Losing the China Policy Game -- Discussion with James McGregor

James McGregor Former Wall Street Journal Beijing bureau chief Monday, August 1, 2005; 11:00 AM

[James McGregor has spent the past 15 years in China, first as the Wall Street Journal's correspondent in Beijing and later as a businessman and president of the American Chamber of Commerce in China. And he has a warning to make: We're losing the intelligence war against China.]

No, not the one waged with spy satellites, human operatives and electronic eavesdropping. He's talking about the other type of intelligence: having an intelligent understanding of and intelligent discussions about China - where it's heading, why it's bidding to buy major U.S. companies and whether we should worry about it. Above all, he's talking about coming up with intelligent policies for dealing with China. McGregor says that the Chinese government today understands America much better than our government understands China. Consequently, the Chinese government is much better at pulling our strings than we are at pulling theirs.

Since the 1989 Tiananmen massacre, China policy has been a political football that American politicians kick back and forth to score points against one another. But McGregor says those days are over, and he offers a few words of advice.

Former Wall Street Journal Beijing bureau chief James McGregor was online Monday, August 1, at 11 a.m. ET to discuss his Sunday Outlook article, Advantage, China.

The transcript follows.
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Suitland, Md.: Dear James,

You wrote:
The fury surrounding Monica-gate seemed an incomprehensible waste of time to a nation whose emperors were supplied with with thousands of concubines.

Question: How many of the Chinese audience would have the mind set of Emperor-era sexuality attitude towards their leaders? Wasn't a fact that the people of Chinese watch and listen and read with much the same interest with the details of Monica-gate scandal? Since you claim you lived in China for 15 years. Did you have any chance to talk to local people, heart to heart?

Your assessment of the Chinese people is very close to insulting.
Hongkuan Li
editor - BigNEWS.org

James McGregor: I am sorry that you feel my assessment of the Chinese people is insulting. I have many friends and great respect for the Chinese people. But you are entitled to your opinion.
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Beijing, China: Jim, does the following news signal any changes of China Policy within the U.S. government?
China-US strategic dialogue, a trust-building one

The first China-U.S. strategic dialogue is held today in Beijing. U.S. Deputy Secretary of State Robert B. Zoellick and Chinese Vice Foreign Minister Dai Bingguo sat together and exchanged views on sensitive and major international issues of common concern, focusing on both practical questions and ideological principles. At a sensitive moment when the relations between the two countries remain intricate and the U.S. concern over China mounts, such a strategic dialogue is very timely and significant, which not only opened new prospects but might point out the direction of Sino-U.S. ties.

James McGregor: I think this dialogue is an important step forward. But the administration needs to follow it with a consistent and coherent policy that it works out in conjunction with the Republican leadership in Congress. There are many people in the U.S. government who have a very clear understanding of China. What the issue needs is leadership and consistency.
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Powhatan, Va.: We adopted two Chinese children, just like an increasing number of families in the U.S. We found the Chinese very kind and helpful in this process. Do all the thousands of Chinese children living in the U.S., and the thousands more to come have ANY political dimension or influence to U.S./China relations?

James McGregor: There are so many constructive people-to-people exchanges between the US and China that I often find that normal people have a better feeling for relations between the two countries than do politicians.
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Washington, D.C.: Despite the obvious differences in the situations, is China headed for an economic meltdown like 1980's Japan?

James McGregor: I am not an economist, but from what I have seen the Chinese are extremely good managers of their economy and finances. It is certain that China will have some sort of an economic slowdown, just as everybody does. The economic machine can't keep running at this pace forever. However, if you look at the country's 40% individual savings rate, and the government's $750 billion in foreign exchange reserves, you can see that the country is poised to be able to handle a slowdown on the economic side. A slowdown would be much trickier to handle on the political front.
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Beijing, China: Hi Jim, what do the following two sentences mean?

1. Public embarrassment (what does it mean? or what's this in reference to?) and internal competition for foreign investment may prove to be stronger motivators than foreign complaints.

2. China can no longer employ IPR policies appropriate for a banana republic. (What does this sentence mean?)
James McGregor: The AmCham/US Chamber IPR index is being designed to give rating to major Chinese cities and provinces as to how well they handle IPR enforcement. By publishing these ratings every quarter or so, the leaders of these entities will be compared to each other in IPR performance. This could become important in attracting foreign investment, and in their "face" before the central government in Beijing. It is a positive way to try to enhance IPR protection.
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Washington, D.C.: Thank you for your excellent column. I look forward to reading your book.

After 9/11, Americans cleared out bookstores in an effort to bone up on Islam. What advice do you have for Americans who want to learn more about China? Can you recommend specific books, magazines, for both general and specialized audiences? Thank you.

James McGregor: I hate to be so bold, but you can learn a lot about China by picking up "One Billion Customers: Lessons From the Front Lines of China Business" after it is published in October. I would also read the China articles in the Washington Post, New York Times, and The Wall Street Journal. They have excellent reporters in China. The more distorted China stories come from Washington D.C. and elsewhere in the US when reporters get caught up in the US political debate over China and have insufficient China background or understanding to put their reporting in context.
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Arlington, Va.: Are there organizations in the area that you can recommend to the casual reader who wants to get a better understanding of China? A lot of us don't know much of China outside of their Communist regime and Human Rights violations. Thanks.

James McGregor: The National Committee on US China Relations, the US China Business Council and The Asia Society often have very good speakers on China subjects at their various luncheons and forums.
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Arlington, Va.: Are the Chinese concerned at all that as their economy improves, wages increase that companies will just move manufacturing to countries with cheaper labor like maybe Africa or elsewhere. In other words, what is their plan to avoid the loss of manufacturing jobs like we experienced?

James McGregor: China will face labor cost increases in the upcoming decade. they are already moving some manufacturing from the more wealthy coastal areas to interior regions. workers in China will begin to push for more rights, better wages and better work conditions. That is inevitable and necessary. However, with China's huge population and the need for jobs, it will be decades before manufacturers will move out of China to seek less expensive manufacturing elsewhere. China is also move up the value chain very quickly on high-tech manufacturing processes.

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Silver Spring, Md.: Jim -- Congratulations from Jane and me on a fabulous op-ed piece in yesterday's Post, and on the publication of your upcoming book. As always, we think your insights on China, and your observations on the China-U.S. relationship, are spot on. No one I know has articulated these issues as cogently or clearly. Looking forward to reading your book!

Note: My wife served as AmCham's executive director under Jim McGregor's leadership when we lived in Beijing, and we've been privileged to call him a good friend for some 11 years now.

James McGregor: Steve, so nice to hear from you. Thanks for the compliments on my article. I look forward to catching up with you in the Fall when I stop by D.C. on my book tour.
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Washington, D.C.: Jim -
I understand your statement that "China has no ideology other than enriching itself." It seems that few people in China study humanities despite the rich heritage of Chinese poetry.

Is this a sign of the times in China? Does the plethora of architecture students correspond with the rapid construction in the country? And if so, do you think the Chinese will turn to the humanities as their economy matures?

James McGregor: The Party in China can't seem to come up with a coherent philosophy these days. They put out lots of new slogans and they take old ideas and swirl them into ever new combinations. Like any political system, there are deep divides within the Party. When Hu Jintao came up with the "peaceful rise" as a slogan, it quickly disappeared because some people thought it made China sound weak.
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Laurel, Md.: The world hasn't seen a totalitarian capitalist country since the communists and democratic capitalists occupied them in 1945.

How much of our problems with China results from their ability to "solve" social and political problems from the top down? For example, pollution. One element of the Unocal purchase controversy is that China doesn't compete fairly with U.S. oil refiners, who have to respect environmental laws. How important is it that China can "race to the bottom" of any economic barrier through totalitarian fiat?

James McGregor: The government of China can't let pollution get much worse. As people get wealthy, they care a lot about their environment and the health of their children. This kind of public pressure the government must respond to. While China is still very much a top-down political system, they also have to pay attention to the opinions of people. This is already happening with consumer rights and the nascent environmental movement. this is also what happened in Taiwan in the days of tight control there. The first areas where reporters could investigate problems with consumer rights and environmental pollution.

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Alexandria, Va.: How does/will Taiwan play in the dynamics between the Mainland and the U.S.? Do you suspect anything coming to a head before the 2008 Beijing Olympics?

James McGregor: The Taiwan-China question is always worrisome. Before Taiwan became a democracy, the two entities were able to talk to each other quite easily because both the CCP and KMT were formed under Soviet advisors and with similar structures. Once Taiwan became a democracy, the Taiwanese politicians had to focus on getting re-elected and appealing to a majority of the people. The messages required to do this are often in direct contravention to what the Mainland authorities would like to hear. I think the people on both sides would be happy to maintain the status quo for now but there are political agendas in Taiwan to push for independence, and there are agendas among the PLA to use the Taiwan issue to build up military budgets and raise the specter of someday having to face the US in combat. so far, cooler heads usually prevail. the more commerce between Taiwan and China, the lower the possibility of any conflict.
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Washington, D.C.: Thanks for holding this discussion today.

Some reports have claimed that American companies would be better off fighting IPR issues in China by adjusting the prices of their products to fit the Chinese market. I believe Microsoft is considering their own version of this idea.

What's your take?

James McGregor: This is a very good approach. Warner has begun selling its movie DVDs in China for about $3, when the pirated ones are $1. You can't expect people to pay $15 to $20 for a movie. Even in the US people don't pay that. They rent movies instead. As for software and other products, I think that one way of solving the IPR issue is for foreign companies to adjust prices. This isn't only a China problem. With file sharing and the Internet, the ability of companies to have 60% or higher margins on products is very difficult to maintain.
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Silver Spring, Md.: Jim --
Your opinion piece in yesterday's Post is one of almost daily headlines, stories and editorials being written about China. Does China feel it is being portrayed fairly and accurately by the U.S. press?

James McGregor: China usually feels it is unfairly portrayed by the US press. However, Chinese authorities really don't understand "objective" information. Information is a tool in China, just as it was in the dynasty days. When journalists write about dissidents and other subjects that authorities would rather not hear about, they feel that journalists are advocating the cause. They don't understand that they are just doing their job and reflecting reality.
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Washington, D.C.: Hi Jim,
Great discussion so far.

An article in today's news says that the Chinese government has warned its citizens against uprisings.
If all the strikes and uprisings in rural China last year are a sign of things to come, should the Communists be worried? How much longer can they hold power? How will they do it?

Thank you.

James McGregor: I am sure the government is very worries about the unrest in China. So far, they have been quelling disturbances by going in and arresting the ringleaders, and also going after the officials who led to the problem. Their view is that corrupt officials are bad, and people who make the system look bad thorough protests are also bad. Chinese leaders generally want to weed out corruption. But the system is all checks and no balances. It all comes down to the communist Party policing itself. And that hasn't been working very well so far.
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Arlington, Va.: Singapore is a sophisticated, developed country that is often derided as "the nanny state" because of the government's restrictions on individual rights and freedoms. This situation will not likely change soon. How viable is it for China to become a giant version of Singapore and indefinitely put off the political reforms that are supposed to accompany greater economic liberalization?

James McGregor: China can't become Singapore. Singapore is a village and Lee Kuan Yew could have huge influence in controlling how people live and think. China is too big, and the Chinese people are much more independent minded than the Singaporeans. Just the Haidian district of Beijing is larger than Singapore. What the Chinese have learned from Singapore is to modernize their propaganda. The Chinese state-controlled media no longer pretends that the country doesn't have problems. They just present them in the context of a forthright government that is solving the problem being discussed. They learned this from Singapore.
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Richmond, Va.: I saw a film recently - Beijing Bicycle was the name. I was wondering if you have seen it; and if you feel it is a good reflection of life in China.

Also, were you in China during the spy plane incident a few years ago? Wondering what kind of impact (if any) did it make in U.S. - China relations at the working class people level in China.

James McGregor: I was in China during the EP3 spyplane incident. It was a scary time. The PLA hardliners were asserting themselves, and the rhetoric was back to the Cold War days. Then I went to Washington as part of a delegation of former AmCham China chairman who were dispatched to see what was happening in Washington in the wake of the incident. We found the same kind of Cold Warriors in Washington. Both countries have alliances of modern neo-cons and old cold warriors who regard the other country as a future enemy. If these groups get too influential in policy, we could end up with a self-fulfilling prophecy.
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Rochester, N.Y.: You note the general level of ignorance of Americans regarding China. But couldn't you extend that comment to Americans' general level of ignorance of the world generally (or our own history as well?) Is American ignorance of China any worse than its ignorance of the world generally? After all, we do have a president who, though son of a president and scion of one of the nation's wealthiest families, never went to London or Paris until he, too, was president.

James McGregor: Living overseas for many years, I have generally found that those people who need to understand other countries in order to prosper are those who spend the time to understand the world. Europeans need to trade globally because their domestic markets are small. America has had such a big market, and being insulated by two oceans, that we have been able to get away with being quite ignorant about the outside world. Since China is coming out of poverty, its people are very motivated to learn about the world and become part of it. Perhaps a generation or two in the future, Chinese will also become ignorant about the outside world because they will suffer from the same mixture of wealth, hubris and lassitude that Americans today suffer from.
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Vienna, Va.: I am planning to major in international economics this fall. It has been suggested that I focus on China rather than Europe. I am being told that I should learn Mandarin (which seems awfully complicated). Is Mandarin really necessary? Is English spoken in the business circles in China?

James McGregor: My advice is to learn mandarin and focus on China. It will be the most important place in your lifetime. I didn't start learning Mandarin until I was age 33. If I can do it, anybody can. It just takes putting the time into it.

English is often spoken in business circles, but not knowing Mandarin is a huge disadvantage because your Chinese counterpart will know both languages. Also, by learning the language you also learn much about the Chinese culture and way of thinking.
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Washington, D.C.: Thanks for discussing today.

America's economic power is largely based on our technological advantage and our outstanding R and D capabilities, as you pointed out in your article.

Does China do any of its own high-tech R and D? Information abounds about American companies doing R and D in China, but is there any home-grown high-technology in China? Will China ever get to the next step in its economy if it continues on its drive-down-costs strategy? Thanks for answering.

James McGregor: China will be a global R&D power within a decade. There are now hundreds of research and development labs run by foreign multinationals in China. the weakness for Chinese R&D has been the management, not the brainpower. Those scientists and researchers now at multinational facilities in China will break off on their own and create new technologies and products. The Chinese government also has some quite impressive research facilities. they will soon be cleaning America's clock on biotech if we don't change out policies on stem cell research.
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Washington, D.C.: Is there any history that indicates that the European colonial powers were planning to sub-divide China into smaller trading colonies? All the treaties from the Opium Wars forward show that major cities were each designated a foreign occupying force, sort of like the many developing countries today that speak European languages (i.e., West Africans with perfect French, Brazilians who speak Portuguese, and Argentineans who speak Spanish).

James McGregor: China was being carved up by the Europeans, Japanese and Americans in the 1800's and early 1900's. Those memories are still ingrained in the Chinese psyche, and they affect how people think today. If you are a foreigner in China, you need to understand this.
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Washington, D.C.: In your 15 years in China, what topic stands out as having gone from being taboo to openly discussed?

James McGregor: Almost any lifestyle topic is now open for discussion. All that is really off limits is directly challenging the Party. The most open topic is economics. The debate on economics and business in China is very open. Academics regularly criticize government policies and journalists report on incongruities in the economic system. Sex, drugs and rock & roll fill the newspapers.
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Washington, D.C.: Popular uprisings often lead to very quick changes in governments and times of instability. Your article proposes a "go slow" approach to U.S. encouragement of governmental change in China. However, a number of people believe that Communism (especially autocratic, top-down style Communism) bears the seeds of its own collapse. With examples like the Tiananmen massacre and Hong Kong's issues as a guide, is it out of the realm of possibility to see China change internally, and quickly, to a fledgling democracy or, worse, low-level anarchy (think of revolutions in Romania, Russia, etc. in the 1990's)? Put another way, should not the U.S. be prepared for such a change in the status of China and shouldn't our foreign policy be governed by the expectation of this coming change?

James McGregor: I think our foreign policy should be based on trying to help keep China stable and progressing toward pluralism and human rights protections. I don't believe that China will blow up thorough a revolution. If there is significant unrest, as in 1989, I believe it will end quickly with the leadership split that led to such troubles being quickly solved and the Party cleaning up its act. When you think of the Chinese government, it is better to view today's government as a permutation of the imperial dynasties instead of stir-fried Kremlinology.
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Bowie, Md.: Not really on-subject, but something I keep wondering:
How big a problem (to them) is the inherent limitations of the Chinese language and what are they doing about it.
Traditional Chinese is non-alphabeting, making it difficult to coin new words. And has a very small vocabulary for the language of such an advanced society. It is also not widely spoken (except for their own ex-patriates) in other nations. For that matter, does the U.S. need to be working on the Chinese language skills of our own population?

James McGregor: I see no problems with the Chinese language adapting to modern times. I have worked in the Internet for years, and the Chinese have adapted and created words to work well for that. I do believe that the US needs to get more Chinese education into our public schools. Teaching French and German is good if we want our kids to be able to order dinner in restaurants during visits to Europe. If we want our kids to stay ahead in the world of commerce, they should be studying Chinese. The Chinese language schools in china today are flooded with students from Korea and Japan.
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Anonymous: As a Chinese-American I agree with your comments 100%. Take for example representative Rohrabacher, who has said that China is the greatest threat to U.S. security, even over Islamic extremists. Clearly, people like that are not living in reality. China has always been for centuries a regional power, but has never never never had colonial aspirations. It's national symbol, the Great Wall, is a symbol of protecting itself from outsiders, not a monument to expansionism. People ought to recognize that.

James McGregor: While China doesn't have sufficient power to be a threat to others right now, that doesn't mean that a rich and powerful China wouldn't be a threat. China claims huge sections of ocean that are way outside its territorial borders because their may be undersea oil and natural gas reserves. It also have shown itself to have little or no generosity of spirit when dealing with other nations. China is all about China and making China rich. that is why I believe that China needs to formulate a leading ideology that makes the world comfortable with the country's intentions.
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Washington, D.C.: In the 1970's, we had to appease or otherwise accommodate the Soviets, because they were on the rise, the primary economic and military power . . .In the 1980's, we had to prepare being second fiddle to the Japanese and Germans: we were too lazy, too backwards, our manufacturing technology was second-rate . . .In the 1990's, we needed to understand the rise of a unified and potent Europe, one with a market larger than the U.S. and built upon centuries of civilization . . . .Now, in the 2000's, comes those arguing that China is the next great superpower, with all of their new-found verve. The U.S. is full of "wealth, hubris and lassitude," we are told. It seems to be the same old story, told with a different protagonist, right?

James McGregor: Your point is well taken. We American always worry about the next power that will supplant us. Much of this worry is overblown. China won't supplant America, unless we continue to weaken ourselves. Piling up huge debt as a country and individuals, and not focusing on making our schools the best in the world, are not the ways that a world power stays in power. The Brits and the Romans did get weaker as they got richer. It is just natural for the wealthiest to become the most complacent. This too will happen to China someday, but not for a long time.
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Minneapolis, Minn.: Jim,
Do you see the Chinese government reducing the ownership requirements for foreign investments? I believe it is 50% ownership today, for example, for a foreign company to own a manufacturing facility in China.

James McGregor: most manufacturing facilities today in China are 100% owned by foreigners, except in some critical industries such as automotive
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New York, N.Y.: What I find interesting in talking with people from China are both their intense national loyalty/exclusivity and their great worry concerning instability. I'd be interested in your perception of the origin or influence of these two emotions for China in the future. Thank you.

James McGregor: The Chinese have great worry about instability. The Cultural Revolution, Boxer Rebellion, etc., give them good reason to worry. They worry about their own cultural flaws -- difficulty cooperating with each other, taking care of you and your own family to the disregard of greater society -- affecting social stability. I believe that China needs to pluralize and democratize. But this will be a long-term process. In a top-down society, once the control from the top ends, it takes much time and effort to get people control their own behavior.
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Alexandria, VA: Very interesting discussion. A few of your remarks are quite surprising, and I wonder if you'd like to re-consider: ".....The Taiwan-China question is always worrisome. Before Taiwan became a democracy, the two entities were able to talk to each other quite easily because both the CCP and KMT were formed under Soviet advisors and with similar structures."
That's revisionist history. "You can't expect people to pay $15 to $20 for a movie. Even in the US people don't pay that. They rent movies instead." I think you'll find the sale of movie DVDs in the US is quite large. "....the Chinese people are much more independent minded than the Singaporeans." I have lived in China and Singapore several years each. That statement is just plain wrong.

James McGregor: I can't say much other than we should agree to disagree. the history of the KMT and CCP is quite clear. As for the Singaporeans versus Chinese ways of thinking, my time in both places leads me to what I said. I also have friends from China who moved to Singapore because of their quite generous visa policy for mainlanders with certain skills. Several people I know have moved back to China because they found Singapore to be such an intellectual vacuum.
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London, Ontario: About ten years ago, there was an essay in Time magazine entitled "China's Youthquake" in which it described China as having experienced three separate disillusionments (the Great Leap Forward, the Cultural Revolution, and Deng's "black/white cat" speech). The significance of these were that Chinese citizens are not held together by a unifying ideology because of an almost systematic destruction of the definition of citizenship to begin with.

With China rapidly becoming the first country in human history to grow old before it grows rich, how is this lack of common ideology going to affect them? In the 10k year history of humans, there is yet to be a system of social control (innovative or otherwise) that doesn't rely on either ideology, coercion, and/or compensation. Seeing as ideology is not a possibility and they lack the mean level of wealth to properly compensate folks for participating in a system that is rapidly becoming polarized, that pretty much leaves repression. Am I being needlessly dystopic?

James McGregor: Time to go now. Thanks for your questions and insightful comments.
regards, Jim McGregor