chinese economy. The government’s continued struggle with its desire to maintain harmony in the present at the risk of significant social unrest in the future should be a concern for many people. Lubman’s blog post offers much needed exposure of the faults of the government, but, like many of its predecessors, fails to provide alternatives for addressing the very real concerns the party leaders face today.

India and Japan Sign CEPA

By Viola Tang, BASC Research Assistant

On February 16, 2011 India and Japan signed a Comprehensive Economic Partnership Agreement (CEPA) that will remove tariffs on 94% of trade between the two countries by 2021. The agreement aims to boost bilateral trade between the two countries, from the current amount of US$10.36 billion to US$25 billion, in four years. India will gain from removed tariffs on food products (including pepper, tea, and curry), textiles and pharmaceuticals, as well as the new allowance of ‘commercial presence’ of Indian working professionals in Japan to set shop and provide services. Japan will gain from reduced barriers on products (including auto parts, steel imports, electronics and machinery) and greater opportunities to invest, with ensured protection of intellectual property, in key resources and mega industrial and infrastructure projects in India. The agreement also enables Japan to develop its production networks in Asia via relaxed restrictions on single brand companies. However, neither side has given leeway on sensitive sectors, such as rice and spices.

The pact highlights the advent of increasing strategic trade partnerships in response to changing power dynamics in Asia. For Japan, CEPA provides a counter-balance to its increasing economic dependence on China and diversifies the risk of diplomatic flare-ups. The agreement is also a move for Japan to remain competitive against South Korea, which has utilized free trade to improve its global competitiveness. Having just fallen to the number three spot in global GDP ranking, the pressure is on the Japanese government to boost growth. For India, the pact is the first with a developed country, providing a market for its booming economy. The agreement also led to proposals to create a US$9 billion revolving fund with Japan to finance an industrial corridor, which could fundamentally improve India’s infrastructure for economic development. Finally, the pact provides India with a competitive edge over China, South Korea and Vietnam, which do not have FTAs with Japan.

China Moves Further Away from Global Legitimacy in its Handling--or Lack Thereof--of the North and South Korean Crisis

by Mona Fang
BASC Research Assistant

With the renewal of North and South Korean tensions, it seems all though all the nations are scrambling to find solutions with the exception of the one country whose actions could really make a difference.  Despite China’s geographic, economic and political closeness to North Korea and various forms of public persuasion employed by national leaders, Chinese government officials have not only remain resistent to demands of greater Chinese involvement in the crisis, but also continue to justify their non-interventionist approach, placing themselves further and further away from the path towards becoming a respected global leader.  

Historically, China’s foreign policy towards its unpredictable neighbor, and really any controversial country, can be described as accommodating at best, or put more harshly, appeasement.   Although the lack of a formal peace treaty to conclude the 1950-1953 Korean War between the two nations mean that technically North and South Korea are still at war, the two sides have avoided open warfare, a “peaceful” coexistence, marked by intermittent skirmishes for the past half century. An overview of North and South Korean conflict has revealed the occurrence of several military clashes, often instigated by the unstable and unpredictable North that seemed dangerously close to the beginnings of another open war.  More recently, conflict between the two in the past year flared up with the sinking of the Cheonan, a South Korean warship, and the death of 46 sailors in late March.  An investigation conducted by the South Korean government two months later led officials to conclude that the cause was a North Korean torpedo fired from a “midget” submarine.  In addition to public condemnation, South Korean retaliation took the form of cutting back trade with the North.  Tensions continued to mount as nearly a hundred thousand North Korean protestors gathered to condemn the South Korea accusation as intentionally creating cross-border tension between the two nations.  In spite of repeated demands from South Korea, Japan and the U.S. to publicly censure North Korea and take an active approach in resolving the crisis, China chose not to back UN Security Council action against the country and instead questioned the legitimacy and accuracy of the investigation reports, adhering to traditional Chinese policy of neglect and effectively leaving the growing crisis to simmer.  

Then, in late November, North Korean soldiers fired dozens of shells at a South Korean island, killing two of the nation’s soldiers.  In an attempt to justify their actions, the North Korean government pointed to South Korea’s previous firing of test shots in the region, despite South Korean insistence that none such shots had touched North Korean soil.  This latest skirmish around Yeonpyeong Island, a mere miles away from the Northern Limit Line, has once again drawn the attention of world powers like the U.S. and Japan and mobilized global leaders to attempt to resolve the conflict with the same strategy that evidently was a diplomatic failure: indirect pressure on North Korea that is contingent on China’s involvement.  U.S. efforts have included a phone call from President Obama to President Hu Jintao and “sharp criticism” of China from Admiral Mike Mullen, the chairman of the Joint Chiefs of staff.  While Chinese response has been one of typical hesitation and cozy diplomacy as indicated by a recent meeting between top government official Dai Bingguo and the Kim Jong-il in Pyongyang, global leaders should consider that perhaps such a lukewarm response from China is a mere reflection of the unwillingness of the U.S. and other world leaders to devote a substantial amount of time and effort in pressuring China to, in turn, pressure its North Korean ally.  

Regardless of who in the global community has the greatest responsibility and most important role to play in the situation between North and South Korea, China’s projected image of an increasingly influential economic giant that has been continuously reluctant to exert its leverage for purposes beyond its own self-interests is not only to the detriment of the entire global community but also clearly not doing anything in the way of establishing China’s desired status as a global leader.  North Korea and their actions against their neighbor to the south have presented numerous occasions for China move towards attaining the coveted legitimacy of a true world power and expand the foundations for their growing influence beyond that of pure economic might.  However, instead of taking advantage of these opportunities, Chinese officials continue to pursue an outdated and counterproductive policy of non-intervention in an era of global connectivity, feeding a growing globally accepted belief that China, despite their modern economic developments, is still centuries behind with respect to its attitudes foreign policy and international relations.

US Completes Long-Awaited Free Trade Deal with South Korea

by Ren Yi Hooi
BASC Research Assistant

As highlighted by the Washington Post and CNN, the US and South Korea have finally completed talks on their free trade agreement, which has seen unending controversy since 2007. This deal was reached after key concessions were granted by both sides, including a major reduction of tariffs on US auto imports on the part of South Korea and the waiving of US demand for complete access to the South Korean beef market.

Although it met with strong criticism from Public Citizen, an advocacy organization which claimed that the FTA would cause widespread job losses, it appeared to satisfy most US automakers that had previously held out against the deal. Business leaders such as Jeffrey Imelt, CEO of GE, also lauded the agreement for promoting both US economic and strategic interests. Various Korean sources reacted positively to the agreement as well.

The closure of the KORUS FTA not only paves the way for an expansion of trade between both countries, but also signals a strengthening of their bilateral alliance at a critical time marked by North Korea’s attack on South Korea. It is could thus be seen not only as an economic move, but one influenced by political motivations.

The FTA will enter into force once –and if– it is ratified by the US Congress.

To Hell with the Rule of Law, “My Dad is Li Gang”

Michelle Mengsu Chang, BASC Research Assistant

“Sue me if you dare, my dad is Li Gang.” Over the past month, this phrase has become ubiquitous on every Chinese website and online community.

It came from a 22-year-old man named Li Qiming, from a small city called Baoding in Hebei Province. On October 16th, Li Qiming, while drunk, drove onto the campus of Hebei University at high speed and ran over two female university students.  One of them died on the spot, and the other was badly hurt. Li Qiming did not stop the car but kept on driving toward his girlfriend’s dorm. On his way back he was forced to stop by students and security guards who had gathered around the dead girl. When he got out of the car he said only one thing: “Sue me if you dare, my dad is Li Gang.”

As it turned out, Li Gang was but a deputy police chief at a branch office of the Baoding police force, and Baoding is only a minor city in Hebei Province. Yet even with this low level of influence and connections, his son could boast impunity after taking the life of a girl and breaking the leg of another.

This is not the first time accidents like this have happened in China. Almost every month there is news in China about children of rich and powerful parents speeding down busy streets in luxury cars and killing pedestrians. But Li Qiming’s arrogance, total lack of remorse, and utter disrespect for the rule of law is unprecedented. Immediately, angry citizens took the incident to the Internet and the story spread like wildfire. Millions wrote long articles condemning the abuse of justice, while others made sarcastic comments about social ills in China. The feeling of outrage was universal.

Following the incident Li Qiming was temporarily imprisoned while awaiting trial. On October 22nd, China Central Television (CCTV) released a video showing Li Gang making an apology to the public. Li Gang wept in front of the camera, and bowed down for half a minute until the reporter stepped forward to stop him. However, the TV station did not even make an attempt to interview the deceased girl’s family. In fact, around the same time, all major news agencies were recalling their reporters who were reporting in Baoding on developments of the accident and banned further publication regarding the scandal. Critical articles and commentaries also started disappearing from the Internet. Furthermore, the attorney for the girl’s family reported that he was asked to terminate his representation in the case by the Bureau of Justice in Beijing. Meanwhile, legal experts in China revealed that Li Qiming would be sentenced to three years at most.

Today in China, people everywhere are expressing their anger at the Li Gang scandal. University students in China and abroad have been passing around petitions to be presented to the central government, demanding that the Administration take the matter seriously. Yet each of these attempts has been abruptly silenced. The right and wrong in this case is crystal clear and people’s demand is simple: that Li Qiming be severely punished, that the girl’s family be given a fair answer, and that the rule of law be upheld and respected. What an average Chinese citizen is most indignant about is not only that none of these demands have been fulfilled, but that an obscure little bureaucrat like Li Gang can trample on the sense of justice of an entire nation of people. The likelihood of people’s outrage at the scandal transforming into a major social unrest is rather small. In a few months’ time, most people will lose interest in the case, learn to live with reality, and move on to other things. But if this is indeed how the incident will come to end, a sting will remain in China’s collective consciousness.

When debates on the Li Qiming case had barely started to die down, on November 10th, a man named Zhang Lianhai in China was sentenced to two and half years in jail. Zhang Lianhai is the father of a victim during the tainted milk scandal in 2008. That year, tainted milk power produced by one of China’s most trusted companies resulted in the death of six babies while 50,000 other babies were hospitalized for serious kidney problems and 300,000 were sickened to various degrees. Each child diagnosed with kidney stones from drinking the milk was promised 2000 RMB in compensation, equivalent to $300—a  pathetic amount in China’s expensive healthcare system. Zhang Lianhai, a former journalist, represented thousands of parents to demand better healthcare packages for their sick children. He rallied legal support and wrote persuasive articles on his blog. While he won the sympathy of the Chinese population, the government still decided to seize him from his home and put him behind bars for “inciting social disorder.” Unsurprisingly, news reports on his sentence that were shared all over China’s online communities spurred an explosion of public anger.

 The impunity of Li Qiming and the incarceration of Zhang Lianhai are seemingly unrelated. But these two events, together with thousands of other controversial legal cases, are posing serious questions about the state of the Chinese society.

For years, as the West criticized China for absence of democracy, corrupt governance, and human rights violations, the Chinese government and defensive citizens have come up with many excuses. The country is too big. The people are too many. Most of the citizens are not educated enough to make informed decisions. You cannot lift 1.3 billion people out of poverty without hurting a few... But in some cases, where even the least informed of citizens can tell right from wrong, where every sensible person knows that something could be done, there is no more excuse.

Today, the legitimacy of the Chinese government depends on its ability to intoxicate its citizens with a 10% annual economic growth rate and appease them with illusions of a harmonious and affluent society. Every Li Qiming, every Zhang Lianhai that emerges is an invaluable opportunity for the government to win the trust and goodwill of its people by upholding the rule of law. Yet almost every time, the government has chosen to disappoint.

There might be a day where the Chinese economy will begin to slow down, where people’s demand for justice will have to be answered, and where another Olympics and World Expo and National Day parade will fail to distract them from the real problems in China. There will not be a Li Gang to save the Party. What will the Party do then?

For Business Interests, Republican Victory is a Mixed Bag of Tea

Robert Nelson, BASC Research Assistant

Free traders and business interests are usually ecstatic when Republicans win electoral victories, but this most recent triumph might be a change from the norm. While this new Republican majority in the House will likely prove to be just as anti-regulation and anti-taxation as previous Republican majorities there is reason to believe that in areas of international commerce this group will be far more protectionist.

Unlike previous conservative victories, this one was orchestrated by a populist Tea Party movement driven not only by an anti-government ethos, but also by a desire to return America to its glorious days as an industrial superpower. They feel like the country has taken a rapid change for the worse. And while most of blame lies with Obama and his progressive polices, some of the responsibility belongs to trade deals like NAFTA, the influx of illegal immigrants, and the profligate spending by both political parties. It is these other enemies of the Tea Party movement that might prevent Republicans from being as supportive of free trade as they normally are.

There are four areas of chief concern that might spell trouble for traditional Republican business interests: immigration policy, trade agreements, relations with China, and the debt ceiling. Tea Partiers have positions at odds with the establishment Republicans on all of these issues.

Illegal immigrants are the perennial bogeymen of the Tea Party movement. Business groups, on the other hand, tend to see them as important contributors to the American economy. This tension probably will result in a stalemate for the foreseeable future, as the Tea Party members of the Republican party will block any sort of immigration bill that creates a pathway to citizenship for illegal immigrants. A compromise on illegal immigration was not likely before the Tea Party movement took power, but with the Tea Partiers in greater number it will also be difficult to pass less contentious policies like an expansion of H-1B visas, something business lobbies directly support.

Trade agreements will also be an issue of contention for these new Republican members of Congress. While the Tea Party is nominally a free market movement, Tea Partiers are not exactly eager to outsource more jobs to Asia. The line here will probably depend on public awareness. If a trade deal like the Koreas-U.S. FTA can fly under the general public’s radar, then it will probably go through. If, on the other hand, it becomes a major issue, it will probably stall. The more complex and obscure a trade deal, the more able business interests will be able to co-opt Tea Partiers and get them to vote for it.

Relations with China are not an obscure issue and Congress has always been more apt to be tough with China than the White House. This might be one of the few areas of bipartisan agreement in the next two years. Both sides were unrelenting in accusing each other of shipping jobs to China during the election. Long before the Tea Party movement began, Democrats were considering hitting China with a tariff to punish it for its currency suppression. This will not change in the new Congress, and Tea Partiers will be just as eager to get tough with China as their Democratic predecessors.

The area of largest concern and one where hopefully cooler heads will prevail is the national debt ceiling. This spring Congress will have to vote to approve a rise in the debt ceiling. This act is much like a family paying its monthly credit card bill, and Congress has historically passed the measure with bipartisan support. This year, however, was the first time in recent history that no Republican voted to raise the debt ceiling. If Republicans continue with this policy and either fail to pass a rise in the House or filibuster a rise in the Senate, the U.S. will default on its debt and a global financial crisis could occur. This is unlikely, as the Republican leaders will probably whip up enough votes to ensure passage along with the Democrats. But if one takes the Tea Party at its word, it is a possibility.

Overall, the next few years will probably be defined by policies favorable to business or at least a neutral stalemate. But in some areas, business interests will find more resistance than they are used to from Republican members of Congress and on some issues business leaders might experience outright hostility.

Hope for U.S.-South Korea FTA

Lauren Dansey, BASC Research Assistant

The new Republican Congress is predicted to take greater steps towards developing U.S. free trade deals. But will the new Congress be able to resolve the current issues blocking the U.S.-South Korea free trade agreement (FTA)? Reuters suggests the key to overcoming the barriers to the agreement maybe found in Rob Portman, the recently elected Republican Senator from Ohio. Senator Portman served as the U.S. trade representative (USTR) under the Bush administration from 2005-2006. While Portman was at the USTR office, he began talks with South Korea about signing a U.S.-South Korea FTA.  

The New York Times reported the newest roadblock to completing the FTA is White House concerns over the impact on trade sensitive sectors such as the auto industry. Labor Unions and car companies like Ford claim an FTA with South Korea will create an imbalanced trade where American car manufactures will suffer. Ford representatives argued that “for every 52 cars Korea ships here, the U.S. can only export one there.” 

Auto and union lobbyists have so far successfully delayed ratifying the agreement, but the incoming Congress will likely complete the South Korea FTA as part of their program to liberalize trade. Even Dave Camp—a Republican representative from Michigan, home of the auto industry—is advocating completing the FTA with South Korea. The GOP-run house will particularly focus on signing agreements with countries like South Korea to capitalize on the expanding Asian market. Moreover, politicians see the FTA as opportunities to increase U.S. involvement in Asia and counter Chinese regional influence. This new congressional agenda gives Senator Portman the opportunity to exercise his experience as the former USTR and complete the talks with South Korea he began five years ago.

For "Our" China Trade Emergency...

Do-Hee Jeong, BASC Research Assistant

Many politicians made the China debate a central component of their campaign platforms for the recent midterm elections, and Ohio Democratic Senator Sherrod Brown was no exception to this trend. Brown and others assert that since normalizing trade relations with China in 2000, the US bilateral trade deficit has increased dramatically (by 170 percent to be exact) because of China’s illegal subsidies and currency manipulation (for more information on China’s currency controversy, refer to this recent blog post by Professors Vinod Aggarwal and Simon Evenett). Senator Brown criticizes proponents of this bilateral relationship who emphasize the fact that exports to China have also increased as inaccurately telling only one side of the story. In his own words, it “is like reporting just one team’s score in baseball: the Cubs scoring five runs sounds good, until you hear that the Reds tallied 12.”

However, in his recent New York Times op-ed, Senator Brown also seems to fall victim to his own criticism, because isn’t trade a two-way relationship? Rather than focusing on just China’s actions that undermine free-market competition, why not focus on the US’ failed attempts to make its own industries competitive globally? The labor cost argument stretches only so far, as the US could have found other comparative advantages. Instead of developing industries that could be more competitive, the US government continues to bail out its uncompetitive automobile industry. As the US complains about its trade deficit, the rest of the world is already moving far ahead in innovative and sustainable technological developments, as Ren Yi Hooi describes here. 

Even if the US had not normalized trade with China a decade ago, it is questionable whether or not the US would have this trade deficit today without better developing its comparative advantages. Other countries with cheap labor sources would probably have taken China’s place. Similarly, even if Section 301--which allows Washington to respond with aggressive trade measures, including tariffs if investigations find that China’s support for clean-energy exports violates international trade rules--is implemented, there are still other countries that will probably replace China and continue to prolong the US trade deficit. The US would then still be pointing the finger at others for its unemployment and deficit, rallying its people to support protectionist measures to improve the trade deficit. The senator claims that the 1980s and 90s restrictive measures against Japanese and Korean subsidies and trade barriers led to more balanced trade relationships. But ironically, the US government still places blame on Japanese car companies for the demise of the American automobile industry and still brings up the asymmetrical automobile trade with Korea as a hindrance to the KORUS FTA. If trade restrictions are so effective, why do we still have similar problems with trade deficit in sectors that have been protected?  

I am not saying that the invisible hand should have been or be the sole solution, since every economic action is complicated by political ramifications. Furthermore, I am not arguing that the Chinese have not implemented unfair trade policies. But, I wanted to draw attention to the other aspect of the bilateral trade relationship that seems to be ignored in recent politically-charged criticism against Chinese trade policies. Instead of using China as a scapegoat to its domestic problems, the US should focus more on better developing its competitive sectors not only to assuage internal tensions but to provide a long-term solution to establish its competitiveness since trade restrictions, such as the Section 301 proposal provides only a temporary solution. This dramatic shift will not be easy and without public protest, but it seems to be a necessary sacrifice in order to secure America’s competitiveness in the long-run.  Perhaps, these trade restrictions are necessary to alleviate immediate trade deficit and unemployment. But, the government should take further steps beyond this temporary solution to continue developing its successful industries to establish long-term trade competitiveness.

I agree with Senator Brown that “‘made in America’… is more than an empty slogan.” It should definitely be more than empty political rhetoric and instrument to evoke patriotism amongst the American public. However, promoting “made in America” does not necessarily mean standing up for ALL American manufactures, but rather for those that can be made competitive.  

China: The Root of all Evil?

Cindy Li, BASC Research Assistant

With nearly one out of every ten Americans jobless, election campaigns have been buzzing with mentions of record-high unemployment and the “failed” stimulus plan. But of course, merely quoting the unemployment rate is no longer enough to incite anger and frustration from voters. The American people want answers. It used to be that fingers were pointed at the greedy investment bankers with their undeserved bonuses, but this year’s elections have shifted the spotlight to China.   

As David Chen noted in a recent New York Times article, at least 29 candidates have endorsed advertisements that attack opponents for being too sympathetic to China (watch a sample of these anti-China ads here). Videos range from a high-budget ad depicting an evil Chinese professor in a futuristic classroom chuckling villainously about the collapse of the US, to simple ads with cliché images of Chairman Mao looking approvingly towards a field of wind turbines while an authoritative voice accuses a candidate of fighting for jobs in China at the expense of American workers.  As Democrat Joe Sestak’s attack of Pat Toomey demonstrates, being a former Wall Street executive isn’t why we shouldn’t vote for Toomey; rather, it’s that he moved from Wall Street to work in China.  

So does this mean candidates have already forgotten about the sub-prime mortgage crisis and the ensuing credit crunch, and instead believe that China (and of course, those China-sympathizing politicians) are to blame for America’s continued economic woes?

No, alas campaign ads do not change the biting reality of economics. Rather, they reflect voters’ biggest concerns. The American people want hope. The continued increase in unemployment in the first half of 2010, even with the $787 billion stimulus package and significant regulatory changes, raises concerns that the American economy may never be restored to its previous glory. Naturally, the politician who can provide the solution will win the heart of his or her district. And of course, pointing at an external enemy is much more popular than telling voters to accept that the effects of the financial crisis will take more than a couple of years to ripple through the economy.  Until then, political campaign ads will likely continue to rely on blaming over-paid CEOs and Chinese manufacturers for all our problems.  

The Chinese Government and Anti-Japan Protests: Some Food for Thought

By Michelle Chang, BASC Research Assistant

As the diplomatic crisis between China and Japan over disputed territories in the East China Sea drags on, thousands have mobilized in both countries to protest what each side calls the violation of their country’s sovereignty by the other side. Particularly in China, protesters took to the streets in every major city and in cities like Chengdu attracted more than 10,000 participants. While all reports of the protests in China make note of angry youths boycotting Japanese products and in some cases of Japanese properties being demolished by protestors, what attitude the Chinese government has taken towards the protests has been obscured by conflicting pieces of evidence. 


On the one hand, the government has been very careful not to let public anger get out of control. Particularly in Beijing, demonstrators outside the Japanese Embassy were tightly managed by the police and were often outnumbered by police forces. Moreover, notices, comments, photos, and videos of anti-Japan protests were quickly taken down from the Internet in China. An article in TIME Magazine speculates that the Chinese state is fearful because anti-Japan protests in China have a history of turning against the Chinese government after a while, drawing a parallel between the current crisis and the 1919 “May 4^th Movement” that started as a reaction against the Treaty of Versailles but in the end sealed the demise of Imperial China. 


On the other hand, however, there are reasons to believe that the Chinese government has also indulged the protests to some degree. According to an article in the Washington Post, the government publically described the protests as “understandable.” Moreover, it seems rather unlikely that a state capable of silencing both the Tibetan and the Uighur independence movements would have been incapable of stopping the mob gatherings that reduced to waste so many Japanese shop windows, showcases, and even Toyotas on the streets. What attitude the Chinese government takes towards the protests, therefore, is an interesting question to think about. As domestic tensions over various social issues have built up over the years, a foreign enemy seems to be an easy outlet for public anger. But keeping that anger under control is difficult business.

Let's Go, G20

Do-Hee Jeong, BASC Research Assistant

Twenty celebrity singers in South Korea recently released a collaborative G20 campaign song, “Let’s Go,” to mobilize young Korean citizens for the upcoming G20 Seoul Summit as part of a larger campaign to promote the G20 not only in Korea, but internationally as well. The active campaigns, reminiscent of those during the quadrennial World Cup hype in South Korea, emphasize the great weight the November summit holds. So why is this upcoming summit so important?

The November summit’s importance is two-fold. First, it will establish the legitimacy of the G20 as an organization that produces concrete solutions to global economic problems. Second, as the first summit hosted by state that was not a member of the G8, the summit will test the ability of non-G8 members to successfully manage a global forum and make significant contributions.

The Seoul Summit will be an important follow-up from the previous summit in Toronto. It will have to provide a basis for an international framework for strong, sustainable, and balanced growth focusing on macroeconomic policy coordination; reform of international financial institutions, mainly the IMF and World Bank; and reform of financial regulation during this aftermath of the global financial crisis. It is important that the G20 deliver real outcomes not only to avoid a double-dip recession, but also to solidify the legitimacy and effectiveness of the G20 as a premium forum for international economic cooperation.

Korea is also the first non-G8 country to host the G20 Summit, and therefore carries the importance of setting the precedent for other non-G8 members to play central roles in the future. Korea plans to promote the creation of a global financial safety net that will provide insurance mechanisms in case of another liquidity problem created by future global financial crises; development that will take many lessons from Korea’s unprecedented transformation from aid-recipient to donor country; and a business summit that will provide an official avenue for the private sector’s voice on global matters. Seoul’s success in promoting its agenda and hosting the two-day summit will legitimize and open more doors for the involvement of non-original G8 members in the G20.

Although the campaign song—along with the numerous promotional videos created by Korean celebrities and popular street events that inform the public about the G20—may be just mere displays of Korean pop culture on the surface, they nevertheless demonstrate the great significance of the upcoming Seoul G20 Summit.

(Source: The information is based on Secretary General of the Presidential Committee for the G20 Summit Changyong Rhee's speech during the 2010 MacArthur Asia Security Initiative Annual Meeting in Seoul)

Reframing Trade: Obama, Democrats, and Trade Liberalization after the Midterm

Kathy Bowen, BASC Research Assistant 

  

With all but a cadre of Obama loyalists predicting a thumping for the Democrats this November, does the Administration have much, if anything, to look forward to after the midterm elections? The good news for liberals - of the Ricardian variety - is that a GOP majority in Congress may be more likely to approve bilateral deals with South Korea, Columbia, and Peru, a Trans-Pacific Strategic Economic Partnership agreement, and a final settlement to the Doha Round. Obama has thus far seen little movement on any of these initiatives, in part because many Democratic incumbents were elected with the support of organized labor, a group traditionally opposed to trade liberalization. Notwithstanding the outcome this November, future Democratic administrations may not have to sacrifice their party’s majority to achieve victories on trade. With an improved rhetorical packaging, the Obama Administration may be able to reframe the trade debate to make new agreements a winning issue for Democrats.

Pressure from labor unions and skyrocketing unemployment has increasingly shifted the Democratic Party’s rhetoric from ambivalence to antagonism on trade-related issues, manifested most recently by a wave of Congressional China-bashing. However, Democratic-led protectionism is not a new phenomenon. Trade liberalization has divided progressives for decades, splitting the party largely between politics and policy – or between traditional constituents and a ‘forward-looking’ economic agenda (Mishel and Teixeira, Economic Policy Institute). The former has dominated far more often than the latter, as blue collar workers and organized labor, empirical bastions of Democratic support, have fervently denounced new trade initiatives. This dynamic was evident during the Clinton years, with the Midwest and industrial Northeast heavily against ratification of the North American Free Trade Agreement (NAFTA), and reappeared again during George W. Bush’s fight over the Central American Free Trade Agreement (CAFTA). Non-college-educated middle-class workers, historically a significant source of Democratic electoral support, opposed NAFTA because of its potentially detrimental effects on American manufacturing jobs and wages; CAFTA debates recycled many of these same arguments, with the agreement ultimately passing by an incredibly narrow party-line vote.

The pressure is especially pervasive this session, with many incumbent Democrats facing tough reelection races and desperately needing the vote-gathering and financial potential of organized labor. According to Jagdish Bhagwati, senior fellow at the Council on Foreign Relations, this crop of Democrats is particularly ‘indebted to trade-fearing unions,’ inhibiting the otherwise pro-trade Obama Administration. United States Trade Representative Ron Kirk captured the Democrat’s bind in a speech to Arkansas farm interests this month, admitting that it was “only politics” that kept him from submitting free trade agreements with South Korea, Columbia, and Peru to Congress (Truitt, Ag Today).

Kirk’s moment of candor demonstrates the extent to which the Democrats' rhetoric is damaging to Obama’s trade agenda, independent of members’ actual voting record on trade issues. First, vocal Democratic opposition to trade initiatives creates the perception of future legislative hurdles, dissuading the Administration from submitting already completed agreements to Congress and from negotiating them in the first place. Second, protectionist posturing transmits a broader signal that does not go unnoticed by Washington’s trade partners. Negotiations for what is arguably Obama’s top trade priority, the Trans-Pacific Partnership (TPP), have been put on hold until after the midterm elections because of uncertainty regarding Obama’s ability to muster sufficient Democratic support. Alex Frangos writes in the Wall Street Journal that “in Asia, the impression is also that any trade pact will require the political atmosphere in Washington to change.” Moreover, former ASEAN secretary-general Ruodolfo Severino was quoted as suggesting that the current mood in Congress would make it impossible to enter into a free-trade area like the TPP. He suggested that if Obama cannot get a bilateral deal with Korea approved, which has been in the works since 2007, it is unlikely he would get Democrats to move on a deal involving many more parties.

Thus, Democrats are contributing to Washington's turn away from trade. Can policy overcome politics, or will Democratic administrations be perpetually forced to play up protectionism? While it remains unlikely we will see a push for trade-friendly initiatives prior to the midterm, Obama may be able to sell his own party on trade come January.

First, the immediate political pressures on Democrats to appease organized labor will have dissipated. Empirically, political pandering has been the largest proximate cause of Democratic protectionism.

Second, Obama has already begun to refashion the trade debate in his favor, and bolder steps in this direction could yield political pay-offs. While pundits have gone so far as to brand Obama’s trade agenda as “anemic” (Wolverson, CFR) and even a “contradiction in terms” (Drezner, WSJ), the National Export Initiative at least takes the right approach at framing the issue. By setting the goal at doubling US exports over the next five years, Obama officials can tout trade initiatives as a means to an end for American business. The language of keeping America competitive vis-à-vis exporters like China will make it difficult for opponents to capitalize on trade politically, and will allow Obama and Democrats to take the moral high-ground on Chinese trade and currency policy. While most Democratic China-bashing can be chalked up to an attempt at developing a winning issue for the midterm, this kind of rhetoric is unproductive at best, catastrophic at worst. Trade as a means of securing foreign market access and bolstering export-led growth can be spun as a way to beat China at its own game while avoiding its use of unfair fiscal and monetary practices. This framing may also create a longer-term political niche for Democrats between free-market liberalism and economic populism.
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Finally, Obama should tacitly pursue labor protections in accordance with trade initiatives. While a persuasive argument exists to forgo muddying trade agreements with Christmas tree-like provisions, political realities require an acknowledgment of labor’s grievances. Obama should make concessions to organized labor as a means of currying favor with rank-and-file Democrats. In exchange, Democrats may be more willing to move on the Administration’s trade priorities. Labor standards can either be conditioned on the FTA itself, or can be disaggregated from the larger deal. The latter method could be adopted in contentious bargaining contexts, in order to avoid creating the perception among foreign governments that labor standards are a deal-breaker. Beyond its short-term political benefit, promoting labor protections alongside trade liberalization could help to avoid a broader public backlash to globalization.

With the midterm quickly approaching, and a presidential election in the not-too-distant future, any successful movement on the Administration’s trade initiatives will require a bolder effort to reframe the issue. Trade liberalization and a Democratically-controlled Congress do not have to be inimical objectives for the Obama Administration, but achieving both in the longer-term will necessitate a shift in the rhetoric surrounding trade. Democrat’s don’t have to tank their traditional sources of electoral support to champion a progressive trade agenda; however, Obama does need to more aggressively frame trade as a means to achieve export-led economic growth while simultaneously making side-deals to build up political capital with organized labor.

China’s Clean Energy & Climate Change Dilemma

Ren Yi Hooi, BASC Research Assistant

            For years, China has been heavily criticized for its massive energy consumption and colossal volume of carbon emissions, the inputs and outputs of its rapid growth. Recently, however, China has made impressive strides in green energy development and pollution reduction – even surpassing the United States as the leader in clean energy investment for the first time in 2009. This has ironically resulted in a backlash of US sentiments against China’s ‘unfair’ trade dominance in the green energy sector.

           

Through the end of 2009, China—the largest industrializing nation— was castigated by the United Nations and in particular the United States for being the world’s leading carbon emitter. Indeed, China consumed over three billion tons of coal in 2008 and 2009, more than triple the amount used by the United States, and total energy consumption in China doubled in less than a decade this century. And at the Copenhagen climate change conference last December, China took much of the blame for the breakdown in talks.  However, with China taking effective action to capitalize on other sources of energy, global attention has shifted from the damage it has caused to the immense progress it is making in the arena.

            China invested over double the amount that the United States expended on clean energy technology, spending a total of $34.6 billion as compared to $18.6 billion in the US in 2009. More specifically, it has not only become the world's largest market for wind turbines, but also established itself as the largest global manufacturer of solar panels. As Chinese officials recently announced a plan to spend $75 billion a year on clean energy, China’s swift progress in the industry does not appear to be stalling anytime soon. Of course, China’s development of green energy does not necessarily mean that it will actually reduce its usage of coal or other conventional energy sources – but one should at least give it points for trying. Moreover, China has made efforts to assume a leadership role in global environmental cooperation. It is hosting a UN conference on climate change this week. Although little tangible progress is expected to ensue from this conference, it demonstrates China’s realization of its responsibilities as a major world player as well as its emerging desire to create change on the global forefront. China’s investment in green technology has appeared to pay off, as its exports increased over 500% to around $27 billion between 2004 and 2008. However, this has also incurred heavy political cost. 

            US lawmakers and trade unions alike have criticized China’s moves in the green energy industry, saying that it employs “predatory trade practices…to give its manufacturers an unfair advantage in the green technology revolution." In addition to a letter from 180 congressmen, the USTR also received a 5,800-page petition from the United Steelworkers union. This document accuses China of using billions of dollars in subsidies, performance requirements, preferential practices and protectionist and predatory activities to dominate the solar and wind industries and other clean-energy sectors. The USTR has until October 24^th to decide whether to accept the petition, which could mean a WTO-level dispute if accepted. China flatly rejected the complaint, stating that such comments were hypocritical when China is under pressure to cut greenhouse gas emissions. Despite the litany of new trade-related complaints the US has generated about China, the old criticisms remain in place. At the ongoing climate change conference, both countries again disagreed over the issue of whether developed or developing countries should bear more responsibility for carbon emission reductions, and the possible establishment of a mechanism to verify such reductions. All of these developments reflect the mounting tension between China and the United States over China’s new green energy policy.

            What insights can we draw from this state of affairs? First, the United States should perhaps take the time to think about long term considerations before pressing other countries to take up any course of action. As seen from this example, US criticism of China’s energy consumption caused it to turn towards alternative sources of energy, yet that again fueled the ire of the United States. Should the US decide to pursue its complaints against China’s green energy developments, it could result in severe bilateral conflict with China. Worse still, it could affect the green initiative on a global scale by making other countries question how seriously they should commit towards environmental responsibility given the US reaction to China’s efforts. Next, even if even if it was a mistake for the US to point fingers a little too early, this example still highlights the ease with which noble causes like climate change can be used as a screen behind which unfair trade or protectionism lurks. We should not just be aware of this possibility, but also begin to think about how such developments can be mitigated. Lastly, the spat between China and the United States reminds us that the critical issues of global warming and climate change really require genuine global cooperation, not the pushing of responsibility or a race for individual limelight. If only each country could focus on doing what is best for the earth, instead of what it is best for its interest groups, we would be able to see a far greener world. 

Image courtesy of http://venturebeat.com/2009/12/28/china-makes-nice-after-copenhagen-passes-green-energy-law/.

Cyber Security: A New Frontier for the U.S.-Japan Alliance?

Kristi Govella, BASC Project Director

Last week, American and Japanese officials announced that they will join forces to combine Internet-based attacks that disrupt the operations of firms and governments. The agreement came in a meeting between communications minister Kazuhiro Haraguchi and Julius Genachowski, chairman of the U.S. Federal Communications Commission.

This announcement may mark a move in a direction that has long been discussed by U.S.-Japan alliance managers—the broadening of the relationship beyond strict definitions of military security. Given the restrictions on Japan’s military activity due to Article 9 of its constitution, the two countries have often found themselves at odds over the appropriate amount of burden-sharing. While the U.S. was relatively happy to provide for Japan’s protection during the Cold War, when the island nation represented a bulwark against communism, such expenditures have become harder to justify in an era where many wonder what the alliance is targeted against. Moreover, Japanese domestic politics have made the relocation of the Marine Corps Air Station Futenma on Okinawa extremely controversial, creating further tensions in the alliance.

Given these problems, cyber security seems to represent an important area that the U.S. and Japan can cooperate on with relative ease. In the current information age, cyber security is an issue of critical concern, but one that is often discounted—partly because current leaders have been relatively slow to understand the impact and insecurity that new technologies have brought to their countries. These issues made headlines earlier this year, thanks to the accusations made by Google about attacks from Chinese hackers, with the possible support of the Chinese government itself. If these allegations are true, they suggest an interesting intersection of traditional and cyber security, illustrating that the two are not as different as we might (like to) think. Given the importance of this issue and continuous comments that Japan does not contribute enough to the U.S.-Japan alliance, cyber security seems like a perfect area for Japan to focus its attention—it certainly has the resources and knowhow to do so, and since its participation would not require “military” contributions, Article 9 does not represent a constraint.

This proposition is not uncontroversial, however. Some alliance managers believe that adding new dimensions to the alliance may only serve to distract the two countries from what should be their top priority: ensuring the military security of Japan and the Asia-Pacific region as a whole. From this viewpoint, cyber security should be dealt with in other forums, and Japan’s contributions on the cyber security front should not be taken as substitutes for traditional military cooperation.

While the latter perspective raises important concerns about keeping bilateral priorities straight, cyber security seems less of a distraction than environmental cooperation or a host of other things that have been suggested as potential areas of growth for the U.S.-Japan alliance. As illustrated by the previous Chinese example, cyber security is intimately intertwined with national security. As Japan and the U.S. continue to work on information sharing and greater military coordination, it will be important to make sure that this information is safeguarded from would-be aggressors. And it seems like Japanese leadership on the issue would represent an area of real contribution.

Japan and the U.S. agreed to lead discussions on the issue when they attend an APEC ministerial meeting on telecommunications and information in Okinawa in October, so we will have to wait to see what kinds of goals the two countries will set for themselves. Japan seems to be moving forward with steps to increase its own domestic cyber security. Yesterday, a government panel worked out a set of information security strategies featuring steps against Internet attacks to be taken by the public and private sectors over the next four years, including training to minimize the damage of attacks against vital infrastructure (computers at railways and financial institutions, for example) and developing a damage prevention system. So perhaps Japan is taking this matter seriously. In any case, both the U.S. and Japan seem to be recognizing that the world has changed—it remains to be seen if they will redefine their military alliance in response to these new realities.

Image courtesy of http://www.flickr.com/photos/23905174@N00/ / CC BY 2.0

U.S.-China Naval Rivalry over Oil?

Do-Hee Jeong, BASC Research Assistant

Not even a decade ago, China was totally absent from competition over oil, but today this emerging global power’s efforts to obtain long fought-after resources is a commonplace topic making headlines everyday. Propelled by its rapid economic development and rising competitiveness, China has become a central player in the global race to find oil deposits and gain self-sufficiency. This strategic move is perhaps not very surprising given the fact that industrialization and development accompanied by rising consumption have increased China’s demand for oil, putting pressure on the government to seek out more resources. It also seems natural then that the growing importance of oil and natural gas has led the government to secure its economic interests through military naval power.

Last week, the Chinese military announced that it will seek to project naval power beyond the Chinese coast to the Pacific shipping lanes that connect China to its oil ports in the Middle East, an area where the United States Navy has until now been the only dominant force. Chinese admirals want warships to escort commercial vessels from as far as the Persian Gulf to the Strait of Malacca in Southeast Asia to protect Chinese interests. In March, two Chinese warships made their first appearance in the Middle East at Abu Dhabi. Last month, Chinese officials told the Obama administration that the South China Sea was now part of its “core interest” of sovereignty and that China also intends to extend its reach to the Philippines, a zone that overlaps with the U.S. Navy’s area of supremacy.

The modernization of China’s navy has also been dramatic and unprecedented. Currently, the Chinese navy receives more than a third of China’s military budget, with the total budget estimated to be around $105 to $150 billion by the Pentagon. As part of its “far sea defense” strategy, China has tested long-range ballistic missiles that could be used against aircraft carriers. It plans to deploy aircraft carrier groups within the next few years and is developing a modern submarine fleet that can better protect vital transport of key resources. Already, a base in Yalong Bay on the southern coast of the Hainan Island has submarines that are able to reach deep water in the South China Sea within 20 minutes. A 2009 Pentagon report also estimates that China has a naval force of about 260 vessels and more than 60 submarines.

This growing assertion of economic interests is a marked change from China’s traditional policy of defending its own coasts and governing Taiwan. This is the first time China has ever asserted its “core interest” of sovereignty outside of Tibet and Taiwan. Chinese officials told senior American officials that it would not withstand any foreign interference in its territorial issues in the South China Sea, and both sides have clashed over the definitions of each country’s “exclusive economic zone” in the region. Although the Chinese have until recently been focused on domestic development and stability, its growing dependence on oil and other resources has shifted its attention outward. Not only is China seeking to extend its sphere of influence in other developing countries - most notably in Africa and Latin America - but is also now fortifying its sea lanes to further secure its vital economic interests.

Although the Chinese claim this expansion of naval power is for self-defense, these moves not only exacerbate its tensions with the United States but also create instability and anxiety across the Asian region. This announcement coincides with President Obama’s proposal to expand exploration in the United States coastline to reduce foreign dependency on oil and natural gas. Both countries are now competitors in the race to secure self-sufficiency in energy and gain control over oil deposits to maintain dominant positions in the global market. Furthermore, in the midst of U.S. pressure for Chinese currency revaluation, the announcement of extending naval influence in traditionally U.S. dominated sea lanes seems to be a symbolic move to show China’s growing self-confidence. China is asserting its own interests by changing the rules of the game initially established by the United States.

Of course, the expansion of the Chinese navy currently does not pose a significant threat to U.S. military hegemony. Although China’s navy may not be 20 years behind the United States’ anymore, its capabilities still lag behind those of the United States’ and China’s military spending is still relatively miniscule in comparison to the U.S. However, even if the Chinese navy poses no real threat to the U.S. and this military expansion is purely for defensive purposes, China’s recent actions still create growing tension and instability in the international community. Although the threat is not yet real, the possibility of China’s navy to challenging the dominant American presence in the Pacific is unsettling for many.

Map courtesy of The New York Times

Leaving China: How Smart is Google?

Michelle Chang, BASC Research Assistant

One month ago, on March 22nd, Google decided to step out of China and end four years of censoring the web for the Chinese government. Thus exited the world’s most powerful Internet company from the world’s most populous country. While only maintaining some R&D and advertising activities in China, Google shifted mainland Chinese users from “google.cn” to “google.com.hk”. The company kept to an earlier statement it made in January that it would stop filtering information from Chinese Internet users.

Over the past four years, Google had been cooperating with the Chinese government to filter out sensitive political information and pornography from the web. While attracting intense criticism for compromising freedom of expression, Google argued that the benefits of allowing more of the Chinese population access to Internet information outweighed the costs. However, in mid-December 2009, Google started to detect cyber attacks from China on its corporate infrastructure. While the attacks were initially traced to a small vocational school, Google insisted that the level of sophistication of the attacks made it almost certain that the attacks were overseen by the government and the military. Furthermore, the attacks were directed at the Gmail accounts of Chinese human rights activists.

The cyber attacks exceeded the limit of how much Google was willing to compromise in order to stay in China. In a statement issued in January 2010, Google took a firm stance against censorship of information and refused to comply with the Chinese government. Over the following months, bitter verbal conflicts took place between Google and the Chinese government, and there was much speculation and debate about whether Google would eventually forsake the biggest Internet market in the world in defense of freedom. And in March, Google irreversibly decided to end its operations in mainland China.

To most people, leaving a country with one-fifth of the world’s population seems like a huge sacrifice on Google’s part. In fact, however, Google will suffer little commercial loss from the pullout. Google’s annual revenue in China is estimated at $300 million to $600 million, only a fraction of the company’s $24 billion annual sales worldwide. Instead, the biggest victims are likely to be Chinese companies. Two of China’s largest mobile companies, China Mobile and China Unicom, were forced to scrap lucrative deals with Google under political pressure. Moreover, many small startup companies who used to make their living through advertising opportunities on Google now have to find other alternatives.

Not only does Google not suffer much commercial loss from exiting China, its decision could actually be a smart business strategy in the short run. Indeed, over the past few years, Google’s compliance with the Chinese government attracted much unwanted criticism from the West. By taking a stand against an authoritarian government and defending freedom of expression, Google manages to evoke a positive corporate image in many people’s minds.

However, several problems await Google in the long run. First of all, the relationship between Google and the Chinese government has risen to such a point of hostility that it is now virtually impossible for Google to re-enter the mainland Chinese market. Secondly, by taking a stance against censorship, Google sets a high standard for itself that it might not always be able to meet, thereby opening itself up to future criticism. Indeed, if it refuses to censor information in China, how should it conduct itself in other countries that also allow censorship, such as England? In the future, Google might face a lose-lose situation in which its only options are to compromise its corporate image or forsake more lucrative markets.

While leaving China has relieved much political and social pressure from Google, the future looks rather ambivalent for the Internet giant.

Photo:

http://www.flickr.com/photos/antonis/ / CC BY-NC-SA 2.0