Reluctant Warriors

Assertive Chinese and job-hungry Americans are gearing up for a trade war across the Pacific. Fortunately, cooler heads will likely prevail.

The United States and China are deeply interdependent, with trade in goods between the two countries reaching a whopping $366 billion in 2009. But a growing number of influential people on both sides find that reality deeply alarming, albeit for different reasons.

In the United States, campaign ads this election season routinely blame trade with China for U.S. job losses. And in China, rising stars like Wang Yang, the Communist Party boss who governs China's booming southern province of Guangdong, fret that China's "traditional model is excessively dependent on international demand." In just the latest sign of this growing tension, the U.S. House of Representatives last month passed legislation seeking to raise the cost to China for its currency policies. All signs at the moment point toward increased trade and financial tension between the world's two economic giants.

A full-fledged trade war between the United States and China would be disastrous; thankfully, it's far from likely. Decision makers on both sides appear to have concluded that their trade disputes can be managed without undermining the entire U.S.-China relationship. Trade conflict is here to stay, but it is fast becoming a "new normal" in relations between Washington and Beijing.

What is fueling this growing tension on trade issues? Unemployment and flat growth in the United States are one part of the story. But four underlying factors are dramatically changing the U.S.-China economic relationship and will ensure that conflicts persist into the future.

First, U.S. and Chinese firms increasingly compete head-to-head because China is moving up the value chain far more quickly and across a wider array of sectors -- from electric vehicles to solar energy to high-speed rail -- than many in the United States once expected. As China seeks both to "indigenize" technology -- not simply rely on technology transfers -- and to compete globally, it is forcing U.S. firms to confront a fast-changing and vastly more competitive landscape.

Chinese firms already offer cutting-edge technology in high-speed rail and are in the hunt for contracts in developed markets such as Australia and California. And U.S. companies that once assumed a grand bargain -- providing U.S. technology in exchange for market access in China -- must now fight Chinese competitors for the same market share.

Many in China, not least Premier Wen Jiabao, argue that China came late to both the industrial and information revolutions, and they are determined to ride the next technological wave. So, China (like other states before it) is using government policy to support its ambitious goals -- for example, favoring domestic companies in government procurement and offering preferential financing to homegrown national champions such as the Commercial Aircraft Corporation of China, which might soon challenge Boeing in the narrow-body passenger jet market.

The bottom line is that U.S. firms face a more vigorous challenge from China. And they are working to meet that challenge in two ways: First, by seeking to move up the value chain faster -- companies like Apple, for example, have upped their game and succeeded, even in places like Japan, which is a wonderland of indigenously produced consumer electronics. And second, U.S.-based multinationals are teaming up with Western diplomats to push back against discriminatory market-access policies in an effort to level the playing field in China. Even though China's undervalued currency preoccupies Congress and smaller manufacturers, U.S. firms complain more often about the business climate in China -- a problem that will not go away even if the currency issue disappears. 

A second trend -- partly a result of intensifying competition -- is that old coalitions that once provided ballast to U.S.-China relations are breaking down.

In China, interest groups divide over nearly every economic issue: Chinese exporters, bankers, and political leaders -- who once coalesced around trade-related issues -- are increasingly at odds. Thus, China's central bank initiated a revaluation of its currency in June despite opposition from China's Ministry of Commerce and export lobbies. Chinese interest groups are split over anti-dumping and protectionist trade measures. And Chinese interest groups are divided, too, about access for foreigners to sensitive sectors, such as Shell's partnership with PetroChina to explore for shale gas in Sichuan province.

Meanwhile, despite the fact that many U.S. companies are deepening their engagement with China, the old political-business coalition that helped Beijing gain permanent normal trading status in the 1990s is fraying. It would likely be impossible to reassemble the alliance that worked to promote closer trade links in the Clinton and early Bush years. And new areas of trade conflict are emerging, such as in clean energy, which might produce new groups of skeptics. Just last week, the United States opened an investigation into Chinese support for clean-energy producers at the urging of the United Steelworkers, prompting a vigorous verbal challenge from China. 

A third trend is the growing tolerance for trade tensions in both Washington and Beijing. This confidence has made both governments less restrained in pursuing trade disputes. But it also means the United States and China have largely separated security issues, such as North Korea and Iran, from the minutiae of Section 301 and 421 filings and market-access disputes. The relationship will not collapse, even in the face of an avalanche of anti-dumping suits, as both governments work to delink the various issues on an increasingly complex bilateral menu.

Beijing, having grown more comfortable with the World Trade Organization's dispute-resolution procedures (and having learned to leverage the system to its own advantage), is now prepared to vigorously fight U.S. suits in many of these areas. It has investigated numerous anti-dumping cases brought by Chinese producers, lent its ear to a proliferation of Chinese business lobbies, and is investigating a countervailing duties case into U.S. subsidies for the Big Three automakers.

Finally, U.S. demands for access to China's 1.3 billion consumers are growing in both scope and intensity, particularly as China's indigenous innovation policies threaten the proprietary technologies of U.S. companies. And demands for market access now flow both ways. A China already resistant to U.S. pressure will become even more so the more Chinese investments in the United States are blocked.

Taken together, these four factors guarantee that U.S.-China trade relations are certain to become more fraught in the months and years ahead.

But U.S.-China relations can probably weather a proliferation of such acrimonious trade disputes, especially if they are channeled through the WTO and other rules-based mechanisms. The bilateral relationship is extremely diverse; both sides have strong incentives not to let trade friction undermine every other form of cooperation. And it's worth noting that virtually no U.S. company plans to flee China -- not even those that stand to lose the most from China's indigenous innovation policies.

Meanwhile, Beijing has two good reasons to keep the overall relationship with Washington on track. For one, China's economy is not yet "decoupled" from America's; China continues to run large trade surpluses with the United States and, because of its own stabilized exchange rate, is bound to U.S. monetary policy as its dollar reserves accumulate. For another, Beijing has more trade and investment options with more countries than ever before; China can now weather conflict with the United States more easily -- thus Beijing need not treat trade conflict with Washington as a strategic threat.

Still, to keep frictions from escalating, both sides must make sure they stick as much as possible to WTO and rules-based mechanisms for resolving their differences, avoiding purely punitive actions not linked to specific commercial grievances.

The likely course for the United States probably involves pursuing a mix of anti-dumping and countervailing duties cases -- and continuing to search for a more systemic remedy to press, persuade, and sometimes coerce China to level its playing field.

That will produce very real tensions. But rules-based spats, though contentious, will not likely result in underlying strategic conflict. Indeed, the essential strategic reality of Asia today is this: China is fast becoming the central player in a new economic regionalism, but Asian countries are deepening defense and political coordination with the United States as a hedge against Beijing's growing strategic weight.

For that reason, military and political disputes (think standoffs in the South China Sea, or over Taiwan) are more likely to decisively destabilize U.S.-China relations. The business of both China and the United States is business. And both plan to keep doing a lot more of it with one another.



Telling Secrets

WikiLeaks isn't the problem. It's reams of unnecessarily classified documents that remain hidden from the public eye by overzealous intelligence officials. And the Obama administration's fixes don't go far enough.

Washington is bracing for another Wikileaks document dump later this week and the Pentagon is urging reporters not to publish the secret files from the Iraq war -- once again, the conversation has turned to whether or not there's a danger in releasing this information. But in a city full of fractious disagreements, there is one issue that nearly everyone in Washington agrees on: The overclassification of information in the name of national security has run amok. We need "effective measures to address the problem of overclassification," President Barack Obama stated last year. "We do overclassify," affirmed Director of National Intelligence James R. Clapper Jr. at his confirmation hearing this summer. "We can be a lot more liberal, I think, about declassifying, and we should be," he added.

Excessive government secrecy is an evergreen concern -- as far back as 1956, a Defense Department study complained that overclassification had "reached serious proportions." This problem has serious ramifications throughout the vast national security bureaucracy. It impedes the flow of information across agency boundaries, obstructs the feedback mechanisms that keep policies and programs on track, conceals error and incompetence, undermines oversight and accountability, and fosters public ignorance on vital matters of national security and foreign policy.

Given the severity of this problem and the seemingly bipartisan will to devise a solution, it seems fitting that Congress passed -- and the president signed into law on Oct. 7 -- a set of remedial measures called the Reducing Over-Classification Act.

The new law mandates, among other things, that classifiers receive formal training in the proper use of classification, enlists agency inspectors general in overseeing the classification system, encourages the release of unclassified versions of certain intelligence, and creates a new position at the Department of Homeland Security to assist state and local officials in accessing information.

Facing a problem so deeply entrenched in the U.S. government, will the new act make any tangible difference? Forget eliminating the problem completely -- will it even "reduce" overclassification, as its title modestly proclaims?

It almost certainly will. There is a real need for training in the proper exercise of classification authority, as the law requires, because tens of thousands of people currently implement classification procedures with minimal supervision. And by tasking inspectors general to participate in oversight of the classification system, it will multiply the number of sharp eyes on what material is classified several times over. In fact, each provision in the act is useful, and none seems likely to do any harm. Its passage is a notable achievement in a policy field that is littered with failed proposals.

Nevertheless, the new law also has profound shortcomings that illustrate the depth and complexity of this problem.

The law's fundamental flaw lies in the fact that it does not define "overclassification." Because it does not provide any criteria for identifying the problem, it cannot meaningfully inform the training or oversight that is supposed to reduce it. Providing such a definition is intrinsically difficult because it involves practical judgments about the requirements of national security and also raises politically delicate questions about legislating the boundaries of executive authority. But without clear definitions, the ensuing policy is unavoidably vague, if not altogether toothless.

In practice, the term "overclassification" is used in two distinct ways. Of course, it refers to information that should be unclassified and publicly available, but is kept secret. But the term is also used more narrowly to refer to information that is classified at too high a level, thereby impeding sharing within the U.S. government. At a lower classification, it would still be classified -- and withheld from public disclosure -- but it would no longer be "overclassified."

The act blurs this distinction, but its provisions will do more to promote information sharing among authorized persons than force the public disclosure of wrongly classified information. This law isn't going to trigger a new wave of declassification.

To the contrary, the act actually tends to reinforce the status quo in significant ways. In particular, it embraces the president's executive order on classified national security information as the reigning standard of proper classification. In effect, the classification system is whatever the president says it is. So under the act, classifiers will be trained in the correct application of the president's policy, and oversight will consist of verifying that the executive order was implemented correctly.

What this means is that the law does not contemplate the possibility that the president's classification policy could be wrong! If the executive order is being faithfully implemented, then as far as the act is concerned, all must be well by definition.

But this leaves the roots of overclassification untouched. Agency officials often make absurd, erroneous, or self-serving classification judgments -- and not just because they lack training or supervision. For example, ever since 2007, the Office of the Director of National Intelligence (ODNI) has publicly disclosed the total budget for the National Intelligence Program. But last year, when I asked for the size of the 2006 budget, ODNI's staff asserted that the 2006 figure is still classified and would damage national security if disclosed. This is self-evidently ridiculous and reflects the widespread inability of classifiers to re-evaluate past practices in the light of new circumstances.

The new act provides no mechanism for correcting overclassification of this kind. For that, a different approach will be needed.

As it happens, the Obama administration has recently initiated one such approach to correcting classification errors. The president's executive order, which took effect last June, established a procedure called the "fundamental classification guidance review," and it requires every agency to start reviewing all its current classification guidelines in order "to identify classified information that no longer requires protection and can be declassified." Not only that, but a directive states that the review is supposed to involve "the broadest possible range of perspectives" to validate classification policies and eliminate obsolete classification requirements.

The success of this review process, to be completed by mid-2012, is not guaranteed. It might be implemented perfunctorily, halfheartedly, or perhaps not at all -- despite the presidential order. And if, for example, items such as the 2006 intelligence budget total remain classified at that point, we will know it was a failure. But the review represents a novel attempt to systematically challenge and adjust the inherited classification judgments that are the legacy of a now distant past.

Beyond mere adjustments and corrections to the status quo, Obama has also raised the possibility of designing "a more fundamental transformation of the security classification system." But this notion has not yet been given any substance.

To point out the limitations of the new act is not to devalue it. Others, such as the late Sen. Daniel P. Moynihan, who proposed to legislate a statutory foundation for classification, have aimed higher and ended up achieving less. But the incremental progress represented by this law is a reminder that, when it comes to addressing the problem of overclassification, much remains to be done.

Secrecy in matters of national security is easily mistaken for security itself. But they are not the same thing, and sometimes they are opposites. This is particularly true when secrecy corrupts the policy process, diverts resources into bottomless black holes, and leads the country where it would never have voluntarily chosen to go. Reducing secrecy to a minimum is simply good democratic hygiene.

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