What Can Beijing Expect From Obama 2.0?

U.S. President Barack Obama’s re-election has made moot the vacuous threat that China would be declared a currency manipulator on day one of the new administration as the Republican challenger Mitt Romney had promised to do had he won. Though China’s senior officials know enough of American presidential campaigns to ignore the shrillest words spoken on the campaign trail (and we may have Harvard University to thank for some of that, according to Bloomberg), Beijing is rarely a big fan of change. It will be happier with the devil it knows. One point of relief all round is that the unpredictability of an early test of a President Romney by Pyongyang will have been avoided. Yet it is worth asking how a second term Obama administration’s policy towards China could change from the first.

That was marked by Washington’s Asian pivot in foreign policy, still seen as a policy of containment of China by a hegemonic U.S. It will not escape Beijing’s notice that Obama’s first post-re-election-victory foreign trip will take in its old ally, Myanmar, which is shaping up as a testing ground of the competing thesis of whether economic reform has to precede political reform, the so-called Beijing consensus, or whether the two can move in lockstep, the Washington view. Yet the relationship between the superpowers is better characterized as increasingly tetchy, particularly over trade, tempered by the reality that they still have to deal with each other on a range of issues where their interests also range from competitive to common.

There was a cautionary note in Beijing’s official congratulations to Obama on his re-election, an expression of hope that the end to the election campaign would put an end to what it called the China-bashing game. That was played louder and more irrationally on the campaign trail by Romney, as is the wont of challengers unencumbered by the reality of office. Obama, as an incumbent, gets to play it for real.

The Obama administration has been ratcheting up the number of complaints about China it has filed to the World Trade Organization (and Beijing has responded in kind, we should note). There was one that is particularly significant to this Bystander’s eye. In September, Washington formally complained to the WTO about what it said were unfair subsidies to China’s auto and auto-parts makers. Obama needed, and got, the American auto workers vote this week. It won for him Ohio, one of half dozen key swing states with large numbers of electoral college votes and where one in eight jobs is tied to the auto industry, and Michigan, home state of Detroit and the Romney family as it happens. The labour vote also won for Obama Wisconsin, home state of Romney’s running mate, Paul Ryan.

One WTO complaint filing doesn’t make a swing, of course. Obama’s bail out of General Motors and Chrysler after the 2008 global financial crisis mattered a great deal more. Oddly, that was a lot less politically popular at the time of 2010’s mid-term elections, in which Obama’s Democrats were pummeled. But we do expect organized labor to be looking for a thank-you for turning that round and rallying to Obama’s cause this time.

We think that will manifest itself as intensifying trade disputes with Beijing, not just over the traditional parts of the car industry, such as tires and auto parts, but also wherever it touches the new technologies for alternative fuels and electric vehicles, solar power being one example of where it is already happening. As the Obama administration has been subsidizing electric vehicle development, that will provide plenty of scope, too, for Beijing to retaliate.

Greater trade friction is also inevitable as recovery of the U.S. economy requires export growth, an avowed Obama goal, and with that acceleration of  bi- and multi-lateral free trade negotiations, a game Beijing is playing, too. The TransPacific Trade Partnership could become a priority project for Obama as he looks to foreign policy in his second term to define his legacy. If there is a silver lining to any of that, it is that the detailed and unglamorous work of trade diplomacy could become a proxy for the security relationship, which then has some room to deteriorate, if it needs to on a rhetorical rather than real basis–and that might be driven as much as anything by internal Chinese politics as Xi Jinping establishes his grip on power with former Presidents Hu and Jiang looking over either shoulder.

There is one piece of change that we know is coming to Washington’s diplomatic front. U.S. Secretary of State Hilary Clinton has said she won’t do a second term in that exhausting office, and her assistant secretary of state for East Asia, Kurt Campbell, is also unlikely to continue. Senator John Kerry and U.N. ambassador Susan Rice are two names being floated as Clinton’s successor. Kerry might be the more welcome in Beijing. Rice would come fresh from the Security Council battles over Iraq and Syria.

Renault Affair Is New Face Of National Rivalry

Is the Chinese auto industry behind the alleged theft of industrial secrets from the French automaker, Renault? Bernard Carayon, the French lawmaker from President Nicolas Sarkozy’s conservative party who heads parliament’s working group on economic intelligence, thinks there is reason to believe so, citing “proven, diverse and reliable” sources. Sarkozy, himself, has reportedly put the French intelligence services on the case. Three Renault executives, reportedly including one of its management committee, are accused to selling proprietary technical information about the engines and batteries for the electric cars on which the carmaker has bet its future to the tune of a $5 billion investment with its partner, Japan’s Nissan. The three executives have been suspended and face legal action, the company says. (Update: Renault said at the weekend that it has lost no critical technical or strategic information, only design and cost details. Via Deutsche Welle.)

Clean technologies in general and electric cars in particular are seen as a market in which Chinese companies can establish leadership. In 2007, a Chinese student on work placement with Valeo, a French clean-technology industrial group, was jailed by a French court for obtaining confidential documents from the company. Valeo now builds the power trains for electric cars it is developing with Beijing Automotive.

China is widely suspected in the West of indulging in widespread state-backed industrial espionage, the dark side of Western multinationals’ private grumbling that Chinese companies are draining them of technology in return for access to the Chinese market. China’s industrial development may be moving long-term from imitation to innovation, but the old habits are dying hard.

What makes that more difficult for multinationals is the way nation states’ expression of hard power is becoming more dependent on economic strength. Rivalry between nations is increasingly being framed in terms of economic competition, trade and investment jockeying, cyberwarfare and corporate espionage. This is happening when the leading, most technologically laden multinationals are becoming more global and less rooted in the nations from which they were born.

There is also a domestic French political dimension to the Renault case. If China’s involvement is established, it is likely to set back Sino-French relations. They hit a low point two years ago when Sarkozy criticized Beijing’s policy on Tibet before President Hu Jintao’s visit to Paris bearing a raft of Chinese buying orders late last year restored the equilibrium. Another downturn would make for a rough year for Sarkozy’ presidency of the G-20. He needs needs Beijing’s cooperation on issues from global governance to climate change for the successful high-energy presidency that is seen as a necessary precursor for his reelection as France’s president in 2012.

China’s Automakers Likely To Cross Taiwan Strait For Parts

Taiwan’s three largest auto parts makers, Tong Yang Industry, TYC Brother Industrial and Depo Auto Parts Industrial, are open to investment from the mainland, Bloomberg reports. China’s car makers would get core design and manufacturing technologies they lack as assemblers and Taiwan’s parts makers would get access to on of the world’s still growing car markets. SAIC and Geely, who have acquired auto technologies in the U.K. and South Korea and Australia respectively, would be the most likely be in the vanguard of investors. Beijing lifted its ban on Taiwan investment on April 29 (see: “First Cross-Strait M&A Deals Struck“); for its part Taipei is considering opening 65 industries to mainland investment.

China Loses Its First WTO Case

China’s appeal against the World Trade Organization’s ruling in July that it was imposing discriminatory taxation on imported U.S. auto parts has failed. The WTO Appellate Body upheld the original ruling that China is violating trade rules by requiring automakers operating there to buy most components from local suppliers or face higher duties. This is the first case China has lost since joining the WTO in  December 2001.

The full report of the WTO’s decision is here (.pdf: and a whopper, 123 pages). A  summary of the findings is here.

Car Parts

While General Motors was making play of its $250 million investment in an R&D plant in Shanghai to develop green auto technologies, China’s auto-parts makers were headed for its home turf.  At the end of last week, some of the leading ones gathered in Detroit for a mini-trade fair to promote Chinese made auto parts. Last year, according to the U.S. Commerce Dept., U.S. manufacturers imported $7 billion worth of Chinese auto parts, up by a third from the previous year. That makes China the U.S.’s second largest auto parts supplier after Mexico.