The Double Standard of America’s China Trade Policy

As a Chinese official once explained to me, the strategy is to open the window but place a screen on it. They get the fresh air (foreign investment and technology) while keeping out the harmful elements (volatile capital flows and disruptive imports).

In fact, China’s practices are not much different from what all advanced countries have done historically when they were catching up with others.

.. One of the main US complaints against China is that the Chinese systematically violate intellectual property rights in order to steal technological secrets. But in the nineteenth century, the US was in the same position in relation to the technological leader of the time, Britain, as China is today vis-à-vis the US. And the US had as much regard for British industrialists’ trade secrets as China has today for American intellectual property rights.

.. The fledgling textile mills of New England were desperate for technology and did their best to steal British designs and smuggle in skilled British craftsmen. The US did have patent laws, but they protected only US citizens. As one historian of US business has put it, the Americans “were pirates, too.”

.. Any sensible international trade regime must start from the recognition that it is neither feasible nor desirable to restrict the policy space countries have to design their own economic and social models. Levels of development, values, and historical trajectories differ too much for countries to be shoehorned into a specific model of capitalism.

..  Governments that worry about the transfer of critical technological know-how to foreigners are, in turn, free to enact rules prohibiting their firms from investing abroad or restricting foreign takeovers at home.

.. Many liberal commentators in the US think Trump is right to go after China. Their objection is to his aggressive, unilateralist methods. Yet the fact is that Trump’s trade agenda is driven by a narrow mercantilism that privileges the interests of US corporations over other stakeholders. It shows little interest in policies that would improve global trade for all. Such policies should start from the trade regime’s Golden Rule: do not impose on other countries constraints that you would not accept if faced with their circumstances.

Why China Won’t Yield to Trump

China may give Donald Trump some face-saving way out from the trade war he has started, but it won’t offer any substantive concessions. In other words, Trump’s tariffs will do nothing to improve America’s external balance, output, employment, or real wages.

.. some defend Trump’s actions as a  to impel China to adjust its trade policies, such as the requirement that foreign companies share their intellectual property (IP) to gain access to the Chinese market.

.. Trump does not understand the basics of such a negotiation: he thinks that a country with a trade deficit necessarily has the stronger negotiating position. In reality, the surplus country is often in the stronger position, because it has accumulated financial claims against its “opponent.”

.. China does not necessarily even have to sell to wield influence. With US debt expanding and interest rates on the rise, even rumors that the Chinese might stop buying Treasury securities could be enough to drive down US bond prices and accelerate the increase in US interest rates.

.. While industries and consumers in China would also be hurt by a trade war, that country’s leaders can overrule interest groups and stifle protests.

In any case, public opinion will largely back retaliation against the US.

.. The Chinese remember well the Opium Wars of the nineteenth century, when the Middle Kingdom tried and failed to resist the British campaign to force it to open its economy to opium and other imports.

.. Add to that Trump’s reputation for flip-flopping, and the odds that Chinese leaders would bother making a deal with Trump to change their country’s trade policies seem small.

.. Even if China did decide to concede something to Trump, it would not be meaningful.

.. China could export less merchandise to the US directly, instead routing products through Taiwan and other countries, where some final assembly could take place.

.. The result would be economically meaningless; but so is the concept of the bilateral deficit itself, as Chinese exports to the US contain a high proportion of intermediate inputs produced in South Korea, the US, and elsewhere.

.. What really matters is that China’s current-account has been falling since 2008, and now stands at a relatively small 1% of GDP.

.. America’s external deficit is growing, but that is the result not of trade policy; it stems from Republicans’ , which is blowing up the budget deficit and reducing national saving.

.. As for Trump’s complaints about China’s IP “theft,” there are some valid grievances on this front. But addressing this issue requires technical expertise and negotiating skill, not blunt threats based on inadequate knowledge.

Crucially, it would also require cooperation with other partners who have similar grievances with China, ideally including pressure applied through rules-based institutions like the World Trade Organization.

Trump is pursuing the opposite strategy, arguing that neither multilateralism nor bilateral negotiations work with China. Yet such tactics have helped to compel China to allow a 37% appreciation of the renminbi in 2004-2014 and to crack down on counterfeiting of US merchandise and theft of US software.

.. Trump may also want to avoid the WTO because the US doesn’t win all of the cases it brings there. But it does have a 90% success rate. And it is not as if the US has never violated international rules

 

The Art of the Flail

Whenever investors suspect that Donald Trump will really go through with his threats of big tariff increases, provoking retaliation abroad, stocks plunge. Every time they decide it’s just theater, stocks recover.

.. while trade is one of Trump’s two signature issues — animus toward dark-skinned people being the other — when it comes to making actual demands on other countries, the tweeter in chief and his aides either don’t know what they want or they want things that our trading partners can’t deliver. Not won’t — can’t.

.. In some ways, China really is a bad actor in the global economy. In particular, it has pretty much thumbed its nose at international rules on intellectual property rights, grabbing foreign technology without proper payment

But if getting China to pay what it owes for technology were the goal, you’d expect the U.S. both to make specific demands on that front and to adopt a strategy aimed at inducing China to meet those demands.

.. In fact, the U.S. has given little indication of what China should do about intellectual property. Meanwhile, if getting better protection of patent rights and so on were the goal, America should be trying to build a coalition with other advanced countries to pressure the Chinese; instead, we’ve been alienating everyone in sight.

.. Anyway, what seems to really bother Trump aren’t China’s genuine policy sins, but its trade surplus with the United States

.. Over all, the U.S. trade deficit is just the flip side of the fact that America attracts more inward investment from foreigners than the amount Americans invest abroad.

.. A decade ago, China’s current account surplus — a broad measure that includes trade in services and income from investments abroad — was more than 9 percent of G.D.P., a very big number. In 2017, however, its surplus was only 1.4 percent of G.D.P., which isn’t much.

.. But in that case, why is “bilateral” trade between the U.S. and China so unbalanced? The answer is that it’s largely a kind of statistical illusion. China is the Great Assembler: it’s where components from other countries, like Japan and South Korea, are put together into consumer products for the U.S. market. So a lot of what we import from China is really produced elsewhere.

.. It’s not clear why we should demand that China stop playing that role.

.. it’s not clear that China could even do much to reduce its bilateral surplus with the U.S.: To do so, it would basically have to have a completely different economy. And this just isn’t going to happen unless we have a full-blown trade war that shuts down much of the global economy as we know it.

.. Oh, and a trade war would also devastate much of pro-Trump rural America, since a large share of our agricultural production — including almost two-thirds of food grains — is exported.

 

The Case for Responsible Nationalism

The excesses of globalization are real, but trade wars aren’t the answer.

More than two decades ago, Harvard economist Dani Rodrik warned that globalization was driving a wedge between workers who had the skills and mobility to prosper in the global economy and those who did not. The key challenge, he argued, was to make globalization “compatible with domestic social and political stability”—that is, to ensure that international economic integration “does not contribute to domestic social disintegration.”

.. International trade weakens the postwar social contract between American employers and their workers. Less-skilled workers often are forced to accept lower wages, inferior benefits and diminished job security. Leading economists acknowledged that increased trade with lower-wage countries would widen the gap between highly skilled and less-skilled workers in advanced economies, but they played down the magnitude of these effects.

Western policy makers embraced the Panglossian assumption that maximizing open markets and minimizing social policy would produce better living standards for all. The West assumed that its edge in innovation and productivity would enable it to dominate in the 21st century as in the decades after World War II.

..  China’s accession to the World Trade Organization in 2001. Yes, China had a large state-owned sector, used public resources to encourage the private economy, and broadly subsidized its producers. But over time, the thinking went, the communists would see the folly of propping up inefficient producers. The state sector would shrink, and the market would become more powerful. China’s economy would converge with the Western model, and its political institutions eventually would evolve too.

Democratic and Republican administrations then presided over a flood of Chinese imports that gutted entire sectors of the U.S. economy. After a period of stability in the 1990s, U.S. manufacturing employment shrank by more than three million between 2001 and 2007—before the onset of the Great Recession, which destroyed another two million jobs. These developments hit rural and small-town areas with particular force, creating the geographically concentrated sense of abandonment and loss that helped propel Mr. Trump to the White House.

.. automation—not protectionism—is the key to the future.

.. the Trump administration should focus, as it belatedly has begun to do, on the forced transfer and sometimes outright theft of American intellectual property. If necessary, U.S. laws and regulations should prevent American corporations from yielding information about technologies that will shape the future in return for access to China’s market.