Let’s talk about Trump and China

Trump is right this time

Even though many U.S. business leaders fear that tariffs on a wide range of Chinese imports will hurt their bottom line and raise prices for the consumers, I am inclined to support President Trump’s unconventional approach this time, for one simple reason: for the past two decades, nothing else has worked in terms of making China stay in line.

The decision by President Trump to impose tariffs on an additional $100 billion in Chinese goods has given rise to a great deal of discussion, much of it centered on whether such move could lead to a trade war between the world’s two largest economies. The consensus was that, if a trade war do occur between these two countries, it would derail the current global economic expansion as well as cripple American companies doing business with China. Not only that, a trade war could further complicate geopolitical priorities especially now that China is helping the Trump administration in scheduling historic talks with North Korea in June.¹

But perhaps it is time for us to be honest with ourselves and ask whether President Trump’s claim that China is a trade cheat is true. To put it bluntly, many of the Trump administration’s economic documents have been laughably sketchy and, sometimes, laughable. However, there is one exceptional document presented by the administration, namely, the Office of the U.S. Trade Representative’s 2017 report to Congress on China’s compliance with global trading rules.² This report detailed how China has failed to enact promised economic reforms as well as how it had backtracked on others. In measured prose and great detail, it explained the series of strong-arm tactics used by China to block foreign firms from competing in its huge market. According to the report, the Chinese government has increased its intervention in the economy in recent years, by particularly taking aim at foreign companies. It is worth bearing in mind that all these contradicts China’s commitments in 2001, when it joined the World Trade Organization (WTO).³

So, it is only natural for President Trump to decide that it is time to take action. Whether or not one accepts the conclusion that the United States was blinded by their expectation that China would liberalize its market when it supported that country’s entry into WTO, it is clear that that expectation has proved to be mistaken. The fact remains that the WTO rules under which the member nations (including China) are required them to abide by certain codes for doing business but, unfortunately, China has been violating these codes.

 When China applied to join the WTO, the United States handled their application the same way they handled that of the other countries that joined in the mid-20^th century. When these countries, including China, were admitted, the United States in particular and the free world in general opened their markets to the new entrants. The newly admitted countries, in turn, reciprocated by lowering barriers to their markets. That was how such countries as Singapore, South Korea and Japan joined the WTO. It should be noted here that these countries (excluding China) have two things in common. First, they were relatively small when compared to the size of the global economy. Second, they all lived under the security umbrella of the United States. As a result of these two factors, it was easy for the United States and the West to have considerable leverage over these countries when they joined WTO. During the time that it joined the GATT (which was the precursor to the WTO), Singapore had only 2.2 million people and a gross domestic product (GDP) of $19 billion. South Korea had a population of 30 million and a GDP of $41 billion when it joined the organization. With a population of 90 million and a GDP of under $800 billion, Japanese economy was larger than that of Singapore and South Korea when it joined the organization.⁴

Now, let’s take another look at China when it joined WTO in 2001. During that time, China had a population of 1.3 billion people and a GDP of $2.4 trillion.⁵ Judged from that size, China’s economy was almost a fifth of U.S.  economy when it joined WTO. To the Chinese politicians at the time, the large size of their economy and market provided an immense advantage in that it means that every country in the ‘WTO club’ would vie for access. This large demand for their market (that is, China’s market) would, in turn, give the country the ability to cheat without much fear of reprisal. Also, unlike Singapore, South Korea and Japan, China was never dependent on United States for its security. As a matter of fact, it had fought a war against U.S. troops in the 1950s with some success: about thirty-six thousand American troops died in that war.⁶ Today, it has grown into a great power in its own right.

The scale and speed of China’s integration into the world trading system made it the most dramatic economic developments of recent decades. Studies have found that about a quarter of all manufacturing jobs lost in the United States between 2001 and 2015 could be explained by the trade deficit with China, coupled with the unfair Chinese trading practices, which have hollowed out the U.S.  manufacturing sector.⁷  It is only fair to say that nothing on this scale had happened before. It is also not an exaggeration to say that feelings were mixed when China began to integrate rapidly with the world economy, even though the rest of the world had waited a long time for that country to open up.

There are obvious reasons for that: over the years a lot of foreign companies had suffered a great deal while doing business in China. Let me put it as politely as I can: as a condition for gaining access to China’s huge market, its government requires foreign firms to hand over their trade secrets – a requirement that leads to Chinese companies getting their hands on the foreign firms’ technologies and intellectual properties(IT). This requirement by the China’s government has basically blocked the world’s most successful technology companies, from Google to Facebook to Amazon, from having a noticeable footprint in China.  In some sectors, China will only let foreign firms operate if, and only if, they agrees to operate through joint ventures in which the Chinese partners have the majority stake. Take the banking sector. To sell their services to Chinese customers, foreign banks often have to team up with local partners who add zero value to the operation. The case of technology companies is even worse: after sharing their technologies with Chinese partners, they (that is, the Chinese partners) often systematically reverse-engineer some of the same products and compete against the foreign companies.⁸ The clear consensus is that this is essentially an unfair trade practice.

Another way that China gets what it wants from foreign companies, particularly the U.S.  companies, is through cyber-theft. I know this may sound strange, but it is true. Russia is actually not the country that have waged the most extensive cyberwarfare against the United States. It is China, and the main targets are the U.S.  companies, whose secrets and IT are then shared with the Chinese competitors.⁹

It may also be stated that China is not alone in the game of trade cheating. India and Brazil are also trade cheats. In fact, a significant point to remember here is that Brazil and India teamed up with China to obstruct the last series of world trade talks known as the Doha Round.¹⁰ Today, these large countries who have refused to liberalize their economies and who also have enough power to hold firm, are the greatest threat to open world economy.

The Trump administration’s get-tough approach may not be perfect in terms of making China provide more market access to foreign businesses and do a better job of protecting intellectual property as required by WTO. According to President Trump, his government will focus on steel, slapping tariffs, alienating key allies and working outside WTO. This is not the wisest course; however, his administration’s frustrations is very understandable. In addition to exerting pressure privately, previous U.S. presidents have worked within the system and tried to get allies on board but their efforts never made China to change its behavior. Instead, it got worse. So, it is only natural for President Trump (and most Americans) feels that, without pressure, little progress will be made. Hence, even though many U.S. business leaders fear that across-the-board tariffs on a wide range of Chinese imports will hurt their bottom line and raise prices for the consumers, I am inclined to support President Trump’s unconventional approach, for one simple reason: for the past two decades, nothing else has worked.

References

¹Swanson, A., & Bradsher, K. (2018, April 5). Trump Doubles Down on Potential Trade War With China. New York Times. https://www.nytimes.com/2018/04/05/business/trump-trade-war-china.html

²U.S. Trade Representative (2018). 2017 Report to Congress On China’s WTO Compliance. Retrieved April 13, 2018 from https://ustr.gov/sites/default/files/files/Press/Reports/China%202017%20WTO%20Report.pdf

³Zakaria, F. (2018, April 5). Trump is Right: China’s A Trade Cheat. The Washington Post. https://www.washingtonpost.com/opinions/global-opinions/trump-is-right-chinas-a-trade-cheat/2018/04/05/6cd69054-390f-11e8-8fd2-49fe3c675a89_story.html?utm_term=.85595b5de9bd

⁴Ibid

⁵Ibid, para. 5

⁶Farley, R. (2014, October 29). Deadly Lessons: The Last Time China and America Went to War. The National Interest. Retrieved April 20, 2018 from http://nationalinterest.org/feature/deadly-lessons-the-last-time-china-america-went-war-11558

⁷Pickel, R. (2017, February 1). Millions Of US Jobs Lost To Trade With China, Study Shows. The Daily Caller. Retrieved April 20, 2017 from http://dailycaller.com/2017/02/01/millions-of-us-jobs-lost-to-trade-with-china-study-shows/

⁸Shane, D. (2018, April 5). How China Gets What It Wants From American Companies. CNN Money. Retrieved April 22, 2018 from http://money.cnn.com/2018/04/05/news/economy/china-foreign-companies-restrictions/index.html

⁹Zakaria, op. cit., para. 7

¹⁰Ibid