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The following post was co-authored by Shawn Lesser (Watershed Capital Group) and me and appeared initially on the Cleantechies blog:

A number of the cleantech efforts between the United States and China reflect the need for cooperation on issues surrounding climate change and clean energy as it is a major factor in the relations of these two countries. Although there are still issues to resolve in many of the collaborations, it is believed that if the United States and China can continue in their cleantech collaborations, that it will show the world that two major players on the international platform are serious about combating the challenge of climate change, and it will also encourage other countries to create alliances. Through collaboration, the two largest greenhouse gas emitters will be able to create technologies required to combat climate change. Not only that, but tangible benefits will be developed, not just for the United States and China, but the world as a whole.

1) United States – China Ten Year Framework for Cooperation on Energy and Environment was established in 2008, and it “facilitates the exchange of information and best practices to foster innovation and develop solutions to the pressing environment and energy challenges both countries face.” It also led to the creation of “EcoPartnerships” – a way to encourage both United States and Chinese stakeholders to strengthen their commitment to sustainable economic development within the local level.

2) United States – China Clean Energy Research Center (CERC) has its main headquarters in both countries. It will facilitate research and development of technology by a team of leading scientists and engineers in the clean technology industry. The research center receives both private and public funding which is split evenly for each country. The initial research priorities of the United States – China Clean Energy Research Center includes building energy efficiency, clean vehicles, and clean coal, which includes carbon capture and storage. It was founded in 2009 by United States President Barak Obama and Chinese President Hu Jintao. The goal of the research center is to “build a foundation of knowledge, technologies, human capabilities, and relationships in mutually beneficial areas that will position the United States and China for a future with very low energy intensity and highly efficient multi-family residential and commercial buildings.”

3) United States – China Energy-Efficient Buildings (CERC-EEB) Action Plan enables the United States and China to work alongside the private sector in an effort to develop energy efficient rating systems and building codes, benchmark industry energy efficiency, provide training to building inspectors as well as energy efficiency auditors at industrial facilities, synchronize test procedures and performance metrics for consumer products that are energy efficient, exchange energy efficient labeling systems best practices, and assemble a new annual United States – China Energy Efficiency Forum. The action plan will be achieved through green building and communities, industrial energy efficiency, consumer products standards, advanced energy efficiency technology, and public and private engagement.

4) United States – China Electric Vehicles (CERC-EV) Initiative builds upon the previous United States – China Electric Vehicle Forum which was held in 2009. The initiative comes from the shared interest in increasing the utilization of electric vehicles to decrease oil dependence and greenhouse gas emissions, while promoting viable economic growth. This initiative includes a joint standard in development, demonstration projects in multiple cities in each country, technical road mapping, as well as projects to provide the public with more information.

5) 21st Century Coal Program (CERC-ACTV) promotes a cleaner use of coal resources, such as large-scale carbon capture and storage projects. The program calls for collaboration between a number of companies in the United States, including General Electric, AES, and Peabody Energy, which will be working with a number of Chinese companies to develop an integrated gasification combined cycle power plants, methane capture, as well as a number of other technologies.

6) China Greentech Initiative was founded in 2008 and has rapidly grown to become the only China-international collaboration platform of 100+ organizations, focused on identifying, developing and promoting green technology solutions in China. CGTI released its first free public deliverable, The China Greentech Report at the World Economic Forum in Dalian, China in 2009. With over 50,000 copies in use, the report is commonly referred to as the ‘primer’ by which to understand China’s greentech markets.

7) United States Alliances in Chinese Cleantech Industry includes the availability of a number of United States cleantech companies to invest into the Chinese cleantech industry. Currently, many companies from the United States are finding opportunities through alliances and cleantech and capital technology transfer investments. This leads to an increase in opportunities to assist cleantech into becoming one of the largest industries on a global platform. There has been much in the way of cross-border collaboration in many cleantech sectors, including solar and wind generation, water technologies, smart grid infrastructures, and electric transportation.

8 ) United States – China Renewable Energy Partnership develops roadmaps for widespread and continual renewable energy research, development and deployment in the United States and China, including renewable energy road mapping, regional deployment solutions, grid modernization, advanced renewable energy technology research and development collaboration in advanced biofuels, wind, and solar technologies, and public-private engagement to promote renewable energy and expand bilateral trade and investment via a new United States – China Renewable Energy Forum held annually. In connection with the U.S.-China Renewable Energy Partnership, another important area of U.S.-China cooperation is the Shale Gas Initiative.

9) United States – China Energy Cooperation Program describes itself as the only non-governmental organization that focuses on the United States – China business development within the clean energy sector. The partnership’s purpose is to “promote commercially viable project development work in clean energy and energy efficiency, and support the sustainable development of the energy sectors in both countries.” It was founded in Beijing in 2009, initiative by the United States commercial sector, and provides a vehicle allowing companies from both countries to work together and pursue clean sector market opportunities, address any trade impediments, and increase sustainable development.

10) Key U.S.-China Regional Cooperation Initiatives. An important layer of ‘connectivity’ in the U.S.-China clean energy business landscape is provided by long-standing, regionally-based cooperative initiatives. Top among these are the U.S.-China Green Energy Council (based in the Bay Area), the U.S.-China Clean Energy Forum (based in Greater Seattle with a Washington DC presence), and the Joint U.S.-China Cooperation on Clean Energy (based in Beijing, Shanghai and Washington DC).

Article by Shawn Lesser & Terry Cooke.

Shawn is president and founder of Atlanta-based Sustainable World Capital, which is focused on fund-raising for private equity cleantech/sustainable funds, as well as private cleantech companies and M&A. He is also a co- founder of the Global Cleantech Cluster Association (GCCA), and can be reached at

Terry Cooke is Strategic Advisor for Global Partnerships for the Global Cleantech Cluster Association (GCCA).  He is also a 2010 Public Policy Scholar on U.S.-China Clean Energy at the Woodrow Wilson Center and author of the forthcoming Sustaining U.S.-China Clean Energy Cooperation being published by the Kissinger Institute of the Wooldrow Wilson Center.   His website is .

There’s a curious disconnect in discussions about China’s ability to innovate. Yes, there’s no question that China lacks the chemistry to produce tomorrow’s Google — rigid educational system, lack of intellectual property rights protection, constricted flow of ideas, top-down control of ‘right thinking,’ etc. But what tends to get overlooked in this discussion is China’s headlong embrace of the future, the attitudinal openness to change. It perhaps took the searing experience of the Cultural Revolution to burn into the consciousness of present-day China where never to return and thereby to point the way to where to head — a modern and global future. We should be able to respect China’s focus on the future and, in doing so, avoid getting too comfortable in our present.

This article by James Allworth at at the Forum for Growth and Innovation at Harvard Business School puts this issue into clear perspective.

How the U.S. Could Avoid Being Disrupted by China by James Allworth, Harvard Business Review, 1:12 PM Tuesday December 21, 2010,

Last week, President Obama met with the CEOs of 20 of the largest corporations in the U.S. It was a widely praised meeting. But given what the President is hoping to achieve — creating sustained economic growth, which in turn leads to jobs — listening to much of what these guys have to say is the wrong approach. And asking them to start hiring misses the point. Obama is talking to the wrong people.
The U.S.’s position as a global economic leader has been based on one thing more than anything else: its ability to innovate. From Detroit to Silicon Valley, America has always been at the center of the “next big thing”. Each of the industries that have sprung up around these innovations has become an engine for America’s economic growth. Amazingly, each time as one has begun to slow down, the next one has picked up.
But this cycle is being jeopardized… [and in danger of] falling into the trap that leads to disruption — the same one that snares executives in many successful companies. Just as talented corporate leaders gradually shift their focus further and further upmarket in service of their best customers, the U.S.’s political leadership is increasingly doing that, too, by catering to the largest American companies… These are companies at their zenith. They have been through periods of exponential growth, but now they’re mature. America’s economic future is not dependent on the companies that are peaking now; the future is going to depend on the companies and industries that will peak in ten or 20 years time from now, the companies that are about to go through a period of break-out growth.
Unlike the startups that represent America’s future, the big players have an inherent bias toward protecting the status quo. They play a defensive game and face a different set of issues to their smaller brethren; fixing these issues is their priority when talking to politicians. The problem with this is that America’s economic competitiveness has always been built upon its ability to disrupt what it already has with something better. That’s a game played by smaller — not larger — companies.
Tilting the power balance in favor of large companies changes America’s winning formula. Here are just a few examples of where the big players and their undue influence in the political process have hurt America’s competitiveness, particularly relative to the U.S.’s emerging economic competitor, China:

• Big oil and big coal have stymied the growth of green energy within the U.S. Their lobbying and advertising have made it practically impossible to form political consensus. Putting aside the debate about the science, if the rest of the world believes global warming is real and is committed to stopping it, they’re going to want to get clean energy from somewhere. Right now, that’s not going to be the U.S. — it’s going to be China. What should be even more concerning to the U.S. is that while it remains too early to call, the green revolution looks like it’s going to be “the next big thing”, and the U.S. is set to miss out.

• The builders of every technical revolution — engineers — are being turned out at incredible rate in China. Compare the Chinese government’s attitude to that of the U.S. government. American politicians (at the behest of big content businesses) have tied federal funding of universities to anti-piracy efforts on campus. Do you think it makes sense to tie a country’s ability to innovate to protecting a business model that’s in the process of being disrupted?

• Intellectual property protections — frequently cited by big companies as being critical to innovation — are lacking in China. Ironically, this lack of IP is making China a more innovation-rich environment. The reason? The only protection you get in China is being able to innovate at such a rate that nobody else can catch you. Compare this to the U.S., where you create your IP and then rely on the legal system to keep your competitors at bay. This approach doesn’t work if your competitor doesn’t respect your IP laws. Further compounding the issue for America is that its current system strongly favors the big players. If a startup becomes a threat to a large company, then a common tactic is to rely on a long, drawn-out IP infringement lawsuit. Most startups don’t have the resources to fight back.

Over the past 20 years, America has gotten away with this shift in attitude, simply because it has had no competition. China changes that. The Chinese are determined to become a global hub for innovation, so America will have to compete to be the best environment in which to create the “next big thing” If the U.S. doesn’t want to lose its position and threaten its future prosperity, it’s going to need go back to its roots. The starting point is getting our political leaders to stop talking to the CEOs of large corporations and talk to entrepreneurs instead.

James Allworth is a Fellow at the Forum for Growth and Innovation at Harvard Business School.
Find the complete article at

I wrote around to some contacts yesterday including a link to this article by Thomas M. Hout and Pankaj Ghemawat in the current issue of Harvard Business Review. 

China vs the World: Whose Technology Is It? – Harvard Business Review

Emon Wang, a partner at Spirea Capital, wrote back with some insight of his own:

“Interesting and impressive… maybe the best English article on this topic I read this year.

However, as a native Chinese who works in cross-border deals in cleantech from Europe I`d like to add some words:

– The relationship between Beijing and local governments are very complicated and subtle. For foreign players, knowing how to play with both side is critical. Tip for beginners: it`s practical to make friend first with local governments.

– Instead of complaining, in order to maintain competitive power, foreigners might spend more time and money on R&D at home, to ensure a leading position and be one step head of China and other emerging powers. Without continuous innovation, being caught up on is only a matter of time. VW shared its technology with China for so many years and is still the No.1 seller in the country, a hell of money they have made and I don`t think they lose any of their core technology strength. IMHO, if your stuff can be easily copied, then it makes theoretically no sense to over-protect it and increase the cost of simple technology artificially.

– What China lacks is exactly the ground of technology innovation and R&D competence. Not the available technology itself. Consider the growing number of high-educated Chinese both domestically and oversea, the next generation needs the infrastructure. The government is now building this up.

– Technology in exchange for market is a fair trade. No one is forced to share his technology (take Google for example, you can quit if you want). On the micro level it`s about greed. On the political level it`s about p/l and jobs at these multinational corporations. And it`s about negotiation. If you did your homework badly and made too many enemies, you can`t expect a good deal.

– All in all, if you really understand the Chinese history, you will understand why own technology competence is so important in the culture. It`s not about taking profit from the foreign corporation or about a technology war whatsoever.”

Tim Giesecke, author of the forthcoming EcoCommerce 101, made the following comment and asked for some clarification from me on Emon’s last paragraph.

Tim’s comment:  “Perhaps the timeline is the most telling – China becomes the #1 economy in 500 AD – looses the title in 1850AD – poised to regain it soon. We Americans will need to recognize asap that we can sit and be entertained, but not all the time.”

Tim’s question:  “If you can help me tie the ends of the last paragraph – technology competence is so important in the culture…is it to prevent themselves of becoming vulnerable to market forces, negoiations?”

My attempt at clarification:  “There’s a tactical level that has to do with negotiations (Sun Tzu’s Art of War and all that) but it is mostly a culturally-patterned value deeply embedded in Chinese (read ’embedded in the Han majority’ comprising 95% of the Chinese population) as a result of centuries of real and perceived humiliation on the global stage after centuries of preeminence. They don’t want to ever go back to that historical place of weakness and technology is their ladder out.”

Economists like to tell some jokes about trying to discern the
future – It is very difficult to forecast, especially about the
future. He who lives by the crystal ball soon learns to eat ground
glass. Jokes aside, the current business landscape is increasingly
complex and rapidly changing. A serious look at the future is essential.

First, before you look at future trends, you should enhance your trend watching skills. Thanks to TrendWatching (a great site –visit it for a further description of these tips, sign up for their newsletter) here are some tips –

  • Know why you are tracking trends
  • Make sure you acquire a point of view about the world around you.
    The more trends you spot and track, and the more skilled you are at
    putting these trends into context, the more guidance you’ll have.

  • Celebrate the incredible wealth of trend resources at your fingertips, many of them free or dirt cheap! (Yes indeed, more on this below)
  • Have a Trend Framework: basically a long list of all the trends we’ve spotted over the years.
  • Every company should have its own Trend Group. Even if that “group”
    is just you. The Trend Group is not some multimillion dollar/euro/pound
    affair. It doesn’t have to employ a dozen staff (though that would be
    nice ;-). It’s more a state of mind. It can be low-cost, unauthorized
    and grass roots if need be. Don’t wait for permission, make the Trend
    Group a fait accompli.

Ok, now let’s look at some trends. The first list is from Ernst & Young’s 2009 Global Megatrends

For a comprehensive discussion of these trends visit E&Y’s
website. This is one of the best resources on future business trends.

Asia’s Economy:                                               

Challenge and Opportunity for the Obama Administration

by Terry Cooke (www,

February 2009

Terry Cooke is a Senior Fellow at FPRI and the principal director of GC3 Strategy, Inc., an international consultancy specializing in sustainability-related technologies and capital linkages between Asia and the U.S. Previously, Dr. Cooke was Director of Asian Partnership Development for the Geneva-based  World Economic Forum. He has advised the Lauder Institute on global business outreach as a member of the University of Pennsylvania’s Wharton School’s Department of Management.  Dr. Cooke was a career-member of the U.S. Senior Foreign Service, with postings in Taipei, Berlin, Tokyo and Shanghai. This Enote is one in a series concerning Asia policy for the new administration.

The Obama administration faces a changed world. As a precarious economy and a global economic crisis have risen to the top of the U.S. security threat list, Asia’s geopolitical significance is looming larger. In adapting economic policy towards Asia under these conditions, the new administration must also confront the loss of U.S. reputation and influence that the financial crisis has entailed. It must communicate the causes and consequences of the crisis to the public and address them in policy. It has to take responsibility for U.S. policy failures while maintaining firmness where required of our Asian partners and reaffirming the basis of our enduring engagement with the region.

For the first time since Asia’s modernization, both the West and Asia are together falling headlong towards economic stagnation and deflation. More than a half-century of interdependent growth is now over, as the U.S. and Asia find their economies roped together and sliding precipitously downward.

The current crisis has its origin in a quarter-century of global trade growth which, particularly across the Pacific, has far outstripped global output growth. With the World Bank anticipating a drop of 2.1 percent in world trade in 2009 following this unprecedented 27-year boom, the rapid expansion of international trade has given rise to imbalances that are now threatening the global system.

Early Signs

The earliest signs of the current financial crisis appeared in late 2007 in the U.S. subprime credit markets. At the outset, observers tended to see this problem as an American problem. Asia was reassured by the thought that its economies, following decades of strong regional growth, had effectively “decoupled” from Western markets. While Asian markets were, with the exception of Japan, smaller in absolute size than counterpart economies in the West, they had been enjoying steady and high growth rates and seemed to be developing strong intraregional demand. The region, so the thinking went, would be inoculated against any economic flu afflicting the West. This hope was bolstered by Asia’s experience coming through the 1997-98 Asian Financial Crisis.

But throughout 2008, it became increasingly clear that Asia would not be a safe haven in the spreading crisis. Some of Asia’s highly touted emerging economies now verge on being “submerged.” While a drop of projected output from high single-digits to low single-digits might seem good news compared with the negative growth projected for the U.S. and other advanced economies, the ability of Asian countries to withstand the social and political effects of slower growth is open to question. Taiwan’s exports were down 44 percent in January from the prior year. Korea is currently experiencing a bigger collapse in exports and a higher rate of capital flight than it did as the epicenter of the Asian Financial Crisis. The government of China has already announced that an estimated 20 million manufacturing jobs have been lost, with many more expected by late spring.

What Happened?

The root cause of instability has been an imbalance long embedded in the global trading system between a debt-leveraged structure of consumption in the Western economies and a savings-biased structure of export dependence among Asian economies. In recent years, this imbalance has reached unsustainable levels as a result of China’s quantum expansion of the vaunted Asian growth model.

After decades of unprecedented global peacetime growth, China’s quantum-level expansion of Asia’s traditional, export-led manufacturing model combined with other factors such as new demands on global supply from the rapidly growing middle-classes of China and India have tended to accentuate existing imbalances in the global system. In the resources realm, this disequilibrium took the shape of price spikes and commodity shortages for energy, food, minerals and other natural resources over recent years. From second quarter 2007 to second quarter 2008, the NYMEX price of oil doubled. In tandem, global food production, highly dependent on energy-intensive fertilization and dwindling agrable land, rose in price beyond the range of poor consumers. Political discussions of energy and food security took on new urgency, as did debate over how to combat climate change. In the area of global finance, rapid growth further amplified the basic disequilibrium between consumption-led growth in the West and export dependence among Asian economies. In China, the level of foreign exchange reserves resulting from its successful expansion of the export-led growth model rapidly eclipsed the level of surplus generated by Japan and Taiwan in earlier decades. Simultaneously, an upstart group of new sovereign wealth funds (SWFs) popped up to recycle the bonanza of petrodollars in the Middle East as well as foreign exchange surpluses in Asia resulting from booming exports to the West. China’s sovereign wealth vehicles, China Investment Corporation (CIC) and State Administration of Foreign Exchange (SAFE), began acting as new drivers of Beijing’s effort to draw in raw materials from around the world. In parallel to Beijing’s resource-attuned policies in Africa and other parts of the undeveloped world, China’s SWFs vetted acquisition of global resource companies in Australia and elsewhere in the developed and developing world. In the wake of the collapse of CNOOC’s bid for Unocal in 2005, Chinese SWFs were scrutinized with regard to the motivation for, and transparency of, their activities. In Washington, Congress increasingly preempted the executive branch’s public lead on these issues, fanning exaggerated fears in China of a supposed U.S. determination to block China’s rise.

Meanwhile, U.S. consumers kept piling on more debt to continue their splurge in the housing market and to absorb the flood of low-cost goods being churned out by Asian factories. To keep their export levels and employment in their factories high, China kept financing U.S. over-consumption through the recycling of its foreign exchange surpluses into purchases of U.S. Treasuries and other stable debt instruments.

While openly caustic about the United States’ biting the hand that feeds, Beijing has few other options for recycling its surpluses. Given the scale of the reserves being recycled, no other form of investment offers close to the capacity, liquidity, and relative safety of dollar-denominated Treasury issues. While there is ample blame to share on both sides, then Undersecretary of the Treasury Tim Adams put it best when he said in 2006, “You can’t have a situation where everyone complains about U.S. consumption and then drives their economic strategy to survive off that consumption.”

Under the Bush administration, China policy was mostly run through the Treasury Department and Hank Paulson’s Strategic Economic Dialogue (SED) process. For the U.S. side, the fulcrum of these negotiations was to wean Beijing away from a policy of fixing artificially low exchange rate for the yuan as a means to boost to China’s export industries. Since the first, grudging signs of China’s responsiveness to this negotiating push, the yuan did appreciate 21.5 percent against the dollar over the three-year period from mid-2005 to mid-2008. This level of appreciation was a step forward but is modest given the overall degree of bilateral and global structural imbalance. 

However, since the onset of the financial crisis, that movement has stalled. During the fifth, most recent SED meeting in Beijing in December 2008, the chair of the Chinese side, Wang Qishan , lectured the U.S. delegation on U.S. consumer profligacy. At the Davos World Economic Forum meeting in January 2009, Premier Wen Jia-bao broadened this critique, in unison with Russian Prime Minister Vladimir Putin, to a more general attack on the Western financial system. Despite these rhetorical flourishes and the stated fears from many quarters that the crisis might prompt China to reverse direction and devalue its currency, the yuan has held steady in recent months. In effect, Beijing is choosing to practice the Taoist art of wu wei (“do nothing”)  with its exchange rate policy while weathering the first bouts of financial turbulence and reckoning the direction of the new Obama administration.

In forming its economic policy, the Obama administration must find a means of breaking the sterile cycle of recrimination engendered by a narrow focus on exchange rate policy. Leading the world economy will require the U.S. to curb its own excesses and to offer a more compelling vision to encourage trade partners in Asia to move forward together as stakeholders in the global system. A renewed commitment to world trade can be a starting point.   (continued in next entry)

(continued from previous entry – Part 2 of 2,  Asia’s Economy: Challenge and Opportunity for the Obama Administration)

Renewing and Rebalancing Our Global Commitment to Free Trade

In the coming months, the new administration will be closely watched in two
of the preeminent arenas governing world trade.

The labored and precarious Doha Round of WTO talks largely stalled during the
second half of 2008 as the world waited for results of the U.S. presidential
election. When trade ministers convened unofficially in Davos in late January
2009, it was clear that prospects had not improved. While the financial crisis
has underscored the urgency to complete this round, it also reduced the room for
maneuver and compromise. Newly empowered Democratic constituencies in the U.S.
are now looking to strengthen labor and environmental safeguards in these
negotiations, while India and other standard bearers of the developing world are
stiffening their defenses in response to the subsistence risk posed by rising
prices for rice and other basic commodities. The United States’ moral authority
in these trade talks has been further weakened by the collapse of Wall Street
and its global consequences. A clear statement of the new administration’s
commitment to longstanding principles of free and balanced trade is a necessary
precondition to completing what WTO director-general Pascal Lamy figures to be
the remaining 20 percent of this process. The U.S. also must articulate a
creative win-win proposition to align the new administration’s vision of a
changed and changing world with legitimate demands from the developing

A nearer-term traction point is the upcoming cycle of G8/G20 meetings.
Tremors signaling a shift in global power were already felt during the G20
Summit held in New York last November. Occurring in the aftermath of Lehman
Brothers’ collapse, this meeting effectively upstaged the G8 process and
signaled a shift of influence from the advanced economies to the emerging
economies led by BRIC (Brazil, Russia, India, and China). Change in the balance
of influence between the G8 and G20 is natural, and to be encouraged. According
to IMF statistics, the developed world in aggregate is estimated to see growth
fall to -2 percent at the anticipated trough of the world economic crisis, while
the BRICs and emerging/developing economies will see their growth fall from
previously much higher levels to an average of +3.3 percent.

The consequences of this disparity cut two ways . Despite higher overall
growth rates in the developing economies, the narrow diversification and limited
trickle-down of their economies will likely lead to greater political and social
dislocation than experienced by negative-growth advanced economies. By the same
token, however, the positive contribution to world growth through the crisis
will doubtless translate into expectations of an amplified voice in the future
for managing the world’s financial system. President Obama will have the
opportunity to recognize that a greater role for these economies is inevitable
and beneficial during his first overseas travel to the G20 meeting in London
this spring.

Stabilizing the Regional Economy, Limiting Political Fallout

President Obama must also attend to the risks of political and social fallout
in the home markets of major trade partners in Asia.

At the onset of the financial crisis, there was hope that Japan’s economy
might be a bright spot. With no housing bubble and with the positive experience
of painful reform instituted during and after its “lost decade” (a period from
roughly 1991 to 2003), there was some basis for optimism. However, Japan’s
contraction in the fourth quarter of 2008 was 12.7 percent, far steeper than in
the U.S. The reason appears to be structural over-reliance on exports. Despite
some notable headway in diversifying its economy in the wake of the Asian
Financial Crisis, Japan reverted to dependence on exports for growth following
the meltdown. From 2002-07, annual exports jumped by 74 percent while
household spending rose by less than 7 percent. The result has been a negative
cycle, with stagnation of reform and leadership crisis reinforcing one another.
With December 2008 exports down by 35 percent from the prior year, the
manufacturing sector now finds itself hobbled with too many workers in factories
operating at excess capacity . Even Toyota is being forced to reengineer its
celebrated employment model.

Meanwhile, export-reliant South Korea’s economy appears headed for a 2
percent contraction this year. Following average GDP growth rates of 5-6 percent
in recent years, this represents a wrenching downward adjustment. Likely
repercussions are mounting pressure for protecting key sectors of the domestic
economy and an erosion of popular support for trade multilateralism as well as
political efforts to unify the Korean Peninsula. A critical issue will the fate
of the U.S.-Korea Free Trade Agreement (FTA) signed on June 30, 2007 but not yet
approved due to expiry of the Bush presidency’s fast-track trade negotiating
authority. Should this FTA finally be approved by the Obama administration and
the National Assembly of South Korea, it would lift approximately 85 percent of
duties assessed on each country’s imports of industrial goods from the other.
More broadly, concluding this FTA would represent the United States’ first FTA
with a major Asian trading partner. In order to achieve this, however, the Obama
administration must deal with longstanding concerns over environmental and labor
standards as reflected in this and other, already concluded FTAs. It must also
resolve deep-seated ambivalence within the Democratic party over the benefits of
FTAs in general.

Taiwan, with an economy structurally similar to that of South Korea though
somewhat smaller, has been exceptionally buffeted by the downturn. January’s 44
percent drop in exports relative to the prior year is unprecedented in Taiwan’s
post-1949 experience. This economic loss has taken wind out of popular support
for the newly elected KMT party’s program of commercial and trade link
normalization with the mainland.

Like South Korea, Taiwan pins its hopes on concluding an FTA with the U.S.
While there are solid economic arguments in favor of this possibility, the
prospects, both procedurally and politically, are much dimmer than in South
Korea’s case. Procedurally, Taiwan will need to demonstrate substantial progress
under the existing Trade and Investment Framework Agreement (TIFA) process as a
prerequisite for the U.S. Trade Representative to be willing to take up
consideration of a U.S.-Taiwan FTA. Also, Congress will need to re-extend
fast-track authority to the new President. Beyond those procedural hurdles, any
possible U.S.-Taiwan FTA would be sure to face a political firestorm of
criticism from Beijing and its supporters. Active cross-strait comanagement with
China of fallout from the financial crisis may provide a practical parallel
track for keeping relations with China moving in a positive direction.

Indonesia, with a large domestic economy and some sectoral insulation from
the global economy, may be less affected by the financial crisis than its
smaller, more globally integrated neighbors such as Thailand, with its high
dependence on tourism and the global automotive supply chain. A forecast by
Consensus Economics for Indonesia’s 2009 GDP growth shows a still healthy 4
percent gain, though this is down by almost one-third from its 5.8 percent
growth rate in 2008. Similarly, resource-rich Australia is forecast to register
0.9 percent growth in 2009, down from 2.8 percent in 2008. While limping forward
rather than sprinting, these economies are at least moving ahead. This gives
them a leg up on much of the developing and developed world. Against this
background, the real immediate challenge for this region will be to maintain
momentum toward ASEAN economic integration and some semblance of political
relevance amid the global slump.

India, which was even later than China to plug back into the global grid
following its failed experiment with socialism, is now enjoying some of the
benefits this relative insulation has conferred in the current crisis.
Additionally–and uncharacteristically for Asian economies–it has a relatively
highly developed service economy, which lessens its economy’s weighting toward
manufactured exports. Due to these and other factors, India appears positioned
to withstand the financial turbulence in 2009 with its growth momentum
reasonably intact. Having registered approximately 8 percent growth in 2008, it
appears on track to achieve close to 6 percent growth in 2009.

Pakistan, on the other hand, presents an alarming case study of a downward
spiral, with economic and political instability feeding off one another. On the
brink of insolvency, Pakistan has been forced into the role of global financial
supplicant, increasingly dependent on the strained resources of the
international financial community. The horizons of its politics have largely
collapsed to moment-by-moment imperatives of survival. Neither of these
conditions strengthen its government’s popular support. The global financial
crisis amplifies all of these pressures. Whether through loss of government sway
in its own territories or through misguided adventurism aimed at India as a
means to offset internal loss of control, security challenges will be
exacerbated in 2009 by the financial turmoil.

Rebalancing Our Economic Relationship with China

Key to helping stabilize the Asian regional economy in the years ahead will
be putting our bilateral relations with China on a sounder economic footing.
Like the U.S. in 1929, China stands in the middle of the current crisis.
Currently the world’s most dynamic economy, it is also generating the largest
balance-of-trade surplus. It therefore stands to be hurt the most if other
nations step back from an open trading system.

A snapshot of the current condition of China’s economy provides at best a
mixed picture for the near- to mid-term. Agriculture is the crux of China’s
social engineering experimentation and a primary cause for anxiety over social
stability and the continuity of CCP rule. Given the inefficiency of small-scale
farming landholding and the disproportionate population in under-productive
rural areas, China has an imperative to move 15 million rural inhabitants into
more productive urban settings each year. The minimum 8 percent which is often
cited as Beijing’s minimum GDP growth target is, in a more practical and
existential sense, the level of annual growth required to attract this number of
new arrivals to urban factories each year and absorb them. The recent volatility
in world food pricing, the current impasse of the Doha round trade talks, and a
large-scale flow of migrant workers back to their home villages over the Chinese
Lunar New Year all bode poorly for China’s near-term agricultural outlook.
Consumer-related sectors (which include a broad range of consumer goods and
services, real estate, and the steel and cement industries which provide raw
material inputs to the housing sector) are also down sharply now that China’s
real estate bubble has burst. The technology sector is reeling from the same
drop in worldwide demand that has caused Taiwan’s exports to plummet, reflecting
not only the global economic downturn but also commoditization pressures on core
product lines. Ironically, banking and financial services provide one of the few
bright spots in the Chinese economy. This reflects the fact the Chinese
regulators have kept China’s banking system relatively insulated from the world

Despite the dire outlook at a sectoral level, recent statistical data for
freight bookings and factory purchase plans provide grounds for hope that
China’s could be among the first of the world’s hard-hit economies to pull out
of the current downward spiral. If so, it would be a notable achievement
because, as a result of its export dependence, China is among the three groups
of countries identified by the Council on Foreign Relations’ Sebastian Mallaby
as most challenged by the current financial crisis–the others being
high-spending oil producers like Dubai, Iraq and Venezuela and smaller
finance-dependent economies such as the U.K. But whatever the short-term
outcome, China still faces clear forks in the road for the longer-term
development path it follows from this point on.

Essentially, there are three directions Beijing’s policy response might take.
First, it could pursue a neo-mercantilist approach and wait as a free-rider for
other countries to take steps to stimulate and stabilize the global economy.
Second, it could continue in the direction of its announced stimulus plan of
last November and conduct more pump-priming for the build-out of hard
infrastructure. Finally, it could redirect spending in such a way as to
transform and modernize the economy, focusing on “soft infrastructure” to put in
place a social safety net that is now largely absent, to spur commercial
innovation, and to put spending power in the pockets of its citizenry.

These three pathways for Beijing’s policy response lead directly to three
different outcome scenarios for China’s economy. In the first case, China would
likely encounter the same outcome experienced by OPEC producers as a result of
the 1970s oil shock. They would find that the world recession is not good for
their economy and that people get angry in response to “beggar thy neighbor”
approaches. In the second case, China would simply be increasing the capacity of
its export machine, with all the attendant risks of a policy approach that
depends upon the goodwill and deep pockets of consumers in the West under
present circumstances. In a strictly economic sense, this approach also risks
diminishing returns. As Japan experienced in the 1990s when faced with a
structurally similar situation, there are only so many roads and dams that can
be built without further encouraging corruption and economic inefficiency. The
third approach is in line with what Robert Zoellick termed the responsible
“stakeholder” approach for China’s involvement in the global community. It would
entail a structural transformation of the current export orientation of China’s
economy in order to integrate more fully and sustainably with the world economy.
Notwithstanding considerable enthusiasm for this approach in Chinese think tanks
and progressive policy circles, this pathway of transformation represents an
arduous and long-lasting undertaking, one which would encounter–and need to
overcome–deeply entrenched interests. Basic building blocks of this approach
would need to include: boosting household incomes to better match the nation’s
GDP growth; building out educational and health care systems to provide
fundamental security for population undergoing stresses of rapid “graying” and
demographic imbalance; and top-to-bottom reorientation of the business
environment to foster a more services-oriented economy protective of innovation
and promoting domestic consumption.

No one wants to see China burrow deeper into a neo-mercantilist mindset. But
fundamental trade-offs and contradictions must be recognized as the Obama
administration begins to advocate specific policy prescriptions prompting
Beijing toward one or the other of these scenario-pathways. To the extent that
the Obama administration looks to Beijing for immediate, synchronized stimulus
to help alleviate the current crisis, they will try to push Beijing down the
more traditional pathway of “hard infrastructure.” “Available bandwidth” and
“potential carrying-speed” for government investment in “soft infrastructure”
are simply too limited to allow for large-scale and immediate stimulus. For
instance, large-scale investment in the build-out of heathcare and pension
systems will not be efficient or successful unless China’s citizens overcome
traditional barriers of distrust and come to see the state as a more reliable
partner for assuring their long-term livelihood and security needs. Likewise,
the state needs to further develop intermediate market mechanisms before it can
reduce its reliance on state-owned enterprises and begin channeling more of its
resources through consumer discretionary spending. The catch-22 here is that
immediate pressure by the Obama administration to enlist China’s support in
synchronizing global stimulus will tend to further rev exactly the same Chinese
“export machine” engine that was responsible for powering the current crisis.
Conversely, a stalled export machine could lead to massive unemployment and the
Chinese Communist Party’s nightmare scenario of widespread social unrest.

The Obama administration has indicated a new policy direction that holds
better promise of underpinning a structural transformation of China’s economy
over a longer-range timeframe: a proposed agenda for mobilizing the two
economies to assume joint leadership in helping the world counter the effects of
climate change. As the world’s two largest contributors to the emissions that
are driving climate change, the complementary economies of the U.S. and China
could each realize structural benefits by working together toward this common

By highlighting this initiative during her February 13 speech at the Asia
Society and by tapping Todd Stern, her new special envoy for climate change, to
accompany her to Beijing, Secretary Clinton appears to be clearing the way for
this strategic reorientation. To progress in this direction, the Obama
administration will need to update some traditional instruments of policy
guidance, but the administration has already shown itself adept in this regard.
More generally, today’s multipolar world of challenge and opportunity realizes
in many respects the vision of shared responsibility that postwar U.S. policy
sought to create.
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