A Step Closer to Getting High-Speed Rail in America?

Some have thought that getting high-speed rail in the U.S. is impossible. But maybe not, now that the Chinese appear to be making a serious play for both California and Florida. This piece of news yesterday seems a significant first step:

General Electric Co. and CSR Corp., China's largest maker of rail vehicles, plan to invest $50 million in their U.S.-based venture for supplying passenger trains for high-speed lines in California and Florida.

The initiative may "sustain or create" 250 jobs by 2012, potentially at GE Transportation factories in Erie and Grove City, Pennsylvania, the company said today. The partners also will form a business to work on medium-speed trains and on urban rail-transit systems, GE said in a statement.

China's CSR is of course the rolling stock company that has been doing the heavylifting on high-speed rail, having ran its fastest Chinese high-speed train last week, clocking in at just above 300mph during a trial. GE, given its long track record of operating in China, powerful brand, technological complementarity, makes sense as the joint venture partner.

Of course, a mere framework agreement does not mean commencement of a high-speed rail line next year. And the myriad political hoops, both at the federal and state levels, remain serious obstacles, particularly given the sensitivity surrounding Chinese investment in the U.S. But this recent venture speaks to several larger points that may give some reason for optimism on seeing ground break on a high-speed rail line.

  • China can leverage the kind of state financing that a debt-ridden state like California currently cannot. Beijing has also approved using its $2.6 trillion in foreign exchange reserves to help fund Chinese investments in other markets. (You probably wouldn't want to pump forex reserves back into the domestic economy anyway because it would create inflationary pressures.) I suspect a certain level of pledged financing by China to support construction would be necessary to get any eventual deal done. In other words, a China that's willing to offer some relief to the fiscal constraints in various states. 

  • The messaging on "jobs" and "manufacturing" in the U.S. seems to indicate that certain companies in China may be finally feeling the political pulse in the U.S. Yes, the estimated paltry 250 jobs created by 2012 won't cut it. But should the shovel actually hit the gravel on the project, China will almost certainly have to use U.S. labor force (somewhat paralleling what the Japanese and Korean giants did by investing in manufacturing capacity in the US and creating domestic jobs). Already, it seems like the joint venture has agreed to "Buy American" local content requirements--so U.S. steel, cement, etc.

  • Joining forces with a notable American industrial and technological icon like GE is also smart strategy. It might go some way toward mitigating the politics around Chinese investment in a high-tech sector in America.
  • China will probably have to send over some engineers and design specialists, but those jobs will be kept to a minimum. In short, the Chinese strategy in developing markets, particularly in Africa, of exporting Chinese workers is going to fall flat in the U.S.
  • For Chinese investors, accessing an OECD market has increasingly become a preoccupation. Of course, cracking the U.S. market would be capturing the crown jewel in their minds, not to mention it would be in a high-tech sector that could dramatically alter the reputation/perception of "Made in China."

  • Of course, none of this is preordained, and numerous factors could derail (no pun intended) such a gambit in entering the U.S. market. But clearly, these steps taken so far suggest a more sophisticated strategy on the part of the Chinese. We'll see whether these initial steps will bear fruit and result in 300mph trains zipping from SF to LA or Boston to NYC and elsewhere. As someone who was always fond of trains, I remain hopeful.
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Damien Ma is a fellow at the Paulson Institute, where he focuses on investment and policy programs, and on the Institute's research and think-tank activities. Previously, he was a lead China analyst at Eurasia Group, a political risk research and advisory firm.

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