A Strained Relationship

Heads first started to turn when the U.S. hiked up its tariffs on tire imports last fall, initiating China’s launch of its antidumping probe into imported American goods and services. ABJ speaks with Kathy Segerson, an expert in environmental and resource economics, to discuss China-America trading and what its environmental impact will be in the future.

In the midst of a recovering global market, the United States re­gards its trading relationship with Asian countries, but particularly with China, to be critical for self-stabilization. Many supporters of this bilateral relationship claim the two have mutual respect for one another, offering the best prospects to maximize shared economic interests—as well as draft their own climate change policies and meet specific targets.

Industry observers are more skeptical, however, and are con­cerned about how the United States is managing its political and strategic interests—not to mention navigate around growing ten­sions over the alleged cyber attack on Google’s operations and antidumping probes into imported American goods on Chinese soil. The trading relationship between the world’s most powerful trading partners is quickly turning sour. Ties are already strained by arguments over the yuan currency’s exchange rate, which U.S. critics say is unfairly low. Some are also worried about trade pro­tectionism and U.S. arms sales to Taiwan.

After world leaders met in Copenhagen last fall, the spotlight is now on China’s manufactur­ing sector and what its environmental and eco­nomic impact will be on the global community. China is growing so fast that it has become the world’s top exporter, as well as surpassed the United States to become the world’s largest pro­ducer of greenhouse gases. Perhaps the ques­tion is no longer whether China is equipped to play a role in combating climate change, but how that role will affect other countries.

Environmental and resources economics expert Kathy Segerson couldn’t agree more. “This is really a key issue that has had implica­tions across the board, in terms of international negotiations on climate change. The question is to what extent are there tradeoffs between de­velopment goals that China might have and the environmental goals of the global community,” Segerson asks. She is the Philip E. Austin Profes­sor of Economics at the University of Connecticut and the President of the Association of Environ­mental and Resource Economists (AERE).

Putting it in context

Historically speaking, relations between the two major trading partners have been characterized by experts as complex and multi-faceted: the U.S. and the People’s Republic of China (PRC) are neither allies nor enemies. At the same time, it is generally acknowledged that the nature of Sino-American relations will be a major factor in deter­mining the state of the world in the 21st century.

The Chinese see their national identity as rich, powerful and united, with centuries of hu­miliation erased and some of its ancient glory restored. On the other hand, Americans see their national goal as bringing freedom and democ­racy. But rampant human rights violations and significant differences in political ideology put a wedge between the two powerful trading part­ners. And so, while there are many irritants in Sino-American relations, there are also several stabilizing factors, including a common enemy—the global efforts to prevent and suppress acts of terrorism.

On the other side of coin, however, experts say there is still a great deal of mistrust of Ameri­can intentions in China, as well as the grudging realization that the United States will likely re­main an equal global power for much of the early 21st century (although a direct challenge to the United States is likely beyond China’s capability for several decades). There is also a realization that most of China’s challenges and difficulties are internal, and therefore there is a desire on the part of China to maintain stable relations with the United States. In other words, there are a lot of politics intertwined in this relationship.

Segerson concurs. “There are a lot of politics. Part of that is because there are different groups that are trying to achieve different things, and ac­complish different goals and objectives, and they weigh the various impacts differently,” explains Segerson. And when it comes to economic suc­cess and the environmental implications, there are distinct differences in the overall approach. “Some groups would be more concerned about the environmental impacts, whereas other peo­ple would be more interested in the impact on the economy,” points out Segerson. Again, it all comes down to priorities.

Manufacturing sector and its environmental tradeoffs

In recent years, China’s manufacturing sector has grown at a steady rate of 8 percent every year and is attracting a large number of foreign investors, including the United States. From the beginning, however, there were concerns in some U.S. sectors over the number of companies who were wooed to China with its enticing tax incen­tives to save money on their manufacturing and operations costs.

With America’s open and transparent trading regime, China has strategically courted several U.S. sectors and, in turn, has seen major invest­ment in China’s manufacturing sector, namely in petrochemical, coal, automobile, pulp and paper, as well as textiles. By offering competitive prices, companies by the thousands have been persuad­ed to manufacture its goods and services over­seas. China’s grip on household items industries, for instance, has increased to about 50 percent of a share in the world-wide camera market, 30 percent for air conditioners, 25 percent for wash­ing machines and 20 percent of refrigerators.

While this surge in growth has created jobs for several hundred million Chinese workers who moved from the countryside to its cities over the last 30 years, the Chinese government has sub­sidized its exporters by pegging the renminbi at an unnaturally low rate to the U.S. dollar, argues Tyler Cowen, a professor of economics at George Mason University in a New York Times article. He argues that “those same subsidies have spurred excess capacity and created a dangerous politi­cal dynamic in which these investments have to be propped up at all costs.”

As China has built up its manufacturing sector with factories and production capacity in pretty well every sector of its economy, the pay­off of these investments are not quite clear. As Cowen argues there is an overall lack of trans­parency when it comes to China’s statistics on its gross domestic product, which has reportedly only recorded its production activity rather than what is actually sold. This sort of ambiguous pro­jection of economic stability may be a red flag of an overheated China.

According to a study of trade data by Stan­dard Chartered, the export production profiles of China’s trading relations with closer neighbors, such as Vietnam and Indonesia, vary significant­ly from China—while those of Thailand and Ma­laysia overlap much more. Meanwhile, in a news report in the Financial Times, HSBC’s China chief economist was quoted as saying “the fig­ures reflect a trend for Chinese imports of Asian manufactured goods to rise as Beijing switches its economic focus from investment to consump­tion in an effort to rebalance its economy. Yet, from electronics and earphones to toys and trin­kets, the Chinese have their eyes on American consumerism as a source of revenue and have successfully embedded themselves into the na­tion’s corporate manufacturing process.”

So what, then, does this boil down to at the end of the day, in terms of the environment and global economy?

Economic trade-offs

Manufacturing is an obvious area of Chinese strength. But it appears that an uneven bal­ance between the China-America trading part­nership has analysts concerned particularly when it comes to its socio-economic and envi­ronmental impact. Climate scientists agree that the cheapest way to combat global warming is to curb carbon dioxide emissions, and economics agree that the cheapest way to do so is by chang­ing emitter’s incentives, either with an emissions tax or permit, writes economics professor Robert Frank of Cornell University in the New York Times.

As we ring in the Chinese New Year in Feb­ruary, the Asian country is not only celebrating its prosperity but also its success in becoming a very powerful trading player, emerging as a leader in the global economy. But what does this mean for the United States, as it struggles to recover from the downturn? “For the U.S., I think this means they must work with the Chi­nese government, because clearly the country will continue to be an important player on the world stage,” tells Segerson point blank, adding the importance of the U.S. government to fur­ther promote both economic and environmental goals early on. “As China grows and becomes a bigger player on the world stage, the hope is that it does so in a way that is beneficial for, ob­viously, its own population, but also good for the global environment as well,” explains Segerson.

Moving forward

Experts say to move forward on this front, the two countries must have an open dialogue about all environmental issues and related tradeoffs—whether it is a cap and trade or emis­sions tax—most especially when it comes to the China’s large manufacturing sector. “Many economists feel that it is very important for an economic perspective to be brought to bear on these [environmental] issues, so governments can better draft policies through identifying, recognizing and assessing the tradeoffs in­volved,” explains Segerson.

But it’s not just about assigning a dollar value to any given resource or an industry’s greenhouse gas emissions. “Because in the context of climate change, it’s true that trying to reduce greenhouse gas emissions may have some environmental benefits but it will also have some costs, so the key is to recognize both; but they don’t have to be commercial or dollar delineated. Many of the environmental benefits are not necessarily measured in dollar terms; they aren’t weighed or manifested in market outcomes but they are equally as im­portant,” points out Segerson. And so it turns out it’s about broadly defining both the benefits and costs to determine the tradeoffs.

“Not to say that you should make a deci­sion based solely on the cost-benefit analysis; rather simply, it’s a recognition of tradeoffs and frank discussion,” she says. So far this sort of balanced analysis is positively reflected by the Obama administration’s approach to its policy making. “I think [the Obama administration] is cognizant of the potential tradeoffs. The impor­tant issue is to try to have policies that reflect both economic and environmental goals,” she says, in terms of China-America relations.

When asked what recommendations should be made to the U.S. decision-makers at the policy level to stay competitive, as well as meet its own environmental goals, she said “the government should continue to look for ways to simulate the economy, while at the same time, reducing environmental by, for example, pro­moting improvements in energy efficiency, and I think that’s what Obama’s administration is trying to do,” she says.

In the future, however, there is the potential for other irritants to upset the fragile Sino-Amer­ican relation. The concept of so-called “environ­mental aid” may very well become the next con­tentious issue among developing countries, and the United States. “On the environmental front, the question of to what extent developed coun­tries will help developing countries with the costs of improving environmental protection—who will pay for those improvements—that’s a contentious issue; for less developed countries there will and has already been an argument made that the international community should pay for or bear much of that cost,” argues Segerson.

But the problem is as China moves into a more affluent position, or as its economy contin­ues to grow, then that argument because a little less persuasive.

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