Copyright (c) 2005, 
Dow Jones & Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.China has a new calling card: champion of free trade.
Since March, Beijing has opened free-trade talks with South Korea, Pakistan, Australia and Iceland. In November, it inked deals with Thailand, Malaysia and eight other Southeast Asian countries. Even though China's government still controls large swaths of the country's economy, it has sealed or is seeking free-trade pacts with 25 countries -- up from zero two years ago.
China's pursuit of trade deals, combined with a flurry of big-ticket bids for energy and other assets, underscores its desire to don the uniform of a great power. Having created a credible army and a booming economy, China is positioning itself as a leader of global trade and investment, rivaling the U.S. in one of its traditional spheres of influence. As a result, China's market clout is making it a rallying point for countries looking for a counterweight to the world's lone superpower.
All this is raising alarms within the Bush administration, whose own trade agenda has lost momentum amid rising protectionism in Congress. A U.S. trade deal with five Central American countries squeaked through Congress by two votes this summer after months of Republican arm twisting. In particular, Washington is fretting over China's courting of countries on the outs with the U.S., including Venezuela, Cuba, Sudan and Uzbekistan.
"China's involvement with troublesome states indicates at best a blindness to consequences and at worst something more ominous," U.S. Deputy Secretary of State Robert Zoellick said in a speech in New York last month. He said China's new prominence has stirred "a cauldron of anxiety."
Chinese officials say they are not trying to rival the U.S. or stir trouble. Beijing's trade and investment agenda, they say, is designed to support an economy dependant on exports that also has a thirst for energy and raw materials. In addition, for decades, U.S. presidents have urged China to join the international economy and to take its rightful place on the diplomatic stage.
"Ironically, now our teachers are getting worried because we, the students, followed your advice so faithfully and became so successful," said Long Yongtu, a former deputy trade minister who led China into the World Trade Organization, in a May speech to the Institute for International Economics in Washington, D.C. "As the students, we believe that our teachers should not be worried about that."
China's own economy still remains relatively closed. It doesn't allow a free flow of capital, restricts foreign stakes in key sectors, such as autos, telecommunications and banking, and restrains its population's movements. But in the narrower sphere of international trade, its alacrity in signing trade deals is making the U.S. appear sluggish.
China took just two years to strike a pact with 10 Southeast Asian countries. The agreement whittles import tariffs on commodities such as fruits and vegetables to zero by 2010. During the same period, in the Asian arena, Washington inked one 1,200-page deal with Singapore. Talks with Thailand have been halting and likely won't wrap up until 2006 at the earliest. Efforts to get negotiations under way with South Korea continue to falter amid misgivings in Seoul.
One reason for the slowdown, say trade experts, is that U.S. negotiators are forced to load up agreements with environmental and labor conditions to help them pass through Congress. They also have to try to protect sensitive U.S. markets by maintaining tariffs or quotas. China generally eschews such niceties.
"The U.S. is losing the competition for influence in Southeast Asia," said Singapore's ambassador at large, Tommy Koh, in remarks late last year that echoed around the region. "The winner, at least for the time being, is the People's Republic of China." Mr. Koh, speaking at a forum sponsored by the San Francisco-based Asia Foundation, offered the Bush administration a pointed bit of advice: "Resist new protectionist measures" and stand firm by America's "longstanding policy of free trade and open investment."
Bush officials argue that U.S. trade deals are much trickier propositions to negotiate than those sought by China. In the Thai negotiations, for example, U.S. companies want access to Thailand's telecom and banking sectors even though American sugar growers and truck makers are reluctant to reciprocate with their own concessions. China's objectives, on the other hand, meshed neatly with those of South Asia's countries: lower barriers on farm and manufactured goods with few strings attached.
Beijing can now claim an unusual roster of friendly countries: North and South Korea, Iran and Iraq, Pakistan and India. It is also getting closer to traditional American allies such as Australia and Canada. Canada and China have held months of discussions about Chinese participation in developing the vast oil sands of Alberta and other energy-related projects.
Talking trade, and little else, has assured Chinese President Hu Jintao a warm welcome around the world. Beijing began negotiating a free-trade agreement with Australia in May and Australia's usually prickly parliament gave Mr. Hu a standing ovation in late 2003. "We are ready to be your long-term and stable cooperation partner, dedicated to closer cooperation based on equality and mutual benefit," the Chinese president told legislators. President George W. Bush was heckled the day before addressing the same body with a speech largely focused on terrorism and the war in Iraq.
Chen Yonglin, a recent defector from the Chinese consulate in Sydney, Australia, told a congressional panel in July that China sees trade as a way to drive a wedge between Australia and the U.S. He said China also wants Australian help to marginalize local chapters of Falun Gong, a religious group outlawed in China.
Beijing agreed to buy Australian liquid-natural gas "to obtain both Australia's natural resources and its political compromises," said Mr. Chen.
U.S. officials, meanwhile, tick off a lengthening list of examples where China has wooed tainted leaders for commercial gain. For example, Uzbek President Islam Karimov received a red-carpet welcome in Beijing in late May, just 12 days after his troops killed hundreds of protestors in a town square in eastern Uzbekistan. The Uzbek government contends that Islamic militants sparked the unrest and that 187 people were killed, including government security forces. The U.S. and its North Atlantic Treaty Organization allies called for an international inquiry, but Chinese leaders greeted the Uzbek leader as a "reliable friend."
During his visit, Mr. Karimov inked a $600 million deal giving China National Petroleum Corp., a state-owned giant, access to 23 Uzbek oil fields.
Mr. Zoellick, the U.S. deputy secretary of state, says in an interview he quizzed China's top diplomats on this issue when he was in Beijing in August, asking them: "What advantage do you really gain over time if you are associated with genocide and guys who are running their countries into the ground?"
Mr. Zoellick says the U.S. welcomes China's participation in international markets, as long as it isn't to the exclusion of the U.S. Another message he says he delivered: If China hoped to use its trade leverage "to push the U.S. out, they would get a counter reaction."
Throughout history, China has veered between embracing and rejecting international trade. In the early-to-mid 19th century, Britain and other imperial powers pried open the country's doors in a struggle that culminated in the Opium Wars. The Communists who took power in 1949 strived for self-sufficiency and turned the country's gaze inward. Only in 1978 did Chinese leader Deng Xiaoping decide to open the economy to foreign investment to fuel export growth. In the 1980s, China cultivated ties with Western countries through deals to modernize telecommunications, energy production and auto manufacturing. Trade has underpinned China's economic rise.
Even before China's re-emergence on the international scene, the blending of economic and diplomatic interests was a tool of statecraft. In 1972, for example, the year of President Richard Nixon's historic visit to China, Beijing bought 10 Boeing 707s.
But China's booming growth in the past few years has created a new set of challenges. The nation's demand for oil, gas, iron ore, copper and aluminum has strained domestic supplies and bid up global prices. A middle class has developed a taste for foreign goods. Ambitious Chinese companies have headed overseas and discovered receptive markets.
As a result, Mr. Hu launched an "economic diplomacy" campaign soon after he became China's leader in 2003. The idea, which had been percolating in Beijing for several years, was to use China's economic allure to cement friendships abroad. That would have the added benefit of suggesting that China doesn't pose a long-term threat to Asia's stability, despite, for example, its coveting of Taiwan.
In summer 2004, Mr. Hu met with China's ambassadors to determine how the strategy should be applied to developing countries. During the Cold War, China was a leader of the Nonaligned Movement, an association of countries largely set up as an alternative to the U.S. and Soviet blocs. China, which retained these ties, has seen its clout among developing countries soar in recent years, especially within bodies like the United Nations and the World Trade Organization. Many see China as a potential bulwark against U.S. hegemony.
In South America, Venezuelan leader Hugo Chavez is touting his China strategy, playing Beijing against Washington using his country's oil riches as leverage. Likewise, Zimbabwe's embattled leader Robert Mugabe has trumpeted his strong ties to Beijing as his "eastern strategy."
"There's a lot of goodwill for China," says Christopher Mutsvangwa, Zimbabwe's ambassador in Beijing, who recalls firing Chinese-made AK- 47s as a guerrilla soldier in the 1970s.
A year ago, China's Ministry of Commerce issued new guidelines for Chinese companies investing overseas. They included a list of 135 countries, mostly in Africa and Asia, where China's central government doesn't need to approve new investments. Among the exceptions: the U.S., Japan and the United Kingdom.
To smooth the way for trade and investment, China is dropping barriers to its own market and pressing other countries to do the same. Over the past 13 years, China has slashed average import tariffs to 9.9% from 43.2% in 1992. That has spurred imports: 60% of China's sales overseas are made from imported materials.
"Countries don't need to fear China's rise," argues Zhou Yongsheng, a foreign-policy analyst in Beijing and the author of a book on Chinese economic diplomacy. "Our rise benefits many, especially American companies."
China critics in Congress and within U.S. industry accuse Beijing of cheating the trade system. Chinese companies, for example, export many knock-off versions of Western brand-name goods. In recent months, U.S. officials have also taken aim at China's management of its currency system, saying the Chinese yuan is pinned at a level that allows the country to sell goods overseas at an artificially low price. In July, China slightly widened the band in which its currency trades.
Concern that the U.S. may be losing influence in Asia is now widespread within the U.S. government. Late last year, China endorsed holding a 13-country East Asia Summit that wouldn't include the U.S. The proposal sparked a flurry of communiques between the State Department and embassies in Asia, although U.S. officials now maintain that the forum isn't a big deal. The first such event, which will include Australia and New Zealand, is set for December in Malaysia.
China has also been scoring diplomatic and economic victories in Central Asia, a region rich in oil and home to several American military bases. In addition to its recent deals in Uzbekistan, China recently signed several oil-exploration deals with Kazakhstan, part of a campaign to increase its access to oil. Beijing is also funding construction of a $248 million port in the obscure Pakistani fishing village of Gwadar, which opens onto the Arabian Sea and is positioned to feed China with gas and oil from Central Asia and the Middle East.
Administration officials say they suspect that China, along with Russia, would love to see the U.S. out of Central Asia. China has worked hard in recent months to make the Shanghai Cooperation Organization, a regional group founded in 2001 to combat terrorism in Central Asia, a more aggressive outfit.
In July, the group demanded that the U.S. put down a timetable for withdrawing from air bases in the area. Weeks later, amid a spat with Washington over his recent military crackdown, Uzbekistan President Mr. Karimov, gave the Pentagon an eviction notice for the Khanabad air base. It's a key supply point for the U.S. military in Afghanistan.
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