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Posted Friday, December 14, 2007 10:17 PM

Strait Talk: Fear and Misunderstanding

Jonathan Adams
The U.S. and China are talking past each other. That's abundantly clear from a survey of US and Chinese perceptions released this week by the Committee of 100, an organization of Chinese-American leaders.

The biggest perception gap was on the question "What are your two greatest concerns about U.S.-China relations?" On the U.S. side, the general public and business leaders cited the loss of US jobs to China as #1. For China, the top worry was Taiwan--the self-governed island that China considers part of its territory awaiting reunification, but which the U.S. has pledged to help defend if attacked.

The top concerns reflect largely irrational fears that are being stoked by nationalists in both countries. In fact, recent business and geopolitical trends should be blunting both worries.

Take U.S. hand-wringing over job losses. Several studies have shown that the number of U.S. manufacturing jobs that have gone to China is likely far smaller than China-bashers would have the U.S. public believe (last year the pro-free-trade CATO Institute estimated 150,000 jobs per year
lost to China). Certainly, overall U.S. manufacturing jobs are sharply down, but that's part of a long-term shift toward service sector employment in the U.S. economy (and globally) that's accelerated as better technology allows factories to produce more with fewer workers.

Another reality check: according to one study, China has been losing even more manufacturing jobs than the U.S., due to the downsizing of state-owned enterprises and technological upgrades. CATO cited a 2003 study by Alliance Capital Management LP in New York that found that from 1995 to 2002, China's manufacturing sector workforce shrank 15%, compared to an 11% decline in the U.S. in the same period.

Moreover, labor costs in China are rising--particularly in coastal areas--as the nation grows wealthier and workers demand better compensation. One telltale sign this week: the Taiwan stock market
plunged Thursday in part on news that Taiwan contract manufacturing giant Hon Hai will soon offer permanent contracts to employees at its mainland units who have worked at the company for more than eight years.

That's a preemptive move to comply with new Chinese labor regulations that take effect January 1, and which are widely expected to further boost the labor costs of firms doing business in China. Those rising costs, combined with inflation, are already driving Hon Hai and other firms to expand in lower-cost places like Vietnam.

Then there's China's obsession with Taiwan. It's certainly not surprising (they're constantly bending U.S. officials' ears on the issue). But it reflects paranoid fears about what Taiwan might do, and about what support Taipei politicians would get from the U.S.

In fact, Taiwan is highly unlikely to formally declare independence or make any similar extreme moves -- there's simply no consensus on the island for doing so. Meanwhile, the Chinese should be reassured by recent public U.S. remarks. Washington has been telling Taipei more clearly than ever that it can't necessarily count on U.S. military support if the island is seen as provoking a crisis.

Case in point: Just this week, American Institute in Taiwan chairman Raymond Burghardt repeated U.S. opposition to Taiwan's plan to hold a referendum this March on joining the UN under the name "Taiwan". That bid has sparked perhaps the most blunt public criticism the U.S. has ever made of its island ally. Such tough talk should help put the brakes on any possible adventurism in Taipei, and so stabilize the Strait.
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