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Hu's on First; Gas Tops $3

The Journal Editorial Report

Paul Gigot: This week on "The Journal Editorial Report," President Hu goes to Washington. The Chinese leader meets with President Bush and Bill Gates in his first official visit. With China emerging as a world power, can the U.S. maintain its economic and strategic edge? Plus, gas prices pass the $3 mark as oil hits new highs. What can be done to take the sting out of summer travel? Those topics and our weekly "Hits and Misses." But first these headlines.

Gigot: Welcome to "The Journal Editorial Report." I'm Paul Gigot. With trade topping the agenda, Chinese president Hu Jintao made Seattle the first stop this week in a four-day visit to the United States. Hu met with Microsoft chairman Bill Gates, whose company, like Google and Yahoo, has been criticized for complying with the Chinese government's efforts to censor its citizens' Internet use. Former Wall Street Journal China bureau chief James McGregor is the author of "One Billion Customers: Lessons of From the Front Lines of Doing Business in China." He joins me now in the studio. Jim, welcome.

McGregor: Thank you.

Gigot: Interesting to see the Chinese president stop not in Washington, D.C., first, but in Washington state, visiting Boeing and Microsoft. What message was he trying to send?

McGregor: Well, I think he gets along with businesspeople better than he does other politicians. He doesn't have any real strife with the business community other than various trade issues. And Boeing is always a stop for Chinese leaders. They all like to do what the other leaders did, and everybody stops at Boeing. Microsoft is a new edition because they want to say we're going to do something about IPR, intellectual property rights.

Gigot: Intellectual property rights.

McGregor: Yeah.

Gigot: And this was a message that they aren't--China is going to try to get something done. Because that is one of biggest complaints that American businesses have in China.

McGregor: It's terrible. Intellectual property rights enforcement and copied products and theft are terrible in China. The business community's fed up, and Congress is getting very unhappy about this. So what China did is they made a concession this time, that they are requiring computer makers to install software at the factory. What they've been doing is, the computers, including Lenovo, the IBM merger, puts their computers out with no software, and mysteriously software ends up on them, and they say, geez, we have nothing to do with that. But now they're going to require it to come out of the factories. The U.S. should hold their feet to the fire and make sure they do this.

Gigot: One line in your book that's really interesting, you said, in China a contract is no guarantee of anything. Does that mean--I mean, is it getting at all better over the course of time?

McGregor: Well, yeah, contracts have gotten better in China. If there's a part of the contract that helps the Chinese partner, they will enforce it. But if it's the foreign partner side in the contract, it doesn't matter.

Gigot: What American companies have succeeded in China, and what's the secret of success there?

McGregor: Well, in fact, most of them are doing pretty well now, because they went in in the '90s with way too much money and ambition and desire to get that market overnight, and they lost a lot of money. Now, they have slowly built. They've built Chinese staffs, and really American business is part of the social fabric in China now.

Gigot: No kidding?

McGregor: Yeah. I mean, you arrive in China. You come in on a Boeing; you take a GM car to the Sheraton hotel, and you can stop for a Starbucks and go across the street and go to McDonald's, and buy all kinds of American goods. So it's a more open market than Japan.

Gigot: No kidding?

McGregor: Yeah.

Gigot: What about this issue of the Internet companies, who are growing enormously around the world, and in China, Google, Yahoo, Microsoft have been criticized because they've agreed to Chinese government censorship? Microsoft, for example, has agreed to take the word "democracy" to be filtered out of Web searches. Was this a good decision for these companies to make?

McGregor: No, these people are damned if they do and damned if they don't. They have to be in China. China's the No. 2 Internet market in the world, but China censors. So what do you do on your servers in China? Go ahead and censor, but label it like a warning on a cigarette pack, saying cigarettes will harm your health? Say "this search has been censored according to Chinese law"?

Gigot: Now, Google does that.

McGregor: Google does that. And they have kept their blogs and their email and other products that would gather Chinese user information, out of China. They've have tried to do the honorable thing. And if Congress tried to keep the American Internet companies out of China, well, then, their Chinese competitors, all of whom are listed on Nasdaq--Sina, Sohu, NetEase. Baidu is the No. 1 search engine in China.

Gigot: Nasdaq being the American stock exchange.

McGregor: Yeah, the American stock exchange. So Chinese companies can use our capital to build their Internet, but our Internet companies can't go--that's wrong. But these companies have to keep pushing the envelope. Yahoo has been way too compliant. I mean, if I was running Yahoo and the Chinese came and wanted user information. I'd say, "Yes we've got it around here somewhere." And I'd look around for a while and off you skate, and take my time and try to keep as much information as I could offshore.

Gigot: But there's an argument that you hear the companies make, which is that just going in there, even if some of their searches are censored, just being there it will provide more information to the Chinese public than they would otherwise have received, and open them up to the world, and that is in and of itself, subversive of the government. Do you agree with that?

McGregor: The Internet has changed China. I have been involved with Internet companies from the beginning there, and people have access to all kinds of information. Eight-five percent of Chinese users go on the Internet for news because their traditional media is government-controlled. And the news sites in China are always pushing the envelope, staying ahead of the censors, and they put it out there and then censors will take it down, and then they'll put something else out there. It's a game of cat and mouse that the government can't keep up with.

Gigot: Just to finish, talk about the policy choices here in Washington. Because a lot of people are saying, look, we should impose tariffs on China because of the big trade deficit. What reaction do you think that would have inside China? And would American businesses welcome that?

McGregor: No. I mean, Washington has to get it straight on China. No. 1, the currency issue is the wrong issue. It's not going to make a difference. No. 2, the deficit is structural and will always be there. What we need to do is focus on intellectual property protection and be ruthless in how we enforce that, because this is a knowledge-based economy and that is our advantage, and that's what we have to protect.

We also have to do trade promotion. We've got to promote our products in China. When the chancellor of Germany goes to China he brings 200 businesspeople. When the prime minister of Canada goes to China he brings a couple hundred businesspeople. The American president comes, he's talking Iran, Iraq and every other issue and has no business agenda. I understand he is a busy man, but we've got to get out and sell in the world. People aren't automatically going to come to us.

Gigot: All right, Jim McGregor, thanks very much.

McGregor: Thanks for having me.

Gigot: When we come back, in the wake of President Hu's visit, at least one European paper is touting China as the new superpower, warning that America is losing its supremacy. Can the U.S. maintain its economic and strategic edge? Plus, gas prices soar as oil reaches new highs. As the summer months approach, what can be done to keep costs under control? Our panel weighs in on those topics, and our "Hits and Misses" of the week when "The Journal Editorial Report" continues.

President Bush: We intend to deepen our cooperation in addressing threats to global security, including the nuclear ambitions of Iran; the genocide in Darfur, Sudan; the violence unleashed by terrorists and extremists; and the proliferation of weapons of mass destruction.

Gigot: Welcome back. President Bush welcomed Chinese president Hu Jintao to the nation's capital Thursday amid questions of how to manage the emerging world power while avoiding a foreign-policy or economic crisis. Joining the panel this week, Wall Street Journal columnist and deputy editor Dan Henninger, editorial features editor Tunku Varadarajan and Wall Street Journal editorial board member Rob Pollock.

Tunku, you heard Jim McGregor make what I thought was a pretty optimistic case about U.S.-China relations, particularly on the business front. You're a little bit more skeptical. Why?

Varadarajan: Yeah, Jim was optimistic. I counsel what might be called strategic pessimism. I'm not saying be afraid; I'm simply saying be prepared. You know, China is the third-largest trading nation, but five years from now, can we say what it will be like? You know, you look at England; you know the queen will still be here in five years. And you look at America, and you know it will be a democracy. But China? What political shape will it be in?

Gigot: Hu Jintao, we don't know if he'll be at the top. It's very volatile. And Rob, you know, China on foreign policy has not been very cooperative with the United States. I mean, they are not doing much about the North Korean nuclear threat. They're now obstructionist--on Sudan and on Iran getting a nuclear weapon--at the U.N. Is this a responsible foreign-policy partner?

Pollock: No, China is not a responsible foreign-policy partner, and I don't think we should treat them as if they're an ally. On the other hand, I don't belong to the sort of China alarmist school. Frankly, there's a lot of people worried about the sort of Chinese juggernaut that's going to overtake us as the new world superpower. I think we're a long way from that. You know, people always talked about Brazil as the country of the future. Frankly, I think China is in a way the new Brazil--or I'm sorry, they said Brazil is the country of the future and always will be. And the reason for that is China has problems with the rule of law. And if it's going to go beyond this sort of, you know, sort of early-stage capitalist economic growth that it's experiencing now, it's got a lot to go--a long way to go politically.

Henninger: Well, I think Rob's point about Brazil is a good one. If you think about Brazil and South America, they are not trying to project hegemony over the rest of South America. They are trying to become a tremendous economic power at the tip of that continent. China, you have to divide into two parts. Yes, they are developing internally, economically and politically, but they have a totalitarian government, or at least a despotic government, which wants to project power outward. I think what we want to do is encourage the internal development, but we are going to, as Jim McGregor was suggesting, going to have to resist their offensives overseas.

Gigot: Well, aren't we doing it, Tunku? I mean, we're hedging our bets certainly with--by enhancing our relationship with Japan, the strategic alliance, and forming a new one with India. Even Mongolia. President Bush visited Mongolia, not a great power but on the fringes of China.

Varadarajan: And Vietnam, too, as Bob Kaplan wrote on the page today. You know, the way I see it, China is in a state of reorientation right now. It doesn't really have an ideology. It doesn't have a direction ever since it destroyed Confucianism and is now rethinking communism. And I think once it democratizes, if it does democratize, it's going to be lurching in various directions that it hasn't really got a map for. And you know, it's a country with 14 land boundaries--with land boundaries with 14 different countries, each of which it has a major territorial dispute with. It's got six major maritime disputes. I can see China coalescing around international conflict as a way of stabilizing itself internally, and I see it--

Gigot: But they've got so much internally to worry about, Tunku, and the aspirations of its people. They have to keep those satisfied with economic growth. And if they start flexing their muscles outward, as Dan suggests, that's going to jeopardize that economic progress. Why would they want to do that?

Varadarajan: Well, they have economic growth right now, but they also have 415 million people who live under $2 a day. I mean, they can both, I think it's, you know, it's not a contradiction in that sense.

Henninger: Well, like Russia, this was a country that imposed totalitarian communism, on a population of a billion people. Now, that has an effect. And to unwind that is a complex process. Just in the past year, they had 87,000 rural protests. This is a volatile, dynamic population, and to manage that is going to be extremely difficult.

Gigot: All right. Thank you. Last word, Dan. Thanks.

Coming up, oil prices reach new highs this week, forcing Americans in many places to pay more than $3 a gallon for gasoline. As the summer travel season approaches, what can be done to ease your pain at the pump? Our panel weighs in when we come back.

Gigot: A barrel of crude hit record highs this week, and then jitters over the continuing nuclear standoff with oil-rich Iran. With prices at the pump pushing $3 a gallon in many markets, what can the U.S. do to bring costs under control? We're back with Dan Henninger and Rob Pollock. And also joining the panel is Wall Street Journal editorial board member Kim Strassel.

Kim, the politicians want to blame foreigners, or they want to blame oil companies, but the Congress itself holds some responsibility for this recent run-up in gasoline prices. Why don't you tell us about the ethanol?

Strassel: A lot of the blame is theirs. You know, to understand this story, you have to go back to 1990, when the Congress said the people had to oxygenates in their gas. And the two main ones were MTBE and ethanol, and they became a big part of our fuel supply. Now, two things have happened over the past year. Last year, in the energy bill, Congress did not give liability protection to MTBE makers that are being hit with lawsuits, and they are now pulling out of the market right and left. And ethanol makers, they handed them a huge prize in the form of a new mandate, saying everyone had to use more of their stuff. Not only is the industry not capable of filling that mandate; they're certainly not capable of making up the slack from those MTBE makers that are getting out. So we're having gasoline shortages now.

Gigot: So 10 cents, 20 cents a gallon, might be Congress's own fault from its energy bill that was suppose to solve this problem last year?

Strassel: Absolutely. And it could be worse. I mean, there's been some shortages in Texas, which is to be expected. Places like--

Pollock: And on the East Coast, you know, just yesterday and today shortages are being reported because of the ethanol mandates.

Strassel: And that's because it's hard to transport ethanol.

Henninger: Well, one answer to the shortages is to allow the importation of ethanol from Brazil. But there's a 54-cents-a-gallon tariff on Brazilian ethanol--

Gigot: It's amazing.

Henninger: --which they will not lift because they are trying to protect our own internal ethanol industry.

Gigot: Well, with elections coming up and gas prices being an issue, the Democrats think they can exploit it. Why is the Bush administration not lifting those tariffs or import quotas?

Strassel: Presidential politics. You know, look, I mean, you know the ethanol industry is centered in Iowa.

Gigot: I'm sorry, but 2008 is two years after 2006.

Strassel: You can never be too close to the ethanol industry.

[Laughter]

Henninger: Well, they're doing exactly the wrong thing. Energy is a commodity, and all of this is about price. Commodities respond to prices; conservation responds to price; new technologies for discovering new sources of energy respond to price. To the extent they do these kinds of subsidies, they distort the price mechanism and create the sort of situation we're in now.

Gigot: Rob, the president said, in his State of the Union, the United States is "addicted to oil." He hasn't used that phrase recently, but you've seen a lot of people talk about the need to free us from oil use, to become energy independent. Is that realistic at all?

Pollock: God, no. And it's really a shame that the president had to join in that rhetoric. I mean, look, why do we worry about being energy independent? The essence of a modern economy is dependence on other people for all things, basic things like food. I mean, we can all be sort of poor subsistence farmers and be independent and not have to worry about anybody else, but that's just not the way you're going to be if you're going to be rich and you're going to be modern.

Strassel: And the thing is, too, is we could be doing more things here to help ourselves. Let's remember that we first started talking about opening ANWR six years ago. Now most of the--

Gigot: That's oil drilling in Alaska.

Strassel: In Alaska. Now, most estimates are that it would take about five years to get it on line. If the Senate had actually passed it back when Bush asked them to, we might be actually getting some oil out of that area already.

Henninger: I think the addicted-to-oil argument is essentially a national security issue. They're worried about the Middle East: They're worried about revenues flowing to countries that fund terrorists, and they're worried about supplies from the Middle East. But if that is as important as the president and the rest of them suggest, then why isn't Congress getting serious, in the way Kim was suggesting, about opening up the energy supply system in this country?

Gigot: Well, because they're saying we've got this great new world of renewables, biomass, solar, wind. We've got a lot of subsidies for them. But they only provide, right now, a very small share of America's total energy supply.

Strassel: And you know what? Everyone is missing the big lesson that's come out of this entire run-up in prices recently. It's that the market does respond. You know, we're hearing all this stuff about getting oil from tar sands, for instance. This was stuff that people didn't consider feasible a while ago because it's expensive to do. Now, it doesn't look so expensive. And at one point, that's going to happen, maybe, in solar and renewable energy. But we should be letting the market make those decisions.

Gigot: But there's nothing really that can happen in the short term, save for perhaps letting the imports come in on ethanol and making up for that mistake. But these production questions are really longer-term, are they not?

Strassel: The production questions are certainly longer-term. One thing that we talked about, too, is the Fed in its monetary policy, in prices. That probably is feeding in somewhat.

Gigot: A little bit of inflation in the system, which is feeding commodity prices and speculation.

Pollock: And strong demand from a growing world economy. Put demand together with a lot of dollars chasing oil, and you're going to get high prices no matter what the other policies are. Although, we do have these things that are unnecessarily jacking up the cost at the pump.

Gigot: I think what you're saying is we can't do anything in the short term, but Congress could help a lot in the long term.

Pollock: Yeah.

Gigot: All right. Thanks, Rob. We have to take one more break. When we come back, our "Hits and Misses" of the week.

Gigot: Winners and losers, picks and pans, "Hits and Misses." It's our way of calling attention to the best and the worst of the week. Item one, Ted Kennedy the author. Dan?

Henninger: Yes, Sen. Kennedy has written his first book since 1982. It's called "America Back on Track"--no pun intended, I assume. It's a full-throated assault on the Bush administration. And when he gets on the domestic policy, even the Boston Globe said, "Kennedy's policy proposals will surprise few who follow liberal politics." He's coming out for a higher minimum wage. He wants billions of dollars in spending on education, higher taxes on the wealthy, equal rights for gays and lesbians, and nationalized health insurance.

And you say, why the oldies but goodies? I think I have an explanation. Ted's working on his legacy. He wants to make sure that that first paragraph, that crucial first paragraph in the Times obituary, says that Ted Kennedy was a saint of liberal politics, rather than several available alternatives.

Gigot: OK. Thanks, Dan. Next, forget the woman who won millions in a lawsuit after spilling hot coffee on herself. There's a new contender for the title of most outrageous jury award. Kim?

Strassel: Yeah, the latest candidate for most crazy award comes courtesy of Texas. A woman of Iranian descent named Samantha Carrington was on a flight in 2003, a Southwest flight. She got into an altercation with a bunch of flight attendants. It got very heated. And on the other end she was arrested. Now, the charges were dropped, and you would have thought that after Sept. 11, all the tensions being high, that everyone would have just forgive and forget. But she sued. She felt she'd been racially profiled. And this week a jury gave her $27.5 million for her inconvenience. Now, Southwest is appealing, and I think I need a new career, which is to go out and to get people to offend me.

Gigot: Maybe you should just get a couple of airline tickets and leave it at that. Finally an unforeseen byproduct of the hybrid car. Rob?

Pollock: Yeah, Paul, we've all heard of road rage. Well, there's a new subcategory, according to the L.A. Times, known as Prius rage, which is named after Toyota's gas-sipping, and frankly ugly hybrid little car, which is often seen cruising along very slowly on the freeways, often in the left lane, getting in people's way.

Gigot: A hybrid runs on electricity and gas.

Pollock: That's right. So you have sort of--apparently an explosion in comments in the Internet chat rooms, such as, "Go with the flow or get the heck out of the way." But my favorite comment comes from a Prius owner himself, who said basically, "People think we're a bunch of hippies, and people were a lot nicer to me when I owned a Mercedes."

Gigot: But they all feel so virtuous for driving them, Rob. I mean, how dare you burst their bubble?

Pollock: On an episode of "South Park," there was a hybrid car known is as the Pious.

[Laugher]

Gigot: All right, Rob, thank you very much. That's it for this week's edition of "The Journal Editorial Report." Thanks to Dan Henninger, Kim Strassel and Rob Pollock. I'm Paul Gigot. Thank you all for watching. We hope to see you next week.


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