Our reading on the bus these days is “The Next 100 Years: A Forecast for the 21st Century” by George Friedman, founder of STRATFOR, the strategic intelligence consulting firm. It’s a good, fun read, an informed speculation about global economic and political power in the coming century. America still dominant even as Poland and Turkey become rising powers? Sure, and Friedman explains why. (Geography+population+economy+control of the seas = American predominance.)

His analysis of China is timely and runs contrary to the popular, pessimistic view that China’s economic might and population mean it will overtake the United States. Short version: History shows us that any nation’s economy cannot continue to grow at China’s pace, and when the inevitable slow-down occurs, China will turn inward and more authoritarian to counter the great regional disparities in population and wealth. As Friedman wrote in a New Statesman: column last year

About 65 million Chinese people live in households with more than $20,000 a year in income. Around 165 million make between $2,000 and $20,000 a year. Most of these live within 100 miles of the coast. About 400 million Chinese have household ­incomes between $1,000 and $2,000 a year, while about 670 million have household incomes of less than $1,000 a year. China is a land of extra­ordinary poverty. Mao made the Long March to raise an army of desperate peasants to rectify this sort of extreme imbalance. The imbalance is there again, a volcano beneath the current regime.

China would have to triple the size of its economy – and the US would have to stand still – if China were to pull even with the US in GDP. Militarily, China is impotent. Its army is a domestic security force, its ability to project power blocked by natural barriers. Its navy exists mostly on paper and could not possibly pose a serious threat to the US. Casual assertions of China surpassing the US geopolitically ignore fundamental, overwhelming realities. China could conceivably overcome its problems, but it would require most of the century to overcome problems of this magnitude.

We remember interviewing David Halberstam in Corvallis, Oregon, after the 1986 publication of his book about Japan’s inevitable economic defeat of the United States. “The Reckoning” was a thoughtful book even as it embodied the conventional wisdom of the time. But in the 1990s, Japan’s bubble economy popped and decades of stagnation followed. The reckoning was Japan’s.

China economic challenges to the United States are many and they’re serious. Still, in preparing for their trip to Beijing, members of President Obama’s cabinet would do well to add Friedman’s “The Next 100 Years” to their briefing materials. America’s strengths are many, and so are China’s difficulties, today and over the next century.

The Washington Post today runs a good big-picture, grand-scheme, peering-into-the-future op-ed on U.S.-China relations by James McGregor, former chairman of the American Chamber of Commerce in the People’s Republic of China, “Time to rethink U.S.-China trade relations.” Writing in anticipation of next week’s U.S.-China Strategic Economic Dialogue, McGregor focuses on technology and China’s recent protectionist procurement policy, “indigenous innovation.”

Most worrisome is the Chinese government mandate to replace core foreign technology in critical infrastructure — such as chips, software and communications hardware — with Chinese technology within a decade. The tools to accomplish this include a foreign-focused anti-monopoly law, mandatory technology transfers, compulsory technology licensing, rigged Chinese standards and testing rules, local content requirements, mandates to reveal encryption codes, excessive disclosure for scientific permits and technology patents, discriminatory government procurement policies, and the continued failure to adequately protect intellectual property rights. The poster child is the evolving “indigenous innovation” policy, which appears aimed at using China’s market power to coerce foreign companies to transfer and license their latest technology for “co-innovation” and “re-innovation” by Chinese companies.

McGregor’s cautions are warranted. The National Association of Manufacturers has been active on the “indigenous innovation” issue. In a May 10 joint submission to the Chinese government, the NAM and other trade association expressed strong (albeit diplomatically worded) objections to Beijing’s policy and procurement agenda. Excerpt:

We also urge China to proceed with an ongoing dialogue with stakeholders on best policies and practices that promote innovation and do not discriminate against foreign firms’ investments in and exports to the Chinese market. In that regard, as an essential first step, the Chinese government should undertake an immediate review of all innovation policies to ensure they do not discriminate between foreign and domestic suppliers and achieve the goal of the opening China’s market wider to foreign investment and exports promised by President Hu and Premier Wen.

Administration officials, meanwhile, are previewing their themes on their way toward the Strategic Economic Dialogue.

AFP, US commerce secretary urges China to import more”

Bloomberg, “Geithner Urges China to Ensure ‘Level Playing Field’ With U.S.“

The United States has learned its historical lessons and will avoid going down the path of the depression-deepening Smoot-Hawley and protectionism as it counters the current recession. Surely it has.

But given the new global economy, more integrated and competitive than in the 1930s, the United States is not the sole determiner of economic policies. Maybe this time around, it’s China that makes the mistake of enacting its version of Smoot-Hawley, a foolish, domestically targeted policy that sparks a trade war.

From Reuters, “Yuan drop extremely disturbing“:

WASHINGTON, Dec 4 (Reuters) – A sudden drop this week in the value of the Chinese yuan <CNY=CFXS> could reignite political tensions over the huge U.S. trade deficit with China, U.S. business groups said on Thursday.

“This is extremely disturbing,” Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers, told Reuters as U.S. Treasury Secretary Henry Paulson and other senior Bush administration officials were in Beijing for high-level economic talks.

The yuan’s drop came just days before that meeting and just a little more than one month before President-elect Barack Obama takes over in the White House.

This news comes just as the fifth U.S.-China Strategic Economic Dialogue wrapped up. Secretary Paulson did not address the issue in his formal closing remarks, saying later that China remains “committed” to continued appreciation of the currency. And trade is not ONLY currency.

From Paulson’s closing statement:

As in the past, we discussed the importance of domestic-led growth, and the importance of a market-determined currency in promoting balanced growth in China that will contribute to a healthy global economy. I welcome the steps announced by the Chinese to further open their financial markets, such as allowing foreign banks to trade bonds on the same terms as Chinese banks. Strong financial markets will enable healthy economic development across China. (continue reading…)

Sen. Sherrod Brown (D-OH) unveiled trade legislation yesterday, or rather anti-trade legislation, at a news conference where he was flanked by labor leaders. As The Plain Dealer summarizes: “The legislation would forbid negotiations on new trade deals until the government conducts a detailed review of all existing trade pacts, and recommends changes to ensure they meet tougher standards to protect U.S. workers and consumers.”  In response:

Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers, said the bill baffles him because only a small portion of the nation’s trade deficit is accounted for by countries that have trade deals with the United States. Blocking new trade deals would cost U.S. jobs, he warned.

“To me, it’s pretty silly legislation,” Vargo said.

The bill is S. 3083. According to Brown’s news release, he was joined by other anti-trade members of Congress. Who were also flanked by labor leaders.

Meanwhile, the U.S. Treasury announced that the next round of the U.S.-China Strategic Economic Dialogue will take place June 16-17 at the Naval Academy in Annapolis. From the AP story:

Frank Vargo, vice president for international affairs at the National Association of Manufacturers, said that the Chinese will be under pressure to produce results at the upcoming meetings in order to convince the next administration that the whole effort is worth continuing.

“The Chinese have to reach more deeply into their pockets and come up with something to keep this dialogue going,” he said.

UPDATE (10:40 a.m.): A news release from the Teamsters, supporting Brown’s legislation. James Hoffa attended yesterday’s news conference.