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Our Predatory Trading Partners

How Russia and China take advantage.

Aug 9, 2010, Vol. 15, No. 44 • By IRWIN M. STELZER
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And so it seems they are: Foreign investment continues to pour into China, despite last week’s report by the U.S. Chamber of Commerce pointing out the danger to the American economy of China’s rise to a technology superpower in the next decade or so. China’s “indigenous innovation policy,” says the report, is forcing U.S. technology companies “to anguish over balancing today’s profits with tomorrow’s survival.” So far, today’s profits are receiving pride of place.

It may well be that the Chinese have decided that they no longer need American business executives as spokesmen in Washington. These quasi-lobbyists can be replaced with the powerful farm bloc. American farmers’ annual sales to China now total $14 billion, and the United States is running a $1 billion monthly trade surplus with China in the market for agricultural products such as soybeans, cotton, and animal feed. It is not unreasonable to expect that farm-state senators will have a friendlier attitude towards the nation that is enriching their constituents than, say, those from our sclerotic industrial heartland. 

Russia is taking a slightly different path to the same destination. On his recent visit, President Dmitry Medvedev not only shared cheeseburgers in Arlington with President Obama (anti-obesity czar Mrs. Obama was nowhere to be seen) but dangled before the rulers of Silicon Valley the prospect of huge sales in Russia. Bring us your technology, he told the bosses of our leading high-tech firms, and we will welcome you to our country—the land of Mikhail Khodorkovsky (anyone remember Yukos Oil?) and others who have watched as the Russian state snatched the fruits of their labor—either by imposing large, retroactive tax bills or by transferring ownership to friends of Vladimir Putin.

This is a country whose de facto ruler, Putin, was pictured in the New York Times looking sternly across the desk of Vitaly Savelyev, the CEO of Aeroflot, rebuking the executive for buying aircraft from Western companies. “That won’t do,” Putin told Savelyev, who presumably can guess what a firm stare and such an admonition from the former KGB officer means. “There was nothing artificial about the message. .  .  . Russian airlines will be under pressure to buy Russian jets,” reported the Times

Not good news for U.S. and European manufacturers. Or for our military. Sukhoi, the state-created aircraft manufacturer best known for its fighter jets, needs large orders from Aeroflot to increase the viability of its commercial sector, which can then give support to the military end of the business. But this restatement of Russia’s protectionist policies has not deterred Obama from reaffirming his determination to have Russia admitted to the WTO, after President Medvedev promised to end Russia’s ban on the import of American chickens.

So the U.S. trade agenda looks something like this. Led by Cisco, Silicon Valley entrepreneurs have agreed to pour billions in high-tech investment into Russia to reduce its dependence on commodities exports, and to help bring its industries, and presumably its military, up to modern standards. Medvedev is planning an innovation hub at Skolkovo, outside of Moscow, to house laboratories, manufacturing facilities, and apartments for engineers, programmers, and the like. Our entrepreneurs will help. Esther Dyson, chairman of EDventure Holdings and well regarded in high-tech circles, says, “There is a huge amount of creativity in Russia. .  .  . It’s simply not channeled and disciplined.” Putin in particular will savor the notion of disciplined creativity.

Meanwhile, President Obama will help Russia gain entry into the WTO. In return, Russia will import more chickens, but definitely not more aircraft. And it has plans afoot to pour $320 million into subsidies for its wheat farmers, who are taking their share from America in world markets, thanks to the efficiencies produced by the replacement of Russian tractors with American-made machines, according to Kirill Podolsky, CEO of a major Russian wheat exporter.

Trade, in short, is now a matter of national strategy as much as of economics. China and Russia know this. They want American technology for reasons other than improving their trade balances. They want membership in the WTO, which China is already using to its advantage without regard to the reciprocal behavior expected of all members. Russia wants to duplicate that feat while at the same time making sure that the state maintains control of industries it deems of strategic importance.

Lenin, who once said that the capitalists will sell us the rope with which we will hang them, must be smiling up at his successors. While Obama presses hard on his reset button.

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