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April 22, 2005



PAUL GIGOT: While most attention is on Iraq and the Middle East as the focus of United States foreign policy, the world's second superpower, China, throws its weight around, challenging the United States and its allies. Most recently, China threatened Taiwan and attacked Japan for wanting as much power as China at the UN. In the end, those decisions backfired, helping persuade Europe not to sell arms to China. But China will present a continuing challenge, based on its size and strength.

China has the largest population, 1.3 billion, the second largest military, and a known nuclear capability. China's new law authorizing the use of force against Taiwan if it moves toward independence has raised fresh security worries for the United States and Europe.

There are concerns about the rise of Chinese military spending and potentially Chinese military power and its increasing sophistication. The United States has promised military help, should Taiwan be attacked. All of this at a time when the U.S. needs Beijing's help on issues like controlling North Korea's nuclear weapons program.

China's military expansion has been fueled by its tremendous economic successes. The U.S. trade deficit with China grew by 31 percent last year, to a record 162 billion dollars. China is sitting on a reserve of 500 billion U.S. dollars, and because China refuses to comply with President Bush's demands that it revalue its currency, Chinese exports will continue to be cheaper in global markets.

The signs of growth are everywhere. Forty percent of the world's concrete, 50 percent of the world's construction cranes, and a quarter of all the steel goes to build new office and apartment complexes in China. The United States now competes with China for concrete and steel on the world market. And the worst may be yet to come -- oil.

Today, China consumes only a fraction of the oil the United States uses. But that will change as Chinese citizens switch from bicycles to automobiles. That means one day, China will be bidding for limited oil supplies in yet another challenge to the United States.

PAUL GIGOT: Joining us now from Hong Kong to talk about all this is Mike Gonzalez, the editor of THE ASIAN WALL STREET JOURNAL Editorial Page. Michael, welcome. You've been covering the anti-Japanese demonstrations in China. Do we know if these are spontaneous, or have they been encouraged by the government in Beijing?

MIKE GONZALEZ: Well Paul, the people I talk to at Peking University, one of the universities where many of the demonstrators in Beijing came from, tell me that the demonstrations were definitely tolerated and even encouraged. Now even if they don't go so far as to say that they were orchestrated, I guess encouraged is damning enough. But there's circumstantial evidence which suggests that the level of involvement was beyond just encouragement.

For example, the demonstrators were bused in oftentimes, and sometimes even in advance of the work units that are so important in the Chinese companies. There's also the very damning evidence of the police standing by and allowing the demonstrators to run riot, pelting the Japanese embassy and the ambassador's residence with paint and with rocks, shattering windows. I guess I need not add that this is happening in China, where a political demonstration would be quashed within 10 seconds, and where a pretty defenseless sect, the Falun Gong, were swept off the street.

So this suggests that the Chinese, even if they did not orchestrate it -- and they may have -- they at least encouraged these things.

PAUL GIGOT: Mike, if I might ask, what do you think explains this burst of Chinese nationalism, both in the Japanese instance and regarding Taiwan? What does the government hope to get out of it?

MIKE GONZALEZ: Well, I think that the government -- two things. With Taiwan, it was already in the process of getting this law passed, a law which basically mandates that China invade Taiwan if Taiwan does not rejoin the motherland at a time of China's choosing. And then it passed it, even though Taiwan was actually giving signs that it wanted a rapprochement with China, the Chinese government just wanted to show its people that it could be tough with Taiwan. I guess if Taiwan began to veer ever more toward its independence, it would be a huge loss of face for the Chinese government, and this is one of the sources of legitimacy for the Chinese government.

PAUL GIGOT: But Mike, am I not right that this does seem to have backfired on China? I mean you had the EU deciding in the wake of the Taiwan law not to sell arms to China, and now you have Japan really fighting back, if you will, on the case of the demonstrations and saying this is going to have a cost in China-Japanese relationship. Were they surprised, do you think, in Beijing, by the reaction?

MIKE GONZALEZ: This has been a horrible two months for China. It suggests a certain Keystone quality to China's foreign policy. They did not expect, on the Taiwan law, they did not expect what they got at all. They thought that they were just passing a very mild law. And in effect, people have taken notice that China's rise may not be as peaceful as China would like people to believe around the world.

Also, the Europeans were moving inexorably towards lifting the 15-year-old embargo. This is egged on by France. And it's going to become very difficult for France and Brussels to lift this embargo. The Chinese, by the way, are telling people that they realize they made a mistake with Taiwan, that they passed a law at exactly the wrong time and they told this to U.S. officials and to some reporters. With Japan, that was really the straw that broke the camel's back with regard to the Europeans. So yes, I think they're beginning to realize that they've had a very bad two months in terms of their foreign policy.

PAUL GIGOT: Okay Mike. Dan Henninger, what do you think this tells us about China's emergence here as a great power? It's clearly doing so. It's been a success of the United States foreign policy in the last four years or so, at least if you measure it by the lack of any real troubled times. It's been pretty smooth. Suddenly we have this. What does it say about China?

DAN HENNINGER: It says that China is in its adolescent phase, really. Just at the end of the week, they had this flap over the Japanese textbooks with China and the war crimes. And the Japanese prime minister apologized to the Chinese for that. And the Chinese spokesman said something very interesting. He said that's great. He said we welcome the expressing it is one aspect. What is much more important is the action. You have to make it a reality. This is China's problem. They have to show that they want to be part of the world solution and not part of the problem, as Mike has been describing here for us.

PAUL GIGOT: Bret, you have a government which is not democratic. It doesn't have democratic authority therefore, that comes from elections. It has, to rely on other sources, a legitimacy, does it not?

BRET STEPHENS: That's right. The Chinese, ever since the death of Mao and the rise of Deng Xiaoping, the Beijing dictatorship has relied on two strategies. One is nationalism, and the other is prosperity, a form of capitalism.

PAUL GIGOT: Economic growth.

BRET STEPHENS: Economic growth. And these have sort of moved in fits and starts, and often in opposite directions. And now we're going through a kind of bout of nationalism. Now that hasn't been helped by the fact that we're having our own bout of economic nationalism here in the United States. There are three anti-Chinese protectionist bills moving through Congress this month. There is this sentiment that the Chinese have to float their currency or else. The National Association of Manufacturers has been crying foul about subsidized Chinese exports, and they're getting support in Congress.

I should add, most of these bills are sponsored by Democrats. All of them are violations of World Trade Organization rules, which calls into question Democratic fidelity to multi-lateral international institutions.

PAUL GIGOT: Mike Gonzalez, what Bret talks about here in the United States, this effort to confront China on trade, is certainly taking place. What's the reaction there? How are they taking that U.S. new aggressiveness on trade?

MIKE GONZALEZ: Well, it's called China bashing. And not just by China but by the sinologist community. And I don't think they get the nuance. They don't see that it's Congress, oftentimes, as Bret said. These bills are put in by Democrats, or you have the more protectionist side of the Congress, people in the South, in South Carolina, that care about textile interests. So they just think that there is a movement, a ground swell in Washington, to bash China, to contain China. And what they miss a lot is that the policy that's coming from the White House and from the State Department is definitely very sophisticated. They don't get that. They don't get the nuances.

PAUL GIGOT: Now when you say sophisticated, you mean that the United States government right now is now encouraging protectionism in the United States, but it is pushing back some on the security front. Is that what you're talking about when you say sophisticated?

MIKE GONZALEZ: Well, I think that last year, the U.S.-China relations was as good as it had been in a very long time. It is very difficult to accommodate China's rise. And yet I think that the White House has done a fairly good job of just stopping China when it was just being nationalistic, and pushing back, and then trying to engage it and trying to ease its growth as a world trader. And this is I think what we want to do with China.

PAUL GIGOT: Wouldn't trade sanctions have the potential to backfire on the United States? Because so much U.S.-China trade is what we call "intra-company trade." That is, American companies like General Electric farm out manufacturing to China, and then import those goods to sell here? Mike?

MIKE GONZALEZ: Absolutely. I think that also the growth in trade makes China more and more a country ruled by law and not by men. And I think that if we see a rising protectionism, within five years times, or within 10 years time we may be going, as we were in the 1950s, through that question, "Who lost China?"

PAUL GIGOT: Well, what is the complaint you hear most from American businesses in China? What do they most dislike about doing business in that part of the world?

MIKE GONZALEZ: Well, American businessmen want to do business ruled by the rule of law. And China is not quite there yet. Connection Guanxi is what it's called here. Matters for a lot, whom you know. Even when corruption is absent, businessmen have to spend a lot of time talking to village leaders, that shouldn't have any say on a contract or about getting a permit, they have to get to know them, sometimes drink quite heavily with them, and then oftentimes there's corruption involved. And American businessmen don't like losing a case just because somebody's son happens to be on the other side.

A second common complaint that you get is intellectual property theft, obviously. And it is a problem. And it's just property theft. And the American government keeps telling the Chinese they have to get serious about this. And the Chinese say, "Yeah, we will," but they haven't done that quite yet.

PAUL GIGOT: All right, Mike. Thanks so much for joining us from Hong Kong. It sounds like this China story, this emerging power, is going to be with us for a long time. Thank you. Next subject.