BEIJING: Fresh from reworking US trade agreements with North American partners, the European Union, and South Korea, the Trump administration is focusing on its biggest…
BEIJING: Fresh from reworking US trade agreements with North American partners, the European Union, and South Korea, the Trump administration is focusing on its biggest trade irritant, China.
In confronting China, US President Donald Trump enjoys support from a policy community worried about China’s military assertiveness and willingness to flout global norms in fields ranging from international investments to intellectual property.
But President Trump’s demands on China have ranged all over the map, demanding at one point that China reduce its bilateral trade surpluses, later that it drop the “Made in China 2025” technology initiative, and now that it eliminate tariffs that adversely affect Republican voters.
This new charge of election meddling — which President Trump laid out in remarks on nonproliferation to the UN Security Council — has been recently amplified by Vice-President Pence in even harsher terms that stopped just short of calling for full disengagement from China.
Calls for disengagement are premature and dangerous; earlier steps must include finding better US strategies for dealing with China. US policy needs clearer objectives, a more realistic approach, and better tactics to achieve its goals.
Today’s reflexive, tit-for-tat tariff escalation is proving ineffective and may cause lasting damage to both economies and to the critical US-China geopolitical relationship.
US-CHINA TRADE ISSUES
The United States has inter-related problems with China and at different times has emphasised different issues, confusing Chinese negotiators.
President Trump has made a big deal of the bilateral trade imbalance. Economists do not see this as a problem.
China’s overall current account surplus, the broadest measure of trade, is down to about 1 per cent of GDP in 2018. China has deficits with many countries that export natural resources and surpluses with some advanced economies, like the United States, that import its manufactured goods.
The administration could probably reach an agreement to sell more to China, especially agricultural and energy products. Other things being equal, this would reduce China’s bilateral surplus. But the United States would then likely sell less of those products to other countries so that those bilateral imbalances would worsen. Nothing real would have happened.
A second and more important issue is that China has many market access restrictions. Some of these are old-fashioned protectionism: For many years, China had a 25 per cent tariff on auto imports. That has recently been reduced to 15 per cent, but such taxation is still high in today’s world.
There are also many sectors in which China restricts direct foreign investment, usually by requiring foreign firms to be minority partners in joint ventures.
Here, China is out of step with practices in other large emerging markets such as Brazil, India and South Africa. This investment protectionism puts foreign firms at a disadvantage and results in their transferring technology to Chinese state enterprises that will eventually be their competitors.
But China is now showing willingness to reduce restrictions in autos and financial services. This is a good start and a promising area in which Washington could make real progress in negotiations.
THE TECHNOLOGY COMPETITION
A third issue closely related to the second is technology competition between these two biggest economies in the world.
These two spend the most, globally, on research and development, and there will naturally be competition to develop the technologies of the future. As long as it is on a level playing field, such competition is healthy. Each is likely to make breakthroughs.
The innovators will capture some of the benefits, but the nature of technology diffusion is that much of the benefit will spread to the whole world.
Yet China distorts this competition in multiple ways. Chinese firms operating behind protective barriers often gain extra resources to take their innovations out to the world.
China’s industrial plan, “Made in China 2025,” sets targets for domestic self-sufficiency in key industries, and some tools to achieve these goals will violate market-oriented rules.
Direct subsidies to innovators and to state-owned enterprises also tilt the playing field toward China’s technologically sophisticated companies.
