U.S. Policies for India and China

Kent H. Hughes and Samuel F. Wells, Jr.

Globalization Past and Present:

Herman van der Wee noted the similarities and the differences between today's globalization and that of the late 19th into the early 20th centuries.

Both globalizations were driven by new opportunities, new forms in transportation, and a revolution in communications. Growth in Europe and the opening of the Americas, steam ships, the spread of rail transport, and the development of telegraph (now referred to as the Victorian Internet) and Trans-Atlantic cable combined to draw peoples, technology, and investment to new parts of the world.

In the mid-19th century, Great Britain was in the dominant position later occupied by Europe and then the United States. By the end of the 19th century, Britain faced the challenge of a rising Germany and the growing United States. With the construction of new rail lines, Czarist Russia was compounding the challenge by moving ever closer to India, then the jewel in the British crown.

Yet, it was a very different world. Much of the world was a colonial possession of the European powers, universal education was still largely an American invention, class divisions were sharp, and the fruits of industrial development had not spread to whole populations.

Today's globalization started in what was often billed as ‘the American Century.'
In the early post-world war II period, the victorious powers built a series of international institutions designed to avoid the mistakes of the Inter-War period and secure a more peaceful and prosperous world.

Starting with Ghanaian independence in 1957, one colonial possession after another gained its independence. Lingering colonial ties have loosened over the years as many former possessions have forged their own economic and political alliances.

Welfare states emerged in most industrial countries with the degree of societal protection being most developed in European countries. America, alone in the industrial world, developed a hybrid system in which private business carried a major share of the responsibility for funding retirement and health care.

In the second half of the 20th century, the Cold War split Europe, divided much of the world into rival camps, and slowed the development of a second globalization. During the Cold War period, however, quiet revolutions in transportation and communications were developing that would bring the twentieth century world together ways unimagined by the 19th century globalizers. Super tankers and containerization took the lead in transportation while first satellites, then proliferating undersea cables, and then the Internet made a major auto accident in Nairobi evening news in New York.

The Samurai Surprise: The Challenge to the United States and Europe

By the late 1970s, Japan had fully recovered from the devastation of World War II and was emerging as a major industrial force.

Shielded from international competition in the early post-World War II years, the Japanese challenge was a particular shock to the United States. Not only did Japan seem on a steady march to overwhelming one American industry after another but they were doing it all with a distinctly different economic model.

Europe had its own champion as an economically resurgent Germany also regained traditional markets in the United States and alternated with the United States as the world's largest exporter.

But Europe was far from immune to Japanese economic pressure. Expressing his frustration with the combination of a mounting European deficit with Japan coupled with hard to penetrate Japanese markets, Sir Roy Denman, then a key figure in Brussels, became famous for describing Japan as "a nation of workaholics living in rabbit hutches." In December of 1982, Time reported on the second battle of Poitiers – a French demand that all Japanese Video Cassette Recorders (VCRs) be inspected by the small customs house in Poitiers.

In the United States, the rise of Japan coincided with domestic economic turmoil driven by two oil shocks and failed macro-economic policies. By the end of the decade, Americans were talking about stagflation – the dreaded combination of no growth and rising prices.

Multiple economic challenges forced American business and the U.S. government to change practice and policy. By the end of the 1980s, American manufacturers and a growing number of major service providers had adopted or adapted Toyota's fabled lean-production approach. The U.S. Government took a series of steps to help speed the translation of new ideas into new competitive products: universities were allowed to commercialize federally funded research; government laboratories were opened to potential collaboration with business, government agencies set aside part of their budgets to fund small business innovations, pension funds were allowed to invest in venture funds while still meeting the ‘prudent man' rule, and businesses themselves were given partial immunity from the anti-trust laws to encourage cooperation on research ventures.

Japan, in particular, triggered what became known as the competitiveness movement in the United States. National and state-level commissions formed to study competitiveness and their efforts were matched by a series of legislative initiatives by the U.S. Congress to define a long-term productivity growth strategy that was adapted to realities of global competition and rapid technological change.

Europe and the Organization for Economic Cooperation and Development also turned their focus to developing a competitiveness strategy that would respond to global competition.

The Rise of China and India

There is only occasionally a single turning point in the affairs of nations. There were some in the 20th century – the descent of Europe into World War I, the onset of the Great Depression, and the allied victory in World War II.

In terms of today's economic challenges, 1989 and the fall of the Berlin Wall is a useful marker for the emergence of a truly global economy. The freeing of Eastern Europe was followed, in 1991 by the collapse of the Soviet Union itself. At much the same time, India responded to an economic crisis by reversing decades of closed, Soviet style development policies and started the process of gradually joining the world economy. China had started down a path toward global engagement and a more market oriented economy in 1978 with the advent of the Deng Xiao Ping reforms. By the early 1990s, China was well on its way to becoming the new ‘workshop of the world.'

China and India were not alone. The former Soviet sphere of influence because part of the world economy and Brazil emerged as a major force in agriculture with a growing commitment to manufacturing, energy and services. Two books caught the new economic reality in their titles:

Tom Friedman's The World is Flat: A Brief History of the 21st Century
Clyde Prestowitz's Three Billion New Capitalists: The Great Shift of Wealth and Power to the East

China: The Dragon's Strategy for Greatness

China started down the path to rapid growth with agricultural reforms. The communes were dissolved and agricultural productivity soared.

In terms of industry, China has adopted a variant of the export-led growth strategy that has worked so well in other countries of East Asia. Like Japan, they focused on manufactured exports, manipulated their currency to achieve a competitive advantage, and "borrowed" intellectual property. Unlike Japan, however, China has sought foreign investment as a way of accelerating growth and adding to stock of technological know-how.

In a short period of time, China has had enormous success. It has moved from toys and textiles to manufacturing autos and moving into ever more sophisticated electronics. American stores are filled with ‘made in China' products and more and more American manufacturers are struggling to match what they refer to as ‘the China price.' Even in agriculture, China is becoming an export force creating competition for strawberry growers in Europe and apple growers in Pennsylvania.

The U.S. Response:

The U.S. Government, industry, and universities have all become deeply involved with China.

The U.S. Government: The Clinton Administration (1993 to 2000) adopted a strategy of engagement to bring China more fully into the global economy and the international community. As part of this strategy, the Clinton Administration succeeded in securing permanent normal trader relations (previously known as most favored nation treatment) as part of China joining the World Trade Organization. As part of its accession process, China actually took on ambitious commitments in terms of opening its economy and subjecting state run enterprises to international competition.

During the George W. Bush Administration, U.S. policy has continued to seek engagement, avoided pressing China on its international commitments, and been supportive of U.S. companies seeking to invest and do business in China.

Currency Manipulation: The growing bi-lateral trade deficit with China is part of twin imbalance with the United States experiencing record trade and current account deficits while China has registered record trade and current account surpluses.

The Omnibus Trade and Competitiveness Act of 1988 required the U.S. Treasury to submit an annual report to the House and Senate Banking Committee. A finding of currency manipulation in specific circumstances would require the Secretary to open negotiations with the manipulating country.

The U.S. Treasury has not found China to be manipulating its currency. In response to mounting pressure from the Congress and some segments of industry, Secretary Paulson has launched a Strategic Economic Dialogue and has made repeated pleas for China to allow market forces to determine the value of the currency. In response, China has allowed its currency to fluctuate within specific bounds and, over time, permitted only a very gradual appreciation.

Intellectual Property: China has been aggressive in borrowing intellectual property without bothering to pay for patents, copyrights, or know-how. Before joining the World Trade Organization, China expected foreign investors to ‘share' their intellectual property as a price of doing business in China.

American companies, fearing an unfavorable response by the Chinese government, have been reluctant to ring official complaints and have, generally, not pressured the Office of the United States Trade Representative (USTR) to bring a complaint under the WTO. Only recently has USTR brought a case.

To limit intellectual property theft, U.S. business is now more likely to have wholly owned subsidiaries. Labor, of course, is mobile and companies have taken added precautions by keeping key pieces of a new technology in their labs and plants where intellectual property protection is reliable.

Import Dependence: Although the United States has become increasingly dependent on imports for key electronic devices, it has not taken major steps to stimulate domestic production or consciously diverse supply. In the first Clinton term, there was an attempt to foster a competitive, domestic, flat panel display industry. For the most part, the administration found itself caught between the limitation imposed by world trade rules and congressional objections to what some saw as an industrial policy.

About three years ago, the Defense Science Board (DSB) issued a report expressing concern about the degree to which the semiconductor industry was shifting from the United States to China. The DSB report has not, however, led to any concerted action.

Congress Proposes but does not Act: China has triggered considerable debate in the Congress and led to a variety of legislative proposals to offset what many legislators see as China's manipulation of its currency to gain a competitive advantage in the U.S. and world markets. In the last Congress, Senator Charles Schumer (D-NY) and Senator Lindsey Graham (R-SC) garnered considerable attention over a legislative proposal to impose a high tariff on Chinese goods to offset the currency advantage. More recently, senators have proposed adopting a Warren Buffet proposal to balance trade by requiring imports to be accompanied by certificates that would be issued to exporters. None of the proposals is likely to be adopted in the current climate.

The one concrete step the Congress has taken is to establish the U.S.-China Economic and Security Review Commission. Established in 2000, the Commission holds hearings on economic and security related topics and issues an annual report that includes recommendations for action.

U.S. Business:

U.S. Business has three reactions to the challenge and opportunity posed by China. Large manufacturing enterprises have invested heavily in China and, increasingly, are establishing R&D facilities there as well. Faced with Chinese competition, many other U.S. companies have become much more efficient while others have been forced out of business.

Global Businesses: Major U.S. companies such as IBM, Cisco, General Motors, and General Electric have established manufacturing facilities China. Several have done very well in supplying the Chinese market. For instance, both General Motors and Volkswagen have made healthy profits in China. Many companies are or plan to use China as an export platform to supply their customers in the United States an elsewhere around the world.

More recently, U.S. and other global firms have begun to establish R&D facilities in China. Some are designed to adapt U.S. (or other foreign) products to Chinese tastes and conditions. There are other R&D facilities that are drawing a growing pool of Chinese scientists and engineers to do more fundamental research that is part of the companies overall strategy.

U.S. Universities:

Like their business counterparts, leading U.S. universities are forming partnerships with their Chinese counterparts and counterparts in other corners of the world. The presence in China facilitates Chinese learning by American students and also helps attract Chinese students to the home campus in the United States.

More and more universities will help educate Chinese students in China. Their presence is a complement to the Chinese focus on making a select set of universities world class. China's long-run aspiration, according to at least on informed observer, is to have 1000 (one thousand) University of Michigans.


In Sum: The U.S. government has relied on U.S. companies, universities, and market forces to define economic relations. Official action has been limited to the Strategic Economic Dialogue and some legislative proposals that are still at the debating stage.

India: The Elephant Starts to Move

After years of inward looking, Fabian inspired, Soviet influenced central direction, the economic crisis of 1991 forced India to change direction. The elephant is now steadily marching toward integration with the global economy – first in business services, then R&D, and with the clear intent to become a manufacturing force.

The industrial world was concerned about losing its computer networks as the year 2000 arrived. (What was known as the Y2K problem was based on the fear that many computer programs would recognize the 0 in 2000 as 1900 and thus completely disrupt a host of computer-dependent functions.) Companies invested billions in new computer equipment and a massive reprogramming effort. The demand for skilled programmers shot up and India has the trained personnel to respond.

When the U.S. and other global companies spread telecommunications capacity around world as digital analysis became more feasible, again India was poised to expand into a variety of business services. Now everything from legal research to chip design has been outsourced to India.

India's growing pool of relatively low cost well education scientist and engineers have also attracted a growing number of U.S. R&D facilities in the information technology, electronics, and pharmaceutical fields. For instance, Intel has an estimated 3,000 employees working on next generation chip design. Accenture, a U.S.-based, global consulting firm, now has more employees in India than in the United States.

Responding, in part, to the opportunity to attract more R&D-based investment and the prospects of fostering more innovations themselves, India has recently moved to tighten the enforcement of its intellectual property laws.

The U.S. Response:

India's well educated workforce and the growth of digital technology have created major opportunities for U.S. business to outsource a variety of business services. Business is not alone. Hospitals have begun to rely on Indian doctors to read X-rays, lawyers turn to India for legal research, and even local governments have sought saving by sending work overseas.

U.S. universities are also establishing partnerships and entire campuses in India. The Georgia Institute of Technology is a recent example. The university will initially staff the Indian campus with George Tech professors teaching to a Georgia Tech standard but the plan is to make it an all India operation.

The rise of India has not resulted in much congressional heat or action. Some professional societies have expressed concern on behalf of their members. There may be more of a reaction in the future. Alan Blinder, a Princeton professor, former Vice Chairman of the Federal Reserve, and former member of President Clinton's Council of Economic Advisors has estimated that 30 million American workers may eventually be affected by international competition.

Certainly, the rise of India has made it more difficult for advocates of open trade and global integration to simply argue that more education is the path to future prosperity. Lawyers, architects, doctors, and engineers are all highly educated but now face international competition for the first time. As Blinder notes, the dividing line is now longer between the more and less educated but between those with skills that face global competition those that do not.

In a typically American fashion, some adapting is taking place without official government action. There are reports that deans of engineering are meeting to design curricula that will help insulate their students from global competition.

Perhaps because there has been little public pressure for action, the Bush Administration has not taken any steps in response to the competitive pressures posed by India's talent workforce. As with China, they have an abiding faith that markets will seek out the right answer.












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